Examination of Witnesses (Question Numbers
60-79)
MRS LOWRI
KHAN, MR
CHRIS MARTIN
AND MR
DAVID LUNN
9 MARCH 2010
Q60 Colin Challen: I think it is
E.ON which owns Kingsnorth power station and they have dropped,
temporarily at least, maybe permanently, plans to develop a new
coal-fired power plant because they are not sure about the policy
framework on CCS. Yet RBS presumably could go to some other country
where they do not have any policy framework and invest in unmitigated
coal plant. So you have government policy in one respect causing
a bit of confusion and in another respect a government-owned bank
investing where there is no policy. It seems to me that the whole
thing is a complete mess.
Mr Martin: There is a wider debate
to be had around global coal emissions. There is also a wider
debate to be had around coal policy in this country. If you wish
to do something about that then the view we have taken is that
the right thing to do is to change the global regulations or change
the national legislation here, rather than try to affect the individual
decisions of these commercial institutions which we are trying
to run on the basis of maximising the return for the shareholder
consistent with wider normal corporate duties.
Q61 Mark Lazarowicz: It is fair to
say that although you have this commitment to these wider policy
objectives there is no way these are translated into specific
instructions or requirements of UKFI for them to pass on to the
banks with their shareholdings.
Mrs Khan: That is right. The position
was set out very clearly by UKFI that essentially they have a
mandate. Part of that mandate is indeed based around having a
sustainability policy that is not in a capacity as a direct instrument
of delivering the Government's broader environmental policies.
It is, however, expected to conduct its duties in a way which
is consistent and promotes those.
Q62 Mark Lazarowicz: As a matter
of interest, is this approach one that you take with regard to
other objectives which might be defined as not too narrow business
objectives in relation to the shareholding, for example, policies
on equality, on company boards, policies on industrial relocation?
Do you have that same hands-off approach in all these areas?
Mrs Khan: You have spoken to UKFI
about how they interpret their remit. We would expect them to
behave as an agent that respects and adheres to good practice
in these areas.
Q63 Mark Lazarowicz: It does seem
to me that the kind of hands-off approach you are taking would
suggest a degree of disconnect from what is happening in the outside
world which I find hard to believe is the case in the Treasury.
People read newspapers; they know there is a debate about tar
sands, for example. Surely there must be some point at which somebody
in the Treasury is at least raising the question as to whether
you should not be doing something about this or do you simply
take the view that this is something which you do not ask questions
about but leave it to UKFI and the banks to do for you?
Mrs Khan: RBS and Lloyds are very
large commercial entities. They have very large loan books; they
have a lot of very large investment portfolios. The Government
do not take the stance that they can be in there on every transaction
those banks undertake and direct those transactions. We do, however,
engage through UKFI at the strategic level, as colleagues from
UKFI set out earlier. We do set expectations in terms of the way
that those entities conduct themselves in accordance with best
practice at the strategic level.
Q64 Mark Lazarowicz: This is important
because we heard UKFI, probably correctly, do not have a large
staff and do not have environmental specialists, so I got the
impression that they look to the Treasury to provide that kind
of expertise. Do you provide that kind of input in this high level
engagement which you have with UKFI? Do you try to keep them on
their toes on environmental sustainability issues, particularly
as they do not appear to have the resources in-house?
Mr Lunn: Generally speaking we
did review the sustainability policy which UKFI have now introduced
and we commented on it before it went to their board and was accepted
by their board. At that level we had an input. We have discussed
sustainability on a number of occasions over the last year at
a working level with UKFI. It is fair to say that it is not the
bread and butter of the discussion.
Q65 Martin Horwood: The Treasury
commissioned the Stern Report, so presumably you accept its conclusion
that even in just bald economic terms climate change is the biggest
single threat to the long-term stability not only of the UK economy
but the world economy. You accept that conclusion, do you not?
Mrs Khan: Yes.
Mr Martin: Absolutely.
Q66 Martin Horwood: Do you think
Mr Budenberg and Mr Woods understand that?
Mrs Khan: I think you can reach
your own conclusions as to that. I am very clear that they understand
the remit they have been given.
Q67 Martin Horwood: That was not
my question. Do they understand the Treasury's economic analysis
of climate change, that climate change itself is the most significant
threat to the stability and the long-term prosperity of the UK
economy? Do you think they understand that?
Mrs Khan: I cannot speak for them
in the sense of whether they understand.
Q68 Martin Horwood: You have just
heard them give evidence and you heard Mr Budenberg. He actually
laughed in reply to the Chair's question about the avoidable crisis
of climate change and whether or not that was comparable to the
avoidable crisis of the financial markets we have been through.
Was your impression from that evidence session that he understands
what you know to be Treasury policy on climate change?
Mrs Khan: I really cannot speak
for what Mr Budenberg understands or does not understand. Clearly
he has a clear understanding of what the Treasury expects from
UKFI.
Q69 Martin Horwood: In that case
may I ask you what you expect of UKFI in terms of the Stern Report's
economic analysis? Set aside government policy and government
objectives and things like that, but do you think their economic
analysis about the threat to UK plc and to the broader economy
of climate change is part of their remit from you to take account
of what the Treasury have concluded is the biggest single threat
to the UK economy?
Mrs Khan: Very clearly we have
had a dialogue with UKFI over their sustainability policy and
we take a broader based view on how we achieve the broader objective
that we have set ourselves, building on the conclusions of the
Stern Report.
Q70 Martin Horwood: Have you discussed
the conclusions of the Stern Report with them?
Mrs Khan: With UKFI?
Q71 Martin Horwood: Yes.
Mrs Khan: Not to my knowledge;
no.
Mr Lunn: It is important to recognise
that their overarching objective is to dispose of the shares in
a way that maximises value for the shareholders, the taxpayer.
You would expect UKFI to operate within that overarching objective.
Q72 Martin Horwood: The conclusion
of the Stern Report, which was commissioned by your department,
was that the best way to look after the long-term economic interests
of this country and long-term investments was to move towards
a decarbonised economy, was it not?
Mr Lunn: I understand that but
the remit for UKFI has been set in certain terms and you would
expect UKFI to act in line with that remit. That is what I am
saying.
Q73 Martin Horwood: But the Stern
Report seems to imply that that should mean that they should be
investing in a decarbonising economy, should they not?
Mr Martin: These can be consistent.
The point is that the Stern Report absolutely underlies our overall
policy framework. We have introduced carbon budgets which are
legally binding. We have signed up to the European directives
of which the Committee are well aware. We have established the
renewables obligation which spans the whole of the industrial
sector, all the energy suppliers and potential providers of capital,
and that is the framework we are trying to put in place across
the entire economy to ensure that we decarbonise and meet these
targets. What we are talking about here is actually just a couple
of companies in which at the moment we happen to have a substantial
shareholding but we do not own in totality. We are trying to make
sure we manage those and operate those consistent with the financial
stability objectives that were absolutely pre-eminent at the point
at which we took on the shareholding and we would expect those
companies to respond to the policy framework we have put in place
across the piece.
Q74 Martin Horwood: But Stern was
not just a set of policy recommendations, was it? It was an economic
analysis.
Mr Martin: Absolutely; yes.
Q75 Martin Horwood: A lot of other
companies concluded from the Stern Report that they needed to
shift and change their strategy.
Mr Martin: Indeed.
Q76 Martin Horwood: It is not a fine
detail point. It is absolutely a strategic issue, is it not? We
need to shift into low-carbon investments and low-carbon economic
development.
Mr Martin: Yes, and we would hope
and expect to see all providers of capital in the economy over
the next few years shifting into investing in, for example, offshore
wind where there is a very large capacity in the UK.
Q77 Martin Horwood: Good. Including
UKFI?
Mr Martin: You would expect to
see all companies doing that, responding to the commercial incentives
which we have put in place.
Q78 Martin Horwood: Including UKFI?
You would expect them to make that shift, would you?
Mr Martin: Yes.
Mr Lunn: If you look at UKFI's
sustainability policy, it is to make sure that the banks themselves
have sustainability policies which are in line with best policy
guidance out there, which you would expect following Stern.
Q79 Martin Horwood: Mr Martin just
said you would expect them to shift towards low-carbon investments.
Mr Martin: You would expect to
see the sector overall responding.
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