Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Environmental, Social and Governance Issues
Address to the Goldman Sachs JBWere Superannuation Forum
4 July 2008
I'd like to thank Goldman Sachs JBWere for the opportunity to speak at the "Environmental, Social and Governance Issues in Superannuation Forum".
This forum reflects the growing recognition in the superannuation industry of the importance of these issues.
I am proud that a system I help set up to ensure Australia's economic security, remains in a powerful position to secure our futures though its ability to recognise the market forces of sustainability.
Forums like this are important in addressing institutional investors concerns about how to reconcile their role as investment delegates with the broader ESG considerations.
Role of ESG
I would like to take this opportunity to outline my perspective on the role of ESG in super.
Australia's managed funds industry is one of the major markets for managed funds in the world and the largest in the Asia Pacific, with a total of A$1.4 trillion this is forecast to grow to around A$2.5 trillion by 2015
The growth of managed funds industry in Australia has been underpinned by Australia's innovative superannuation system.
Superannuation funds dominate the local fund management industry, with super investments representing approximately 75% of managed funds with around A$1.1 trillion in assets
The future is bright with compulsory contributions, together with tax advantaged voluntary contributions continuing to support the strong growth of the managed funds industry.
It is widely recognised that concern for the environment and sustainability is growing in prominence - the asset management industry is rapidly evolving in its efforts to assess these issues and integrate them into its long term decision making.
There is a growing realisation within the industry that range of environmental, social and governance (ESG) issues pose core investment risks with the potential to impact heavily on the long term viability of investments –
From climate change and other environmental risks, to human capital management, human rights and health and safety, local communities to supply chains and brand reputation.
These value drivers extend well beyond those captured in traditional financial reporting, but are never the less fundamentally linked to shareholder returns.
The development of carbon pricing presents a stark example of how extra-financial factors, traditionally kept of the balance sheet, can become real risks for business… and investors.
It is a timely reminder on how regulation can evolve to impact on a company, and how those companies that recognises and respond to ESG factors can be better prepared for both the risks and opportunities that the future brings.
In response growing evidence of the materiality of ESG factors, global investors and asset managers are increasingly integrating a broader assessment of risk into their decision making activities.
The role of ESG factors in the effective analysis of risk and investment valuation has also seen a broadening in the understanding of the fiduciary responsibilities of financial institutions.
This is evident in the significant uptake of the UNPRI, which has to date attracted more than 230 signatories with funds under management of over US$10 trillion.
Australia has a number of signatories - they include ARIA, BT Financial Group, CARE super, Catholic Super Fund, CBUS, Christian Super, HESTA, Local Government Super, Portfolio Partners, State-wide Super Trust, VicSuper, Vision Super and a number of government funds.
Sustainable investment focuses on a comprehensive analysis of material investment risks that have not traditionally assessed by financial analysts.
It is not a values-based investment analysis in line with ethical investing and does not necessarily involve excluding industries or companies from investment portfolios.
It is though a comprehensive evidenced based review of extra-financial risks, sustainable investments aims to ultimately improve returns and lower investment risk.
The consideration of ESG factors should be seen as a complement to the current focus on short-term financial evaluation, as it does not detract or conflict with them.
In this way, sustainable investment is the convergence of traditional investment approach with that of long term sustainability.
It is my belief that the incorporation of ESG analysis is not a short term trend, but represents a fundamental change in how the industry does business. An understanding of the impacts that ESG factors can have on investment performance is critical for sustainable, long term economic growth.
ESG and Super
The very nature of superannuation investment is long term. Superannuation funds, perhaps more than any other group of investors, are placed to take advantage of the long term opportunities, and are most exposed to long term risks.
I understand that perceptions about the legal environment have made trustees hesitant to expressly incorporate ESG factors for investment strategies for which they have been responsible.
However, the consideration of ESG factors is so critical to the long term financial success of super assets, that in my view it is an important part of the fiduciary responsibilities and as such, should be incorporated into the investment decisions making process of superannuation trustees.
Trustees of superannuation funds in Australia have solid grounds for pursuing sustainable investment strategies, provided they are precisely formulated and carefully implemented…and the purpose is the advancement of members interests.
I must stress the integrity of decision making that is required.
This is not about justifying a broad ideological agenda, stimulated by a handful of highly visual examples such as AWE or Hardies.
Sustainable investment is a long term investment strategy that must be backed by rigor.
To achieve this, there needs to be the investment data and analytical tools available.
One of the biggest impediments appears to be access to adequate, verifiable information about ESG risks
The Super industries exploration of initiatives that can kick start the availability of high quality and practical research, such as the EAI, to which a number of Australian super funds are members is to be commended.
I am heartened to see it on this forum's agenda.
It is important that the industry work collaboratively to increase the availability of quality analysis, recognising the value of this information is essential to the mainstream development of sustainable investment.
The Government recognises the importance of CSR reporting, which is essential in your efforts to incorporate ESG issues into your investment decisions.
While Australian corporate entities can already report on their environmental social and governance issues as part of their annual report, which more than 80% of the ASX 100 do, only 27% provided an increased disclosure level with only 16 % reporting according to the recognised Global Reporting Initiative (GRI) framework.
The Government is keen to develop in close consultation with industry and stakeholders suitable approaches to promote and improve CSR reporting.
As part of its review of Directors' report, I have asked Treasury to include a discussion of the options that might improve the quality of disclosure about sustainability risks and the strategies companies have in place for managing those risks.
We have also provided $2 million to the St James Ethics Centre to develop initiatives to expand the number of companies actively engaged in identifying and adopting responsible business practices.
I am mindful of the concerns around a mandatory approach to reporting that could result in a "tick the box" report- this would not be in anyone's best interest.
However the reporting level must improve and while government has a role, the super industry can play a powerful role in driving CSR reporting and the overall CSR debate.
A simple reality is that money talks.
Super funds have both the capacity and the occasion to exert direct and substantial influence over the operation of listed companies. This gives institutional investors the capacity to influence corporations approaches to corporate social responsibility including the management of non financial risk.
This can be driven through your investment practices, mandate to funds managers and through your role a shareholders.
As I mentioned earlier funds managers and investors around the world recognise that extra–financial issues such as climate change affect corporate performance in the long term.
I know climate change is on your agenda to do and I would like to take this opportunity to discuss the Government's initiatives in this area.
The Government recognises that Australia's future economic development will, in part, depend on today's response to climate change. And that is why the government is moving quickly to implement its comprehensive framework for climate change.
Our climate change policy is built on three pillars –reducing domestic emissions at least cost…adapting to the effects of unavoidable climate change and helping shape a global solution.
This morning I will touch on the first two pillars, briefly.
The Government is introducing a broad based emissions trading scheme by 2010 to help reduced Australia's emissions at least cost.
The scheme will create a robust, competitive domestic carbon market.
This is a major economic reform that will create real economic incentives and provide for regulatory and investment certainty – driving essential investment in low emissions projects and technologies. Indeed, Australia's transformation into a low carbon economy will require substantial investment in long lived assets.
In particular, we expect to see investments in renewable energy sources grow significantly over the coming years.
The Government is also committed to expanding the renewable energy target to ensure that 20% of Australia's electricity comes from renewable energy by 2020. A discussion paper on the design is currently available and open for submissions until the end of the month.
It is designed to support our emissions trading scheme, and will be phased out between 2020 and 2030 as the EMT matures.
This presents a significant opportunity, particularly for super funds, which focus on returns over the long term, to diversify investment portfolios and invest in sustainable projects that keep performing over the long run.
Now I understand that you are all keen to know the magic number to complete your modelling, as it is critical in accessing the financial implications of carbon liabilities for companies.
Given the important role of industry and the community in engaging with emissions trading scheme, the final design of the scheme will be decided after extensive consultation. It will be informed by Treasury modelling and the work of the Garnaut Review.
As part of this, the Government will release a green paper later this month, with the final scheme design including targets and trajectories, to be released by the end of the year.
Adaptation is an area that has received little attention to date, however for superannuation funds and the financial services industry it is a crucial issue.
However the industry's knowledge and experience means it is well placed to assess these impacts and adapt accordingly.
The Government is helping to build Australia's capacity to understand the implications of climate change through the establishment of the Australian Centre for Climate Change Adaptation. The centre will provide governments, industry and the community with clear and reliable information to assess risk and develop adaptation strategies.
I would like to end by reiterating my support for the Superannuation industries leadership in driving the integration of broader sustainability risks into investment decision making.
Trustees of superannuation funds in Australia have solid grounds for pursuing sustainable investment strategies, you have the most to gain from understanding the ESR risks in investments and encourage you continue to drive research and innovation in this area, developing the data, skills and tools necessary and take advantage of your unique position in relation to long term opportunities.
In relation to the Governments initiatives to transition to a low carbon economy, they will have affects on existing investments and create new opportunities. It is important that trustee ensure their investments adapt to these changes.
Keep up the great work.