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Foreign Affairs, Defence and Trade References Committee
29/10/2018
United Nations Sustainable Development Goals

ADAMS, Professor Carol, Private capacity

HURLEY, Mr Sam, Policy Director, Centre for Policy Development

Evidence was taken via teleconference

Committee met at 09:07

CHAIR ( Senator Gallacher ): I declare open this public hearing of the Senate Foreign Affairs, Defence and Trade References Committee for the committee's inquiry into the United Nations Sustainable Development Goals. I remind witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee. Such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee.

While the committee prefers all evidence to be given in public, under the Senate's resolutions, witnesses have the right to request to be heard in private session. If you would like any of your evidence to be heard in camera, please don't hesitate to let the committee know. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. As noted previously, such a request may be made at any other time.

I now welcome Mr Sam Hurley from the Centre for Policy Development and Professor Carol Adams, via teleconference. Thank you for your time. I remind you that the protection of parliamentary privilege only covers evidence and witnesses in Australia. If you wish to provide any evidence which you believe is sensitive, please consider asking the committee to take the evidence in camera. Would each of you like to make a brief opening statement before we proceed to questions?

Prof. Adams : I want to talk about investors and companies and their importance to the achievement of the SDGs—particularly investors, who can influence companies, if they so choose, through their engagement practices. Leading asset managers are seeking to engage with company management about risks and opportunities, including relating to the SDGs. The issues are specific to particular companies, and they report the outcome to the pension funds and asset owners. There are also major companies that acknowledge that long-term business success is dependent on the achievement of the SDGs. But there are a substantial number of pension funds and companies that have not acknowledged such risks yet, and there are others that are scattering SDG symbols through their annual reports after doing what they call a mapping exercise, which is essentially a bureaucratic task identifying SDG targets linked to their activities. That keeps the action and the thinking away from the boardroom. I think reporting and governance are really important in creating change and developing strategy around the SDGs, and boards need to be considering the risks and opportunities of sustainable development issues, as a minimum in regard to business as usual, but better still would be rethinking their business models to take advantage of opportunities to address sustainable development issues and gain a competitive advantage.

In the UK, ministers have effectively written to companies and pension funds and have quite a significant impact around sustainability issues, in particular writing to top pension funds and large companies, asking them questions like—and this would be a proposal, really, for the Senate committee to consider—what are they doing about climate change risk? Are they following, or do they plan to follow, the recommendations of the TCFD? And have they considered broader sustainable development risks? I wrote a report last year drawing on research which sets out how to do this, and I see it's been endorsed in submissions of the Chartered Accountant and mentioned in some other submissions. It involves thinking about the sustainable development issues which impact on the organisation and incorporating them into a strategy.

I'd really also urge the government to involve bodies that influence reporting and governance mechanisms, such as the ASX and the AASB. The ASX's consultation on the corporate governance principles, published in May, proposes to ask boards to consider the social licence to operate. But that's not enough, because a social licence to operate looks at the level of negative impact that society will bear now, which is very different from what is needed for long-term corporate success aligned with sustainable development. I think the corporate governance principles really ought to now be calling on boards to consider the TCFD and the Sustainable Development Goals and their relevance to their strategy. I'm sure you'll hear others argue that mandatory reporting requirements will stifle innovation, but there's now a substantial body of international guidance and examples for pension funds and large ASX companies to follow. Thank you.

Mr Hurley : Good morning everyone. Thanks for the opportunity to provide evidence on behalf of the Centre for Policy Development here today. I wanted to start by speaking briefly about one key part of the submission that we made to the inquiry, and it's actually related in a broader sense to the evidence you just heard from Professor Adams. We argued that Australia's revamped SDG strategy should include an explicit focus on sustainable finance, and we suggested one way that might take shape in practice, which was through a sustainable finance action plan that's aligned with the SDGs.

Just quickly on why we thought this prism can be valuable: a number of concerns have come up quite frequently in submissions to this inquiry, including that the SDGs are seen as all about foreign aid or primarily about offshore issues and that they're sidelined from wider policymaking as a result. We think that focusing on how sustainable development links with trade, investment and finance could help rectify this. This framing can be really effective in practice. We know that from our own work, which is focused primarily on climate risks in the financial sector. Also, this is where the conversation is already going.

Globally there's a lot happening in this area, and I thought I'd just give a couple of quick examples. Financial innovations to get more private finance for sustainable investment, including through things like SDG bonds, are already becoming a key part of the forward agenda on the SDGs. Indeed, we've already seen some of this in Australia with SDG-linked bonds domestically. Financial regulators are now saying that climate and sustainability are key issues for financial stability and for good corporate governance, and Australia has been part of this movement too. Both ASIC and APRA have made really critical interventions on this over the last 12 to 18 months. Globally, just at the strategic level, leading financial centres around the world are starting to roll out really comprehensive road maps and strategies around green finance and sustainable finance. The UK has a green finance initiative; the EU has an action plan on financing sustainable growth; Canada has appointed an expert panel on sustainable finance; and there's been a huge amount of activity on these types of issues in China and elsewhere. With all that in mind, one key thing that the Australian government could do—tomorrow, if it wanted to—is set up a sustainable finance task force here that follows on from some of those international precedents.

The key point, for today's purposes, is that, like those reviews offshore, this framework could be explicitly aligned with the SDGs and the Paris Agreement. The SDGs are really relevant to that agenda. They go directly to some of the key questions that this kind of task force would be looking at anyway; things like developing standards around what counts as sustainable, mapping sustainability related risks and opportunities, deciding how these issues should be disclosed and reported, et cetera. This is all a policy agenda that we really desperately need anyway, whether or not it's aligned with the SDGs. We need it to keep up with the competition that's happening internationally, and we should have a financial system that embeds a wider social contribution in how it creates value. The royal commission is just the latest reminder of that.

Again, for today's purposes, linking this work to the SDGs as well as being good substantively would actually be really good, we think, for the 2030 agenda itself in Australia. It would help raise the profile of the SDGs, including in the business community, and expand the domestic and international focus for SDG-related work. It takes us into an issue where Australia has major strengths and interests. We know in practice that this kind of focus can be effective. For all those reasons we think it's an idea that is worth exploring in the inquiry. We are obviously happy to take questions on that or anything else in our submission.

CHAIR: Thank you very much, Mr Hurley and Professor Adams. I might head off with a fairly challenging question first. You correctly point to pulls capital, which could be ultimately deployed to the greater good, so to speak. But how do you get over the sole purpose test? I'll put it to you this way: I've attended a number of conferences in respect to superannuation as the chair of an investment committee and a director of a fund. If you look at Asia and you deploy your capital in gambling, alcohol, tobacco and pharmaceutical drugs, you're going to get a greater return and an easier return, if you like, than you would if you deployed it in more ethical areas. How does that challenge get conquered?

Mr Hurley : I'm happy to have a go at that first, if that suits the committee's purposes. I won't speak explicitly about the sole purpose test per se, but I'll offer a couple of quick observations that go to a similar set of legal issues. CPD's work over the last two years on these issues has focused in part on the other side of the coin, in terms of company directors' duties to consider climate related risks or sustainability related risks in their activities and their decision-making in the interests of their companies. One of the concerns that was previously quite prominent in this discussion was that company directors, even those who were inclined to take a more active approach towards climate change and managing those risks and opportunities, might have been restricted in their ability to do so because of the legislation which governs how they make decisions in the interests of companies. Essentially, it might have put forward an argument that they're restricted from their ability to take climate into account because what they have to do is maximise value to shareholders.

There's an emerging body of work and expertise globally and in Australia which highlights the fact that climate risks and opportunities—and, as an example, sustainability related risks generally—are becoming much more material and foreseeable. As a result, they're exactly the kinds of things which company directors are not only allowed to take into account but indeed have to take into account as a question of their director duties. CPD commissioned a legal opinion by a couple of prominent barristers, which analysed the duties in the Corporations Act and found that it was likely that that analysis is how it would be borne out if it came to a head in the Australian courts—essentially that company directors that aren't taking these issues into account adequately are running a risk that at later date they'll be found to be liable for not doing so.

That's on the other side of the coin to the question of trustee duties and the sole purpose test, but I think it's just an example of the extent to which these issues are becoming a question of the financial interests of a company or the financial return that an investment is going to deliver over a certain profile. On the trustees point, putting the explicit question about the sole purpose test to one side, I think it's certainly the case that longer-term risks around climate and sustainability are becoming much more directly relevant to the longer-term performance of investment across the board, and they're exactly the kinds of issues that institutions like superannuation funds, which have a very long-term return profile, should be taking carefully into account as a question of discharging their responsibilities to their trustees beneficiaries.

Prof. Adams : If I could add to that very briefly—if you take a young person just starting in the workforce, who could be investing in a pension fund for fifty years, to pass the sole purpose test I think a fund has to be considering climate change and other sustainable development risks. If it's not, it runs the risk of actually not applying that test.

CHAIR: The only movement that we've seen in this space is the introduction of an ethical choice of investment within super funds—you can go cash, equity, equity plus, balance, and you can rule out some of the euphemistically called sin stocks of alcohol, tobacco and gambling. But it is really challenging to get the capital in the right space. Thank you for your answer.

Senator MOORE: I'm interested because both of you are doing considerable work in your areas on these issues, but what I'm wanting to find out is whether you have discussed your work with government. Certainly, Professor Adams, in your submission you talk about the work you've done. I want to talk about the specific projects later, but what I'm wanting to find out is what linkage you have with government in terms of PM&C and DFAT, who were leading the SDG agenda in Australia. And the same, Mr Hurley, with you—your submission, again, talks about the fact that businesses are looking at these things and taking them on board, but you actually suggest quite directly that there should be more engagement with government. What engagement have you had to date with the leadership of the government? It's very hard, with the teleconference, to leave a question open in the air. Professor, would you like to start, and then, Mr Hurley, could you come in.

Prof. Adams : I've written a number of submissions to consultations over the last year. There's been a lot happening in the UK, in corporate reporting and governance consultations. I wrote to the Green Finance inquiry in the UK and I've written to the ASX's corporate governance consultation about these issues. I've not been specifically asked by government to input into these issues, but I do seek to submit to consultations. I do think government ought to be consulting with researchers on these issues.

Senator MOORE: The coordinating group that was leading Australia's SDG action until the voluntary report—and we understand action will continue; we're just not absolutely sure by whom—hadn't interacted with the projects you've described or the kind of work you've done internationally in this space. There's been no request for engagement or discussion with DFAT at all?

Prof. Adams : No, there hasn't. My work is particularly relevant to corporate reporting and corporate governance. Those areas, from my research, have been found to be particularly influential in changing corporate behaviour.

Senator MOORE: Overseas?

Prof. Adams : The regulatory requirements on reporting and governance.

Senator MOORE: The various conferences that have been held in 2016, 2017 and 2018 and that were jointly arranged—were you part of those conferences, through the Sustainable Development Solutions Network and the Monash Sustainable Development Institute? Were you involved in any of those activities?

Prof. Adams : I think I did attend a workshop before the finalisation of the Sustainable Development Goals, but not since.

Senator MOORE: Okay, I'll come back with other questions, Professor. Mr Hurley, in terms of interaction with the government about the kinds of work that you've put into your submission, what has been the interaction you've had?

Mr Hurley : In the case of the work that I mentioned on directors' duties to take climate into account, we certainly wrote to the relevant ministers at the time of that work to notify them of the findings. We've engaged extensively, more so with regulators because, substantively, what we saw as some of the key action points coming out of our work when we first sought that opinion on director's duties was the need for organisations like APRA and ASIC to be well and truly across the issues that raised in terms of their mandates. So that's been the area in which we've focused most heavily in terms of our engagement. On the sustainable finance taskforce proposal, which I guess we've suggested is a good one through our submission—we're looking at those international precedents at the moment and thinking about how that might work best in Australia, including the different role that regulators, the private sector and key actors within government might play. As we continue to refine that proposal, that's something that we'll be hoping to talk actively to the government about towards the end of this year.

Senator MOORE: There's been no opportunity raised by government for you to share your concerns about Australian companies and what they're doing, particularly the investment processes? That hasn't been something initiated by DFAT or PM&C? In fact, I wrote a little note on your submission about whether you'd had a chance to speak with PM&C, but that has not specifically happened?

Mr Hurley : Not explicitly. We have discussed the work with officials from PM&C and Treasury and I think—I'd have to double-check—possibly from DFAT as well. But, as I said, the main focus up to this point has been engaging on the regulatory side of things.

Senator MOORE: ASIC and the various other regulatory bodies have been engaged in your discussions? It's something to which they've been open?

Mr Hurley : Yeah, they have, at least as far as it connects to the specific findings around climate related risks and how they might manifest in the financial sector when there's a question of corporate governance. When we released the opinion which I've mentioned, which is referred to as the Hutley opinion on directors' duties to consider climate risks, we had a round table down in Melbourne. That was at the back end of 2016. We invited senior reps from ASIC and APRA to that event—John Price from ASIC and Geoff Summerhayes from APRA. They were involved in those discussions.

Senator MOORE: One of the things that's been mentioned in a number of submissions is that the kinds of issues that are engaged in the SDGs are already important issues in various elements of policy at all levels of government. One of the frustrations has been that people are doing work but they aren't referencing the SDG agenda. In those meetings, were the discussions about climate—and of course the climate issue has been on the agenda for a long time—referenced within an SDG framework? Or were they about climate investment, which I think has been on the agenda for a long time? Did they talk about the SDG focus in those meetings?

Mr Hurley : I'd have to check my notes to see whether the SDGs were mentioned per se, but what I can say with certainty is that climate has featured heavily in these discussions because it's such a prominent and pressing example of sustainability related risk and opportunities. But, at least from the frame of analysis that we've brought to bear on it in terms of the legal responsibility to take issues that are in a company's interest into account, it's definitely the case that, equally, a whole range of longer-term sustainability related issues are important and amenable to the same kind of analysis.

In those meetings and in our discussions with a whole range of stakeholders on this work, we have been at pains to emphasise—and I think there is a very good understanding of this—that there are a whole range of other things that might fit into the SDG framework which are relevant to the analysis on climate. There is a reasonably high degree of awareness out there of the SDG as a framework which is potentially really valuable in these conversations. I do know that the regulators, for example, are aware of what is happening overseas. I mentioned some of the things in my opening remarks—for example, the EU's action plan on financing sustainable growth is oriented explicitly on how. It frames the whole endeavour around delivering on the SDG and on the Paris agreement. So there is certainly a high degree of awareness of the extent to which the goals that are added in the SDG framework are relevant to this discussion.

Senator MOORE: You said that awareness was there internationally. Do you think our regulators, organisations and businesses are picking up on that because of their international links?

Mr Hurley : I think that is part of it. Let's say that, until recently, it was the case that the conversation in Australia was noticeably behind where it has been in the UK, Europe and elsewhere. We have had organisations like the Bank of England, for example, sounding pretty clear warnings for quite a while now about climate related risks and also the longer term sustainability issues and how they are relevant in the financial sector. So Australia was quite behind the curve on this stuff until quite recently. Having said that, I think APRA and now ASIC have made some really important decisive statements on the relevance of this stuff to their mandate and to the Australian financial sector. So I think the gap is definitely closing. Just in our conversations on this over the last two years, you can say that the level of awareness has risen quite considerably and there is a lot of action happening now.

Senator MOORE: To Mr Hurley and Professor Adams, the same question: why do you think that has happened? You said that recently there has been a move. There was agenda 2016 and we are now in 2018. Why do you think it has had a stimulant in the recent period? What has caused that? Mr Hurley, if you could start, and then I will come to you, Professor.

Mr Hurley : Again, I can only really answer that in terms of the specific framework that we have had around climate risks. Firstly, there is the weight of international experience in dealing with these things, which I have already spoken about. That has clearly been influential. Secondly, there is just the increasing evidence and awareness in a practical sense of the ways in which this is impacting business directly. So it is no longer, even if it ever was, an academic issue or an issue that is only relevant on a medium- or long-term horizon. These things are quite pressing and immediate. There has been a realisation that perhaps investors and companies have not been as across these things as they should have been and, as a result, there has been a bit of a flurry of activity to catch up and for the organisations which are ahead of the curve to press their advantage, which is something that they are obviously entitled to do and is in their interests as well. That has contributed. It is probably safe to say that the political debate around this was such that it was very difficult to talk constructively about some of these issues publicly, going back a couple of years. I think bit by bit, because of the realisation that we just really need to get across some of these issues, that is less of a constraint now. So I think all of those factors have helped.

Senator MOORE: On that same question, Professor Adams, your submission does say that there have been recent advances. I know that you have been working a lot internationally, but what do you think has caused increased action recently in the Australian context?

Prof. Adams : In the UK there is a real awareness of the need to shift funding to fund green and sustainable initiatives in order to meet agreed climate change emissions reductions. And there are global initiatives around in standard setting. The International Integrated Reporting Council's Integrated Reporting Framework requires scanning of the external environment for risks and opportunities and for developing strategy accordingly. The Global Reporting Initiative has developed a list of possible activities towards achieving the SDGs for companies and the relevant organisational indictors that demonstrate contribution to the Sustainable Development Goals. The Principles for Responsible Investment have also been active with pension funds and investors. I can give an example of changes alluding to something that was mentioned before by one of the senators. I've been working with an asset manager in Scotland in Baillie Gifford. They have a particular fund where there are two key goals: to make money and to have a positive social impact.

The SDGs are changing the language away from 'responsible investment' and making sure you don't have a 'negative impact' to having a 'positive contribution'. The reason for that is simple: it's demonstrated that if companies are addressing these sustainable development issues, climate change in particular, they're going to be able to achieve long-term returns for investors. It's not one or the other. The two go together, and there is research which demonstrates that quite successfully. I think the changes come from a need to shift financing into sustainable development and green initiatives to achieve goals but also to reduce risks and earn long-term returns through global reporting initiatives, particularly the integrated reporting and sustainability reporting requirements starting to address the SDGs. But it does need to go much further than the mapping exercises that some organisations are doing. If I could emphasise that again, it needs to be about incorporating these risks into strategy.

I'm not quite as optimistic as Mr Hurley that enough is being done. I think there is some window-dressing being done. We're starting to see SDG symbols in corporate reports, but I'm not convinced it's really getting into strategy considerations at board level, which is where it needs to happen and where the ASX corporate governance principles, the revised proposals, really fall short of allowing that to happen.

Mr Hurley : And I'd just briefly echo that—

Senator MOORE: Being more optimistic, Mr Hurley?

Mr Hurley : Generally, I try to be. I'm certainly not convinced that enough is being done. I think the case is that there's a really promising window that's opened up now to press this conversation and to try to ensure that we avoid a greenwashing, window-dressing approach to this and, indeed, that our important institutions in the private sector and the public sector are thinking really strategically and systematically about how we embed this as a question of doing business, not just producing flashy reports. I think there's some momentum in that direction, but it's going to take a lot of hard work from a lot of different players to make sure that that positive direction of travel continues.

Senator MOORE: I have one last question about the two projects you specifically mentioned in your submission. There's the one that you're doing, which is interviewing CFOs about what they're doing in Australia, and also there's the other one where another couple of professors you mentioned are specifically interviewing public sector leaders about the same thing. What's the time frame of those projects—they're both 2018—and who's funding that?

Prof. Adams : I can't comment on the one I'm not involved in. We haven't received external funding for the one which is interviewing CFOs on the SDGs, but we're planning that work now and we have started to interview CFOs on that project. It's too early to talk about findings at this point. Those interviews are in progress now.

Senator MOORE: For the end of 2018 or sometime in 2019?

Prof. Adams : It will be sometime in 2019 before we've got data analysis complete.

Senator MOORE: Both of those projects are through Swinburne?

Prof. Adams : Yes.

CHAIR: Before I go to Senator McGrath, can I ask both of you about this: an economist or a reasonable person could conclude that the government investment, state and federal, into closing the gap in Indigenous communities hasn't been all that successful. Where do you think governments are going wrong when they spend money?

Senator MOORE: You always ask the easy ones, don't you!

Prof. Adams : Could you repeat the question, please.

CHAIR: State and federal governments of all persuasions have over decades spent enormous sums of taxpayers' money in closing the gap in Indigenous communities. A rational person could conclude that that investment hasn't been all that successful. Where do you think these governments are going wrong in deploying the funds? It will probably take you about three days to answer that, but is there any advice you could give us?

Prof. Adams : I can't comment on that particular issue, but if we are looking at changing corporate reporting practices, corporate governance practices and those practices around pension funds and the way that they invest and report on how they invest, then governments really need to be engaging with those organisations that set the principles, the codes and the standards. They really need to be engaging with those organisations and pressing them to do more and legislating where need be. Soft regulation has also proved really important in some instances in some jurisdictions. Writing to companies, writing to pension funds and asking them what they are doing about these issues is a stimulus for thinking and change. It is not enough, but it does make a difference.

CHAIR: Thank you. Mr Hurley.

Mr Hurley : I'm not an expert on that area of policy so I can't comment specifically.

CHAIR: It's an obvious example of an SDG failure in Australia when you look at Indigenous communities.

Mr Hurley : Absolutely. And there are many others in some of the other SDG that we could point to. The broader point which I would make on that question and a key point for our purposes in the context of the thinking that we are doing on sustainable finance is that, irrespective of the difficult policy questions that are embedded in whether the government is spending money effectively to target progress on any one of the particular SDGS, it is important to make sure that what the government is doing is aligned with what is happening in other parts of the economy and of society. One of the big things which is really evidenced in some of the discussion around the SDGS, certainly in the evidence which has already been given to the inquiry and in many of the submissions, is that even with the best will and commitment in the world from government and even with really effective interventions from government to target progress there will still be a very large gap in funding that we need to close to meet the SDGS globally, which means by implication that the money is an important contribution that we can make by leveraging investment from the private sector. So I think doing that in the SDGs in Australia, perhaps through the kind of body which we've suggested with the sustainable finance road map or just another strategy to try and leverage the involvement of business and finance in SDGs, is a critical part of the conversation, whatever is happening on the government side.

Senator MOORE: Mr Hurley, can I just ask you on notice—because this is something I do not understand and Senator Gallacher will—for some more information on the SDG-linked bond that you talked about earlier in your contribution as a practical process in the financing area. That could be something that we could learn from.

Mr Hurley : Absolutely. I am happy to do that. I can point briefly to some work that is happening internationally on this. With the UN Global Compact—I might get the terminology wrong—they have effectively highlighted a substantive focus on innovative financing around the SDGs, including SDG bonds, as a major priority over the next year or so. This might be something you hear a bit more about in other evidence to the inquiry, but I am certainly happy to provide some information.

CHAIR: Professor Adams and Mr Hurley, thank you very much for your submissions, for your attendance here today and for answering questions.