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Federal Minister for the Environment and Heritage
The Hon Dr David Kemp, MP

Delivered by Mr Roger Beale
Department of the Environment and Heritage

ANZ Pavilion, Victorian Arts Centre, Melbourne
25 July 2002

Check against delivery

Finance and Sustainability Forum Opening Address

The finance sector has the potential to be a great driver behind Australia’s push for sustainability. Turning that potential to actuality makes economic sense as well as environmental sense.

Investors, lenders and insurers all need to be attuned to risk.

Exposure to environmental risks is becoming a more important part of total corporate risk. Polluters increasingly face the risk of costly clean up or loss of customer loyalty. Some industry sectors are exposed to the effects of environmental degradation on their productive capacity. The scientists tell us that all industries are likely to face the disruptions that could emerge from an increase in severe weather events – but some will be more exposed than others as a result of the nature of their business. And sectors that are highly greenhouse gas intensive need to develop long term strategies to lower their vulnerability to climate change responses in the decades ahead.

Good companies manage these risks carefully. In an efficient capital market poor performers face increased costs because of higher risks, and the better performers are rewarded with easier access to lower cost capital.

This simple model can be equally applied to lending and insurance decisions where differences in company sustainability performance can affect the risk profile and therefore the cost of credit or insurance.

That’s the theory, and putting that theory into practice is much of what today is about. We need to find ways to ensure that markets are supporting and rewarding the sustainability initiatives of corporate Australia.

Across Australia there are some wonderful examples of voluntary environmental initiatives at the company level. Many of these are underpinned by Greenhouse Challenge or Eco-efficiency agreements with my portfolio. I’m pleased that we are starting to see innovative products in the finance sector too - not just more Socially Responsible Investment (SRI) products, but innovations such as ‘green’ loans and mortgages. The challenge of sustainability is to scale these initiatives up across the economy in commercially sound and lasting ways.

Through the Natural Heritage Trust and the National Action Plan for Salinity and Water Quality, the Howard Government has shown its commitment, a $2.4 billion commitment, to addressing specific environmental issues, such as restoring environmental flows to waterways, addressing salinity and protecting biodiversity. It has also committed close to $1billion on climate change programs.

This catalytic Government spending is vital, however, a key to decoupling economic growth from environmental stress in the longer term will be to develop markets that support sustainability. And no markets are more important in their influence over the economy than the financial markets.

One example of this is the long-term need to build a strong and competitive economy based around a lower greenhouse signature. We know that only technology will enable us to reduce greenhouse emissions and maintain our prosperity in the decades ahead. There are enormously promising technologies on the horizon – in renewable power, in clean coal technologies, in geological sequestration of CO2 and in the development of the hydrogen economy. These technologies have to be taken from design concepts to field trials and eventually to commercial commitment. This is a long term process. It will require major capital expenditure over the coming years. The Commonwealth has already made a major investment in the science and this will continue. But clearly the action must progressively move from the government sector to the commercial world, and the finance sector will need to be a key part of the equation.

While Socially Responsible Investment (SRI) is still a small segment of the investment market, there has been considerable discussion on the issue over the last 12 months. Perhaps even more encouraging than the launch of the many new SRI products, is that the principles behind SRI are starting to become part of mainstream investment thinking.

This is occurring through investment managers assessing the sustainability performance of companies as part of standard corporate governance and risk management practices. There seems to be some evidence that companies who manage their environmental, occupational health and safety and social risks thoughtfully, manage the other elements of their business equally carefully.

The so-called ‘engagement strategy’ being adopted by the $10 billion combined Commonwealth and Public Service Superannuation Schemes is an example of one such approach. I understand you’ll be hearing more about this during the afternoon. These are the types of moves I support for they represent the objective mainstreaming of environmental issues into financial markets as opposed to some of the more subjective approaches in some of the SRI schemes. Don’t get me wrong – there is a place in the retail investment market for SRI products that focus on simply excluding specified ‘sin’ areas from the portfolio. But for SRI to make a difference to sustainability of the economy, the relationship between the fund and those in its portfolio needs to be more subtle and comprehensive.

The relevance of good corporate sustainability performance, or triple bottom line performance as it is increasingly becoming known, can only increase for business, and as a consequence, for investors. It is not hard to make a link between the community anger toward aggressive accounting practices in recent corporate collapses and rising community expectations about corporate environmental, social and governance performance. If companies don’t manage their environmental performance and reputation appropriately, this is likely to have an increasingly negative impact on share price and present a significant risk to investors.

Increased disclosure, transparency and reporting is clearly a key tool in managing the relationship between companies and investors asking questions about how environmental risks are being managed. The Financial Service Reform Act will play a role in this increased transparency for investors. I’m aware that a number of global investors are starting to require that the companies they invest in produce an environment or sustainability report in order to give them confidence that environmental risks and responsibilities are being managed appropriately.

The Commonwealth Government has been actively encouraging industry to consider the benefits of environmental reporting for a number of years. In March 2000 Senator Hill launched the Australian Framework for Public Environmental Reporting, and funded Public Environmental Reporting Officers to work in the Business Council of Australia, the Australian Industry Group and the Australian Chamber of Commerce and Industry. For some time my Department has also had a library of Australian environmental reports on its website.

I am particularly interested in the attention the finance sector is starting to give to environmental reporting. This is because it starts to give tangible financial benefits to producing a report. Those companies better managing the environment and making the effort to report on how they are doing this are now not only being rewarded by regulators and the communities in which they operate, but the financial markets too. That’s a good message.

I want to finish today by mentioning three initiatives that the Government is supporting to continue our encouragement of corporate sustainability reporting. Much of the focus to this work is on facilitating the continued interaction between companies and financial market players so that both can better manage the risks associated with environmental issues.

Firstly, a grant of $55,000 is being provided to the Sustainable Investment Research Institute (SIRIS) to develop the Sustainability Reporter database. The project is a landmark in linking corporate sustainability reporting with finance sector decision-making. The database will provide a publicly accessible resource where stock exchange listed companies can disclose core sustainability information. The database aims to encourage and provide an easy mechanism for companies not producing an environment or sustainability report to make some information available. For those companies already reporting, the database enables them to avoid repetitive requests for data from analysts and other stakeholders.

On the other side of the ledger Sustainability Reporter will provide a one-stop-shop for investors to get a more transparent and consistent picture on the sustainability performance of corporate Australia. Financial institutions already supporting the database include Vic Super and IOOF.

With the growing importance of sustainability issues to good corporate governance and investment performance I’d encourage companies to provide information for the database and for investors to start to use it as their first point of analysis. There are a number of people from SIRIS here today so if you want further information track them down over the course of the day.

Much of the discussion during the afternoon session of today’s Forum focuses on parallel initiatives being run by my Portfolio and our colleagues from Family and Community Services. These initiatives will develop core environmental and social reporting indicators and methodologies, something I understand developed out of discussions at the last Forum and in response to the need for standardisation of reporting frameworks. They will also help to reduce the cost to companies of providing this material.

The indicators initiative will complement the Sustainability Reporter database by developing a more consistent framework for what companies should actually report. The objective with both initiatives is to encourage greater consistency and comparability in reports so that they are of more value to both the reporter and those analysing the reports, and reduce the extent to which companies are asked by successive analysts or fund managers for different metrics.

I also recently agreed to provide funding of $50,000 to the Ethical Investment Association to support continued investor education on Socially Responsible Investment. I’m keen to see investors informed of investment options, though some of the subjective screens put on SRI funds can be just that - subjective. Surveys suggest many investors still know little of what SRI is about and I hope this funding aids the development of both niche and mainstream options to integrate sustainability and finance issues.

It is important to remember that the savings of individuals make up the massive $600 billion pool of superannuation in Australia. The views of these individuals should not be forgotten by the finance sector. The importance of keeping in mind the relationship between individuals, the finance sector and corporate Australia is highlighted by the fact that the total value of the Australian stock market is only in the order of $700 billion.

The funding for the Ethical Investment Association will be used to raise public awareness, to repeat a study to determine the growth of the SRI sector over the last 12 months and to support the association’s annual conference.

On that note I should conclude this opening address. I consider this a very interesting and important area of work, wish you well for today’s discussions and look forward to talking with many of you over coming months. Thank you.

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