5 February 2009

Closing Keynote Address to the Australian Centre for Corporate Social Responsibility 3rd Annual Conference, Sydney

Introduction

Good evening.

First, please allow me to thank Leeora Black, from the Australian Centre for Corporate Social Responsibility for inviting me to address your third annual conference and Westpac, a corporate leader in CSR, for hosting the event.

I appreciate the commitment of the Australian Centre for Corporate Social Responsibility to promoting CSR issues. Your comprehensive advisory, research and training services are nurturing a real understanding of CSR across the public, private and government sectors.

I would also like to take this opportunity to congratulate the Centre on its partnership with La Trobe University to deliver a Graduate Certificate in Corporate Responsibility, being launched here today with classes starting later this month. It will be the first graduate level qualification in this important and emerging corporate management area.

I look forward to following its progress, and the contribution the programs graduates make in this field.

Conferences such as this play an important role in encouraging stakeholders to discuss and debate the often complex issues raised by the deceptively simple three letters – C-S-R .

It is also an opportunity for leaders in the area, who are critical to driving this important evolution in business thinking, to get together and exchange cutting-edge thinking about the future direction of CSR in Australia.

The Rudd Government has a commitment to a strong CSR policy, one that builds on your skills, leverages on your commitment and adds to your efforts.

Shortly I want to share the Government's thoughts on the importance of what you do and the long-termism that you bring to investment decision-making, and how we, as the Government, can assist in your important work.

But before I do I want to make a few comments on the current economic environment and the actions the Rudd Government are taking to deliver nation building and jobs to Australia.

Current Economic Situation

Let me be very clear – as has the Prime Minister and the Treasurer recently – the world is currently facing a global recession.

I don't need to go through the causes and events that have led to 2009 shaping up as a very tough year for the global economy and for Australia – the background is now well known.

Global growth forecasts have been slashed for 2009 and the IMF is now forecasting a collective budget deficit of seven per cent of GDP for advanced economies.

Australia cannot be immune from the effects of this crisis. A budget deficit is now forecast for 2008-09 of $22.5 billion, or 1.9 per cent of GDP.

The Rudd Government reaffirms its commitment to deliver budget surpluses, on average, over the course of the economic cycle.

As the economy recovers, and grows above the trend, the Government will take action to return the budget to surplus.

Nation Building and Jobs Plan

In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs and invest in nation building.

That's why the Rudd Government announced on Tuesday a $42 billion Nation Building and Jobs Plan to support jobs and to invest in future long-term economic growth.

Treasury estimates that the Plan will provide a boost to economic growth of around ½ per cent of GDP in 2008-09, and around ¾ per cent to one per cent of GDP in 2009-10.

The $42 billion Nation Building and Jobs Plan builds on the stimulus measures already implemented by the Rudd Government to support economic activity and jobs.

And why does this matter to the issue of today's conference? It matters very much – the Nation Building and Jobs Plan is about economic stability, economic confidence and economic growth. It has strong immediate payment support but also strong longer-term features to drive long-term growth.

It is exactly this kind of stability that will further assist in maintaining the growth and continuing the mainstreaming of the CSR agenda that everyone in this room works so hard to deliver.

Long-Termism And Extra-Financial Risk

I would now like to take this issue of the long-term a little further, particularly as it relates to CSR and investment decision-making.

As the Federal Minister with responsibility for corporations, markets and also superannuation, my portfolio brings together for the first time two of the most powerful drivers in responsible business practice: corporate governance and compulsory long-term investment.

As I know everyone here understands, business and the financial markets do not, and cannot exist in a void, isolated from the communities and the environment in which they operate.

The Rudd Government is committed to sustainable economic growth, and realises that sustainable, responsible businesses are integral to our future prosperity and international competitiveness.

To be sustainable, businesses must take a long-term view of their impacts on local communities and the natural environment - as well as returns to investors.

Responsible business practice is an integral part of sound corporate governance practices and that the integration of environmental, social and governance issues into investment decisions is critical to valuing long-term investments.

The current global financial crisis has shown us, all too clearly, the folly of business and investment decisions based on a focus on short-term paper profits over long-term real and measurable value creation.

The financial crisis has highlighted not only the materiality of a broad range of extra financial indicators in determining risk – but also brought to peoples attention the importance of the economy as a piece of social infrastructure.

While the Rudd Government is committed to responsible economic management, and minimising the impact of the current financial crisis, we are equally committed, as our Nation Building and Jobs Plan clearly illustrates, to delivering a sustainable, long-term future for the nation.

After so much was squandered on short-termism – now is the time focus on the long-term.

It presents an important opportunity for a repricing of risk and the deep integration of long-termism in investment decision-making.

Responsible business and investment is not about not taking risks – it is about a better understanding of risks, the implications for the the community, the environment and value creation. And then taking the right risks.

Addressing these issues – social, economic and environmental is key to long-term business success.

It was disheartening, but not overly surprising to recently read that in an international survey just released it was found that 40% of global business leaders surveyed said their industries would have to pull back on CSR initiatives – including energy efficiency and environmental.

I am cognisant that in the current financial climate many companies are looking to reduce their costs and that in these circumstances some may see CSR as "low-hanging fruit".

I would see this as an unnecessary mistake.

While I realise that there may be some softening in discretionary spending as businesses tighten their belts – if we can move to a point where CSR and long-termism is truly embedded in business practice, we wouldn't see this response.

CSR mitigates against knee-jerk responses.

For example, in the current financial environment many companies are making very difficult human resource decisions, decisions that will have a significant effect on their future sustainability, and that of the economy and the community as a whole.

I believe businesses that are able to factor in the complex and long- term impacts of their decisions and explore innovative approaches to managing staff and the delivery of their services will be better placed to weather the storm. They will emerge in a better place to take advantage of new opportunities for growth.

This is the face of modern CSR during a global financial crisis.

Only recently BT, one of the world's largest telecommunications providers delivered a strong practical argument for the business case for CSR.

BT analysis showed that ₤2.2 billion of new revenue could be tracked to the company's CSR credentials.

Having spent ₤22 million on charitable activities, they thought it was important to show value for money. In addition to this they gained huge cost savings of ₤410 million a year from their environmental initiatives, including energy efficiency measures and changing the way staff work.

There is a strong nexus between corporate social responsibility, sound corporate governance and sustainable business development.

Or to put it another way, wise investors and consumers will respond to good CSR.

And in turn, that creates the right environment for long-term survival and growth.

While terms like "corporate social responsibility" and "responsible investment" may sound altruistic, they all boil down to sustainable business practices.

The kind of business practices Australia needs right now.

Partnerships

I now want to turn to the framework in which this Government approaches modern CSR.

Our approach is to apply a multi-faceted framework based around partnerships – real, productive, pragmatic and practical partnerships between Government, business and the community.

We cannot rely on strict regulation to mandate CSR on business, this would stifle innovative responses from business, add costs and be counter-productive.

I consider the Government to be part of a three-way partnership with business and the community.

We must work together to foster the long-term profitability of corporate Australia, and deliver flow-on benefits and reduce any costs to the community at large.

Climate change is a perfect example of where we are developing this triangle of partnership – Government, business and community.

Action so far

The Rudd Government has already begun to develop its role within this partnership framework.

In May last year, the Prime Minister announced that the Government had granted $2 million over three years to the St James Ethics Centre.

This support has enabled the Centre to build a hub of activity working with Australian businesses to develop their capacity to identify and adopt more responsible business practices.

The Centre has continued to develop and refine the CSR management tools available to small-to-medium enterprises and the Corporate Responsibility Index.

In a world first, the funding has enabled the Centre to become the focal point in Australia for the Global Reporting Initiative – the international gold standard for reporting on sustainability and the UN Global Compact – the global initiative in corporate citizenship.

Linking these to very significant global initiatives in corporate responsibility and creating a base for them in Australia – the Centre is helping make the way clear for Australian companies to engage in CSR both locally and in the international space.

In my view, this Government-supported, community organisation-delivered initiative is a perfect example of the partnership approach at work.

Speaking of building partnerships, I should also take this opportunity to congratulate Dr Simon Longstaff, Executive Director of the St James Ethics Centre, on his appointment to the Global Reporting Initiative Board.

Taking the next step – CSR Reporting and the Global Reporting Initiative

Now I'd like to comment on the role of business in reporting on their CSR activities – a critical part of the equation.

As I have said on other occasions, the true value of corporate responsibility crystallises around effective reporting.

Commercial activities can have a substantial impact on community wellbeing and the environment, and the public is keen to know how this impact is being managed.

But CSR reporting can also contribute to better functioning markets.

CSR reporting provides a mechanism which helps broader social, environmental governance issues to be priced into investment decisions. This is important — markets cannot function efficiently and sustainably unless these issues are taken into account.

With access to CSR information, investors can better understand how a company creates financial value and deals with issues that can affect its financial performance and value over time.

Many investors are also realising that when financial and non- financial is combined it can provide valuable insight into the overall quality of management.

Australia's regulatory approach to non-financial reporting has generally been to establish broad reporting principles under which CSR reporting is implicit.

Entities that must prepare a Directors' Report must report on CSR if the issues are significant enough to be considered in a general review of the business. Information is also required on performance in relation to particular and significant State or Commonwealth environmental regulations.

Notwithstanding these requirements, CSR reporting by Australian businesses is lagging behind the rest of the world.

The recent KPMG report into international corporate responsibility reporting shows that despite having risen from 23% in 2005 to 45% by 2007, the prevalence of CSR reporting in Australia is still well below that of leading nations such as Japan and the UK.

It is however very encouraging to note that the number of top 100 companies reporting has doubled to 68 over this period.

That said, in our contribution to the partnership, we want to carefully consider any regulatory approach to CSR reporting. We certainly want to avoid boilerplate disclosures and increased compliance costs. The Government does not wish to rush into a heavy-handed approach.

Rather, we are keen to promote the importance of sustainability reporting and to play an active role in the development of well‑designed and functional sustainability reporting frameworks.

That is why our initial efforts in this area have focused on supporting the Global Reporting Initiative, or GRI.

The GRI has emerged as the global standard framework for CSR reporting.

Governed by an international multi-stakeholder board, that promotes the importance of non-financial reporting. The GRI's vision is that reporting on environmental and social performance by all organisations will be as routine and comparable as financial reporting.

To date, in excess of 1,500 companies worldwide have declared a voluntary adoption of the GRI guidelines.

As a demonstration of the Government's willingness in this area, I am announcing today that we have formally accepted an invitation for the Australian Government to be represented, for the first time, as a member of the GRI Governmental Advisory Group.

A seat at the global table on GRI will directly buy us into the development of this key reporting approach.

Membership of the Group will put the Government in a position to provide high-level advice and feedback to the GRI.

Through its membership, the Government can directly contribute to the development of the GRI and improve its relevance and uptake in Australia.

It is also an important opportunity for the exchange of best practice and policy advice among governments on policy development.

Through its membership, the Government is demonstrating its commitment to leadership in the field of sustainability, not only locally but regionally and internationally.

The Australian Government's representation on the GRI Government advisory board complements and bolsters the work of the St James Ethics Centre and Dr Longstaff.

The other side of the coin – the role of the investment

This brings me to the final aspect of my approach to CSR and the partnership that underlies it.

That is, to drive CSR into the mainstream considerations of business, rather than using blunt Government regulation, we strongly feel that the answer lies in the role of the investor community, and in particular superannuation funds.

Placing CSR in the minds of the investment community stands to powerfully reshape how CSR is considered in decision-making and harness the power of market forces to drive change.

Some of you may be aware that I have a bit of a keen long-term interest in superannuation; in fact I have even been known to list it as a personal hobby.

Superannuation – as you will all know – is the natural long-term investment. As such it has a range of natural structural commonalities with the long-termism needed of good CSR decision-making.

Sustainability, long-term value creation and superannuation go hand in hand.

Australia has a sophisticated financial sector, served by commercially astute professionals who offer their services to the world.

Our 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$1.1 trillion under investment, this is forecast to grow to around A$2.5 trillion by 2015.

Superannuation funds dominate the local industry.

Because superannuation is a long-term investment, it is well placed to take advantage of long-term opportunities, but is also most exposed to long-term risks.

The role of ESG factors in the effective analysis of risk and investment valuation has also seen a broader understanding of the fiduciary responsibilities of financial institutions.

The growing realisation within the industry that a range of environmental, social and governance issues poses core investment risks, can be seen by the fact that more than half of all funds under management in Australia have signed up to the United Nations Principles of Responsible Investment (UNPRI).

The Principles are a global initiative by the UN Environment Programme Finance Initiative and the UN Global Compact that brings together leading investment institutions from around the world, representing over A$10 trillion in assets under management.

Signatories in Australia Include ARIA (CSS PSS), Australian Super, CBUS Super, HESTA, UniSuper and VicSuper, just to mention a few.

Yet despite this growing realisation within the superannuation industry of the long-term investment risks posed by a range of ESG issues, I understand that perceptions about the legal environment have made superannuation trustees hesitant to expressly incorporate ESG factors in investment strategies for which they have been responsible.

I see it as very important that trustees understand their responsibilities when it comes to balancing short and long-term objectives and give careful consideration of the associated long-term risks that can effect investment decisions.

In my view, the consideration of ESG factors is so critical to the long-term financial success of super assets, it is an important part of trustees' fiduciary responsibilities. And as such, I believe that ESG and other extra-financial factors should be incorporated into the investment decision-making process of superannuation trustees.

Their potential to impact heavily on the long-term viability of investments links them inextricably to beneficiary outcomes, including financial returns.

Trustees that recognise and respond to ESG factors will be better prepared for the risks and opportunities that they will face.

I believe that a comprehensive, evidence-based review of extra-financial risks will ultimately improve the returns and lower the investment risk they offer members.

That is why I have written today to the Australian Prudential Regulatory Authority, APRA requesting it 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 environmental, social and governance (ESG) issues in the formulation of their investment and other operational strategies.

APRA has informed me that it will in the very near future consult closely with industry in undertaking this analysis.

This is a critical formal step on the part of the Government to ensure that the regulatory environment throws up no impediments to the mainstream integration of ESG/CSR factors in superannuation fund investment decision-making.

Responsible Investment Academy

It is one thing for Government to ensure the framework for ESG consideration is sound.

But for the partnership around investment decision making to really reap rewards, we need to ensure that the investment community is fully geared up to deliver on its end of the bargain.

With the growing evidence of the materiality of ESG factors and the strong commitment by investors address these issues – comes the challenge of actually incorporating it into their investment methodology.

I am keen to take advantage of this window of opportunity to engage the investment sector as they reassess their strategies in light of the current economical and environmental climate.

This afternoon, I am delighted to announce that the Government will provide $2.5 million over three years to the Responsible Investment Association Australasia to help it establish the Responsible Investment Academy.

The Academy will deliver education and training programs to members of the investment community on how to better assess the ESG considerations of investment opportunities. It will help develop the skills and the capacity in the industry to harness the potential of responsible investment.

There is also an opportunity for business to utilise the Academy, Investment Managers and CSR managers, will need to develop the skills b to effectively engage and communicate with investors.

The Academy's addition to the sector is expected to lead to innovations in the market for finance.

I believe the Academy will play an important role in enhancing Australia position as an international financial service hub.

Though its education and continual development program, the Academy will facilitate the responsible, informed and sustainable investment – through the emergence of new management techniques, analysis and forecasting practices, along with a greater sophistication in risk pricing.

The learning programs of the RIA have the potential to lead to improvements in corporate governance standards, and practices that lead to better run companies.

This will inturn benefit investors, business and society through reduced costs of business failure, improved long term investment returns and attraction of investment capital.

Conclusion

Ladies and gentlemen, in closing this evening, I would like to restate my commitment to fostering responsibility in the Australian business and investment communities.

We have seen the perils of short-term thinking, both, economically, socially and environmentally.

What we need now is a greater long-term view, one that is grounded in socially and environmentally sustainable business practices. This is vital if we are to secure Australia's future prosperity and international competitiveness.

Thank you.