Australian Ethical Annual Report 2019

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Annual Report 2019 HERE FOR GOOD About this report Welcome to the Australian Ethical Investment Limited (Australian Ethical) Annual Report for 2019. This year we are…
Annual Report 2019 HERE FOR GOOD About this report Welcome to the Australian Ethical Investment Limited (Australian Ethical) Annual Report for 2019. This year we are reporting our financial and sustainability disclosures in two companion reports. We have included the performance for Australian Ethical and its wholly owned subsidiaries: Australian Ethical Superannuation Pty Ltd (Australian Ethical Super) and Australian Ethical Foundation Limited (The Foundation) for the period 1 July 2018 to 30 June 2019 (FY19) in this report. KPMG have audited the financial statements within our Annual Report and are assuring selected sustainability disclosures in our Sustainability Report. We welcome your feedback on our reports. Please contact Tom May, General Counsel & Company Secretary, Australian Ethical Investment Limited on 0488 779 474 or at Our Corporate Governance Statement is available at Australian Ethical is Australia’s leading ethical wealth manager. Since 1986, Australian Ethical has provided investors with wealth management products that align with their values and deliver strong returns. Investments are guided by the Australian Ethical Charter which shapes our ethical approach and underpins our culture and vision. Every year, 10 per cent of our profits* are distributed to charitable organisations and social impact initiatives through The Australian Ethical Foundation. * After tax and before bonuses. Annual Report 2019 Contents Message from the Chair & CEO 2 Financial performance 6 Year in review 10 Award-winning ethical investment products 12 Investment performance 14 Investing for good 16 The Australian Ethical Foundation 20 Our senior leadership team 24 Annual Report 27 1 Message from the Chair & CEO Australian Ethical is here for good. Our core purpose is to invest in a future where people and nature thrive. We are living proof that investors can give equal weight to social and environmental factors and still achieve outstanding returns for customers. We bring the highest ethical conviction to our investment selection, coupled with advocacy for more ethical behaviour in the corporate and broader community and philanthropic giving through our Australian Ethical Foundation. These credentials attest to our record have all occurred in the last authenticity and our results speak 20 years2, while the UN Secretary General for themselves. In FY19 our managed recently warned that “climate change is fund investors enjoyed above progressing even faster than the world’s Phil Vernon benchmark annual performance for top scientists have predicted and is Managing Director & CEO all bar one of our funds. Our super outpacing our efforts to address it.”3 fund also delivered for members with Indeed, 64% of Australians now say the Growth Option ranked number climate change is ‘a critical threat’ and one by SuperRatings for one-year that “we should act now even if it has performance, the MySuper (Balanced significant costs.”4 Our own annual Accumulation) Option ranked second brand research echoes this sentiment. over one-year and the Australian For the first time in five years global Shares Option, the strongest performer warming and climate change are more in the rankings over both five and concerning to Australians than the cost seven years.1 of living.5 Our purpose Even the most conservative of Australian Investing for a better world has financial institutions including ASIC, never been more important. As we APRA and the Reserve Bank have called approach the third decade of a century out the financial and governance risks dominated by development at all posed by climate change6 and the costs, Australian Ethical demonstrates critical role company directors must play that there is another way. We show to ensure these risks are adequately Steve Gibbs that as well as delivering returns for assessed. Chair customers and value for shareholders, Capital is key businesses can make a positive impact on the world. New threats to human Despite the demand for action from health, human rights, animal welfare all segments of society, most of the and the environment seem to emerge G20 countries are not on track to meet every day. One phenomenon – climate their 2015 Paris targets.7 This is indeed change – underpins and amplifies them frustrating and disappointing. As all. The threat of mass migration, the concerned citizens, we must continue to ongoing viability of agriculture and hold our government to account, but we human settlements as we know them, can do more in other ways. More than the risks to biodiversity: there is no three-quarters of the top 200 economic doubt our climate is in crisis. NASA entities in the world by revenue are reports the 19 warmest years on corporations not countries.8 2 Annual Report 2019 As investors and shareholders we We advocated for a ban on live animal our Ethical Charter. We are not simply therefore have the power to create export and supported critical social ‘ticking boxes’, but are true to our a better future by directing capital justice campaigns like ‘Kids Off Nauru’. ethical label, through and through. towards the right kinds of entities and We received substantial industry We must not take our leadership away from those who do harm. We can recognition in FY19 for our unique position for granted. We recognise the and must use our influence to lobby combination of ethics and investment need to fight hard to keep our position for ethical and empathetic corporate know-how. Our super fund received in a growing market segment. Our behaviour. three Gold ratings from SuperRatings, challenge is to clearly communicate The Australian Ethical portfolio is a along with the SuperRatings Infinity our comprehensive value proposition, case in point. Our Ethical Charter has Award for Sustainability, and Money in contrast to light green or single- guided us to invest in solar, wind, tidal, Magazine’s Best Green Super Fund topic screens, that may for example geothermal and hydro renewable 2019. Our Australian Shares Fund won adequately exclude fossil fuels but energy companies – and not in coal the Money Management Responsible remain silent on the human slavery in or oil. So just by choosing to invest Fund of the Year award and Financial their investee supply chains. with us, rather than staying with a Standard’s Investment Leadership typical super or investment fund, our Award (ESG Category), with the Growth clients can make a difference to their Diversified Shares Fund also a finalist In February 2019 we reached a impact on the planet9 and support the in the category. significant milestone, surpassing transition to the new economy. In 2019, we were again recognised for $3 billion in funds under management our advocacy and digital marketing (FUM). By the end of FY19 FUM was Ethical leader $3.42 billion. This increase was driven leadership, winning both Social In FY19 we engaged with more than Initiative of the Year and Social by member growth, positive net flows 250 companies to influence positive Campaign of the year in the Financial and strong investment performance. change on issues relating to the Standard MAX Awards. Our super fund remains one of the environment, animal protection and the fastest growing funds in Australia11 treatment of people on behalf of our Good money enjoying a 4% increase in overall investors and shareholders. We believe It’s pleasing to see more investors institutional investors can provide a considering Environmental Social 1. SuperRatings SR50 Growth (70-90) Index FY19; SuperRatings SR50 MySuper Index considered, independent and long-term and Governance (ESG) impacts in FY19 and SuperRatings SR50 Australian perspective on highly politicised issues their investment decision-making. Shares Index FY19 like how we address climate change. Indeed, by this definition the pool 2. NASA/GISS Investors can drive progress through 3. Secretary-General António Guterres to of responsible investments now climate meeting in Abu Dhabi, 30 June 2019 individual and collaborative company represents 44% of Australia’s $2.25 4. The Lowy Institute Poll 2019 engagement, shareholder voting, trillion professionally managed assets.10 5. Australian Ethical brand research, Pollinate divestment triggers and using their March 2019 investor voice in advocacy activities With our comprehensive negative and 6. REP 593 Climate risk disclosure by Australia’s positive screens, focus on sustainable listed companies, ASIC, 20 September 2018; and support public campaigns to drive Climate Change Awareness to Action, APRA, government change. As shareholders, future-building investments, and 20 March 2019; Climate Change and the we are also well positioned to positively the community grants and impact Economy, Deputy Governor Reserve Bank of Australia, Guy Debelle, 12 March 2019. influence the decisions of powerful investing programs offered through 7. Emissions Gap Report 2018, UN businesses. our Foundation, we believe Australian Environment, November 2018 Ethical provides investors with one of 8. During the year we supported climate- the most authentic and comprehensive richest-100-entities-planet-are-corporations- related shareholder resolutions against not-governments-figures-show green choices on the market. The 9. Origin Energy and QBE. We divested way we recruit, the way we invest, calculator/ from companies that did not meet our the way we treat our employees and 10. RIAA Benchmark Report 2019, KPMG expectations for ethical behaviour suppliers, the decisions made when 11. KPMG Super Insights Report 2019. Published and managing human rights issues. 15 April 2019 (Source: APRA Annual Fund- operating our funds are all governed by level Superannuation Statistics June 2018) 3 membership and an 11% increase in The Foundation Share price funded members in FY19. This despite Since 2000, the Australian Ethical Due to a climbing share price, we the industry-wide requirement to Foundation has donated more than $3.8 made the decision to implement identify any low or no balance accounts million (10 per cent of our yearly profits)14 a share split of 100 to one. We in accordance with the ‘Protecting your super’ legislation. to a range of organisations aligned to believed this would result in our our purpose. These organisations must shares remaining accessible to retail We have seen strong competition in deliver benefit to at least one of our and smaller investors and increase the responsible investing segment, three key impact areas: People, Planet trading volumes. The resolution however our continued growth and and Animals. In 2019 alone, $360,000 was approved at our 2018 AGM and the uptick in rollover rates validate was provided through our Community took effect on 21 December 2018, that Australian Ethical has clearly Grants program to 20 community- resulting in a new share price of differentiated itself as a genuine deep focused charities across Australia (more $1.63 with 112,093,000 shares on green option, appealing to a growing on page 21) and $420,000 was allocated issue (compared to a share price investor audience as environmental to our new multi-year strategic $163 before the split with 1,120,930 and social concerns escalate. grants program, totalling $780,000 in shares on issue). The share price We know our customers enjoy their philanthropic funding support. closed at $1.77 on 30 June 2019. experience with us. Our customer The strategic grants program allows us Another milestone for the business satisfaction scores are amongst to focus our impact on the most critical was reached in March 2019 when we the highest in the industry12 and issue of our time: climate change. Our were included in the All Ordinaries are backed up with our impressive response is focused in three impact index for the first time. customer retention rates.13 areas: educating and empowering In FY19 our growing scale enabled us women, preventing deforestation of to pass on the benefits to customers the temperate and tropical forests, 12. Australian Ethical brand research, Pollinate through reduced fees for a number of and supporting the shift to a more March 2019 our managed funds as well as changes plant-based diet. All three impact 13. KPMG Super Insights Report 2019. Published 15 April 2019 (Source: APRA Annual Fund- to thresholds which meant more areas are listed in the top 20 solutions level Superannuation Statistics June 2018) customers were able to take advantage to global climate change identified by 14. After tax and before bonuses of lower wholesale fees. Project Drawdown.15 15. Farewell On 26 June 2019, Phil Under his leadership, funds under to rank as a ‘Best for The World’ Vernon announced that management have increased from B Corp ever since. The success of $600 million to over $3.4 billion. The the business has also allowed the after nine years with market capitalisation of the company Australia Ethical Foundation to Australian Ethical he would has grown from $20 million to $200 provide an ever-growing pool of step down from his role as million, while the super fund has funding to not-for profit organisations Managing Director and CEO. regularly ranked among the fastest aligned to our ethos. On behalf of the Board, growing in the country. Under Phil’s Phil’s contribution to the success of management and staff, I wish to stewardship Australian Ethical has Australian Ethical has been enormous extend my sincere thanks and forged an enviable reputation as and it is only fitting that I use this gratitude to Phil for his significant one of Australia’s leading purpose- opportunity to offer a sincere and contribution to Australian Ethical. driven organisations. In 2014 we heartfelt thank you to Phil, on behalf He has led the organisation through were the first Australian publicly- of all of us at Australian Ethical. a period of unparalleled growth and listed company to be certified as a Steve Gibbs success over the past decade. B Corporation and have continued Chair 4 Annual Report 2019 In FY19 we engaged with more than 250 companies to influence positive change on issues relating to the environment, animal protection and the treatment of people on behalf of our investors and shareholders. 5 Financial performance Funds under management Funds under management (FUM) FUNDS U N DER MAN AGEMEN T for the full year increased by 21% $3.42 bn as at 30 June 2019 to $3.42 billion, up from $2.82 Managed Funds Retail billion reported for the previous corresponding period. The increase was driven by member growth, 8% positive net flows and strong Managed Funds Wholesale investment performance. Indeed, in a market where many 20% super funds have been losing members1, Australian Ethical Super with funded members increasing 11% since 30 June 2018, remains one of the fastest growing super funds in the country.1 In the third quarter 6% of the year, an improvement to the 66% onboarding process at our super fund Institutional administrator resulted in an uplift in Superannuation flows evident in the final quarter. The second half of the financial year also showed significant improvement for managed fund flows, following volatile investment markets in the first half. ANN U AL F L OWS Profit 519 The net profit after tax (attributable 454 332 to shareholders) for the year ended 319 Inflows 30 June 2019 was $6.5 million, up 29% on FY18. This positive result was 177 driven by continued membership 88 growth, positive net flows and strong investment performance. The consolidated statutory net profit Outflows after tax, which includes the results of The Foundation, was $6.6 million, up 2014 2015 2016 2017 2018 2019 from $5.1 million in FY18. 1. K PMG 2019 Super Insights Report – Managed Funds Institutional Superannuation Net Flows published April 2019 6 Annual Report 2019 Funds under management – by product Funds $m Income 1.4 Income (Wholesale) 6.4 Fixed Interest 0.5 Fixed Interest (Wholesale) 18.1 Balanced 104.9 Balanced (Wholesale) 237.4 Advocacy 3.7 Advocacy (Wholesale) 42.3 Diversified Shares 12.1 Diversified Shares (Wholesale) 174.7 International Shares 3.5 International Shares (Wholesale) 67.3 Australian Shares 152.5 Australian Shares (Wholesale) 269.1 Emerging Companies 5.3 Emerging Companies (Wholesale) 54.6 Other direct equities 3.6 Total 1,157.4 Super investment options $m Accumulation Defensive 59.9 Conservative 75.5 Balanced 1,047.9 Growth 359.1 Advocacy 117.1 International Shares 62.7 Australian Shares 397.5 Total 2,119.7 Pension investment options $m Defensive 4.7 Conservative 22.6 Balanced 72.2 Growth 12.9 International Shares 3.6 Australian Shares 22.6 Total 138.6 7 Return to shareholders Revenue Our shareholders continue to enjoy Strong super FUM growth of 23% and a performance fee for the outperformance sustained performance, with the of the Emerging Companies Fund contributed to overall revenue increasing 14% Board declaring a fully franked final to $41 million in the period. This increase was despite reductions in managed fund dividend of 3 cents per share for the fees and wholesale thresholds announced in October 2018. The combination of full year ended 30 June 2019, bringing lower fees and a higher proportion of wholesale investors resulted in reduced the total dividend for the year to average FUM-based revenue margins. 5 cents per share, an increase of We have continued to invest in channel diversification, customer experience 25% on the previous year. During the and employee capability, while maintaining expense growth at a modest level in period our share price increased from comparison to revenue growth in FY19. $1.35 (revised number as if share spilt had already occurred) on 30 June Product FUM-based Revenue Margin 2018 to $1.77 on 30 June 2019. FY15 FY16 FY17 FY18 FY19 Managed funds 2.09% 1.71% 1.60% 1.37% 1.15% Financial position Superannuation 1.74% 1.40% 1.25% 1.21% 1.21% Our balance sheet position Total Average Revenue Margin 1.86% 1.50% 1.36% 1.26% 1.19% remains strong with no debt. Net assets increased 11% to $16.4 FUM ($M) ARM (%) million excluding The Foundation. Total FUM The majority of assets are held 4,000 2.0 Total average revenue margin (ARM) in cash to meet our regulatory 1.8 3,500 requirements and to support 1.6 continued investment in growth 3,000 1.4 and customer experience. The 2,500 1.2 parent’s net tangible assets position 2,000 1.0 is $10.4 million, which is $5.4 million 0.8 1,500 surplus to our Australian Financial 0.6 Services Licence requirements. The 1,000 0.4 only significant non-cash asset is a 500 0.2 property held for sale in Canberra 0 0.0 and fixed assets which primarily 2015 2016 2017 2018 2019 consist of office furniture, fittings and IT equipment. This information is discussed in detail in Notes 15 Outlook and 18 of the Financial Statements. Looking forward, Australian Ethical remains committed to enhancing our customers’ The assets held in excess of the experience to pave the way for the next phase of our growth journey. Our Australian Financial Services Licence investment to date has paid off with market-leading customer satisfaction scores1 requirements continue to provide and retention rates2. a prudent buffer in the event of We have begun working on our new digital platform which will be a key focus in FY20 a sustained market downturn and will roll out incrementally. We will also continue to invest in brand awareness and enable us to react to market and extending our customer reach. And we’re developing our products and opportunities should they arise. accessibility to ensure our customers can reach us through their channel of choice. This will position Australian Ethical to build on the strong 2019 result and allow us to deliver better products and services to our customers, provide greater returns flowing to ou
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