Celebrating 30 yearsAnnual & Sustainability Report 2016 Making money do good Mercury Energy’s Ohakuri Hydro Power Station in
New Zealand. When investing in hydro electricity
we balance the benefits of renewable energy with
the social, animal and environmental harms of
some hydro projects.
Photo credit: Mercury Energy
For 30 years
Australian Ethical
has proven that
you can make
money while
doing good.
Phil Vernon,
Managing Director,
Australian Ethical
Annual and Sustainability Report 2016
Celebrating 30 years
1
About this report
Welcome to Australian Ethical Investment
Limited’s Annual and Sustainability Report
2016, a combined overview of our financial and
sustainability disclosures.
This report has been developed in accordance
with the ‘Comprehensive’ requirements of the
Global Reporting Initiative’s G4 guidelines. We
have outlined our performance for the period
1 July 2015 to 30 June 2016 for Australian
Ethical Investment Limited and its wholly owned
subsidiary Australian Ethical Superannuation
Pty Ltd. References to the activities of Australian
Ethical Foundation Limited are also included.
This year, we focus on the key trends affecting
the superannuation and investments sector,
and have identified material topics that we as a
business can and must influence.
To make it easy to navigate, the report has been
divided into three sections: Foundations, This
Year and Essentials.
KPMG have audited the financial statements
and have also assured selected sustainability
disclosures made in this report. Additional details
of assurance are available on page 121-122.
We welcome your feedback on this report. Please
feel free to contact Tom May, General Counsel
and Company Secretary, Australian Ethical
Investment Limited on 02 8276 6294 or at
tmay@australianethical.com.au.
Our Corporate Governance Statement is available
at australianethical.com.au/shareholders/
corporate-governance/.
2
Annual and Sustainability Report 2016Celebrating 30 years Contents
FOUNDATIONS
Managing Director’s and Chairman’s review
Our year in numbers
Our story
Our Ethical Charter
Creating impact
THIS YEAR
Key industry trends
What matters most
Delivering returns in a volatile market
Investing in a sustainable future
Our commitment to the community
Transitioning towards a lower carbon economy
Delivering a great experience
Investing in our people
ESSENTIALS
Leadership
Directors’ Report
Remuneration Report
Lead Auditor’s Independence Declaration
Independent Auditor’s Report
Consolidated financial statements
Shareholder information
Company directory
4
6
8
10
12
14
16
18
24
36
40
52
56
62
65
68
79
80
82
119
121
3
Annual and Sustainability Report 2016Celebrating 30 years Foundations / Managing Director’s and Chairman's review
Ahead of the curve
for 30 years
This year Australian Ethical celebrated
a significant milestone – we turned 30.
Over the past three decades, we’ve seen a
significant shift in attitudes towards investments
and super. Ethical investing is now part of
the mainstream – or at least the enlightened
mainstream. We are proud of the important part
Australian Ethical has played in this journey. Our
track record shows that investors do not have to
compromise returns in order to do what’s right.
And the great news is, we continue to go from
strength to strength.
In FY16, I’m thrilled to report we’ve increased our
net flows by 78%, bringing our total funds under
management (FUM) to more than $1.5 billion. In
addition, our net profit after tax was up 53% to
$3.0 million.
Many of our managed funds continue to
outperform the market. Our Australian Shares
Fund was in the top quartile for performance over
FY16 and is the #1 best performing Australian
shares fund over the last 10 years (compared to
both ethical and non-ethical funds).
Our superannuation membership also grew by
24% in FY16. Over 5,000 new members joined us
in that period, with a high proportion opting to
roll over their entire super balance to us.
Focused on clients, shareholders,
employees and the community
There’s a bit of an art to balancing the needs of
various stakeholders in a values-based business.
We believe in doing what’s best not only for our
shareholders, but also for employees, clients and
the wider community.
On 30 June 2016, we lowered fees on our
superannuation fund by 0.22%, which represents
a total reduction of 1.3% – over half the fee for a
member in our MySuper product – since 2013.
As we grow, we will continue to share the benefits
of scale with our clients and prospective new
members.
Our share price has increased from $58.80
on 30 June 2015 to $81.11 on 30 June 2016,
benefiting shareholders – even while we lower
fees. In FY16, our total shareholder return
was 43%.
None of this would be possible without our
employees. In FY16, we launched an office
expansion that aims to have our team working
in a modern, collaborative environment and
allow for growth. We also continue to support
employees in their professional and personal
lives, with the belief that these two areas are
inextricably linked. To ensure that the goals of
employees and the company are aligned, each
employee is also a shareholder in the business.
4
Annual and Sustainability Report 2016Celebrating 30 years Our grants program remains a source of
immense pride for us. This year we supported
18 community projects – from animal welfare
to environmental conservation to helping
alleviate poverty. To date, we have donated
over $2 million to community projects, and our
recently established Foundation will provide
additional flexibility in how we support charitable
organisations in the future.
Operating within the global
investment landscape
The pressure to deliver short-term returns can
drive companies to deplete the resource base
(economic, natural and human) that underpins
their own future prosperity. We’ve been
pleased to see increasing discussion on how
we can change this trend within international
markets and focus capital markets more on the
longer term.
At Australian Ethical we’re committed to:
•
focusing capital on delivering long-term value,
and
• shifting financial markets towards a more
responsible and sustainable footing.
Global capital is the most dominant force in the
world today. Our purpose is to make sure that
capital is used for the good of people and the
planet. Through our ownership of companies,
on behalf of our clients, we are recalibrating
businesses to focus on creating sustainable, long-
term value.
One of the biggest threats facing our world
today is climate change. We’re proud to say that
each day at Australian Ethical we’re taking action
to address this issue. By refusing to invest in
environmentally damaging industries such as
coal and old-growth logging, and by investing in
clean energy solutions such as solar and wind,
we’re directing capital towards sustainable and
future-driven industries. We’re doing this not
only for the prosperity of our company and the
nation’s economy, but also for the prosperity of
our planet.
Looking to the future
We have a clear vision for our business. We aim
to be the financial services company of choice
for conscious consumers. This year we’ve shown
we’re on track to achieve this vision, and remain a
leader in the field of ethical investing.
We have a goal of reaching $5 billion in FUM by
2020. Ambitious, sure – but we’re committed to
reaching it. We know this type of growth would
allow us to:
• deliver broader services to our clients,
• have greater impact in society for positive
change, and
• continue to deliver strong returns for our
shareholders.
A 30-year milestone is a great opportunity to
reflect. After three decades of ethical investing,
we’re stronger as a business than ever before.
And our core priority – to make money do good
for people and the planet – will allow us to
operate a thriving, sustainable business well into
the future.
Steve Gibbs
Chairman
Phil Vernon
Managing Director
5
Annual and Sustainability Report 2016Celebrating 30 years Foundations / Highlights
Our year in numbers
Employee
engagement
2016:
77%2
26,000+
Super members
24% increase
since FY15
27%
RETURN ON
EQUITY
#1
‘BEST RESPONSIBLE
INVESTMENT
REPORT’ 2015 1
$395,314
provisioned for
community impact
Emerging
Companies Fund
AN INNOVATIVE NEW
P ROD UCT LAUNCHED
1 Responsible Investor Reporting Awards
2 Externally benchmarked by AON Hewitt.
6
Celebrating 30 years
Annual and Sustainability Report 2016
$23
million
revenue
60,259
4
TONNES LE SS CO 2
$3.0
million
profit after
tax
$3.00
DIVIDENDS
282C
earnings
per share
OVER
$1.5 billion
IN FU NDS UNDER
MANAGEMENT
Top quartile
for performance
OUR AUSTRALIAN SHA RES FUND
OVER THE PAST
12 MONTHS 5
4 Emissions of Australian Ethical share investments compared
to benchmark of S&P ASX 200 Index (for Australian share
fund holdings) and MSCI World Index ex Australia (for
international share fund holdings). Calculated as at 31
December 2015.
5 Mercer Survey, June 2016
Annual and Sustainability Report 2016
Celebrating 30 years
7
Foundations / Our timeline
Our story
It’s been 30 years since a group of
progressive, like-minded friends got
together to make money do good –
for their clients and the planet.
$ 2 0 0 m
1986
Company is formed
as Directed Financial
Management Ltd to
formalise the joint ethical
investments of a group of
friends in Sydney
The Australian Ethical
Charter is created, which
consists of 23 principles
to guide investment
decisions
1992
Company name changes
to August Financial
Management Limited
1998
The Australian Ethical
Retail Superannuation
Fund is launched
2005
First fund manager to
be accredited for SRI
Recognition by Ethical
Investment Association
1995
Company name changes
to Australian Ethical
Investment Ltd
2000
The community grants
program is launched,
giving away 10% of
before-tax profits to
charitable organisations.
2002
Listed on the
stock exchange
8
Celebrating 30 years
Annual and Sustainability Report 2016
$500m
2006
Hit $500m in funds
under management
2008
Infinity Award winner
Winner of the
SuperRatings Infinity
Award for the most
environmental and
socially conscious
superannuation fund
2010
Over $1 million donated
to community projects
since 2000
Current CEO and
Managing Director
Phil Vernon is appointed
2011
Ethical Investor Fund of
the Year
Named Ethical Fund
of the Year for the
Australian Shares
Fund by the Australian
Sustainability Awards
$1.5
billion
2015
Awarded Best For the
World status by B Corp,
which ranks the top 10%
of B corps worldwide
Money Management
Responsible Fund of
the Year Award
2016
Hit $1.5b in funds under
management with over
26,000 Super members
2013
Head office moves from
Canberra to Sydney
Super fund
named 'Rising Star'
by SuperRatings
2014
Received B Corp
certification
Annual and Sustainability Report 2016
Celebrating 30 years
9
Foundations / Charter
Australian Ethical Charter
WE SEEK OUT INVESTMENTS
that support
+ The development of workers’
participation in the ownership and
control of their work organisations
and places
+ The production of high quality
and properly presented
products and services
+ The development of locally
based ventures
+ The preservation of
endangered eco-systems
+ The dignity and well being of
non-human animals
+ The alleviation of poverty in
all its forms
+ Activities which contribute
to human happiness, dignity
and education
+ The efficient use of human waste
+ The development of sustainable
land use and food production
+ The development of appropriate
technological systems
+ The amelioration of wasteful
or polluting practices
+ The development and preservation
of appropriate human buildings
and landscape
10
Celebrating 30 years
Annual and Sustainability Report 2016
WE AVOID INVESTMENTS
that harm
– Pollute land, air or water
– Destroy or waste non-
recurring resources
– Extract, create, produce,
manufacture, or market
materials, products, goods or
services which have a harmful
effect on humans, non-human
animals or the environment
– Create markets by the
promotion or advertising of
unwanted products or services
– Market, promote or advertise,
products or services in a
misleading or deceitful manner
– Discriminate by way of
race, religion or sex in
employment, marketing,
or advertising practices
– Exploit people through the payment
of low wages or the provision of
poor working conditions
– Acquire land or commodities
primarily for the purpose of
speculative gain
– Create, encourage or perpetuate
militarism or engage in the
manufacture of armaments
– Entice people into financial
over-commitment
– Contribute to the inhibition
of human rights generally
Annual and Sustainability Report 2016
Celebrating 30 years
11
Foundations / Values
Creating impact
OU R P URP OSE
Make money do
good – for you and
for the planet.
OUR BELIEFS
& VALUES
Our beliefs are central to our
business and underpin everything
we do. Our values guide our
actions and our investments.
EX TERNAL EN VIRONMENT
T h e
d e t a i l s
OU R V AL UES AND BE LIEF S
OUR VALUES
• Respect
• Compassion
• Trust
• Leadership
• Authenticity
OUR BELIEFS
• A new model for business is needed
not focused solely on profits
• Ethical and financial outcomes can
be achieved together – no need to
compromise on either
• Money has power to make a
difference
• Individuals have power through their
investment and consumption choices
• We take action and lead to
inspire others
12
Celebrating 30 years
Annual and Sustainability Report 2016
EXTERNAL
ENVIRONMENT
The external environment
encompasses market instability,
economic conditions, societal issues
and environmental challenges,
all of which may influence our
operations. We are working
to operate sustainably in an
environment of constant disruption,
political and regulatory change and
increasing competition.
OUR AMBITION
To be the financial services
company of choice for
conscious consumers
The magic
Using a process of investment,
monitoring, screening,
engagement and where required
divestment, we are able to use
our clients’ money to create
a clean, clever and humane
tomorrow that is both ethically
and financially stable.
=
DELIVERING
VALUE FOR THE
LONG TERM
Delivering value for our clients goes beyond
the dollars. We work to deliver sustainable
and long-term returns, provide insurance
protection, enable adequate savings for
our retirees and do good for the planet
through meeting social and environmental
performance standards.
TARGETS
Our financial and
sustainability targets guide
our day-to-day actions and
operations and motivate us
to stay focused.
$
$
EXTERNAL EN VIRONMENT
THE MA GI C
TARGETS
OUR OUTCOMES
• High conviction
ethical screening
• Divestment if
they don’t
• Professional
portfolio
management
• Active ownership
of companies to
improve their
behaviour
• Fully featured
products for our
clients
• Exceptional service
• Net zero emissions for
• Our clients – competitive
portfolio by 2050
• $5 billion in FUM by 2020
• Gender balance in our
candidate shortlists
when recruiting
• Industry leading
Net Promoter Score
returns, fees, products and
service
• Our planet – strong growth,
greater positive impact
• Our people – inspiring
workplace, purpose
alignment, share in
company’s performance
• Our shareholders –
exceptional shareholder
returns
Annual and Sustainability Report 2016
Celebrating 30 years
13
This year / Key industry trends
Key industry
trends
Over the past year, the following four industry
trends have had a significant influence on our
business and performance. In light of these
trends, we've identified the things that matter
most to our business. Our response to these
trends and material topics is detailed on pages
18-61 of this report.
14
Annual and Sustainability Report 2016Celebrating 30 years 1 Rising social
consciousness
3 Increasing client
expectations and digitisation
Clients expect financial services to deliver
as good a consumer experience as any
other industry. We recognise that digital
technology influences everything we do
at Australian Ethical. For more details, see
‘Delivering a great experience’, page 52.
Material topics:
• Product innovation and differentiation
4 Climate change
The reality of climate change is more
evident than ever before. Australia’s
biggest companies are facing
greater shareholder scrutiny of their
environmental impact and strategies. For
more information about our response to
climate change, see ‘Transitioning towards
a lower carbon economy’, page 40.
Material topics:
• Decarbonisation of portfolios
• Divestment from gas
• Advocacy and shareholder activism
Forty percent of consumers consider
themselves ethical, while money
flowing into responsible funds globally
has doubled in the past two years. For
more details about our response to this
trend, see ‘Investing in a sustainable
future’, page 24.
Material topics:
• Ethical approach to investment
• Consistent investment performance
• Ethical product offerings
2 Market volatility and
competitive pressures
Market volatility seems like it’s here
to stay – at least in the short term.
The uncertainty caused by Brexit and
the slowdown in growth in emerging
economies, particularly China, are only
some of the potential causes. For more
details on how we are responding to this
trend, see ‘Delivering returns in a volatile
market’, page 18.
Material topics:
• Competitive pressures on
financial services
• Fee pressures
• Increasing shareholder value
• Regulatory reform
• Ethical market leadership
s
m
e
t
s
y
S
d
n
W
s
a
t
s
e
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i
:
t
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d
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Annual and Sustainability Report 2016Celebrating 30 years
This year / What matters most
What matters most
We applied the principles of the Global Reporting Initiative
(GRI), a global benchmark for sustainability reporting, to define
what matters most to our company.
We engaged Ernst & Young to support the
implementation of the GRI’s four-step process
of assessing material topics for inclusion in this
report. This involved:
identification of material topics and their
boundaries which might have an impact on us as
a business and influence our stakeholders;
prioritisation of material topics using
stakeholder engagement and assessments,
such as a review of peers, media articles,
news stories, policies, industry trends and
our corporate strategy;
validation of material topics through an internal
workshop with our senior management team6;
review and a final sign-off by our Non-Executive
Directors and Managing Director.
Engaging with stakeholders
We identify our key stakeholders as people who
our business has a direct or indirect impact
on, and those who have an impact on us. This
includes our clients, shareholders, employees,
employers, financial advisers and the wider
community.
Talking to our stakeholders strengthens our
relationship with them and also helps us obtain
their views on material topics. Material topics
are those that attract significant stakeholder
interest and have the potential to impact our
economic, environmental or social performance.
This helps inform the content of our annual and
sustainability report. Throughout this report, you
will see examples of how we have engaged with
stakeholders.
This year’s material topics have been assessed
against a background of the key trends affecting
the investment and superannuation sector
(shown on page 15). Throughout this report, we
have attempted to explain how these industry
trends affect our business and how we as a
company are working to influence positive change
in society.
6 Senior Management Team refers to Australian Ethical Investment Limited’s Key Management Personnel (KMP)
16
Annual and Sustainability Report 2016Celebrating 30 years Reporting what
matters
Ethical approach to investment
Ethical market
leadership
Ethical product offerings
Fee pressures
Consistent investment
performance
Divestment from gas
(gas and fossil fuels)
Decarbonisation
of portfolios
Competitive pressures on
financial services
Increasing shareholder value
Retirement adequacy for members
Advocacy and
shareholder
activism
Product innovation and differentiation
Diversity and equal opportunity
Customer queries and feedback
Regulatory reform
Industry engagement
Employees
Legislative
compliance
Increasing member
demand for ethical
investment
Reputation and branding
Community grants
Ethical and financial advice
Governance and risk
Environmental impacts
of operations
Tax transparency
Proxy
voting
Use of
digital
platforms
5
4
3
2
1
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G
I
H
D
E
M
W
O
L
l
s
r
e
d
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k
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t
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r
u
o
o
t
e
c
n
a
t
r
o
p
m
I
0
1
2
LOW
3
MED
4
5
HIGH
Influence on our success
17
Annual and Sustainability Report 2016Celebrating 30 years
This year / Delivering returns in a volatile market
Delivering
returns in
In recent years, Australians have grown accustomed
to the seesawing share market.
Sharp falls in share prices, high
private and public sector debt
levels, monetary policy settings,
increased government intervention
in the economy, tax transparency
measures and falling resource prices
have all played a part in creating
market volatility.
We understand the concern this causes
our clients and remain committed to
delivering competitive returns as the
volatile market plays out.
Our managed funds were some of the
best performing during the Global
Financial Crisis. Our Australian Shares
Fund has returned an average of 10%
per annum over the last 20 years.
Over the 12 months ending 30 June
2016, the Australian Shares Fund
again significantly outperformed the
S&P/ASX 200 Accumulation index
returning 12.7% vs 0.6%. For periods
greater than one year not only has
the Fund consistently outperformed
but has done so with lower volatility.
l
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18
a volatile marketAnnual and Sustainability Report 2016Celebrating 30 years
Delivering
returns in
Financial returns
Our success in recent years has been
underpinned by ethical leadership, strong
investment performance and a clear retail
distribution strategy.
In May 2016, we achieved two significant
milestones. We passed $1.5 billion in funds
under management (FUM) for the Australian
Ethical Group, and $1 billion in FUM in our
superannuation fund. Since reaching these
milestones, our FUM has continued to grow,
hitting $1.56 billion at 30 June 2016.
Not only that, this year our full-year profit
increased by 53% to $3.0 million. This increase is
due to strong growth in our FUM, as a result of
both strong flows and general market conditions.
Some other results that reflect our growth and
performance are:
• superannuation membership at 26,342 (up
24% since last year);
• top quartile investment performance for most
of our funds; the Australian Shares Fund is the
top ranked fund in its category over 10 years7;
• over $390,000 provisioned for
community grants
Net profit
Net profit after tax for the financial year to
30 June 2016 was $3.0 million compared to
$2.0 million in the previous year.
The increase was the result of increase in FUM
from strong flows and investment performance.
The additional revenue from the FUM increase
more than offset the fee reductions made in
July 2015.
Our funds
under
management
$1.5bn
18 months (June 2016)
$1bn
8 years (Nov 2014)
$500m
20 years (Nov 2006)
7 Mercer Investment Performance Survey of Retail Equity All Caps
June 2016.
19
Annual and Sustainability Report 2016Celebrating 30 years This year / Delivering returns in a volatile market
Revenues
Revenue increased by 9% to $23.0 million, up
from $21.2 million recorded for the previous year.
Net inflows increased by 78% to $319 million for
the year, compared to last year’s net inflows of
$179 million.
FUM for the full year increased 33% to
$1.6 billion, up from $1.2 billion in the
previous corresponding period. This growth in
FUM has been driven by a combination of new
inflows and asset management performance.
The impact of superannuation fee reductions
at the end of the previous financial year was
offset by increases in net flows and growth of
FUM this year. An additional fee reduction of
0.22%, reducing superannuation administration
asset based fees to 0.41%, occurred on 30 June
20168. We continue our medium-term strategy to
progressively reduce fees to a more competitive
level, taking into account business needs and
shareholder returns.
Fee reductions are one of a number of strategic
initiatives to increase our competitiveness. The
following table illustrates the potential impact of
the most recent fee reduction. Revenue margins
have been calculated as annualised FUM-based
revenue divided by average FUM.
Products
Managed funds
Superannuation
Overall
Revenue margin
based on 2015
fees (%)
Revenue margin
based on 2016
fees (%)
Adjusted margin
2017
(%)
2.09
1.74
1.86
1.71
1.40
1.50
–
1.24
–
Our revenue margin has reduced over time due to planned fee reductions and increased flows into
wholesale priced products. However, we have continued to substantially increase our FUM during the
same time as highlighted in the graph below.
FUM ($M)
Total FUM
Total average revenue margin (ARM)
ARM (%)
$2,000
$1,500
$1,000
$500
$0
2.50
2.00
1.50
1.00
0.50
0.00
2012
2013
2014
2015
2016
Average revenue margin is FUM-based revenue as a proportion of average FUM over the year. FUM-based revenue is one component of total
revenue. Other revenue includes member and withdrawal fees, interest and rent. Details can be found in Note 6 of the Financial Statements of the
2016 Annual Report.
8 Fee reduction included a reduction in the reserve allocation of 0.07%.
20
Annual and Sustainability Report 2016Celebrating 30 years Final dividend
A fully franked final dividend of $1.80 per share
was declared for the full year ended 30 June
2016, bringing the total dividend for the year
to $3.00 per share. The record date for the
dividend is 9 September 2016, with payment on
23 September 2016.
Expenses
Total expenses increased by $0.8 million (4.3%).
Expenses increased due to the following:
• Marketing: an increase in marketing activity
drove the increase in flows with costs increasing
by $0.6 million over the previous year.
• External services: costs to outsource providers
increased by $0.1 million as a result of
increased audit fees and platform fees. Fund-
related costs increased by $0.4 million due to
increases in FUM and client numbers.
•
Income tax expense: the effective tax rate was
36%, a decrease on the previous year’s rate
of 45%. Our effective tax rate is impacted
by items that are not deductible for tax
purposes, which are detailed in Note 4b of the
Consolidated Financial Report.
• Property: due to further weakening in the
Canberra commercial property market our
property in Canberra reduced in value by a
further $0.18m.
• Provision for remediation: A provision of
$0.9 million has been made in relation to
remediating superannuation members for unit
pricing errors with investigations continuing.
The Group is committed to ensuring that
members are not materially disadvantaged
as a result of these errors and rectification is
expected to be finalised in FY17.
The above expense increases were offset by:
• Employee benefits expense: costs have
decreased by $0.8 million or 9.2% over the
previous year due to the prior year containing
a number of transition impacts. There is one
series of share performance rights remaining
in respect of the employee incentive scheme
(these share performance rights have been
replaced by a different scheme referred to as
deferred shares). Due to the increase in share
price over the year expenses related to these
rights were $0.9m. Salary costs increased by
$0.1 million.
Financial position
We retain a strong balance sheet
position with no debt. Net assets
increased by $1.7 million over the
year to $12.8 million. The majority
of assets are held in cash to meet
our Australian Financial Services
Licence (AFSL) requirements. The
only significant non-cash asset is a
property held in Canberra, which
is discussed in detail in Note 7 of
the Consolidated Financial Report.
The assets held in excess of the
licence requirements provide a
buffer in the event of a sustained
market downturn.
Over the year we achieved
$319 million in net flows, a
78% increase on the flows for
the previous year of $179 million.
An increase in online marketing
contributed to the improved flows,
which were supported by strong
investment performance.
Annual and Sustainability Report 2016
21
Celebrating 30 years This year / Delivering returns in a volatile market
Our products
As at 30 June 2016, we have $508 million in FUM in our managed funds, $1,035 million in FUM in our
superannuation fund and pension fund.
On 1 July 2015, we launched a new managed fund, called the Emerging Companies Fund. The objective
of the fund is to provide long-term growth by investing in small capitalisation companies that meet the
criteria in our Ethical Charter. This includes companies working in information technology, healthcare,
communications, education, sustainable yield and others.
Super
For individuals
and employers
Pensions
For retirees and
people transitioning
to retirement
Managed
Funds
For individuals, self-
managed super funds
and organisations
Super investment options
Defensive
Conservative
Balanced
Growth
Advocacy
Smaller
International
Pension
Defensive
Conservative
Balanced
Growth
Smaller
International
Total
$’m
40.5
28.4
423.5
158.0
50.6
236.5
25.8
4.2
10.2
33.4
6.0
15.9
2.3
Managed funds
Balanced
Australian retail
Australian wholesale
Diversified retail
Diversified wholesale
International retail
International wholesale
Emerging retail
Emerging wholesale
Cash retail
Cash wholesale
Fixed retail
Fixed wholesale
Property
1,035.2
Advocacy retail
Advocacy wholesale
Total
$’m
107.1
119.9
93.4
39.7
58.2
2.5
23.2
1.5
9.5
1.6
6.1
0.5
14.2
10.8
2.5
17.5
508.0
22
Annual and Sustainability Report 2016Celebrating 30 years Super regulatory reform
Changes to superannuation were also announced
in the FY17 Budget. The majority of these changes
are proposals and will only apply if changes to the
law are passed.
In December 2014, the Financial System Inquiry
(FSI) released the Murray Report. To give you an
idea of the influence of the FSI, previous reports
in 1981 and 1997 led to the floating of the
Australian dollar and the restructure of financial
regulator ASIC.
Among other recommendations, the Murray
Report called for the nation’s $1.8 trillion
superannuation system to deliver better
retirement outcomes, and for the powers of the
regulators to be increased. At Australian Ethical,
we support these initiatives to improve retirement
outcomes.
Operating in a
competitive market
As social consciousness grows and the demand
for ethical investing expands, competition is set
to increase.
In the past three years, we’ve seen niche
superannuation funds target consumers who
have concerns around particular issues. At
the same time, large superannuation funds
are seeking to appeal to ethical consumers
by launching sustainable options within their
mainstream offering.
At the most basic level, this growth means
that consumers want their money to benefit
the planet and themselves and as a result are
demanding more from professional money
managers and superannuation funds.
We have benefited immensely from this increased
demand. By leveraging digital platforms like
Facebook and Google, we’ve met potential clients
online and grown the interest and awareness of
Australian Ethical Investment immensely.
Having honed our position in the market for
30 years, we welcome the current competition
as it increases awareness of ethical investing
and challenges us to keep our edge. We’ve been
guided by our Ethical Charter since 1986, and
compared to niche funds our prices are lower,
and our products are more fully featured.
We are, and aim to remain, the voice of ethical
investment in Australia.
23
Annual and Sustainability Report 2016Celebrating 30 years sustainable
future
Today’s consumers are more likely than ever to be socially
conscious9, and to choose to engage with companies that
reflect their values.
Consumer demand for ethical funds
has helped double the size of the
industry over the last two years to
$51.5 billion.10.
We don’t just pay lip service to
investing in a sustainable future –
it’s at the heart of everything we do.
Guided by our Ethical Charter, we
seek out investments that benefit
people, animals and the planet and
also deliver competitive returns.
We don’t just believe this is the best
way to support investors and the
planet, we’ve proven it: over the last
decade, our ethical investing has
consistently outperformed traditional
investing approaches – all while
directing capital towards planet,
people and animal-friendly industries.
y
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9 The 2014 Nielsen Global Survey on Corporate Social Responsibility, http://www.nielsen.com/us/en/press-room/2014/global-consumers-are-
willing-to-put-their-money-where-their-heart-is.html
10 Figures according to the Responsible Investment Benchmark Report 2016 by Responsible Investment Association Australia (RIAA). http://
responsibleinvestment.org/resources/benchmark-report/aus-2016/
24
Investing in aAnnual and Sustainability Report 2016Celebrating 30 years
Busting the
investment myth
Q&A with David Macri,
Chief Investment Officer
What is the number one concern you
hear from potential clients about
investing with Australian Ethical?
The biggest concern is whether we can generate
the same level of returns as mainstream funds.
That’s an easy one for us to answer, because
we have been consistently outperforming the
mainstream market for years.
How does your team deliver
investment returns as well as
adhering to ethical standards?
Once an investment passes our ethical filters, we
try to maximise returns and generate the best
performance we can, just like every other fund
manager. I would argue that everyone filters the
universe in some way, and then they apply their
processes to try to generate the best outcome.
We do the same thing, except the environmental
and social issues are considered at the start of
the process, not at the end.
What are the benefits of investing
ethically?
One of the biggest benefits – and this is really a
driving force for us – is that if everyone invested
ethically, we would be living in a much better
world than we currently live in. Capital would be
directed towards good things, such as cleaner
energy and medical research, and investment
decisions would not be based purely on
self-interest.
The other major benefit of investing ethically,
which people often don’t consider, is that we tend
to have a higher level of research than traditional
fund managers and super funds. At Australian
Ethical, we look at environmental and social issues
in great detail, well before mainstream managers
started applying ESG research to their process.
This level of detail tends to give us an advantage;
we become aware of risks that others perhaps
are not aware of, helping inform our investment
decision.
How do you answer people who say
that choosing to invest ethically
comes at a risk to their retirement
savings?
I would tell them that is a myth. We have
demonstrated that you can achieve competitive
returns from ethical investments. We have proven
that you do not have to compromise either on
your values or on investment performance in
order to save for your retirement future. We have
shown that we can consistently outperform other
funds and believe we will continue to do so, as
long as we continue to follow our well established
process, which I have every intention of ensuring
we do!
25
Annual and Sustainability Report 2016Celebrating 30 years This year / Investing in a sustainable future
What is Australian Ethical's
investment outlook going forward?
We expect global markets to remain volatile until
a sustained economic recovery is more evident.
In the near term prospects of recovery are being
held back by sluggishness in Europe and the
slowdown in growth in emerging economies
particularly China.
In Australia we have subdued growth
expectations. Employment growth has been
slowing and signs of underemployment are
visible, with much of 2016’s jobs growth coming
from part-time not full-time roles. Wages growth
has been slow, and in turn inflation has come
in at a level well below the Reserve Bank’s
target band.
Internationally, while the initial impacts on
markets of the Brexit vote have subsided, the
impact on global growth remains uncertain.
In an attempt to prop up investor sentiment
the European Central Bank expanded its
‘Quantitative Easing’ program and now includes
corporate bonds.
In the US, recent payroll data has seen a bounce
back to trend and the market is again pricing
some possibility of the Federal Reserve resuming
its tightening cycle. The biggest inhibitor for
the Fed is that its tightening is out of step with
otherwise accommodative global monetary policy
and any moves to “go it alone” will see US dollar
strength that could damage the recovery process.
How do you answer people who say
that investing ethically is unlikely to
change the world, because there will
always be people willing to invest
in things like tobacco, weapons and
fossil fuels?
There are still many people investing in things
like weapons and tobacco, but ethical investing
is gaining traction around the world, and the
more that funds are invested this way, the bigger
the impact. If a big proportion of the investment
market stopped investing in coal, the cost of
capital would go up, it would become difficult for
coal companies to do business and the industry
would find it tough. Divestment also sends a
message that it’s not just civil society groups who
take action against the social and environmental
damage of unsustainable products. Serious
investment managers are also deeply concerned
by this harm and the threat it poses to the
financial security of their clients. The investment
market is incredibly influential. We can direct the
world to a better place and to navigate some
of the big risks like climate change. I think it is
negligent of us not to use that influence in a
positive way.
What will be some of the biggest
challenges facing the ethical
investment market moving forward?
There are a large number of descriptions being
assigned to funds these days – from ESG to
sustainable, responsible and ethical. While there
are differences between each approach, there
is no conforming minimum standard. I think
Responsible Investment Association Australasia
(RIAA) have done a lot of good work trying to
educate and certify products which help people
make informed decisions. We urge investors
who consider an ethical or responsible approach
to look through the marketing material and ask
whether the product does in fact meet their
standard. We are the first to admit that we may
not be suitable for everybody, but we at least
pride ourselves on being fully transparent in how
we invest.
26
Annual and Sustainability Report 2016Celebrating 30 years l
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27
Fish as a source of protein in Australia (and globally) is growing strongly. Sustainable aquaculture is essential to meet growing demand for fish as a source of protein as the world’s oceans are over fished.Ray Gin, Australian Ethical Equities AnalystAnnual and Sustainability Report 2016Celebrating 30 years
This year / Investing in a sustainable future
What’s happening
in Australia?
That’s almost
half of all assets
professionally managed
in Australia
That
includes
us!
Did you know we are:
* One of the 9
largest super
funds in Australia
holding core
responsible
investments
* 6th largest
investment
manager of
core responsible
investments in
Australia
* $1.56 billion
funds under
management at
30 June 2016
Largest asset managers of core responsible investments ($millions)
Generation Investment Management
UCA Funds Management
Hunter Hall Investment Management
Uniting Financial Services
Australian Ethical Investments
Perpetual Investments
BT Investment Management
New Forests
Investa Property Group
AMP Capital
961
965
971
990
1,012
1,064
1,061
1,039
1,038
1,366
1,701
1,860
1,861
2,080
2,493
2014
2015
2,909
2,905
3,257
4,232
4,237
Figures according to the Responsible Investment Benchmark Report 2016 Australia Report (pages 4, 9, 7, 11) by Responsible Investment
Association Australia (RIAA). http://responsibleinvestment.org/wp-content/uploads/2016/07/RIA413_Benchmark_Report_A4_OZ_v4.pdf
The Responsible Investment Benchmark Report 2015, responsibleinvestment.org.
28
$ 633.2bn is the total responsible investment industry accounted for at 31 Dec 2015 62% Growth in core responsible investing bringing it to $51.5bnAnnual and Sustainability Report 2016Celebrating 30 years The Australian Ethical
approach to investing
Our investment process is guided by our Ethical Charter,
which has been in place since 1986. Follow the steps in the
diagram below to see for yourself how every investment goes
from being an idea to part of our portfolio.
INVESTMENT
IDEA
CONTINUAL
MONITORING
OF INVESTMENT
Portfolios and
investments are
regularly reviewed by
the Chief Investment
Officer, Ethics Research
Team and Portfolio
Managers to ensure
the following:
• ongoing compliance
with our Ethical
Charter
• investment remains
suitable for portfolio
inclusion
APPROVAL
OF INVESTMENT OR
REJECTION OF
INVESTMENT
Chief Investment Officer
approves or rejects the
investment. If approved
a limit is established for
the investment.
ETHICS
ASSESSMENT
AND ANALYSIS
FOR PORTFOLIO
INCLUSION
The following tools are
used to ethically assess
investments:
• Our Ethical Charter
– investments are
screened against
both the positive and
negative principles in
the charter
• Industry-based
and/or issue-based
frameworks –
developed by our
Ethical Advisory
Group, these help
us to interpret our
charter and make
investment decisions.
Celebrating 30 years
29
Annual and Sustainability Report 2016 This year / Investing in a sustainable future
Investment performance
In FY16, once again our performance across our funds and
superannuation options has been excellent with many funds
delivering above median performance over the year11.
Managed funds return to 30 June 2016
1 year
3 years
5 years
7 years
10 years
Return Quartile Return Quartile Return Quartile Return Quartile Return Quartile
2.4%
2
3.2%
2
3.8%
1
4.0%
2
Fund
Cash
Fixed Interest
Fixed Interest Wholesale
Balanced
Diversified Shares
Diversified Shares – Wholesale
Advocacy
Advocacy – Wholesale
1.5%
5.5%
6.4%
5.6%
6.9%
8.3%
6.8%
8.2%
Australian Shares
12.7%
Australian Shares – Wholesale
14.6%
International Shares
0.5%
International Shares – Wholesale
1.4%
Emerging Companies
16.4%
Emerging Companies – Wholesale 17.2%
4
3
3
1
1
1
1
1
1
1
1
5.2% n/a
n/a
n/a
n/a
n/a
1
1
1
1
1
1
1
2
9.1%
13.0%
14.5%
13.3%
14.8%
15.4%
17.2%
12.7%
n/a
n/a
n/a
n/a
n/a
1
1
8.2%
11.7%
n/a
n/a
11.3%
1
n/a
n/a
n/a
n/a
7.0%
8.9%
n/a
n/a
n/a
n/a
n/a
4
3
n/a
n/a
n/a
n/a
n/a
4.2%
4.4%
n/a
n/a
n/a
n/a
n/a
2
2
n/a
n/a
n/a
12.5%
1
11.1%
1
9.3%
1
n/a
n/a
n/a
n/a
9.2%
4
5.8%
4
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Property
1.5%
(0.9)%
(0.4)%
1.8%
Super accumulation return to 30 June 2016
Fund
Defensive
Conservative
Balanced
Growth
Smaller Companies
International Equities
(5.7)%
Advocacy
2.4%
1 year
3 years
5 years
7 years
10 years
Return Quartile Return Quartile Return Quartile Return Quartile Return Quartile
0.9%
3.5%
2.6%
0.8%
8.4%
3
1
1
2
1
3
1
1.6%
4.0%
7.1%
7.5%
12.9%
7.7%
10.6%
2
3
1
1
1
3
1
2.3%
4.1%
7.1%
7.8%
11.9%
6.9%
10.0%
2
4
2
1
1
4
1
2.8%
2
3.1%
2
n/a
n/a
n/a
n/a
5.9%
6.0%
10.3%
4.2%
4
4
1
4
n/a
n/a
3.7%
2.8%
8.7%
n/a
n/a
2
4
1
n/a
n/a
11 The rate of return has been calculated by Australian Ethical based on the periods to 30 June 2016. The calculation of the quartile is based on
Mercer’s Peer Group category as at 30 June 2016.
30
Annual and Sustainability Report 2016Celebrating 30 years
Super pension return to 30 June 2016
Fund
Return Quartile
Return Quartile
Return Quartile
Return Quartile
Return Quartile
1 year
3 years
5 years
7 years
10 years
Defensive
Conservative
Balanced
Growth
1.1%
3.3%
3.4%
0.1%
Smaller Companies
6.6%
International Equities
(6.3)%
4
1
1
2
1
3
1.6%
4.1%
7.4%
8.1%
12.7%
6.7%
4
4
2
1
1
4
2.6%
4.4%
7.8%
9.0%
13.3%
6.2%
4
4
3
1
1
4
3.3%
3
3.7%
3
n/a
n/a
n/a
n/a
6.7%
7.2%
11.7%
3.6%
4
4
1
4
4.0%
3.3%
9.5%
3
4
1
n/a
n/a
1 – top 1%-25% of peer group, 2 – in range of 25%-50% of peer group, 3 – in range of 50%-75% of peer group,
4 – bottom 75%-100% of peer group
Portfolio breakdown
Investments by sector*
Unlisted Equities 0.5%
Utilities 11.6%
Telecommunication
Services 4.7%
Property Trusts 6.1%
Materials 0.9%
Information
Technology 17.2%
* Sectors are defined by GICS classifications
Investments by region
North America
Canada
United States
9.8%
0.9%
8.9%
Consumer
Discretionary 7.9%
Consumer Staples 1.4%
Financial-X-
Property Trusts 19.4%
Health Care 17.2%
Industrials 13.1%
Energy 0.0%
Pacific Rim
Australia
Hong Kong
Japan
New Zealand
Singapore
83.9%
73.2%
0.1%
3.0%
7.6%
0.0%
Western
Europe
Austria
Belgium
Denmark
France
Germany
6.3%
0.4%
0.2%
0.3%
1.0%
1.6%
31
Annual and Sustainability Report 2016Celebrating 30 years
This year / Investing in a sustainable future
Investing for change
We have an impact by our choices of who we
will and won’t invest in. We are also a positive
influence by actively engaging with companies to
support them to comply with our Charter.
We work to:
• enquire with a company or other third parties
to test alignment with the Ethical Charter
following identification of a significant event.
• engage and explore identified areas of non-
alignment or potential non-alignment with the
Charter. We may also engage on topics which
may increase alignment with positive elements
of the Charter.
• advocate privately, through collaborative
influence or public advocacy for specific
change to address identified areas of
nonalignment with the Charter.
In FY16, we worked on a total of 76 distinct
engagements on social and environmental issues.
In a nutshell, here’s what we advocated for
last year:
• Respect for human rights and employees
• Animal welfare
• Better government policy
• Better understanding of fiduciary
responsibilities of Directors, trustees
and investors
• Responsible lending
• Climate action
• Purpose driven business
•
Improved banking sector conduct
• Sustainable agriculture and less use of
antibiotics
• Responsible corporate lobbying
• More recycling
• Sustainable supply chains
Human rights and
employee conditions
Last year human rights were in the spotlight
in Australia. We followed the scrutiny of
Broadspectrum (formerly Transfield) and its
operation of offshore detention centres on
Nauru and Manus Island. We empathised with
the hindrance of human rights on convenience
store workers. We did our part at Australian
Ethical to advocate for improved living and
working conditions.
Against offshore detention
We do not invest in companies operating offshore
or onshore detention centres and we have never
invested in Broadspectrum. A fundamental
harm we avoid under our Ethical Charter is the
inhibition of human rights.
This is reflected in our support of No Business
in Abuse (NBIA), a grass-roots campaign which
aims to raise awareness and take action to stop
companies like Broadspectrum profiting from
the abuse of human rights. During the year, we
engaged with NBIA regarding the investment
implications of human rights issues. We donated
$5,000 to support their research and awareness
raising activities with relevant companies and
other investors.
While some mainstream investors have argued
that Broadspectrum should not be targeted for
implementing government policy, we believe that
companies have a responsibility to society and
therefore play a major role in supporting human
rights. Since the scrutiny and hard work of many,
the new owner of Broadspectrum, Ferrovial, has
announced that it will discontinue the business
of offshore detention centres – a business which
has been the company’s biggest profit earner.
We hope this will drive recognition that Australia
needs to treat its asylum seekers better.
32
Annual and Sustainability Report 2016Celebrating 30 years Improving working conditions
Did you know we’re part of an international group
of investors working to improve the reporting
of working conditions and other human rights
impacts of business around the world? The
group advocates for a new reporting framework
for business compliance with the UN Guiding
Principles on Business and Human Rights. The
framework is a guide for companies to identify
and explore the human rights issues in their
operations and supply chains and to develop
policies, systems and practices that safeguard
human rights.
This year we used the framework in a number
of engagements with Australian and global
companies to investigate concerns about
restrictions on employee union participation,
compulsory overtime and handling of asbestos-
related claims. In most cases we saw positive
improvements in company practices.
Supporting animal welfare
Australia also has a long way to go in protecting
and supporting animal rights. This year,
we became the first Australian fund to join
international investors to promote ethical
agriculture using the Business Benchmark on
Farm Animal Welfare. The Benchmark ranks
global food producers and supermarkets
(including Woolworths and Coles) according to
their management and reporting of impacts
on the wellbeing of farm animals. As you can
probably imagine there is much room for
improvement by the Australian supermarkets.
We’ve also joined the Farm Animal Investment
Risk & Return Initiative, working to harness
investor influence to improve animal treatment
in food production. Through this, we recently
supported a campaign targeting the excessive
use of antibiotics in livestock production.
Indiscriminate antibiotic use is concerning for
many reasons. It facilitates overcrowding of farm
animals; there’s an impact on animal wellbeing
when used to promote growth rates; and the
encouragement of antibiotic-resistant bacteria
poses great risk to the health of both humans
and animals.
Better government
Better government is always an interest of ours,
and this year we have been advocating for
improving policy around:
• Corporate reporting and reduction of
emissions – in our submission to the Senate
inquiry into Carbon Risk Disclosure in March
2016, we argued that increased corporate
monitoring and reporting of emissions is
fundamental to ensuring companies set
accountable emissions reduction targets. We
proposed specific disclosure requirements
and also contributed to pro-transparency
submissions made by the Investor Group on
Climate Change and Financial Services Council.
Refer to ‘Corporate climate lobbying’ on page
47 for more information.
• Unconventional gas mining – in March
2016, we called for a moratorium on
unconventional gas mining in our submission
to the Senate inquiry into regulation of that
sector. We don’t invest in the sector because
of the risk of water contamination and fugitive
methane emissions, alongside other adverse
community and environmental impacts of the
sector. Read our full submission here:
aph.gov.au/Parliamentary_Business/
Committees/Senate/Gasmining/Gasmining/
Submissions.
33
Annual and Sustainability Report 2016Celebrating 30 years This year / Investing in a sustainable future
Banking culture in Australia
You’ve probably heard or seen or experienced
poor conduct in the banking sector. With
excessive fees, inappropriate financial advice,
rejection of insurance claims and manipulation of
interest rates there is much media debate about
the state of bank ‘culture’. Additionally, banks also
need to be accountable for the impacts that their
lending decisions can have.
We like to think of ourselves as helping transform
banking culture and lending decisions from within
the financial services sector. We argue that banks
need to say more about how they are creating
organisations of integrity and be transparent
about the impacts of their lending activities (See
the “Big four banks and climate” on page 47 for
more information on this).
We're not prescribing a particular corporate
culture, we're simply saying that companies
need to put customers back at the centre
of their decision making. With greater
consumer awareness, companies, particularly
banks, will need to get their acts together...
culturally speaking.
• Recycling – in February 2016, we supported
the introduction of a container deposit scheme
in NSW to raise recycling rates. We’re happy to
see that the NSW Government has announced
plans for such a scheme (start saving those
bottles!). Full details are on our website.
• Businesses impact on climate change –
in April 2016 we presented at an Australian
Labour Party event hosted by the Financial
Services Council called The good business of
managing climate change. Shadow treasurer
Chris Bowen also presented.
• Lobbying at Parliament House – Our
CEO joined a group of investors meeting
with members of parliament in Canberra to
build support for the opportunities in impact
investing.
Fiduciary duty
For many years companies and investment
managers have claimed that they can’t decrease
their impact on global warming because of their
legal duties. This is often offered as a reason for
inaction but it misunderstands fiduciary legal
responsibilities. (Note: we don’t buy it!)
This year we continued to advocate publicly
and privately for change to these entrenched
attitudes. Our Managing Director recently
challenged the status quo in industry magazine
Superfunds, arguing that it’s not the law that
constrains action, but inertia and a lack of
will. Our Head of Ethics Research discussed
the importance of business purpose at a two-
day conference in Sydney. As part of a B Corp
Working Group, we are exploring how changes in
legislation and regulation can help.
The B Corp movement represents an emerging
group of companies that are using the power of
business to create a positive impact on the world.
By becoming a certified B Corp and using other B
Corps for service delivery, we aim to support and
grow the better business community.
34
Annual and Sustainability Report 2016Celebrating 30 years “You can’t help
but want to
protect this jungle
and its wildlife
after seeing how
breathtakingly
beautiful it is.”
Ella McKinley, Ethics Analyst
Annual and Sustainability Report 2016
Celebrating 30 years
35
Our commitment to the
community
While ethical investing is our bread and butter, we
know there are a lot of projects and organisations
doing good that aren’t traded on investment
exchanges. These projects have a vital role to play
in achieving a happy, healthy world, so each year
we donate 10% of the prior year’s pre-tax profits
to organisations making a positive difference.
Since our community grants program began
in 2000, we have donated over $2 million to
charitable organisations. We received a total of
739 applications for grants paid this year. These
applications were reviewed internally for their
ability to deliver tangible outcomes that benefit
the planet, people or animals. All our major
stakeholder groups have a say in who receives
a grant, employees and shareholders voting
on the winner from a shortlist. For the grants
to be paid in FY17, clients are also being given
the opportunity to participate in this process.
In FY16, we distributed $230,000 of community
grants to 18 organisations through the Australian
Ethical Foundation and in FY17 $220,000 will be
distributed. The Foundation was granted charity
registration with the Australian Charities and Not-
for-profits Commission on 12 August 2015.
Community grant recipients
(Paid in FY16 from FY15 profits)
$20,000
grant recipients
Environmental
Defenders Office Inc (NT)
Improving access to
environmental justice in the
Northern Territory
edont.org.au
Angel Place
Supporting homeless
families through crisis
accommodation in hotels
angelplaceproject.com
Animalia Wildlife Shelter
Helping sick, injured and
orphaned wildlife in Victoria
animaliawildlife.org.au
Animal Aid Abroad
Improving the welfare
of working donkeys in
Afghanistan
animalaidabroad.org
Green Connect
Providing jobs for young
people and refugees and
improving sustainability in
the Illawarra, NSW
green-connect.com.au
36
Annual and Sustainability Report 2016Celebrating 30 years $15,000
grant recipients
East Gippsland
Rainforest Conservation
Management Network
Protecting rainforests
and providing Indigenous
employment opportunities
in Victoria
egrainforest.org.au
Abundant Water
Providing clean water filters
and education programs to
improve the lives of women
in Laos
abundantwater.org
$10,000
grant recipients
$5,000
grant recipients
The Incredable Tip Shop
Providing jobs for
disadvantaged job seekers in
Mackay, Queensland
facebook.com/
TheIncredableTipShopMackay
A Girl & Her World
Supporting girls to stay in
school and mothers to achieve
financial independence in Fiji
agirlandherworld.org
Australian Red Cross with the
Royal Flying Doctor Service
Providing healthy living programs for
remote Aboriginal communities
redcross.org.au
Alternative Technology
Association
Providing repairs for solar-power
systems in villages in East Timor
ata.org.au/what-we-do/ipg
Assisi Aid Projects
Providing programs to help widowed
women in rural India achieve financial
independence
assisi.org.au
Indigo Foundation
Providing job opportunities and food
for women in Indonesia through
community gardens
indigofoundation.org
Wildlife Asia
Protecting the critically endangered
Sumatran rhino
wildlifeasia.org.au/help-us/operation-Aceh
With Compassion & Soul
Caring for at-risk wildlife, including sun
bears and orangutans, in Borneo
withcompassion.com.au
The Orangutan Project
Protecting orangutans against
poachers and environmental threats
orangutan.org.au
Free to Shine
Providing school scholarships for girls
at risk of sex-trafficking in Cambodia
freetoshine.org
Sleepy Burrows
Helping sick, injured and orphaned
wombats in NSW
sleepyburrows.com.au
37
Annual and Sustainability Report 2016Celebrating 30 years This year / Our commitment to the community
Giving back our time
We know it’s important to donate time – not just
money – to charitable organisations. That’s why
we encourage our employees to volunteer with
the organisations we support, so they can see
first-hand the good work these organisations do.
In FY16, each Australian Ethical employee was
given two full working days to volunteer. This
meant, as a team, we donated a total of 315
volunteering hours between our 31 employees.
Employees can also organise their own
volunteering activities as part of the two-day
allocation.
Green Connect: creating jobs and
reducing food waste
In May, eight Australian Ethical employees
volunteered at Green Connect, assisting with farm
activities such as preparing garden beds, planting
seeds and picking fruit.
Green Connect is a social enterprise that employs
resettled refugees and young people to work
on its organic farms and assist in sustainable
waste management. The organisation received
one of our $20,000 community grants last year.
The grant was used to support the expansion
of a chemical-free farm which rests on formerly
neglected school land. Green Connect sells
vegetables from the farm direct to the local
community.
“With the money from
Australian Ethical
we expanded our
chemical-free farm.”
Jacqui Besgrove,Green Connect
38
Celebrating 30 years
Annual and Sustainability Report 2016
Matt, our Senior Business Analyst, works
alongside a former refugee during a
volunteering day at Green Connect.
This year we:
* showed off our cooking skills to
Wayside Chapel,
which provides showers, low-cost meals and clothing for
the most disadvantaged members of the community;
* painted chicken coops at Triple Care Farm,
a residence that rehabilitates 16–24 year olds suffering from
substance abuse, mental illness, homelessness and family
breakdown;
* oohed and ahhhed at lots of cute animals
at the Animal Welfare League,
a registered charity that has been caring for surrendered,
neglected and abandoned animals for over 55 years;
* mulched with Landcare Australia,
a grass-roots volunteer movement made up of individuals and
groups working to protect and restore local environments;
* farmed some organic veggies with
Green Connect,
a social enterprise that aims to provide job opportunities
for young people and refugees.
3939
Annual and Sustainability Report 2016Celebrating 30 yearsAnnual and Sustainability Report 2016Celebrating 30 years Transitioning towards a lower carbon economy
lower carbon
economy
The international community negotiated a new global
climate agreement at the end of 2015 in Paris. We support
this agreement to limit the planet’s temperature rise to well
below 2° celsius.
We know this is the only way to
ensure a fair and sustainable future
for people, animals and the planet.
The transition to a lower-carbon
economy has begun, and as fund
managers we’re driving change in
three ways:
Our investment choices (avoiding
climate unfriendly sectors and
targeting climate friendly sectors);
our advocacy on climate policy;
reducing and offsetting our own
operational emissions.
We recognise that climate change
presents a specific series of risks
for investors, super fund members
and shareholders. The economy’s
reliance on energy from fossil
fuels can’t continue. Reductions
in carbon emissions require a
fundamental change in the energy
mix that underpins business and
investment activity and we all have a
responsibility to act.
40
Transitioning towards a Annual and Sustainability Report 2016Celebrating 30 years Making it happen through
climate commitments
We’ve set a zero emissions target for our
investment portfolio. As far as we know, we’re the
only Australian-based fund to have done so.
We are committed to:
• targeting our portfolios to be zero emissions
intensive by 205012 following a pathway
consistent with keeping warming below
2° Celsius.
• disclosing the emissions intensity of our
portfolios, starting with the intensity of our
equities portfolio and moving to other asset
classes in the future.
We’re part of two international climate action
initiatives, the Montreal Pledge and Portfolio
Decarbonisation Coalition, which are driving
investor disclosure and decarbonisation.
We believe that all investment funds should
disclose the emissions intensity of their portfolios
and set emissions reduction targets. While it is
easy to simply focus on the fossil fuel industry
as the most emissions-intensive sector, it is not
enough. To fully meet the urgent challenge of
global warming, the entire economy needs to
‘decarbonise’.
12 The 2050 target has been set in line with recommendations of the Australian Climate Change Authority. We will continue to work to move
more quickly.
Our decarbonisation commitment is designed to:
Drive right outcomes
Be practical to implement
• A process that creates incentives to invest in all
aspects of clean energy by taking into account
positive and negative impacts of investments.
• Addresses structural changes needed across
•
Integrates the target into our portfolio
management to continue to meet our dual
objectives of ethical and high-performing
investments.
the economy and society.
Ensure transparency
• Drives capital to zero emissions energy
production (e.g. wind and solar); low energy
use sectors (e.g. software and digital content);
and technologies which increase the efficiency
of energy use (e.g. LED lighting, recycling and
smart energy products).
• Transparency of progress against our targets
creates internal and external accountability
and shows clients the impact of their choices.
Inspire others
• Shows leadership, sharing tools which other
investors and companies can adopt, leveraging
our impact as an ethical investor beyond our
own portfolios.
41
Annual and Sustainability Report 2016Celebrating 30 years This year / Transitioning towards a lower carbon economy
Making it happen
through measurement
Establishing a target is not enough. We need
to understand the true carbon impact of our
portfolios if we want to drive real change.
This year in addition to the annual carbon
footprint measurement of our share portfolios
by Trucost, we also compared the emissions of
our portfolios to a 2° benchmark and for the first
time calculated emissions savings from selected
company investments.
Our share portfolio footprint
This is the third year we have reported the carbon
footprint of our investments (and the second year
to include international shares).
Our carbon emissions footprint for our share
portfolios as at 31 December 2015:
31 Dec
2014
31 Dec
2015
172.4
167.8
281.8
279.2
Australian Ethical
shareholdings
(tonnesCO2e/
AUDm revenue)
Blended benchmark13
(tonnesCO2e/
AUDm revenue)
AEI footprint relative to
benchmark (%)
61%
60%
Our carbon footprint decreased by 3% over the
2015 calendar year and is well below the footprint
of the benchmark. This shows the effectiveness
of our Ethical Charter in identifying low-carbon
investments.
To continue reducing emissions to our zero
target, we need to understand the factors which
affect the carbon intensity of our investments
as measured by Trucost. For example, our
measured footprint this year was negatively
impacted by the following:
• Compared to the benchmark, we hold fewer
investments in banks and retailers which tend
to have lower operational emissions than other
companies.
• Compared to the benchmark, we hold more
investments in energy utilities which tend to
have higher operational emissions than other
companies.
But this should not be a signal to switch
our investments from renewable electricity
generators to banks and retailers. Although this
switch would reduce our footprint, it won’t help
the transition to a zero emissions economy.
So to give ourselves a fuller picture of how our
investment choices can drive this transition, we
supplemented the Trucost analysis by comparing
our portfolio to a ‘2° Celsius benchmark’.
Comparison to a 2° Celsius benchmark
We asked the respected 2° Investing Initiative (‘2ii’)
to assess our investments to help us understand
where we can influence maximum change.
Looking at our utility and power investments, 2ii
concluded that the energy mix of our investments
are outperforming a ‘2°Celsius trajectory’, being
a path for power generation aligned with capping
global warming at 2°Celsius. This result did not
surprise us given our appetite for investment in
renewable energy.
It was interesting to see that 2ii attributed part
of our performance to our investment in Contact
Energy, a company which Trucost identified as
the single biggest contributor to our portfolio’s
operational emissions (about 17% of our
emissions intensity). Contact is an example of a
company which creates significant emissions for
greater emissions reductions. In recent years it
has grown its geothermal electricity generation
so that in the 2015 financial year the percentage
of electricity it generates from renewable sources
grew from 69% to 76%, and the emissions
intensity of its electricity generation reduced
by 10%.
13 Blended benchmark of S&P ASX 200 Index (for Australian share fund holdings) and MSCI World ex Australia Index (for international share fund
holdings). Data has been provided by Trucost, an independent company that provides analysis of carbon and other environmental impacts of
companies and portfolios. The footprint includes direct company emissions and some indirect emissions. See trucost.com/glossary-of-terms/
for more information.
42
Annual and Sustainability Report 2016Celebrating 30 years Because we think it’s crucial to better understand
these positive impacts of renewable energy –
and of insulation, recycling and other ‘energy
productivity’ technologies we invest in – we also
worked this year with international accounting
firm EY to actually quantify these emissions
savings benefits.
Capturing emissions savings
The lifecycle emissions experts at EY helped
us analyse the positive impacts of selected
companies in our portfolio who are doing good
things like making household insulation and
bicycles, generating renewable electricity and
recycling waste metals. One of the companies we
looked at was REC Silicon. REC Silicon is identified
by Trucost as one of our highest emitters because
silicon production is an energy intensive process.
But silicon is part of the climate solution, not the
climate problem (see diagram at right).
We calculated the emissions savings from our
investment in REC Silicon during 2015 as 1,248
tonnes of CO2e. We explain how we worked this
out on the next page.
So even though our investment in REC Silicon
was identified by Trucost as one of the 10 biggest
contributors to our emissions footprint, our
work with EY indicates that when you look at the
bigger picture this investment is actually lowering
global emissions. We’ll continue to develop and
refine this method for estimating the emissions
saved by our investments. We’ll also look for ways
to combine emissions savings with our carbon
footprint calculations to provide a more complete
picture of the climate impact of our investing.
We invest in
REC Silicon
REC Silicon
produces silicon
Silicon is used in
manufacturing
solar PV panels
Solar PV panels
generate renewable
electricity
Renewable
electricity reduces
emissions by
avoiding generation
of electricity from
fossil fuels
43
Annual and Sustainability Report 2016Celebrating 30 years Transitioning towards a lower carbon economy
Saving emissions at
REC Silicon
REC Silicon produces silicon used for PV solar
electricity generation. EY calculates that typical
solar panels avoid 0.58 tonnes of CO2e per MWh
of electricity generated14. They also calculate that
solar panels built using silicon produced by REC
Silicon in 2015 will generate around 41,847,000
MWh of electricity over their lifetime. Multiplying
these two numbers together gives total lifetime
avoided emissions of around 24 million tonnes
of CO2e from solar panels using silicon from
REC Silicon.
REC Silicon can’t take all the credit for this. The
next step is to share these avoided emissions
between REC Silicon and the other businesses
involved in solar electricity generation (from the
manufacturers of other PV solar components
through to the panel fabricators and installers
and the electricity distributors). For this sharing
of emissions savings, our ethics research team
developed an innovative method to calculate REC
Silicon’s contribution to the total ‘value chain’ for
production of PV solar electricity. We calculate this
value contribution as 3.3% of the end price of the
electricity generated from the company’s silicon
production. See ‘Sharing the blame and credit’
which follows for more on our allocation approach.
Putting this all together means that around
802,402 tonnes of CO2e emissions will be avoided
because of REC Silicon’s 2015 silicon production.
But producing this silicon emits carbon, so we
deduct the company’s 2015 production emissions
to give net avoided emissions of 415,848 tonnes.
Finally, based on the 0.3% of the company we
owned at the end of 2015, we can put our hand on
our heart and claim credit for around 1,248 tonnes
of CO2e emissions savings from our investment in
REC Silicon during 2015.
Savings from switching to PV solar
0.58 tonnes CO2e per MWh of electricity
Electricity production from solar panels built
with the silicon that REC Silcon produced in 2015
41,847,000 MWh of electricity
Total emissions savings from this electricity
24,271,260 tonnes CO2e
41,847,000 x 0.58
= 24,271,260
Price of this electricity
$3,046 million (present value calculated by EY)
REC Silicon’s 2015 revenue from the sale of
silicon used for this electricity, less direct
external input costs
$100.7 million
REC Silicon’s share of emission savings
802,402 tonnes CO2e
100.7/3,046 (i.e.
3.3%) x 24,271,260
= 802,402
REC Silicon’s 2015 emissions from silicon
production
386,554 tonnes CO2e
From REC Silicon
annual report
REC Silicon’s net emission savings
415,848 tonnes CO2e
802,402 – 386,554
= 415,848
Our ownership of REC Silicon at end 2015
0.3% (of enterprise value)
Emissions savings from our investment in REC
Silicon in 2015
1,248 tonnes CO2e
0.3% x 415,848
= 1,248
14 This is gross avoided emissions, based on a global average emissions intensity estimate for fossil fuel generation calculated using the IEA 2
degree climate change scenario. The calculation takes account of reducing solar PV electricity generation over the 25 year assumed lifetime
of the solar panels. It also includes the IEA assumptions about carbon capture and storage for fossil fuel generators. The emissions avoided
from PV solar will be greater if these assumptions are overly optimistic, as we fear they are.
Panels at Nyngen Solar Farm
44
Celebrating 30 years
Annual and Sustainability Report 2016
The Evolution of Australian Ethical Portfolio Renewable
Capacity versus the 2°C Benchmark
)
W
M
(
y
t
i
c
a
p
a
C
s
e
b
a
w
e
n
e
R
l
l
a
t
o
T
40
30
20
10
0
Current capacity and planned
additions in Australian Ethical portfolio
29 MWh additional renewables relative
to 2°C renewable benchmark
Minimum capacity
required in a
2°C scenario
2015
2020
2025
Source: 2ii, based on GlobalData and IEA.
Sharing the blame and credit
Current carbon footprinting methods don’t do
a good job of capturing emissions produced or
emissions saved from the use of a company’s
products. One reason is difficulties in fairly
allocating the emissions or emissions savings
between the many companies involved in
production and use of the products. For example,
how should the emissions from the burning of
coal be allocated between the coal miner, the
coal fired electricity generator and the businesses
using that electricity?
The same double counting issues apply to
products that result in emissions reductions,
which are much more relevant to our ethically
screened investment portfolios. It’s important to
calculate and allocate these savings, to help us
better understand what emissions savings our
investments are supporting.
The novel allocation approach we developed for
REC Silicon can be used for sharing emissions
both produced and saved by many different
types of product. The central idea is to look at
how much value a company is contributing to
the end product compared to the total value of
the product – and use that to calculate its share
of emissions. This breaks down the market value
of the end product into the value added at each
stage of production of the product.
For REC Silicon the end product is the PV solar
generated electricity which the company’s
silicon helps to produce. We calculate the value
contributed by REC Silicon to this electricity as the
amount of the company’s silicon sales revenue
less its direct external costs of producing the
silicon. We divide this contributed value (A$100.7
million) by the total value of the electricity which
will be produced by solar panels built with the
company’s silicon (A$3,046 million). This gives
3.3%, which we use as REC Silicon’s share of the
emissions avoided from this renewable electricity.
The direct silicon production costs we use in this
calculation of contributed value are the cost of
raw materials like silica, and the depreciation
expense for the machinery used to produce the
silicon. (We assume the company purchases this
machinery from another company so we treat
the depreciation as an external cost.) We do not
deduct employee or indirect or overhead costs
such as salaries, rent and electricity. So in effect
a company claims its share of avoided emissions
based on the value it has added through its
own internal labour and general operating
infrastructure.
A similar approach could be used for allocating
emissions in the fossil fuel electricity supply
chain between coal miners, transporters
and generators. We don’t invest in fossil fuel
companies, but those investors who do should
account properly for their role in the production
of dangerous emissions from burning fossil fuels.
Annual and Sustainability Report 2016
Celebrating 30 years
45
This year / Transitioning towards a lower carbon economy
Making it happen through
our investment screens
We have never invested in coal or oil. In 2011,
as evidence emerged of the impact of coal seam
gas (CSG) on the artesian basin, we divested
from companies involved in CSG but maintained
holdings in natural gas pipelines as a transitional
fuel to accelerate the closure of coal electricity
generation.
Rapid advancements in renewable energy
technology, in particular energy storage
technology and production, means we are now
confident that divesting from natural gas will not
push demand back to coal-fired power.
From 1 July 2016 we are now free from all
companies whose main business is fossil fuels,
as well as diversified companies that earn some
fossil fuel revenue and aren’t creating positive
impact with their other activities. We may invest
in a diversified company which is having a
positive impact in other ways such as producing
renewable energy, provided its fossil fuel revenue
is sufficiently low (a maximum of 5% to 33%
depending on the fuel). For example, we invest
in Contact Energy whose electricity production is
76% renewables. They earn some revenue from
gas, but we think they are worth supporting as
they continue to invest in renewables and help us
get to 100% clean energy.
Alongside our fossil fuel exclusion we pursue
climate friendly investments in:
• Renewable energy like solar, wind, geothermal,
hydro and tidal power.
• Energy efficiency like LED lighting, more
efficient motors and smart energy
management technologies.
• Other products and activities reducing
energy usage like recycling, insulation and
battery storage.
46
Celebrating 30 years
Annual and Sustainability Report 2016
Mercury Energy Ngatamariki Geothermal
Power Station. Photo credit: Mercury Energy
Making it happen
through advocacy
We are the voice for climate action.
Through our advocacy work we want to influence
how climate change risks and opportunities are
managed. That is why we are constantly engaging
with government and the private sector.
COP21 – and beyond
Our Managing Director, Phil Vernon, was in Paris
in December 2015 participating in meetings and
forums for investors and other companies to
advocate for decisive climate action. We support
the COP21 agreement, which reinforces our long-
standing commitment to:
• take action through our day-to-day investing
and purchasing decisions, with a 2 degree
world in mind, and
• pressure governments to implement the
specific climate policies needed.
On this front, we participate in two international
groups targeting corporate lobbying practices,
which obstruct positive policy change. We also
lead the market with our own commitment to
decarbonise our investments, and advocate for
others to do the same.
Big four banks and the climate
The 2015 end-of-year reporting and annual
general meeting season for the four big Australian
banks brought greater openness about their
lending to climate-sensitive sectors, as well as
some encouraging new commitments to align
their businesses with a 2° world.
Around the same time, the US investment
manager, Boston Common Asset Management,
published a report examining the management
of climate-related risk and opportunity by 61 of
the world’s largest banks. Based on 18 months
of research, where we led the engagement
with the four big Australian banks, the report
showed strong performance from Australian
banks relative to international peers. Conscious
Australian investors and dedicated climate
campaigners like 350.org and Market Forces can
claim considerable credit for the progress that
Australian banks have made.
At the ANZ annual general meeting on
17 December 2015, we used our Advocacy
Fund’s nominal shareholding in ANZ to support
a shareholder resolution calling for an improved
response to global warming. The resolution
demanded better climate disclosure and setting
targets. There was progress with 5.4% support,
up from 3.1% of the vote for the 2014 climate
resolution.
We believe that more needs to be done by the
banks. They need to continue to enhance their
carbon monitoring and reporting, and move
beyond disclosure to making tangible changes
to the way they lend and invest. They need to be
clearer about the practical climate action they are
taking – including increased renewables lending
and no new fossil fuel lending. We’ll continue our
efforts in FY17.
Corporate climate lobbying
In 2016, as part of our submission to the Senate
inquiry into Carbon Risk Disclosure, we argued
that increased corporate monitoring and
reporting of emissions is fundamental to ensure
companies set accountable emissions reduction
targets.
We made specific recommendations to lower
reporting thresholds under the national
greenhouse and energy reporting scheme;
require disclosure on scope 3 emissions and
broaden the scope to include financed emissions
from the investment and super sectors.
We also contributed to the pro-transparency
submissions made by the Investor Group on
Climate Change and Financial Services Council.
The inquiry was put on hold due to the federal
election; however, the submissions generated
positive media interest.
47
Annual and Sustainability Report 2016Celebrating 30 years This year / Transitioning towards a lower carbon economy
Making it happen through
operational emissions
As an investor cutting the carbon intensity of our
investments has the greatest impact. But we are
also committed to reducing the carbon footprint
of our operations. This year we joined Carbon
Disclosure Project/World Wildlife Fund ‘Science
Based Targets’, an initiative to drive ambitious
climate action by businesses, inspiring them to
commit to greenhouse gas emission reduction
targets in line with climate science.
In FY16, we had 44.2 tonnes of scope 1&2
emissions (direct emissions from our operations
and the generation of electricity used in those
operations). Our scope 3 emissions from travel was
75.4 tonnes. We offset 100% of all these emissions.
This year we purchased premium offsets from the
Kariba REDD+ project which aims to teach farmers
to sustainably increase their productivity, which in
turn prevents further land clearing.
44.2tonnes
75.4tonnes
This year we purchased premium offsets from the Kariba REDD+ project which aims
to teach farmers to sustainably increase their productivity, which in turn prevents
further land clearing.
48
Celebrating 30 years
Annual and Sustainability Report 2016
Emissions from direct operations and generation of electricity used in those operationsEmissions from travel
Photo credit: The Meridian Energy Mill Creek
wind farm is located northwest of Wellington
near Ohariu Valley includes 26 turbines and
generate up to 59.8 megawatts of electricity.
4949
Annual and Sustainability Report 2016Celebrating 30 yearsAnnual and Sustainability Report 2016Celebrating 30 years We are having a
global impact
United Kingdom
* Signed an open letter published in the
Financial Times to BP, Chevron, ENI,
ExxonMobil, Shell, Statoil and Total
(companies we don’t invest in) calling on
them to ‘put limiting climate change to
well below 2°C, and preferably 1.5°C, at
the heart of your businesses’ plans for
the future’.
* First Australian fund to join international
investors to promote ethical agriculture
using the Business Benchmark on Farm
Animal Welfare.
North America
* Signed letters to major food companies
including McDonalds, Wendy’s and
Domino’s (companies we don’t invest in)
to rule out antibiotics in animal growth
promotion and factory farming.
New York
* Signed up to the United Nations Women’s
Empowerment Principles.
50
Annual and Sustainability Report 2016Celebrating 30 years Europe
* Managing Director Phil Vernon attended
Paris COP to push for strong action on
climate change.
* Participated in Principles for Responsible
Investment clinical trials transparency
initiative to encourage better use of
medical research and reduce need for
animal testing.
* Voted in support of Shell resolution calling
for investment of fossil fuel profits into
renewables using shares in the Australian
Ethical Advocacy Fund.
* Encouraging speedier resolution of
asbestos-related claims by working with
individual companies.
Africa
* Offset our corporate emissions by
supporting the REDD+ forest conservation
project in Zimbabwe.
Australia
* Submission to the Australian
Government calling for a moratorium on
unconventional gas.
* Encouraged the NSW Government to
introduce a robust Container Deposit
Scheme to support recycling.
* Supported the work of ‘No Business in
Abuse’ to stop human rights abuses in
offshore detention.
* Voted in support of the ANZ shareholder
resolution calling for action on climate
change using shares in the Australian
Ethical Advocacy Fund.
* Signed open letter by Australian Marriage
Equality showing our support for marriage
equality.
Asia
* Supported 1 Million Women palm
oil labelling campaign including an
awareness-raising visit by our Ethics
Analyst to plantations in Sumatra.
* Supported the expansion of B Corps
in Asia by sharing our experience with
companies in Taiwan; Head of Ethics
Research was a keynote speaker at the B
Corp conference.
* Directly engaged on better labour and
environmental standards of two Australian
manufacturers in their operations and
supply chain in developing markets.
51
Annual and Sustainability Report 2016Celebrating 30 years a great
experience
Our clients don’t tend to be the people drifting through
life unaware of what’s going on. They take an active
role in making the world a better place.
So our commitment to 100%
transparency really works for them.
We’ve built a vibrant community
online to hear from customers.
With one of the highest levels of client
satisfaction in the industry15, we
make sure clients are at the forefront
of everything we do. And that means
listening. When our clients told us
they wanted us to make things easier,
we simplified our application forms
and fund names. When they told us
we were too expensive, we worked on
lowering our fees.
We know our key role is to
connect good people with positive
investments. So we need to serve
our customers as well as we do
their money.
15 Based on an independent member satisfaction telephone survey conducted by the CSBA Link Group for the period of October 2014
to March 2015.
52
Celebrating 30 years
Annual and Sustainability Report 2016
Delivering Who are our clients
Our clients are values driven and care about the impact their money has. Our target markets this year are
superannuation members, managed fund investors, employers and financial advisers.
In the last six months, our members continued to display strong satisfaction towards us. We recorded
a strong Net Promoter Score of +55. Net Promoter is the most commonly accepted measure of client
loyalty and +55 puts us above industry standard. Members’ growing satisfaction is largely driven by our
ethical stance and their satisfaction with knowing they can do good for themselves and the planet.
Growing client base
We know that good people like doing good business. By meeting ethically minded people through social
networks, we’ve been able to rapidly expand our member base. New clients averaged 550 per month this
year compared to 384 per month last year.
Number of Members 2003–201516
26,342
21,196
17,663
14,868
12,567
13,230
13,864 13,826
10,647
11,352
8,892
8,001
6,740
5,619
30,000
25,000
20,000
15,000
10,000
5,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
16 Based on an independent member satisfaction telephone survey spanning 207 calls and 60 interviews with a response rate of 29% conducted
by the CSBA Link Group for the period of October 2014 to March 2015.
“ My super is invested according to
my conscience and they provide
a service that is consistently
responsive and transparent.”
Shruti,
Super member since 2008
53
Annual and Sustainability Report 2016Celebrating 30 years This year / Providing good service
Responding to
clients’ needs
Financial advisers
Over the years we have also been engaging with
our financial advisers to understand how we can
ease their work. In FY15, our financial advisers
told us that they require additional information
on ethical and social products to educate their
clients. We have responded with a ‘Fact Find’
questionnaire – a quick, easy-to-read source of
information advisers can use when talking to
clients. We have made ourselves available for
our advisers’ clients who can contact us directly
for additional information on ethical products
and services.
Employers
We have found that our employer groups need a
better way to communicate the Australian Ethical
Superannuation offering to their new and existing
employees. To this end we have developed
tailored induction kits which outline our
superannuation offering including information on
default insurance. It also introduces our ethical
approach and the types of investments that our
screening directs us to.
Into the future
We want to give the very best service and advice
to customers and we are currently redefining
our customer experience strategy and operating
model. This includes consideration of how we
provide financial advice and services to delight
our customers every day.
We know our clients want to choose from a
range of high quality products and services.
Our approach to product innovation and
differentiation sees us working hard to respond
to develop products and services that optimise
investment outcomes.
New clients
In FY15, clients told us they wanted an easier way
to join and invest with Australian Ethical. This year,
we simplified our application forms for super and
managed funds. Our forms are now a quarter of
the size and less complex, making them easier to
understand and faster to complete.
Portfolio names have also been simplified to
better reflect what the investment options
actually are. On 1 July 2015, we changed the
names of the Smaller Companies Trust and
Larger Companies Trust to Australian Shares
Fund and Diversified Shares Fund respectively.
We also changed all ‘Trusts’ to ‘Funds’ as a fund is
a term that is more commonly understood.
Investors
We also introduced the Emerging Companies
Fund for retail and wholesale investors. The
Emerging Companies Fund provides clients with
the opportunity to invest in small capitalisation
companies on the basis of their social,
environmental and financial credentials.
Additionally, wholesale investors can now invest
in the Australian Ethical International Shares
Fund and the Australian Ethical Cash Fund, with a
minimum investment of $25,000. Since wholesale
fees are lower than retail, this is a win for our
high-value clients.
Finally, in July 2015 we listed our managed funds
on the ASX’s mFund platform, making it easier for
investors who want to transact online. The mFund
platform allows investors the ability to diversify
their investments across a range of asset classes
in a cost effective way.
54
Annual and Sustainability Report 2016Celebrating 30 years Our digital presence
The financial services sector is experiencing great
change with the evolution of digital technologies.
Over the past decade, companies have
transitioned from face-to-face interaction with a
few clients to digital experiences across a range of
client groups.
During FY16, we’ve continued to build a
significant digital community for Australian Ethical
clients. From virtually nothing a few years ago, the
total number of our social media followers is now
close to 100,000. This online community is highly
engaged, with nearly 6,000 people engaging with
our Facebook posts each week.
We know this growth isn’t just us ‘being’ online.
There are many companies who have entered
the world of social media but not gained the
engagement they expected – especially in
financial services.
Our audience engagement and growth has
been no small feat. We’ve worked hard to
produce original, interesting content and respond
to clients’ questions and comments online. We
know clients come to us for our belief and
understanding of ethical issues and making their
money do good.
Early this year, we invested in a full-time
Communications Specialist to produce high-
quality, original content for all our digital channels.
In January 2016, we released an ethical fashion
guide which has been downloaded by more than
600 people. We’ve also published over 40 articles
on our blog and have grown our partners’
relationships to collaborate on niche content for
specific audiences like young women.
1 Million Women, a grassroots movement
empowering women to take action on climate
change, repost many of our blogs, and recently
one of our team members contributed a blog to
their site. We’ve also engaged with speakers from
the Festival of Dangerous Ideas to offer exclusive
content to Australian Ethical clients in Good
Money magazine.
Another important area we’ve emphasised is
making sure we respond to people online. The
great thing about online communities is that
people can easily ask us questions and comment
on what we’re doing every single day. We’ve
taken this as a real opportunity and used it to
bust myths around ethical investing and educate
the community. Our Head of Ethics Research,
Stuart Palmer, personally responds to several
queries a week. You can see for yourself in the
graphic above.
55
Annual and Sustainability Report 2016Celebrating 30 years our people
Our culture is shaped by our purpose, values and commitment
to fostering a happy and fulfilling work environment.
But most importantly, it’s shaped by
our people.
Every single one of our employees
has an impact on Australian Ethical
and how we get things done. Over
the past 30 years, we’ve achieved
many milestones – and we have the
opportunity to achieve many more as
we work collectively towards our 2020
goals. Having the capability to deliver
on these goals is key. We’re focused
on engaging and developing our
people so they can grow and develop
Australian Ethical into the future.
56
Investing in Annual and Sustainability Report 2016Celebrating 30 years A collaborative culture
Expanding our workplace
As Australian Ethical grows, we want to continue
to build a flourishing workplace that reflects our
purpose, values and culture.
This year we will be growing the office in Sydney
by expanding to the neighbouring office space on
our floor. Construction will commence in FY17.
As part of the expansion process, an external
design consultant was commissioned to design
the interior so our working environment better
matches who we are as a company and people.
The final concept looks to meet the needs of our
multi-generational workforce and our various
working styles. Current work practices, preferred
work practices, inclusive working environments
and visual design were factored in.
Sustainability will be a leading driver in the new
fit-out with an environment and sustainability
consultant engaged to guide the process.
We don’t believe in traditional office hierarchical
structures. The workplace and team landscape is
constantly changing. To build a high-performance,
collaborative culture that is focused, efficient,
customer-centric, agile and self-managing we
know people have to love their jobs and feel
connected to something bigger.
Living our values
Most people have worked for a company where
the values are hanging on walls around the office
but no one really knows what they mean or how
they influence daily life and behaviours.
That’s why this year we worked on bringing our
values of respect, trust, leadership, authenticity,
compassion and kindness to life. We held three
collaborative workshops with employees to
understand how employees’ individual values
align with the company’s. The emphasis was on
both individual expression and the collective.
We recognise that to develop an inclusive, strong
workplace culture it’s important that every
employee has the opportunity to contribute to
broader, organisation-wide discussions. As part
of this process, we have begun the journey of
defining how our values translate into action in
our day-to-day business. These ‘ways of being’ will
be formalised in the coming months.
Engaging our employees
Our annual employee survey is one of our key
indicators of employee engagement. In FY16, our
employee participation rate remained steady at
94% and we have maintained our top quartile
presence in the AON Hewitt Best Employer Group
scores in Australia and New Zealand.
It is good to see that our employee engagement
score has increased once again to 77%; up
4% from FY15, outperforming the Financial
Services sector.
Based on employee feedback from last year, we
invested in learning and development initiatives
and strengthened our performance management
processes this year. We also continue to develop
our manager – employee relationship. It is no
surprise that increased collaboration is a key
theme employees are more satisfied with.
We recognise that there is more work to do,
especially in the areas of providing additional
career opportunities, increasing diversity and
inclusion and supporting work life balance. We
will be working with our employees in the coming
months to understand expectations and develop
programs that respond to these identified areas.
57
Annual and Sustainability Report 2016Celebrating 30 years This year / Investing in our people
A diverse and inclusive
workplace
There have long been systemic concerns about
the lack of gender diversity at senior levels in
financial services. We recognise that even within
our own senior management team this is an area
that requires development and, as such, it has
been a focal point of our recruitment this year.
Despite considerable effort, we were unable
to improve gender diversity in the senior
management team this year. We continue to
strive for a reasonable gender balance in our
candidate shortlists when recruiting. In a number
of cases, specific roles were held open for longer
periods to maximise the opportunity for female
candidates. In FY17, we will continue our efforts
to improve female representation at the senior
management level and in the wider organisation.
Setting diversity targets
Our Diversity Policy encourages diversity
in ethnicity, gender, language, age, sexual
orientation, religion, socio-economic status,
physical and mental ability, thinking styles,
experience and education. Our diversity targets
are guided by the ASX Corporate Governance
Principles and Recommendations, FSC
requirements – Standard 20 and the Workplace
Gender Equality Agency. We are also guided by
industry norms as set by the Australian Institute
of Company Directors, the Australian Council of
Superannuation Investors and the UN Women’s
Empowerment Principles.
At the Board level, targets are established for
achieving gender diversity and an annual review
is undertaken to measure progress. In 2012, we
adopted a target of 40% female representation
on our Board and senior management team and
50% for our employees by 2016. We currently
have 40% female representation on our Board.
We came close to our target for employees, but
there’s still work to be done.
Our progress against our targets is:
Category
Board
Senior Management
Team
FY16
(Actual)
FY17
(target)
40%
14%
40%
40%
Employees
40%
50%
Equal pay
We’re big believers in equal pay, so you won’t
see any gender inequality in our remuneration
practices.
In FY16, we managed to reduce our male-to-
female pay ratio by an impressive 6%! (That’s
down from 22% in FY15 to 16%17.) We should
point out that the current gap exists due to an
underrepresentation of women across leadership
positions in the business and not because of a
gap in pay for equal or similar roles.
Here’s the comparison of basic salary
and remuneration of women to men by
employee category.
Category
FY15
FY16
Management
N/A
NA
Professional
Support
22%
below
34%
above
17%
below
40%
above
17 The pay gap is representative of the ‘Professional’ category only and not Senior Management Team and Support staff.
58
Annual and Sustainability Report 2016Celebrating 30 years Industry engagement
Diversity and inclusion continues to be a priority
for us, and in FY16 we engaged with various
parties to take our commitment forward.
We organised a boardroom lunch session
to discuss gender equality in our workplace
with key employees. The session expanded
the discussion on inequality, gender bias, pay
scales and encouraged conversation among the
group. A key outcome of the session and Board
discussion was the decision to track our progress
and performance against Workplace Gender
Equality Agency gender equality indicators such
as appointments, promotions, resignations by
gender and employment status and resignations
during parental leave. We will start reporting on
these indicators in FY17. These indicators will
further support our work in strengthening the
diversity of our workplace.
We’ve been supporting 1 Million Women for
several years now and this year we leveraged
that relationship to raise awareness of the
environmental impact of palm oil. As part
of this support, one of our employees, Ella,
joined Natalie, 1 Million Women’s Director, on a
company supported trip to Sumatra, Indonesia to
investigate the issue.
Capacity building
and learning
We support learning where employees are
driving their own development through relevant
experiences, beyond work related skills and
knowledge building. Learning needs are
determined by a variety of factors, such as annual
performance discussions, employee requests and
manager recommendations.
Each year, we set aside a budget of $2,000 per
employee for external learning opportunities
that support their careers and self-development.
In FY16, our employees used this allowance to
pursue further studies, participate in leadership
programs and even childbirth education.
New e-learning module
In FY16, we implemented a new e-learning
website accessible to all Directors and employees
of Australian Ethical. This new method of learning
is more robust and interactive than the previous
method of in-person training. The website
contains 11 short training modules which include:
• Share trading
• Privacy
• Conflict management
• Whistleblowing
• Code of conduct
• Expenditure and accounts payable
•
Incident and breach management
• Complaints handling
•
IT acceptable use
• Anti-money laundering and counter-terrorism
financing
• Risk management
We will add additional modules to the site on an
as-needed basis. All new Directors and employees
are required to complete the training modules
within two months of coming on board. We
also hold annual refresher training for current
Directors and employees.
In FY17, we’ll be implementing minimum training
requirements and hours for each position at
Australian Ethical.
Individual performance
Each year, employees set goals they want to
achieve that reflect critical success factors to the
business strategy. Informal feedback on their
performance and action towards these goals
is provided regularly. This informal feedback is
matched with biannual performance and career
development reviews
59
Annual and Sustainability Report 2016Celebrating 30 years This year / Investing in our people
Health and wellbeing
If you ever stop by our office, you’re likely to see
Australian Ethical employees enjoying vegan
treats or heading out to their weekly netball
game. Our employees care about health and
feeling good – and we do our part to support that.
Safety is an important consideration in day-to-day
work. While we work in an environment that does
not have a high incidence of workplace injury, we
take steps to ensure both the physical and mental
wellbeing of all our employees. In FY16, two minor
injuries were sustained at our head office with 14
hours of lost time recorded. During the reporting
period, a WHS audit was carried out in both office
locations and actions taken to increase safety at
work.
We are continually improving our health
and wellbeing programs in consultation with
employees. We continue to run a lunchtime
movie series which started in early 2015 and
weekly meditation sessions. Last month, we
watched ‘That Sugar Film’ and learned about the
harmful effect of excess sugar on our health.
The wellbeing room, that was created last year,
has been popular for meetings, as well as being
used as a ‘mindful’ space for creativity and for
quarterly massages.
The benefits that form part of the annual
wellbeing program include weekly sessions of
meditation for a period during the year, free flu
vaccinations and health screening, weekly organic
fruit, an annual ergonomic check and return-to-
work coaching for employees who return to the
workplace after a period of prolonged absence.
Other employee benefits include travel insurance,
novated car leasing at fleet prices, contribution
for employee personal development activities
such as health memberships and public speaking
courses, recognition-of-service bonuses for
every five years of employment, two weeks’ paid
paternity leave for new dads and twelve weeks’
paid parental leave and super contributions while
an employee is on parental leave up to twelve
months.
60
Annual and Sustainability Report 2016Celebrating 30 years People highlights
35 employees
Average training hours
Male
21
Female
14
Per employee
Per female
Per male
Per employee category
Manager
26.23
20.04
29.11
52.94
Total Full Time Equivalent (FTE)
is 32.56
Total hours of training
Professional
16.63
Support
16.50
892
Age diversity
Employment by gender and contract
Female
Male
No.
%
Female
Male
■ Under 30
■ 30-40
■ 40-50
■ 50-60
■ 60+
Total
5
15
7
7
1
14%
43%
20%
20%
3%
35
100%
■ Full time
■ Part time
9
4
■ Part time casual 1
Total
14
19
1
1
21
61
Annual and Sustainability Report 2016Celebrating 30 years This year / Essentials / Leadership
Our Board
Steve Gibbs BEcon, MBA
Non-Executive Director since 2012 and
Chair since 2013
Steve chairs the People, Remuneration and
Nominations Committee, is a member of
the AEI and AES Audit, Compliance and Risk
Committees and is now the Chair of Australian
Ethical Superannuation Pty Limited (AES) and the
Australian Ethical Foundation Limited. Steve has a
long history of involvement in the investment and
superannuation industries, particularly focused
on ethical and responsible investing.
Mara Bun BA
Non-Executive Director since 2013
Mara is a member of the People, Remuneration
and Nominations Committee and the Audit,
Compliance and Risk Committee and is a Director
of Australian Ethical Superannuation Pty Limited
and the Australian Ethical Foundation Limited.
Mara brings more than 20 years of business and
community experience to Australian Ethical.
Kate Greenhill BEc, FCA, GAICD
Non-Executive Director since 2013
Kate is Chair of the Audit, Compliance and
Risk Committee and a member of the People,
Remuneration and Nominations Committee. Kate
is a Director of Australian Ethical Superannuation
Pty Limited and Australian Ethical Foundation
Limited. Kate has extensive knowledge of finance
and risk. As a former Partner with PwC, Kate has
worked in both Australia and the UK, and has
over 20 years’ experience in providing assurance
and advisory services to clients in the financial
services industry.
Phil Vernon BEc, MCom, MBA, FCPA, FAICD
CEO since 2009 and Managing Director
since 2010
Phil is a Director of Australian Ethical
Superannuation Pty Limited and Australian
Ethical Foundation Pty Limited. He has over
30 years’ experience in financial services covering
funds management, superannuation, corporate
governance and industry regulation.
Tony Cole AO, BEc
Non-Executive Director since 2013
Tony is a member of the People, Remuneration
and Nominations Committee and the Audit,
Compliance and Risk Committee and is a Director
of Australian Ethical Superannuation Pty Limited
and the Australian Ethical Foundation Limited.
Tony has an extensive background in investment
and public service.
62
Annual and Sustainability Report 2016Celebrating 30 years Our Senior
Management Team
Phil Vernon BEc, MCom, MBA, FCPA, FAICD
Managing Director since 2010
Phil provides overall leadership and strategic
direction to the company including acting as a
direct liaison between the Board and the senior
management team.
Adam Kirk Dip FS, FP
Head of Business Development since 2011
Adam oversees business development and
client service activities to manage and grow our
existing accounts by devising client strategy,
developing client relationships and delivering
client objectives.
David Barton BComm, MMgt, CPA
Chief Financial Officer 2013 – August 2016
David oversees a range of corporate services
including finance, fund accounting, member
operations and information technology.
Dr Stuart Palmer BA, LLB, MLitt, PhD
Head of Ethics Research since 2014
Stuart evaluates companies’ social and
environmental impacts to assess alignment with
our Ethical Charter and to promote sustainable
business models and practices.
David Macri BSc (AdvMath), CFA
Chief Investment Officer since 2012
David is responsible for ensuring the effective
management of all investment aspects of
the company.
Fiona Horan MBus (HRM)
Head of People and Culture since 2013
Fiona ensures effective delivery of People &
Culture initiatives to build an engaging and
inspiring workplace aligned with our purpose
and values.
Tom May BA, LLB, MBA, GDACG, FGIA
General Counsel and Company Secretary
since 2010
Tom oversees the company’s governance
including company secretarial and legal
functions to ensure that the Group meets its
regulatory obligations.
63
Annual and Sustainability Report 2016Celebrating 30 years Financial
Report
Contents
Directors’ Report
Remuneration Report
Lead Auditor’s Independence Declaration
Independent Auditor’s Report
Consolidated Statements of Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Directors’ declaration
Page
65
68
79
80
82
83
84
86
87
118
64
Annual and Sustainability Report 2016Celebrating 30 years Directors’ Report
The Directors present their report together with the consolidated financial statements of the Group comprising
Australian Ethical Investment Limited (the Company) and its subsidiaries for the year ended 30 June 2016 and
the auditor’s report thereon.
1. Directors
The Directors of the Company at any time during or since the end of the financial year are detailed on page 62
of this report.
2. Company secretary
Tom May BA, LLB, MBA, FGIA 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.
3. Directors’ meetings
The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings
attended by each of the Directors of the Company during the financial year are:
Director
Stephen Gibbs
Mara Bun
Tony Cole
Kate Greenhill
Phil Vernon
Ruth Medd
Les Coleman
Board
People, remuneration
and nominations
Audit,
compliance
and risk
Eligible
Attend
Eligible
Attend
Eligible
Attend
10
10
10
10
10
10
10
10
10
10
6
6
6
6
–
6
6
6
6
–
7
7
7
7
6
4
1
7
7
7
7
6
4
1
4. Principal activities
The Group’s principal activities during the financial year were 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 what is described in this report, there were no significant changes in the
nature of the Company’s activities during the year.
5. Operating and financial review
The consolidated profit for the year to 30 June 2016 is $3.010m (2015: $1.970m). A review of operations for the
Group is set out in the Shareholder Newsletter on pages 10 to 14.
65
Annual and Sustainability Report 2016Celebrating 30 years Directors’ Report (continued)
6. Dividends
Dividends paid or declared by the Company to members since the end of the previous financial year were:
Declared and paid during the year 2016
Final 2015
Interim 2016
Total
Declared after end of year
Cents
per share
Total
amount
($)
Franked/
unfranked Date of payment
120
120
240
1,313,052
Franked
30 September 2015
1,313,052
Franked
24 March 2016
2,626,104
180
2,008,535
Franked
23 September 2016
The financial effects of the dividends declared after end of year have not been brought to account in the
consolidated financial statements for the year ended 30 June 2016 and will be recognised in subsequent
financial reports.
7. Events subsequent to reporting date
6,832 shares were issued on 31 August 2016 to the Employee Share Trust for employee long term incentives.
This amount comprises of 10,663 shares for FY 2016-17 tranche less 3,831 shares forfeited from prior years.
On 31 August 2016 14,812 LTI employee share rights (AEFAE) were issued to employees following vesting of
shares on 30 June 2016.
Other than the matters discussed above, the Director’s believe there has not been any transaction or event of a
material and unusual nature between the end of the financial year and the date of this report.
8. Likely developments
The Group’s business strategy is discussed in the Shareholder Newsletter.
9. Environmental regulation
The Company acts as a responsible entity for the Australian Ethical Property Trust and the Australian Ethical
Balanced Trust, both of which owned direct property assets during the year. 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 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.
One of the two properties held in the Australian Ethical Balanced Fund was sold on 18 May 2016.
The properties in this fund are not required to have a minimum of Green star rating.
66
Annual and Sustainability Report 2016Celebrating 30 years 10. Shares issued during the year and prior to the issue of the report
During the year and prior to the release of this report the following shares were issued:
Date
Number of
shares Issued
Reason
Balance 30 June 2015
1,053,817
31 August 2015
31 August 2015
31 August 2015
11,899
Conversion of STI performance rights (AEFAG)
16,834
Conversion of LTI performance rights (AEFAC)
11,659
Issued to the Employee Share Trust as long term incentives
Balance 30 June 2016
1,094,209
31 August 2016
31 August 2016
6,832
Issued to the Employee Share Trust as long term incentives
14,812
Conversion of LTI performance rights (AEFAE)
Balance 31 August 2016
1,115,853
No further shares have been issued or are planned from the date of this report. No amounts are unpaid on any
of the shares.
11. Indemnification of Directors’ and Officers
Indemnification
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 Company has paid premiums to insure each of the Directors and officers of the Company against liabilities
for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while
acting in the capacity of Directors and officers of the Company, other than conduct involving a wilful breach of
duty in relation to the Company. Details of the amount of the premium paid in respect of the insurance policies
are not disclosed as such disclosure is prohibited under the terms of the contract.
12. 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 79.
67
Annual and Sustainability Report 2016Celebrating 30 years Remuneration Report
Dear Shareholder,
On behalf of the Board, I am pleased to present our
Remuneration Report for 2016.
The 2016 financial year has been an extraordinary
one in terms of growth for the company. The
foundations that we have laid over the past few
years including the strengthening of our investment
team, making our fees more competitive and
improving our marketing have taken our funds
under management beyond $1.5bn and delivered a
significant increase in dividends and share price for
shareholders.
We believe that the introduction of our new
remuneration system in 2014 has been a key
contributor to that success as it has provided a more
direct link between contribution and reward and
better alignment with the long term performance
of the company. It is also aligned to the philosophy
of the company that sees our people as key
stakeholders in the company’s success.
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.
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.
68
Annual and Sustainability Report 2016Celebrating 30 years Remuneration Framework Summary
Element
Key Driver
Quantum
How Paid
Criteria
Fixed
remuneration (FR)
Pay people fairly
Short term
incentive (STI)
Incentivises
and rewards for
achieving annual
objectives
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
Long term
incentive (LTI)
Retention and
fostering an
interest in the
Company’s long
term performance
Percentage of
fixed remuneration
based on market
assessment
Paid fortnightly
Continued
employment
Paid annually on
last pay period
in September.
Timing allows for
the inclusion of
financial results
in performance
assessments
Objectives include
(depending on role):
• Profit
• Growth
•
•
Investment
performance
Individual
objectives
• Culture
Shares held in
trust and vest
after three years
Shares subject to
three 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
69
Annual and Sustainability Report 2016Celebrating 30 years Remuneration report (continued)
Remuneration framework
The Deferred Share scheme operates as follows:
Description
Performance
hurdles
Deferred share scheme
Shares are issued or bought on
market at the commencement of
the three 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.
50% will vest if the employee
remains with the Company after
three years. 50% will vest on the
following basis:
•
•
•
If EPS growth18 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.
Dividends
Dividends paid on unvested shares;
which:
• provides real value that
employees lose if they leave the
Company.
• 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
Fully deductible in year of issue
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
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 September of each year following
the finalisation of annual results and performance
reviews.
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
Description
Profit
Growth
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
Culture
Each employee will have certain
individual objectives to achieve for
the year
Employees have an obligation
to adhere to certain cultural
standards. These include abiding
by the Company’s values and risk
management requirements
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 three years. They
vest in the name of the employee after three 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.
18 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.
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Annual and Sustainability Report 2016Celebrating 30 years Actual remuneration
Total remuneration paid and alignment
with Company performance
Short term incentives (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 is 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. STI rewards are provided for in the year
they relate to and paid in the following year following
the performance review process.
Other elements of remuneration are aimed at
building longer term value. Long term incentives
(LTI) is subject to average Earnings per Share Growth
(“EPS”) are performance hurdles over the three year
vesting period19 and continued employment over the
period. If these are not met the shares are held in
trust and reduce the amount that is required to be
funded in future years.
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
STI constitutional bonus (old scheme)
STI cash payable
STI rights expense (old scheme)
LTI rights expense (old scheme)
LTI shares issued (new scheme)
Rights under/over accrual
Bonus under/over accrual
Notes
30 June
2012
30 June
2013
30 June
2014
30 June
2015
30 June
2016
1
6,544,510 5,902,946 5,611,929 5,699,239 5,777,241
177,993
217,305
280,381
293,175
360,525
2
3
4
5
6
7
7
85,846
66,926
65,000
–
–
94,131
277,753
220,018 1,141,982
833,571
–
164,857
473,191
479,943
–
231,478
70,696
436,139
928,557
848,985
–
–
–
–
–
175,852
320,559
(56,098)
21,226
64,355
18,893
(13,250)
7,508
228,152
(42,075)
Total bonus and rights expense
411,455
510,884 1,223,082 3,018,841 1,979,933
Other employment costs
Total remuneration
(348,450)
29,739
32,309
39,392
96,393
6,785,509 6,660,875 7,147,703 9,050,647 8,214,091
Net Profit After Tax ($’000)
Underlying Profit After Tax ($’000)20
402
860
1,063
1,675
2,543
3,111
1,970
2,454
3,010
3,821
Return on Equity (three year average)
11.1%
12.1%
18.1%
23.4%
27.4%
Earnings per share
40.10
104.84
248.51
190.00
281.97
Earnings per share growth (three year average)
Share price at end of period ($)
Dividends (c per share)
Total shareholder return (TSR)
Average FTE
–9.9%
17.50
60
(5%)
41.5
54.1%
19.50
85
16%
34.3
53.3%
35.45
200
92%
28.6
89.3%
58.80
200
72%
30.7
36.1%
81.11
300
42%
30.1
* Directors’ fees includes both AEI Ltd and AES Pty Ltd Directors. Remuneration of AES Pty Ltd is not included
in the Director pool approved at the AGM in October 2014.
19 From FY15 EPS growth replaced average RoE as the performance hurdle for LTI. Three year average RoE will remain relevant until past
performance rights which use this hurdle either vest or lapse.
20 Refer to Shareholder Newsletter on page 11 for reconciling table.
71
Annual and Sustainability Report 2016Celebrating 30 years Remuneration report (continued)
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.
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:
2016 performance
Total net flows of $319m, a 78%
increase on the previous year.
Superannuation members
increased by 24% over the year.
Regular top quartile
investment performance in a
number of funds.
Employee engagement
score considered to be in
“Best Employer” range.
Risk and compliance measures
included in all employee
objectives.
3
(a) The STI cash component increased
significantly in 2015 due to:
Measure
Growth
Investment
performance
Culture
i.
ii
The inclusion of all employees in the
Scheme
The move to pay STI as 100% cash rather
than 50% cash and 50% performance
rights. The cash payable under the new
scheme includes 100% of the FY15 year
STI expense compared to only 50% under
the old scheme.
(b) The STI cash component for 2016 includes
the accrual for expected bonuses in respect
of meeting performance hurdles in the 2016
financial year which will be paid in the 2017
financial year. These performance hurdles
included investment performance, flows and
profit targets.
4 The final STI rights vested on 30 June 2015.
5
This is the final year for which there will be an
item for LTI rights expense under the old scheme
as the scheme rolls off to be replaced by the
new scheme. In 2016 the amount has remained
high despite it being in respect of only one year’s
worth of amortisation due to:
(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.
For 2016 this is two years amortisation of the
first issue of shares and one year’s amortisation
of the second issue of shares under the new
share scheme. This 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.
Over/under accruals are due to needing
to finalise accounts prior to finalisation of
performance assessments and are accrued
based on “target”.
6
7
72
Annual and Sustainability Report 2016Celebrating 30 years
Senior 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
Managing Director & CEO
Fixed
Remuneration
(%)
Maximum
Short-term
incentive
(%)
Maximum
Long Term
incentive
(%)
P Vernon
Managing Director & CEO
56%
28%
16%
Current Management
D Barton
CFO
A Kirk
D Macri
T May
Head of Business Development & Client Relations
CIO
General Counsel & Company Secretary
S Palmer
Head of Ethics
77%
71%
50%
77%
77%
15%
21%
33%
15%
15%
8%
8%
17%
8%
8%
Contract terms
All KMP’s have formal contracts of employment and are permanent employees of the Company.
Term
Notice period
Managing Director
Three years
concluding
on 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
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 $360,000 was approved at the AGM in October 2014. A review of Non-Executive
Directors’ remuneration is undertaken annually by the Board, taking into account recommendations from the
People, Remuneration and Nominations committee.
The following table sets out the agreed remuneration for Non-Executive Directors by position:
Director
Chair
NED
Australian Ethical Investment Limited – Group
Committee
Chair
Committee
member
Total**
Stephen Gibbs
Tony Cole
Kate Greenhill
Mara Bun
Total Group
30,000
60,000
60,000
60,000
60,000
–
–
12,000
–
30,000
240,000
12,000
16,000
16,000
16,000
16,000
64,000
106,000
76,000
88,000
76,000
346,000
*
All Directors above are also Directors of Australian Ethical Superannuation Pty Ltd and members of the
Australian Ethical Superannuation Pty Ltd Audit, Compliance and Risk Committee.
** This table shows the Non-Executive Director remuneration for a full year, for actual remuneration received
see below.
73
Annual and Sustainability Report 2016Celebrating 30 years Remuneration report (continued)
Statutory reporting
Management team remuneration
The table below outlines Executive reward as calculated in accordance with accounting standards and the
Corporations Act 2001 requirements. The amounts shown are equal to the amount expensed in the Company’s
financial statements.
Short Term Benefits
Post-
Employment
Benefits
Salary,
Fees and
Leave
($)
Cash
Bonus
($)
Super-
annuation
($)
Equity
Settled
Share-based
payments
($)
Long Term
Benefits
Performance
Based
Proportion
($)
Total
($)
Long
Service
Leave
($)
Name
Year
Managing Director & CEO
P Vernon 2016
2015
355,753
337,458
139,342
76,162
19,307
18,782
258,661
103,904
773,063
536,306
51.5%
33.6%
11,871
10,842
Current Management
D Barton 2016
2015
A Kirk
D Macri
T May
2016
2015
2016
2015
2016
2015
S Palmer 2016
2015
247,193
238,513
232,324
212,000
298,144
280,124
201,678
193,356
178,449
164,307
37,183
21,282
55,247
30,502
132,033
67,179
29,679
17,696
26,451
5,605
Departed Management
19,252
18,782
19,233
18,782
19,307
18,782
19,308
18,782
19,465
16,142
33,281
–
114,836
11,344
186,043
100,574
82,849
21,376
8,761
–
336,909
278,577
421,640
272,628
635,527
466,659
340,364
251,210
233,126
186,054
20.9%
7.6%
40.3%
15.3%
50.0%
35.9%
33.1%
15.6%
15.1%
3.0%
P Smith
Total
2016
2015
2016
2015
–
83,488
–
–
1,513,541
1,509,246
419,935
218,426
–
7,469
115,872
117,521
–
12,053
–
103,010
684,432
249,251
2,733,780
2,094,443
–
11.70%
40.40%
22.30%
5,732
5,915
5,719
5,778
10,084
12,086
6,952
5,631
3,970
4,167
–
–
44,328
44,419
For details on the performance criteria for each tranche of performance rights and deferred shares refer to
Note 11 of the Notes to the Consolidated Financial Statements.
Notes in relation to the 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 2015 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.
74
Annual and Sustainability Report 2016Celebrating 30 years Non-Executive Directors remuneration
Short Term Benefits
Post-
Employment
Benefits
Equity
Long Term
Benefits
Name
Year
Salary,
Fees and
Leave
($)
Cash
Bonus
($)
Super-
annuation
($)
Settled
Share-based
payments
($)
Performance
Based
Proportion
($)
Total
($)
Long
Service
Leave
($)
Non-Executive Director’s – Australian Ethical Investment Ltd – Group
S Gibbs
T Cole
2016
2015
2016
2015
K Greenhill 2016
2015
M Bun
2016
2015
Departed Directors
R Medd*
2016
2015
L Coleman* 2016
2015
Total
2016
2015
93,413
80,897
63,444
39,531
78,253
55,600
62,198
33,018
21,084
35,531
10,854
23,278
329,246
267,856
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,874
7,647
6,027
3,737
7,434
5,256
5,909
3,121
2,003
3,359
1,031
2,200
31,278
25,319
–
–
–
–
–
–
–
–
–
–
–
–
–
–
102,288
88,544
69,471
43,268
85,687
60,856
68,107
36,139
23,087
38,890
11,885
25,479
360,525
293,175
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
* R Medd and L Coleman were Directors of AES Pty Ltd
Non-Executive Directors remuneration includes Directors of the subsidiary company which are not included in
the Directors pool approved at the AGM in October 2014.
75
Annual and Sustainability Report 2016Celebrating 30 years Remuneration report (continued)
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
Managing Director & CEO
P Vernon
AEFAC
AEFAG
AEFAE
Deferred Shares
AEF Ordinary shares
2016 Total
2015 Total
Current Management
D Barton
AEFAG
A Kirk
D Macri
Deferred Shares
AEF Ordinary shares
2016 Total
2015 Total
AEFAC
AEFAG
AEFAE
Deferred Shares
AEF Ordinary shares
2016 Total
2015 Total
AEFAC
AEFAG
AEFAE
Deferred Shares
AEF Ordinary shares
2016 Total
2015 Total
Balance at
beginning
of year
No.
granted
No. forfeited/
Expired/ Sold
No. vested
& exercised
Balance at
the end
of year
2,432
1,967
4,037
2,412
5,013
15,861
12,218
566
604
–
1,170
–
1,142
811
856
537
28
3,374
2,346
1,379
1,785
3,223
2,313
–
8,700
9,767
–
–
–
1,913
–
1,913
4,379
–
479
–
479
1,170
–
–
–
426
–
426
1,348
–
–
–
1,834
–
1,834
4,483
–
–
–
–
–
–
(736)
–
–
–
–
–
–
–
–
–
(1,900)
(1,900)
(320)
–
–
–
–
(2,263)
(2,263)
(5,550)
(2,432)
(1,947)
–
–
4,399
–
–
(566)
–
566
–
–
(1,142)
(811)
–
–
1,953
–
–
(1,379)
(1,785)
–
–
3,164
–
–
–
–
4,037
4,325
9,412
17,774
15,861
–
1,083
566
1,649
1,170
–
–
856
963
81
1,900
3,374
–
–
3,223
4,147
901
8,271
8,700
76
Annual and Sustainability Report 2016Celebrating 30 years Rights/Shares
Class
Balance at
beginning
of year
No.
granted
No. forfeited/
Expired/ Sold
No. vested
& exercised
Balance at
the end
of year
Name
T May
AEFAC
AEFAG
AEFAE
Deferred Shares
AEF Ordinary shares
2016 Total
2015 Total
S Palmer
AEFAG
AEF Ordinary shares
Deferred Shares
2016 Total
2015 Total
939
470
720
501
–
2,630
2,641
149
382
–
531
–
Management who have departed during the prior year
P Smith
AEFAC
AEFAE
AEFAF
AEF Ordinary shares
2016 Total
2015 Total
–
–
–
629
629
2,303
–
–
–
398
–
398
971
–
341
–
341
531
–
–
–
–
–
–
–
–
–
–
(1,409)
(1,409)
(982)
–
–
–
–
–
–
–
–
–
–
(1,674)
(939)
(470)
–
–
1,409
–
–
(149)
–
149
–
–
–
–
–
–
–
–
–
–
720
899
–
1,619
2,630
–
723
149
872
531
–
–
–
629
629
629
For details on the performance criteria for each tranche of performance rights and deferred shares refer to
Note 11 of the Notes to the Consolidated Financial Statements.
Future vesting schedule
Type
Rights*
Deferred Shares
Deferred Shares
Deferred Shares**
Total
Issue year
FY 2011 – 12
FY 2013 – 14
FY 2014 – 15
FY 2015 – 16
Fair Value
Vesting date
$1,201,401
31/08/2016
$1,005,277
31/08/2017
$840,137
31/08/2018
$864,876
31/08/2019
$3,911,691
Number
14,812
12,394
10,358
10,663
48,227
*
On 31 August 2016 14,812 LTI employee share rights (AEFAE) were issued to employees following vesting of
shares on 30 June 2016.
** 6,832 shares were issued on 31 August 2016 to the Employee Share Trust for employee long term
incentives. This amount comprises of 10,663 shares for FY 2016-17 tranche less 3,831 shares forfeited from
prior years.
77
Annual and Sustainability Report 2016Celebrating 30 years Remuneration report (continued)
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 2015/16 financial year
were:
• Stephen Gibbs (Chair);
• Mara Bun;
• Kate Greenhill; and
• Tony Cole.
The PRNC met six times during the year.
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
2015/16 is shown in Statutory Reporting table and
relates to the previous financial year of 2014/15. 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.
Annually an assessment is made on the eligibility
for vesting of deferred shares issued under the long
term incentive scheme.
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.
Outcomes of votes at Annual
General Meetings
At the 2015 AGM, the Remuneration report
received 29.2% of the vote against it out of 52.6% of
shareholders that voted on the report. This result
constituted a ‘first strike’.
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
31 August 2016
78
Annual and Sustainability Report 2016Celebrating 30 years Lead Auditor’s
Independence Declaration
79
Annual and Sustainability Report 2016Celebrating 30 years Independent
Auditor’s Report
to the Members of Australian Ethical Investment Limited
80
Annual and Sustainability Report 2016Celebrating 30 years 81
Annual and Sustainability Report 2016Celebrating 30 years Consolidated Statements
of Comprehensive Income
For the year ended 30 June 2016
Revenue from continuing operations
2
23,039
21,171
19,656
18,240
Consolidated entity
Parent entity
Notes
2016
$’000
2015
$’000
2016
$’000
2015
$’000
Expenses
External services
Employee benefits expense
Occupancy costs
Marketing and communication costs
Fund related expenses
Other expenses
Depreciation and amortisation expense
Gain/(loss) of disposal of assets
Community grants expense
Impairment of property, plant and equipment
Total expenses
Profit before tax
Tax expense
Net profit for the year
Total comprehensive income for the year
3
10
3
3
3
3
3
3
7
(1,821)
(1,714)
(1,598)
(1,330)
(8,214)
(9,051)
(8,077)
(8,956)
(365)
(1,382)
(406)
(762)
(365)
(1,364)
(3,322)
(2,916)
(1,004)
(406)
(748)
(952)
(2,448)
(1,627)
(1,454)
(1,514)
(182)
7
(395)
(181)
(186)
(74)
(373)
(484)
(182)
7
(395)
(181)
(186)
(74)
(373)
(484)
(18,303)
(17,593)
(14,613)
(15,023)
4,736
3,578
5,043
3,217
4(b)
(1,726)
(1,608)
(1,011)
(605)
3,010
3,010
1,970
1,970
4,032
4,032
2016
Cents
2,612
2,612
2015
Cents
281.97
190.00
271.80
180.69
Earnings per share for profit attributable to
the ordinary equity holders of the Group:
Basic earnings per share
Diluted earnings per share
21(a)
21(b)
The above Consolidated Statements of Comprehensive Income should be read in conjunction with the
accompanying notes.
82
Annual and Sustainability Report 2016Celebrating 30 years Consolidated Statements
of Financial Position
As at 30 June 2016
Consolidated
entity
At
Parent entity
At
30 June
2016
$’000
30 June
2015
$’000
30 June
2016
$’000
30 June
2015
$’000
Notes
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Capitalised website development costs
Deferred tax assets
Investment in subsidiary
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Current tax liabilities
Provisions
Employee benefits
Total current liabilities
Non-current liabilities
Trade and other payables
Employee benefits
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Issued capital
Reserves
Retained earnings
Total equity
5
6
7
4(d)
17
8
9
10
8
10
14
15
14,072
12,227
12,349
495
368
1,780
323
149
313
8,566
1,757
272
14,935
14,330
12,811
10,595
1,823
2,068
1,823
2,068
–
914
–
57
772
–
–
641
316
57
742
316
2,737
2,897
2,780
3,183
17,672
17,227
15,591
13,778
1,632
1,930
2,014
605
900
1,169
4,688
69
99
168
3,191
1,177
–
1,435
5,803
142
130
272
412
–
1,169
3,213
69
99
168
4,856
6,075
3,381
12,816
11,152
12,210
8,693
1,929
2,194
7,004
2,338
1,810
8,693
1,929
1,588
617
–
1,435
3,982
142
130
272
4,254
9,524
7,004
2,338
182
12,816
11,152
12,210
9,524
The above Consolidated Statements of Financial Position should be read in conjunction with the
accompanying notes.
83
Annual and Sustainability Report 2016Celebrating 30 years Consolidated Statement
of Changes in Equity
For the year ended 30 June 2016
Issued
capital
$’000
Asset
revaluation
reserve
$’000
Share-
based
payments
reserves
$’000
Retained
earnings
$’000
Total
$’000
Notes
6,432
(4)
1,122
1,933
9,483
Consolidated entity
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 due to rights vesting during
the year
14, 15
572
Dividends provided for or paid
Employee share scheme – Rights
Employee share plan – Deferred shares
16
15
15
Balance at 30 June 2015
Balance at 1 July 2015
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:
–
–
–
572
7,004
7,004
–
–
–
Shares issued due to rights vesting during
the year
14, 15
1,689
Dividends provided for or paid
Employee share scheme – Rights
Employee share plan – Deferred shares
16
15
15
Balance at 30 June 2016
–
–
–
1,689
8,693
–
4
4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,970
1,970
(4)
–
1,966
1,970
(572)
–
–
–
(2,089)
(2,089)
1,472
316
–
–
1,472
316
1,216
(2,089)
(301)
2,338
2,338
–
–
–
1,810
11,152
1,810
11,152
3,010
3,010
–
–
3,010
3,010
(1,689)
–
–
–
(2,626)
(2,626)
868
412
–
–
868
412
(409)
(2,626)
(1,346)
1,929
2,194
12,816
The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.
84
Annual and Sustainability Report 2016Celebrating 30 years Issued
capital
$’000
Asset
revaluation
reserve
$’000
Share-
based
payments
reserves
$’000
Retained
earnings
$’000
Total
$’000
Notes
6,432
(4)
1,122
(337)
7,213
Parent entity
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 due to rights vesting during
the year
14, 15
572
Dividends provided for or paid
Employee share scheme – Rights
Employee share plan – Deferred shares
16
15
15
Balance at 30 June 2015
Balance at 1 July 2015
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:
–
–
–
572
7,004
7,004
–
–
–
Shares issued due to rights vesting during
the year
14, 15
1,689
Dividends provided for or paid
Employee share scheme – Rights
Employee share plan – Deferred shares
16
15
15
Balance at 30 June 2016
–
–
–
1,689
8,693
–
4
4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,612
2,612
(4)
–
2,608
2,612
(572)
–
–
–
(2,089)
(2,089)
1,472
316
1,216
2,338
2,338
–
–
–
–
–
1,472
316
(2,089)
(301)
182
182
9,524
9,524
4,032
4,032
–
–
4,032
4,032
(1,689)
–
–
–
868
412
(2,626)
(2,626)
–
–
868
412
(409)
(2,626)
(1,346)
1,929
1,588
12,210
The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.
85
Annual and Sustainability Report 2016Celebrating 30 years Consolidated Statements
of Cash Flows
For the year ended 30 June 2016
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
Interest received
Income taxes paid
Community grants paid
Consolidated entity
Parent entity
Notes
2016
$’000
2015
$’000
2016
$’000
2015
$’000
23,981
36,273
18,402
31,028
(16,946)
(28,399)
(13,400)
(25,940)
216
205
172
(2,348)
(1,426)
(1,022)
(481)
(200)
(481)
133
(746)
(200)
Net cash inflow from operating activities
12
4,422
6,453
3,671
4,275
Cash flows from investing activities
Payments for property, plant and equipment
7
(58)
(67)
(58)
(67)
Proceeds from sale of property, plant and equipment
Proceeds from sale of investments
Payments for website development costs
Dividends received from subsidiary
–
–
–
–
Net cash (outflow)/inflow from investing activities
(58)
Cash flows from financing activities
5
1
(26)
–
(87)
–
–
–
2,689
2,631
5
1
(26)
2,988
2,901
Dividends paid to the Company’s shareholders
(2,519)
(2,089)
(2,519)
(2,089)
Net cash (outflow) from financing activities
(2,519)
(2,089)
(2,519)
(2,089)
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
1,845
12,227
4,277
7,950
3,783
8,566
Cash and cash equivalents at the end of year
5
14,072
12,227
12,349
5,087
3,479
8,566
86
Annual and Sustainability Report 2016Celebrating 30 years Notes to the Consolidated
Financial Statements
30 June 2016
Contents
1 About this report
How numbers are calculated
2 Revenue
3 Expenses
4 Income taxes
5 Cash and cash equivalents
6 Trade and other receivables
7 Property, plant and equipment
8 Trade and other payables
9 Provisions
10 Employee benefits
11 Share-based payments
12 Cash flow information
Capital
13 Capital management
14 Issued capital
15 Share-based payments reserves
16 Dividends
Other information
17 Investments in subsidiaries
18 Related party transactions
19 Financial risk management
20 Remuneration of auditors
21 Earnings per share
22 Commitments and contingencies
23 Events occurring after the reporting period
Page
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93
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87
Annual and Sustainability Report 2016Celebrating 30 years 1 About this report
The financial report covers the consolidated entity of
Australian Ethical Investment Limited, the ultimate
parent entity, 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 Group is a for-profit entity for the purposes of
preparing financial statements.
The consolidated financial report was authorised for
issue by the Directors on 31 August 2016.
(a) Basis of preparation
The principal accounting policies adopted in
the preparation of these consolidated financial
statements are set throughout the report. These
policies have been consistently applied to all the
years presented, unless otherwise stated.
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) 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.
(iii) New standards and interpretations not
yet adopted
Certain new accounting standards and
interpretations have been published that are not
mandatory for 30 June 2016 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.
Accounting Standard
Requirement
Impact on Financial Statements
AASB 9 Financial Instruments
and consequential
amendments
AASB 15 Revenue from
Contracts with Customers
AASB 9 addresses the
classification, measurement and
derecognition of financial assets,
financial liabilities and hedging.
This standard becomes mandatory
for the June 2019 financial year,
and will be applied prospectively.
AASB 15 provides a new five step
model for recognising revenue
earned from a contract with a
customer and will replace the
existing AASB 118 Revenue and
AASB 111 Construction Contracts.
The standard become mandatory
for the June 2019 financial year
and will be applied retrospectively.
The Group is assessing the potential
impact on its consolidated financial
statements resulting from the
application of AASB 9.
The potential effect of this standard is
yet to be determined.
88
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years (e) Segment information
The Group determines and represents operating
segments based on the information that is internally
provided to the Managing Director (MD), who is the
Group’s chief operating decision maker.
An operating segment is a component of the Group
that engages in business activities from which it
may earn revenues and incur expenses, including
revenues and expenses that relate to transactions
with any of the Group’s other components. The
Group comprises of one main operating segment
being Funds Management.
1 About this report (continued)
(a) Basis of preparation (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.
(b) Rounding of amounts
The Group is an entity of a kind referred to in ASIC
Corporations (Rounding in Financial/Directors’
Reports) Instrument 2016/191 issued by the
Australian Securities and Investments Commission
(ASIC) relating to the “rounding off” of amounts in
the financial statements. Amounts in the financial
statements have been rounded to the nearest
thousand dollars in accordance with that ASIC
Corporations Instrument, unless otherwise indicated.
(c) Comparatives
Where necessary, comparative information has
been reclassified to be consistent with current
reporting period.
(d) 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.
The areas involving significant estimates or
judgements are:
• Assessment of impairment of property, plant and
equipment - Note 7
• Recognition and measurement of share based
payments - Note 11
• Recoverability of deferred tax assets - Note 4
• Measurement of the amount of the provision for
remediation - Note 9
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.
89
Annual and Sustainability Report 2016Celebrating 30 years How numbers are calculated
This section provides additional information about those individual line items in the consolidated financial
statements that the Directors consider most relevant in the context of the operations of the Group, including:
(a) accounting policies that are relevant for an understanding of the items recognised in the financial
statements. These cover situations where the accounting standards either allow a choice or do not deal
with a particular type of transaction
(b) analysis and sub-totals
(c) information about estimates and judgements made in relation to particular items.
2 Revenue
3 Expenses
4 Income taxes
5 Cash and cash equivalents
6 Trade and other receivables
7 Property, plant and equipment
8 Trade and other payables
9 Provisions
10 Employee benefits
11 Share-based payments
12 Cash flow information
90
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 2 Revenue
From continuing operations
Management and performance fees (net of rebates)
16,069
13,642
16,674
15,096
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
Member and withdrawal fees
Administration fees
Interest income
Other income
Dividends
2,018
4,615
246
91
–
1,675
5,609
205
40
–
–
–
202
91
–
–
133
23
2,689
2,988
23,039
21,171
19,656
18,240
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable.
(i) Fee revenue
Fee 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.
3 Expenses
External services
Ethical research
Audit
Consultants
Legal services
Other
Depreciation and amortisation expense
Depreciation
Amortisation
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
134
543
325
118
701
164
594
379
126
451
134
420
237
115
692
164
320
293
109
444
1,821
1,714
1,598
1,330
126
56
182
134
52
186
126
56
182
134
52
186
91
Annual and Sustainability Report 2016Celebrating 30 years 3 Expenses (continued)
Occupancy costs
Rent
Rates and taxes
Electricity and gas
Other occupancy costs
Marketing and communication costs
Printing and stationery
Marketing
Fund related expenses
Administration and custody
Licence fees
APRA levy
Other fund related expenses
Other expenses
Insurance
IT
Travel
Subscriptions and listing
Remediation expense (Note 9)
Other
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
242
268
242
268
63
28
32
60
30
48
63
28
32
60
30
48
365
406
365
406
224
1,158
1,382
159
603
762
206
1,158
1,364
2,901
2,447
323
91
7
315
88
66
681
319
–
4
3,322
2,916
1,004
145
603
748
591
258
–
103
952
117
115
49
48
1,027
1,021
1,014
1,011
205
87
900
112
247
74
–
170
203
87
–
101
239
74
–
142
2,448
1,627
1,454
1,514
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 the bonus or incentive payment not
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 the above mentioned bonus and amount gifted not been deducted.
Provision for community grants expense amounting to $395,314 has been made in the current year (2015:
$373,481).
92
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 4 Income taxes
(a) Income tax expense through profit or loss
Current tax expense
Under/(over) provision in prior year
Deferred tax (benefit)/expense
Consolidated entity
Parent entity
2016
$’000
2015
$’000
1,865
2,028
3
(142)
(44)
(376)
2016
$’000
907
3
101
1,726
1,608
1,011
2015
$’000
1,008
(44)
(359)
605
(b) Numerical reconciliation of income tax expense to prima facie tax payable
Profit from continuing operations before income tax benefit
Tax at the Australian tax rate of 30.0% (2015 – 30.0%)
Tax effect of amounts which are not deductible (taxable) in
calculating taxable income:
Non-deductible rights 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
Consolidated entity
Parent entity
2016
$’000
4,736
1,421
2015
$’000
3,578
1,073
2016
$’000
5,043
1,513
2015
$’000
3,217
965
260
54
(12)
–
3
442
145
(8)
–
(44)
260
54
(12)
(807)
3
442
145
(7)
(896)
(44)
605
Income tax expense
1,726
1,608
1,011
The applicable weighted average effective tax rates are as follows:
(c) Amounts recognised directly in equity
Deferred tax: Employee share plan 2014/2015
Deferred tax: Employee share plan 2015/2016
36%
45%
20%
19%
Consolidated entity
Parent entity
2016
$’000
82
150
232
2015
$’000
139
–
139
2016
$’000
82
150
232
2015
$’000
139
–
139
93
Annual and Sustainability Report 2016Celebrating 30 years 4 Income taxes (continued)
(d) Deferred tax assets
The balance comprises temporary differences
attributable to:
Other employee benefits
Audit fees
Community grants
Provision for remediation
Provision for employee leave
Total deferred tax assets
Movements:
Opening balance
Charged/credited:
– to profit or loss
Closing balance
Consolidated entity at
Parent entity at
2016
$’000
2015
$’000
2016
$’000
2015
$’000
250
45
119
270
230
914
342
66
144
–
220
772
250
42
119
–
230
641
342
36
144
–
220
742
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
772
396
742
383
142
914
376
772
(101)
641
359
742
Recognition and measurement
Tax expense comprises of current and deferred tax
expense recognised in the profit and loss except
where related to items recognised directly in equity.
Tax expense is measured at the tax rates that have
been enacted or substantially enacted based on the
national tax rate for each applicable jurisdiction at
the reporting date.
Current tax is the expected tax payable or receivable
on taxable income or loss for the year and any
adjustment in respect of previous years.
Deferred tax is recognised in respect of temporary
differences between the carrying amounts of assets
and liabilities.
Deferred tax assets and liabilities arise from timing
differences between the recognition of gains
and losses in the financial statements and their
recognition in the tax computation. These are offset
if there is a legal enforceable right to offset. Deferred
tax assets are recognised only to the extent that
it is probable that future taxable profits will be
available against which they can be utilised. These
are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the
related tax benefits will be realised.
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.
94
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 5 Cash and cash equivalents
Current assets
Cash at bank
Deposits at call
Term deposits
Consolidated entity at
Parent entity at
2016
$’000
2015
$’000
2016
$’000
2015
$’000
128
8,844
5,100
20
12,207
–
123
7,226
5,000
15
8,551
–
14,072
12,227
12,349
8,566
Recognition and measurement
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.
6 Trade and other receivables
Consolidated entity at
Parent entity at
2016
$’000
2015
$’000
2016
$’000
2015
$’000
Trade receivables
495
1,780
149
1,757
Information relating to transactions with related parties is set out in Note 18.
Recognition and measurement
Trade and other receivables are recognised initially at fair value, which approximates their carrying value.
Subsequent measurement is recorded at amortised cost using the effective interest method, less provision for
impairment. Trade and other receivables are generally due for settlement within 30 days. They are presented as
current assets unless collection is not expected for more than 12 months after the reporting date.
Collectability of trade and other receivables is reviewed on an ongoing basis. Debts which are known to be
uncollectible are written off by reducing the carrying amount directly.
There are currently no past due receivables as at 30 June 2016 (2015: nil).
95
Annual and Sustainability Report 2016Celebrating 30 years 7 Property, plant and equipment
Consolidated entity
and Parent entity
Year ended 30 June 2015
Opening net book amount
Additions
–
–
–
–
Reclassification of assets classified as
held for sale and other disposals
230
1,728
Depreciation charge
Impairment loss
Write off
–
–
–
(25)
(464)
–
Closing net book amount
230
1,239
Land
$’000
Buildings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
334
8
280
(39)
(20)
–
563
1,117
(554)
563
125
59
–
(70)
–
(78)
36
374
(338)
36
230
–
230
1,785
(546)
1,239
Land
$’000
Buildings
$’000
Leasehold
improvements
$’000
Plant and
equipment
$’000
At 30 June 2015
Cost
Accumulated depreciation
Net book amount
Consolidated entity
and Parent entity
Year ended 30 June 2016
Opening net book amount
230
1,239
Additions
Depreciation charge
Impairment loss
Write off
–
–
–
–
–
(48)
(128)
–
Closing net book amount
230
1,063
At 30 June 2016
Cost
Accumulated depreciation
Net book amount
230
–
230
1,657
(594)
1,063
563
26
(71)
(53)
–
465
1,090
(625)
465
36
32
(7)
–
4
65
409
(344)
65
96
Total
$’000
459
67
2,238
(134)
(484)
(78)
2,068
3,506
(1,438)
2,068
Total
$’000
2,068
58
(126)
(181)
4
1,823
3,386
(1,563)
1,823
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years Recognition and measurement
Property, plant and equipment are measured at
cost less accumulated depreciation and impairment
losses. 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. 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.
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 methods and useful lives
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
Estimated useful life
Buildings
5 – 40 years
Plant & Equipment
2.6 – 10 years
The assets’ residual values and useful lives are
reviewed, and adjusted if appropriate, at the end of
each reporting period.
Impairment
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.
97
Annual and Sustainability Report 2016Celebrating 30 years 8 Trade and other payables
Trade payables
Unearned income
Community grants payable
Accrued expenses
Trade payables
Unearned income
Community grants payable
Accrued expenses
Current
$’000
440
80
395
1,099
2,014
Current
$’000
425
80
395
732
Consolidated entity at
30 June
2016
Non–
current
$’000
Total
$’000
Current
$’000
–
69
–
–
69
440
149
395
1,099
2,083
1,171
60
481
1,479
3,191
Parent entity at
30 June
2016
Non–
current
$’000
–
69
–
–
Total
$’000
Current
$’000
425
149
395
732
313
60
481
1,076
1,930
30 June
2015
Non–
current
$’000
Total
$’000
–
1,171
142
–
–
142
202
481
1,479
3,333
30 June
2015
Non–
current
$’000
–
142
–
–
142
Total
$’000
313
202
481
1,076
2,072
1,632
69
1,701
Recognition and measurement
Trade and other payables are unsecured and are usually paid within 30 days of recognition.
The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their
short-term nature.
98
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 9 Provisions
Consolidated entity at
Parent entity at
30 June
2016
$’000
30 June
2015
$’000
30 June
2016
$’000
30 June
2015
$’000
Provision for remediation
900
–
–
–
At year end, the Group became aware of errors in the calculation of unit prices for the Australian Ethical Retail
Superannuation Fund in respect of prior and current years. The errors are currently being investigated and
further work is required to determine the cause of and responsibility for the errors and the precise impact
on members, and to develop a rectification plan. The Group is committed to ensuring that members are not
materially disadvantaged as a result of these errors. The Group intends the investigation and any rectification to
be finalised in FY17. Based on investigative work completed to date, an amount of $900,000 has been provided
for in these financial statements. This provision is the best estimate of the impact on members and has been
calculated based on the current project findings using assumptions around member cash inflows and outflows
in order to return member balances to the correct value had the errors not occurred. The final amount could
change once the investigation and any corrective actions are completed.
10 Employee benefits
The balance in employee benefits is as follows:
Employee bonus payable
Employee benefits provisions
– long service leave
Consolidated entity and Parent entity at
30 June
2016
Non–
current
$’000
–
99
99
Current
$’000
833
336
1,169
30 June
2015
Non–
current
$’000
Total
$’000
Total
$’000
Current
$’000
833
1,142
–
1,142
435
293
1,268
1,435
130
130
423
1,565
During the year, the Consolidated entity and Parent entity incurred the following employee benefits
expense:
Employee benefits expense
Employee remuneration
Directors fees
Bonus and rights amortisation
Other employment costs
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
5,777
5,699
5,777
5,699
361
293
224
198
1,980
3,019
1,980
3,019
96
40
96
40
8,214
9,051
8,077
8,956
99
Annual and Sustainability Report 2016Celebrating 30 years 10 Employee benefits (continued)
Recognition and measurement
Employee benefits provisions
Employee benefits 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.
Short-term obligations
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 include 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.
Other long-term employee benefit obligations
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.
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.
Further details on employee benefits expense are included in the Remuneration Report.
Employee share trust
Long term incentives for employees are held as shares in an employee share trust with various vesting
conditions.
100
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 11 Share-based payments
The following share-based payment arrangements existed as at 30 June 2016.
(a) Performance rights (equity-settled)
Under the Company’s 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 with these rights holding no voting or dividend rights.
Performance rights summary
Rights
Class
Performance
Period
Grant
Date
Vesting
Date
No.
Granted
No.
Forfeited
No.
Vested
No.
Expired Balance
AEFAC FY 2013-15
30/06/2013 30/06/2015 23,357
AEFAE
FY 2014-16
30/06/2014 30/06/2016 17,955
(6,523)
(3,143)
AEFAG FY 2015
30/06/2015 30/06/2015 11,899
–
(16,834)
(14,812)
(11,899)
–
–
–
–
–
–
(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
$868,000 (2015: $1,472,000) relating to rights issued under the ESIS.
(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 with the shares having voting rights and employees receive dividends.
Included under employee benefits expense in the consolidated statements of comprehensive income is
$320,000 (2015: $176,000) relating to the performance shares granted.
Deferred shares are held in an Employee Share Trust until vesting conditions are met.
Deferred shares (continued) Performance shares summary
Performance
Period
Grant
Date
Vesting
Date
No.
Granted
No.
Forfeited
No.
Vested
No.
Expired Balance
FY 2014-15
31/08/2014
31/08/2017
14,924
FY 2015-16
31/08/2015
31/08/2018
12,190
(2,530)
(1,832)
FY 2016-17*
31/08/2016
31/08/2019
10,663
–
–
–
–
–
–
–
12,394
10,358
10,663
* This tranche of performance shares was issued to the Employee Share Trust on 31 August 2016.
(i) Fair value of deferred shares issued
The fair value of the shares issued to the Employee Share Trust (10,663) was $864,876 based on the 30 June
2016 price.
101
Annual and Sustainability Report 2016Celebrating 30 years 11 Share-based payments (continued)
On 31 August 2016, the following deferred shares were issued to the Employee Share Trust.
Number to
be Granted
10,663
Attributes
i)
employment must continue until July 2019
ii) the number of shares that will be issued to an employee is fixed at the grant date
iii) 50% of the shares are subject to the following hurdle:
(a) if the compound earnings per share (“EPS”) growth over 3 years is less than 5%, no
shares will vest
(b) if the compound EPS growth over 3 years is greater than 10%, 100% will vest
(c) if the compound EPS growth over 3 years is greater than 5% and less than 10%, then
pro rata amount will vest on a straight line basis
(d) the compound average growth rate on earnings per share is determined as the average
EPS over six month periods calculated using audited half-year financial statements
iv) the performance period is the financial years 2016/17, 2017/18 and 2018/19.
12 Cash flow information
Reconciliation of profit after income tax to net cash inflow from operating activities
Profit for the year
Adjustments to operating profit:
Depreciation and amortisation
(Gain)/loss on disposal and write-off of property, plant
& equipment
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 in trade and other receivables
(Increase)/decrease in other current assets
(Increase)/decrease in deferred tax assets
(Decrease)/increase in trade and other payables
Increase in provisions
(Decrease)/increase in current tax liabilities
Decrease in deferred tax liabilities
(Decrease)/increase in employee benefits
Consolidated
entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
3,010
1,970
4,032
2,612
182
186
182
186
(7)
85
(7)
85
1,188
1,649
1,188
1,648
181
(53)
484
(61)
181
(53)
484
(61)
–
–
(2,689)
(2,988)
1,285
(45)
(142)
(1,303)
900
(477)
–
(297)
966
39
(376)
–
–
558
(1)
954
1,608
1,418
(41)
101
(424)
–
(110)
–
(297)
53
(360)
25
–
220
(1)
954
Net cash inflow from operating activities
4,422
6,453
3,671
4,275
102
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years Capital
This section of the notes discusses the Group’s capital structure and dividends paid to shareholders.
13 Capital management
14 Issued capital
15 Share-based payments reserves
16 Dividends
103
Annual and Sustainability Report 2016Celebrating 30 years 13 Capital management
The Group manages its capital structure and related financing costs, including its balance sheet liquidity and
access to capital markets. The Group’s objectives when managing capital are to safeguard its ability to continue
as a going concern, to continue to provide returns to shareholders and benefits to other stakeholders, and to
reduce the cost of capital.
(i) Regulatory capital requirements
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
Commission (ASIC) requires the Company to:
• prepare 12-month cash-flow projections which must be approved at least quarterly by Directors, and
reviewed annually by auditors;
• hold at all times minimum Net Tangible Assets (NTA) the greater of:
(a) $150,000
(b) 0.5% of the average value of scheme property (capped at $5 million); or
(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
least $50,000 in Surplus Liquid Funds (SLF).
The Company has complied with these requirements at all times during the year.
(ii) Dividend policy
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 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.
As at year end the Group had no long term debt arrangements.
There were no changes to the Group’s approach to capital management during the year.
104
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years
14 Issued capital
Issues of ordinary shares by Parent entity
Date
No.
Issued
Price
Opening balance 1/07/2014
1,023,147
Amount
$’000
6,432
Comment
31/08/2014
31/08/2014
31/08/2014
31/08/2014
10,694
$35.45
380
Vesting of AEFAF Rights
1,257
3,795
$46.00
$35.45
58
Vesting of AEFAF Rights
134
Vesting of AEFAA Rights
14,924
–
Issue of deferred shares to the
Employee Share Trust1
–
Closing balance 30/06/2015
1,053,817
Opening balance 1/07/2015
1,053,817
31/08/2015
31/08/2015
31/08/2015
11,899
$58.80
16,834
$58.80
11,659
–
7,004
7,004
699
990
Vesting of AEFAG Rights
Vesting of AEFAC Rights
Issue of deferred shares to the
Employee Share Trust1
–
Closing balance 30/06/2016
1,094,209
8,693
1 Shares issued to the Employee Share Plan Trust are considered to be Treasury shares as the Trust is defined as an agent of the Company. No
value is attributed to these shares.
Ordinary shares are classified as equity. The Company does not have authorised capital or par value in respect
of its shares.
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax,
from the proceeds.
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.
105
Annual and Sustainability Report 2016Celebrating 30 years 15 Share-based payments reserves
Share–based payments reserve
Opening balance
Employee share plan expense
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2,022
868
1,122
1,472
2,022
868
1,122
1,472
Issue of shares held by entity to employees
(1,689)
(572)
(1,689)
(572)
Employee share plan reserve
Opening balance
Employee share plan - Deferred
1,201
2,022
1,201
2,022
316
412
728
–
316
316
316
412
728
–
316
316
1,929
2,338
1,929
2,338
Share-based payments reserve
This 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 11.
Employee share plan reserve
This reserve relates to shares granted by the Group to its employees under its current share-based payment
arrangement. Further information about the new share-based payments to employees is set out in Note 11.
106
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 16 Dividends
(a) Dividends declared/paid during the financial year
Dividends declared and/or paid fully franked at 30% tax rate in respect of the corresponding
financial year.
30 June 2016
Ordinary shares – 2015 final
Ordinary shares – 2016 interim
Total dividends paid
30 June 2015
Ordinary shares – 2015 interim
Ordinary shares – 2014 final
Total dividends paid
Cents per
share
Total
amount
Date of
payment
%
Franked
120
120
$1,313,052
30/09/2015
$1,313,052
24/03/2016
$2,626,104
80
$843,054
27/03/2015
120
$1,246,676
03/10/2014
$2,089,730
100
100
100
100
(b) Dividends declared after the end of the reporting period
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
In addition to the above dividends, since year end the Directors
have declared a final dividend of 180 cents per fully paid ordinary
share (2015: 120 cents), fully franked based on tax paid at 30%.
The aggregate amount of the declared dividend expected to be
paid on 23 September 2016 out of profits for the year ended at
30 June 2016, but not recognised as a liability at year end, is:
2,009
1,313
2,009
1,313
Recognition
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.
107
Annual and Sustainability Report 2016Celebrating 30 years Other information
This section of the notes includes other information that must be disclosed to comply with the accounting
standards and other pronouncements, but that is not immediately related to individual line items in the
financial statements.
17 Investments in subsidiaries
18 Related party transactions
19 Financial risk management
20 Remuneration of auditors
21 Earnings per share
22 Commitments and contingencies
23 Events occurring after the reporting period
108
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 17 Investments in subsidiaries
Details of the Group’s subsidiaries at the end of the reporting period are as follows.
Place of
incorporation
and operation
Proportion of
ownership interest
and voting power
held by the Group
Cost of
investment
Australia
100%
$316,000
Australia
100%
$1
Name of the subsidiary
Principal activity
Australian Ethical
Superannuation
Pty Limited (AES)
Australian Ethical Investment
Limited Employee Share Plan
Trust (AESSPT)
Trustee of the
Australian Ethical Retail
Superannuation Fund
(AERSF)
Employee deferred
share plan trust
(a) Principles of consolidation
(i) Subsidiaries
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls
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 consolidated from the date on which control is transferred to the Group. They are deconsolidated from the
date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are
eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment
of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure
consistency with the policies adopted by the Group.
(ii) Employee Share Trust
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 Company on the basis that the Trust is merely acting as an agent of the Company.
109
Annual and Sustainability Report 2016Celebrating 30 years 18 Related party transactions
(a) Key management personnel compensation
Consolidated entity
Parent entity
2016
$
2015
$
2016
$
2015
$
Short-term employee benefits
2,262,722
1,994,192
2,138,224
1,910,221
Post-employment benefits
Long-term benefits
Share-based payments
147,151
142,840
135,324
134,863
44,328
44,420
44,328
44,420
684,432
249,251
684,432
249,251
3,138,633
2,430,703
3,002,308
2,338,755
Information regarding key management personnel’s remuneration and shares held in Australian Ethical
Investments Limited as required by Corporations Regulations 2M.3.03 is provided in the Remuneration Report on
pages 6 to 20 of this Annual Report.
(b) Transactions with related parties
Australian Ethical Superannuation Pty Limited (AES) acts as a trustee for Australian Ethical Retail
Superannuation Fund (AERSF).
Australian Ethical Investment Limited (AEI) acts as the responsible entity for the following Australian Ethical
Trusts (AETs):
Name
Australian Ethical Australian Shares Fund
Australian Ethical Diversified Shares Fund
Australian Ethical Cash Fund
Australian Ethical Fixed Interest Fund
Australian Ethical International Shares Fund
Australian Ethical Advocacy Fund
Australian Ethical Property Trust
Australian Ethical Emerging Companies Fund
Australian Ethical Balance Fund
The following transactions occurred with related parties:
Consolidated entity
Parent entity
2016
$
2015
$
2016
$
2015
$
AETs
AEI provides investment services to the AETs as
identified above in accordance with the trust deed
7,616,711
21,625,739
7,616,711
21,625,739
AERSF
AES provides investment services/ (rebate of
investment services) to AERSF
AES provides Administration/Trustee services
to AERSF
AES provides Member Administration services
to AERSF
(70,008)
(14,491,963)
12,888,710
11,959,605
2,018,014
1,675,403
–
–
–
–
–
–
110
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 18 Related party transactions (continued)
(b) Transactions with related parties (continued)
Consolidated entity
Parent entity
2016
$
2015
$
2016
$
2015
$
AES
Service fee paid to AEI
Dividends paid to AEI
Director fees paid by AEI
Transactions between AES and its parent entity AEI
under the tax consolidation and related tax sharing
agreement referred to in Note 4
–
–
–
–
AEFL *
Community grants paid by AEI to AEFL
480,542
–
–
–
–
–
9,006,256
7,954,852
2,688,557
2,988,213
136,323
92,836
714,907
1,004,218
480,542
–
*
Australian Ethical Foundation Limited (AEFL) was created in July 2015 as a vehicle to distribute the
community grants the Company makes each year. This will provide greater flexibility in the types of support
the Company would be able to provide recipients and in the future will provide an opportunity to invite the
shareholders and clients to contribute to AEFL and participate in the support of many worthwhile recipients.
Transactions between related parties are on commercial terms and conditions no more favourable than those
available to other parties unless otherwise stated.
(c) Outstanding balances
The following balances are outstanding at the end of the reporting period in relation to transactions with
related parties:
Consolidated entity
at
Parent entity
at
30 June
2016
$
30 June
2015
$
30 June
2016
$
30 June
2015
$
Investment held in AES
–
–
316,000
316,000
Amounts receivable from the AETs
53,140
1,056,974
53,140
1,056,974
Amounts receivable from AERSF
Amounts payable to AERSF
Amounts receivable from AES
Amounts payable to AEFL
396,572
720,066
(1,675)
(853,049)
–
–
–
–
–
(395,314)
–
–
50,201
697,408
(395,314)
–
111
Annual and Sustainability Report 2016Celebrating 30 years 19 Financial risk management
The Group’s activities expose it to a variety of
financial risks, including market risk arising from
Funds under Management, credit risk and liquidity
risk. The Board of the Company has in place a risk
management framework to mitigate these risks.
The Group does not have a material exposure to
currency, price and interest rate risk.
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 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 has appropriate processes in place
for managing all types of 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
the Committee are to identify emerging risks and
determine treatment and monitoring emergent
and current risks. In addition, the Committee
is responsible for seeking assurances from
management that the systems and policies in place
to assist the Group to meet and monitor its risk
management responsibilities certain appropriate,
up-to-date content and are being maintained.
The Group is complying with its licences, and the
regulatory requirements relevant to its roles as
responsible entity, trustee and fund manager; and
that there is a structure, methodology and timetable
in place for monitoring material service providers.
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.
Exposure
The Group’s revenue is significantly dependent on
Funds Under Management (FUM) which is influenced
by equity market movements. Management
calculates that a 10% movement in FUM changes
annualised revenue by approximately $1,718,000
(2015: $1,606,000).
(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.
The Group manages this risk by holding cash
and cash equivalents at financial institutions with
a Standard & Poor’s rating of ‘A’ or higher. 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 of cash and cash equivalents. For
all financial instruments other than those measured
at fair value their carrying value approximates
fair value.
The trade and other receivables are short term in
nature and are not past due or impaired.
(c) Liquidity risk
Liquidity risk is the risk that the Group will not be
able to meet its financial commitments or will incur
significant debt to meet those commitments.
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.
112
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 19 Financial risk management (continued)
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.
Trade and other payables
At 30 June 2016
Consolidated entity
Parent entity
At 30 June 2015
Consolidated entity
Parent entity
Less than
6 months
$’000
6-12
months
$’000
2,332
1,949
331
331
Less than
6 months
$’000
6-12
months
$’000
3,964
2,703
309
309
113
Annual and Sustainability Report 2016Celebrating 30 years 20 Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the Company,
KPMG Australia and its related practices:
Audit services for the consolidated entity and subsidiaries
Audit and review of consolidated and subsidiary
financial statements
Consolidated entity
Parent entity
2016
$
2015
$
2016
$
2015
$
57,710
32,710
37,450
27,450
Audit services in accordance with regulatory requirements
42,480
40,480
38,050
36,250
Audit and review of Assurance Services in relation to
Sustainability Report
19,500
–
19,500
–
119,690
73,190
95,000
63,700
Audit services for non–consolidated trusts and superannuation fund *
Audit and review of managed funds for which the Company acts
as Responsible Entity
137,400
109,290
137,400
109,290
Audit and review of superannuation fund for which the
subsidiary entity acts as Responsible Superannuation Entity
26,160
21,160
Audit services in accordance with regulatory requirements
48,330
46,030
–
–
–
–
Total remuneration for audit services
Non-audit services
Tax advice
Other accounting advice
211,890
176,480
137,400
109,290
331,580
249,670
232,400
172,990
41,850
37,074
34,900
31,233
63,775
56,819
41,775
56,819
Total remuneration for non-audit services
105,625
93,893
76,675
88,052
Total remuneration of KPMG Australia
437,205
343,563
309,075
261,042
* These fees are incurred by the Company and are effectively recovered from the funds via
management fees.
The Board considered the non-audit services provided by the auditor and is satisfied that the provision
of the non-audit services above by the auditor is compatible with, and does not compromise, the auditor
independence requirements of the Corporations Act 2001 for the following reasons:
• all non-audit services are subject to the corporate governance procedures adopted by the Company and are
reviewed by the Audit, Risk and Compliance Committee to ensure that they do not impact the integrity and
objectivity of the auditor, and
• non-audit services provided do not undermine the general principles relating to auditor independence as
set out in APES 110 Code of Ethics for Professional Accountants, as they do not involve reviewing or auditing
the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an
advocate for the Company or jointly sharing risks and rewards.
114
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 21 Earnings per share
(a) Basic earnings per share
2016
cents
2015
cents
From continuing operations attributable to the ordinary equity holders of the Company
281.97
190.00
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 of $3,010,000 (2015: $1,970,000)
• 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.
(b) Diluted earnings per share
2016
cents
2015
cents
From continuing operations attributable to the ordinary equity holders of the Company
271.80
180.69
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 (nil in 2016 and 2015), and
the weighted average number of additional ordinary shares that would have been outstanding assuming the
conversion of all dilutive potential ordinary shares.
(c) Weighted average number of shares used as denominator
2016
number
2015
number
Weighted average number of ordinary shares used as the denominator in calculating
basic earnings per share
1,067,549 1,036,821
Adjustments for calculation of diluted earnings per share:
Weighted average number of rights outstanding
39,929
53,418
Weighted average number of ordinary and potential ordinary shares used as the
denominator in calculating diluted earnings per share
1,107,478 1,090,239
115
Annual and Sustainability Report 2016Celebrating 30 years 22 Commitments and contingencies
(a) Operating leases
Operating leases relate to leases of office premises for a term of seven years. The Group does not have an
option to purchase the premises at the expiry of the lease period.
Non-cancellable operating lease commitments
Within one year
Later than one year but not later than five years
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
483
2,134
2,617
232
431
663
483
2,134
2,617
232
431
663
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 financial statements 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.
Effective from 1 July 2016, the Company had taken a new long-term operating lease for its Sydney office for a
period of seven years including additional office space.
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
(b) Guarantees
Consolidated entity
Parent entity
2016
$’000
2015
$’000
2016
$’000
2015
$’000
224
224
234
234
224
224
234
234
80
69
149
60
142
202
80
69
149
60
142
202
The Group has provided a guarantee for $504,000 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 2016.
116
Notes to the Consolidated Financial Statements (continued)Annual and Sustainability Report 2016Celebrating 30 years 23 Events occurring after the reporting period
The Group’s fees are primarily based on its funds under management which in turn is impacted by
changes in equity markets.
6,832 shares were issued on 31 August 2016 to the Employee Share Trust for employee long term
incentives. This amount comprises of 10,663 shares for FY 2016-17 less 3,831 shares forfeited from
prior years.
On 31 August 2016, 14,812 LTI employee share rights (AEFAE) were issued to employees following vesting
of shares on 30 June 2016.
Other than as outlined in this report, no other 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.
117
Annual and Sustainability Report 2016Celebrating 30 years 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 64 to 117 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 2016 and of its
performance, for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001;
and
(b) there are reasonable grounds to believe that the Group will be able to pay its debts as and
when they become due and payable.
The Directors have been given the declarations required by Section 295A of the Corporations
Act 2001 from the Chief Executive Office and Chief Financial Officer for the financial year ended
30 June 2016.
The Directors draw attention to Note 1(a)(i) to the consolidated financial statements, which
includes a statement of compliance with International Financial Reporting Standards.
2
3
Signed in accordance with a resolution of the Directors:
Phil Vernon
Managing Director and Chief Executive Officer
Sydney
31 August 2016
118
Annual and Sustainability Report 2016Celebrating 30 years
Shareholder information
Shareholder Information as at 1 August 2016
Security
Number of
holders
Number on
issue
Voting rights
Fully paid ordinary shares
1,225
1,115,854
One vote per share
Top 20 shareholders of fully paid shares
Shareholder
Select Managed Funds Pty Ltd
James Andrew Thier
Ms Caroline Le Couteur
Mr Howard Pender
Mr Eric Yin Wang Tse & Mrs Patty Bik Yuk Tse
Pacific Custodians Pty Limited
National Nominees Limited
Mrs Judith Margaret Boag
Mr Trevor Roland Lee
Mr Bruce Allan McGregor & Mrs Ann Marion McGregor
HB Sarjeant & Assoc Pty Ltd
Mr Anthony Scott Cook
Garrett Smythe Ltd
Daisy Thier
BNP Paribas Noms Pty Ltd
Dr Judith Ingrouille Ajani
Nurturing Evolutionary Development Pty Ltd
Mr Michel Beuchat & Mrs Ann Beuchat
Mr Phillip Andrew Vernon
Mr Andrew Charles Gracey
Total
Balance of register
Grand total
Balance
%
196,472
17.61
51,367
49,436
39,002
35,000
33,415
30,515
28,503
26,376
23,647
20,140
18,121
17,169
15,297
12,766
11,700
11,500
9,667
9,412
8,349
4.60
4.43
3.50
3.14
2.99
2.73
2.55
2.36
2.12
1.80
1.62
1.54
1.37
1.14
1.05
1.03
0.87
0.84
0.75
647,854
468,000
58.06
41.94
1,115,854
100.00
119
Annual and Sustainability Report 2016Celebrating 30 years Shareholder information (continued)
Distribution of holdings of fully paid shares
Range
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and Over
Totals
Holders
Total
units
1,136
237,765
93
9
16
1
193,639
64,024
423,954
196,472
%
21.31
17.35
5.74
37.99
17.61
1,255
1,115,854
100.00
On Thursday, 8 September 2016 AEF ordinary shares closed at $85.52. Accordingly, 6 or more shares
constitute a marketable parcel. On Friday, 9 Septebmer 2016 the Company had 11 shareholders whose
holdings is not a marketable parcel, these 11 shareholders own a total of 27 shares.
120
Annual and Sustainability Report 2016Celebrating 30 years Letter of Assurance
121
Annual and Sustainability Report 2016Celebrating 30 years Letter of Assurance (continued)
122
Annual and Sustainability Report 2016Celebrating 30 years Company directory
AEI Group
Responsible Entity
Australian Ethical Investment Limited
ACN 003 188 930; AFSL Number 229949
Registrable Superannuation Entity
Australian Ethical Superannuation Pty Limited
ACN 079 259 733; RSEL Number L0001441
Australian Ethical Foundation Limited
ACN 607 166 503
Security Exchange Listing
Australian Ethical Investment Limited is listed on
the Australian Securities Exchange.
ASX Code: AEF
Directors
Steve Gibbs (Chair and Non-Executive Director)
Mara Bun (Non-Executive Director)
Tony Cole (Non-Executive Director)
Kate Greenhill (Non-Executive Director)
Phillip Vernon (Managing Director and Chief
Executive Officer)
Offices
Head Office
Australian Ethical Investment Limited
Level 8, 130 Pitt Street
Sydney, NSW 2000
Registered Office
The Company’s registered office is now care of:
Company Matters Pty Limited
Level 12, 680 George Street
Sydney, NSW 2000
Phone +61 8280 7355
PO Box 20547
World Square NSW 2002
Post
GPO Box 8, Sydney 2001
Phone +61 2 8276 6288
Fax +61 2 8276 6287
enquiries@australianethical.com.au
www.australianethical.com.au
Share Registry
Link Market Services Limited
Locked Bag A14
Sydney South, NSW 1235
Phone +61 1300 554 474
Fax +61 2 9287 0303
registrars@linkmarketservices.com.au
www.linkmarketservices.com.au
Company Secretary
Tom May
Banker and Custodian
National Australia Bank Limited
Level 3, 255 George Street
Sydney NSW 2000
Administrator
For Superannuation
Link Super Pty Ltd
Locked Bag 5125
Parramatta, NSW 2124
For Managed Funds
Boardroom Pty Ltd
GPO Box 3993
Sydney, NSW 2001
Auditors and Taxation
KPMG Australia
10 Shelley Street
Sydney, NSW 2000
Media Inquiries
Honner
Belinda White
Level 5, 8 Spring Street
Sydney, NSW 2000
Corporate Governance Statement
australianethical.com.au/shareholders
/corporate-governance/
Annual and Sustainability Report 2016
Celebrating 30 years
Contact us
Phone: 1800 021 227
Email: enquiries@australianethical.com.au
Address: Reply Paid GPO Box 8, Sydney NSW 2000
Web: australianethical.com.au
This report is published on 100% recycled paper. The fibre source has been independently certified by the Forestry Stewardship Council (FSC).
Unless otherwise indicated, the photographs and drawings of assets in this report are not real assets connected to the Australian Ethical Managed Investment
Schemes (“Managed Funds”) or the Australian Ethical Retail Superannuation Fund (“Super Fund”). Photographs and drawings of public buildings, transport, or
panoramic views do not depict Managed Funds or Super Fund assets. Where used, photographs of the assets of the Managed Funds or Super Fund are the
most recent available.
The information in this report is general information only, and does not take into account your personal financial situation or needs. You should consider
obtaining financial advice that is tailored to suit your personal circumstances. Any views or opinions expressed are the author or quoted person’s own and
may not reflect the views or opinions of Australian Ethical.
COPYRIGHT: No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or any means, electronic, mechanical,
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