Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Corporate Responsibility - Alive and Well
Keynote Address to Property Council of Australia
20 April 2009
I would like to thank the Tasmanian Division of the Property Council of Australia for this opportunity to speak to you today, here in my home state.
I would also like to welcome my Tasmanian Ministerial colleague, the Hon Lisa Sing, the Minister for Corrections and Consumer Protection.
Thanks also to Quadrant Super - Wayne and Sue - who has partnered with the Property Council to organise today's event.
A few quick words on the Property Council.
The Property Council is an important feature of the national advocacy environment. Whether it is here in Hobart, or back in Canberra, as an organisation you champion your members' interests well, whether they be in relation to tax issues - obviously highly topical at present - or on planning, development, environmental and urban policy matters.
I also thank you for the chance to address you today on an issue in which you've demonstrated significant interest as an organisation, and indeed as an audience, and that is the very important issue of Australia's long-term economic, environmental and social sustainability.
Today the world is confronted two of the greatest challenges of our time. These are the twin global policy challenges of global climate change and the global economic crisis - the former will haunt humankind for generations if don't act now and the latter is the most significant disruption to economic activity and wealth generation in many, many generations.
Two seismic challenges, yet neither can be neglected. Both must be dealt with by us today.
But from these twin crises does come opportunity. We have never had a better opportunity, nor a higher need, to address the shortcomings of the past, and develop an economy and society that prepares us for the future and, importantly, that remains sustainable and stable into the future.
And at the heart of both solutions will lay our business and corporate sectors.
And within that broad group, both I and the Government of which I am a part, strongly believe that the property sector will play a doubly vital role in moving us towards such a future. The property sector has been a very active participant in addressing sustainability issues by informing the debate and more importantly developing solutions.
These property sector initiatives have even flowed through to drive innovation and change outside of the industry.
The Property Council of Australia has show particular leadership in this area, especially through its education programs, abatement fund and guidelines and standards.
Before I outline my specific views on sustainable development and responsible business practice today, I would fist like to touch in more detail on the second of the two crises I've mentioned - the current economic crisis we are facing as a global economy.
Global economic crisis and Rudd Government's response
We are all well aware that the world is facing the most significant upheaval in the global economy markets in all of our living memories.
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.
2009 is shaping up as a very tough year for the global economy — and a tough year for Australia as well.
Our national economy is operating against the backdrop of the worst synchronised global economic downturn in the post-war period. Much of the developed world is in recession and the economies of important export markets in the region have weakened significantly.
The deteriorating global outlook has seen growth forecasts slashed for 2009. The IMF is now forecasting a collective budget deficit of seven per cent of GDP for advanced economies.
The Chinese economy, an engine of growth in recent decades and, indeed, an increasingly important trade partner of Australia's, is expected to slow markedly. Indeed, most of our major trading partners have identified the imperative to undertake economic stimulus and financial sector measures in support of ailing demand and credit growth.
This has had real effects on the Australian economy and on the Tasmanian economy. We have seen this in rising unemployment figures and we are facing the impact as we currently seek to frame the Government's second Federal Budget in some of the most challenging circumstances in more than a generation.
Although in recent weeks there have been encouraging signs of growing stability within financial markets, the prevailing climate of global weakness is likely to continue for some time and may even deteriorate further before things begin to improve.
However, we cannot sit idly by and allow our economy to take the full battering it would otherwise receive.
Through early, decisive and substantial action we have acted to ensure that things - whilst difficult - are much less so than would be the case if inaction was our response.
Nation Building Plan
The Government has taken responsible and targeted policy actions to support economic growth, jobs and Australia's long term future.
You are no doubt aware of the Government's $42 billion Nation Building Plan.
The Plan builds on previous decisive stimulus measures already implemented by the Rudd Government to support economic activity and jobs.
These stimulus measures include:
- the $10.4 billion Economic Security Strategy to strengthen the Australian economy through measures to support pensioners, working families and first home buyers. Critically, the ESS also increases the number of training places and fast tracks infrastructure commitments
- the $15.2 billion COAG National Reform Package
- the $4.7 billion infrastructure package that invests in road, rail, and education infrastructure, as well as tax changes to help Australian businesses during tough economic times.
Now, turning specifically to the $42 billion Nation Building Plan.
Treasury estimates that the Plan will support up to 90,000 jobs in 2008-09 and 2009-10.
The initiatives in 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.
Key measures funded by the Plan - many of which have direct relevance to the property and construction sectors, include:
- free ceiling insulation for around 2.7 million Australian homes
- constructing or upgrading a building in every one of Australia's 9,540 schools
- building more than 20,000 new social and defence homes
- one-off cash payments of $900 to eligible families, single workers, students, drought-affected farmers and others
- a temporary business investment tax break for small and general businesses buying eligible assets
- and a significant funding increase for local community infrastructure and local road projects.
The OECD's Interim Economic Outlook demonstrates that Australia's economic stimulus measures, with a strong focus on direct government investment, are amongst the most effective of all OECD fiscal packages in terms of stimulating activity and supporting employment.
By investing in jobs and long-term economic growth, the Plan strikes the right balance between providing immediate support for jobs now and delivering the long-term investments we need to strengthen future economic growth.
In fact, for every $1 spent providing immediate stimulus to the economy, the Government has invested more than $2 on long-term investments that will generate future economic growth.
Internationally, key Governments around the world have now mounted a unified response to the challenges posed by the global financial crisis.
A key focus has been to work towards restoring the stability of national financial systems, including measures to provide liquidity, support access to funding, such as guaranteeing deposits and debt issuances and providing additional capital to absorb losses and support continued lending.
Governments have also been working to boost aggregate demand, to maintain cross-border flows of trade and investment and to address the regulatory deficiencies exposed by the global financial crisis.
The G20 has played a key role in this process.
The Government, led strongly by the Prime Minister, has strongly supported an enhanced role for the G20 to focus efforts to achieve a coordinated global response.
The key outcome of the London Summit was agreement by G20 Leaders to an additional US$1.1 trillion program of support to restore credit, growth and jobs in the global economy.
The Government understands that without a strong and functioning economy and financial services market we will not have the kind of investment required to build the sustainable economy of the future.
Property sector's role in the response
It is clear from the stimulus measures taken by the Rudd Government that we understand the critical role a strong property and construction sector plays in our economy and in securing our long term sustainable economic development.
Investment in the commercial property has a direct impact on employment, employing about 150,000 on the construction side - much more when you take into account the related property and building services and retail sectors.
The total exposure of banks to commercial property in Australia (including all Australian banks, foreign bank subsidiaries and foreign bank branches) was $190 billion in December 2008.
However, reports from the Property Council and others have highlighted the issue of a potential liquidity shortage from foreign financers and banks withdrawing finance as a result of the global financial crisis.
The Rudd Government is not willing to take a wait-and-see approach on this issue, as has been suggested by the Opposition. We won't be waiting for foreign lenders to withdraw their money and pull the rug pulled from under this vital and viable sector.
That is why we've introduced legislation to establish the Australian Business Investment Partnership, known as ABIP.
ABIP is a temporary contingency measure to provide liquidity support for financially viable commercial property assets in Australia where finance relating to those assets is not available from other financiers.
It is a joint venture between the Government and the four major domestic banks.
Without action, Treasury predicts that a combination of weak demand and tight credit conditions could see up to 50,000 people lose their jobs, with further flow-on effects to other parts of the economy.
Peter Verwer, the Property Council CEO, summed this up well when he said:
"ABIP is an essential mechanism to inject stability and confidence into commercial property.....This is decisive and sensible action.....This will protect the lending collateral for Australian small business whose jobs and productivity will lead us out of this economic slump"
Unfortunately, the Liberal Opposition doesn't share the Governments or the Property Council's commitment to supporting Australian jobs and the broader economy during the worst global recession in living memory - nor the long term vision to secure Australia's economy and better prepare it for the future.
Such a strategy not only fails to recognise both the causes and the consequence of this situation it also ignores the vital role investment in the property sector plays in our economy and our long term sustainable future.
I would now like to explore this issue of long term sustainability a little further, particularly the role responsible business and investment practices and the role of the Government.
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.
Everyone here would know from first hand experience that 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.
Responsible business and investment is not about not taking risks - it is about a better understanding of risks, the implications for the community, the environment and value creation.
And then taking the right risks.
One area critical to sustainability in which the property sector has a critical role to play is that of Australia's low carbon future. That is, in addressing that other great challenge of our generation - climate change.
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 companies and investors. These issues will differ across sectors of the economy and will continue to grow with time.
The Rudd Government recognises climate change as a priority for decisive and responsible action both at home and abroad.
The era of denial in which the effects of climate change on the world, our own nation both environmentally and economically were ignored by the Government has come to an end.
The Government is committed to bringing about real change, and making Australia apart of the climate change solution as we face the challenges of a carbon constrained economy.
The Government has built its response to climate change on three pillars: reducing Australia's carbon pollution, helping shape a global solution, and adapting to the impacts of unavoidable climate change.
The introduction of a broad-based Carbon Pollution Reduction Scheme in 2010 will set us on a path to reduce Australia's emissions at least cost. 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 Energy Policy Journal predicts that the global carbon market will grow to $10 trillion - comparable to the size of the oil market.
And the International Energy Agency predicts that halving emissions by mid next century will require $45 trillion of investment.
Along with reducing greenhouse gas emissions and developing renewable energy sources, improvements to energy efficiency represent a key part of our transition to a sustainable low-pollution future.
Historically our buildings have not been built with energy or water efficiency as a key concern-
As such, the property sector provides important opportunities to improve energy efficiency in the Australian economy.
Energy use in the commercial building sector accounts for around 10 per cent of Australia's greenhouse gas emissions.
Australian homes produce around another 10 per cent of Australia's emissions, both directly from energy used in homes and from electricity use.
Improving energy efficiency will help to lower the energy intensity of the Australian economy, and this, together with a decrease in the emissions intensity of the production of that energy, will be a major contribution to Australia's greenhouse gas abatement.
A fantastic example is here in Tasmania in the newly opened office of a true leader in responsible business practice - Hydro Tasmania. The new Cambridge office of Hydro's leading consulting business that develops sustainability solutions around Australia and the world, is the first 5-star green certified building in Tasmania.
It set a benchmark for environmental design, innovation and sustainability. It uses 18% of the energy previously consumed at their last premises, emits 50% less CO2 than the average Australian office building, It reduced impact on the environment is further enhanced by water conservation measures and the extensive use of recycled material in its construction and fit out.
I congratulate Hydro for this important commitment not only to its continued business success but also our nation's future. It is this type of long-term vision that will drive this state, the property sector and our economy into the next century.
Government policies advancing sustainability in the built environment
The Government shares this long term vision and has a number of policies focused on reducing energy and water consumption.
Energy Efficient Homes
The Rudd Government's $3.9 billion Energy Efficient Homes investment is again part of the Nation Building Plan. This investment - another example of the adversity of the global economic crisis providing an opportunity to address the twin global challenge of climate change, with the property and building sectors as a deliver mechanism - will improve the energy efficiency of Australian homes through installing insulation and increasing rebates for solar and heat pump hot water systems.
It could result in almost all Australian homes operating at a minimum two-star energy rating by the end of 2011. It is expected to reduce greenhouse gas emissions by around 49.4 million tonnes by 2020, the equivalent of taking more than one million cars off the road.
Green Building Fund
The Government has established the Green Building Fund, which comprises $90 million in competitive grants primarily for meeting up to half the cost of refurbishing, refitting and recommissioning office buildings to reduce their energy consumption.
The Government also has a comprehensive suite of programs for household and community sustainability including low-interest Green Loans, rebates to help install rainwater tanks or grey-water systems and expanded minimum performance standards and energy rating labels.
The Rudd Government fully understands the critical relationship between tackling climate change and achieving long-term sustainable economic growth.
Up to now, the wrong incentives in the market have driven climate change. If we are going to truly tackle climate change, 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.
Now I'd like to comment on the role of business in reporting on their environmental, social and governance, or ESG activities - a critical part of the equation.
As I have said on other occasions, the true value of responsible business practice 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 ESG reporting can also contribute to better functioning markets.
ESG 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 ESG 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.
Despite the considerable investment sustainability initiatives by many companies - Australian levels of corporate reporting in this important area are lagging well behind their international counterparts.
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 sustainability 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 with many using reporting frameworks such as the Global Reporting Initiative (GRI).
The Property Council is again showing leadership in this area by developing a corporate responsibility (CR) reporting template for the property sector.
As a part of a broader Code of Practice for the property and capital markets communities. I understand that It will integrate with the de facto global standard developed by the Global Reporting Initiative and conforms to the United Nations Global Compact's 10 principles of social responsibility. I look forward to the release of both the reporting guide and draft code of practice year.
The Government is keen to develop in close consultation with industry and stakeholders suitable approaches to promote and improve corporate responsibility reporting.
The Government understands that it has a strategic role to play in encouraging the right conditions for sustainable business practice.
And that sustainable, responsible businesses are integral to our future prosperity and international competitiveness.
The primary objective of the Government's involvement in the corporate responsibility sphere is to create an enabling environment and encourage more companies to integrate sustainable, responsible business practices into their business operations secondly opens them up to accountability and transparency.
The Government considers that facilitating and encouraging a greater awareness of responsible business practices in Australia may, in turn, contribute to the long term profitability of corporate Australia, and deliver benefits to the community. Through engaging with corporate responsibility practices, companies may be more able to assess and manage their risks.
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 with over 6000 business participants in over 130 countries.
Australia will also be represented for the first time - as a result of a decision taken by the Rudd Government - on the Global Reporting Initiative, or GRI Governmental Advisory Group.
The GRI has emerged as the global standard framework for CSR reporting.
To date, in excess of 1,500 companies worldwide have declared a voluntary adoption of the GRI guidelines.
A seat at the global table on GRI will directly buy us into the development of this key reporting approach.
Through its membership, the Government can directly contribute to the development of the GRI and improve its relevance and uptake in Australia.
The role of the investment industry
The investment industry plays a critical role in driving responsible business practice and addressing the sustainability issues we face.
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. Superannuation funds dominate the local industry with more than A$1.1 trillion under investment, 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), of this investment almost 30% is held in Australian equities and a further 15-20% directly or indirectly invested in the Australian property sector.
The decisions made by investment advisory industry about exactly where these funds should be invested, as you are now doubt aware, has important implications for the property sector in a competitive investment marketplace.
A recent survey by Global Core-Net and Jones Lang LaSalle highlighted that over 50% of investors consider sustainability a "tie-breaker" factor in investment decision making and that tenant expectations are a considerable driver of sustainability which has, in turn, important implications for rental incomes and building valuations.
Ensuring that investment analysts understand these issues as they advise investors such as superannuation funds, is critically important.
Superannuation has some powerful and unique properties that make it an important and powerful driver of responsible business and the broader issue of sustainability apart from its sheer size.
Superannuation consolidates ownership and control of the investments of millions of Australians - unifying shareholders powers, in a framework of universal share ownership and long-term investment horizons. Further, trustees who control this massive investment must act in the best interest of there members - this breaks down the traditional divide between shareholder, stakeholder and the community.
The potential for ESG factors to impact heavily on the long-term viability of investments links them inextricably to beneficiary outcomes, including financial returns.
The growing realisation within the industry that a range of ESG issues pose 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.
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.
Trustees that recognise and respond to ESG factors will be better prepared for the risks and opportunities that they will face.
That is why I have requested the Australian Prudential Regulatory Authority, to 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/sustainability issues in superannuation fund investment decision-making.
Responsible Investment Academy
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.
That is why the Government has provided $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.
The Academy's addition to the sector is expected to lead to innovations in the market for finance.
National regulation of consumer credit and financial services
Before I conclude I would like to make one final set of comments on a very significant national project currently well underway.
It is a project I know Minister Singh in the audience will also care very much about.
A major and important reform currently afoot is the transfer of all remaining financial services and consumer credit regulation and supervision from the States and Territories to the Commonwealth Government.
This transfer was agreed at COAG in late 2008 and covers such areas as all consumer and mortgage credit, investment home loan credit, credit brokers, debentures, margin lending and trustee companies - together, some 20% of all financial services in Australia.
The outcome will be a single, standard national supervisory regime requiring all credit providers and advisers to be licensed as holders of Australian Credit Licenses and to be oversighted by the Australian Securities and Investment Commission (ASIC). All lending must be done responsibly and must include an assessment of an individuals capacity to repay.
I raise this project also because it has important implications for the property sector.
Any property mortgage or advice in relation to a credit for an individual to finance property will be covered.
Furthermore, with the transfer of the existing set of consumer credit legislation from the States we will be extended its scope in two key way.
The new laws will cover situations where credit is supplied for the renovation of residential property or for the purchase of property for investment purposes,
To minimise the risk of avoidance mechanisms the regime will also include off-the-plan, as well as existing investment properties.
Under the new National Consumer Credit Protection regime all licensed holders of Australian Credit Licenses will also be required to be members of an independent low-cost external dispute resolution scheme.
A single standard national regime is in the best interest of both business and consumers. For business one set of national rules means ease of operation across state boundaries. Equally the weeding out from the margins of industry the small number of unscrupulous operators whose behaviour sometimes bring everyone into disrepute is a collective industry gain.
For consumers the level of improved protection is substantial.
A medium sized modern economy such as Australia cannot afford the economic inefficiencies of eight sets of rules for financial services.
The Rudd Government has led the way - and we've been greatly assisted by the States, the Territories and industry - towards a 21st century financial product system for Australia.
In conclusion, ladies and gentlemen, I opened my address to you this morning by saying that the present twin challenges we face as a community place before us both an immense, historical challenge but also an equally momentous opportunity.
In the area we've been focused on today, the opportunity before is to take the road to an economically, socially and environmentally sustainable future.
The choices we make today will determine our future prosperity, , stability and security.
The Rudd Government has demonstrated its commitment to preparing the Australian economy for a sustainable future.
The property industry has also played and I am sure will continue to play an important partnership role in this same endeavour.
Everyone in this room can be part of the solution to the issues we now face.
I thank you for your commitment and the Government looks forward to continuing its close working relationship with industry and stakeholders to move forward in this area.Thank you.