Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Speech to Committee for Economic Development of Australia
9 October 2008
Thank you for inviting me to join you this afternoon and take the opportunity to engage with Committee for Economic Development of Australia members on the very important issue of corporate social responsibility (CSR) and sustainability.
For nearly 50 years, CEDA has informed, influenced and raised the standard of public policy debate on the current and emerging issues shaping Australia's economic and social development, and CSR is a very important issue in that context.
Though events such as today's, CEDA, nurtures important connections between business, government, peak bodies, and industry and community groups.
As you would all no doubt be aware, the expectations and demands of business in the 21st century are evolving rapidly and there is growing realisation that if we are to overcome the major sustainability challenges we face – business must be part of the solution.
We are currently witnessing the unwinding of a credit – driven boom, in which, the PM has said, greed sometimes drove many to make decisions often not at all in the interest of the wider community.
In the US we saw mortgage salespeople preyed on the aspirations of millions of vulnerable families, soliciting them to take out home loans with hidden fees, ratchet interest rates, and confusing repayment terms.
Many who participated said and did anything to make a sale. There was a total lack of any regulation, supervision and disclosure.
Predatory financers inflated borrower's income and overstated their ability to pay back a loan.
Then these bad loans were financially engineered into elaborate new financial instruments, and like pass the parcel, sold on to banks, pension funds and insurance companies as asset backed securities – offering the illusion of low risk and high yield in turn backed by dubious AAA credit ratings, themselves often highly conflicted.
Mainstream lenders and analysts risk models ignored the broader social factors at play – who the loans were going to, who was selling them and why.
Driven by corporate governance structures that encouraged short term paper results over long term measurable and sustainable outcomes.
Money was pumped into these opaque financial instruments in search of ever more growth and all the time moving away from a sustainable long-term investment approach – in what was most likely the largest miss-selling this century.
As we know this entire arrangment collapsed under its own weight, resulting in the world financial crisis we face today.
The sub-prime examples reflects a fundamental failure of values and provides a clear example of the business and social case for CSR.
The world financial crisis is not just a corporate issue; the economy is not a private product but critical piece of social infrastructure.
The PM is particularly is committed to responsible economic management ,matched with a long term, sustainable vision for the nation's future.
After so much squandered on short-termism – now is the time to address the responsibilities and long term values of corporate.
The Rudd Government's $71 million historic plan for single, standard national regulation of consumer credit is an important part of this.
This two-phase action plan for Commonwealth regulation of consumer credit, agreed at last week's COAG meeting, will have a strong focus on responsible lending and and sustainable practices.
This delivers on our commitment to modernise Australia's key financial services.
The reform is vital for our 21st century national economy, and for continuing consumer confidence in our fast-changing, increasingly complex financial services marketplace.
The Government is moving to give consumers a new level of protection by including, for the first time, a requirement for lenders to lend responsibly, including assessing borrowers' capacity to repay loans and for finance brokers, mortgage brokers and lenders to be licensed.
Sustainable, responsible businesses are integral to our future prosperity and our international competitiveness.
To be sustainable, businesses must take a long term view of their impacts on local communities and the natural environment – as well returns to investors.
Business must be aware of the impact they have on society.
Scrutiny and pressure is only going to increase and therefore so is the importance of managing its external impacts.
Concerns about climate change, the pending introduction of the Carbon Pollution Reduction Scheme, along with the impacts of business on society and the environment in general have increased the profile of sustainability issues in Australia.
One clear view of sustainable development is that it comprises three interrelated areas – (1) environmental sustainability, (2) economic sustainability and (3) social sustainability. It is about being able comprehend all three elements whilst still meeting the needs of the present generation but without compromising those of the next.
Corporate Social Responsibility (CSR) is about business commitment to and responsibility towards such a goal of sustainable economic development.
CSR is an issue whose time has come – it is my opinion that developments in this area are not a short term trend, but represent a fundamental shift in how we do business.
CSR has continued to develop well beyond its philanthropic and community beginnings, and there is now a growing realisation that a business cannot operate in a void – insulated from the people, community and society in which they seek success.
It is not just about how a business distributes its profits, but how it goes about making that profit – across the organisation.
This requires business to take a long term view of their impacts on the wider community and the environment and embed CSR in to the business process.
The long-term success in running a business in today's complex, economic, environmental and social landscape is increasingly dependent on extra financial factors previously left off the traditional balance sheet.
A company's approach to intellectual and human capital can have consequences for its reputation, its capacity to innovate, its brands, and its many other intangible assets, all of which are critical to value creation in today's modern economy.
These and other issues, including industrial relations policy, supply chain management, human rights, environmental management systems, represent a growing number of extra-financial factors that can drive a company's performance and valuation.
These factors can have a direct impact on the short and long term returns, they can also have an impact through such mechanisms as reputation loss and customer satisfaction and loyalty.
While some commentators have speculated that the financial crisis with put a stop to CSR programs – I believe this not be the case. Such views are driven by a misunderstanding of what CSR is all about. If anything the current crisis should accelerate is adoption.
Companies may need to refocus their efforts, and concentrate on the shared values between them and the wider community in which they operate.
I believe the current circumstances highlight the realities of CSR as an important means for companies to manage non-financial risk and to maximise their long-tern value.
The mainstreaming of CSR into management practice is central to maximising its contribution to business success and to greater sustainability goals.
In providing a more holistic view of the business and its activities, CSR can stimulate better polices, decision making and business practice and stronger long-term profits.
I am a strong believer that companies which take a broader range of social and environmental factors into account when making business decisions are more likely to grow long term shareholder value.
The Carbon Beta report by the strategic advisors, Innovest – (a research firm that warned about the pending sub-prime crisis) showed strong evidence linking proactive corporate action with strong financial performance.
Climate change has emerged as one of the greatest challenges we face – environmentally, economically and socially.
Climate change has shown that environmental issues have a direct economic impact and implications for business activities.
It will see a complex range of issues impacting of companies and investors. These issues will differ across sectors of the economy.
And the Australian Government recognises climate change as a priority for decisive and responsible action.
Australia's future economic development will, in part, depend on today's response to climate change.
The introduction of a broad-based Carbon Pollution Reduction Scheme in 2010 will set us on a path to reduce Australians emissions at least cost, and it will provide the real incentives and the regulatory and investment certainty needed to drive new and innovative ways to reduce carbon emissions.
Harnessing the response from capital markets through the redirection of capital flows from "high-emitting" capital to "low-emitting" capital is a critical part of combating climate change.
A recent article from the Energy Policy journal predicts that the global carbon market will grow to $10 trillion – comparable to the current size of the oil market.
The International Energy Agency predicts that halving emissions by mid- next century will require $45 trillion of investment.
Australia has a competitive advantage with its vast renewable energy sources – wind, solar, wave and geothermal.
Renewable energy presents a significant opportunity, as the Government delivers on its commitment to expand the renewable energy target to 20% by 2020.
We expect these policies to be particularly appealing for investors, who focus on returns over the long term.
Under the CPRS carbon exposure will become increasingly financially material to investors.
Climate change and the development of carbon pricing presents a stark example of how extra-financial factors, traditionally kept of the balance sheet can become real challenges for business.
Investors will need to manage this exposure and identify investments that will be best positioned in an increasingly carbon constrained environment.
The Garnaut Climate Change review predicts that failure to mitigate greenhouse gas emissions could result in a lowering of Australia's GDP by around 1% by 2025 and 4.8% by 2100, however early action could reduce these risks and lower mitigation cost.
Up to now the wrong incentives in the market have driven climate change.
If we are going to truly tackle this generational challenge the, we need to harness the full power of the market.
We need to plan now for the impacts of climate change and factor this into the financial decisions and investments we make.
In response to the growing evidence of the materiality of these factors, global investors and asset mangers are increasingly integrating a broader assessment of risk into their decision making activities. This has also been accompanied by a broadening of the understanding of the fiduciary responsibilities of financial institutions.
Australia's managed funds industry is one of the world's largest managed funds pool in the world with well over A$1 trillion funds under management; which is expected to grow to A$2.5 trillion by 2015.
The growth of managed funds industry in Australia has been underpinned by Australia's compusary superannuation system now 20 old.
Superannuation funds dominate the local funds management industry, with superannuation investments representing approximately 75% of managed funds.
The very nature of superannuation investment is long-term. As more or less permanent holders of stock in Australia's largest listed companies, superannuation funds, perhaps more than any other group of investors, are placed to take advantage of long term opportunities, and are most exposed to long term risks.
There is realisation within the industry that a range of environmental, social and governance (ESG) issues pose a core investment risk with the potential to impact heavily on the long term viability of investments.
Trends for funds and global investors to incorporate a broader assessment of risk into their investment process has gathered pace.
This is evident in the significant uptake of the United Nations Principles for Responsible Investment (UNPRI), which has to date attracted more than 230 signatories with funds under management of over US$10 trillion.
Sixty-six Australian organisations and 8 international fund managers are signatories to the UNPRI – representing more than 30% of all funds under management.
An understanding of the impacts that ESG factors can have on investment performance is critical for sustainable, long term economic growth.
I note the Australian Institute of Superannuation Trustees and the Australian Council of Super Investors joint submission to the Government's Green Paper on the establishment a CPRS states that: "as significant long-term owners of Australian companies – not-for-profit superannuation funds had a fiduciary obligation to address climate change risks and that these should be addressed sooner rather than later".
I would also like to reinforce this point adding that the consideration of ESG factors are so critical to the long-term financial success of super assets, that in my view it is an important part of the fiduciary responsibilities of all trustees and as such, should be incorporated into the investment decisions making process of those 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.
It is great to see that institutional investors and funds managers are cooperating and allocating considerable resources to encourage investment research that considers the impact of non-traditional and non-financial issues including climate change on long term company performance.
A practical and powerful tool that superannuation funds are increasingly embracing to manage these issues and build on their investment decisions, is to actively engage companies as a shareholder.
Active ownership through shareholder resolutions, direct engagement strategies and voting can value add to investment decisions and is critical for ensuring good oversight, governance of companies and their sustainable performance.
One aspect that will need to be front and centre in the superannuation sectors consideration of climate change and other ESG related risks and opportunities will be the need to take a long term approach to investment decisions.
It must be understood that superannuation trustees play a central role in the investment chain, how super trustees structure mandates will affect their ability to manage climate change and other long-term risk factors.
Funds managers and analysts will need to be sufficiently encouraged to take this approach.
The business needs to be aware that as concerned investors become increasingly discerning about these issues when selecting portfolios; this has the potential to impact considerably on a company's valuation and access to capital.
Fund managers and trustees, in seeking and valuing non-financial performance information will be a critical influence on sustainable business performance and a critical force in driving the value of CSR.
Government believes that the meaningful disclosure is critical to development of socially and environmentally sustainable corporate behaviour.
Transparency, accountability and disclosure are at the cornerstone of corporate governance and essential to the sustainable growth of capital markets.
Importantly companies reporting their sustainability risks and strategies for managing those risks provide valuable information to both the market and broader community of the impacts of their corporate activities.
Reporting is also a powerful management tool critical for business to realise the potential of CSR.
Through clear business reporting on the strategies, performance and prospects, that combines non-financial information with financial information – valuable insight to a companies overall management can be gained.
While Australian corporate entities can and already do report on the environmental, social and governance issues as part of their annual report, recent figures from a study by the Australian Council of Superannuation Investors showed that in 2007 only 16% of the ASX 100 reported against recognised GRI.
This compares with 76% in the UK and 80% in Japan.
It is very pleasing that certain Australian companies (some 83 to date including a several here today) are moving beyond the regulatory requirements and are producing corporate responsibility reports using reporting frameworks such as the Global Reporting Initiative (GRI).
Yet despite the considerable investment in CSR by many companies, Australia's level of reporting on these issues is lagging well behind their international counterpart.
While am cognisant of the fact that quantity doesn't necessarily equate to quality, there is a clear need to improve the relevance and utility of reporting in an Australian context, and to ensure incentives are there for all companies to report openly and comparatively.
It is clear to me that the true value of CSR crystallises around effective reporting.
Reporting needs to provide the information investors and consumers seek.
It needs to allows them to confidently compare the performance of different companies in a particular sector.
To do this;
It must be genuine, informative and forward looking.
It must be material and timely and address risks and opportunities and management.
For this it needs to include key performance indicators that link to the businesses strategy, stakeholder requirements and facilitate comparisons.
It also needs to be objective and credible.
For business to realise the potential benefits from developing non-financial indicators of performance they need to link the measures to the strategic goals of the business, ensuring that they quantify what they purport to represent.
Without adequate reporting CSR risk becoming nothing more than a marketing devices.
As such I have asked Treasury to examine opportunities that might improve the disclosure of sustainability risks and the strategies companies have in place for managing those risks.
The Government is keen to develop in close consultation with industry and stakeholders suitable approaches to promote and improve corporate responsibility reporting.
While recognising the need for responsible business practice and reporting of sustainability issues, the Government also understands the requirement for a flexible, rather than the one size fits all approach.
The Government understands that it has a strategic role to play in encouraging the right conditions for sustainable business practice.
And that sustainable and responsible businesses are integral to our future prosperity and international competitiveness.
I believe the role of Government is in creating an environment that – first encourages, facilitates and promotes the integration of CSR into company's business practices and secondly opens those practices up to accountability and transparency.
However, we do not want to stifle innovative responses by dictating what companies responsibilities should be beyond the regulatory standards in which they operate.
This said, the government recognises the importance of corporate responsibility and is considering a range of options to encourage and improve companies' engagement with this issue.
Along with this the Government accepts it must demonstrate leadership in this area.
That includes looking at its own behaviours in relation to the impacts of its policies and everyday activities in relation to its contribution to sustainable future.
The Prime Minister announced in May an internal government examination of the sustainability of Government operations. This review is currently under consideration.
I would like to reiterate that I see the development of socially and environmentally sustainable business practices as vital to our future prosperity and international competitiveness and as such is high on my priorities.
The Government will be working in close consultation with industry and stakeholders to move forward in this area.
I am keen to hear your views and ideas on possible approaches to promote and improve the integration CSR into mainstream business practice, along with meaningful reporting.
As business leaders … and as companies actually facing the challenges of addressing your sustainability responsibilities, you play an integral role a sustainable economic future for Australia.