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Chapter Two - Backgroud
2.1
Corporate responsibility is emerging as an issue of
critical importance for Australia's
mainstream business community. Until relatively recently it was a fringe
notion, largely the domain of academic discourse, and which resulted in sporadic
corporate reporting on environmental and social impacts. Over the past decade,
however, it has developed into a practical mechanism for companies to assess
and manage their non-financial risks and maximise their long-term financial
value. It is also a bourgeoning driver of modern financial markets. The rapid
trends towards globalisation of financial and labour markets, and several
disastrous, large-scale corporate collapses have brought the issue to a new
level of prominence.
2.2
This chapter provides a background to the discussion on
corporate responsibility. It looks at:
-
definitions and concepts in relation to
corporate responsibility;
-
historical context;
-
the role of corporations in society; and
-
the current state of play in Australia.
Definitions and concepts
2.3
A number of submissions pointed to the fact that there
is uncertainty about what corporate responsibility actually means. Mr
Jeremy Cooper
of the Australian Securities and Investments Commission (ASIC) outlined the
definitional issues that arise in the area of corporate responsibility:
[t]here are some very vexing terminology problems ... such as
what a stakeholder is, what sustainability means, what triple bottom line
reporting is and what we really mean by corporate social responsibility
itself...[1]
2.4
This section of the chapter looks at definitions
commonly put forward for the terms and concepts used in the debate on corporate
responsibility.
Corporate responsibility and corporate
social responsibility
2.5
The Australian Stock Exchange (ASX) points out that the
terms 'corporate responsibility', 'corporate social responsibility', and 'sustainability'
are used interchangeably.[2] Similarly, Mr
Turner submitted that:
...the terms 'corporate social responsibility', 'corporate
social transparency', 'triple bottom line', 'corporate sustainability' and 'social
and environmental responsibility' are all used to refer to the same concept.[3]
2.6
In the debate on corporate responsibility, the acronym
for corporate social responsibility 'CSR' is frequently used. Another acronym
used is 'CR', for corporate responsibility. A significant proportion of the
evidence presented in this report uses these acronyms.
2.7
Corporate responsibility is usually described in terms
of a company considering, managing and balancing the economic, social and
environmental impacts of its activities. It is about companies assessing and managing
risks, pursuing opportunities and creating corporate value, in areas beyond
what would traditionally be regarded as a company's core business. It is also
about companies taking an 'enlightened self-interest' approach to considering
the legitimate interests of a company's stakeholders.
2.8
A submission from Monash
University offered the following broad
definition:
CSR is acceptance by a corporation of responsibility for the
social impact of its activities, including effects on the natural environment.[4]
2.9
The submission from the Treasury stated:
Corporate social responsibility lacks a universally accepted
definition. However, it can be described as a company's management of the
economic, social and environmental impacts of its activities.[5]
2.10
The Business Council of Australia (BCA) submitted that
corporate responsibility was more than merely corporate philanthropy.[6] The Treasury submission agreed with
this view, pointing out that philanthropic initiatives could be financed by
activities which are damaging to the communities in which business is
conducted.[7]
2.11
The BCA noted the definitional problems around terms
such as corporate responsibility, and commented that this lack of clarity can
lead to considerable misunderstanding and controversy about what is meant by
these terms. The BCA submitted that the essence of corporate responsibility
was:
Corporations operate within the community.
For corporations to be sustainable and successful in the long term, they need
to engage with the community and take account of community attitudes.
Successful companies therefore factor into their forward strategies activities
that manage the challenges and risks to the community and capture the opportunities
that community engagement can bring. To be valid, these activities must
deliver benefits both to the community and the shareholders of the corporation.[8]
2.12
Some submissions expressed concern over the use of the
word 'responsibility'. For example, Habitat for Humanity Australia suggested
that the use of the word 'responsibility' has connotations with corporate guilt,
which it suggests has led to some difficulties in increasing corporate
involvement in social activities and engagement.[9] The BCA also took issue with the word 'responsibility',
arguing that it implied an obligation that had to be enforced:
...the use of the word 'responsibility', suggests that companies
will not engage in CSR unless they are forced to. ... The risk in trying to
develop a precise definition to CSR, particularly a narrow definition of CSR or
what is meant by 'responsibility', is that the definition may inhibit companies
from continuing to pursue innovative and creative activities that suit their
own unique circumstances.[10]
2.13
ECOS Corporation echoed this view:
Corporate Social Responsibility immediately implies obligation
to do things that are against what business wants to do.[11]
2.14
Despite its shortcomings, the term 'corporate
responsibility' will be used throughout this report. At times 'corporate
responsibility' is used interchangeably with 'sustainability' and 'non-financial
risk management'.
2.15
Recognising that corporate responsibility is a
multi-faceted concept the committee makes no attempt to reach a conclusive
definition. Because of the sheer diversity of modern corporations – in terms of
size, sectors, stakeholders, structures and strategies – the concept of
corporate responsibility can have a different meaning to different people and
different organisations. However, there is a range of common elements. Chapters
3 and 6 also discuss a number of broad principles in relation to corporate
responsibility.
Stakeholders
2.16
Stakeholders are the groups and individuals that are
impacted on by corporate activity, and that themselves can impact on corporate
activity. Stakeholders include company shareholders, but also include some non-shareholder
interest groups. Stakeholders commonly identified include employees, the
community, and the environment. A submission from the Key Centre for Ethics, Law,
Justice & Governance at Griffith University
indicated that there were at least two approaches to defining 'stakeholder':
The term 'stakeholder' covers a wide array of interest holders
depending on the definition used. It is important to recognise that the
stakeholder definition used impacts on what is required of corporations to meet
CSR demands. Early stakeholder theory focused on the managerial model of an
entity and, as a result, narrowly defined 'stakeholder' as a group that impacts
on the success of the organisation in terms of production outcomes and
transactions. The broader definition of the stakeholder view of the firm
includes those who may affect or be affected by the organisation – employees,
customers, local community, management, owners and suppliers and so on.[12]
2.17
The BCA pointed out that different companies and
different sectors had different stakeholders to consider:
While some stakeholders, such as employees, will be common to
all corporations, many others vary significantly. A mining company for example
is likely to place a higher priority on environmental issues than an accounting
firm.[13]
2.18
Evidence to the committee indicated that corporations often
face situations where stakeholders have conflicting interests.
It is important to be aware of such [conflicting interests] and
resist the temptation to place all interest holders under the same banner
without recognition of the different agendas each stakeholder or stakeholder
group brings to the debate. Recognition of the competing interests serves to
highlight the balancing task corporations have, regardless of the types of
reform implemented when it comes to balancing financial interests of the
company and its shareholders, and the interests of other stakeholders.[14]
Corporate governance
2.19
The terms corporate responsibility and corporate
governance are sometimes confused with each other. Corporate governance refers
to broader issues of company management practices. It concerns the conduct of
the board of directors and the relationships between the board, management and
shareholders. At the core of corporate governance is the transparency of major
corporate decisions, and accountability to shareholders.[15]
2.20
Corporate responsibility is only one aspect of an
organisation's governance and risk management processes.[16]
Sustainable responsible investment
2.21
Sustainable Responsible Investment, or Socially Responsible
Investment, is a term that was used in evidence to the committee. It is an
approach to investment by institutional funds or individuals which places value
on investments that minimise or do not have negative impacts on society and the
environment. The Ethical Investment Association provides the following
definition:
Sustainable Responsible Investment (SRI) is the integration of
personal values with investment decisions. It is an approach to investing that
considers both the profit potential and the investment's impact on society and
the environment.
Sustainable Responsible Investment may avoid industries such as
gaming, tobacco, armaments or uranium mining and companies with little regard
for the environment, governance, and labour and human rights. On the other
hand, SRI may also actively seek out profitable 'industries of the future' that
are positive for society and the environment such as renewable energy,
biotechnology, water management, waste management and health care.[17]
Sustainable development
2.22
Some submitters to the inquiry referred to the concept
of sustainable development. This concept was defined in 1987 by the World
Commission on Environment and Development chaired by the Prime Minister of
Norway, Mrs Gro Harlem Bruntland, which published a report Our Common Future (the Bruntland Report).[18] The report provided a definition of
sustainable development as development:
that meets the needs of the present without compromising the
ability of future generations to meet their own needs.[19]
Sustainability reporting
2.23
Sustainability reporting refers to reporting mechanisms
used by organisations to disclose information on social, environmental, and
economic performance. It facilitates reporting on achievements in sustainable
development, and allows a degree of transparency to shareholders and other
stakeholders of organisational performance and behaviour.
2.24
A recent report on sustainability reporting in Australia
released by the Minister for the Environment and Heritage, Senator the Hon
Ian Campbell
described sustainability reporting as follows:
Sustainability or non-financial reporting involves companies
assessing their performance against environmental, social and economic
criteria, how these results relate to the success of the business, and how
potential impacts, opportunities and risks are addressed.[20]
2.25
The term 'triple bottom line reporting' is also used,
referring to the three areas of performance: economic, environmental, and
social. Chapter 6 of this report goes into some detail on sustainability
reporting, the various reporting frameworks in existence, and the current
status of sustainability reporting in Australia.
Historical context
2.26
The origins of the concept of corporate responsibility
can be tracked back as far as the first half of the twentieth century.
PricewaterhouseCoopers recognised in its submission that '[t]he term 'corporate
responsibility' has been extensively discussed for over 100 years in the 'business
in society' literature.'[21] For
example in the 1930s a famous public debate in the United
States between Professors Berle and Dodd
considered the relative merits of either side of the argument. The debate
continued to develop throughout the middle of the twentieth century as the size
and influence of corporations grew and the dominance of multinational
corporation became apparent.
2.27
The first examples of what has become triple bottom
line or sustainability reporting occurred during the 1970s. These reports,
although groundbreaking in nature, were typically adjuncts to annual reports,
focussed on single issues, and provided little useful information about the
overall performance of a company.
2.28
The next phase of corporate responsibility reports
occurred in the late 1980s and early 1990s. Organisations such as The Body
Shop, Shell Canada and Ben and Jerry's
released the first combined social/environmental reports. These reports were an
important landmark, demonstrating the level of commitment of these corporations
to report publicly on their non-financial performance. Since this time a strong
trend has emerged towards integrated social-environmental-economic reports
(also known as triple bottom line reports or sustainability reports). Sustainability
reporting is discussed further in chapters 6 and 7.
2.29
As a global issue, corporate responsibility has grown
significantly over the past decade, particularly since the turn of the century.
In its discussion paper on corporate social responsibility, the Corporations
and Markets Advisory Committee quoted recent research which shows:
Whereas 54% of executives in one global survey in 2000 said that
this notion was 'central' or 'important' to their corporate decision-making,
that figure had grown by 2005 to 88% of executives surveyed. Likewise, whereas
34% of professional investors in that same global survey in 2000 said that
corporate social responsibility was 'central' or 'important' to their
investment decisions, that figure had risen by 2005 to 81%. Also, it has been suggested
that perceptions of corporate social responsibility being more in the nature of
corporate public relations or marketing rhetoric than substance may be
diminishing.[22]
2.30
This quote demonstrates the significant global rise of
corporate responsibility as a factor in corporate decision-making and
investment practices. Importantly, there also appears to be a global trend
towards 'doing' rather than mere rhetoric. In the view of the committee this is
an encouraging trend that with appropriate government support will continue.
The role of corporations in society
2.31
The role of corporations in society was a matter for
discussion during the inquiry. Is their function solely to make a profit, or do
corporations have a wider responsibility to the society in which they operate
and which allows them to exist? This section of the chapter looks at some of
the background to this question.
2.32
Entities that structure collective commercial or
community activity have long existed. Legal frameworks to regulate these
entities have developed over centuries in response to increases in commercial
activity, particularly since the rise of capitalism and the industrial
revolution and the rise of large-scale organised interest groups. In
particular, legal structures have evolved that place limits on the liability of
investors, in order to attract investment. This principle of limited liability
is discussed further below.
2.33
Australian corporate law owes much to the Companies Act 1862 (UK) and its
predecessor, the Joint Stock Companies
Act 1856 (UK), which allowed incorporation as of right (and with limited
liability) through a simple registration process.[23] Schemes providing for the national
regulation of companies in Australia have encountered a number of problems
relating to the constitutional power of the Commonwealth Parliament but those
now appear to have been finally settled with the referral by the States to the
Commonwealth, in 2001, of the power necessary for such regulation.
2.34
Corporations have flourished in Australia
and played a major role in the development of its economy. The stimulation of
investment brought about by the corporate structure and the associated limited
liability have enabled the effective exploitation of Australia's vast natural
resources, as well as fostering the development of its general industries. As
noted in Treasury's submission:
Corporations, large and small, multinational and local, play a
fundamental, multi-dimensional and evolving role in promoting economic growth
and improving the living standards of all Australians.[24]
2.35
Many submissions to the inquiry highlighted the
benefits of corporations. Australian companies generate considerable tax
revenue for the Commonwealth, the states and territories. The Business Council
of Australia submitted that as a percentage of GDP, the tax paid by Australian
companies is well above the OECD average.[25]
By contrast, the recent Warburton-Hendry review of Australia's
tax regime found that Australia's
30 per cent corporate tax rate is slightly above the unweighted OECD average of
28.5 per cent, and below the weighted average of 36.5 per cent.[26] Beerworth & Partners summarised
the economic benefits of companies by pointing out that the modern day
corporation:
-
allows passive capital to be used actively;
-
limits the liability of the subscribers of that
passive capital;
-
provides leverage for successful corporate
managers enormously beyond their own resources; and
-
is the most powerful engine ever devised for
capital formation – the aggregation of vast amounts of private capital for
enterprise.[27]
2.36
The BCA pointed out the benefits of corporations to
society, including the creation of employment:
It is important to note that ... the greatest social
contribution made by corporations is through the goods and services they
provide, the wealth they create and the employment they generate.[28]
2.37
Mining and production company Alcoa provided an example
of the way corporations can have a positive impact on local economies and
employment:
Our investment has provided essential infrastructure and
supported the growth of regional communities. We are one of Australia's
leading regional employers, and we provide more than 7,500 jobs, mainly in
regional Victoria and Western
Australia.[29]
2.38
Treasury quoted the Hon Justice Michael
Kirby to demonstrate the economic and social
benefits of corporations:
the idea of an
independent corporation, governed by directors and accountable to shareholders,
was a brilliant one. It permitted people to raise capital from the public, to
invest it without, in most cases, a danger of personal risk and to engage in
entrepreneurial activity which, otherwise, would probably not occur.[30]
2.39
The role of corporations in society has changed
remarkably over time. From relatively humble business ventures to the gigantic
multinational enterprises of today, corporations continue to have a growing
influence globally. In 2000, the
Institute for Policy Studies released a study that showed that of the
world's 100 largest economic entities, 51 are corporations and 49 are countries.[31]
2.40
Corporations are also taking a greater role in the
provision of what are often referred to as 'public' or 'essential services'.
With the rise of the privatisation of government businesses and government
owned assets, corporations are taking on more and more societal roles that were
traditionally seen as the domain of governments. For example commercial and
not-for-profit corporations are now actively involved in the management and
operation of 'public services' such as hospitals, child care, education,
employment services, water and electricity supply, telecommunications, banking,
defence, etc.
Types of
corporations
2.41
Companies operate in many facets of everyday life. A
company may be run for profit, such as BHP Billiton and the ANZ Bank, or they
may be a not-for-profit company, such as the Smith Family and Mission
Australia.
Companies operate in both the private and the public sector spheres, being used
by individuals, organisations, and governments alike as a vehicle for achieving
their objectives. There are of course other structures recognised by law for
achieving business and social ends such as partnerships, trusts and
incorporated associations. For reasons discussed below, companies have however
proved to be a very popular legal form for conducting business.
2.42
There are over 1.4 million companies in Australia.[32] Companies can be established in a
number of ways. Most companies in Australia have been established following the
procedures set out in the Corporations
Act 2001 and its predecessors.
2.43
Companies established under the Corporations Act must
either be proprietary companies or public companies. The key difference between
public and proprietary companies is that proprietary companies cannot have more
than 50 shareholders (excluding shareholders who are employees) and they
are not permitted to engage in certain fundraising activities. In contrast,
there is no limitation on the amount of people who can be shareholders of
public companies, and public companies are permitted to engage in certain
fundraising activities such as issuing shares to the general public. One way
that public companies can raise funds is by listing on the Australian Stock
Exchange (ASX). Currently there are approximately 1,900 public companies listed
on the ASX with a market capitalisation of $1.1 trillion.[33]
Key
features of companies
2.44
Companies have two legal features which have made them
a very popular vehicle for conducting business. These are the notion of the
corporation being a separate legal entity and the fact that limited liability
may attach to a company.
Separate
legal entity
2.45
A company is regarded as a legal entity separate from
the people who established it.[34] It
also exists as an entity separate from company shareholders and the people who
manage it.[35] A corporation has all
the legal powers and capacities of an individual.[36] As a result it can contract in its
own right, it can sue and be sued, hold property and do other things that an
individual is able to do.
2.46
As a result of the notion of a separate legal entity,
creditors of the company must look to the company rather than people involved
with the company's operations (such as directors) when making a claim to
recover money owed by the company.
2.47
The Corporations Act and the common law have developed
a limited number of circumstances where the notion of the separate legal entity
can be disregarded and legal responsibility for actions of the company can be
placed on people who are associated with the company. This is known as 'piercing
the corporate veil'. Circumstances where the corporate veil can be pierced
include where the company has engaged in insolvent trading, where the reverse
onus of proof mechanism is used, and where the company is used as a vehicle for
fraud.
Limited
liability
2.48
A company may be a limited liability company. The
effect of limited liability is that shareholders are not liable for the company's
debts.[37]
2.49
Not all companies under the Corporations Act are
limited liability companies. Proprietary companies can take two forms;
proprietary companies limited by shares and unlimited proprietary companies
with share capital. Public companies can take four forms; companies limited by
shares, companies limited by guarantee, unlimited companies with share capital
and no liability companies. Out of these six types of companies, limited
liability applies to companies limited by shares and companies limited by
guarantee.
2.50
For companies that are limited by shares, the liability
of company shareholders is limited to the amount (if any) that they still owe
the company for the purchase of their shares. If the shares are fully paid
shares, shareholders will have no further liability. If the company is limited
by guarantee, the liability of shareholders is limited to the amount of money
owed under that guarantee.
2.51
A number of benefits of limited liability have been
noted. In particular, it facilitates investment and otherwise encourages
economic activity by separating investment and management functions and
shielding investors from any corporate loss in excess of their equity capital.
This protection for investors reduces the cost of raising capital.[38]
Decision
making process and influences
2.52
Whilst the company's constitution will determine the
split of decision making between the directors and the company shareholders,
generally speaking the board of directors has the power to make decisions on
all business matters other than those that have been expressly stated as being
for shareholders to vote on at a general meeting. Directors have a series of
legal responsibilities or duties to the company. These include the requirement
that they act in good faith, with care and diligence, for the benefit of the
company and for the purpose for which a power was conferred. They also must not
secure an advantage to themselves or others.[39]
Whilst directors do bear ultimate responsibility for decision making, many of
the day to day decisions made for the corporation are made by company officers
(such as Chief Executive Officers, Chief Financial Officers and Secretaries)
who do not sit on the board of directors.
2.53
When making decisions for the company, directors and
company officers may have to choose between a decision which produces short
term benefits for the company or one that achieves long term results. Decision
makers may often find themselves under pressure to secure short term benefits at
the expense of achieving more long term objectives in order to meet their own
personal performance measures as well as posting adequate financial results for
the company. This 'short-termism' approach is discussed further in chapter 3.
The state of play in Australia
2.54
Over the past decade, Australian businesses,
governments, communities and academia have generally shown greater engagement
with the corporate responsibility agenda. For example, Philanthropy Australia
stated in its submission:
There is undoubted growth in corporate community activity in Australia,
evidenced through Australian Bureau of Statistics data and more generally in
the growth of voluntary corporate participation in initiatives such as the
Australian Corporate Responsibility Index, the Prime Minister's Community
Business Partnership Awards, and the Global Reporting [Initiative].[40]
2.55
Australia
also has many companies that are leading the push towards greater
sustainability. It is impossible to provide a comprehensive list of strong
corporate performers in this area without the risk of omitting a committed
company. However it is worthwhile noting a couple of the very strong
performers.
2.56
Westpac Corporation was cited in many submissions as a
leader in the adoption of corporate citizenship.[41] Rio Tinto and BHP Billiton were also
cited as leaders in the field.[42] The
mining and resources sector in general has been a strong performer, primarily
as a result of their ongoing need for mining approvals. Australia's
finance sector is also considered to be highly engaged.
2.57
Some Australian companies have been key contributors to
developments in the area of global reporting mechanisms. Westpac and National
Australia Bank have contributed to international initiatives such as the Global
Reporting Initiative.
Sustainability reporting
2.58
KPMG reports that there has been a significant increase
in the rate of sustainability reporting in Australia
over recent years. Data indicates that the number of sustainability reports
produced by the top 500 companies in Australia
has increased as follows:
1995: 6 companies (1%)
2000: 65 companies (13%)
2005: 119 companies (24%)[43]
2.59
Despite this progress, developments in sustainability
reporting have been slow in comparison to other developed countries. According
to KPMG, which has conducted several national and international surveys into
sustainability reporting, '[i]n Australia
the public reporting by organisations...is well below that of most developed
countries...although it is increasing rapidly from this low base.'[44]
2.60
The following data indicates the percentage of
sustainability reports produced in 2005 by the top 100 companies in certain
developed countries, and shows Australia's
poor showing internationally:
- Japan:
81%
- UK:
71%
- Average
(16 countries): 41%
- Australia:
23%[45]
2.61
The committee notes several reasons for the higher rate
of reporting in other countries including legislative requirements to disclose
sustainability information and more active consumers and non-governmental
organisations advocating for improvement. The committee notes that a low level
of sustainability reporting does not necessarily correlate to low level of responsible
corporate activities. However, the level of reporting activity is seen as an important
indicator of the level of interest and commitment of Australian companies.
2.62
Progress in Australia
in the area of sustainability reporting is considered in more detail in chapter
6.
Prime Minister's Community Business
Partnership
2.63
A significant initiative taken by the Australian
Government in recent years is the Prime Minister's Community Business
Partnership (the Partnership), and related initiatives. The Partnership was
established in 1999. It is a group of prominent Australians from the community
and business sectors who work to foster community business partnerships, act as
a 'think-tank' on philanthropic matters and promote corporate giving and
corporate social responsibility.[46] The
Prime Minister chairs the group. The Partnership's programs and initiatives, which
focus on community business collaboration and corporate social responsibility
are discussed in more detail in chapter 8.
ASX Corporate Governance Principles
2.64
Another recent development in Australia
has been an initiative by the Australian Stock Exchange (ASX), focussing on the
corporate governance practices of listed companies. In response to a number of
high-profile corporate collapses which occurred in Australia
and overseas throughout 2001 and 2002, the ASX Corporate Governance Council
released its Principles of Good Corporate
Governance and Best Practice Recommendations (the ASX Council Recommendations).
2.65
Although the ASX Council Recommendations are designed
to encourage improved corporate governance practices, three of the ten
principles relate to the disclosure of sustainability information. These principles
are: to promote ethical and responsible decision-making; to recognise and
manage risk; and to recognise the legitimate interests of stakeholders.[47] The ASX Council Recommendations are
explored in detail in chapter 7.
Corporate philanthropy
2.66
Surveys have shown that philanthropic activities by
Australian business have increased in recent years. A recent study, Giving Australia: Research on Australian
Philanthropy, identified that business giving in 2003–04 more than doubled
since 2000–01, with more than 525,000 businesses, or 67 per cent of all
businesses, giving $3.3 billion in money, goods, services and time during 2003–04.[48] The report was coordinated by the
Australian Council of Social Service and funded by the Prime Minister's
Community Partnerships Program.
2.67
The report noted the advantages for business in
engaging in corporate philanthropy:
For business, giving to nonprofit organisations may result
in profile or advertising and attract or retain customers (eg via
sponsorship). Business may attract staff or improve staff retention rates or
skills through employee volunteering or giving programs.[49]
Community consultation
2.68
An innovative development in Australia
in recent years has been the setting up of consultative arrangements between
corporations and representative community groups, to facilitate engagement with
the community, and two-way communication. Westpac gave the example of its
Community Consultative Councils, which it says play a critical role in
focussing Westpac's corporate responsibility activities:
Council members are drawn from community and government
organisations in subject areas relevant to Westpac's social and environmental
impacts. .....
The Council supplements ad-hoc and project-based dialogue with
external stakeholders and brings together the leaders of these organisations
with the CEO and key executives. It provides Westpac with feedback on its
policies and strategic direction.[50]
2.69
Energy retailer Origin Energy also gave evidence of its
community consultation. Mr Tony
Wood of Origin Energy told the committee how,
after consultation with representative non-government organisations such as the
Brotherhood of St Laurence, innovative practices were adopted to assist
customers experiencing financial hardship to pay their bills.[51]
Sustainable responsible investment
2.70
According to the Ethical Investment Association (EIA),
there has been a significant increase in Australian funds managed as
sustainable investments, also known as Sustainable Responsible Investment
(SRI). The EIA in its survey entitled Sustainable
Responsible Investment in Australia 2005 reported that during the 2005
financial year, SRI managed funds grew by around 70 percent (from $4.5 billion
to $7.7 billion). In the five years between 2000–05, SRI managed funds grew by
over 2 000 percent.[52] The main
factors contributing to this significant increase were large superannuation
funds adopting SRI policies for existing portfolios, and the strong investment
performance of SRI managed funds.
2.71
A comparison of average investment returns also clearly
demonstrates the strong performance of Australian funds managed by 'ethical'
investors compared with mainstream investors. Data from the 2005 survey
conducted by the EIA indicates that over the longer term the average Australian
SRI fund consistently outperformed average mainstream funds and the top 300
corporate index (the S&P/ASX300 Index).[53]
For example, when averaged over a five or seven year period SRI funds
outperformed mainstream funds and the S&P/ASX300 Index benchmark by around three
per cent per annum. Although there is insufficient empirical research to
support this view emphatically as yet, based on the evidence so far, the committee
is of the opinion that corporations that engage in material corporate
responsibility activities may better and more completely assess medium and long
term risk and business opportunities. This issue is discussed further in
chapter 3.
2.72
Although past returns do not guarantee future
performance, the sustained positive trend, particularly over the long term, is
an encouraging development and lends weight to the connection between good
corporate behaviour and strong financial performance. Further discussion of
sustainable responsible investment as a driver of corporate responsibility is
included in chapter 3, and the influence of SRI on investment decisions by
institutional investors is considered in chapter 5.
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