Australian Ethical Investment
Annual Report 2015

Plain-text annual report

Australian Ethical Investment Limited Annual Report 2015 Contents Chair and Managing Director’s Report ______________________________________________ 2 Financial Summary ___________________________________________________________________ 8 Community Grants __________________________________________________________________11 Director’s Report_____________________________________________________________________13 Remuneration Report _______________________________________________________________18 Corporate Governance Statement __________________________________________________33 Financial Statements ________________________________________________________________39 Auditor’s Independence Declaration _______________________________________________81 Independent Auditor’s Report ______________________________________________________82 Shareholder Information ____________________________________________________________85 Contact Us Phone: 02 8276 6288 Fax: 02 9252 1987 Email: enquiries@australianethical.com.au Web: australianethical.com.au Post: Australian Ethical Investment Ltd Reply Paid 3993, Sydney NSW 2001 Registered address: Level 12, 225 George St Sydney NSW 2000 Chair & Managing Director’s Report Dear shareholder, We are very pleased to write to you with our update for the year. Financial performance The past year has been a significant year on many fronts. There is a sense that we are at a real tipping point regarding climate action with so many positive moves around the globe toward a hopefully positive outcome in Paris in November. Add to that breakthroughs in technology such as battery storage and grid technology and there is real cause for optimism on the climate front. More generally people are increasingly making ethical choices in their daily consumer purchases as well as their investment and savings decisions. Our research confirms an increasing demand from investors for ethical product and a greater confidence that it will produce the same or better returns than unscreened investing. And the evidence continues to strengthen that this is the case. The recently released Benchmark Report of the Responsible Investment Association of Australia showed that money invested in ethical investment funds had doubled in the past two years. Moreover, the investment performance of ethical investment funds had outperformed mainstream funds across all asset classes over most time periods. This growth and performance of the sector is reflected in our own returns with strong performance over the past year across many metrics: • Funds under management (FuM) of $1,167m (up 32% on previous year) • Net inflows of $179m (up 96%) • Superannuation membership at 21,196 (up 20%) • Top quartile investment performance of a number of our funds • Record of over 700 philanthropic grant applications We are living proof that businesses and investment funds can operate to give consideration to social and environmental factors as well as financial returns and deliver on each equally as well. Net profit Net profit after tax for the financial year to 30 June 2015 was $1.97m compared to the prior year of $2.54m. The 23% decrease on the previous year is due to three main factors: a reduction in fees at the beginning of the financial year on our superannuation fund as part of an ongoing fee reduction strategy, issues arising from the transition to a new remuneration structure, and a further impairment on the Company’s property in Canberra. Revenues Revenue increased 6% to $21.2 million, up from $20 million recorded for the previous corresponding period. Revenue is mostly driven by funds under management which is, in turn, influenced by market movements and net inflows. Funds under management increased 32% to $1,167 million, up from $887 million in the previous corresponding period. Net inflows almost doubled to $179 million for the year, up 96% on last year’s net inflows of $92 million. The progressive reduction of superannuation fees over the medium term continues to have a significant impact on revenues. This strategy is aimed at sharing the benefits of growth with our members and improving our competitiveness, taking into account shareholder returns and the long term sustainability of the business. Our goal for fees is to be at the 75th percentile of comparable MySuper funds by 2020. Consistent with this strategy, on 30 June 2014 we reduced the fees on our superannuation fund by 0.67% and by a further 0.30% on 31 July 2015. Whilst net flows are impacted by many factors, their significant increase over the past year supports our contention that these planned fee reductions will lead to growth that will, ultimately, offset the reduction and lead to a better, long term, sustainable business with far greater impact. 2 Annual Report 2015Final Dividend A fully franked final dividend of $1.20 per share was declared for the full year ended 30 June 2015, bringing the total dividend for the year to $2.00 per share. The record date for the dividend will be 16 September 2015 with payment due on 30 September 2015. We are pleased to maintain our dividend during a period where profit has been impacted by changes aimed at building a stronger business over the long term, namely the fee reductions and remuneration changes. Expenses Operating expenses increased by $2.0m, an increase of 14% over the previous year, due to the following: • Employee costs: Employee costs have increased by $1.9m or 27% over the prior year. This increase comprises a number of significant items including: ᵒ bonuses in general have been high due to outperformance on most key performance indicators including investment performance, net inflows and new clients. ᵒ under our revised incentive scheme we will now be paying Short Term Incentives entirely in cash rather than a mix of cash and performance rights, as was previously the case. Thus we have accrued 100% of the bonus payable for the current period as well as the amortised performance rights attributable to the previous year. ᵒ increased provision for employee share rights as a result of significant increases in the share price over the year. The total expense for rights issued under the previous remuneration model this year was $1.4m. ᵒ an adjustment of $0.23m was made in respect of bonuses under-accrued in the previous year. Non-operating expenses were impacted by: • Property impairment: A full year impairment of $484,249 has been incurred on our property held in Bruce in Canberra. This has been due to the further deterioration of the Canberra property market particularly for secondary grade properties. We continue to seek a purchaser for the property and have recently secured a tenant for half of the available floor space. Further detail is provided in Note 11 of the financial statements. • Income tax expense: Tax expense increased despite the lower profit due to items that are not deductible for tax purposes which are detailed in Note 8b of the financial report. The effective tax rate was 45%, an increase on the prior year rate of 38%. The above increases in expenses have been partially offset by the following decreases: 3 • External services: costs to outsource providers have reduced by $0.3m as a result of reduced use of consultants this year following significant projects completed in 2014; and • Marketing: marketing costs have decreased by $0.25m over the prior year due to a reduction in the cost of acquisition of new clients. Financial Position The Company retains a strong balance sheet position with no debt. Net assets increased by $1.7m over the year to $11.2m. The majority of assets are held in cash to meet the Company’s Australian Financial Services Licence conditions. The only significant non-cash asset is the property held in Canberra which is discussed in detail in Note 11 of the financial statements. Funds Under Management Funds under management has grown from $887m to $1,167m over the past year (a 32% increase). $1 billion milestone passed In November 2014 we hit a significant milestone in our 28 year history by reaching $1bn. This result follows strong growth over the past year which defies industry averages. We are extremely proud of the Company’s performance in reaching this milestone. It marks a coming of age and maturing of the Company to be a stable and substantial player in the financial services landscape. Since reaching this milestone our funds under management has continued to grow reaching $1.167bn at 30 June despite some recent market falls. Net inflows Over the year we achieved $179m in net flows almost double (96% increase) the flows for the prior year of $92m. Many factors contributed to the improved flows including an increasing awareness of ethical investing and of Australian Ethical, website optimisation making the joining process more client friendly and a more efficient process in consolidating members benefits from other super funds. New clients Our new client growth continues to be strong due to active sales and marketing strategies, a rapidly growing social media community and continued improvements to our digital and online processes removing the barriers for members to join. New clients averaged 439 per month compared to 375 per month in the previous year. Australian EthicalInvestment performance Performance across our funds and superannuation options has been strong with a number of our funds and investment options delivering above median performance over the year according to the regular survey published by consulting firm Mercer1. Managed Fund Cash Fixed Interest Balanced Diversified Shares Advocacy Australian Shares International Shares Superannuation Accumulation Options Defensive Conservative Balanced Growth Smaller Companies International Advocacy 1 year Quartile 3 years Quartile 5 years Quartile 7 years Quartile 10 years Quartile 3rd 3rd 3rd 1st 1st 1st 4th 2nd - 3rd 1st 1st 1st 2nd 1st - 4th 1st 1st 1st 4th 1st - 2nd 1st - 1st 3rd 1st - 2nd 1st - 1st - 1 year Quartile 3 years Quartile 5 years Quartile 7 years Quartile 10 years Quartile 3rd 4th 3rd 1st 1st 4th 3rd 3rd 4th 3rd 1st 1st 4th 3rd 2nd 4th 4th 4th 1st 4th 3rd 2nd - 3rd 4th 1st 4th - 2nd - 3rd 4th 1st - - Our flagship Australian Shares fund recently celebrated its 20th anniversary having delivered consistent upper quartile performance over the whole period. Its exceptional track record ranks it first over every reported time period. The fund has returned 10% per annum over its 20 year history, far exceeding its benchmark index. Similarly our Diversified Shares fund, ranks first over all periods. 1 Based on Mercer’s Peer Group Category as at 30 June 2015. 4 Annual Report 2015Product Improvements We continue to review our product suite to ensure competitiveness in an increasingly changing and competitive environment. Superannuation fees As communicated previously, the superannuation environment has become increasingly competitive and we have a medium term strategy for our fees to be at the 75th percentile of comparable My Super funds by 2020. Consistent with this strategy on 30 June 2014 we reduced the fees on our superannuation fund by 0.67% and by a further 0.30% on 31 July 2015. The reductions to date have moved us some way toward our goal however we still have some way to go and shareholders should expect further reductions in the future. Launch of the Australian Ethical Emerging Companies Fund On 1 July 2015 we launched a new fund, the Australian Ethical Emerging Companies Fund which invests in a diversified portfolio of shares in small capitalisation companies on the basis of their social, environmental and financial credentials. The Fund utilises an active stock- picking management style with stocks selected for growth rather than income. There is increased interest in small capitalisation companies and we have a demonstrated strength in selecting growth stocks. Inflows in the first month have been very positive. Improved access to our managed funds We also made a number of changes aimed at making our managed funds more accessible to both retail investors and advisers. These were: • listing on the ASX mFunds platform - a number of our funds were listed on the ASX mFunds platform, a platform that provides easier access for both retail investors and advisers • more funds with wholesale units - we increased the number of our funds with a wholesale unit providing lower fees for clients with large balances • product name changes - we changed the names of a number of our investment funds to better reflect their underlying portfolio and align with current industry practice. 5 Awards We continue to be regularly recognised by industry peers through awards. The following awards were received over the year: • Ethical Fund of the Year - we were awarded the Ethical Fund of the Year award from the financial magazine, Money Management. • International Fund of the Year - we were awarded the International Fund of the Year by the Australian Investment Management Association. This is significant as it was rated against the market as a whole not just purely ethical peers. • United Nations Association of Aust. - we were awarded two awards in the United Nations Association of Australia World Environment Day: Excellence in Overall Environmental Management (Business) and the Leadership Award for Large Organisations. • B Corp “Best for the World” - we were awarded B Corp “Best for the World” status ranking us in the top 10% of B Corps worldwide (a field of 1,300) for our social and environmental credentials. United Nations Association of Australia Awards Australian EthicalEthical leadership We continue to be the leader in ethical investment in Australia with the highest ethical conviction in our investment selection coupled with taking a strong stand in encouraging more ethical behaviour in the corporate and broader community. The following are key initiatives pursued through the course of the financial year: Net zero emissions by 2050 To meet the urgent challenge of global warming, investors, companies and governments need to commit to decarbonise across all sectors of the economy not just a single sector. Excluding high emissions fossil fuel companies is important, but this needs to be accompanied by action across the many other industry sectors which are big direct and indirect emitters. Alongside our exclusion of coal, oil and unconventional gas, Australian Ethical has set a target to fully de- carbonise all our portfolios (i.e. net zero portfolio emissions) in the timeframe needed to limit warming to 2 degrees. To achieve this we need to reduce emissions across our entire portfolio, from health care to food production to manufacturing. Our decarbonisation project has a dual purpose: • to ensure that our investments are aligned with a clean energy future; and • to help create momentum to drive the mainstream action needed to address climate change. During the year we became the first Australian member of the international Portfolio Decarbonisation Coalition, a coalition of institutional investors launched at the 2014 United Nations Climate Summit to mobilise financial markets to drive economic de-carbonisation. The big banks: a force for good or bad in a warming world? During the year we collaborated with a number of investors and NGOs to encourage the banks to better disclose their exposure to carbon emissions. This included: • work with other institutional investors and the banks to agree a more uniform approach to disclosure of lending to fossil fuel and renewables sectors; • supporting shareholder resolutions at bank AGMs; and • working as an Australian ‘co-lead’ for an international investor initiative focused on climate governance at 60 banks globally. The Australian banks responded to this diverse activity at the end of 2014 with significant new disclosure of fossil fuel and clean energy exposures. Support for climate expertise in the Boardroom In 2014 we were proud to again have supported Ian Dunlop for election as a director of BHP Billiton by being one of his nominating shareholders via a shareholding in our Advocacy Fund, in order that his climate expertise could help BHPB show greater leadership in dealing with the risks and opportunities created by climate change. Although Ian was unsuccessful, we credit his campaigns with raising public awareness of the issues at stake and encouraging greater climate transparency from BHPB. Climate lobbying We are participating in two international investor collaborations advocating for ‘responsible corporate climate lobbying’, to encourage companies to play a productive rather than destructive role in the development of responsible climate policy. Too often companies stand silent as their industry associations promote media scare campaigns which are not aligned with their privately stated views – or with long term company, industry and societal interests. Human rights We are participating as a lead investor in a global investor coalition to improve the way companies identify and manage human rights risks in their supply chain and other activities (http://www.ungpreporting.org/early- adopters/investor-statement/). We are encouraging both Australian investors and companies to use this new reporting framework to improve the quality of their internal discussions and external disclosure of the human rights impacts of their activities. Shell and BP shareholder resolutions We were part of the “co-filing group” for shareholder resolutions by a coalition of UK investors and NGOs calling on energy and petrochemical giants BP and Shell to say more about the preparation they are making for a low carbon world. In particular we want disclosure of operational emissions, their testing of the resilience of their businesses to different global warming scenarios and their work on low carbon energy R&D and investment. The resolutions were passed with overwhelming shareholder support following recommendations from both Shell and BP that shareholders vote in favour of the resolutions. The next step is to hold the companies to account to provide meaningful reporting about how they are aligning their businesses with the global changes needed to deliver a low warming future. 6 Annual Report 2015Global markets are currently going through a period of considerable volatility and we expect that this will continue for some time. This will impact our revenues as the value of funds under management (which is in turn influenced by the state of the markets) is the largest driver of revenues. Our Company is a very special company and truly serves as a model of the future where social and environmental outcomes are achieved alongside financial performance. With our funds under management having passed $1bn, we are of a size and capacity where we are a significant player in the financial services landscape with a substantial voice and influence. With rising consumer awareness of the ethical impact of their consumption choices and the need for better ways of doing business, we are well placed to continue to grow and have an even greater impact on achieving a better world. We have our sights firmly set on reaching $5bn by 2020 and with the passion, commitment and skills of our people we have every reason to believe that we’ll get there. Steve Gibbs Chairman 28 August 2015 Phil Vernon Managing Director & Chief Executive Officer 28 August 2015 Our People Our people are our greatest asset – we say it often and with good reason. It is only with the determination and dedication of our people that we can serve our clients, generate long-term value for our shareholders and contribute to the community. We focus on cultivating and sustaining a diverse work environment and workforce, which is critical to meeting the unique needs of our diverse client base and the communities in which we operate. Our goals are to maximise individual potential, increase commercial effectiveness, reinforce the company’s culture, expand our people’s professional opportunities, and help them contribute positively to their greater communities. Focusing on cultivating and sustaining a diverse work environment and workforce supports these goals. 2015 Community Grants Each year 10% of the Company’s pre-tax profit is donated to community organisations working to address humanitarian, environmental and animal welfare needs, one of the highest percentages of a listed company’s profits donated to charity in Australia. In the 2015 financial year $0.37m has been provisioned for payment to charitable and conservation organisations under our community grants program with over $2m having now been paid or provisioned. Recently we created the Australian Ethical Foundation as a vehicle to distribute the community grants we make each year. There are two drivers behind establishing a Foundation: • Flexibility: the Foundation will provide an investment pool that would give greater flexibility in the types of support we would be able to provide recipients; • Leverage: in the future we would like to invite shareholders and clients to contribute to the Foundation and participate in the support of the many worthwhile recipients. Outlook The growth in the ethical investment market is strong as increasingly people are becoming more socially conscious and realising that they can consume and invest in alignment with their values without compromising on quality and performance. The regulatory environment for superannuation and managed funds continues to evolve with increasing compliance costs and downward pressure on fees. We will continue to assess product fees against the market balancing member interests, returns to shareholders and the need to develop a long term, sustainable business. 7 Australian EthicalFinancial Summary Funds Under Management ($m) Revenue ($m) 1,167 887 21.2 19.9 15.7 14.8 16.4 669 708 599 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Profit After Tax ($m) 2.5 Dividends (cps) 200 200 2.0 170 Special Ordinary 85 60 1.1 1.1 0.4 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Basic Earnings Per Share ($) 2.49 1.90 Return On Equity (%) 33.0 21.5 1.13 1.05 15.0 15.4 0.40 5.7 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 8 Annual Report 2015Funds under Management Net Inflows Managed Funds Super Net Flows Managed Funds $390m Super $777m $80 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$20 I n fl o w s O u t fl o w s As at 30 June 15 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Financial results for the year to 30 June 2015 Profit Revenue 2014 ($,000) 2015 ($,000) % change 19,889 21,171 Operating expenses (14,476) (16,478) Non-operating expenses* Net Profit After Tax (NPAT) Adjustments (gross) Add back employment restructure Add back property revaluation Tax on adjustments Underlying Net Profit After Tax (UPAT)^ (2,871) 2,542 409 282 (122) 3,111 (2,723) 1,970 - 484 - 2,454 (21%) 6% (14%) 6% (23%) * Non-operating costs include tax, depreciation, amortization, community grants, loss on disposal of assets and property impairment. ^ Underlying profit is provided to assist shareholders in understanding the Company’s performance. Underlying profit excludes certain items, as determined by the Board and management, that are either significant by virtue of their size and impact on Net Profit After Tax, or are deemed to be outside normal operating activities. It reflects an assessment of the result for the ongoing business of the Group. This table has been prepared in accordance with the Australian Institute of Company Directors (AICD)/ Finsia principles for reporting underlying profit and ASIC’s Regulatory Guide 230 Disclosing non-IFRS financial information. Underlying profit after tax has not been reviewed or audited by our external auditors, however the adjustments to net profit have been extracted from the books and records that have been audited. 9 Australian Ethical             Funds Under Management Opening FuM Super flows (net) Managed Funds flows (net) Net Flows Market movement Closing FuM Dividends Interim (fully franked) Final (fully franked) Total dividend 2014 ($m) 2015 ($m) % change 708 78 14 92 87 887 132 47 179 100 887 1,167 25% 70% 240% 96% 14% 32% 2013/2014 (cents per share) 2014/2015 (cents per share) % change 80 120 200 80 120 200 - - - 10 Annual Report 2015Community Grants Each year 10% of the Company’s pre-tax profit is donated to community organisations working to address humanitarian, environmental and animal welfare needs, one of the highest percentages of a listed company’s profits donated to charity in Australia. In the 2015 financial year $0.37m has been provisioned for payment to charitable and conservation organisations under our community grants program with over $2m having now been paid or provisioned. Image Courtesy of Mungalla Aboriginal Corporation for Business 11 Australian Ethical2014 Community Grant Recipients Tennant Creek Transport Inc. (NT) Providing much-needed transport for one of the most socially-disadvantaged communities in Australia Mungalla Aboriginal Corporation for Business (QLD) Up-skilling unemployed indigenous youth for environmental outcomes Port Phillip Housing Association (VIC) Community garden project designed to build social connection and skills among rooming house tenants Free to Shine (Cambodia) Girls scholarship program to prevent sex trafficking The Orangutan Project (Indonesia) Funding Wildlife Protection Units of local people to patrol the national park and prevent poaching The Exodus Foundation (NSW) Sustainable Communities project to reduce the environmental impact of Exodus’ food programs for the homeless The Pyjama Foundation (QLD) Funding Pyjama Angels who provide individual attention and support to children in foster care Jewish House (NSW) Refurbishment of the homeless shelter to accommodate pets of the homeless The Kokoda Track Foundation (PNG) Microlending program for women to address poverty and provide clean energy alternatives Kids Under Cover (VIC) Scholarships for youth at risk of homelessness to complete their secondary education Sir David Martin Foundation (NSW) Contributing to 12 week rehabilitation programs for youth fighting addiction, mental health issues and homelessness Timor Leste Vision (East Timor) Project to install a reliable water system to deliver clean water to the remote village of Hatete Australian Cervical Cancer Foundation (Kiribati) HPV vaccination program to protect women in Kiribati against cervical cancer The Deli Women & Children’s Centre (NSW) Safe Healing project for women who have suffered domestic violence and abuse, especially those from Aboriginal or CALD backgrounds Animal Aid Abroad (Egypt) Revitalisation of the Port Said Equine clinic and training a local team to treat working equines Liberian Community Action for Unity, Social & Economic Development (VIC) Establishment of a ‘Newlife Restaurant’ social enterprise to provide skills training and employment opportunities for the West African community Delivery Cycles (VIC) A social enterprise providing employment opportunities for marginalised groups, especially refugees, through the establishment of a food delivery business Director’s Report The Directors present their report together with the consolidated financial report of Australian Ethical Investment Limited (the Company) and its controlled entity, Australian Ethical Superannuation Pty Limited (together, the Group), for the year ended 30 June 2015 and the auditor’s report thereon. 2007 and 2014. Green Cross Australia is dedicated to empowering resilience to the impacts of climate change working with business, community and research networks using digital engagement models. Mara currently is a resilience strategist and is Non-Executive Director of Green Cross Australia and Enova Community Energy. Directors The Directors of the Company at any time during or since the end of the financial year are: Stephen Gibbs BEc, MBA Chair and Non-Executive Director Stephen joined the Board in July 2012 as a Non-Executive Director and on 4 February 2013 was appointed Chair. He chairs the People, Remuneration and Nominations Committee, is a member of the Audit, Compliance and Risk Committee and is a director of Australian Ethical Superannuation Pty Limited. Stephen was formerly Chair of the Responsible Investment Academy Advisory Council. From early 2000 he was CEO of ARIA, the trustee of the PSS and CSS – the superannuation schemes for federal government employees. When Stephen left ARIA in January 2008 it had close to $A20 billion under management. Prior to ARIA Stephen was the Executive Officer of the Australian Institute of Superannuation Trustees (AIST). His earlier career was in the trade union movement. Tony Cole AO, BEc Non-Executive Director Tony was appointed as a Non-Executive Director on 4 February 2013. Tony is a member of the Investment Committee and the People, Remuneration and Nominations Committee. For the past 17 years Tony has been a senior investment consultant and executive in Mercer’s Investment Consulting business, including heading the business in the Asia Pacific region for more than five years. Tony recently ceased working with Mercer. Prior to joining Mercer, Tony held several senior positions in the Commonwealth Public Service, including Secretary to the Treasury, Secretary of the Department of Health and Social Security, Deputy Secretary to the Department of the Prime Minister and Cabinet and Chair of the Industry Commission (now the Productivity Commission). Tony served as an Alternative Director of the World Bank and was Treasurer Paul Keating’s principal economic adviser and head of office in the early years of the Hawke- Keating government. Other career highlights for Stephen include his personal invitation from the then UN General Secretary to join the steering committee and investor group which developed what became the United Nations Principles of Responsible Investment - UNPRI and membership of the ASX Corporate Governance Council from its inception until 2008. Tony is currently a Trustee Director of the Commonwealth Superannuation Corporation and a member of the Advisory Board of the Northern Territory Treasury Corporation. He Chaired the Advisory Board of the Melbourne Institute for 10 years and was a longstanding member of the Australian Office of Funds Management Advisory Board. Stephen is a director of Ecosystems Investment Management (Australia) Pty Ltd and an Expert Panel member of the Fair Work Commission. Kate Greenhill BEc, FCA, GAICD Non-Executive Director Mara Bun BA Non-Executive Director Mara brings over 20 years of business and community experience to Australian Ethical. She was born and raised in Brazil, was educated in the US and was a financial analyst in Morgan Stanley’s M&A and technology banking groups before moving to Australia in 1991. During the 1990s Mara was responsible for finance and administration at Greenpeace Australia and was head of policy and public affairs for Choice. She returned to investment banking as Senior Equities Analyst covering the Internet sector for Macquarie Bank during the dotcom period. She has been a Director of The Allen Consulting Group, head of research at Canstar, and Director of Business Development at the CSIRO. Mara was the founding CEO of Green Cross Australia between 13 Kate was appointed as a Non-Executive Director on 22 February 2013. Kate is Chair of the Audit, Compliance and Risk Committee, a member of the People, Remuneration and Nominations Committee and a director of Australian Ethical Superannuation Pty Limited. Kate was formerly a Partner with PricewaterhouseCoopers assisting clients with advice and assurance in relation to financial statement audit opinions, accounting and regulatory developments, capital raisings, accounting for complex transactions, due diligence, valuations, compliance, risk management, organisational structure and the operation of controls. Kate is a director, and member of the finance committee, for a not for profit organisation. Australian EthicalUnited Funds Management (a subsidiary of IOOF Holdings Limited), and since 2004 has taught in the Finance Department of the University of Melbourne. Changes to Subsidiary Board directors subsequent to 30 June 2015 The following changes to Australian Ethical Superannuation Pty Limited directorships occurred since 30 June and prior to the issue of this report: • Les Coleman resigned as non-executive director on 26 August 2015; • Tony Cole was appointed as a non-executive director on 26 August 2015; • Mara Bun was appointed as a non-executive director on 26 August 2015; Principal activities The Group’s principal activities during the financial year was to act as the responsible entity for a range of public offer ethically managed investment schemes and act as the Trustee of the Australian Ethical Retail Superannuation Fund. Other than as described in this report, there were no significant changes in the nature of the controlling entity’s activities during the year. More details on the Group’s principal activities are included in the Shareholder Newsletter. Changes in the state of affairs There were no significant changes in the state of affairs of the Company that occurred during the year not otherwise disclosed in this report or the financial statements. Operating and financial review The consolidated profit for the year to 30 June 2015 is $1.970m (2014: $2.543m). A review of operations for the Group is set out in the Shareholder Newsletter. Phil Vernon BEc, MCom, MBA, FCPA, FAICD Executive Director and Managing Director Phil joined the Company as Chief Executive Officer in December 2009 and was appointed Managing Director in July 2010. He is also a director of Australian Ethical Superannuation Pty Limited. Phil has over 30 years’ experience in financial services including funds management, superannuation, corporate governance and industry regulation. He has extensive experience in strategy, people management and leadership. Phil is a Director of not for profit organisations Planet Ark and Beyond Zero Emissions and of industry associations Responsible Investment Association of Australia and the Investor Group for Climate Change. Company secretary Tom May BA, LLB, MBA, FGIA Tom has experience in the superannuation and distribution aspects of financial services law. He has been a lawyer since 1990 when he was a legal officer in the federal government. He subsequently worked in house with funds management and life insurance companies before working in private practice in London and Tokyo. Subsidiary Board directors and Board committee members Ruth Medd BSc, Dip Comp Science, CPA, MAICD Chair and Non-Executive Director, Australian Ethical Superannuation Pty Limited Ruth is Chair of the Company’s wholly owned subsidiary Australian Ethical Superannuation Pty Limited and a member of the Company’s Audit, Compliance and Risk Committee. Ruth is currently on the board of the NFAW Ltd (National Foundation for Australian Women) and WOB Pty Ltd (Women on Boards). Ruth started in IT in the 1970s. Since then she has been a senior public servant, a broadcasting regulator, the inaugural Company Secretary at Telstra and the Executive Director of an industry association. Les Coleman B.Eng.(Hons), B.Sc.(Hons), M.Ec., PhD Non-Executive Director, Australian Ethical Superannuation Pty Limited Les is a member of the Company’s Audit, Compliance and Risk Committee and is also a director of Australian Ethical Superannuation Pty Limited. Les has been a trustee of two superannuation funds, and a director of ten companies involved in finance, retail and distribution. He has over 20 years’ experience in senior operational, planning and finance roles in Australia and overseas. He is currently a member of the investment committee of 14 Annual Report 2015Dividends Dividends paid or declared by the Company to members since the end of the previous financial year were: Cents per share Total amount ($) Franked/ unfranked Date of payment Declared and paid during the financial year Final 2014 Interim 2015 Total Declared after end of year 120 80 200 1,246,676 Franked 3 October 2014 843,054 Franked 27 March 2015 2,089,730 Final 2015 120 1,264,582 Franked 30 September 2015^ ^ Planned payment date Events subsequent to reporting date On 31 August 2015 the following share transactions occurred: • Vesting of 11,899 STI employee share rights (AEFAG); • Vesting of 16,834 LTI employee share rights (AEFAC); and • Issue of 11,659 shares to the Employee Share Trust for employee long term incentives. On 31 July 2015 we reduced the fees on our Superannuation fund by a further 0.30%. This is part of a medium term strategy, discussed in previous communications, to progressively make our superannuation product fees more competitive. On 28 July 2015 the Australian Ethical Foundation Ltd, a company limited by guarantee, was registered. As discussed in the Shareholder Newsletter the Foundation will receive the donations from the Company each year and manage the allocation of those grants. Other than as outlined in this report, no matters or circumstances have arisen since the end of the financial year which have or may significantly affect the operations of the Company and its controlled entity, the results of those operations or the state of affairs of the Company in financial years subsequent to the financial year ended 30 June 2015. 15 Outlook - Likely developments and business strategies The Group’s business strategy is discussed in the Shareholder Newsletter. Environmental Regulation The Company acts as a responsible entity for the Australian Ethical Property Trust and the Australian Ethical Balanced Trust both of which own direct property assets. These fiduciary operations are subject to environmental regulations under both Commonwealth and State legislation in relation to property developments. Approvals for commercial property developments are required by state planning authorities and environmental protection agencies. The licence requirements relate to air, noise, water and waste disposal. The responsible entity is responsible for compliance and reporting under the government legislation and engages professional property managers to manage the properties. The Company is not aware of any material non- compliance in relation to these licences during the financial year. The Company has determined that it is not required to register to report under the National Greenhouse and Energy Reporting Act 2007, which is Commonwealth environmental legislation that imposes reporting obligations on entities that reach reporting thresholds during the financial year. The last property in the Australian Ethical Property Trust was sold on 24 July 2015. Since that time the Trust has invested in units of unlisted property trusts that meet the investment criteria. The properties held in the Australian Ethical Balanced Trust are not required to have a minimum of Green star rating. Australian EthicalThe Deed also provides that the Company will pay on behalf of the director or officer or lend to the director or officer the amount necessary to pay the reasonable legal costs incurred by the director or officer in defending an action for a liability incurred as a director or officer of the Company or a subsidiary on such terms as the Company reasonably determines. The director or officer must repay to the Company such legal costs if they become legal costs for which the Company was not permitted by law to indemnify the director or officer. The Company need not pay or provide a loan to the director or officer to the extent that the director or officer is actually reimbursed for legal costs as they fall due under an insurance policy or otherwise. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify a director, officer or auditor of the Company or of any related body corporate against a liability incurred as such director, officer or auditor. Auditor’s Independence Declaration A copy of the Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 81. Indemnification of Directors’ and officers The Company and its controlled entity indemnify the current Directors and officers of the Company and the controlled entity against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the Group, except where the liabilities arise out of conduct involving a lack of good faith. The Company and its controlled entity will meet the full amount of any such liabilities, including costs and expenses. Insurance The constitution of the Company provides a general indemnity for officers of the Company against liabilities incurred in that capacity, including costs and expenses in successfully defending legal proceedings. During the financial year, the Company paid a premium to insure the directors (named above), the company secretary and all officers of the company and of any related body corporate against a liability incurred as a director, secretary or officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. During the year the Company entered into or maintained deeds of indemnity, insurance and access (Deed) with directors and officers which provides general indemnity against liabilities incurred in that capacity to the extent permitted by the Corporations Act 2001. The Deed obligates the Company to use its reasonable endeavours to obtain and maintain insurance for the benefit of a director or officer of the Company and any subsidiary, to the extent that such coverage is available in the market on terms which the Company reasonably considers financially prudent and on terms consistent with the practice of comparable companies operating in similar markets. 16 Annual Report 2015Director’s meetings The number of Directors’ meetings (including meetings of committees of directors of which not all directors are members) and number of meetings attended by each of the directors of the controlling entity during the financial year are set out below. Director Board Investment People, remuneration and nominations Audit, compliance and risk Eligible Attend Eligible Attend Eligible Attend Eligible Attend Stephen Gibbs Mara Bun Tony Cole Kate Greenhill Phil Vernon Ruth Medd Les Coleman 5 5 5 5 5 - - 5 5 5 5 5 - - 3 - 3 - 3 - - 3 - 3 - 2 - - 4 - 4 4 4 - - 4 - 4 4 4 - - 7 - - 7 7 7 6 7 - - 7 7 6 6 Shares issued during the year and prior to the issue of the report During the year and prior to the issue of this report the following shares were issued: Date Number of shares Issued Reason 1 July 2014 11,950 Conversion of STI performance rights (AEFAF) 1 September 2014 3,795 Conversion of LTI performance rights (AEFAA) 12 March 2015 14,924 Issued to the Employee Share Trust as long term incentives 31 August 2015 11,899 Conversion of STI performance rights (AEFAG) 31 August 2015 16,834 Conversion of LTI performance rights (AEFAC) 31 August 2015 11,659 Issued to the Employee Share Trust as long term incentives No further shares have been issued or are planned from the date of this report. No amounts are unpaid on any of the shares. 17 Australian EthicalRemuneration Report Dear Shareholder, On behalf of the Board, I am pleased to present our Remuneration Report for 2015. The 2015 financial year has further built on the excellent result for 2014. We have delivered strong underlying business performance against a background of market and regulatory pressure on fees. We demonstrated this through our strong investment performance and improved net flows and our ability to deliver a strong dividend payment for our shareholders. In 2014 we introduced a new remuneration structure aimed at providing better alignment between employees and shareholders, a more direct link for employees between effort and reward and better employee retention. All permanent employees participate in our employee share plan reflecting our Charter commitments. In a small team such as Australian Ethical everyone plays a part in delivering superior results and the remuneration model applies to all employees with greater portions of remuneration at risk for more senior employees. This ensures we retain the team that is delivering strong returns for shareholders as well as building long-term value for our company. We will continue to review our remuneration arrangements to ensure they remain effective in attracting and retaining the best talent to drive Australian Ethical forward. Stephen Gibbs Chair People, Remuneration & Nominations Committee About this Report This report deals with the remuneration arrangements for Australian Ethical Investment Limited’s (“The Company”) Key Management Personnel (KMP). This includes the Non-Executive Directors, the Managing Director and the Executives. The Report has been audited as required by section 308(3C) of the Corporations Act 2001. Terms used throughout the report are defined in the section “Key Terms Used in this Report”. Our Remuneration Policy and Structure The Company’s remuneration policy is designed to create a motivating and engaging environment for employees where they feel appropriately paid and incentivised for the contribution they make to the performance of the Company. General principles The principles underpinning our remuneration framework are: • pay people fairly for the work that they do • build long term ownership in the Company • be motivating for employees • align reward with contribution to the Company’s performance • align shareholder interests and the Company’s capacity to pay • attract and retain talented people • promote the values of the Charter and be aligned with the purpose of the Company • be simple to administer and to communicate The remuneration philosophy is also consistent with the principles of the Company’s Constitution and Charter. In particular: • it is designed to ensure that the Company facilitates “the development of workers participation in the ownership and control of their work organisations and places” - Charter element (a) • it is designed so as to not “exploit people through the payment of low wages or the provision of poor working conditions” - Charter element (ix) • the incentive structure meets the requirements of Rule 15.1(c) of the Constitution which provides that prior to recommending or declaring any dividend, provision must be made for a bonus or incentive for employees to be paid of up to 30 percent (30%) of what the profit for that year would have been had not the bonus or incentive payment been deducted. 18 Annual Report 2015Remuneration Framework Summary Element Key Driver Quantum How Paid Criteria Changes to prior year Assessed against market data based on position and skills and experience brought to the role. Target remuneration is based around the Median of the relevant comparator group for each job role. Percentage of Fixed Remuneration based on market assessment. Paid fortnightly Continued Unchanged employment Paid annually on first pay period after 1 November. Timing allows for the inclusion of financial results in performance assessments. Objectives include (depending on role): Changed to 100% cash. Previously a combination of cash and 12 month performance rights. • Profit • Growth • Investment performance • Individual objectives • Culture Change to 100% cash provides a more direct alignment for employees between effort and reward. The issue of performance rights had the potential to impact profits if there were significant changes in the share price. Percentage of Fixed Remuneration based on market assessment. Shares held in trust and vest after 3 years. Shares subject to 3 year vesting as follows: • 50% based on remaining employed with the Company • 50% based on compound annual growth in Earnings per Share (EPS) and remaining employed with the Company Changed to Shares held in Trust for 3 years subject to EPS vesting hurdle. Previously performance rights issued after 3 years subject to a Return on Equity (RoE) vesting hurdle. Changes provide: • Greater alignment between shareholders and employees due to participation in the dividend • Employee participation in the affairs of the Company through the voting rights • A vesting hurdle (EPS) more directly relevant to what employees can influence (compared to RoE) Fixed remuneration (FR) Pay people fairly. Short Term Incentive (STI) Incentivises and rewards for achieving annual objectives. Long Term Incentive (LTI) Retention and fostering an interest in the Company’s long term performance. 19 Australian EthicalRemuneration Framework Short Term Incentive The aim of the Short Term Incentive Scheme is to incentivise and reward employees for performance against annual objectives. The maximum incentive paid each year is based on a percentage of each employee’s Fixed Remuneration and their role and responsibility and benchmarked against market data. It is paid in cash in November of each year following the finalisation of annual results and performance reviews. A number of changes have been made to the Short Term Incentive scheme over the past few years. These are: • A number of schemes were in operation across the Company. These have now been amalgamated into one consistent scheme; • One scheme that applied just to management and the investment team previously paid bonuses as 50% cash and 50% performance rights with one year vesting. This has now been changed to 100% cash to offer a more direct link between effort and reward and to simplify administration; • The scheme that applied to remaining employees was previously not linked to market benchmarks. All employees are now benchmarked to market; and • The Company has progressively been moving employees to market equivalent remuneration. Outcomes are assessed based on performance against a “balanced scorecard” of objectives. The actual objectives and percentage vary depending on the role and cover the following: Measure Profit Growth Description A portion of the incentive is based on meeting annual profit targets determined by the board. Focussed on building long term growth. Measures include growth in client numbers and net inflows. Investment performance Assessed according to performance against investment benchmarks. Individual objectives Each employee will have certain project based objectives to achieve for the year. Culture Employees have an obligation to adhere to certain cultural standards. These include abiding by the Company’s values and risk management requirements. 20 Annual Report 2015Long Term Incentive Scheme The aim of the Long Term Incentive scheme is to foster an interest in the long term performance of the Company, to encourage participation in the affairs of the Company and to encourage the retention of employees. The maximum incentive paid each year is based on a percentage of each employee’s Fixed Remuneration and role, benchmarked against market data. Shares are issued at the commencement of each financial year and held in trust for 3 years. They vest in the name of the employee after 3 years, provided that the employee remains employed and that long term financial performance hurdles are met. Whilst the shares remain unvested, employees participate in dividends and have voting rights. The performance hurdles have been determined as follows: Portion Performance hurdles Rationale 50% Based on remaining employed during the period 50% Average EPS growth less than 5% pa Zero Average EPS growth between 5% and 10% pa Pro rata Average EPS growth exceeds 10% Maximum Aimed at retention and increasing share ownership. Employee share ownership is very low due to past hurdles not being met. EPS growth was chosen as a hurdle as it is the measure which employees can most directly influence (see below). Changes were made to the Long Term Incentive Scheme in the 2014 year as follows: • Performance rights were replaced by shares held in trust. We believe this better aligns employee and shareholder interests and better fosters an interest in the long term performance of the Company. • The hurdle was changed from Return on Equity to Earnings per Share growth. This was done as we believe that Earnings per Share is the measure that employees can most directly influence. We believe the hurdles set are both attainable and challenging. Two alternatives were considered; Total Shareholder Return and Return on Equity. Total Shareholder Return takes into account share price performance and dividend returns; it is subject to external factors beyond employees’ influence and is not as effective for a stock with low liquidity. Return on Equity is heavily influenced by balance sheet decisions and was considered insufficiently challenging and thus not aligning the interests of employees and shareholders. 21 Australian EthicalA detailed comparison between the two schemes is as follows: Performance rights (old scheme) Deferred shares (new scheme) Description Rights issued at the commencement of the 3 year performance period and, subject to meeting performance hurdles, vest into ordinary shares at the end of the period based on the share price at the end of the period. Employees have placed limited value on them in the past making them ineffective as a retention mechanism. Shares are issued or bought on market at the commencement of the 3 year performance period and held on trust. At the end of the period, subject to performance hurdles being met, shares transfer into the name of the employee. Performance hurdles Vesting is subject to the following hurdle: 50% will vest if the employee remains with the Company after 3 years. • If RoE is less than 15% over 3 years, 50% will vest on the following basis: zero will vest. • If RoE is greater than 20% over 3 years, 100% will vest. • If RoE is between 15% and 20%, a pro rata amount will vest. • If EPS growth is less than 5% pa, on average, zero will vest. • If EPS growth is greater than 10% pa, on average, 100% will vest. • If EPS growth is between 5% and 10% pa, on average, a pro rata amount will vest. EPS was chosen over RoE as it is more within the influence of employees and is a driver of long term shareholder value thereby providing better alignment between employees’ effort and shareholder interests. Dividends No dividends paid on unvested rights. Dividends paid on unvested shares. This: Dividends are taken into account in the calculation of rights to be issued. Employees cannot vote on unvested rights. Rights are amortised over 3 years based on an assessment of the share price at the end of the 3 year period. A rising share price leads to a greater expense. • Provides real value that employees lose if they leave the Company, making them an effective retention mechanism. • Provides a direct real interest in the six monthly dividend performance of the Company and hence alignment with shareholders’ interests. Employees can vote on unvested shares. Cost of shares is fixed at time of issue and expensed over a three year period giving greater certainty. Not deductible. Fully deductible in year of issue. Tax crystallises on vesting which has in some cases led to employees selling their shares to fund their tax bill. Tax crystallises only on exit from the employee share trust and therefore the payment of tax is more in the control of the employee. Voting Expense to company Tax impact on company Tax impact on employees ^ Growth in EPS is defined as compound average annual growth in the Company’s earnings per share comprising basic earnings per share (after tax). The Board may adjust EPS for items that do not reflect management and employee performance and day-to-day business operations and activities. 22 Annual Report 2015 Actual Remuneration Total remuneration paid and alignment with Company performance STI rewards for KMPs are based on a range of key performance measures. Depending on the role these include a portion linked to current year profit, for the investment team a portion linked to the performance of the investment funds for which they’re responsible and for the sales and marketing team a portion linked to net flows. The profit portion of these relate to the prior year to when it is paid. Other elements (e.g.: investment performance and net flows) are focussed on building long term value and will impact profit performance over the longer term. LTI is subject to average Earnings per Share Growth (“EPS”) performance hurdles over the three year vesting period these are not met the shares are held in trust and reduce the amount that is required to be funded in future years. 1 . If The following table shows how fixed remuneration, STI and LTI outcomes compared to the Company’s financial results over the past five years. STI outcomes and company results are not expected to be perfectly correlated as the Company’s STI performance assessment involves a broader consideration of the Company’s progress in generating future value for shareholders (eg: non-financial performance and financial results relative to the targets set by the Board). Five Year Performance Fixed Remuneration Directors fees Bonus and rights expense 30 June 2011 30 June 2012 30 June 2013 30 June 2014 30 June 2015 Notes 6,642,648 6,544,510 5,902,946 5,611,929 5,699,239 156,226 177,993 217,305 280,381 293,175 STI constitutional bonus (old scheme) 194,855 85,846 66,926 65,000 - STI cash payable 141,493 94,131 277,753 220,018 1,141,982 STI rights expense (old scheme) - - 164,857 473,191 479,943 LTI rights expense (old scheme) 255,905 231,478 70,696 436,139 928,557 LTI shares issued (new scheme) Bonus & Rights under/over accrual - - - - - - 175,852 (69,348) 28,734 292,507 Total Bonus and Rights Expense 592,253 411,455 510,884 1,223,082 3,018,841 Other Employment Cost 242,030 (348,450) 29,739 32,309 39,392 Total remuneration 7,633,157 6,785,509 6,660,875 7,147,703 9,050,647 Net Profit After Tax ($’000) Underlying Profit After Tax ($’000) 1,098 981 402 860 1,063 1,675 2,543 3,111 1,970 2,454 Return on Equity (3 year average) 14.1% 11.1% 12.1% 18.1% 23.4% Earnings per share 113 40.1 104.84 248.51 190 Earnings per share growth (3 year average) (2.4%) (27.0%) (2.5%) 83.7% 22.0% Share price at end of period ($) Dividends (c per share) Total shareholder return (TSR) Average FTE 19.1 170 (10%) 48.9 17.5 60 (5%) 41.5 19.5 85 16% 34.3 35.45 200 92% 28.6 58.8 200 72% 30.7 23 1 2 3 4 5 6 7 Australian EthicalNotes: 1. Fixed remuneration has decreased and stabilised over time as the business has become more efficient operating with fewer people. Average salaries have increased as the Company has progressively moved people to market equivalent remuneration. 2. In 2015 the “Constitutional Bonus” paid to staff not in the STI scheme was discontinued as the STI scheme was rolled out to all employees. 3. STI cash component has increased significantly due to three factors: a. The inclusion of all employees in the Scheme b. The move to pay STI as 100% cash rather than 50% cash and 50% performance rights. The current year cash payable amount includes 100% of the current year STI expense compared to only 50% under the old scheme. c. Accrual for expected bonuses in respect of meeting performance hurdles in the 2015 financial year which will be paid in the 2016 financial year. These performance hurdles included investment performance and profit targets. 4. Will reduce to zero in the 2016 financial year. This item is the residual 50% of the prior year STI under the old scheme. 5. This has increased due to the following: a. The increased share price. Performance rights are amortised based on the prevailing share price at the end of the period b. Increased likelihood of meeting hurdles due to the increased RoE This item will reduce to zero in the financial year ended 30 June 2017 as the new scheme (Note 6) increases. 6. This is one year’s amortisation of the first issue of shares under the new share scheme and will increase over time as further issues are made. Once the shares have been purchased any future share price changes do not impact expenses for the Company. 7. Over/under accruals are due to needing to finalise accounts prior to finalisation of performance assessments and are accrued based on “target” Non-financial outcomes As described earlier, in addition to profit targets a number of non-financial objectives are used to determine incentive outcomes. Many of these develop the long term sustainability of the business and so are not necessarily correlated to short term financial performance. These objectives are applied in varying degrees depending on the role. Performance against some of these objectives in the past financial year have been: Measure Growth 2015 performance Total net flows of $179m, almost double the previous year. Investment performance Regular top quartile investment performance. Culture Employee engagement score considered to be in “Best Employer” range. Competitiveness Superannuation fees reduced by 0.67% over 12 months, virtually halving over the past two years. 24 Annual Report 2015Management Team Remuneration The following tables show the fixed remuneration, maximum STI and LTI for each KMP as a proportion of total remuneration. Actual amounts received are shown under the Statutory Reporting tables. Position Fixed Remuneration (%) Maximum Short-term incentive (%) Maximum Long Term incentive (%) Managing Director & CEO P Vernon Managing Director & CEO 56% 28% 16% Current Management D Barton A Kirk D Macri T May CFO Head of Business Development & Client Relations CIO General Counsel & Company Secretary S Palmer Head of Ethics Departed Management 77% 71% 50% 77% 77% 15% 21% 33% 15% 15% P Smith Head of Marketing 76% 16% 8% 8% 17% 8% 8% 8% Contract terms All KMP’s have formal contracts of employment and are permanent employees of the Company. Term Notice period Managing Director 3 years concluding on 31 March 2016. Extended for further 3 years to 31 March 2019. 52 weeks before the Contract expiry date, the Company may terminate the Managing Director’s employment by giving 52 weeks’ notice in writing. In the event the Contract has less than 52 weeks to run before the expiry date, the Company may terminate the Managing Director’s employment by giving notice to the expiry date. Management team No fixed term 12 weeks 25 Australian EthicalNon-Executive Directors Remuneration In addition to fixed remuneration, Non-Executive Directors (NEDs) are entitled to be paid reasonable expenses, remuneration for additional services and superannuation contributions. Non-executive Directors are not eligible to participate in employee incentive plans. The total paid to non-executive directors of the Company is approved by shareholders at the Annual General Meeting. The current pool of $360,000 was approved at the AGM in October 2014. A review of Non-executive Directors’ remuneration is undertaken annually by the Company Board, taking into account recommendations from the People, Remuneration and Nominations committee. The following table sets out the agreed remuneration for Non-Executive Directors by position: Director Chair NED Committee Chair Committee member Total** Australian Ethical Investment Limited Stephen Gibbs* 54,000 Tony Cole Kate Greenhill* Mara Bun Total 20,000 36,000 56,000 36,000 2,185 5,463 19,665 12,018 1,639 1,639 88,203 43,102 77,304 36,000 54,000 148,000 27,313 15,296 244,609 Australian Ethical Superannuation Pty Ltd Ruth Medd 30,000 Les Coleman Total 30,000 20,000 20,000 8,740 8,740 - 17,480 38,740 28,740 67,480 Total Group 84,000 168,000 27,313 32,776 312,089 * Stephen Gibbs and Kate Greenhill are also Directors of Australian Ethical Superannuation Pty Ltd and members of the Australian Ethical Superannuation Pty Ltd Audit, Compliance and Risk Committee. ** This table shows the Non-Executive Director remuneration for a full year, for actual remuneration received see below. 26 Annual Report 2015Statutory reporting Management team remuneration The table below outlines Executive reward as calculated in accordance with accounting standards and the Corporations Act 2001 requirements. The amounts shown are equal to the amount expensed in the Company’s financial statements. Short Term Benefits Name Year Salary, Fees and Leave ($) Cash Bonus ($) Managing Director & CEO Post Employment Benefits Superannuation ($) Equity Long Term Benefits Settled Share-based payments ($) Total ($) Performance Based Proportion ($) Long Service Leave ($) P Vernon 2015 337,458 76,162 18,782 103,904 536,306 33.6% 2014 304,814 49,771 25,000 13,790 393,375 16.2% Current Management D Barton 2015 238,513 21,282 18,782 2014 228,627 - 21,146 - - 278,577 7.6% 249,773 0% A Kirk 2015 212,000 30,502 18,782 11,344 272,628 15.3% 2014 233,143 7,247 17,773 8,574 266,737 5.9% 10,842 7,623 5,915 5,068 5,778 4,858 D Macri 2015 280,124 67,179 18,782 100,574 466,659 35.9% 12,086 2014 243,850 43,623 24,999 T May 2015 193,356 17,696 18,782 2014 189,867 S Palmer 2015 164,307 2014 43,615 Departed Management P Smith 2015 83,488 5,084 5,605 - - 17,143 16,142 3,993 48,719 21,376 5,670 - - 361,191 25.4% 251,210 15.6% 217,764 186,054 4.9% 3.0% 47,608 - 7,299 5,631 4,103 4,167 4,045 7,469 12,053 103,010 11.7% - 2014 183,813 7,713 17,688 6,555 215,769 6.6% Total 2015 1,509,246 218,426 117,521 249,251 2,094,443 22.3% 2014 1,431,729 113,438 127,742 83,308 1,752,217 11.2% 4,274 44,419 37,270 27 Australian EthicalNon-Executive Directors remuneration Short Term Benefits Post Employment Benefits Equity Long Term Benefits Name Year Salary, Fees and Leave ($) Cash Bonus ($) Superannuation ($) Settled Share-based payments ($) Total ($) Performance Based Proportion ($) Long Service Leave ( $) Non-Executive Director’s – Australian Ethical Investment Ltd S Gibbs 2015 80,897 2014 77,559 T Cole 2015 39,531 2014 38,745 K Greenhill 2015 55,600 2014 41,714 M Bun 2015 33,018 2014 32,847 - - - - - - - - 7,647 9,702 3,737 3,588 5,256 3,863 3,121 3,043 - - - - - - - - Non-Executive Director’s – Australian Ethical Superannuation Pty Ltd R Medd 2015 35,531 2014 36,746 L Coleman 2015 23,278 2014 29,999 Departed Directors A Morony 2015 - 2014 13,871 Total 2015 267,856 2014 271,481 - - - - - - - - 3,359 3,404 2,200 2,778 - 1,287 25,319 24,261 - - - - - - - 88,544 87,261 43,268 42,333 60,856 45,578 36,139 35,889 38,890 40,150 25,479 32,777 - 15,158 293,175 299,146 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Notes in relation to the Non-Executive Directors and Management team remuneration: 1. The short term incentive bonus is for performance during the prior financial year using agreed KPI’s. The amount was finally determined in September 2014 after performance reviews were completed and approved by the PRNC. 2. The value of share based payment is based on the market value of shares on the day they vest. 3. No non-monetary benefits were provided to any KMP’s. 28 Annual Report 2015Unvested performance rights, unvested shares and ordinary shares The movement during the reporting period in the number of rights over ordinary shares and ordinary shares in the Company, held directly, indirectly or beneficially, by each key management person, including their related parties is as follows: Name Rights/Shares Class Balance at beginning of year No. granted No. forfeited/ Expired/ Sold No. vested & exercised Balance at the end of year Managing Director & CEO P Vernon AEFAA AEFAC AEFAE AEFAF AEFAG Deferred Shares* AEF Ordinary shares 2015 Total 2014 Total Current Management D Barton AEFAG A Kirk Deferred Shares 2015 Total 2014 Total AEFAC AEFAE AEFAF AEFAG Deferred Shares AEF Ordinary shares 2015 Total 2014 Total 1,472 2,432 4,037 2,195 - - 2,082 12,218 8,467 - - - 1,142 856 320 - - 28 2,696 1,520 - - - - 1,967 2,412 - 4,379 6,232 566 604 1,170 - - - - 811 537 1,348 1,176 (736) (736) - - - - - (736) (2,481) - - - - - - - - (320) (320) - - - (2,195) - - 2,931 - - - - - - - (320) - - 320 - - - 2,432 4,037 - 1,967 2,412 5,013 15,861 12,218 566 604 1,170 - 1,142 856 - 811 537 28 3,374 2,696 * Approval for this issue of securities was obtained under ASX Listing Rule 10.14 at the Company’s 2014 AGM. 29 Australian EthicalName Rights/Shares Class Balance at beginning of year No. granted No. forfeited/ Expired/ Sold No. vested & exercised Balance at the end of year D Macri AEFAA T May AEFAC AEFAE AEFAF AEFAG Deferred Shares AEF Ordinary shares 2015 Total 2014 Total AEFAA AEFAC AEFAE AEFAF AEFAG Deferred Shares AEF Ordinary shares 2015 Total 2014 Total S Palmer AEFAG Deferred Shares 2015 Total 2014 Total 827 1,379 3,223 1,924 - - 2,414 9,767 4,928 758 939 720 224 - - - 2,641 2,291 - - - - Management who have departed during the year P Smith AEFAC AEFAE AEFAF AEF Ordinary shares 2015 Total 2014 Total 968 706 340 289 2,303 1,257 - - - 385 1,785 2,313 4,483 5,505 - - - - 470 501 - 971 944 149 382 531 - - - - - - 1,046 (413) (414) - - - - - (5,137) (5,550) (666) (379) - - - - - (603) (982) (594) - - - - (968) (706) - - (1,674) - - - (2,309) - - 2,723 - - (379) - - (224) - - 603 - - - - - - - - (340) 340 - - - 1,379 3,223 - 1,785 2,313 - 8,700 9,767 - 939 720 - 470 501 - 2,630 2,641 149 382 531 - - - 340 629 629 2,303 For details on the performance criteria for each tranche of performance rights and deferred shares refer to Note 26 of the Notes to the Consolidated Financial Statements. 30 Annual Report 2015Future vesting schedule Type Rights Rights Rights Deferred Shares Total Issue year Vesting year Number 2012 2013 2014 2015 2015 2016 2017 2018 16,834 16,879 11,899 14,924 60,536 Governance The Role of the People, Remuneration and Nominations Committee The role of the People, Remuneration and Nominations Committee (PRNC) is to help the Board fulfil its responsibilities to shareholders through a strong focus on governance, and in particular, the principles of accountability and transparency. The PRNC operates under delegated authority from the Board. The terms of reference include oversight of remuneration as well as executive development, talent management and succession planning. The PRNC members for the 2014/15 financial year were: • Stephen Gibbs (Chair); • Kate Greenhill; and • Tony Cole. The PRNC met four times during the year. A standing invitation exists to all Directors and the Chair of Australian Ethical Superannuation Pty Ltd to attend PRNC meetings. Attendance at these meetings is set out in the Directors’ Report. At the PRNC’s invitation, the Managing Director and the People and Culture Consultant attended all meetings except where matters associated with their own performance evaluation; development and remuneration were to be considered. The PRNC considers advice and views from those invited to attend meetings and draws on services from a range of external sources, including remuneration consultants. Managing Director and KMP Performance An annual assessment of the Managing Director is completed by the Chairman and is overseen by the Board, with input from the PRNC. The review includes a 360 review process, measurement of performance against agreed KPI’s and Company performance. The bonus received by the Managing Director during 2014/15 is shown in Statutory Reporting table and relates to the previous financial year of 2013/2014. This flows from a formula linking the bonus to year on year profit changes and reflects an increase in the results for that previous financial year. The Managing Director is responsible for reviewing the performance of Executives and determining whether their performance requirements were met. Both quantitative and qualitative data is used to determine whether performance criteria are achieved. Use of Remuneration Consultants In May 2014, the PRNC appointed KPMG as its principal remuneration consultant to provide specialist advice on executive remuneration and other Group-wide remuneration matters. KPMG provided information to the PRNC to assist with its review of the remuneration structure implemented in 2014/15. The PRNC also utilised the services of Egan Associates to advise on the Company’s non-executive director remuneration arrangements. 31 Australian EthicalHedging Policy Executives participating in the Company’s equity-based plans are prohibited from entering into any transaction which would have the effect of hedging or otherwise transferring to any other person the risk of any fluctuation in the value of any unvested entitlement in the Company’s securities. Trading Restrictions and Windows All directors and employees are constrained from trading the Company during “blackout periods”. These periods occur between the end of the half year and full year and two days after the release of the half year and full year results. This policy was adopted in May 2015 and replaced the application of a shorter “trading window”. The new policy gives more time for employees to trade shares, minimising the potential impact on the share price. Outcomes of votes at Annual General Meetings At the 2013 AGM, the Remuneration Report received 38.19% of the vote against it out of 70.1% of shareholders that voted on the report. This result constituted a ‘first strike’. At the 2014 AGM, the Remuneration Report received 44.05% of the vote against it out of 62.97% of shareholders that voted on the report. This result constituted a ‘second strike’. This required a spill motion being put to shareholders. The outcome of this motion was that 63.0% of the votes cast were against. In setting the remuneration structure we have carefully considered comments made by shareholders, sought advice from remuneration consultants and reviewed practises of our peers. We believe that the structure we have adopted is the most appropriate for our people, shareholders and the business providing the right balance between motivation, retention and alignment of interests between employees and shareholders. The Directors report, incorporating the Remuneration report, is signed is accordance with a resolution of the Board of Directors. Phil Vernon Managing Director & Chief Executive Officer Dated: 28 August 2015 32 Annual Report 2015Corporate Governance Statement 2015 This Corporate Governance Statement 2015 has been prepared under the ASX Corporate Governance Principles and Recommendations (3rd edition) (“Principles and Recommendations”) and discloses the extent to which Australian Ethical Investment Ltd (“the Company”) followed the Principles and Recommendations during the financial year ended 30 June 2015 (“the reporting period”). This statement will be available from the corporate governance section on the Company’s website. Lay Solid Foundations for Management and Oversight (Principle 1) The Company is governed by a Board of Directors appointed by shareholders. The Board has three committees; an Audit, Compliance and Risk Committee, an Investment Committee and a People, Remuneration and Nominations Committee. Each committee is delegated with authority to fulfil certain obligations and strengthen the overall governance framework. The Company has formalised the functions reserved to the Board and those delegated to Management. The Company’s Constitution requires it to operate in a way that promotes the tenets of the Australian Ethical Charter. The Charter requires consideration of economic, environmental and social impact. Board Role and Responsibilities The roles of the Board of Australian Ethical Investment Limited are: • For the AEI Group – to approve the overall objectives and strategic direction of the AEI Group. • As the Responsible Entity for the Australian Ethical Managed Investment Funds – to seek assurance from Management that the Funds are being operated within the terms of their Constitutions and the requirements of relevant legislation, regulatory obligations, licence conditions, codes of conduct and policies and procedures and in the best interests of all investors. • As the owner of Australian Ethical Superannuation Pty Ltd, the trustee of the Australian Ethical Retail Superannuation Fund – to seek assurance from the AES Board and Management that the Fund is being operated within the terms of its Trust Deed and Constitution and the requirements of relevant legislation, regulatory obligations, licence conditions, codes of conduct and policies and procedures and with reference to the best interests of all members. • To act in accordance with, and further the aims of, the Australian Ethical Charter. The responsibilities associated with each of these roles are outlined in the Board Charter, which is available from the Company’s website. The Board delegates responsibility for the performance of 33 specific functions to the Chair, to the Board Committees and to the Managing Director. The Board Committees are delegated with all necessary authority to carry out their functions as set out in Board Committee Charters which are available from the Company’s website. The Managing Director is delegated with all necessary authority to run the Company on an ongoing, day to day basis other than those responsibilities reserved to the Board and delegations (general or specific) made by the Board to the Chair, Board committees, Directors or other senior executives. The division of functions between the Board, the Committees and the Managing Director is reviewed annually, as part of the review of the content of the Charters, to ensure that the division of functions remains appropriate to the needs of the Company. Fit and Proper Checks for Directors All candidates nominated for election as directors are subject to a comprehensive competency and propriety assessment process. As part of this process, candidates are required to provide the Company with details of their other commitments, and an indication of the time involved, and specifically acknowledge that they will have sufficient time to fulfil their responsibilities as a director. The Company ensures that relevant and sufficient information is provided to security holders to enable them to make an informed decision on whether or not to elect, or re-elect, a candidate for a directorship. This information is provided in the notice of meeting issued in relation to the meeting at which the vote will occur. Terms of Appointment A part of the appointment process, each Director is asked to sign a letter of appointment, and each senior executive is asked to sign an employment agreement, setting out the terms, conditions, expectations and entitlements of the appointment. Independent Legal and other Professional Advice Directors have a right to seek independent legal and other professional advice at the Company’s expense on any aspect of the Company’s operations or undertakings, in order to fulfil their duties and responsibilities as directors, subject to the following qualifications: • They must have the prior approval of the Chair to seek the specific independent legal and other professional advice; • They must ensure that the costs are reasonable; and • Any advice received must be made available to the rest of the Board unless either the Chair or the Board agree that the rest of the Board does not need to see the advice. Australian EthicalCompany Secretary The Company Secretary is directly accountable to the Board, through the Chair, on all matters associated with the proper functioning of the Board. The Board is charged with responsibility to appoint or remove the Company Secretary. All Directors are able to communicate directly with the Company Secretary. Diversity Policy The Company has agreed measurable objectives for achieving gender diversity and requires annual assessment against the objectives and progress in achieving them. The Board has charged the People, Remuneration and Nominations Committee with responsibility for setting the Company’s measurable objectives for achieving gender diversity and annually reviewing these objectives and the Company’s progress towards achieving them. The Company’s Sustainability Report contains detailed reporting in relation to diversity issues and in relation to the status of employees generally. The Sustainability Report is available from the Company’s website. Evaluating the Performance of the Board, the Committees and the Directors An internal review of the performance of the Board was undertaken during the reporting period. The Board has appointed an external facilitator to conduct an evaluation during the current reporting period. The Board intends to continue to conduct annual evaluations and to periodically work with an external facilitator. Evaluating the Performance of Senior Executives Executive performance is evaluated in accordance with the Company’s performance review guidelines. The Chair conducts the Managing Director’s performance review. The Managing Director conducts the performance reviews of the other senior executives. An evaluation of the Managing Director and each of the senior executives was undertaken in the reporting period. From a nominations perspective, the PRN Committee is responsible for the following matters. a. Assessing the necessary and desirable competencies of prospective Directors. b. Ensuring that the current composition of the Board demonstrates an appropriate mix of competencies to allow the Board to discharge its responsibilities effectively. c. Ensuring that Directors have access to appropriate continuing education which updates and enhances their skills and knowledge. d. Ensuring that the Board has developed a succession plan which ensures that an appropriate balance of skills, experience and expertise is maintained on the Board at all times. e. Making recommendations to the Boards in relation to the appointment of, and retirement of, Directors. f. Seeking assurance from Management that: ᵒ All prospective Directors meet the minimum fit and proper requirements; ᵒ There is a Director Induction Program in place and that all new Directors have undertaken the Program within three months of appointment. The PRN Committee considers the above responsibilities, the current Board composition, any nominations or suggestions for directorship and the assessment of incumbent directors. The PRN Committee Charter is available from the Company’s website. Board Skills Matrix The Company is comfortable that the Board collectively held the appropriate skills to perform its roles during the reporting period. Independent Directors and Independent Chair A director is an independent director if they are a non- executive director and: Structure the Board to Add Value (Principle 2) a. People, Remuneration and Nominations Committee The Board has a People, Remuneration and Nominations (PRN) Committee comprising the Chair and two Independent Non-Executive Directors. The qualifications of those appointed to the PRN Committee are provided in the Directors’ Report, as are the number of meetings of the Committee and attendance at those meetings. Is not a substantial shareholder (as defined in the Corporations Act) or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; b. Within the last three years has not been employed in an executive capacity by the Company or another group member, or been a director after ceasing to hold any such employment; c. Within the last three years has not been a principal or employee of a material professional adviser or a material consultant to the Company or another Group member, or an employee materially associated with the service provided; 34 Annual Report 2015d. Is not a material supplier or customer of the Company or another Group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; e. Has no material contractual relationship with the Company or another Group member other than as a director of the Company; and f. Is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. The list reflects the relationships set out in the Principles and Recommendations. The classification of directors who held office during the reporting period is set out below. Director Status Stephen Gibbs (Chair) Independent Non Executive Director Mara Bun Independent Non Executive Director Tony Cole, AO Independent Non Executive Director Kate Greenhill Independent Non Executive Director Non Independent Executive Director Phillip Vernon 35 Appointed by the Board on 25 July 2012. Elected to a three year term on 20 November 2012 at the 2012 AGM and re-elected on 29 October 2014 at the 2014 AGM. Appointed Chair on 1 March 2013. Appointed by the Board on 4 February 2013. Elected to a three year term on 22 November 2013 at the 2013 AGM. Appointed by the Board on 4 February 2013. Elected to a three year term on 22 November 2013 at the 2013 AGM and re-elected on 29 October 2014 at the 2014 AGM. Appointed by the Board on 22 February 2013. Elected to a three year term on 22 November 2013 at the 2013 AGM. Phillip is the Managing Director and was appointed on 26 July 2010. Stephen Gibbs was appointed as a director by the Board on 25 July 2012. Prior to his appointment Stephen was the Chair of CAER Pty Ltd. At the time of his appointment, CAER Pty Ltd was a material supplier of ethical research services to the Company. CAER Pty Ltd is no longer a material supplier to the Company and accordingly Stephen is considered to be an Independent Non- Executive Director. There have been no changes to board membership over the course of the reporting year and no changes to the Independent Non-Executive Directors’ interests, positions, associations or relationships that may bear on their independence. The Board is comprised of a majority of Independent Directors which is consistent with the Principles and Recommendations; the Board intends to keep this balance as it represents best corporate governance and alignment with the Australian Ethical Charter. Director Induction and Ongoing Professional Development The Company requires new Directors to complete a director induction on appointment. The program is created for each individual as they are appointed to reflect their knowledge of the company and the markets in which the company operates. The PRN Committee is responsible for ensuring that the Directors as a group have the appropriate skills, knowledge and familiarity with the Company and its operating environment in order to be able to fulfil their role on the Board and on Board committees effectively. Where gaps are identified, the PRN Committee identifies the training or professional development which could be undertaken to fill those gaps, and organizes for individual Directors to complete this training or professional development within a reasonable timeframe. The PRN Committee Charter is available from the Company’s website. The time in office, skills, experience and expertise of each director in office during the reporting period is included in the Directors’ Report. Act Ethically and Responsibly (Principle 3) The Company is an ethical investment company that manages money in accordance with the Australian Ethical Charter. The Charter is in the Company’s Constitution and informs all aspects of the Company’s operations. The Charter is available on the Company’s website. Code of Conduct The Company has a Code of Conduct that outlines what the Company regards is acceptable business practices for directors, senior executives and employees. The Code of Conduct is addressed in induction training for new directors and employees and is promoted to current directors and employees during corporate and personal development sessions. It is available on the Company’s website. Australian EthicalConflicts Management The Company has a Conflicts Management Policy which documents the procedures in place for identifying, managing, monitoring and reporting situations giving rise to actual, potential and perceived conflicts of duty and interest for the Company and for its directors and employees. The Company maintains a Register of Relevant Duties and a Register of Relevant Interests, which are tabled at each meeting of the Board and the ACR Committee for review. A Summary of the Conflicts Management Policy is available on the Company’s website. Safeguard Integrity in Corporate Reporting (Principle 4) Audit, Compliance and Risk Committee The Board has an Audit, Compliance and Risk (ACR) Committee consisting of two external members and two Independent Non-Executive Directors. The Committee is chaired by an Independent Chair who is not the Chair of the Board. The qualifications of the members of the ACR Committee are provided in the Directors’ Report, as are the number of meetings of the Committee and attendance at meetings. From an audit and financial management perspective, the ACR Committee is responsible for: a. Overseeing compliance with AEI’s financial management obligations, and in particular: ᵒ Acting as a formal channel of communication between the AEI Board, the External Auditor, the Internal Auditor and the Chief Financial Officer; ᵒ Seeking assurance from Management that the stated policies of AEI in relation to statutory, financial, tactical and accounting matters, internal financial controls and discharge of ‘trading company’ fiduciary obligations, are being carried out and that the relevant accounting standards and techniques have been applied. b. Reviewing the final drafts of, and approving and signing: ᵒ The financial statements for the Schemes that are required to be lodged with the ASX and ASIC; ᵒ The Directors’ Declarations; and ᵒ Any other associated documents or statements. c. Reviewing the final drafts of, and making recommendations to the AEI Board as to whether or not the Directors should approve and sign: ᵒ The financial statements for AEI that are required to be lodged with the ASX and ASIC; ᵒ The Directors’ Declarations; and ᵒ Any other associated documents or statements. d. Overseeing compliance with AEI’s external and internal audit obligations, in particular: ᵒ Appointing the External Auditor at least annually and the Internal Auditor at least triennially; ᵒ Reviewing the scope of the audit plans proposed by the External Auditor and Internal Auditor annually; and ᵒ Reviewing the content of all audit reports and monitoring the actions of Management to ensure that identified issues are being appropriately managed and rectified. The ACR Committee considers the performance and independence of the External Auditor over the course of a reporting period. In selecting an External Auditor, the ACR Committee seeks competence, industry experience, integrity and independence. In normal circumstances, appointment of the External Auditor will typically continue for six years. Rotation of external audit engagement partners occurs in accordance with the rotation requirements of the Corporations Act 2001. The ACR Committee Charter is available from the Company’s website. Managing Director and Chief Financial Officer Sign-Off of Financial Reports The Company requires the Managing Director and the Chief Financial Officer to state in writing to the Board that the financial reports present a true and fair view, in all material respects, of the Company’s financial condition and operating results and are in accordance with relevant accounting standards. The Managing Director and the Chief Financial Officer certify to the Board that the integrity of the financial statements is founded on a sound system of risk management and internal control, and that the system is operating effectively in all material respects in relation to identifying, managing and mitigating financial reporting risks. External Auditor Attends AGM The External Auditor attends every AGM to answer audit- related questions from security holders. 36 Annual Report 2015Make Timely and Balanced Disclosure (Principle 5) • Announces the date of the AGM as early as practicable; Continuous Disclosure Policy The Company has a Continuous Disclosure Policy designed to ensure compliance with the ASX Listing Rule disclosure requirements and accountability at senior executive level for compliance. The Policy is available from the corporate governance section on the Company’s website. • Ensures that the AGM is held at a location and venue that is easily accessible to a large number of shareholders; • Provides a facility for shareholders to submit written questions to the Board prior to an AGM; and • Records AGM proceedings and makes the recordings are available from the Company’s website. Respect the Rights of Security Holders (Principle 6) Information Provided on the Website The Company’s website includes a Corporate Governance Landing Page where security holders and other stakeholders can access relevant corporate governance information (including Company announcements). Investor Relations Program The Company is in the process of compiling all aspects of its investor relations program into a single Investor Relations Policy. In addition to the information contained on the website: • A facility is available to shareholders to be advised via e-mail when ASX announcements are made; • The Company has an active social media presence that keeps shareholders and other stakeholders continually updated on issues relevant to the Company and responsible investments; • Regular sequence of communication points with investors and members is in place including a newsletter, Good Money, for investors and a shareholder newsletter; • A Sustainability Report based on Global Reporting Initiative Guidelines is produced annually and is available from the Company’s website; Electronic Communications The Company encourages shareholders to receive and send communications to it and the share registry electronically. Recognise and Manage Risk (Principle 7) Audit, Compliance and Risk Committee From a risk and compliance perspective, the ACR Committee, described at Principle 4 above, is responsible for: a. Overseeing: ᵒ Completion of compliance obligations and controls identified in the Compliance Master Plan; ᵒ Matters relevant to AEI and the Scheme’s compliance with applicable legislative and regulatory requirements as brought to the Committee’s attention by Management. b. The identification, treatment and monitoring of emerging and current material risks, incidents and breaches and complaints relevant to the AEI and the Schemes. c. The lodgment of AEI and the Scheme’s statutory reporting obligations. • In the reporting period shareholders were surveyed for their views on the Company’s Annual and Sustainability Report; and d. The findings of any examinations by regulatory agencies and the timeliness and accuracy of reporting to regulators. • Shareholders are asked to vote on potential recipients of grants under the Company’s community grants program (the Company’s Constitution requires it to distribute 10% of pre-tax profit to a range of non-profit organisations for any useful charitable, benevolent or conservation purpose before a dividend can be declared). Encouraging Participation at Meetings of Security Holders The Company recognises the importance of the AGM to provide shareholders with the opportunity to ask questions of the Board. To encourage participation at the AGM, the Company: e. Seeking assurance from Management that the Group: ᵒ Has in place systems, policies and procedures designed to meet and monitor its audit, compliance and risk management responsibilities and that these policies and procedures are appropriate and contemporaneous; ᵒ Is complying with the conditions of its AFS Licence; and ᵒ Has a structured and methodical program in place to monitor all material service providers. The ACR Committee Charter is available from the Company’s website. 37 Australian EthicalRisk Management Framework The Company has an established framework for the oversight and management of material risks. The Board is charged with overall responsibility for managing risk, including agreeing on the risk management methodology and overseeing its implementation, instilling a strong culture of risk identification and management throughout the Company, and reviewing the Company’s insurance program, having regard to the business and the insurable risks associated with the business. The Board has delegated responsibility for overseeing the continued implementation and maintenance of the risk management framework to the ACR Committee. The ACR Committee requires management to implement and maintain the risk management framework and to report to it on whether material risks are being appropriately identified, managed and mitigated. During the reporting period, regular reporting on risk was provided to the ACR Committee and a wholesale review of the risk management framework was completed. The ACR Committee Charter is available from the Company’s website. Internal Audit Function The Company appointed an external audit firm to perform the internal audit function. The principal focus of the internal audit function is the Australian Ethical Superannuation Fund and related business processes. However, the internal auditor also considers matters relating to the Group as a whole. The internal audit function has a direct reporting line to the ACR Committee. Exposure to Economic, Environmental and Social Sustainability Risks Since listing the Company has produced a Sustainability Report under the Global Reporting Initiative. In 2013 the Company started reporting under the GRI G4 sustainability reporting standard and participated in the GRI G4 Pioneers program along with 83 other organisations from 38 countries in total. In these sustainability reports exposure to economic, environmental and social sustainability risks is addressed; they are available from the Company’s website. The Company is a certified B Corporation. B Corporations are an emerging movement of companies that use the power of business to create a positive impact on the world and generate a shared and durable prosperity for all. In addition, the Australian Ethical Charter which informs all aspects of the company’s operations and investment philosophy is designed to engage with economic, environmental and social sustainability risks in an open and constructive manner. Remunerate Fairly and Responsibly (Principle 8) People, Remuneration and Nominations Committee From a remuneration perspective, the PRN Committee, described in Principle 2 above, is responsible for: a. Monitoring adherence to the guidelines set in relation to remuneration arrangements; b. Monitoring salary relatives through the AEI Group; c. Undertaking an annual review of external remuneration survey data; d. Determining, with reference to Management’s recommendation, the remuneration of AEI employees and the payment of performance-based pay; e. Recommendations to the Board regarding directors’ fees and fees for Board Committees; f. Considering industry benchmarks and comparators for the Managing Director’s remuneration and at least annually determining the remuneration arrangements for the Managing Director. The PRN Committee Charter is available from the Company’s website. Remuneration of Directors and Senior Executives Details of remuneration paid to directors and senior executives during the reporting period are set out in the Directors’ Report which is available from the Company’s website. Non-Executive Directors receive fees for serving as a director in the form of cash plus superannuation contributions. They do not participate in bonus or equity schemes designed for the remuneration of executives. Equity Based Remuneration Scheme The Company maintains equity based remuneration schemes in which all permanent employees participate. The Share Trading policy contains restrictions on the transactions that employees can participate in that might limit the economic risk of participating in these schemes. The Share Trading Policy is announced to the ASX whenever it is updated. Further information about the Company’s equity based remuneration schemes is set out in the Remuneration Report available from the Company’s website. 38 Annual Report 2015Financial Report Financial Statements of Australian Ethical Investment Limited and its Controlled Entities For the year ended 30 June 2015 Consolidated Statements of Financial Position ____________________________________40 Consolidated Statements of Comprehensive Income _____________________________41 Consolidated Statements of Changes in Equity ____________________________________42 Consolidated Statements of Cash Flows ___________________________________________44 Notes to the Consolidated Financial Statements __________________________________45 Directors’ Declaration _______________________________________________________________80 39 Australian EthicalAustralian Ethical Investment Limited and its Controlled Entities Consolidated Statements of Financial Position Australian Ethical Investment Limited and its Controlled Entities As at 30 June 2015 Consolidated Statements of Financial Position As at 30 June 2015 Notes Notes Consolidated entity At Consolidated entity 30 June At 2015 30 June $'000 2015 $'000 30 June 2014 30 June $'000 2014 $'000 Parent entity At Parent entity 30 June At 2015 30 June $'000 2015 $'000 30 June 2014 30 June $'000 2014 $'000 ASSETS Current assets ASSETS Cash and cash equivalents Current assets Trade and other receivables Cash and cash equivalents Available-for-sale financial assets Trade and other receivables Other current assets Available-for-sale financial assets Assets classified as held for sale Other current assets Assets classified as held for sale Total current assets Non-current assets Total current assets Property, plant and equipment Non-current assets Intangible assets Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets Deferred tax assets Total non-current assets Other non-current assets Total non-current assets Total assets LIABILITIES Total assets Current liabilities LIABILITIES Trade and other payables Current liabilities Current tax liabilities Trade and other payables Provisions Current tax liabilities Provisions Total current liabilities Non-current liabilities Total current liabilities Trade and other payables Non-current liabilities Deferred tax liabilities Trade and other payables Provisions Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Total non-current liabilities Total liabilities Net assets EQUITY Net assets Issued capital EQUITY Reserves Issued capital Retained earnings/(accumulated losses) Reserves Retained earnings/(accumulated losses) Total equity Total equity 9 9 11 11 10 12 10 13 12 14 13 14 15 15 16 16 16 16 17 18(a) 17 18(b) 18(a) 18(b) 12,227 1,780 12,227 - 1,780 323 - - 323 - 14,330 14,330 2,068 57 2,068 772 57 - 772 2,897 - 2,897 17,227 17,227 4,333 1,177 4,333 293 1,177 293 5,803 5,803 142 - 142 130 - 130 272 6,075 272 6,075 11,152 11,152 7,004 2,338 7,004 1,810 2,338 1,810 11,152 11,152 7,950 2,745 7,950 12 2,745 362 12 2,238 362 2,238 13,307 13,307 459 83 459 396 83 - 396 938 - 938 14,245 14,245 3,476 757 3,476 232 757 232 4,465 4,465 202 1 202 94 1 94 297 4,762 297 4,762 9,483 9,483 6,432 1,118 6,432 1,933 1,118 1,933 9,483 9,483 8,566 1,757 8,566 - 1,757 272 - - 272 - 10,595 10,595 2,068 57 2,068 742 57 316 742 3,183 316 3,183 13,778 13,778 3,072 617 3,072 293 617 293 3,982 3,982 142 - 142 130 - 130 272 4,254 272 4,254 9,524 9,524 7,004 2,338 7,004 182 2,338 182 9,524 9,524 The above Consolidated Statements of Financial Position should be read in conjunction with the accompanying notes. The above Consolidated Statements of Financial Position should be read in conjunction with the accompanying notes. 3,479 3,175 3,479 12 3,175 325 12 2,238 325 2,238 9,229 9,229 459 83 459 383 83 316 383 1,241 316 1,241 10,470 10,470 2,190 538 2,190 232 538 232 2,960 2,960 202 1 202 94 1 94 297 3,257 297 3,257 7,213 7,213 6,432 1,118 6,432 (337) 1,118 (337) 7,213 7,213 40 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Consolidated Statements of Comprehensive Income For the year ended 30 June 2015 Revenue from continuing operations Expenses External services Employee benefits expense Depreciation and amortisation expense Occupancy costs Marketing and communication costs Fund related expenses Loss on disposal of assets Community grants expense Impairment of property, plant and equipment Other expenses Profit before income tax Income tax expense Net profit for the year Other comprehensive income Items that will not be reclassified to profit or loss Net loss on revaluation of available-for-sale financial assets, net of tax Net realised loss on available-for-sale financial assets, net of tax Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Notes 6 7 7 7 7 7 7 7 8(b) 18(a) 18(a) Consolidated entity Parent entity 2015 $'000 21,171 (1,714) (9,051) (186) (485) (762) (2,916) (74) (373) (484) (1,548) (17,593) 3,578 (1,608) 1,970 - - - 1,970 2014 $'000 19,889 2015 $'000 18,240 2014 $'000 15,692 (2,018) (7,148) (272) (439) (1,007) (2,770) (15) (302) (282) (1,503) (15,756) 4,133 (1,590) 2,543 (1,330) (8,956) (186) (485) (748) (952) (74) (373) (484) (1,435) (15,023) 3,217 (605) 2,612 (1,667) (7,026) (272) (439) (995) (800) (15) (302) (282) (1,400) (13,198) 2,494 (810) 1,684 (1) (7) (8) 2,535 - - - 2,612 2015 Cents (1) (7) (8) 1,676 2014 Cents Earnings per share for profit attributable to the ordinary equity holders of the Group: Basic earnings per share Diluted earnings per share 27(a) 27(b) 190.00 180.69 248.51 241.13 The above Consolidated Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 41 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Consolidated Statements of Changes in Equity For the year ended 30 June 2015 Consolidated entity Notes Balance at 1 July 2013 Net profit for the year Other comprehensive loss for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued during the year Dividends provided for or paid Employee share scheme - Rights Balance at 30 June 2014 Balance at 1 July 2014 Net profit for the year Other comprehensive loss for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued during the year Dividends provided for or paid Employee share scheme - Rights Employee share plan - Deferred Balance at 30 June 2015 Issued capital $'000 6,278 - - - Asset revaluation reserve $'000 4 - (8) (8) Other reserves $'000 345 - - - Retained earnings $'000 669 2,543 - 2,543 17(b) 19 18(a) 17(b) 19 18(a) 18(a) 154 - - 154 6,432 6,432 - - - 572 - - - 572 7,004 - - - - (4) (4) - 4 4 - - - - - - (154) - 931 777 1,122 1,122 - - - (572) - 1,472 316 1,216 2,338 - (1,279) - (1,279) 1,933 1,933 1,970 (4) 1,966 - (2,089) - - (2,089) 1,810 The above Consolidated Statements of Changes in Equity should be read in conjunction with the accompanying notes. Total $'000 7,296 2,543 (8) 2,535 - (1,279) 931 (348) 9,483 9,483 1,970 - 1,970 - (2,089) 1,472 316 (301) 11,152 42 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Consolidated Statements of Changes in Equity For the year ended 30 June 2015 (continued) Parent entity Notes Balance at 1 July 2013 Net profit for the year Other comprehensive loss for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued during the year Dividends provided for or paid Employee share scheme - Rights Balance at 30 June 2014 Balance at 1 July 2014 Net profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued during the year Dividends provided for or paid Employee share scheme - Rights Employee share plan - Deferred Balance at 30 June 2015 Issued capital $'000 6,278 - - - Asset revaluation reserve $'000 4 - (8) (8) Other reserves $'000 345 - - - Accumulated losses $'000 (742) 1,684 - 1,684 17(b) 19 18(a) 17(b) 19 18(a) 18(a) 154 - - 154 6,432 6,432 - - - 572 - - - 572 7,004 - - - - (4) (4) - 4 4 - - - - - - (154) - 931 777 1,122 1,122 - - - (572) - 1,472 316 1,216 2,338 - (1,279) - (1,279) (337) (337) 2,612 (4) 2,608 - (2,089) - - (2,089) 182 Total $'000 5,885 1,684 (8) 1,676 - (1,279) 931 (348) 7,213 7,213 2,612 - 2,612 - (2,089) 1,472 316 (301) 9,524 The above Consolidated Statements of Changes in Equity should be read in conjunction with the accompanying notes. 43 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Consolidated Statements of Cash Flows For the year ended 30 June 2015 Notes Consolidated entity Parent entity 2015 $'000 2014 $'000 2015 $'000 2014 $'000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Income taxes paid Community grants paid Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from buyback/sale of investments Payments for intangibles Dividends received from subsidiary Net cash outflow from investing activities Cash flows from financing activities Dividends paid to the Company's shareholders Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of year 23 10 9 36,273 (28,399) 205 (1,426) (200) 6,453 (67) 5 1 (26) - (87) (2,089) (2,089) 4,277 7,950 12,227 27,868 (21,210) 143 (1,321) (117) 5,363 31,028 (25,940) 133 (746) (200) 4,275 12,768 (10,980) 82 (486) (117) 1,267 (87) 1 87 (29) - (28) (67) 5 1 (26) 2,988 2,901 (87) 1 87 (29) 956 928 (1,279) (1,279) 4,056 3,894 7,950 (2,089) (2,089) 5,087 3,479 8,566 (1,279) (1,279) 916 2,563 3,479 The above Consolidated Statements of Cash Flows should be read in conjunction with the accompanying notes. 44 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 Contents of the Notes to the Financial Statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 General information Summary of significant accounting policies Financial risk management Fair value measurements Critical accounting estimates and judgements Revenue Expenses Income tax expense Current assets - Cash and cash equivalents Non-current assets - Property, plant and equipment Reclassification of assets classified as held for sale Non-current assets - Intangible assets Non-current assets - Deferred tax assets Other non-current assets Current liabilities - Trade and other payables Provisions Issued capital Reserves and retained earnings Dividends Key management personnel disclosures Remuneration of auditors Related party transactions Reconciliation of profit after income tax to net cash inflow from operating activities Subsidiaries Events occurring after the reporting period Share-based payments Earnings per share Commitments and contingencies Page 31 31 39 43 44 44 44 46 47 47 49 50 51 52 52 52 53 54 55 56 57 58 60 60 61 61 63 64 45 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 1 General information The financial report covers the consolidated entity of Australian Ethical Investment Limited and its wholly owned subsidiaries (together referred to as the 'Group' and individually as 'Group entities') and Australian Ethical Investment Limited as an individual parent entity. Australian Ethical Investment Limited is a listed public company (ASX: AEF) and both the parent and wholly owned entities are incorporated and domiciled in Australia. The Company's controlled entities are: Australian Ethical Superannuation Pty Limited and Australian Ethical Investment Limited Employee Share Plan Trust. The Group is a for-profit entity for the purposes of preparing financial statements. Australian Ethical Investment Limited is the Responsible Entity (RE) for a range of ethically managed investment schemes. Australian Ethical Superannuation Pty Limited is the Registrable Superannuation Entity (RSE) of Australian Ethical Retail Superannuation Fund. Australian Ethical Investment Limited Employee Share Plan Trust is a newly established employee deferred share plan trust. The consolidated financial report for the consolidated entity as of and for the year ended 30 June 2015 is available at www.australianethical.com.au. The consolidated financial report was authorised for issue by the directors on 28 August 2015. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements are presented in Australian dollars, which is the Group's functional currency. (i) Compliance with IFRS The consolidated financial statements of the Australian Ethical Investment Limited and its Controlled Entities and the separate financial statements of Australian Ethical Investment Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New and amended standards adopted by the Group There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning 1 July 2014 that have a material impact on the Group. (iii) Historical cost convention These financial statements have been prepared under the accruals basis and are based on historical cost convention, as modified by the revaluation of available-for-sale financial assets and property, plant and equipment. (iv) Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 5. 46 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) (v) New standards and interpretations not yet adopted Australian Ethical Investment Limited and its Controlled Entities Certain new accounting standards and interpretations have been published that are not mandatory for 30 June Notes to the Consolidated Financial Statements 2015 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of 30 June 2015 these new standards and interpretations is set out below. (continued) There are no other standards that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. 2 Summary of significant accounting policies (continued) (b) Principles of consolidation (a) Basis of preparation (continued) (i) Subsidiaries (v) New standards and interpretations not yet adopted Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls Certain new accounting standards and interpretations have been published that are not mandatory for 30 June an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and 2015 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. There are no other standards that are not yet effective and that would be expected to have a material impact on The acquisition method of accounting is used to account for business combinations by the Group. the Group in the current or future reporting periods and on foreseeable future transactions. Intercompany transactions, balances and unrealised gains on transactions between Group companies are (b) Principles of consolidation eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of (i) Subsidiaries the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls Parent entity financial statements are now included in the financial report. an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully (ii) Employee Share Trust consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. For reporting purposes the Australian Ethical Investment Limited Employee Share Plan Trust has been treated as a branch of the Company. The assets and liabilities of the Trust are accounted for as assets and liabilities of the The acquisition method of accounting is used to account for business combinations by the Group. Company on the basis that the Trust is merely acting as an agent of the Company. Intercompany transactions, balances and unrealised gains on transactions between Group companies are (c) Revenue recognition eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of Revenue is measured at the fair value of the consideration received or receivable. the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (i) Revenue from the provision of services Parent entity financial statements are now included in the financial report. Revenue is earned from provision of services to customers outside the consolidated entity. Revenue is recognised when services are provided. (ii) Employee Share Trust (ii) Dividends For reporting purposes the Australian Ethical Investment Limited Employee Share Plan Trust has been treated as a branch of the Company. The assets and liabilities of the Trust are accounted for as assets and liabilities of the Dividends are recognised as revenue when the right to receive payment is established. Company on the basis that the Trust is merely acting as an agent of the Company. (iii) Interest income (c) Revenue recognition Interest income is recognised using the effective interest method. Revenue is measured at the fair value of the consideration received or receivable. (i) Revenue from the provision of services Revenue is earned from provision of services to customers outside the consolidated entity. Revenue is recognised when services are provided. (ii) Dividends Dividends are recognised as revenue when the right to receive payment is established. (iii) Interest income Interest income is recognised using the effective interest method. 47 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (c) Revenue recognition (continued) (iv) Profit or loss from sale of assets Net gains or losses on disposal of non-current assets are included in profit or loss. The gain or loss arising from disposal of an item of property, plant and equipment is determined as the difference between net disposal proceeds, being the cash price equivalent where payment is deferred, and the carrying amount of the item. Profit or loss on disposal of assets is brought to account at the date an unconditional contract of sale is signed. (d) Income tax (i) Current tax The income tax expense or revenue for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. (ii) Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss in the Consolidated Statements of Comprehensive Income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (iii) Tax group Australian Ethical Investment Limited and its wholly owned entities have formed an income tax consolidated group under the Tax Consolidation System. Australian Ethical Investment Limited is responsible for recognising the current and deferred tax assets and liabilities for the tax consolidated group. The tax consolidated group has a tax sharing agreement whereby each company in the Group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. Under the tax sharing agreement Australian Ethical Superannuation Pty Limited agrees to pay its share of the income tax payable to Australian Ethical Investment Limited on the same day that Australian Ethical Investment Limited pays the Australian Taxation Office for group tax liabilities. 48 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (e) Leases Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. The respective leased assets are included in the Consolidated Statements of Financial Position based on their nature. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (f) Impairment of tangible assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. (g) Cash and cash equivalents For the purpose of presentation in the Consolidated Statements of Cash Flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (h) Financial instruments Recognition and derecognition The Group initially recognises financial instruments at fair value on the date that they are originated. All other financial instruments are initially recognised on trade date, which is the date the Group becomes party to the contractual rights or obligations. Subsequent to initial recognition these instruments are measured as set out below. (i) Available-for-sale financial assets The Group holds available-for-sale financial assets, which are financial assets not classified as assets held at fair value through profit or loss, loans and receivables or held-to-maturity investments. Available-for-sale financial assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition they are measured at fair value other than impairment losses and are recognised in other comprehensive income and presented in the Asset Revaluation Reserve in equity. 49 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (h) Financial instruments (continued) (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the Consolidated Statements of Financial Position. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Determination of Fair Value Fair value is determined based on current bid prices for all quoted investments. Investments in unlisted unit trusts are valued at the redemption price as reported by the fund's responsible entity. Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired. The amount of impairment loss is recognised in the Consolidated Statements of Comprehensive Income within other expenses. (i) Other financial liabilities Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. (j) Property, plant and equipment Recognition and measurement Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses (see accounting policy 2(f)). The carrying amount of property, plant and equipment is reviewed annually to ensure that it is not in excess of the recoverable amount from these assets. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost of self-constructed assets includes cost of materials, direct labour, an appropriate proportion of overheads, and where relevant, the initial estimates of the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to retained earnings. 50 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (j) Property, plant and equipment (continued) Subsequent costs Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation The depreciable amount of all fixed assets including buildings, is depreciated over their estimated useful lives on a straight-line basis to the consolidated entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives for current and comparative periods are as follows: Class of fixed asset Buildings Plant & Equipment Estimated useful life 5 - 40 years 2.6 - 10 years The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. (k) Intangible assets The development of the Group's website has been capitalised as an intangible asset and carried at cost less accumulated amortisation and accumulated impairment losses. Additional developments were made to the website during the year ended 2015. Amortisation is recognised on a straight-line basis over the estimated useful life of two and a half years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimates being accounted for on a prospective basis. (l) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. (m) Employee benefits (i) Wages, salaries, annual leave, sick leave and non-monetary benefits Liabilities for wages and salaries and annual leave that are expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the Consolidated Statements of Financial Position and includes related on-costs, such as workers compensation insurance and payroll tax. Non-accumulating benefits, such as sick leave, are not provided for but are expensed as the benefits are taken by the employees. A provision is recognised for the amount expected to be paid under short-term bonus or profit-sharing plans if the consolidated entity has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee. During the year ended 30 June 2014, employee benefits included an amount of $409,831 for redundancy costs incurred during the year as a result of closure of the Canberra office. There were no redundancy costs during the year ended 30 June 2015. 51 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (m) Employee benefits (continued) (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and expected future payments are discounted based on period of service. (iii) Share-based payments The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service conditions are expected to be met and the prevailing share price. The objective is that the amount ultimately recognised as an expense is based on the number of awards that meet the related service conditions at the vesting date. (iv) Employee share trust Long term incentives for employees are held as shares in an employee share trust with various vesting conditions. (v) Employee bonus The Group recognises a liability and an expense for bonuses based on individual key performance indicators. Key staff key performance indicators include profit targets. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (n) Community grants expense The Company’s Constitution states that the directors before recommending or declaring any dividend to be paid out of the profits of any one year must have first: • paid or provisioned for payment to current employees, or other persons performing work for the Group, a work related bonus or incentive payment, set at the discretion of the directors, but to be no more than 30 percent (30%) of what the profit for that year would have been had not the bonus or incentive payment been deducted. • gifted or provisioned for gifting an amount equivalent to ten percent (10%) of what the profit for that year would have been had not the above mentioned bonus and amount gifted been deducted. Provision for community grants expense has been made in the current year. (o) Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. (p) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the reporting period but not distributed at the end of the reporting period. 52 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 2 Summary of significant accounting policies (continued) (q) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Group, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. • (r) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the Consolidated Statements of Financial Position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. All revenue are stated net of the amount of GST. (s) Rounding of amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the 'rounding off' of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (t) Functional and presentation currency The functional and presentation currency of the Company is Australian dollars. (u) Comparatives Where necessary, comparative information has been reclassified to be consistent with current reporting period. As this is the first year that the Parent entity information has been presented, comparative information has been provided. 53 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 3 Financial risk management The Group's activities expose it to a variety of financial risks: market risk (including currency risk, price risk, management risk and interest rate risk), credit risk and liquidity risk. The Board of the Company has in place a risk management framework to mitigate these risks. Risk management framework The Group recognises that risk is part of doing business and that the ongoing management of risk is critical to its success. The approach to managing risk is articulated in the Risk Management Strategy and the Risk Appetite Statement. The Risk & Compliance Manager is responsible for the design and maintenance of the risk and compliance framework, establishing and maintaining group wide risk management policies, and providing regular risk reporting to the Board, the Audit, Compliance & Risk Committee (ACRC). The Board regularly monitors the overall risk profile of the group and sets the risk appetite for the group, usually in conjunction with the annual planning process. The Board is responsible for ensuring that management have appropriate processes in place for managing all types of risk, ranging from financial risk to operational risk. To assist in providing ongoing assurance and comfort to the Board, responsibility for risk management oversight has been delegated to the ACRC. The main functions of this Committee are to oversee the consolidated entity’s accounting policies and practices, the integrity of financial statements and reports, the scope, quality and independence of external audit arrangements, the monitoring of the internal audit function, the effectiveness of risk management policies and the adequacy of insurance programs. This Committee is also responsible for monitoring overall legal and regulatory compliance. The activities of the Group expose it to the following financial risks: market risk, credit risk liquidity risk. These are distinct from the financial risks borne by customers which arise from financial assets managed by the consolidated entity in its role as fund manager, trustee and responsible entity. The following discussion relates to financial risks exposure of the consolidated entity in its own right. (a) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. (i) Currency risk Exposure The Group is not directly exposed to currency risk as all its monetary financial instruments are quoted in Australian dollars. (ii) Price risk Exposure The Group is exposed to price risk on equity securities listed or quoted on recognised exchanges. This arises from investments held by the Group and classified in the Consolidated Statements of Financial Position as available for sale financial assets. There was no exposure to market securities price risk at 30 June 2015 and an insignificant exposure as at 30 June 2014. 54 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 3 Financial risk management (continued) (a) Market risk (continued) Sensitivity Consolidated entity Index Change in variable +/- 10% (2014: +/-10%) Parent entity Index Change in variable +/- 10% (2014: +/-10%) Impact on other components of equity 2014 $'000 1 2015 $'000 - Impact on other components of equity 2014 $'000 1 2015 $'000 - (iii) Market risks arising from Funds under Management Exposure The Group’s revenue is significantly dependent on Funds Under Management (‘FUM’) which is influenced by equity market movements. Management calculates that a 1% movement in FUM changes annualised revenue by approximately $205,000 (2014: $164,000). (iv) Cash flow and fair value interest rate risk The Group's interest bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The risk is measured using sensitivity analysis. The consolidated entity and parent entity’s exposure to interest rate risk arise predominantly on cash balances held with banks. In order to manage the interest rate risk relating to bank deposits the CFO reviews the interest rates on those deposits on a regular basis. Sensitivity Consolidated entity Impact on post-tax profit Interest rates - increase by 100 basis points (100 bps) Interest rates - decrease by 100 basis points (100 bps) Parent entity Interest rates - increase by 100 basis points (100 bps) Interest rates - decrease by 100 basis points (100 bps) 2015 $'000 122 (122) 2014 $'000 79 (79) Impact on post-tax profit 2015 $'000 86 (86) 2014 $'000 35 (35) 55 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 3 Financial risk management (continued) (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or a counterparty to a financial instruction fails to meet its contractual obligations. The Group is predominantly exposed to credit risk on its deposits with banks and financial institutions, outstanding receivables and committed transactions. The maximum exposure of the Group to credit risk on financial assets which have been recognised on the Consolidated Statements of Financial Position is the carrying amount, net of any provision for doubtful debts. The Group manages this risk by settling the receivables from the managed investment schemes and superannuation fund on a weekly or monthly basis and holding cash and cash equivalents at financial institutions with a Standard & Poor’s rating of ‘A’ or higher. The table below outlines the Group’s maximum exposure to credit risk as at reporting date. Cash and cash equivalents Trade and other receivables Consolidated entity Parent entity 2015 $'000 12,227 1,780 14,007 2014 $'000 7,950 2,745 10,695 2015 $'000 8,566 1,757 10,323 2014 $'000 3,479 3,175 6,654 There are currently no past due receivables as at 30 June 2015 (2014: nil). (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities. The Group’s approach to managing liquidity is to maintain a level of cash or liquid investments sufficient to meet its ongoing financial obligations. The Group manages liquidity risk by continually monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. In addition, a twelve month forecast of liquid assets, cash flows and balance sheet is reviewed by the Board annually as part of the budget process to ensure there is sufficient liquidity within the Group. Maturities of financial liabilities The tables below analyse the Group's non-derivative financial liabilities into relevant maturity groupings based on their contractual maturities at year end date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. Contractual maturities of financial liabilities Less than 6 months 6 - 12 months $'000 $'000 More than 12 months $'000 Consolidated entity - at 30 June 2015 Trade and other payables Provisions 3,964 - 3,964 309 293 602 - 130 130 56 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Australian Ethical Investment Limited and its Controlled Entities Australian Ethical Investment Limited and its Controlled Entities Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 30 June 2015 30 June 2015 30 June 2015 30 June 2015 (continued) (continued) (continued) (continued) 3 Financial risk management (continued) 3 Financial risk management (continued) 3 Financial risk management (continued) 3 Financial risk management (continued) (c) Liquidity risk (continued) (c) Liquidity risk (continued) (c) Liquidity risk (continued) (c) Liquidity risk (continued) Consolidated entity - at 30 June 2014 Consolidated entity - at 30 June 2014 Consolidated entity - at 30 June 2014 Consolidated entity - at 30 June 2014 a a a a Trade and other payables Trade and other payables Trade and other payables Trade and other payables Provisions Provisions Provisions Provisions Parent entity - at 30 June 2015 Parent entity - at 30 June 2015 Parent entity - at 30 June 2015 Parent entity - at 30 June 2015 Trade and other payables Trade and other payables Trade and other payables Trade and other payables Provisions Provisions Provisions Provisions Less than 6 Less than 6 Less than 6 months Less than 6 months months months $'000 $'000 $'000 $'000 6 - 12 6 - 12 6 - 12 months 6 - 12 months months months $'000 $'000 $'000 $'000 More than More than More than 12 months More than 12 months 12 months 12 months $'000 $'000 $'000 $'000 3,140 3,140 3,140 3,140 - - - - 3,140 3,140 3,140 3,140 275 275 275 275 232 232 232 232 507 507 507 507 - - - - 94 94 94 94 94 94 94 94 2,703 2,703 2,703 2,703 - - - - 2,703 2,703 2,703 2,703 1,854 1,854 1,854 1,854 - - - - 1,854 1,854 1,854 1,854 309 309 309 309 293 293 293 293 602 602 602 602 275 275 275 275 232 232 232 232 507 507 507 507 - - - - 130 130 130 130 130 130 130 130 - - - - 94 94 94 94 94 94 94 94 Parent entity - at 30 June 2014 Parent entity - at 30 June 2014 Parent entity - at 30 June 2014 Parent entity - at 30 June 2014 Trade and other payables Trade and other payables Trade and other payables Trade and other payables Provisions Provisions Provisions Provisions (d) Capital management (d) Capital management (d) Capital management (d) Capital management (i) Capital requirements (i) Capital requirements (i) Capital requirements (i) Capital requirements The Group manages its capital to ensure that the level of financial conservatism is appropriate for its businesses. The Group manages its capital to ensure that the level of financial conservatism is appropriate for its businesses. The Group manages its capital to ensure that the level of financial conservatism is appropriate for its businesses. Capital is managed to provide business stability and accommodate the growth needs of the Group. The Group manages its capital to ensure that the level of financial conservatism is appropriate for its businesses. Capital is managed to provide business stability and accommodate the growth needs of the Group. Capital is managed to provide business stability and accommodate the growth needs of the Group. Capital is managed to provide business stability and accommodate the growth needs of the Group. Part of the capital management of the Group is to determine the dividend policy. Dividends paid to shareholders Part of the capital management of the Group is to determine the dividend policy. Dividends paid to shareholders Part of the capital management of the Group is to determine the dividend policy. Dividends paid to shareholders Part of the capital management of the Group is to determine the dividend policy. Dividends paid to shareholders are typically in the range of 80-100 per cent of the Group’s net profit after tax attributable to members of the are typically in the range of 80-100 per cent of the Group’s net profit after tax attributable to members of the are typically in the range of 80-100 per cent of the Group’s net profit after tax attributable to members of the are typically in the range of 80-100 per cent of the Group’s net profit after tax attributable to members of the Company, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Company, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Company, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Board may declare a dividend outside that range. Company, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Board may declare a dividend outside that range. Board may declare a dividend outside that range. Board may declare a dividend outside that range. As at year end the Group had no long term debt arrangements. As at year end the Group had no long term debt arrangements. As at year end the Group had no long term debt arrangements. As at year end the Group had no long term debt arrangements. (ii) External requirements (ii) External requirements (ii) External requirements (ii) External requirements In connection with operating a funds management business in Australia the Parent entity is required to hold an In connection with operating a funds management business in Australia the Parent entity is required to hold an In connection with operating a funds management business in Australia the Parent entity is required to hold an In connection with operating a funds management business in Australia the Parent entity is required to hold an Australian Financial Services Licence (AFSL). As a holder of an AFSL, the Australian Securities & Investment Australian Financial Services Licence (AFSL). As a holder of an AFSL, the Australian Securities & Investment Australian Financial Services Licence (AFSL). As a holder of an AFSL, the Australian Securities & Investment Commission (ASIC) requires the Company to: Australian Financial Services Licence (AFSL). As a holder of an AFSL, the Australian Securities & Investment Commission (ASIC) requires the Company to: Commission (ASIC) requires the Company to: Commission (ASIC) requires the Company to: • prepare 12-month cash-flow projections which must be approved at least quarterly by directors, and reviewed • prepare 12-month cash-flow projections which must be approved at least quarterly by directors, and reviewed • prepare 12-month cash-flow projections which must be approved at least quarterly by directors, and reviewed • prepare 12-month cash-flow projections which must be approved at least quarterly by directors, and reviewed • hold at all times minimum Net Tangible Assets (NTA) the greater of: • hold at all times minimum Net Tangible Assets (NTA) the greater of: • hold at all times minimum Net Tangible Assets (NTA) the greater of: • hold at all times minimum Net Tangible Assets (NTA) the greater of: annually by auditors; annually by auditors; annually by auditors; annually by auditors; (a) $150,000 (a) $150,000 (a) $150,000 (a) $150,000 (b) 0.5% of the average value of scheme property (capped at $5 million); or (b) 0.5% of the average value of scheme property (capped at $5 million); or (b) 0.5% of the average value of scheme property (capped at $5 million); or (b) 0.5% of the average value of scheme property (capped at $5 million); or (c) 10% of the average responsible entity revenue (uncapped). (c) 10% of the average responsible entity revenue (uncapped). (c) 10% of the average responsible entity revenue (uncapped). (c) 10% of the average responsible entity revenue (uncapped). The Company must hold at least 50% of its minimum NTA requirement as cash or cash equivalents and hold at The Company must hold at least 50% of its minimum NTA requirement as cash or cash equivalents and hold at The Company must hold at least 50% of its minimum NTA requirement as cash or cash equivalents and hold at The Company must hold at least 50% of its minimum NTA requirement as cash or cash equivalents and hold at least $50,000 in Surplus Liquid Funds (SLF). least $50,000 in Surplus Liquid Funds (SLF). least $50,000 in Surplus Liquid Funds (SLF). least $50,000 in Surplus Liquid Funds (SLF). The Company has complied with these requirements at all times during the year. The Company has complied with these requirements at all times during the year. The Company has complied with these requirements at all times during the year. The Company has complied with these requirements at all times during the year. 57 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 4 Fair value measurements The Group measures and recognises the following assets at fair value on a recurring basis: • Available-for-sale financial assets The Group has no assets or liabilities measured at fair value on a non-recurring basis in the current reporting period. (a) Fair value hierarchy AASB 13 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1) (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2), and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The Consolidated Entity and Parent Entity did not have any available for sale investments at 30 June 2015. Recurring fair value measurements Consolidated entity - at 30 June 2014 Financial assets Available-for-sale financial assets Australian listed equity securities Total financial assets Recurring fair value measurements Parent entity - at 30 June 2014 Financial assets Available-for-sale financial assets Australian listed equity securities Total financial assets Level 1 $'000 Level 2 $'000 Level 3 $'000 12 12 Level 1 $'000 12 12 - - Level 2 $'000 - - Level 3 $'000 - - - - Total $'000 12 12 Total $'000 12 12 There were no transfers between Level 1 and 2 in the year. (i) Disclosed fair values For all financial instruments other than those measured at fair value their carrying value approximates fair value. The carrying amounts of trade and other receivables and payables are assumed to approximate their fair values due to their short-term nature. 58 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 5 Critical accounting estimates and judgements The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. (a) Significant estimates and judgements The areas involving significant estimates or judgements are: • Assessment of impairment of property, plant and equipment - Note 10 • Estimation of provisions - Note 16 • Recognition and measurement of share based payments- Note 26 • Recoverability of deferred tax assets - Note 13 Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. 6 Revenue From continuing operations Management fees (net of rebates) Member and withdrawal fees Dividends Administration fees Interest income Other income 7 Expenses External services Ethical research Audit Consultants Legal services Other Employee benefits expense Staff remuneration Directors fees Bonus and rights amortisation Other employment costs 59 Consolidated entity Parent entity 2015 $'000 13,642 1,675 - 5,609 205 40 21,171 2014 $'000 9,452 1,443 - 8,835 143 16 19,889 Consolidated entity 2014 2015 $'000 $'000 164 318 379 126 727 1,714 5,699 293 3,019 40 9,051 292 358 770 194 404 2,018 5,612 280 1,223 33 7,148 2015 $'000 15,096 - 2,988 - 133 23 18,240 2015 $'000 164 241 293 109 523 1,330 5,699 198 3,019 40 8,956 2014 $'000 12,079 - 956 2,547 82 28 15,692 Parent entity 2014 $'000 291 279 716 146 235 1,667 5,606 173 1,223 24 7,026 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 7 Expenses (continued) Depreciation and amortisation expense Depreciation Amortisation Occupancy costs Premises Rates and taxes Electricity, gas & telephone Other occupancy costs Marketing and communication costs Printing and stationery Marketing Fund related expenses Administration and custody Licence fees PDS expense APRA levy Other fund related expenses Other expenses Insurance IT Travel Subscriptions and listing Other expenses Total expenses Consolidated entity 2014 2015 $'000 $'000 Parent entity 2014 $'000 2015 $'000 134 52 186 268 60 109 48 485 159 603 762 2,447 315 5 88 61 2,916 115 942 247 74 170 1,548 16,662 231 41 272 224 31 105 79 439 135 872 1,007 2,388 219 14 117 32 2,770 118 863 272 38 212 1,503 15,157 134 52 186 268 60 109 48 485 145 603 748 221 258 4 - 469 952 231 41 272 224 31 105 79 439 123 872 995 297 75 - - 428 800 48 932 239 74 142 1,435 14,092 48 863 270 38 181 1,400 12,599 60 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) Income tax expense 8 (a) Income tax expense through profit or loss Current tax expense Under/(over) provision in prior year Deferred tax benefit Consolidated entity Parent entity 2015 $'000 2,135 (44) (483) 1,608 2014 $'000 1,669 - (79) 1,590 2015 $'000 1,114 (44) (465) 605 (b) Numerical reconciliation of income tax expense to prima facie tax payable Consolidated entity Parent entity Profit from continuing operations before income tax benefit Tax at the Australian tax rate of 30.0% (2014 - 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible share based provisions Non-deductible impairment of property, plant and equipment Other non-taxable items Non-taxable intercompany dividend from AES Under/(over) provision in prior year Net realised and unrealised losses on available-for-sale assets Income tax expense 2015 $'000 3,578 1,073 442 145 (8) - (44) - 1,608 2014 $'000 4,133 1,240 279 85 (1) - (11) (2) 1,590 2015 $'000 3,217 965 442 145 (7) (896) (44) - 605 The applicable weighted average effective tax rates are as follows: 2014 $'000 889 (13) (66) 810 2014 $'000 2,494 748 279 85 - (287) (13) (2) 810 (c) Amounts recognised directly in equity Deferred tax: Employee share plan Deferred tax: Revaluation of available-for-sale assets 45% 38% 19% 32% Consolidated entity Parent entity 2015 $'000 139 - 139 2014 $'000 - (1) (1) 2015 $'000 139 - 139 2014 $'000 - (1) (1) The current tax liabilities for the Group represents income taxes payable in respect of the current financial year. In accordance with tax consolidation legislation, the Company, as head entity of the Australian tax-consolidated group, has assumed the current tax asset/(liability) recognised by members in the tax consolidated group. 61 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 9 Current assets - Cash and cash equivalents Current assets Cash at bank Deposits at call Consolidated entity At 30 June 2015 $'000 30 June 2014 $'000 Parent entity At 30 June 2015 $'000 30 June 2014 $'000 20 12,207 12,227 10 7,940 7,950 15 8,551 8,566 5 3,474 3,479 Cash at bank earns interest at floating rates based on daily bank deposit rates. Deposits at call is money invested in bank account earning interest. Interest is calculated daily based on daily bank deposit rates. The average interest rate for the Consolidated entity was 2.04% (2014: 2.41%). The average interest rate for the Parent entity was 2.21% (2014: 1.39%). 10 Non-current assets - Property, plant and equipment Consolidated entity At 30 June 2014 Cost Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Additions Disposals Depreciation charge Closing net book amount Consolidated entity At 30 June 2015 Cost Accumulated depreciation Net book amount Land $'000 Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 - - - - - - - - - - - - - - - - 370 (36) 334 314 50 - (30) 334 1,565 (1,440) 125 306 37 (92) (126) 125 Land $'000 Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 230 - 230 1,785 (546) 1,239 1,117 (554) 563 374 (338) 36 Total $'000 1,935 (1,476) 459 620 87 (92) (156) 459 Total $'000 3,506 (1,438) 2,068 62 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 10 Non-current assets - Property, plant and equipment (continued) Land $'000 Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 - - 230 - - - 230 - - 1,728 (25) (464) - 1,239 334 8 280 (39) (20) - 563 125 59 - (70) - (78) 36 Land $'000 Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 - - - - - - - - - - - - - - - - 370 (36) 334 314 50 - (30) 334 1,565 (1,440) 125 306 37 (92) (126) 125 Land $'000 Buildings $'000 Leasehold improvements $'000 Plant and equipment $'000 230 - 230 - - 230 - - - 230 1,785 (546) 1,239 - - 1,728 (25) (464) - 1,239 1,117 (554) 563 334 8 280 (39) (20) - 563 374 (338) 36 125 59 - (70) - (78) 36 Total $'000 459 67 2,238 (134) (484) (78) 2,068 Total $'000 1,935 (1,476) 459 620 87 (92) (156) 459 Total $'000 3,506 (1,438) 2,068 459 67 2,238 (134) (484) (78) 2,068 Consolidated entity Year ended 30 June 2015 Opening net book amount Additions Reclassification of assets included in a disposal group classified as held for sale and other disposals (see Note 11) Depreciation charge Impairment loss Write off Closing net book amount Parent entity At 30 June 2014 Cost Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Additions Disposals Depreciation charge Closing net book amount Parent entity At 30 June 2015 Cost Accumulated depreciation Net book amount Year ended 30 June 2015 Opening net book amount Additions Reclassification of assets included in a disposal group classified as held for sale and other disposals (see Note 11) Depreciation charge Impairment loss Write off Closing net book amount 63 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 11 Reclassification of assets classified as held for sale In June 2013, the Company's management reclassified its Canberra property from "Non-current assets - Property, plant and equipment" to "Current assets - Assets classified as held for sale" to reflect its effort to sell the property. Over the past 2 years, the Company has had a comprehensive sales program to locate a buyer. Unfortunately despite continued efforts, the Company has been unable to sell the property. As a result of the depressed market, the Company feels that a sale is not probable in the short term. Since 30 June 2014 the Canberra property market continued to soften with: • Secondary rents falling further including units within the properties' immediate vicinity being offered at lower rents. Incentives across all precincts have increased significantly and on average, are moving towards a baseline of 25% for prime and 30%+ for secondary. • • Vacancy rates have continued to increase. • Comparative sales have deteriorated. As a result of the above factors at 31 December 2014, a valuation of the Canberra building was conducted by Jones Lang LaSalle and Knight Frank, independent valuers not related to the Group, to determine the fair value. Based on advice received from independent valuers, the Directors determined that the value of the property was below the carrying value and have recorded an impairment of $412,500. During the subsequent six months the profile of leasing clients changed with further falls in secondary rents which were partly offset by a reduction in incentives offered. A valuation was conducted by Jones Lang LaSalle and based on this advice the Directors determined to record a further impairment of $71,749. Valuers Jones Lang LaSalle and Knight Frank are both members of the Institute of Valuers of Australia. The valuation was determined by reference to recent market transactions on arm's length terms. Estimated selling costs of $75,000, including agent’s commission and associated legal costs, were deducted from the independent valuation to determine the carrying value. In accordance with AASB13 Fair Value Measurement, the fair value category for the Canberra building input into the valuation techniques has been assessed as Level 3. The Company considers the market approach to valuing the building to be the most appropriate method of assessing the fair value. More specifically in arriving at its opinion of fair value, the Company has referred to the direct comparison and capitalisation of net income approach adopted by the independent Valuers. The capitalisation of net income approach is based on estimates of net market rent, capitalised at an appropriate discount rate less estimates of the time required to lease the property, estimated leasing incentives and estimated agents fees. Significant quantitative unobservable inputs used in determining the fair value of the property include market rents, capitalisation rates, leasing downtime, leasing incentives and agents’ fees. These rates are based on feedback from independent Valuers based on the location, type and nature of the property along with current and anticipated market conditions. Significant unobservable quantitative inputs used in determining the fair value as at 30 June 2015 include: Unobservable Quantitative Inputs Comparative sales Building sizes Range $1,700 - $1,900 psm 1,006.5 square meters Average $1,800 psm 64 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 12 Non-current assets - Intangible assets Capitalised website development $'000 129 (46) 83 95 29 (41) 83 154 (97) 57 83 26 (52) 57 Capitalised website development $'000 129 (46) 83 95 29 (41) 83 Consolidated entity At 30 June 2014 Cost Accumulated amortisation Net book amount Year ended 30 June 2014 Opening net book amount Additions Amortisation charge Closing net book amount Consolidated entity At 30 June 2015 Cost Accumulated amortisation Net book amount Year ended 30 June 2015 Opening net book amount Additions Amortisation charge Closing net book amount Parent entity At 30 June 2014 Cost Accumulated amortisation Net book amount Year ended 30 June 2014 Opening net book amount Additions Amortisation charge Closing net book amount 65 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 12 Non-current assets - Intangible assets (continued) Parent entity At 30 June 2015 Cost Accumulated amortisation Net book amount Year ended 30 June 2015 Opening net book amount Additions Amortisation charge Closing net book amount Capitalised website development $'000 154 (97) 57 83 26 (52) 57 13 Non-current assets - Deferred tax assets The balance comprises temporary differences attributable to: Other employee benefits Audit fees Community grants Provision for employee leave Total deferred tax assets Movements: Opening balance Charged/credited: - to profit or loss Closing balance Consolidated entity At 30 June 2015 $'000 30 June 2014 $'000 Parent entity At 30 June 2015 $'000 30 June 2014 $'000 342 66 144 220 772 86 38 92 180 396 342 36 144 220 742 Consolidated entity Parent entity 2015 $'000 396 376 772 2014 $'000 348 48 396 2015 $'000 383 359 742 86 25 92 180 383 2014 $'000 348 35 383 66 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 14 Other non-current assets Consolidated entity At 30 June 2015 $'000 30 June 2014 $'000 Parent entity At 30 June 2015 $'000 Investment in Australian Ethical Superannuation Pty Limited - - 316 15 Current liabilities - Trade and other payables 30 June 2014 $'000 316 Consolidated entity At 30 June 2015 $'000 1,171 60 1,960 1,142 4,333 30 June 2014 $'000 1,446 61 1,684 285 3,476 Parent entity At 30 June 2015 $'000 313 60 1,557 1,142 3,072 30 June 2014 $'000 540 61 1,304 285 2,190 Trade payables Unearned income Other payables Employee bonus payable 16 Provisions Consolidated entity At 30 June 2015 Non- current $'000 130 30 June 2015 Non- current $'000 130 Current $'000 293 Current $'000 293 30 June 2014 Non- current $'000 94 30 June 2014 Non- current $'000 94 Total $'000 423 Current $'000 232 Parent entity At Total $'000 423 Current $'000 232 Total $'000 326 Total $'000 326 Employee benefits - long service leave Employee benefits - long service leave 67 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 17 Issued capital (a) Share capital Ordinary shares - fully paid Notes 17(b), 17(c) Consolidated and Parent Entity At 30 June 2014 Shares 30 June 2015 $'000 30 June 2015 Shares 1,053,818 1,023,147 7,004 30 June 2014 $'000 6,432 The Company does not have authorised capital or par value in respect of its issued shares. (b) Movements in ordinary share capital Details Opening balance - 1 July 2013 Employee share scheme issues Closing balance - 30 June 2014 a Opening balance - 1 July 2014 Employee share scheme issues Closing balance - 30 June 2015 Notes Number of shares 1,015,086 8,061 1,023,147 17(d) 17(d) 1,023,147 30,671 1,053,818 $'000 6,278 154 6,432 6,432 572 7,004 (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Group in proportion to the number of shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (d) Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in Note 26. For information related to rights and shares issued to key management personnel during the financial year refer to the remuneration report contained within the Directors' report. 14,924 shares are considered to be Treasury shares as the Employee Share Plan Trust is defined as an agent of the Company. No value is attributed to these shares. (e) Capital management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group's overall strategy remains unchanged from 2014. The capital structure of the Group consists of equity of the Group (comprising issued capital, reserves, and retained earnings). 68 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 17 Issued capital (continued) (e) Capital management (continued) Management effectively manages the Group's capital by assessing the Group's financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of distributions to shareholders and share issues. The Group has external capital requirements and at all times during the year the Group has met all externally imposed capital requirements. Further details on the external capital requirements are contained in Note 3(d). 18 Reserves and retained earnings (a) Reserves Share-based payments Other reserves Movements: Share-based payments reserve Opening balance Employee share plan expense Issue of shares held by entity to employees Other - Asset revaluation reserve Opening balance Net loss on revaluation of available-for-sale financial assets Net realised loss on available-for-sale financial assets Write-off of available-for-sale financial assets Other - Employee share plan reserves Employee share plan - Deferred Nature and purpose of reserves Consolidated entity At 30 June 2015 $'000 2,022 316 2,338 30 June 2014 $'000 1,122 (4) 1,118 Parent entity At 30 June 2015 $'000 2,022 316 2,338 30 June 2014 $'000 1,122 (4) 1,118 Consolidated entity Parent entity 2015 $'000 2014 $'000 2015 $'000 2014 $'000 1,122 1,472 (572) 2,022 (4) - - 4 - 316 316 345 931 (154) 1,122 4 (1) (7) - (4) - - 1,122 1,472 (572) 2,022 (4) - - 4 - 316 316 345 931 (154) 1,122 4 (1) (7) - (4) - - Rights reserve The share-based payment reserve relates to rights granted by the Group to its employees under its previous share-based payment arrangements. Items included in the share-based payment reserve will not be reclassified subsequently to profit or loss. Further information about share-based payments to employees is set out in Note 26. 69 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 18 Reserves and retained earnings (continued) (a) Reserves (continued) Asset revaluation reserve The asset revaluation reserve represents the cumulative gains and losses arising on the revaluation of available-for-sale financial assets that have been recognised in other comprehensive income, net of amounts reclassified to the Consolidated Statements of Comprehensive Income when those assets have been disposed of or are determined to be impaired. Share-based payment reserve This reserve relates to shares granted by the Group to its employees under its current share-based payment arrangement. Items included in the rights reserve will not be reclassified subsequently to profit or loss. Further information about the new share-based payments to employees is set out in Note 26. (b) Retained earnings/accumulated losses Movements in retained earnings/(accumulated losses) were as follows: Opening balance - 1 July Net profit for the year Dividends Transfer of reserve due to write off of financial assets Closing balance - 30 June 19 Dividends (a) Ordinary shares Interim dividend for the current financial year Final dividend for the prior financial year Consolidated entity Parent entity 2015 $'000 1,933 1,970 (2,089) (4) 1,810 2014 $'000 669 2,543 (1,279) - 1,933 2015 $'000 (337) 2,612 (2,089) (4) 182 2014 $'000 (742) 1,684 (1,279) - (337) Consolidated entity Parent entity 2015 $'000 843 1,246 2,089 2014 $'000 819 460 1,279 2015 $'000 843 1,246 2,089 2014 $'000 819 460 1,279 (b) Dividends not recognised at the end of the reporting period Consolidated entity 2014 $'000 2015 $'000 Parent entity 2015 $'000 2014 $'000 In addition to the above dividends, since year end the Directors have declared a final dividend of 120 cents per fully paid ordinary share (2014: 120 cents), fully franked based on tax paid at 30%. The aggregate amount of the declared dividend expected to be paid on 30 September 2015 out of profits for the year ended at 30 June 2015, but not recognised as a liability at year end, is 1,265 1,246 1,265 1,246 70 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 19 Dividends (continued) (c) Dividend rate Dividends declared and/or paid fully franked at 30% tax rate in respect of the corresponding financial year 2015 Ordinary shares - 2015 interim Ordinary shares - 2014 final 2014 Ordinary shares - 2014 interim Ordinary shares - 2013 final Cents per share Total Amount 80 120 80 45 $843,054 $1,246,676 $818,522 $460,416 Date of Payment 27/03/2015 03/10/2014 28/03/2014 04/10/2013 % Franked 100 100 100 100 20 Key management personnel disclosures The specified Directors of Australian Ethical Investment Limited and its Controlled Entities during the financial year were: Parent entity directors Name Stephen Gibbs Mara Bun Tony Cole Kate Greenhill Phil Vernon Position Chairperson, non-executive Director, non-executive Director, non-executive Director, non-executive Managing Director & Chief Executive Officer, executive Other key management personnel Name David Barton Adam Kirk David Macri Tom May Stuart Palmer Position Chief Financial Officer General Manager, Business Development Chief Investment Officer General Counsel & Company Secretary Head of Ethics & Corporate Advocacy Departed management Name Position Paul Smith (resigned 28/11/2014) General Manager, Strategy & Communications 71 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 20 Key management personnel disclosures (continued) (a) Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments 21 Remuneration of auditors Consolidated entity Parent entity 2015 $ 1,994,192 142,840 44,420 249,251 2,430,703 2014 $ 1,830,107 156,522 37,269 83,309 2,107,207 2015 $ 1,910,221 134,863 44,420 249,251 2,338,755 2014 $ 1,766,239 150,457 37,269 83,309 2,037,274 During the year the following fees were paid or payable for services provided by the auditor of the Company, its related practices and non-related audit firms: (a) KPMG Australia (i) Audit and other assurance services Audit services for the consolidated entity and subsidiaries Audit and review of consolidated and subsidiary financial statements Audit services in accordance with regulatory requirements Audit services for non-consolidated trusts and superannuation fund * Audit and review of managed funds for which the Company acts as Responsible Entity Audit and review of superannuation fund for which the subsidiary entity acts as Responsible Superannuation Entity Audit services in accordance with regulatory requirements Total remuneration for audit services Taxation services Tax and other accounting services Total remuneration of KPMG Australia Consolidated entity Parent entity 2015 $ 2014 $ 2015 $ 2014 $ 32,710 40,480 73,190 31,700 35,600 67,300 27,450 36,250 63,700 26,600 31,500 58,100 109,290 109,400 109,290 109,400 21,160 46,030 176,480 249,670 68,299 317,969 20,500 49,600 179,500 246,800 111,708 358,508 - - 109,290 172,990 68,299 241,289 - - 109,400 167,500 111,708 279,208 * These fees are incurred by the Company and are effectively recovered from the funds via management fees. 72 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 22 Related party transactions (a) Ultimate parent entity (b) Subsidiaries Interests in subsidiaries are set out in Note 24. (c) Transactions with other related parties The following transactions occurred with related parties: Australian Ethical Trusts Australian Ethical Investment Limited provides investment services and administration to the Australian Ethical Trusts in accordance with the trust deed a Australian Ethical Retail Superannuation Fund Australian Ethical Superannuation Pty Limited provides investment services/ (rebate of investment services) to the Australian Ethical Retail Superannuation Fund a Australian Ethical Superannuation Pty Limited provides Administration/Trustee services to the Australian Ethical Retail Superannuation Fund a Australian Ethical Superannuation Pty Limited provides Member Administration services to the Australian Ethical Retail Superannuation Fund Australian Ethical Superannuation Pty Limited Service fee paid to Australian Ethical Investment Limited Dividends paid to Australian Ethical Investment Limited Director fees paid by Australian Ethical Investment Limited Transactions between Australian Ethical Superannuation Pty Limited and its parent entity under the tax consolidation and related tax sharing agreement referred to in Note 2(d) Consolidated entity Parent entity 2015 $ 2014 $ 2015 $ 2014 $ 21,625,739 15,978,015 21,625,739 15,978,015 (14,491,963) (8,549,666) 11,959,605 10,652,828 1,675,403 1,442,946 - - - - - - - - - - - - - - 7,954,852 7,197,435 2,988,213 956,228 92,836 105,038 1,004,218 779,920 73 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 22 Related party transactions (continued) (c) Transactions with other related parties (continued) Transactions between related parties are on commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. (d) Outstanding balances The following balances are outstanding at the end of the reporting period in relation to transactions with related parties: Consolidated entity At 30 June 2015 $ 30 June 2014 $ Parent entity At 30 June 2015 $ 30 June 2014 $ Investment held in Australian Ethical Superannuation Pty Limited - - 316,000 316,000 Amounts receivable from the Australian Ethical Trusts 1,056,974 1,689,795 1,056,974 1,689,795 Amounts receivable from the Australian Ethical Retail Superannuation Fund 720,066 888,253 - - Amounts receivable from the Australian Ethical Superannuation Pty Limited Amounts payable to Australian Ethical Superannuation Pty Limited - - - - 697,408 1,485,318 - 26,788 (e) Terms and conditions Transaction between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. No provision for doubtful debts has been raised in relation to any outstanding balances and no expense has been recognised in respect of bad or doubtful debts due from related parties. Outstanding balances are unsecured and are repayable in cash. 74 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 23 Reconciliation of profit after income tax to net cash inflow from operating activities Consolidated entity Parent entity Profit for the year Adjustments to operating profit: Depreciation and amortisation Loss on disposal of property, plant & equipment Loss on write-off of property, plant & equipment Tax effect of sale of investments recognised in financing activities Non-cash employee benefits expense - share-based payments Impairment loss Recognition of unearned income Dividends received from subsidiary classified as investing activity Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in other current assets Decrease in deferred tax assets Increase in trade and other payables Increase in current tax liabilities Decrease in deferred tax liabilities Increase/(decrease) in provisions Net cash inflow from operating activities 2015 $'000 1,970 186 74 11 - 1,649 484 (61) - 966 39 (515) 857 697 (1) 97 6,453 2014 $'000 2,543 272 15 - (1) 931 282 (71) - (271) (142) (48) 1,559 349 (30) (25) 5,363 2015 $'000 2,612 186 74 11 - 1,648 484 (61) 2014 $'000 1,684 272 15 - (1) 931 282 (71) (2,988) (956) 1,418 53 (497) 882 357 (1) 97 4,275 (1,890) (139) (35) 872 390 (30) (57) 1,267 24 Subsidiaries Details of the Group's subsidiaries at the end of the reporting period are as follows. Name of the subsidiary a Australian Ethical Superannuation Pty Limited a Australian Ethical Investment Limited Employee Share Plan Trust Principal activity Place of incorporation and operation Proportion of ownership interest and voting power held by the Group Trustee of the Australian Ethical Retail Superannuation Fund Australia 100% Employee deferred share plan trust Australia 100% 75 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 25 Events occurring after the reporting period Between 30 June 2015 the following events occurred that may significantly affect the Group: • On 31 August the following shares were issued: - 11,659 shares were issued to the Employee Share Trust for employee long term incentives; - 11,899 shares were issued in respect of the vesting of STI performance rights (AEFAG); - 16,834 shares were issued in respect of the vesting of LTI performance rights (AEFAC). • On 31 July the administration fee on the Superannuation fund was reduced from 0.93% to 0.63%. This reduction will impact revenues in 2015/16. • A new subsidiary company, Australian Ethical Foundation Ltd was established which going forward will receive and administer the Group's community grants. The Group’s fees are primarily based on its funds under management which in turn is impacted by changes in equity markets. Other than as outlined in this report, no matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 26 Share-based payments The following share-based payment arrangements existed as at 30 June 2015. (a) Performance rights Under the Australian Ethical Investment Limited employee share incentive scheme (ESIS) that existed until August 2014, participants were granted performance rights to ordinary shares, subject to meeting specified performance criteria over the performance period. The number of shares that the participant will ultimately receive will depend on the extent to which the performance criteria are met by the Group and the individual employee. These rights were issued for nil consideration. These rights hold no voting or dividend rights. Subject to the terms and conditions of the ESIS rules, the performance rights have the following attributes determining whether shares will be issued in respect of the rights. Performance rights granted during the year: 76 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 26 Share-based payments (continued) (a) Performance rights (continued) Parent entity As at 1 July Granted during the year Forfeited during the year Exercised during the year Expired during the year Other adjustment As at 30 June a Vested and exercisable at 30 June 2015 Performance rights summary 2015 Number of options 2014 Number of options 54,056 11,899 (5,855) (15,745) - 1,257 45,612 11,899 45,043 29,614 (4,147) (8,061) (8,393) - 54,056 10,693 (i) Fair value of rights granted All rights were calculated at grant date based on the underlying share prices minus estimated net present value of future dividends that the holders of rights are not entitled to. Included under employee benefits expense in the Consolidated Statements of Comprehensive Income is $1,648,718 (2014: $930,557) relating to rights issued under the employee share ownership plan. 77 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 26 Share-based payments (continued) (b) Deferred shares Under the long term incentive scheme introduced in 2014, participants are granted shares subject to meeting specified performance criteria over the performance period. The number of shares that the participant receives is determined at the time of grant with the shares being held in trust. These shares are issued for nil consideration. The shares have voting rights and employees receive dividends. Subject to the terms and conditions of the incentive scheme the deferred shares have the following attributes determining whether they will vest. Deferred shares are held in an Employee Share Trust until vesting conditions are met. 27 Earnings per share (a) Basic earnings per share From continuing operations attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From continuing operations attributable to the ordinary equity holders of the Company Parent entity 2015 Cents 190.00 2014 Cents 248.51 Parent entity 2015 Cents 180.69 2014 Cents 241.13 78 Annual Report 2015 Australian Ethical Investment Limited and its Controlled Entities Notes to the Consolidated Financial Statements 30 June 2015 (continued) 27 Earnings per share (continued) (c) Weighted average number of shares used as denominator Parent entity 2015 Number 2014 Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Weighted average number of rights outstanding Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 28 Commitments and contingencies (a) Operating leases Operating leases relate to leases of office premises for a term of 5 years. The Group does not have an option to purchase the premises at the expiry of the lease period. 1,090,239 1,036,821 53,418 31,315 1,054,418 1,023,103 Consolidated entity Parent entity 2015 $'000 2014 $'000 2015 $'000 2014 $'000 Non-cancellable operating lease commitments Within one year Later than one year but not later than five years Payments recognised as an expense Minimum lease payments recognised as an expense Liabilities recognised in respect of non-cancellable operating leases Lease incentives Current Non-current 232 431 663 234 234 223 663 886 208 208 232 431 663 234 234 61 141 202 61 202 263 61 141 202 223 663 886 208 208 61 202 263 (b) Guarantees The Group has provided a guarantee for $221,733 over the rental of building premises at 130 Pitt Street. (c) Other commitments The Group has no other commitments and contingent assets and liabilities as at 30 June 2015. 79 Australian Ethical Australian Ethical Investment Limited and its Controlled Entities Directors' Declaration 30 June 2015 Directors' declaration 1 In the opinion of the directors of Australian Ethical Investment Limited and its Controlled Entities: (a) the consolidated financial statements and notes that are set out on pages 25 to 64 and the Remuneration report in sections to in the Directors’ report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2015 and of its performance, for the financial year ended on that date; and (b) (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. 2 3 The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2015. The directors draw attention to Note 2(a) to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Phil Vernon Managing Director and Chief Executive Officer Sydney 28 August 2015 80 Annual Report 2015 Auditors Independence Declaration 81 Australian EthicalIndependent Auditors Report 82 Annual Report 201583 Australian EthicalThis page has been intentionally left blank 84 Annual Report 2015Shareholder Information Shareholder information as at Tuesday, 8 September 2015 The Company has two classes of equity securities. Equity securities Number of holders Number on issue Voting rights Fully paid ordinary shares Unquoted performance rights 1,000 17 1,094,210 One vote per share 16,416 No voting rights Top 20 shareholders of fully paid shares Shareholder Select Managed Funds Pty Ltd Citicorp Nominees Pty Ltd Mr James Andrew Thier Ms Caroline Le Couteur Mr Howard Pender Mr Eric Yin Wang & Mrs Patty Bik Yuk Tse Mr Trevor Roland Lee Mrs Judith Margaret Boag Pacific Custodians Pty Limited (Employee Share Plan Trust) Mr Bruce Allan & Mrs Ann Marion McGregor HB Sarjeant & Assoc Pty Ltd (HB Sarjeant & Assoc S/F Acc) Mr Anthony Scott Cook Ms Daisy Their Garrett Smythe Ltd Estate of Dr Edward Arthur Iceton Ms Judith Ingrouille Ajani Mr Andrew Charles Gracey Mr Michel & Mrs Ann Beuchat Mr Phillip Andrew Vernon Mr Trevor Roland Lee (Lee Family Super Fund) Balance 196,472 61,754 51,367 49,436 43,952 39,261 29,376 28,503 26,583 24,279 20,140 18,121 18,048 17,169 12,000 11,700 10,349 9,667 9,412 8,041 % 17.956% 5.644% 4.694% 4.518% 4.017% 3.588% 2.685% 2.605% 2.429% 2.219% 1.841% 1.656% 1.649% 1.569% 1.097% 1.069% 0.946% 0.883% 0.860% 0.735% 85 Australian EthicalDistribution of holdings of fully paid shares Range 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001+ Totals Holders Total Units 887 89 7 16 1 207,022 184,438 46,991 459,287 196,472 1,000 1,094,210 % 18.92 16.86 4.30 41.97 17.96 100 On Monday, 7 September 2015 AEF ordinary shares closed at $58. Accordingly, less than 9 shares constitute a marketable parcel. On Tuesday, 8 September 2015 the Company had 14 shareholders whose holding is not a marketable parcel; these 14 shareholders own a total of 49 shares. Tom May, Company Secretary 86 Annual Report 2015Contact us Phone: 02 8276 6288 Fax: 02 9252 1987 Email: enquiries@australianethical.com.au Web: australianethical.com.au Post: Reply Paid 3993, Sydney NSW 2001 Street Address: Level 8, 130 Pitt Street, Sydney Australian Ethical Investment Ltd (ABN 47 003 188 930; Australian Financial Services Licence No. 229949) is the Responsible Entity and Investment Manager of the Australian Ethical Managed Investment Funds. Interests in the Australian Ethical Retail Superannuation Fund (ABN 49 633 667 743; Fund Registration No. R1004731) are offered by Australian Ethical Investment Ltd by arrangement with its subsidiary and trustee of the Super Fund, Australian Ethical Superannuation Pty Ltd (ABN 43 079 259 733, Registrable Superannuation Entity Licence No. L0001441). The information contained in this Update is general information only, and does not take into account your individual investment objectives, financial situation or needs. Before acting on it, you should consider seeking independent financial advice that is tailored to suit your personal circumstances and should refer to the Financial Services Guide, Product Disclosure Statements and Additional Information Booklets available on our website (www.australianethical.com.au). Certain statements in this Update relate to the future. Such statements involve known and unknown risks and uncertainties and other important factors that could cause the actual results, performance or achievements to be materially different from expected future results. Australian Ethical Investment Ltd does not give any representation, assurance or guarantee that the events expressed or implied in any forward looking statements in this Update will actually occur and you are cautioned not to place undue reliance on such statements. The content of this Update is intended to provide a summary and general overview concerning matters of interest and is correct as at the date of publication. It has not been subject to auditor review. Australian Ethical Investment Ltd does not accept any liability, either directly or indirectly, arising from any person relying, either wholly or partially, upon any information shown in, or omitted from, this Update. Under no circumstances will Australian Ethical Investment Ltd be liable for any loss or damage caused by your reliance on information obtained from this Update. You should consider seeking independent advice from a legal or other professional adviser before acting in response to the content of this Update. 

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