We do not expect this Bill to have any significant effects on local authority investment or procurement practices. However, we have significant concerns about the effects the current drafting will have on the operation of the Local Government Pensions Scheme (LGPS).
Key messages
- We do not expect this Bill to have any significant effects on local authority investment or procurement practices. However, we have significant concerns about the effects the current drafting will have on the operation of the Local Government Pensions Scheme (LGPS).
- In proposing or supporting amendments our intention is not to frustrate the Government’s delivery of its manifesto commitment, rather we want to ensure that in achieving that aim there are not unintended, negative consequences on the ability of LGPS funds to pursue other legitimate responsible investment policies
- Local government would welcome discussions with government on potential impacts on councils of the Bill including:
- clarification on who the decision maker is (specifically in the context of the LGPS)
- streamlining the enforcement regime to remove the possibility of parallel enforcement activity and tighten access to Judicial Review
- more effective exemptions for Environmental, Social and Governance concerns.
- The Local Government Pension Scheme is a well-funded and well-run scheme, with very few Pensions Regulator or Pensions Ombudsman cases for a scheme of its size: over six million members and assets of over £360 billion.
- Investment decisions are taken in line with the fiduciary duty – requiring LGPS funds to make prudent investment decisions based on an assessment of the financial consequence of a number of matters, including those relating to ESG factors. Where an LGPS fund decides to divest from particular investments, and those decisions are based on non-financial factors, LGPS funds follow the Law Commission’s direction that any financial impact on the fund should not be significant and that the decision would likely be supported by scheme members.
- The Bill is unclear as to how a reasonable observer will assess whether a decision maker has been “influenced by” a particular consideration. We support the amendment tabled by Lord Palmer of Childs Hill and Lord Shipley to require a decision to be materially influenced by political or moral disapproval, specifically defined as being a decision reached that otherwise would not have been.
- Whilst it is helpful and welcome that the Bill sets out exceptions for factors relating to (amongst others) environmental and labour-related misconduct, we believe that the existing exceptions should be broadened to include systemic human rights violations and genocide. We also believe that any changes to the list of exceptions in the schedule should be limited so that future governments can only add similar kinds of consideration.
- We believe steps must be taken to ensure the Bill does not stifle appropriate and proper discussion at pension committee meetings about concerns relating to risk factors around investments. Geopolitical and territorial factors are relevant to the risk of making, or retaining, certain investments.
Amendment statements
Amendment relating to the disapproval of foreign state conduct prohibited
Clause 1, page 1, line 7, after “was” remove “influenced by political or moral disapproval of foreign state conduct” and insert –
“materially influenced by political or moral disapproval of foreign state conduct.
(3) ‘Materially influenced’ means a decision was reached that otherwise would not have been.”
Explanatory statement
This amendment would raise the threshold for determining if a decision was influenced by moral or political disapproval, requiring that the decision was “materially” influenced, specifically defined as a decision that was reached that otherwise would not have been.
LGA view
The Bill is unclear as to how a reasonable observer will assess whether a decision maker has been “influenced by” a particular consideration. It is impossible to know which factors have influenced each person’s decisions or views beyond what is recorded in the record of the Committee meeting. The wording of the clause should be amended to require a decision to be materially influenced by political or moral disapproval, specifically defined as being a decision reached that otherwise would not have been. We support the amendment tabled by Lord Palmer of Childs Hill and Lord Shipley.
Amendment relating to exceptions relating to Human Rights
Clause 3, page 2, line 40, at end insert -
“(4A) Section 1 does not apply to a decision which has been made in accordance with a Statement of Policy Relating to Human Rights.
(4B) A “Statement of Policy Relating to Human Rights”— (a) is a public authority’s policy criteria relating to disinvestment in cases concerning contravention of human rights, and (b) must be applied consistently by the public authority to all foreign countries.
(4C) Within 60 days of the passing of this Act, the Secretary of State must publish, and lay before Parliament, guidance on the form, content and application of a Statement for the purposes of this section.
(4D) Public authorities must have regard to the guidance referenced in subsection (4C) when devising a Statement for the purposes of this section.”
Explanatory statement
This amendment would exempt public bodies from the prohibition in section 1 where the decision has been made in accordance with a Statement of Policy Relating to Human Rights. A Statement may not single out individual nations – the policy would have to be applied consistently, and in accordance with guidance published by the Secretary of State.
LGA view
Whilst it is helpful and welcome that the Bill sets out exceptions for factors relating to (amongst others) environmental and labour-related misconduct, we believe that the existing exceptions should be broadened to include systemic human rights violations and genocide. We also believe that any changes to the list of exceptions in the schedule should be limited so that future governments can only add similar kinds of consideration. We support this amendment, tabled by Lord Collins of Highbury, Lord Hain and Lord Warner but urge Government to commit to ensure statutory guidance referenced in this amendment is consistent with the Supreme Court’s judgment in the Palestine case.
We would support any of the below amendments, titled amendment 3 (version 1-3) to remove from the bill a prohibition on statements indicating that a person would have acted in a way prohibited by clause 1 were it legal to do so.
Amendment relating to prohibition on statements (version 1)
Clause 4, page 3, line 18, leave out paragraph (b)
Explanatory statement
This amendment would remove the prohibition on a person publishing a statement indicating that they would have acted in a way prohibited by clause 1 if it were legal to do so.
LGA view
We are pleased that Government has listened to our concerns and added clarity to the explanatory notes setting out that “councillors of a local authority are not a public authority and, therefore, are not prohibited from expressing support for or voting in favour of a motion supporting a boycott or divestment policy. If a local authority published the minutes of a debate or a meeting in which a councillor said that they would be in favour of their local authority engaging in such campaigns, this statement would not be captured under this clause.”
While we welcome this addition, concerns remain that this is only covered in the explanatory notes but not addressed on the face of the Bill itself. Steps must be taken to ensure the Bill does not stifle appropriate and proper discussion at pension committee meetings about concerns relating to risk factors around investments. Geopolitical and territorial factors are relevant to the risk of making, or retaining, certain investments. A recent obvious example of this is Russia; at the time of the Russian invasion of Ukraine in March 2022 only around 3 per cent of LGPS assets were invested in Russia. This was such a low proportion because of the clear concerns emerging around Russia, and the increasing risk of stranded assets – a risk that materialised when the UK government imposed sanctions on Russia and all investments in Russia became effectively worthless for UK investors.
Amendment relating to prohibition on statements (version 2)
Page 3, line 13, leave out Clause 4
Explanatory statement
See explanatory statement for amendment 3 (version 1)
LGA view
See LGA view for amendment 3 (version 1)
Amendment relating to prohibition on statements (version 3)
Clause 4, page 3, line 24 at end insert-
(4) “This section does not apply to— (a) a local authority, (b) an elected mayor of a local authority (c) a mayor for the area of a combined authority, (d) the Mayor of London, (e) the London Assembly (f) the Scottish Parliament, or (g) Senedd Cymru.”
Explanatory statement
See explanatory statement for amendment 3 (version 1)
LGA view
See LGA view for amendment 3 (version 1)
Amendment relating to legal proceedings
Clause 5, page 3, line 30, leave out “(irrespective of the other means of enforcement provided by this Act)”
Explanatory statement
This amendment would, in line with standard practice and other legislation, require other means of enforcement provided by this Act to be exhausted before decisions or statements could be enforced via an application for judicial review. In the case of the Local Government Pension Scheme, Judicial Review would only be available if The Pensions Regulator had chosen not to exercise its powers or exercised them unlawfully.
LGA view
We believe this amendment is necessary to maintain the existing precedent of using Judicial Review as a last resort. Given existing pressure on the court system and the lack of clarity around who or what may be deemed to be a sufficiently interested party, it is possible that there may be applications that waste pressured resources in the court system and within local authorities. We strongly support this amendment tabled by Baroness Young of Old Scone.
Amendment relating to the application of prohibitions of a fund investment decision
Clause 12, page 8, line 6, leave out “management,”
Explanatory statement
This amendment would remove management from the definition of a fund investment decision, to allow investors to carry out stewardship activities including engagement and voting, without falling foul of the prohibition.
LGA view
This is being brought forward as a probing amendment to gain a better understanding of what is meant by this term. We support this amendment, tabled by Baroness Blackstone and Lord Hannay of Chiswick.
Amendment relating to the general provision of the bill
Clause 17, page 12, line 13, at end insert—
“(4A) The Secretary of State may not lay regulations to bring section 1 into force until the Secretary of State has laid before Parliament a comprehensive list of the bodies to which section 1 will apply.”
Explanatory statement
This would require the Secretary of State to provide a comprehensive list of which bodies come into scope of this bill, before the provisions in Clause 1 can be brought into force.
LGA view
We support this amendment proposed by Baroness Chapman of Darlington.
Amendment relating to financial and practical risk
The Schedule, page 12, line 26, after “financial value” insert “, risk,”
Explanatory statement
This amendment seeks to allow decision-makers in public bodies to consider the financial risk and impact associated with, for example, the delivery of contracted goods and services and the investments in the Local Government Pension Scheme, without falling foul of the prohibition.
LGA view
We support this change to ensure that the consideration of financial risks is included in the exceptions to Section 1 as this is an essential part of responsible fiduciary management and the exercise of fiduciary duty. We support this amendment tabled by Baroness Drake, Lord Thomas of Cymgiedd, Lord Shipley and Lord Willetts.
Amendment relating to international law
The Schedule, page 13, line 2, leave out paragraph 6
Explanatory statement
This amendment probes the scope of paragraph 6 and its intended purpose.
LGA view
We support this amendment to probe the purpose of this amendment. We urge Government to provide clarity on the purpose of this exception. We support this amendment tabled by Baroness Noakes and Lord Pannick.
Amendment relating to environmental misconduct
The Schedule, page 15, line 26, leave out "amounts to an offence, whether under the law of a part of the United Kingdom or any other country or territory, and” and insert “is a breach of any law designed to prevent harm to the environment, including the life and health of plants and animals, or ensure the sustainable use of natural resources, whether under the law of a part of the United Kingdom or any other country or territory, or”.
Explanatory statement
This amendment broadens the scope of the “Environmental misconduct” exception to Section 1 of the Bill, defining “Environmental misconduct” as either a breach of environmental law in the UK or any other country, or conduct that has caused or has the potential to cause significant environmental harm.
LGA view
We propose this amendment to broaden the definition of “Environmental misconduct” to include breaches of Environmental law or actions that cause significant harm to the environment, including the life and health of plants and animals.