Financial Services and Markets Bill

Written evidence submitted by Global Witness (FSMB48)

Dear Public Bill Committee

Call for Written Evidence: Financial Services and Markets Bill

Thank you for the opportunity to provide written evidence regarding this important Bill.

About Us

Global Witness is an environmental and human rights campaigning organisation with 100 staff and offices in London, Washington DC and Brussels. For over 25 years, we have investigated and exposed environmental and human rights abuses in the forestry, oil, gas and mining sectors, and tracked ill-gotten money and influence through the global financial and political system. Our evidence is submitted in support of our campaign to stop the UK financial sector’s role in driving global deforestation.

Our Evidence

Our evidence is based on the Bill as introduced at First Reading. We agree that this Bill is a ‘once-in-a-generation’ opportunity to redesign the rules underlying all UK financial regulation. In its current form, however, the Bill does not deliver the competitive net zero financial centre and nature-positive economy the British public have been promised by under this government. Nor does it deliver on the UK’s legal commitment to re-align financial flows to end and reverse tropical deforestation by 2030 at the latest.

The amendments we are proposing to this Bill offer an opportunity to ‘future proof’ financial regulation and position the UK as a leading economic power in the global green economic transition. With all major economies signed up to binding Paris Agreement targets, this is a chance for the UK’s regulatory framework to form the bedrock of security and economic prosperity for the British public.

What changes are required?

We recommend the adoption of the following amendments to the Bill :

1. Introduction of new forest-risk commodity due diligence requirements for financial actors , so that UK-based financiers are prohibited from investing in deforestation and human rights abuses , as re commended by the g overnment’s own cross-sector Global Resource Initiative taskforce in May 2022. Such requirements would match those required of large companies under Section 17 of the Environment Act .

2. A new statutory objective for regulators on nature and net zero  

Currently, the Bill forces regulators to prioritise competitiveness and growth over the UK’s nature and climate targets in law . Although the Bill includes a ‘regulatory principle’ (which has a lower status than a statutory objective) on net zero , regulators must only take this ‘ into account when pursuing their statutory objectives ’ .
 
A climate and nature-specific statutory objective – as is backed by the Financial Innovation Lab, Aviva , WWF, ShareAction and E3G among others – would prevent a race to the bottom and position the UK as the financial centre at the forefront of the global green economic transition. It would ensure regulators have the powers necessary to deliver the UK’s legally binding targets, including reaching net zero by 2050 and the Glasgow Leaders’ Declaration on Forests and Land Use.  
 

Why are these changes required?

These amendments are justified by significant evidence that deforestation and climate change are material risks to the UK’s financial stability, as well as individual financial institutions:

Net zero targets can only be met if the UK financial sector stops financing global deforestation. The agriculture, forestry and land use sector produce s almost a quarter of all global greenhouse gas emissions . Around 11% of all CO2  emissions come from deforestation and forest degradation. Urgent action to end deforestation by 2025 at the latest is required to keep the Intergovernmental Panel on Climate Change’s 1.5°C no/low-overshoot scenario pathway alive.  Delivering the binding net zero target under Section 1 of the Climate Change Act 2008 is jeopardised by the City of London’s role in deforestation financing.

Embedding net zero and nature in the UK’s regulatory framework is in the country’s economic and security interest. The Dasgupta Review called for the wholesale reorganisation of the UK economy, leading HM Treasury to commit to a ‘nature-positive’ economy in 2021. As a result, the Environmental Audit Committee has called on the government to place nature and net zero at the centre of UK financial regulation .  Likewise, the Climate Change Committee has concluded climate risk and net-zero must be fully integrated into financial regulation for the UK to achieve the country’s legally binding net zero target.

The UK government has already acknowledged deforestation is key to achieving net zero. Deforestation is a ‘top priority area’ in the UK’s Net Zero Strategy and the government has legislated to limit the deforestation impact of its import and consumption of good s through the Environment Act. It has not , however , legislated to reduce the deforestation impact of the UK financial sector. The Glasgow Leaders’ Declaration on Forests and Land Use was a major outcome of the UK’s presidency of COP26, with at least 145 countries committed to halt and reverse deforestation and land degradation by 2030 – including by re-aligning financial flows. This Bill provides an important opportunity to ensure the UK’s COP26 global legacy, by making good on this commitment.   

The UK is a major financier of global deforestation. UK banks and asset managers provided an estimated $16.6 billion between 2015-2020 to just 20 agri-businesses implicated in deforestation, making an estimated $192 million (£147 million) in profit . Over £300 billion of UK pension money is invested in companies and financial institutions with high deforestation risk and the UK financial sector faces up to £200 billion in risk exposure in Brazilian beef and soy supply chains and Indonesian palm oil supply chains alone. A gri-business companies funded from the UK do not necessarily supply the UK with commodities directly and are therefore not held accountable under the Environment Act, despite the human rights, land grabbing and environmental harms they have been linked to. Many financial institutions are signed up to voluntary deforestation commitments but without legislative underpinning such commitments have consistently failed to deliver the progress needed.  

The solution

Recommended amendment 1: The introduction of mandatory forest-risk commodity due diligence for financial actors . Such obligations for the financial sector were considered under the Environment Act and received support from many MPs and peers from across the political spectrum .

 

This Bill focussed on financial regulation is a more appropriate place for the amendment and the reasons to support it have only grown in the interim. A Y ouGov poll in Dec ember 2021 found that 67%  - over two thirds – of British voters supported the g overnment introducing a law to ban banks from lending money to or doing work for organisations who are involved in deforestation overseas. 3 In May 2022, the g overnment’s own cross-sector Global Resource Initiative taskforce recommended the introduction of mandatory due diligence to prevent, mitigate and remedy the financing of deforestation and linked human rights abuses.   

An amendment in this Bill would bring the financial sector into line with rules already in place on the use of goods from deforested land under Schedule 17 of the Environment Act 2021. We have a written amendment prepared for insertion in the Bill at report stage and are happy to share this with parliamentarians and their staff .

Recommended amendment 2: Introduce a statutory objective for regulators on net zero and nature . Sadly, the current approach of including sustainable growth as a regulatory principle has proved ineffective – as billions in continue to flow into nature-destructive projects from the UK financial sector . There is nothing to suggest replacing the existing ‘have regard’ with a net-zero principle would be any more effective.

What is needed is a new secondary statutory objective requiring the regulators to facilitate the alignment of the financial services sector with net zero , including wider considerations of nature. The UK Green Finance Strategy recognises that climate change and biodiversity loss are a threat to the growth and stability of the UK financial system. In May 2022, the Bank of England concluded climate change will cost UK banks more £340 billion by 2050 if climate action is severely delayed. The economic argument is compelling: the introduction of green investment taxonomies, mandatory net zero transition plans and new sustainability disclosure regimes in key jurisdictions including the UK , EU and US demonstrate the tide is turning. The UK has an opportunity with this bill to steal a march in leading the funding of the green transition, generating huge export opportunities for the country in the future and helping to tackle current issues like reducing household bills. Empowering financial regulators to actively advance climate and nature targets in their policies and supervision will enable the UK to become a front runner in the global green economic transition.  

Further detail

We remain available to provide further oral and written evidence as required through the passage of both this Bill and any subsequent related legislation. Please contact Alexandria Reid, Senior Global Policy Adviser, Global Witness, areid@globalwitness.org.

October 2022