Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Super and ESG: Risk, Opportunity and Responsibility
Address to the Australian Council of Super Investors Annual Conference
29 May 2009
Thank you for that kind introduction, Gerald.
I'm delighted to be here today to address the Australian Council of Superannuation Investors (ACSI) Annual Conference here in Melbourne.
Since 2001, ACSI (AK-SEE) has been leading the way by not only promoting the importance of environmental, social and governance (ESG) risks to superannuation funds, but just as importantly, by equipping its members with the knowledge and skills needed to deal with these risks.
The Council's Environmental, Social Governance and Corporate Governance Guidelines are a great example of ACSI's practical work in helping funds embed ESG into their investment decision-making processes.
Through all this work, ACSI plays a valuable role in protecting and enhancing the interest of superannuation fund members and the system as a whole.
More importantly, ACSI has the support of the industry – this is clearly demonstrated by ACSI's strong and growing membership base and the attendance here today.
I would like to take this opportunity to acknowledge Ann Byrne and Phillip Spathis, your commitment is deeply appreciated by the entire sector.
Today I will make some introductory comments about where we stand in the global recession, the role of the superannuation sector and important reforms for the sector in our pathway to a sustainable recovery.
I will also talk about the importance of a long-term focus in getting the growth balance right and finally I will touch on the Government's executive remuneration reform plans, something that I know ACSI members will be interested in hearing about.
Global Financial Crisis
We are all well aware that the world is facing the most significant upheaval in the global economy in all of our living memories. This is a severe and synchronised global recession.
What was initially seen as a relatively isolated deterioration in the "sub-prime" segment of the US mortgage market has had a ripple effect throughout the world.
During the expansion there was declining risk perceptions, rising risk tolerance, weakening financial constraints, rising leverage, higher market liquidity, booming asset prices and growing expenditure.
The outcome of was the rapid destabilisation of the whole financial system.
I was in New York last August, just days before Lehman Brothers collapsed and the feeling was palpable, the risk to our system extraordinary.
The events of the global financial crisis have clearly highlighted some very real cracks in the regulation of the world's financial system and aspects of the corporate governance framework in many key jurisdictions around the world.
Rudd Government's response
Calendar year 2009 is delivering on all expectations and forecasts as a very tough year for the global economy — and a tough year for Australia as well.
Our national economy, and indeed our national Budget, is operating against the backdrop of much of the developed world being in deep recession and the economies of important export markets in the region having weakened significantly.
And, while we find ourselves in changed circumstances, our mission remains constant and Australians can be confident about our nation's future.
Despite these conditions, we are weathering the storm better than most other countries because we acted early and decisively to support jobs and cushion our economy through critical economic stimulus plans.
What I would remind everyone today is that the large majority of the National Building stimulus package, is just that – geared to nation building.
Nearly 70% of the stimulus package is nation building infrastructure with the biggest school modernisation program in Australia's history, major investments in roads, in rail and in ports, hospitals, broadband and world-leading solar projects.
This program is a prime example of where a government, during a global economic downturn, must step in and stimulate our economy and support jobs and small businesses, even if that means a temporary fiscal deficit.
We don't shy away from that because to do otherwise would guarantee our country a deeper recession, a slower recovery and hundreds of thousands more Australians out of work.
The Rudd Government understands that without a strong and functioning economy and financial services market we would not have the kind of investment required to build the sustainable economy of the future.
So now I would like to turn to our financial services sector, and specifically to our superannuation system, and the key role super will need to play in meeting that sustainability challenge.
Superannuation and the crisis
We all knew that no aspect of the nation's economy could be immune from the financial and economic crisis.
So, it was inevitable that the global financial downturn would have a significant and immediate impact on superannuation fund balances. But despite this, our superannuation system remains robust, sufficiently liquid, and very well-regulated by APRA.
I have often said that Australian superannuation has proved its worth over the long haul. And I am pleased to be able to state that this is still the case.
Over the last 35 years, our superannuation system has delivered very good real returns over and above inflation.
The compulsory nature of our superannuation system and the high cost of tax concessions within the system brings with it a clear "duty of care" on the part of the Government of the day to ensure the system remains sound, efficient and as low cost as can be achieved.
This is a duty of care that I and the full Rudd Government take very seriously.
Review into the governance, efficiency, structure and operation of Australia's superannuation system
Ladies and gentlemen, it gives me great pleasure to this afternoon announce the details of one such action.
Today I can announce the details of the Review into the governance, efficiency, structure and operation of Australia's superannuation system including the membership of the Expert Panel and the Terms of Reference.
As I have mooted over the last year, the Rudd Government will conduct, for the first time in our system's history, a thorough, root and branch review of the governance, efficiency, structure and operation of our entire $1.1 trillion superannuation system.
And, as I am sure you are all aware, on 28 April this year, I I released, together with peak superannuation industry bodies, the Communiqué of Principles on the Australian superannuation system, which contained an industry resolution that the operational features of our system be examined.
I'd like to note that all sectors of the superannuation sector have come on board. This is a mature decision by everyone concerned, and one that I'm confident will help maintain community confidence in our world class system.
This is a landmark process, and I can announce today that the Review will be headed by a Panel of Experts, made up of a full-time Chair, and five part-time members.
The Chair will be Mr Jeremy Cooper, who has been able to join us here today, who will move from his current role as the Deputy Chairman of the Australian Securities and Investments Commission (ASIC).
Importantly, while at ASIC, Jeremy has had oversight responsibility across a range of ASIC's teams in the financial services sector, including superannuation, financial advisers, consumers and retail investors.
Jeremy has worked closely in areas such as super fund choice, switching and other industry issues, financial services conflicts of interest, better disclosure and online disclosure, self-managed super funds and issues affecting retail investors, better and simpler advice and financial literacy.
I would also like to take the opportunity to say that I greatly appreciate the role Jeremy Cooper has played at ASIC. He has made an important contribution to boosting consumer and investor protection, and he will lead this Review with the same expertise and passion he brought to ASIC.
Jeremy is the perfect person for this critical job and he is well suited to lead the Expert Panel, which as a group, will guide what will be a substantial national project aimed at boosting the retirement savings of all Australians by increasing efficiencies, reducing costs and fees and, in turn, lifting long-term rates of return.
I can also announce that the five part-time members of the Expert Panel are to be Mr Sandy Grant, Mr Brian Wilson, Mr Kevin Casey, Mr Greg Evans and Dr David Gruen – most of whom are well known to many here today.
Mr Grant was formerly the CEO of C‑Bus and has professional experience in the retail sector having worked for the Colonial Group.
Mr Wilson, a former Australian Managing Director of the global investment bank Lazard, has extensive funds and investment management experience.
Mr Casey has had a long and acknowledged career in the retail superannuation fund sector, having been with AMP for over 30 years, lastly as AMP's senior manager of superannuation strategy.
Mr Evans is the acting CEO of the Australian Chamber of Commerce and Industry, and is ACCI's Director of Economics and Industry Policy.
And finally, Dr Gruen is Deputy Secretary and Executive Director of Macroeconomic Group at the Australian Treasury.
The full panel brings a wealth of experience from all aspects of the sector and the economy, covering regulatory, legal, investment fund management, business, economic policy and the industry, retail and corporate superannuation sectors.
I am also releasing today the full Terms of Reference for the Review.
After almost 20 years of compulsory superannuation, and with over $1 trillion under management on behalf of many millions of hard-working Australians, it's time we examined our superannuation system.
Now, more than ever, Australians need a superannuation system which will serve them well into the future.
Both Government and the super industry want to ensure the system operates efficiently and sustainably.
The Terms of Reference are structured around examining and analysing Australia's superannuation system by focusing on four threshold areas – governance, efficiency, structure and operation.
I will speak briefly about what I mean by each area – as they are all equally important and they are all equally interlocked.
The Terms of Reference call for an examination of the governance of our system, that is the legal and regulatory framework of the superannuation system. This includes issues such trustee knowledge, skills and training.
In addition, under the governance threshold, the Terms of Reference facilitate a thorough assessment of the risks involved in the use of debt and leverage in superannuation and the development of investment options that might lead to a weakening of the diversification principle, a hallmark strength of the system.
These governance issues are critical considerations that go to the heart of the security of our system and it's time we took a good hard look at them.
On the issue of efficiency, the Expert Panel has been asked to be guided by the clear goal of ensuring the most efficient operation of the superannuation system for all its members, whether they be active or passive and whether they are making compulsory or voluntary contributions.
A key element of this is looking for opportunities to remove unnecessary complexities from the system and ensuring, in light of its compulsory nature, that it operates in the most cost effective manner and in the best interests of members.
Next, the structure of the system is paramount to issues such as cost, and as such the Review will directly examine how we can promote effective competition in the superannuation system that leads to downward pressure on system costs and upward pressure on system returns. That means more money in people's accounts at retirement, and a better standard of living in retirement.
A structural analysis of our system also means a full examination of all the current add-on features of the system and an analysis of other structural legacy features, including the potential for rationalisation where appropriate.
Finally, Jeremy and the Panel will assess the operational features of the superannuation system.
This last area is also squarely about maximising returns to members, including through minimising costs. This covers both passive defaulting members, who should receive maximum returns and value for money through soundly regulated default products, and also active selecting members, who should not be negatively impacted by conflicts of interest that may inhibit advice being in the best interests of members.
This is a broad ranging review, but after some 20 years of compulsory superannuation, and the development of many new features, the Rudd Government and the industry itself strongly agree it is time for such a thorough examination to take place.
The Review will commence its work in the new financial year and will report to the Government by 30 June, 2010, although it may report on particular issues prior to that date.
The Panel will call for public submissions and conduct public hearings in due course. The Review will be supported by a secretariat, led by Treasury and with staff sourced from ASIC, the Australian Prudential Regulatory Authority and from the superannuation industry itself.
The work of the Review will complement the current work of the Australian Future Tax System review, which is addressing what can be broadly seen as tax and "input" issues.
Before moving back to today's main conference theme, I will take this opportunity to make a few final observations on the Cooper Review and the system it will examine.
The Government comes to this important process with no preconceived views in mind, other than a few basic and firm beliefs and those are:
- one, that our system is strong and people should have confidence in it;
- two, that the system, being compulsory in nature, should always work in the best interest of members over the long term; and
- three, that together we can make our strong system even stronger and by doing so significantly boost the retirement incomes of all Australians.
I encourage all of you to contribute to this important work over the coming year.
Superannuation and sustainability
I would now like to turn back to the today's conference theme – governance and the role of superannuation.
Problem of short-termism
Earlier, I spoke of the global financial crisis. Now I'd like to expand a little on the importance of managing risk and taking a long-range view of investment.
The G20, Financial Stability Forum, now Board, and other international bodies and processes have noted that a failure to properly consider risk, coupled with an excessive focus on short-term profitability, were key contributors to the current global recession.
The global recession has also highlighted the importance of non-financial factors in assessing risk.
The failure to address these risks has shattered the confidence and trust not only of the investment community, but in the community as a whole.
I know it has had a profound impact on superannuation members in Australia.
Efforts to combat the short-term mindset and improve risk management strategies are an important tactic in the international response to the recession and are essential in restoring trust and confidence in the community.
The global recession presents us with an important opportunity to broaden the factors we consider in assessing risk, and an opportunity to embed long-range thinking into and investment decision-making.
It is vital that superannuation trustees address these concerns.
Superannuation and the long-term
An important aspect of superannuation's evolution over the past 20 years has been its emergence as a significant market participant and influence on the economy as a whole.
Superannuation funds dominate the local industry with more than A$1.1 trillion under investment, this is almost double the asset figure of five years ago and this is forecast to grow to around A$2.5 trillion by 2015.
This investment in superannuation exceeds Australia's Gross Domestic Product (GDP), and, of this investment, almost 30% is held in Australian equities.
There is a far deeper and broader ownership stake in our economy by the broader community as a result of superannuation and with that ownership comes an interest.
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, and their members, perhaps more than any other group of investors, are excellently placed to take advantage of long-term opportunities, and are similarly most exposed to long term risks. This leads to a very particular investment mind-set.
The current global financial crisis has shown us, all too clearly, the folly of investment decisions which are based on a focus on short-term paper profits over long-term real and measurable value creation.
The potential for ESG factors to impact heavily on the long-term viability of investments links them inextricably to beneficiary outcomes, including financial returns.
Superannuation trustees carry a great deal of responsibility.
One of the key prudential obligations imposed on trustees is the duty to develop and implement an investment strategy for the fund that takes into account diversification, liquidity and the need to balance risk and return in the best interests of members.
There is a growing realisation within the industry that a range of ESG issues pose a core investment risk with the potential to impact heavily on long-term viability of investments.
This has been reflected in the significant uptake of the United Nations Principles of Responsible Investment (UNPRI) with 79 Australian funds now signatories.
The Principles are a global initiative by the UN Environment Program Finance Initiative and the UN Global Compact that brings together leading investment institutions from around the world, representing over A$18 trillion in assets under management – the latter of which I just yesterday launched the Australian network of.
Funds that have signed up to the UNPRI have made undertakings to incorporate ESG issues into analysis and decision making processes, be active owners and seek appropriate disclosure from entities in which they invest.
A view that is becoming more widely embraced by the superannuation industry, and one I strongly support, is that consideration of ESG factors is so critical to the long-term financial success of super assets, that it is an important part of trustees' fiduciary responsibilities.
As such, I believe that ESG and other extra-financial factors should be incorporated into the investment decision-making process of superannuation trustees.
I think what we can say is that ESG factors present superannuation trustees with risks, opportunities and of course responsibility.
That is why I have requested that APRA review its investment guidance with the aim of clarifying the fiduciary responsibility of trustees in regard to balancing short and long-term investment goals and to make it clear that trustees can incorporate ESG issues in the formulation of their investment and other operational strategies.
The next steps – from principles to action
A critical step for the superannuation industry is to cement this paradigm shift in investment thinking and its commitment to UNPRI by ensuring that that move from principle to action.
Superannuation has powerful and unique properties that make it a powerful force in connecting and aligning investments with members' interests apart from its sheer size.
Trustees who control this massive investment must act in the best interest of their members – this breaks down the traditional divide between shareholder, stakeholder and the community.
Being long-term "permanent" and "patient" investors delivers superannuation funds a structural commonality with the long-termism needed to promote good corporate governance. Superannuation funds are uniquely placed to drive change in corporate Australia.
According to the OECD Principles of Corporate Governance, the presence of an effective corporate governance system — both within individual companies and across the economy as a whole — helps to provide the confidence a market economy needs to function well.
The requirement for trustees to manage the assets of the trust in the best interests of their members is a strong incentive for them to be actively involved in their share investments, and the governance of those companies.
To quote Justine Neville Owen from the HIH Royal Commission
"Shareholder apathy can play a part in undesirable corporate governance. If shareholders as owners are unwilling or unable to exercise their power or make themselves heard, management will lack guidance or constraint from those whose interests they are supposed to serve."
I know that ACSI believes that effective governance structures and processes decrease risk and create the stability needed to develop long-term investment strategies.
I call on the entire superannuation sector – all parts, all trustees, all members – to get on board with this long-term, sustainability agenda.
Rudd Government's agenda for action
The Rudd Government also believes we have an important role to play in the development of this agenda – both in terms of specific contributions we can and are making to ESG issues and through important and targeted corporate governance reforms.
Promoting the ESG agenda
The Rudd Government's commitment to responsible business and investment practices has taken a suite of concrete actions to promote the ESG agenda here in Australia.
These actions include:
- $2 million in funding over three years to the St James Ethics Centre for it to become the focal point in Australia for the Global Reporting Initiative and the UN Global Compact;
- $2.5 million to establish a world-first Responsible Investment Academy; and
- requesting the Australian Prudential Regulation Authority to develop a guideline for super fund trustee responsibilities in relation to incorporating environmental, social and governance issues into investment decision making.
So a series of important steps, important contributions to keep the mainstreaming of ESG moving forward.
Important corporate governance reforms
In addition to these steps we've made a range of important and targeted corporate governance reforms. Today, I want to address one in particular, and that's executive remuneration.
The Rudd Government believes that remuneration practices in companies should form part of a long-term and sustainable approach to running a business.
Critical to this is a robust regulatory framework that promotes transparency and accountability on remuneration practices, and better aligns the interests of company directors and executives with those of shareholders and the broader community.
Encouraging boards to align the incentives paid to executives with the interests of shareholders, is a tangible way that trustees can protect the long term interest of fund members.
This is a critical area of corporate governance where superannuation trustees cannot afford to be apathetic – and must step up to meet their responsibilities.
In March this year, the Treasurer and I announced that the Government would be taking measures to curb excessive termination benefits — often referred to as "golden handshakes".
Under the current law, termination benefits can reach up to seven times a director's annual remuneration package before shareholder approval is required. Clearly, this is completely out of kilter with community expectations.
The Government has moved through the Corporations Amendment (Improving Accountability on Termination Benefits) Bill which is currently open for public consultation, to empower shareholders by requiring approval for all directors and executive termination payments that exceed one year's base salary.
The Bill also expands the coverage of company officers who must have a termination benefit approved if it's over the new lower threshold.
In addition, we will establish a regulation-making power that will provide the flexibility to quickly prescribe, in addition to what is already to be set out in the Bill, what is to be considered a "termination benefit" and what is not.
Nimble executive remuneration consultants may feel they are able to call termination benefits new names or pay them in new ways, but this legislation is structured to ensure it keeps pace with any such developments.
These includes accelerated incentive payments which frequently make a mockery of performance linked alignment.
Of course, termination benefits are just one of a complex set of interrelated issues on executive remuneration, that's why the Government has asked the Productivity Commission to conduct a broad‑ranging inquiry into Australia's framework for the regulation of executive remuneration. The Commission will consider the current disclosure requirements and the role of shareholders and institutional investors such as superannuation funds.
The Productivity Commission is expected to deliver its final report to Government by the end of this year.
As part of the review process, the Commission is providing an opportunity for public participation. I encourage you all to actively engage in the Productivity Commission review, this is an very important process and the review offers a significant opportunity to finally get it right.
This work will augment the work done by APRA, which in October 2008, was asked by the Prime Minister to examine what domestic policy actions on executive remuneration would be appropriate to avoid excessive risk taking in Australia's financial institutions.
As you know APRA's report has been publicly released.
The Government will do whatever it takes to ensure that our executive remuneration framework is practical, workable and equitable — and ultimately in the best interests of the Australian community.
And I would like to take this opportunity to thank ACSI for its leadership and advocacy and contribution to the debate around executive remuneration.
In conclusion, I would like to restate my appreciation for the leadership role ACSI and its members have played, and will no doubt continue to play, in protecting the long term interests of the Australian community and building a strong foundation for future growth.
You sit in a special position as trustees of many hundreds of billions of dollars of Australian's superannuation savings.
I thank you for your cooperation as the Government and the superannuation industry move forward in developing a modern superannuation system that is sustainable, equitable and efficient.
I can assure you that the Rudd Government is committed to sustainable long-term economic growth.
We have all been witness to the perils of short-term thinking, economically, socially and environmentally. The opportunity before is to take the road to an economically, socially and environmentally sustainable future.
I do believe that the superannuation Industry has a central role to play in delivering the future we seek.