Australian Ethical Investment
Annual Report 2021

Plain-text annual report

Annual Report 2021 – INVESTING FOR A BETTER WORLD About this report Welcome to the Australian Ethical Investment Limited (Australian Ethical) Annual Report for 2021. We have included the performance for Australian Ethical and its wholly owned subsidiaries: Australian Ethical Superannuation Pty Ltd (Australian Ethical Super) and Australian Ethical Foundation Limited (The Foundation), for the period 1 July 2020 to 30 June 2021 (FY21) in this report. Unlike many other financial services organisations, we know that our impact at Australian Ethical goes much further than the strong financial returns we make for our members and investors. Together, our annual report and sustainability reporting suite will meet the requirements of the Global Reporting Initiative’s (GRI) Sustainability Reporting Standards and continue our long history of providing best practice reporting on how we make money matter. KPMG has audited the financial statements within our Annual Report and will assure a number of key sustainability disclosures in our sustainability reporting. We welcome your feedback on our reports. Please contact Tom May, General Counsel & Company Secretary, Australian Ethical Investment Limited on 0488 779 474 or at tmay@australianethical.com.au. Our Corporate Governance Statement is available at australianethical.com.au/shareholders/corporate-governance ANNUAL REPORT 2021Contents Message from the CEO Message from the Chair Highlights Investment report Investment performance Our senior leadership team Annual report Shareholder information Company directory 2 4 6 8 10 12 15 98 99 1 Message from the CEO John McMurdo, Chief Executive Officer & Managing Director This time last year many of us thought we were in the middle of the COVID-19 crisis but in truth it was only just beginning. Twelve months later and countries remain gripped by the pandemic with vaccine shortages and escalating infection rates. In Australia at the time of writing, swathes of the country are in strict lockdown and struggling to control an outbreak of the Delta variant. And while these circumstances have brought suffering in many forms, they have also set the ball rolling on urgent and overdue improvements. We’ve been reminded of the value of being connected, of good health, of diversity and inclusion. Most significantly, we’ve been reminded of the value of nature and safeguarding the one planet we share. But the latest report from the IPCC1 tells us we are almost out of time. Or, to quote UN Secretary General António Guterres, we’re facing a “code red for humanity.”2 Australians know this. Seven in 10 want to see stronger climate policy3, while 86% expect their super or other savings to be invested responsibly4. We’ve seen our addressable market explode from 10% of Australians in 20195 to 70-80% in 20216, together with record net flows into our business. No longer prepared to wait, Australians are taking climate action into their own hands and turning to Australian Ethical to invest their money. As a result, our funds under management have grown from $4 billion to $6 billion during the period. And yes, while this growth is worth celebrating, what’s more important is the seismic shift of money to good investments that help to build a better future for all of us. That’s because we don’t invest in fossil fuel companies7, or companies involved in nuclear, tobacco or gambling. We measure our impact. The companies in our portfolio produced 77% less carbon than their benchmark8, we have proportionally 13 times more investment in renewable power generation than our benchmark9. We track the contributions the companies we invest in make to the global Sustainable Development Goals10. We actively engage with companies we invest in and advocate for better corporate behaviour from those we don’t. We believe our purpose of investing for a better world has never been more urgent. It’s what defines our investment philosophy, it’s how we run our business, it’s what motivates our people and it’s why people choose to invest with us. More than one year into the pandemic with no definite end in sight, we are using this time to think about the business we want to be in the future. How can we grow the influence of what we do? How can we make more of a positive impact? How can we leverage what we do to address the challenges we face? And how can we do more to bring others along with us? And so, beyond the numbers and the figures on our spreadsheets, this year has been one of humility and humanity for all of us at Australian Ethical; a time of self-reflection as we consider what comes next for our unique business. None of us really knows what the world will look like after COVID-19. We have moved beyond the point where textbooks agree on what happens next. However, in times like these we must focus on what we do know, that there will be no future unless we double down on our commitment to protecting people, planet and animals. We also know that doing less harm is no longer enough. Instead, all businesses must become a force for good and contribute to building an economy that is inclusive, green and resilient. Our success proves that it’s possible; current circumstances prove that it’s necessary. On behalf of the leadership team at Australian Ethical, thank you for your continuing interest in our business. We hope you enjoy our annual report and reading about our many successes this year. We remain committed to working hard with the highest integrity for all our stakeholders as we continue to invest for a better world. John. 2 ANNUAL REPORT 20211. Climate Change 2021: The Physical Science Basis, IPCC, 9 August 2021 2. Statement made by UN Secretary General António Guterres, 9 August 2021 3. Lowy Institute Climate Poll 2021 (sample size 3286 Australian adults) 4. RIAA Consumer Trends Report 2020, RIAA 5. Australian Ethical Research, Pollinate, March 2019 6. 2021 ESG Investor Report, Investment Trends 7. We don’t invest in companies whose main business is fossil fuels or gambling, or in diversified companies that earn some fossil fuel or gambling revenue and aren't creating positive impact with their other activities.^ 8. Carbon intensity (tonnes CO2e per $ revenue) of Australia Ethical share investments compared to the blended benchmark.*^ 9. Proportion of our share investments in renewable power generation compared to the blended benchmark.* 10. Based on the ‘sustainable impact’ revenue earned by companies whose shares we invest in, compared to the blended benchmark.*^ *Shareholdings as at 30 June 2021. ^Further information on page 100 of this report. 3 Message from the Chair Steve Gibbs, Chair One of the more heartening milestones during this past financial year was Australian Ethical’s 35th anniversary. It was an opportunity to reflect on where we have come from and, more importantly, where we are going. Leading with purpose is now a powerful competitive differentiator. Companies are realising that to ignore purpose is to become irrelevant.2 True purpose can’t be backdated, retrofitted or invented overnight – it needs a foundation grounded in authenticity. Looking at our past, our original, authentic and long-standing investment in purpose has given us a strong head start. Looking to the future, the true power of that head start lies in how we now build on it to deliver even greater impact. We believe Australian Ethical has an unmissable opportunity to grow our business and – most importantly – grow the positive impact of what we do. But we must act decisively to harness the momentum, otherwise the window will be lost. We hope this annual report provides you with a rich picture of our values-based mission, our impact and our strategy for building a future-fit company to benefit all our stakeholders. Steve. Australian Ethical has always been driven by purpose. In 1986, our founders set out to prove that harnessing the inherent power of financial markets could bring about significant social change. It was a novel concept, but our founders could see that a society that allocates resources purely to generate short-term profit is untenable. Fast forward to 2021 and their once visionary approach is becoming mainstream as an increasing number of investors seek to make a positive impact alongside the more traditional metrics of risk and return.1 As we look back, we have much to be proud of. Not only have we pioneered ethical investing in Australia and made a positive impact on people, planet and animals, but for over three decades we have run our business with purpose at its core. Does our purpose make us a better business? Yes, unequivocally. It may have taken 30 years to move from niche to game-changer, but we have shown what a sustainable business can and should look like. We’ve proved that brands with purpose grow, that companies with purpose last and that people with purpose thrive. In fact, our once-radical ethos is increasingly seen as the way to do business. 1 From Values to Riches 2020: Charting consumer expectations and demand for responsible investing in Australia, RIAA. 2 Purpose: Shifting from why to how? McKinsey Quarterly, 22 April 2020 4 ANNUAL REPORT 2021for over three decades we have run our business with purpose at its core 5 Highlights $6.07 billion in funds under management $59.1 million revenue 56% increase in net flows $11.3 million profit after tax1 Multiple Investment Excellence Awards2 Emerging Companies fund returned 50.3%3 Australian Shares super option No.1 over 1, 3, 5, 7 & 10 years4 MySuper Balanced (accumulation option) No.1 over 3 years4 23% growth in funded customers5 No.1 fastest growing Super fund in Australia over 5 years by members & AUM6 77% less CO2 produced by the companies we invest in, compared to benchmark7 Nil investment in fossil fuel companies, nuclear, tobacco, gambling companies8,9 2.5 times more impact towards the sustainable development goals than benchmark10 13 x more investment in renewable power generation than benchmark11 6 ANNUAL REPORT 2021A record $1.6 million donated to the Australian Ethical Foundation12 We engaged with 500+ companies for people, planet & animals13 Best for the World for customer & governance by B Corps14 No.1 for customer advocacy15 no.2 for industry NPS (super)15 82% employee engagement16 1. Attributable to shareholders. Underlying profit pre-performance fees up 30%. 2. See pages 8 and 21 of this report. 3. 4. Australian Ethical’s Emerging Companies fund returned 50.3% (after retail fees) for the 12 months to 30 June 2021, outperforming its benchmark the S&P/ASX Small Industrials by 17.3 percentage points Australian Ethical Super’s Australian Shares option ranks No.1 out of 50 for returns over 1, 3, 5, 7 and 10 years according to the SuperRatings Fund Crediting Rate Survey – SR50 Australian Shares Index as at 30 June 2021. Balanced Accumulation Option ranked No.1 out of 50 for returns in the SR50 MySuper Index over 3 years as at 30 June 2021, and achieved top quartile performance over 3, 5 and 7 years ending 30 June 2021 in the SuperRatings Balanced Survey June 2021.# Includes both funded super fund members and managed fund investors. 5. 6. KPMG 2021 Super Insights Report, published May 2021, using statistics from APRA and ATO as at 30 June 2020. Carbon intensity (tonnes CO2e per $ revenue) of Australia Ethical share investments compared to the blended 7. benchmark.*^ We don’t invest in companies whose main business is fossil fuels or gambling, or in diversified companies that earn some fossil fuel or gambling 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, providing its negative revenue is sufficiently low (a maximum of 5% to 33% depending on the activity).^ 8. 9. We have never invested in tobacco and support Tobacco Free Portfolios.^ 10. Based on the ‘sustainable impact’ revenue earned by companies whose shares we invest in, compared to the blended benchmark.*^ 11. Proportion of our share investments in renewable power generation compared to the blended benchmark.*^ 12. Provisioned for donation to the Australian Ethical Foundation in FY21. 13. Total includes lending our voice to support others’ initiatives, engaging with companies directly (on our own or with others) and filing and voting on shareholder resolutions. Represents FY21 activity. 14. B Corps ‘Best for the World Honouree 2021’ Customer and Governance. Awarded to B Corps whose score in the top 5% of all 3,500+ B Corps worldwide. This relates to the Australian Ethical entity, not the investment portfolio. 15. Investment Trends research, June 2021: Number 1 for customer advocacy, Number 2 for industry NPS (super). 16. Culture Amp Survey, June 2021 (Top quartile Australian employee engagement benchmark is 70%). * Shareholdings as at 30 June 2021. ^Further information on page 100 of this report. Past performance is not a reliable indicator of future performance. # SuperRatings does not issue, sell, guarantee or underwrite this product. See the website for details of its ratings criteria. SuperRatings performance figure is net of percentage based administration and investment fees. 7 Investment report David Macri, CFA, Chief Investment Officer The 2021 financial year will go down as one of the better periods for equity markets globally in recent years. Despite the challenges of COVID-19, the Australian equity market reached new highs during the 12 months breaking through 7,000 points early in 2021. The final quarter of the financial year saw the Australian market continue its upward march, returning 8.5% and 28.5% over the 12 months (as measured by the S&P/ASX 300 Accumulation index). International equities also performed extremely strongly, with the MSCI World Index generating a return of 28.1% in Australian dollars and 37.5% in local currencies. The difference reflects the strength of the Aussie dollar through FY21, starting the year at 0.69 USD per AUD and ending at 0.75. Performance highlights* We saw another year of exceptional investment performance for our customers with all but five of our 21 Managed Funds/Super options exceeding their benchmark. Standout results for our managed fund investors were our Australian Shares Fund which returned 41.9% (after retail fees) outperforming its benchmark by 13.4 percentage points (ppts), and our Emerging Companies Fund which returned 50.3% (after retail fees) outperforming its benchmark by 17.3 ppts. In addition, the Emerging Companies Fund generated performance fees of $2.9 million. Strong stock selection again drove the outperformance of these funds. For our super members, our Balanced Accumulation Option (MySuper) delivered a 17.5% return, with our Australian Shares Accumulation Option delivering a 38.8% return for the financial year placing it 3rd out of 104 in the SuperRatings Fund Crediting Rate Survey for Australian Shares Options. Over the longer term, the Option ranked first over 3, 5, 7 and 10 years in the same survey. We are extremely proud of these results which are testament to our process and team. Meanwhile, industry recognition for our investment portfolios and superannuation fund was both global and local. In late 2020, we were recognised by Morningstar as one of just six global leaders for our commitment to ESG, with local accolades from Money Magazine, Finder.com, Financial Standard and Money Management. Canstar awarded our Diversified Shares and Emerging Companies Funds its top 5-star rating, while consumer comparison site, Mozo, named us ‘most recommended’ for superannuation. The details of this achievements are set out on page 21. Future proofing our ethical investment leadership During the past financial year, we took significant steps to shore up our ethical investing leadership by investing in technology, cutting-edge portfolio and risk management practices, and expanding our talented investment team. In 2020 we appointed Alpha Vista to conduct a review of our investment governance and to help us develop a truly world class, innovative approach to asset allocation. The review is part of our long-term expansion strategy and was led by Dr. Ashby Monk, a research director of the Stanford Global Projects Centre, who has consulted to some of the world’s largest pension plans. The findings from the review will facilitate a single view of all our portfolios and allow us to manage risk more accurately, while also contributing to overall portfolio performance. Changes to the investment team included the promotion of Mike Murray, CFA to Head of Domestic Equities and the appointment of John Woods, CFA, as Head of Asset Allocation. *Past performance is not a reliable indicator of future performance. 8 ANNUAL REPORT 2021Fund returned 50.3% (after retail fees) +50.3% Emerging Companies +41.9% +17.5% Australian Shares Fund returned 41.9% (after retail fees) Balanced Accumulation Option (MySuper) returned 17.5% +38.8% Australian Shares Accumulation Option returned 38.8% 9 Investment performance* Managed Funds returns to 30 June 2021# Thirteen of our 16 managed funds met or exceeded their benchmark for FY21. Our Australian Shares and Emerging Companies funds in particular had an exceptional year. 1 year % 2 years % p.a. 3 years % p.a. 5 years % p.a. 7 years % p.a. 10 years % p.a. 15 years % p.a. 20 years % p.a. Fund Performance Income Benchmark1 Income (Wholesale) Benchmark1 Fixed Interest Benchmark2 Fixed Interest (Wholesale) Benchmark2 Balanced Benchmark3 Balanced (Wholesale) Benchmark3 Advocacy Benchmark4 Advocacy (Wholesale) Benchmark4 Diversified Shares Benchmark4 Diversified Shares (Wholesale) Benchmark4 International Shares Benchmark5 International Shares (Wholesale) Benchmark5 Australian Shares Benchmark6 Australian Shares (Wholesale) Benchmark6 Emerging Companies Benchmark7 Emerging Companies (Wholesale) Benchmark7 0.4 0.1 0.4 0.1 (1.5) (0.8) (1.2) (0.8) 18.3 16.4 19.3 16.4 30.3 27.8 31.5 27.8 30.4 27.8 31.5 27.8 27.1 27.5 28.3 27.5 41.9 28.5 43.1 28.5 50.3 33.0 51.1 33.0 0.6 0.4 0.7 0.4 0.8 1.6 1.3 1.6 9.6 8.2 10.6 8.2 11.3 11.1 12.3 11.1 11.3 11.1 12.4 11.1 13.8 15.8 14.9 15.8 20.3 8.9 21.4 8.9 30.4 11.0 31.2 11.0 1.1 0.9 1.2 0.9 3.3 4.2 3.8 4.2 9.7 8.8 10.8 8.8 11.9 11.0 13.0 11.0 12.0 11.0 13.1 11.0 13.2 14.5 14.4 14.5 16.2 8.0 17.3 8.0 25.3 9.4 26.0 9.4 1.3 1.3 1.6 1.3 2.0 3.2 2.7 3.2 8.5 9.0 n/a n/a 10.7 11.2 11.8 11.2 10.7 11.2 11.9 11.2 12.5 14.7 13.7 14.7 13.6 10.0 14.9 10.0 20.0 10.8 20.8 10.8 1.4 1.6 n/a n/a 2.8 4.1 3.6 4.1 8.0 8.4 n/a n/a 10.3 10.0 11.5 10.0 10.3 10.0 11.6 10.0 10.8 12.5 n/a n/a 14.0 10.0 15.4 10.0 n/a n/a n/a n/a 2.2 2.1 n/a n/a n/a n/a n/a n/a 8.3 9.2 n/a n/a 11.0 10.4 n/a n/a 11.2 12.4 n/a n/a 10.8 15.0 n/a n/a 13.1 9.6 n/a n/a n/a n/a n/a n/a 3.1 3.3 n/a n/a n/a n/a n/a n/a 5.6 6.8 n/a n/a n/a n/a n/a n/a 6.5 7.7 n/a n/a n/a n/a n/a n/a 10.7 5.4 n/a n/a n/a n/a n/a n/a 3.5 3.8 n/a n/a n/a n/a n/a n/a 6.4 6.7 n/a n/a n/a n/a n/a n/a 7.4 7.1 n/a n/a n/a n/a n/a n/a 9.9 7.3 n/a n/a n/a n/a n/a n/a * Past performance is not a reliable indicator of future performance. # After fees performance 1 Bloomberg AusBond Bank Bills Index 2 Bloomberg AusBond Composite 3 Indices of underlying asset classes weighted by the Fund’s Strategic Asset Allocation 4 75% S&P/ASX 200 Accumulation / 25% MSCI World ex Australia (NET) 5 MSCI World ex Australia (NET) 6 S&P/ASX300 Accumulation 7 S&P/ASX Small Industrials Accumulation Note: Where benchmarks have changed, we have melded them together. MSCI data is the property of MSCI. No use or distribution without written consent. Data is provided ‘as is’ without any warranties. MSCI assumes no liability for or in connection with the data. For full disclaimer, please see australianethical.com.au/sources 10 ANNUAL REPORT 2021Super and pension returns to 30 June 2021** Our MySuper option (Balanced Accumulation) delivered a 17.5% return, while our Australian Shares Accumulation option delivered a 38.8% return for the financial year. 1 year % 2 years % p.a. 3 years % p.a. 5 years % p.a. 7 years % p.a. 10 years % p.a. 15 years % p.a. 20 years % p.a. 17.5 0.0 (0.2) 4.3 7.6 Accumulation options Performance Defensive Benchmark1 ~ Conservative Benchmark8 Balanced (accumulation) Benchmark9 Growth Benchmark10 Australian Shares Benchmark6 ~ International Shares Benchmark5 ~ Advocacy Benchmark4 ^ 17.9 20.4 22.1 38.8 25.2 25.3 24.1 28.4 24.6 0.1 0.1 3.4 3.8 9.6 8.1 9.8 9.6 19.6 8.3 13.1 13.8 11.1 9.8 0.5 0.5 4.8 4.2 9.9 7.6 10.3 8.7 16.1 7.4 12.6 12.6 11.8 9.7 0.8 0.7 4.1 3.9 9.2 7.8 10.0 9.6 14.3 9.0 12.6 12.6 11.1 9.8 0.9 1.0 4.2 3.8 8.4 6.7 9.0 8.0 14.3 7.6 10.1 10.7 10.2 8.8 1.5 1.7 4.1 4.4 8.2 6.8 9.0 8.2 13.2 0.9 9.8 13.7 10.5 9.7 2.3 3.0 n/a n/a 5.5 5.2 5.2 5.8 10.6 2.7 n/a n/a n/a n/a 2.8 3.6 n/a n/a 6.2 5.2 6.3 5.8 9.7 n/a n/a n/a n/a n/a 1 year % 2 years % p.a. 3 years % p.a. 5 years % p.a. 7 years % p.a. 10 years % p.a. 15 years % p.a. 20 years % p.a. Pension options Performance Defensive Benchmark1 < Conservative Benchmark11 Balanced Benchmark12 Growth Benchmark13 Australian Shares Benchmark6 ~ International Shares Benchmark5 < (0.1) (0.2) 5.0 8.3 14.7 13.6 23.2 24.1 42.6 28.1 27.3 27.1 0.1 0.1 3.6 4.3 8.6 6.5 11.0 10.5 21.7 9.0 14.0 15.4 0.6 0.5 5.2 4.7 9.0 6.2 11.5 9.6 17.5 8.0 13.4 14.1 0.9 0.9 4.6 4.4 8.4 6.3 11.1 10.4 15.7 9.8 13.5 14.3 1.0 1.1 4.5 4.2 8.0 5.8 10.1 8.6 15.4 8.4 10.3 12.0 1.7 1.8 4.5 4.9 8.1 6.4 10.2 8.9 14.5 1.5 9.7 14.6 2.7 3.1 n/a n/a 5.5 5.0 6.0 6.2 11.6 3.3 n/a n/a 3.3 3.6 n/a n/a 6.4 5.2 7.0 6.2 10.6 n/a n/a n/a ** Super and Pension returns are calculated in compliance with APRA SRS702. It is the return that would have been achieved for a representative member with a $50,000 balance and no contributions, after all administration and investment fees, taxes and other costs. 8 SuperRatings SR50 Capital Stable (20-40) Index 9 SuperRatings SR50 Balanced (60-76) Index 10 SuperRatings SR50 Growth (77-90) Index 11 SuperRatings SRP50 Capital Stable (20-40) Index 12 SuperRatings SRP25 Conservative Balanced (41-59) Index 13 SuperRatings SRP50 Growth (77-90) Index ~ Net of tax and % administration fees < Net of % administration fees 11 Our senior leadership team John McMurdo Chief Executive Officer and Managing Director MBA, GAICD John brings more than 30 years’ experience in investment management, private client advisory and wealth management across Australia and New Zealand, including 18 years in CEO roles at several leading investment and wealth management businesses. He has significant Board and Directorship experience within and outside financial services. John has an MBA from Henley Business School (U.K.), is a graduate of the Australian Institute of Company Directors and a member of the Fund Management Board Committee of the Financial Services Council. David Macri Chief Investment Officer BSc, CFA David has been with Australian Ethical for more than 12 years, with nine of these spent as Chief Investment Officer. He is responsible for all investment aspects of the company, including the in-house management of diversified funds, fixed interest, domestic and international equities, and the Australian Ethical Super fund which includes asset allocation and manager selection in the unlisted asset classes. He has over 22 years’ experience in the financial services industry, including stints on the ‘buy-side’ (Credit Suisse Asset Management), ‘sell-side’ (Macquarie) and as an Investment Consultant (Mercer and Mellon). Mark Simons Chief Financial Officer B Bus, CA, GAICD Mark is responsible for business performance, financial control and fund accounting. Mark has more than 30 years’ experience in financial services, having previously held senior roles within Australian Ethical, Challenger, Perpetual, Tyndall and KPMG. 12 ANNUAL REPORT 2021Kim Heng Chief Operating Officer BEng, PRINCE2, DipPM Kim manages all aspects of the organisational strategy focused on operations and technology. With 20+ years’ experience in information technology, program management and delivery, major transformations and Operations, Kim has previously held roles at Local Government Super, FuturePlus Financial Services and RT Health. Maria Loyez Chief Customer Officer MEng Maria is responsible for sales, marketing and customer experience to help drive business growth, which in turn increases positive impact on society. Maria has more than 20 years’ strategic marketing, CX and leadership experience having previously held senior roles at neo-bank Volt, SocietyOne, OFX, AMP, Optus and Virgin. Karen Hughes Chief Risk Officer and Company Secretary BSc (Hons), ACA (ICAEW), GAICD Karen is responsible for the Risk Management Framework at Australian Ethical and is joint Company Secretary. Karen has over 25 years’ experience in risk and compliance with previous roles at StatePlus, Tyndall, Jardine Fleming and PwC. 13 Marion Enander Chief Strategy & Innovation Officer BCom, MBA Marion is driving and championing Australian Ethical’s strategic direction, the innovation agenda and heads up the People & Culture team. She has extensive experience in strategic leadership and consulting roles at companies such as Credit Suisse, Perpetual and Booz Allen Hamilton. She has a MBA from London Business School (UK). Tom May General Counsel and Company Secretary BA, LLB, MBA, TFASFA, MAICD, FGIA Tom is joint Company Secretary and oversees the company’s governance and legal functions to ensure that the Group meets its regulatory obligations. Tom has 30 years’ legal experience in Australia, Asia and Europe. Dr Stuart Palmer Head of Ethics Research BA, LLB, MLitt, PhD Stuart evaluates the impacts which the products, services and operations of companies have on people, animals and the environment. He also contributes to our voice for more sustainable business and investment models and practices. Stuart has previously worked with the Ethics Centre and as a banker and lawyer. 14 ANNUAL REPORT 2021Australian Ethical Investment Limited and its Controlled Entities Annual Report 30 June 2021 Contents Directors’ Report Remuneration Report Auditor’s Independence Declaration Statements of comprehensive income Statements of financial position Statement of changes in equity Statements of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report 16 36 54 55 56 57 59 60 93 94 15 Directors’ Report The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Australian Ethical Investment Limited (referred to hereafter as the ‘Company’ or ‘Parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2021. 16 ANNUAL REPORT 2021 Directors The following persons were directors of Australian Ethical Investment Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Steve Gibbs Non-Executive Director since 2012 and Chair since 2013 BEcon, MBA Steve chairs the People, Remuneration and Nominations Committee, is a member of the Investment Committee, the Product Disclosure Statement Committee and the Australian Ethical Investment Limited and Australian Ethical Superannuation Pty Limited Audit, Risk & Compliance Committees. He is Chair of Australian Ethical Superannuation Pty Limited and Australian Ethical Foundation Limited. Steve is also the Non-Executive Chair of Netlinkz Limited. Steve has extensive experience at both an executive and non-executive level in the investment and superannuation industries, including being a former CEO of the Australian Institute of Superannuation Trustees, a former CEO of what is now Commonwealth Superannuation Corporation and a non-executive director of Hastings Funds Management and Westpac Funds Management. Steve has been recognised for his commitment to, and expertise in, ethical and responsible investing. Mara Bûn Non-Executive Director since 2013 BA (Political Economy), GAICD Mara is a Member of the People, Remuneration and Nominations Committee, the Investment Committee and the Australian Ethical Investment Limited and Australian Ethical Superannuation Pty Limited Audit, Risk & Compliance Committees. She is a Director of Australian Ethical Superannuation Pty Limited and Australian Ethical Foundation Limited. Mara brings executive experience from Green Cross Australia, Choice, CSIRO, Macquarie Bank and Canstar. She is a Founder of The Salmon Project, specialist advisors to Climatetech and Agritech scale-ups advancing Series B venture funding through deep tech R&D. She is the Non-Executive Chair of four organisations: the Gold Coast Waterways Authority; Bowerbird Collective, a chamber music ensemble dedicated to nature conservation through performance; asset consultants Australian Impact Investments; and the Australian Conservation Foundation where Mara is also President. Kate Greenhill Non-Executive Director since 2013 BEc, FCA, GAICD Kate is Chair of the Australian Ethical Investment Limited and Australian Ethical Superannuation Pty Limited Audit, Risk & Compliance Committees and is a Member of the People, Remuneration and Nominations Committee and the Investment Committee. Kate is a Director of Australian Ethical Superannuation Pty Limited and Australian Ethical Foundation Limited, and a Member of the Australian Ethical Superannuation Pty Limited Insurance Benefits Committee. Kate is a Fellow of the Institute of Chartered Accountants in Australia and a Graduate of the Australian Institute of Company Directors. Kate has over 25 years’ experience in the financial services industry with extensive knowledge of finance and risk. As a former Partner with PwC, Kate has worked in both Australia and the UK providing assurance and advisory services to clients. Kate is also the Treasurer of a not-for-profit organisation in the education sector and a Director and Chair of the Audit and Risk Management Group of Intersect Australia Ltd. 17 Michael Monaghan Non-Executive Director since 2017 BA, FIAA, FAICD Michael is Chair of the Investment Committee and a member of the People, Remuneration and Nominations Committee, the Product Disclosure Statement Committee and the Australian Ethical Investment Limited and Australian Ethical Superannuation Pty Limited Audit, Risk & Compliance Committees. He is a director of Australian Ethical Superannuation Pty Limited and the Australian Ethical Foundation Limited. Michael has more than 30 years’ experience in investment, consulting and leadership of financial services organisations both in Australia and internationally. He was Managing Director of State Super Financial Services Australia Limited (StatePlus) from 2011 to 2016 and previously was a Partner in the actuarial practice of Deloitte Touche Tohmatsu, the CEO of Intech Investment Consultants and held senior executive positions at Deutsche Bank, IBM and Lendlease Corporation. Michael is currently a Director of Flag Income Notes 3 Pty Ltd and Alpha Vista Financial Services Holdings Pty Ltd, a start-up global asset management business leveraging large scale data and computing capabilities and artificial intelligence. Julie Orr Non-Executive Director since 2018 BEc, MCom, MCom(Hons), CA, GAICD, FGIA Julie is a Member of the People, Remuneration and Nominations Committee, the Australian Ethical Investment Limited Audit, Risk & Compliance Committee and the Investment Committee. She is also a Director of Australian Ethical Foundation Limited, AvSuper and Masters Swimming NSW. She has over 20 years of experience in executive and board roles including experience with superannuation, investments, financial planning, stockbroking, research, insurance, audit, finance, acquisitions and business integration. Julie’s most recent executive experience was Group General Manager Corporate Development and General Manager Operations for IOOF. She was previously Director of Finance India and Asia Pacific for Standard and Poor’s, Head of Research for Morningstar, Chief Operating Officer at Intech and Senior Audit Manager with Ernst & Young. Julie’s prior board experience includes Perennial Value Management, Ord Minnett and Tax Payers Research foundation. John McMurdo Chief Executive Officer and Managing Director, appointed February 2020 MBA, GAICD John joined the Australian Ethical Board in February 2020 as Chief Executive Officer and Managing Director. He brings more than 30 years’ experience in investment management, private client advisory and wealth management across Australia and New Zealand, including 18 years in CEO roles at several leading investment and wealth management businesses. He also brings significant previous Board and Directorship experience within and outside financial services. John has an MBA from Henley Business School (U.K.), is a graduate of the Australian Institute of Company Directors and a member of the Fund Management Board Committee of the Financial Services Council. 18 ANNUAL REPORT 2021 Company secretary Tom May and Karen Hughes are joint Company Secretaries. Tom May BA, LLB, MBA, TFASFA, MAICD, FGIA Tom also oversees governance and legal functions to ensure that the Group meets its regulatory obligations and maintains industry leading governance practices. Tom has 30 years legal experience in Australia, Asia and Europe. Karen Hughes BSc (Hons), ACA (ICAEW), GAICD Karen is also responsible for the Risk Management Framework at Australian Ethical. Karen has over 25 years’ experience in risk and compliance with previous roles at StatePlus, Tyndall, Jardine Fleming and PwC. Karen was appointed joint Company Secretary on 25 August 2020. 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 (Super 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. Review of operations Introduction and commitment to our purpose While the world in 2021 is different to what most people would have imagined, at Australian Ethical we see many of our founding principles being embraced by a wider audience. The movement to incorporate purpose through investment has accelerated as businesses search for a reason for being beyond profits and look to do good by solving some of the world’s biggest societal challenges. And as society’s expectations of businesses evolve, we’ve seen those businesses with an established purpose pre-pandemic rewarded by stakeholders through increased customer loyalty, brand awareness and growth. At Australian Ethical, our purpose has been a constant during these changing times, serving as both anchor and compass. It is the lens through which we see the world and it underpins our decision-making, innovation and growth plans. It brings energy, curiosity, engagement, meaning, resilience and a determination to succeed. As we adapt to a post-pandemic world, we must never forget the events that have defined the past two years nor the lessons they have taught – both as business leaders and as individuals. For Australian Ethical, this means doubling down our commitment to investing for a better world so we can create better outcomes for people, planet and animals. Today and tomorrow. 19 Year in review Australian Ethical has recorded another year of milestones which have cemented our position as Australia’s original and leading pure play ethical investor. ESG is and always has been in our DNA. The pandemic has ushered in a new way of thinking for many investors, forcing more people to confront the global threat of climate change and how it will impact their lives. It has shown how global risks have cascading effects, and seldom manifest in an isolated manner. Global recognition for our authenticity is especially important as ESG becomes the biggest buzzword in investing and even the most cynical of investment managers jump on the bandwagon, new products are launched, and older funds are rebadged as sustainable. In response Australians are embracing ethical investing in record numbers as they seek to drive positive action using all available levers. We have seen our addressable market explode as people realise that a better world is not just possible, but that they’re the ones who can help make it happen through how they invest. As a result, we have seen record customer flows into our products as Australians continue to seek us out to make their money matter. We ended the financial year with $6.07 billion in funds under management, a significant uptick on the record $5.05 billion we celebrated just 6 months ago in December 2020, which itself was an audacious target we had set ourselves in 2015 when we had just over $1 billion under management. This growth in FUM is of course supported by the outstanding investment returns delivered for our customers by our award-winning investments team, who added several local and global accolades to their already impressive credentials1. In November 2020, we were recognised by Morningstar as one of just six global leaders for our commitment to ESG. The report singled out our Australian Shares Fund as “setting the ESG standard for Australian domestic-equity strategies.” In the report, the Morningstar ESG Commitment Level: Our first assessment of 100-plus strategies and 40 asset managers, it said: “Unquestionably, Australian Ethical Investment is true to its ethical label, evidenced by the robust integration of ESG principles into the investment processes, activism, advocacy, and memberships undertaken by the firm.” Today people can now choose between plenty of products that claim to offer the chance to do the right thing by the planet, but they need reassurance that the products they’re buying meet their ethical standards rather than just being packaged attractively. Strategically, we have seen the green shoots we reported in our half year results continue to grow which gives us confidence about the path our business is on. These green shoots are evident across our business from operations through to investments, and from marketing through to customer services. For example, our ongoing commitment to enhancing the customer experience has been bolstered by bringing the customer contact centre in-house, a complex project that was successfully executed in early 2021. A new brand identity and updated website, launched in May, will help ensure we achieve enough brand recognition and resonance to capture the opportunities we see ahead of us. And while our business is 35 years old – a veritable veteran in responsible investing terms – we believe that our biggest opportunities are yet to come. Over the coming pages we will expand on the many successes of the past 12 months and provide an update on our strategic roadmap and our plan to extend our market leadership position. But first we take this opportunity to thank everyone at Australian Ethical for another stellar year and for proving that money can be a powerful force for good. 20 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Financial year 2021 highlights $6.07 billion in funds under management, 50% up on prior year Record underlying profit of $11.05 million, up 19% (underlying profit pre-performance fees up 30%) Diluted EPS 3-year CAGR of 31% Strategic investment in the business of $4.6 million Record net inflows of $1.03 billion, up 56% Strong growth in adviser channel with FUM now exceeding $1 billion Increase in funded customer numbers by 23% Investment performance after fees of $0.99 billion Performance fee on Emerging Companies Fund (ECF) of $2.9 million Outstanding returns on our funds, in particular Australian Shares Fund and Emerging Companies Fund In November, recognised by Morningstar as one of just six global leaders for our commitment to ESG2 Multiple investment excellence awards1 We remain the fastest growing super fund over 5 years by FUM and members3 A record $1.6 million donated to the Foundation to support its philanthropic endeavours 1 In addition to the global recognition from Morningstar, local accolades included Money Magazine, Finder.com, Financial Standard and Money Management. Canstar gave its top 5-star rating to our Diversified Shares and Emerging Companies Funds while consumer comparison site Mozo named us ‘most recommended’ for superannuation. 2 In November 2020, Morningstar named Australian Ethical as one of just six global leaders, out of 40 asset managers assessed for ESG commitment. Australian Ethical was the only Australian asset manager to achieve this rating. Based on the second assessment (May 2021), one further asset manager was added as a “leader”, who was an Australian asset manager. Inaugural ESG assessment: The Morningstar ESG Commitment Level: Our first assessment of 100- plus strategies and 40 asset managers, Second assessment: The Morningstar ESG Commitment Level: Our second assessment of 140 strategies and 31 asset managers. 3 KPMG 2021 Super Insights Report – published May 2021, using statistics published by APRA and ATO as at 30 June 2020. 21 Profit The net profit for the Group amounted to $11.1 million. The net profit attributable to shareholders amounted to $11.3 million, compared with $9.5 million for the 12 months to 30 June 2020. Underlying profit after tax was $11.05 million, up 19% compared with the prior corresponding period. Excluding the impact of performance fees, underlying profit increased 30%. Net profit attributable to shareholders excluding the impact of performance fees also rose 30% compared to the prior corresponding period. Operating revenue increased 18% to $58.7 million, up from $49.9 million for the year to 30 June 2020. This increase was driven by strong FUM growth, underpinned by record net inflows and strong fund performance, partially offset by the impact of superannuation fee reductions (including those implemented in the second half of FY204) and fee and threshold reductions across some managed funds in October 2020 and June 20214. During the year the average FUM based fee margin reduced from 1.13% to 1.04%. Other income included the settlement of an insurance claim for $0.5 million, lodged in 2017 relating to a historical unit price matter. In turn, $0.2 million was paid into the Operating Financial Risk Reserve of the superfund. Pleasingly, we have been able to donate $1.6 million to the Australian Ethical Foundation following our success during this financial year. This is the largest amount we have donated to the Foundation (prior year $1.3 million) which will amplify the positive impact it makes via its strategic philanthropic grants and other associated initiatives. This $1.6 million Foundation donation included $0.1m which AEI had received from the Federal Government’s cash flow boost COVID-19 stimulus package, which was subsequently allocated for impactful not-for- profit initiatives. AEI did not receive JobKeeper payments from the Federal Government. 4 On 1 April 2020 the percentage-based administration fee was reduced from 0.41% to 0.29% across all superannuation and pension options. On 1 October 2020 the Balanced Fund wholesale investment threshold was reduced from $500k to $200k; the Income Fund management fee was reduced from 0.35% to 0.20% (wholesale) and 0.50% to 0.20% (retail); and the Fixed Interest Fund management fee was reduced from 0.45% to 0.30% (wholesale) and 1.00% to 0.50% (retail). The defensive superannuation option management fee was reduced from 0.40% to 0.20%. In June 2021, fees were reduced on the Australian Shares (1.25% to 1.20%) and International (1.10% to 0.89%) super and pension options and the Balanced (1.84% to 1.51%), International (1.85% to 0.99%), Diversified (1.90% to 1.39%), Advocacy (1.90% to 1.39%), Australian Shares (1.99% to 1.69%) and Emerging Companies (1.99% to 1.69%) retail funds, and the Balanced (0.94% to 0.85%) and International (0.85% to 0.59%) wholesale funds. 22 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Expenses Operating expenses increased by 18% as we continue to invest in our brand, investment expertise, distribution channels, customer experience and in delivering strategic and regulatory initiatives. Key drivers of the cost increases include: • Higher fund-related costs predominantly from the increase in customer numbers and funds under management, implementation of regulatory change compliance • The redesign of our insurance offering for super customers • A new customer relationship management system • Bringing our super member contact centre in-house • A member education program • Expanding our focus on innovation including rolling out training for all staff, feasibility assessments of key technology projects and research on future trends • A new, refreshed brand and movement • Investing in capability and marketing to grow our adviser channel and high net worth customer segments • $0.7 million of software development costs which would previously have been capitalised, in line with recent IFRIC guidance on AASB138 Intangible Assets $bn Opening FUM Super net flows Managed Funds* net flows Total net flows Regulatory projects Closing FUM Funds under management During the period, we have seen record breaking net inflows of $1.03 billion, 56% above the prior corresponding period. Managed funds flows (excluding institutional) increased 161% as we see the results of our strategic focus on this channel and our targeted investment campaigns gain traction. During the period we saw record super flows of $614 million, an increase of 31% year on year – these super flows are predominantly from our direct-to-consumer channel. In June we saw the highest ever monthly net inflows in super of $91 million as we continue to invest in our digital acquisition strategy. Investment in growing our adviser channel is yielding strong results with flows from this channel increasing 168% during the year to reach FUM of $1.2 billion across managed funds, super and our SMA product which was launched in April 2020. These strong flows, together with strong investment performance after fees of $0.99 billion during the period, have resulted in excellent year on year FUM growth of 50% to $6.07 billion at 30 June 2021. These numbers include outflows of $0.04 billion as part of the early release of superannuation scheme. The below table outlines FUM movements for the period: 30 June 2021 30 June 2020 % change 4.05 0.61 0.42 1.03 0.99 6.07 3.42 0.47 0.19 0.66 (0.02) 4.05 19% 31% 122% 56% large 50% * Includes Managed Funds (retail, wholesale and institutional) and SMA 23 Investment performance Fee reductions As ever, we remain committed to making ethical investing as accessible and competitive as possible, which includes making strategic fee reductions as we pass the benefits of our growing scale onto our customers. Since 2014, our pricing has more than halved, with FUM increasing six-fold over the same period6. In October 2020, we reduced the fee on the Defensive super option, and the Income and Fixed Interest funds, and reduced the threshold on the Balanced wholesale fund. In June 2021, we reduced the fee on the Australian Shares and International super options and the Balanced, International, Diversified, Advocacy, Australian Shares and Emerging Companies retail funds, and the Balanced and International wholesale funds. And while ensuring we have competitive fees is important for our customers, we think returns and impact are even more important. Our fee reduction strategy focuses on ensuring there is an equitable balanced share in the success of our growing company between shareholders and customers, while delivering competitive returns and meaningful real-world outcomes for people, planet and animals. Our investment team have delivered another year of strong investment performance for our customers with all but five out of 21 Managed Funds/Super options exceeding their benchmark. Standout results for our managed fund investors include the performance of our Australian Shares Fund (retail) which returned 41.9% (outperforming its benchmark by 13.4%) and our Emerging Companies Fund (retail) which returned 50.3% (outperforming its benchmark by 17.3%). In addition, the Emerging Companies Fund generated performance fees of $2.9 million. Strong stock selection and active portfolio management drove the outperformance of these funds during what was another volatile year for equity markets. For our super members, our Balanced option (MySuper) delivered a 17.5% return, with our Australian Shares super option delivering a 38.8% return for the financial year. Our Australian Shares super option has been ranked first over 1, 3, 5, 7 and 10 years5. Meanwhile, industry recognition for our investments team was both global and local. In addition to the global recognition from Morningstar, local accolades included Money Magazine, Finder.com, Financial Standard and Money Management. Canstar gave its top 5-star rating to our Diversified Shares and Emerging Companies Funds while consumer comparison site Mozo named us ‘most recommended’ for superannuation. 5 Australian Ethical Super’s Australian Shares option ranks no.1 over 1 year, 3 years, 5 years, 7 years and 10 years according to the SuperRatings Fund Crediting Rate Survey – SR50 Australian Shares Index as at 30 June 2021. 6 Since 2014 revenue margin has reduced from 2.26% to 1.04% whilst FUM has increased from $0.9bn to $6.07bn. 24 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Operational excellence & compelling client experience As a purpose-driven organisation, we know we occupy a unique place in the financial services landscape which depends in large part on the special relationship we have with customers, which is why we’re always focused on enhancing their experience. Over the past 12 months we have made significant progress against operational objectives which have already improved the customer experience for both our current and future customers. Projects include redesigning our insurance offer to remove cross subsidies, implementing a new customer relationship management system and insourcing the customer contact centre to have more control over the customer journey. We believe the success of these objectives can be measured by our high NPS and customer retention metrics. No.1 for customer advocacy7 No.2 NPS for industry NPS (super)7 No.3 for retention8 We have more work to do in creating a seamless digital experience for customers. The pandemic has only accelerated these plans as we design for the future. As people have become more accustomed to working, doing business, and investing through digital channels, they’re rightly expecting a frictionless, omnichannel experience from all their transactions. Further initiatives are planned in FY22 to deliver enhanced customer experiences. With the continuing focus on cyber security risks, digital privacy and data security, we have also continued to upgrade our technology platform. In addition, we have made significant investment in our sales and distribution capabilities, adding to existing bench strength in response to booming demand in the intermediated channel. With research pointing to 86% of Australians expecting their financial adviser to ask them about their values in relation to their investments9, advisers are increasingly turning to us because of our established reputation as the country’s leading ethical investor. As a result of our investment in this important channel, we’ve seen flows increase by 168% and we have exceeded the $1 billion in FUM milestone for our adviser channel. Meanwhile, unprompted adviser brand recognition has more than doubled, and we have seen a strong uptick in adviser perception across many other metrics.10 Most noticeable perhaps for external stakeholders is our new brand look and feel, a decision that was taken to better differentiate ourselves in what’s becoming a very crowded market. Our updated brand identity celebrates our ethical pedigree, our investment excellence and our visionary roots to create a unique visual identity quite unlike any other financial services company in Australia. We’ve also updated our website and are continuing to improve the user experience. 7 Investment Trends research, June 2021 8 KPMG 2021 Super Insights Report – published May 2021, using statistics published by APRA and ATO as at 30 June 2020. 9 From Values to Riches: Charting consumer expectations and demand for responsible investing in Australia, RIAA 2020 10 Investment Trends April 2021 adviser brand tracker results 25 Culture is everything COVID-19 Though we may look different on the outside, our unique culture remains intact on the inside. Despite the many changes of the past 12 months, including more lockdowns and continuing uncertainty, Australian Ethical employees remain engaged and energised. We were pleased that our most recent employee engagement survey reported an overall engagement score of 82%, which puts us above the top quartile for financial services organisations in Australia and in line with the top quartile with new technology companies. When employees are committed to a purpose, they become an engine for change, which is why we’re proud of the authentic and lived purpose our employees activate both internally and externally. They prove there’s another way – a better way – to do business. It’s through them that our purpose flows to our customers, our shareholders and our communities. On behalf of the Board, we’d like to thank all Australian Ethical employees for their continuing commitment to investing for a better world. We have been continuing to invest in our employees’ wellbeing over the past 12 months. This includes enhancing our workplace culture to introduce more innovation and more experimentation, as well as a high-performance framework. Meanwhile, we continue to be a leader in gender diversity with 50% female representation on our Board, 44% on our Senior Leadership Team and 57.5% across all employees. The operational challenges that Australian Ethical has faced are negligible compared to the heavy human, social and economic toll that is being wrought worldwide by the pandemic. As an organisation we extend our sympathies to all those who have been affected, and our gratitude to those on the frontline. With half the country in lockdown at time of writing shows that COVID remains a concern. However, our business has proven to be exceptionally resilient by delivering outperformance for investors, members and shareholders despite the ongoing volatility and uncertainty. We are continuing to monitor the COVID situation and our employees’ wellbeing remains front of mind. This includes their day-to-day health and safety as well as their ongoing mental health. The business has strict COVID-safe practices in place and has implemented creative ways to stay connected. Our unique culture has helped us withstand the considerable upheaval, and our pre-pandemic flexible working policy has meant employees have been able to choose a working arrangement that suits their individual circumstances. As a result of these measures, and a robust crisis management plan, we have continued to operate effectively with minimal disruption to business-as-usual operations. Business productivity has remained high, and we have continued to deliver outcomes for all our stakeholders. 26 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Climate change For more than 30 years, Australian Ethical has been investing to protect our planet. During these three decades, the scientists with the Intergovernmental Panel on Climate Change (IPCC) have been issuing major reports about the state of the climate, gradually expressing more certainty about what is happening and why. The latest report, released on 9 August 2021, confirmed what we expected: “It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.” In other words, the climate crisis is not just a threat to future generations; it is a threat that we are already feeling the consequences of today. If we continue the current global trajectory, the crisis will only worsen, deepening the impact of irreversible changes to our world. The principal direct impact of climate change on Australian Ethical’s business is its effect on our investment portfolios. The prospects and value of the businesses we invest in are exposed to risks and opportunities flowing from the many effects of climate change. Physical impacts like sea level rise and extreme weather are already changing where and how buildings and infrastructure can be safely built. Changes in temperature and rainfall are affecting the productivity and viability of different types of agriculture. Achieving the Paris goals of limiting the increase in the global average temperature to well below 2°C above pre-industrial levels is essential, but not easy. The scientists in the latest IPCC report showed that if humans make immediate, rapid and widespread cuts in emissions, warming could be limited to 1.5°C, with the climate stabilising after the middle of the century. It will require a complete transformation of the way the world produces and consumes energy, as well as radical measures to cut emissions from other key sources such as transport, land use and agriculture. It will also require ambitious climate policies from governments. We identify, assess and manage material climate-related investment risks through our ethical investment process. All investments are screened according to the 23 principles of our Ethical Charter which is embedded in our constitution. Our investment screening and company engagement guides us to sectors and companies which are aligning their businesses with the transition needed to limit global warming to 1.5 degrees. These companies are better positioned to manage many climate- related risks, such as the risk of introduction or increase in carbon pricing. However, the effects of climate change will be felt across the economy and society. Higher global warming threatens to disrupt trade and financial markets and carries significant risk of loss to all investment portfolios. Our ethics research team monitors existing and emerging climate-related risks using diverse information sources. The team monitors developments in: • scientific understanding of the rate and impacts of global warming • domestic and international climate policy and regulation • technological innovation in climate mitigation and adaptation. Our ethical screening and engagement approach focuses on the need to reduce emissions to limit dangerous climate change, but also recognises it is crucial that companies have business models and strategies which are adaptable to the physical impacts of current and future climate change. 27 Investment portfolio management Our ethical research defines our sustainable investment universe, guiding us to companies better positioned to manage many risks arising from a transition to net zero emissions. Our ethical assessment of the climate impacts of companies and industry sectors and their products and services can also assist us in identifying climate-related financial risks and opportunities and feed into our buy, sell and portfolio management decisions. For example, company prospects and valuations in the energy sector may be affected by our assessment of the future regulatory environment for the sector. Influencing companies We encourage better measurement and reporting of direct and indirect greenhouse gas emissions; emissions reduction target setting; and analysis of the resilience of the company’s business strategy to different climate scenarios. We aim to reduce companies’ contribution to global warming as well as reducing climate- related harm to their business prospects. Through engagement we also build our own understanding of climate-related risk. We exercise our influence through private engagement, voting at company meetings, public praise or criticism, shareholder resolutions and divestment. The resilience of our real estate and infrastructure investment Real estate and infrastructure are exposed to many physical impacts of different levels of global warming. Greater extremes of heat and cold raise operating costs and in some cases will threaten operational viability. Increased frequency and severity of wind, fire, storms and flooding mean many assets will suffer significant damage more often, increasing repair costs and the need for additional investment to protect them. Some buildings and infrastructure will no longer be capable of fulfilling their original function and will become liabilities rather than assets, with owners required to dismantle or decommission them. We rely heavily on the management of climate-related risks by our external property and infrastructure managers and describe some of their work and challenges in our annual climate reporting. Targets Our target of net zero emissions by 2050 for our investments is aligned with the emissions reduction needed to achieve a 1.5°C warming limit. We keep our climate objectives and actions updated against the growing impacts of climate change as well as growing opportunities to limit that change. This includes work setting interim emissions reduction targets under the latest criteria from the Science Based Targets Initiative. We are committed to setting targets which are evidence based and linked to specific and ambitious concrete action to drive a faster net zero transition. Measurement, transparency, accountability We measure and report annually on our climate performance following the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Our reporting includes the emissions intensity of our share investments (carbon footprinting) and the level of our share investment in renewable energy. This helps us test the effectiveness of our management of climate transition risk and our progress towards our net zero emissions target. We also report on our operational emissions and the 100% offsetting of those emissions. 28 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Strategic update In last year’s annual report, we laid out our medium-term strategy to support our purpose of investing for a better world. Our ambition was to remain as Australia’s leading responsible investor as we move towards a low-carbon world and we identified the four strategic pillars to help us get there. These were: 1. Principled investment leadership 2. Advocates for a better world 3. Compelling client experience 4. Impactful business Success, we said, would depend on how we turn our ideas and ambition into tangible solutions that generate financial returns and a sustainable future. Twelve months later and we’re seeing the benefits of the strategic investments we have made to strengthen our operating platform, diversify our acquisition channels and improve our customer experience. Our strategic priorities and our progress are set out here: Good momentum on delivering on our Strategy in FY21 01 02 03 04 + Principled investment leadership Market leading returns11 Recognised as a global leader in ESG14 New roles: Head of Strategic Asset Allocation, Head of Domestic Equities Advocates for a better world Media voice for Climate Change Bill & improved biodiversity protection Corporate advocacy on key topics incl modern slavery, traditional owner, and emissions reduction Since inception >$6m allocated to not-for-profits via The Foundation Compelling client experience Top Net Promoter Scores12 Insourced customer centre allowing more control over client experience High retention rates – AE has third lowest super outflows in the industry15 Impactful business Refreshed Brand strategy and Brand identify HNW segment: Number of inflows above $1m has grown over 400% New distribution capability & adviser channel now >$1bn Leadership & innovation Top quartile employee engagement13 Leadership & Innovation training Developed worldviews for innovation with global innovation partner Rather than negatively impacting our strategy, the ongoing pandemic has accelerated our plans. We believe we are emerging stronger and the extraordinary momentum we’re seeing gives us confidence in the strategy, confirming that now is the time to extend our market leadership. 11 See Year in review 12 Investment Trends research, June 2021: Number 1 for customer advocacy, Number 2 for industry NPS (super only) 13 Culture Amp Survey, June 2021 14 See Year in review 15 KPMG 2021 Super Insights Report – published May 2021, using statistics published by APRA and ATO as at 30 June 2020. 29 Strategic outlook One of the many highlights of the past 12 months for Australian Ethical has been reaching $5 billion in funds under management. This was an aspirational and audacious goal we set ourselves in 2015 when funds under management were just over $1 billion. At the time, it meant growing our business five times bigger over five years. Naturally, there were people who thought the goal was beyond us and that ethical investing would never become mainstream. And yet quite the opposite has proved to be true with interest in ethical investing continuing to grow and a seismic surge over the past 18 months. This surge, which combines the near-term impact of the COVID-19 pandemic and a multi-decade shift in capital markets, has been a watershed moment for the investment industry. As a result, today’s investors are increasingly seeking access to strategies across asset classes that are designed to deliver positive impacts for people and the planet, as well as performance. Our long history of doing business with purpose has shown what a sustainable business can and should look like. We’ve proved that brands with purpose grow, that companies with purpose last and that people with purpose thrive. And so, with the $5 billion FUM milestone behind us – and a further $1 billion since to push through the $6 billion FUM mark - our minds turn to how we can extend our gamechanger status to grow the positive impact of what we do. What follows is an overview of the significant opportunity we see ahead of us, the existing strengths of our business and the strategic priorities we will invest in to realise our ambition. The opportunity While the pandemic has disrupted our lives in numerous and profound ways; it has also underscored the importance of tackling looming threats – such as the climate catastrophe – before it is too late. It has transformed how people think about our economies and societies with growing support for policies that support the transition to a greener, more inclusive and more resilient tomorrow. And with climate change driving activism at all levels, capital markets are getting behind finding viable solutions and the economics of climate change are shifting for the better. The pandemic has also changed what people are looking for from companies: it’s no longer enough to support change, companies need to be actively making that change happen. We think the future of business will be shaped by consumers’ expectations for companies to address their role in solving the climate crisis and other major global issues. Success will come to those that are willing to step up and prove they’re about more than just profit at all costs. Meanwhile here in Australia, the size of the responsible investment market continues to grow in tandem with Australians’ expectations of how their money is invested. Ethical and responsible investing may have gone into the pandemic with a full head of steam, but its dramatic growth since then has vanquished any lingering scepticism. As such, we’ve seen our potential addressable market grow significantly over the last 24 months. Where once only the deeply ethically conscious were interested in our way of investing, estimates from multiple sources now put that potential market at anywhere from 70% to 80% of the Australian population. This seismic shift presents a unique opportunity for Australian Ethical. As Australia’s largest pureplay ethical investment manager and globally recognised for our approach, we have a considerable head start over our more recently converted competitors. Meanwhile as a purpose-driven organisation, we have an unmatched authenticity in wanting to invest for a better world. These factors alone, combined with our products, people, strong balance sheet and positive momentum, already position us for success. But to capture the full growth opportunity we see ahead of us and retain our leadership position in an increasingly competitive marketplace, we need to continue to deliver on our strategic roadmap, fast track our investment in key capabilities and build a forward-looking business platform. 30 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021A high growth strategy Outlook To futureproof our leadership position and amplify our positive impact, the business will pursue an aggressive growth strategy that shores up our existing market share and expands it where we see the most potential. Our goal is to build a much bigger, more impactful business and we will be reinvesting heavily in our existing business to achieve this ambition. Over the short-term, our strategic focus will be on deepening our investment capability, expanding our product offering, growing our brand awareness, fully digitising and upgrading the customer experience and significantly expanding our newer customer segments. Over the long-term, we anticipate that our short-term focus will cement our leadership long into the future while allowing us to leverage the scale in our business to grow profit. And while there are many factors in the external environment that are outside of our control, we see a significant opportunity to multiply the size of our business as we have done before. With our planned investment and market positioning, if we execute well, we believe it’s possible to continue on our current growth trajectory and grow our business 3 to 5 times over the next 4 to 5 years, generating greater impact, greater returns for our shareholders and greater benefits for our community. We are aware that the speed at which we execute this strategy is vital and dictated by the once in a business lifetime expansion of the addressable market and imminent competition. The planets are aligning very quickly for Australian Ethical with societal, political and economic tailwinds pointing to a business case for responsible investing that is impossible to ignore. And while we are well-positioned – with no debt, strong cashflows and positive momentum – we need to be much more ambitious to safeguard and grow our market share in what will be a fiercely contested market in the near term. As such, our expense growth in the short- term will reflect the investment we will make into our business to realise our ambitious growth aspirations. We expect profit growth to remain modest during this time, though we expect to see a strong increase in funds under management and revenue. Looking out to the medium and long-term, we expect to see higher levels of profitability and operating leverage from achieving greater scale as we realise the anticipated benefits of investing in our business. Like all fund managers, we remain highly leveraged to financial markets at a time when COVID is still a concern and compounded by a slow vaccine rollout in Australia, and we expect market volatility to continue. Any performance fee generated by the Emerging Companies Fund is not guaranteed year on year. But what we have is a 35-year head start on the other investors who are rushing to capitalise on this moment. We are committed to leveraging our leading position and continuing to drive impact through our award-winning ethical investment process, our deep ethical research and our purpose-driven approach. 31 Financial performance – management analysis Net Profit after tax (NPAT) including performance fee Add: Net loss attributable to The Foundation* Net profit after tax attributable to shareholders Adjustments: Government grant income Payment of government grant to The Foundation Net proceeds from insurance settlement Tax on adjustments Gain on disposal of investment property held for sale Underlying profit after tax (UPAT) including performance fee Performance fee (after tax and community grant) Net Profit after tax (NPAT) excluding performance fee Underlying profit after tax (UPAT) excluding performance fee Basic EPS on NPAT (cents per share) Basic EPS on NPAT attributable to shareholders (cents per share) Diluted EPS on NPAT attributable to shareholders (cents per share) Basic EPS on UPAT attributable to shareholders (cents per share) Diluted EPS on UPAT attributable to shareholders (cents per share) 2021 $’000 11,118 143 11,261 (100) 100 (299) 90 – 11,052 (1,885) 9,233 9,167 10.06 10.19 10.02 10.00 9.84 2020 $’000 9,457 – 9,457 % Increase 18% 19% – – – – (178) 9,279 (2,250) 7,207 7,029 8.62 8.62 8.42 8.46 8.26 19% 28% 30% * refer to Note 43 for additional details in relation to The Foundation’s financial results. Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2020 of 2.50 cents (2019: 3.00 cents) per ordinary share – fully franked Special performance dividend for the year ended 30 June 2020 of 1.00 cents (2019: nil) per ordinary share Interim dividend for the year ended 30 June 2021 of 3.00 cents (2020: 2.50 cents) per ordinary share – fully franked 2021 $’000 2020 $’000 2,810 3,362 1,124 3,371 7,305 – 2,810 6,172 Since year end the Directors have declared a final dividend of 4.00 cents per fully paid ordinary share (2020: 2.50 cents) and special performance fee dividend of 1.00 cents per fully paid ordinary share (2020: 1.00 cents). The aggregate amount of the declared dividend expected to be paid on 16 September 2021 out of profits for the year ended 30 June 2021, but not recognised as a liability at year end, is $5,619,000 (2020: $3,934,000). All dividends paid during the year were fully franked based on tax paid at 27.5%. The final dividend to be paid in September 2021 will be fully franked at 30.0%. 32 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021 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 Details Balance Date Shares 1 July 2020 112,387,138 Weighted Average issue price $’000 11,191 Vesting of deferred shares in the Employee Share Trust (1,096,407 shares) August – September 2020 Purchase of deferred shares in the Employee share plan – on-market Vesting of deferred shares in the Employee Share Trust (51,785 shares) 6 October 2020 February – March 2021 – – – $0.96 1,025 $4.53 (1,635) $1.41 95 Balance 30 June 2021 112,387,138 10,676 No amounts are unpaid on any of the shares. Refer to Note 42 for additional information and a detailed breakdown of the shares vested during the year. Significant changes in the state of affairs Likely developments and expected results of operations There were no significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year Apart from the dividend declared as disclosed in Note 32, no other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. Management have considered the impact of the ongoing COVID-19 pandemic in Australia and assessed there are no changes required to the financial statements subsequent to the end of the financial year. Additional information about the Group’s business is available to shareholders on our website. Environmental regulation The Company does not hold any direct investment in commercial property. To the best of the directors’ knowledge, the relevant environmental regulations under Commonwealth and State legislation have been complied with. 33 Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) held during the year ended 30 June 2021, and the number of meetings attended by each Director were: Full Board People, Remuneration and Nominations Committee Audit, Compliance and Risk Committee Eligible Attended Eligible Attended Eligible Attended Steve Gibbs Kate Greenhill Mara Bun Michael Monaghan Julie Orr John McMurdo 10 10 10 10 10 10 10 10 10 10 10 10 7 7 7 7 7 – 7 7 7 7 7 – 6 6 6 6 6 – 6 6 6 5 6 – Product Disclosure Statement Committee Investment Committee Eligible Attended Eligible Attended Steve Gibbs Kate Greenhill Mara Bun Michael Monaghan Julie Orr John McMurdo 2 – – 2 – – 2 – – 2 – – 4 4 4 4 4 – 4 4 4 4 4 – Indemnity and insurance of officers Indemnity and insurance of auditor The Company has indemnified the Directors and executives of the Company for costs incurred, in their capacity as a Director or executive, for which they may be held personally liable, except where there is a lack of good faith. The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. 34 Australian Ethical Investment Limited and its Controlled Entities DIRECTOR’S REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in Note 36 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in Note 36 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Officers of the Company who are former partners of KPMG There are no officers of the Company who are former partners of KPMG. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. 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 immediately after this Directors’ report. Auditor KPMG continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors JOHN MCMURDO Managing Director and Chief Executive Officer 25 August 2021 Sydney 35 Remuneration Report 2021 For the year ended 30 June 2021 Dear Shareholder, On behalf of the Board, I am pleased to present our Remuneration Report for 2021. The 2021 financial year has been challenging due to the ongoing impact of COVID-19. Notwithstanding those challenges it would be fair to say that 2021 was an outstanding year for Australian Ethical as we continue to implement our long-term growth strategies. It is particularly encouraging to see so many Australians trusting Australian Ethical to lead the way with climate change action and ethical investing. This year we are delighted to have again achieved record new member and investor numbers, record net inflows, record profit for the year, strong relative investment performance across most of our managed funds and superannuation investment options, created a new role of Chief Strategy and Innovation Officer and welcomed our new Chief Customer Officer. Our strong staff engagement has been maintained throughout the year, a testament to the shared purpose that underpins the strength of our business, and the commitment of our people. Our remuneration policy aligns to the philosophy of the Company that sees our people as key stakeholders in the Company’s success. Our remuneration framework aims to reward our management and employees fairly, competitively and provide a direct link between contribution and reward and alignment with the long-term performance of the Company. As it has been three years since we formally benchmarked our executive remuneration practices, the Board engaged external remuneration advice to ensure our framework and practices remain contemporary, fair and align with our transformational growth agenda through to 2025 and beyond. Changes we expect to introduce during the next year are summarised in section 3. We are committed to ensuring our remuneration arrangements remain fair to all stakeholders and are effective in attracting and retaining talented people who are motivated and professional. STEVE GIBBS Chair People, Remuneration & Nominations Committee 36 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 20211. About this Report This report deals with the remuneration arrangements that were in place for all employees of Australian Ethical Investment Limited (the ‘Company’), and its wholly owned subsidiaries (together referred to as the ‘Group’) during the financial year ended 30 June 2021. It describes the philosophies behind the remuneration arrangements and other employee benefits. This remuneration report specifically focuses on the remuneration of Non-Executive Directors, the Managing Director/Chief Executive Officer (CEO) and members of the Senior Leadership Team (SLT), collectively referred to as Key Management Personnel (‘KMP’) and has been subject to independent audit as required by section 308(3C) of the Corporations Act 2001. 2. Our Remuneration Philosophy and Structure The Company’s remuneration philosophy 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. Remuneration principles The principles underpinning our remuneration framework are: Fairness • attract and retain talented people • reward people fairly for their work recognising the expertise and value they bring to the Group Alignment • build long term ownership in the Group • align reward with contribution to the Group’s performance • align shareholder interests and employees • promote the values of the Ethical Charter included within the Constitution and be aligned with the purpose of the Group • foster collaboration, trust and diversity of thoughts and ideas • incorporate risk management performance measures in all employee scorecards • be motivating for employees Simplicity • be simple to administer and to communicate to all stakeholders The remuneration philosophy is consistent with the principles of the Australian Ethical Constitution and Charter. It is designed to: • ensure that the Group facilitates “the development of workers’ participation in the ownership and control of their work organisations and places” – Charter element (a) • not “exploit people through the payment of low wages or the provision of poor working conditions” – Charter element (ix) • not “discriminate by way of race, religion or sex in employment, marketing, or advertising practices” – Charter element (x) The remuneration framework is also designed to encompass the Group’s values of wisdom, authenticity, action, and empathy which are embedded in our culture. Adherence to these values is a gate to incentives. The incentive structure meets the requirements of Rule 15.1(c) of the Constitution which provides that prior to recommending or declaring any dividend to be paid out of the profits of any one year, provision must be made for a bonus or incentive for employees to be paid of up to 30% of what the profit for that year would have been had not the bonus or incentive payment been deducted. 37 Income Inequality and Ethical Considerations AEI’s hiring practices and process of setting remuneration for all employees centres around high performance and the Group’s values and culture. We rely on a variety of sources to identify professional values-aligned candidates, including LinkedIn, agencies, job advertising networks and our existing employees’ networks. Intertwined within our hiring practices are our Group’s values around remunerating people fairly for the work that they do and our Charter which stipulates that we do not discriminate by way of race, religion or gender in employment nor exploit people through the payment of low wages or poor working conditions. To ensure we reflect the community around us and therefore benefit from a full range of thinking styles and approaches to work, we strive to achieve diversity with our employees across a number of dimensions including gender, age and ethnicity. We are one of the few Boards on the ASX with 50:50 gender equality and we have 44% female representation on the SLT (target minimum 40% of each gender). Our overall workforce gender balance sits at 57% females (target 50%). Elements of Remuneration (financial year ended 30 June 2021) The following framework applied to all employees of Australian Ethical Investment Limited (not including Non-Executive Directors) for the financial year ended 30 June 2021. Employees of Australian Ethical Superannuation Pty Limited are entitled to receive all the below elements of remuneration with the exception of long-term incentives linked to the performance of the Company. Element Description Quantum Fixed Remuneration (FR) Short Term Incentive (STI) Comprises base salary, superannuation, packaged employee benefits and associated fringe benefits tax. An annual incentive aimed at rewarding employees for achievement of annual objectives. Applies to all employees who have satisfied the risk and values gate. Paid as Cash • Reviewed annually, or on promotion. • Benchmarked against market data1 for comparable roles based on position, skills and experience brought to the role. • Target remuneration is based around the median of the relevant comparator group for each job role, taking into consideration companies in a similar industry and of a similar size. • Maximum achievable is a percentage of Fixed Remuneration up to 100% depending on the role, determined by Board discretion. Cash and deferred shares • Actual outcome is linked to performance and contribution against annual financial and non- financial KPIs. • On an annual basis PRN will consider an additional discretionary bonus paid in deferred shares for specified members of the Investment team, connected to performance fees achieved. • Short term incentives are treated as follows in the following circumstances: – resignation – usually forfeited, subject to Board discretion; – termination for serious misconduct – forfeited; – retirement – at discretion of the Board; – death or total and permanent disablement – at discretion of the Board; and – redundancy – at discretion of the Board. 1 Benchmarked to data provided by the Financial Institutions Remuneration Group Inc (FIRG). FIRG is a peer group provider of remuneration and benefits data in the financial services industry. 38 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Element Description Quantum Paid as Long Term Incentive (LTI) Aimed at fostering 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. Applies to all employees who have satisfied the risk and values gate. Other employee benefits The Group also provides other benefits to all employees. • Awarded as percentage of Fixed Remuneration Shares • Shares are issued or purchased and held in trust for 3 years. • Vest in the name of the employee after 3 years, provided that: – employee remains employed; and – subject to 3-year compound annual growth in diluted earnings per Share (EPS) as follows: • 0 – 5% – nil vests • 5% – 10% – pro rata up to 100% • > 10% – fully vests. • The Board has discretion to adjust EPS for items that do not reflect management and employee performance and day to day business operations and activities. • Employees participate in dividends and have voting rights from the date of grant. • On cessation of employment, no unvested shares shall vest unless the Board in its absolute discretion determines otherwise. Benefits include: – • an employee assistance program; • volunteer leave (2 days per annum); • self-education/study assistance; • professional association memberships, annual health checks and annual flu vaccinations; • flexible working arrangements; • subsidies of training and education costs; and • parental support including 18 weeks paid leave for primary carers and two weeks for secondary carers and superannuation contributions paid whilst on leave for up to 24 months. To support parents returning to work after taking parental leave, we provide primary carers with one day of paid leave each week for the first 3 months. • Salary continuance insurance for five years Our remuneration structure comprises both short and long-term incentives to ensure support for a strong risk culture that values member outcomes and shareholder alignment. Our short-term incentives relating to investment performance measures incorporate 1 and 3 year performance against benchmarks and relative to peers. This is to ensure that incentives are aligned to longer term customer and member outcomes. 39 Performance measures for Short Term Incentives Performance measures for Short Term Incentives are based on a Balanced Scorecard of financial and non-financial metrics, and an individual’s specific performance objectives. Weightings vary with each individual and are based on their role. Employees have no contractual right to receive an STI award and the Board retains discretion to amend or withdraw the STI at any time. Adherence to the Company’s values and risk culture are required to remain eligible for an STI award. The following table provides the overall Balanced Scorecard and the performance outcomes for these objectives for the financial year ended 30 June 2021. Measure Metric Profit Net profit after tax attributable to shareholders (NPAT) Cost to income ratio Business growth Net inflows targets set based on prior year experience, budget expectations and stretch target Compelling client experience Net Promoter Score (NPS) metric for super and managed fund clients. Brand identity review and refresh Investment performance Balanced Fund (BF), Australian Shares Fund (ASF) & Emerging Companies Fund (ECF) performance against market benchmarks. Stretch target for BF is benchmark + 2%, ASF is benchmark + 3%, for ECF is benchmark +4%, over blended 1 and 3 year horizons. BF, ASF & ECF performance relative to peers. Measured in quartiles with stretch target being 1st quartile, over blended 1 and 3 year horizons. Super Fund Balanced option (MySuper) relative to peers performance and Sharpe ratio. Measured in quintiles with stretch target being 1st quintile, over blended 1 and 3 year horizons. Why this metric is appropriate Incentive Award Achievement for FY21 Provides alignment to the Group’s financial performance Growth and scale will benefit our customers through lower fees and better products and service. It also allows us to deliver greater social and environmental impact. Customer satisfaction with product and service is measured using customer surveys conducted by survey tools and independent industry consultants. Delivering long term competitive investment returns for our customers is core to our offering. NPAT before performance fees of $9.4m and NPAT after performance fee of $11.3m. Record NPAT up 19% on prior year. Cost to income before performance fee of 77%. Record net inflows of $1.03bn, an increase of 56% on prior year. Achieved top quartile NPS (+49) and launched new brand identity, website and consumer brand movement. BF, ASF & ECF performance – exceeded stretch targets. ASF & ECF vs peers – top quartile achieved. BF vs peers – top quartile for 3 years and below median for 1 year. Super Fund Balanced option (My Super) performance vs peers – top quintile for 3 years and 3rd quintile for 1 year. Super Fund Balanced option (My Super) Sharpe ratio vs peers – top quintile for 3 years and bottom quintile for 1 year. 40 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Measure Metric Why this metric is appropriate Incentive Award Achievement for FY21 Strategic & regulatory initiatives and Business Plan Key Result Areas Employee engagement Risk Strategy development Delivery of agreed strategic & regulatory initiatives program as a team. Delivery of Key Result Areas per the annual Business Plan Employee annual engagement score (as surveyed by Culture Amp). Assessed against market comparisons SLT leadership and team development measured by performance on 3600 feedback, team engagement scores, unwanted turnover, team upskilling Innovation and high performance are embedded in Company culture Adherence to the Company’s values is treated as a gate to short term incentive awards. Stretch target is top quartile versus financial services companies. Metrics focus on fostering risk management culture and managing strategic and operational risk within Board approved risk appetite for business activities and strategic projects. Adherence to the Company’s risk culture is treated as a gate to the entire short term incentive award. Poor risk action results in reduction to or forfeiture of STI. Delivering priorities consistent with the long- term strategies of the Group Providing a motivating and inspiring workplace and high employee engagement has been proven to drive better business outcomes for customers and shareholders. Delivered all regulatory projects. Delivered a high number of Business Plan Key Result Areas and strategic programs including a number of initiatives not planned but highly valuable. Staff engagement score of 82% in top quartile of Australian Finance and New Tech companies. Maximum target achieved. More than 50% of staff put through leadership and team member coaching course. 3600 feedback implemented. Established a culture of innovation. It is critical for our SLT to have a high degree of ownership for risk management. Impact assessed collectively and individually based on risk management framework of the Company, assessed by PRN and reviewed by Board. High % of target achieved. In assessing the performance of the business and the CEO, the Board acknowledges an excellent set of Group results, outperformance of stretch objectives in a number of key areas and significant progress on our strategic agenda. The PRN considered the SLT’s STI awards in light of the Balanced Scorecard achievements, and each individual’s contribution to the results and recommended to the Board each SLT STI award, as reflected in the statutory table. Awards reflect recognition of the continued strong performance of individuals, the team and the achievement of record business results. 41 3. Developments in Remuneration Practices Over the past few years, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, APRA, shareholders and media have put the spotlight on remuneration practices at financial service institutions. The main focus has been on the variable incentive assessment criteria driving the wrong behaviour and poor customer outcomes. We recognise the important role that remuneration can play in managing risk and emphasising a positive risk culture. In line with this, our balanced scorecard and individual objectives combine both financial objectives and non-financial customer outcomes, balancing risk management, and ensuring adherence to our desired cultural values. All employees, including KMPs have objectives underpinned by the company’s core values and incentivise ethical behaviour and positive customer outcomes. There are clear criteria determining how performance objectives are met and consequences where they are not met. Each year, the Board reviews the remuneration framework and has had oversight of remuneration arrangements for all employees, setting key performance objectives to influence the work ethic/ behaviour of employees and the remuneration outcomes. In FY21, the Board initiated a detailed review of our remuneration structure, including industry benchmarks and incentives, in light of the company’s current market position and aspirational strategic growth targets to 2025. This review has been conducted in the context of proposed changes to the regulatory environment on remuneration and ensuring we continue to meet our highest ethical standards. This review was supported by external remuneration consultancy AON Hewitt. The review concluded that long-term award incentive opportunities for senior executive roles are below market comparative opportunities and that there had been an identifiable shift towards the deferment of short-term incentive awards where those awards exceeded a threshold. A summary of key expected changes to the remuneration structure to take effect from 1 July 2021 are noted below. • All permanent staff presently participate in a Long-term Incentive (LTI) program ranging between 10%-33% of fixed annual remuneration, depending on role type and seniority. This will be replaced by an Employee Share Plan (ESP) fixed at 10% of annual remuneration for the majority of employees and will remain subject to the current 3-year vesting timeframe and hurdle criteria. The ESP will be settled in shares. • A new Executive Long-term Incentive (ELTI) program designed to more closely align to the business strategy with specifically designed KPIs to achieve the growth and business objectives. Specifically, where LTI for executives currently range from 10-33% of fixed remuneration annually depending on role, they will in future range from 10-60%, being 10% in the ESP and up to 50% p.a. in the ELTI. • The ELTI will have a 4-year vesting timeframe. • Vesting criteria will include achievement of stretch FUM and Cost to Income ratio targets, non-financial measures including customer satisfaction, employee engagement and risk management, and an ongoing commitment to our ethical expression, ESG leadership and excellence. • The ELTI will be implemented via issuance of performance rights to qualifying executives. • No award will vest if targets are not attained. If the targets, which are consistent with the growth ambitions as described in the Directors report, are met or exceeded the Board may increase the ELTI to be awarded having regard to the overall performance of the company. 42 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021• No material structural change is proposed in the striking of fixed remuneration or annual Short-term Incentives (STI). Normal annual review of fixed remuneration to apply with reference to market comparisons. • Introducing the addition of a deferred component paid in shares to any STI paid to Key Management Personnel (KMP’s) above $100,000 in any given year. A deferred component is already in place for the CEO and some of the Investment team. In considering implementing a higher LTI opportunity, the Board has been cognisant of the remuneration philosophy remaining consistent with the Constitution and the Ethical Charter as set out in section 2 and ensuring that the structure of the new LTI closely aligns the interests of Executives with those of shareholders. The weighting of new potential remuneration towards long-term and deferred incentives is consistent with the best practice governance principles signaled in the foreshadowed FAR and CPS 511 regulation. 4. Senior Leadership Team Remuneration Outcomes Corporate performance In considering the Company’s short and long-term incentive payments, regard is had to the following measures: 2017 2018 2019 2020 2021 Net Profit After Tax attributable to shareholders ($’000) 2,920 4,998 6,465 9,457 11,261 Underlying Profit After Tax (UPAT) ($’000)1 4,235 4,998 6,540 9,279 11,052 UPAT excluding performance fees 4,139 4,998 6,024 7,028 9,167 Diluted Earnings Per Share (cents per share) 2.62 4.46 5.84 8.42 10.02 Diluted Earnings Per Share (EPS) growth (3 years) 2.8% 35.2% 28.5% 47.3% 31.0% Diluted EPS growth excluding performance fees (3 years) 1.6% 35.2% 25.3% 36.4% 23.2% Share price at end of period ($, restated for share split) 0.94 1.35 1.77 6.66 8.44 Dividends (cents per share, restated for share split) 2.60 4.00 5.00 5.00 Special performance fee dividend (cents per share)2 – – – 1.00 7.00 1.00 Staff engagement scores 55% 78% 71% 86% 82% 1 Underlying Profit After Tax is a non-IFRS measure and is not audited 2 The Special performance fee dividend is linked to the performance fee achieved on the Emerging Companies Fund outperformance in FY20 and FY21 43 Weighting of remuneration components The following are the weightings of the various components of maximum remuneration for the CEO and target remuneration for the CIO and other SLT members. Target Remuneration by Component CEO CIO 43% 43% 43% 43% 14% 14% Other KMPs 74% 19% 7% 0% 20% 40% 50% 80% 100% Fixed Remuneration STI LTI The below is the actual incentive pay received by the SLT, in aggregate, in relation to the maximum incentive pay they were entitled to. The percentages equate to the ratio of STI and LTI components against fixed salary Potential vs Actual Incentive Pay by Component 2021 Actual 2021 Potential 2020 Actual 2020 Potential 45.5% 46.0% 39.8% 45.2% STI LTI 12.2% 12.2% 10.8% 10.8% 44 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021The following two tables set out Senior Leadership Team remuneration. • The table ‘Senior Leadership Team Remuneration Outcomes – Statutory Basis’ is aligned to the way the Company expenses the remuneration of the senior team under the accounting standards and the Corporations Act. • The table ‘Senior Leadership Team Remuneration Outcomes – Cash and Vesting Basis’ shows amounts received by the senior leadership team in cash and shares vested during the financial year ended 30 June 2021. The movement in the Senior Leadership Team remuneration outcomes (statutory basis) between FY2020 and FY2021 is explained in the following table: Role Explanation of movement Chief Executive Officer (CEO) The full year cost of the CEO has been recognised in the current year, whilst the prior year includes only 5 months of costs due to appointment part way through the prior year. The Interim CEO in prior year did not receive any incentives. Chief Strategy & Innovation Officer (CSIO) The new CSIO commenced on 13 July 2020. Amounts disclosed for the CSIO reflect the period of time in this role. Chief Customer Officer (CCO) The new CCO commenced on 20 July 2020. Amounts disclosed for the CCO reflect the period of time in this role. Head of People & Culture (HP&C) The People & Culture department reports to the CSIO. Amounts disclosed in the prior year for the HP&C include termination benefits following restructuring of the People & Culture department. Other Increase in some individual salaries in line with industry benchmarking to ensure reward remains competitive and fair. 45 l e b a i r a V m r e T t r o h S n o i t a r e n u m e R s e v i t n e c n I n o i t a r e n u m e R n o i t a r e n u m e R $ l a t o T f o % a s a i d e x F f o % a s a l a t o T $ 3 y t i u q E – m r e T g n o L s e v i t n e c n I d e r r e f e D g n o L m r e T t r o h S i e c v r e S n o i t a n m r e T i - r e p u S m r e T t r o h S s e v i t n e c n I e v a e L s t fi e n e B n o i t a u n n a 1 h s a C – $ $ $ y r a a S l e l t i T . s t n e m e r i u q e r 1 0 0 2 t c A s n o i t a r o p r o C e h t d n a s d r a d n a t s g n i t n u o c c a h t i w e c n a d r o c c a n i l l d e t a u c a c s a n o i t a r e n u m e r m a e t i p h s r e d a e l i r o n e s s e n l i l t u o w o e b e b a t e h T l s i s a B y r o t u t a t S – s e m o c t u O n o i t a r e n u m e R m a e T p i h s r e d a e L r o i n e S 46 . l d r a c e r o c s d e c n a a b e h t n o d e s a b r a e y r a u c i t r a p e h t l r o f s t n e m e t a t s l i ’ a c n a n fi s y n a p m o C e h t n i d e s n e p x e t n u o m a e h t o t l a u q e e r a n w o h s s t n u o m a e h T s t fi e n e B m r e T g n o L l t n e m y o p m E - t s o P s t fi e n e B s t fi e n e B m r e T t r o h S r a e y l i a c n a n fi 1 2 0 2 % 2 . 1 4 % 6 8 2 . % 6 9 2 . % 0 3 2 . % 7 5 2 . % 8 3 5 . % 2 9 1 . % 3 2 2 . % 1 . 2 3 % 8 3 3 . % 2 9 2 . % 6 4 2 . % 3 3 1 . % 1 . 1 2 % 2 3 5 . % 9 5 1 . % 5 0 2 . % 5 6 2 . – – % 5 2 2 . % 9 5 2 . d n a t n a r g % 1 . 6 5 % 4 7 3 . % 2 4 3 . % 2 0 2 . % 0 2 3 . % 1 . 7 8 % 4 4 1 . % 2 9 1 . % 0 8 3 . % 8 9 3 . % 0 2 4 . % 9 8 2 . % 3 7 1 . % 6 7 1 . % 7 6 8 . % 6 . 1 1 % 5 7 1 . % 2 7 2 . – – % 9 6 1 . % 8 . 7 2 0 4 6 8 4 7 , , 1 4 0 0 2 4 2 7 5 5 6 , 0 0 0 0 1 , , 7 3 7 5 6 4 , 4 3 9 0 8 3 , 2 1 9 8 2 4 , 3 1 9 9 3 8 3 9 1 , 6 5 3 3 5 7 3 1 4 , 4 3 7 4 1 5 , 2 6 7 7 2 , 2 9 5 9 2 , 0 4 2 0 1 , 1 7 2 7 2 1 , 5 7 3 8 2 , 7 1 2 2 3 , 7 6 3 5 3 , 1 4 5 , 1 4 2 2 8 9 9 2 4 , , 1 3 2 0 6 5 , 5 6 5 6 6 3 , 7 0 7 4 1 8 2 8 3 2 7 3 , , 5 2 8 9 9 3 6 6 4 0 7 4 , – 1 2 9 3 1 , 7 3 4 4 2 , 3 3 3 7 2 , 5 4 1 , 3 1 1 1 0 2 4 2 , 4 4 1 , 8 2 4 5 7 2 3 , 7 8 2 7 7 1 , – 7 6 6 , 1 7 , 3 2 0 6 5 4 , 6 7 6 0 6 3 4 , – 1 5 4 2 5 , 6 8 3 6 1 3 , – – – – – – – – – – – – – , 8 5 8 9 6 5 4 , 6 9 3 6 6 3 , 2 3 5 3 2 , – – – – – – – – 2 3 5 3 2 , s e v i t n e c n I $ 2 y t i u q E – $ 9 6 3 7 , 4 3 7 5 , 6 4 4 6 , 2 4 4 6 , 9 8 0 6 , 1 7 4 4 1 , 1 0 1 , 7 1 0 3 9 , 5 8 9 0 1 , 8 3 9 3 7 , 3 0 8 2 , 7 2 2 6 , 3 2 8 5 , 8 9 8 5 , 5 4 6 2 1 , 1 3 5 0 1 , 7 4 3 9 , 1 8 9 6 , – $ – – – – – – – – – – – – – – – – – - 9 0 4 , 1 9 1 – 8 1 6 5 , – 2 2 4 , 1 5 3 7 8 5 6 , , 1 3 8 2 4 2 3 0 0 , 1 2 3 0 0 , 1 2 6 2 5 8 1 2 , – 0 0 0 0 5 , 7 9 5 3 1 8 , 9 2 5 5 7 2 , 4 6 6 0 5 , , 3 6 4 3 0 7 , 2 O E C & r o t c e r i i D g n g a n a M r e c fi f O r e m o t s u C f i e h C O E C & 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 0 0 0 0 1 1 , 4 0 0 3 9 1 2 , 3 7 1 , 1 1 4 , 3 1 6 2 7 2 O E C & r o t c e r i i D g n g a n a M & y g e t a r t S f i e h C r e c fi f O n o i t a v o n n I 0 0 0 0 1 1 , 0 0 0 8 5 , 0 0 0 0 0 1 , 0 0 0 5 2 3 , 0 0 0 0 4 , 0 0 0 0 6 , 0 0 0 0 3 1 , , 5 3 8 9 9 2 6 0 2 5 6 2 , 9 8 8 0 9 2 , 7 7 4 , 1 5 3 9 3 1 , 5 5 2 , 1 4 5 0 9 2 , 2 7 5 0 2 3 r e c fi f O g n i t a r e p O r e c fi f O k s R i r e c fi f O t n e m t s e v n I r e c fi f O r e m o t s u C f i e h C f i e h C f i e h C f i e h C h c r a e s e R s c h t E i f o d a e H l e s n u o C l a r e n e G r e c fi f O l i a c n a n F i f i e h C 6 4 2 5 9 1 , , 0 0 3 2 5 1 , 1 , 5 4 4 7 5 7 2 , 7 7 5 4 1 , 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 7 9 5 0 7 , 0 0 0 2 9 , 0 0 0 0 5 , 0 0 0 0 5 , 0 0 0 5 3 , 0 0 0 4 5 , 0 0 0 2 9 , 0 0 0 0 2 3 , 2 2 9 4 1 , – 4 6 5 3 5 1 , , 1 3 8 6 9 2 9 5 5 7 6 2 , , 1 3 3 2 6 2 4 1 9 7 4 3 , 7 4 6 , 1 8 2 1 3 3 7 8 2 , 8 2 7 7 1 3 , 5 6 3 2 6 1 , O E C & r o t c e r i i D g n g a n a M e r u t l u C & e p o e P l f o d a e H r e c fi f O t n e m t s e v n I r e c fi f O k s R i f i e h C f i e h C h c r a e s e R s c h t E i f o d a e H l e s n u o C l a r e n e G r e c fi f O l i a c n a n F i f i e h C r o t c e r i i D g n g a n a M g n i t c A r e c fi f O g n i t a r e p O f i e h C i m a e t p h s r e d a e l t n e r r u C e m a N ) 0 2 0 2 l u J 3 1 p p a ( r e d n a n E M o d r u M c M J ) 0 2 0 2 l u J 0 2 p p a ( z e y o L M i r c a M D y a M T s e h g u H K g n e H K s n o m S M i l r e m a P S 1 2 0 2 l a t o T m a e t t n e m e g a n a m t n e r r u C 5 ) 0 2 0 2 b e F 0 1 p p a ( o d r u M c M J r a e y l i a c n a n fi 0 2 0 2 ) 7 0 2 0 2 t c O 9 g n i t r a p e d ( g n e H K n a r o H F s e h g u H K i r c a M D y a M T s n o m S M i l r e m a P S O E C m i r e t n I 5 ) 0 2 0 2 b e F 9 o t 9 1 0 2 t e p S 1 ( s b b G S i 6 ) 0 2 0 2 n u J 0 3 p e d ( e g d i r b w o L A t n e m e g a n a m d e t r a p e D 5 ) 9 1 0 2 g u A 1 3 p e d ( n o n r e V P 0 2 0 2 l a t o T s e r a h s f o t s o c e h T . l n a p e v i t n e c n m r e t - g n o i l e h t r e d n u s t n a r g 1 2 - 0 2 0 2 d n a 0 2 - 9 1 0 2 , 9 1 - 8 1 0 2 e h t f o h c a e f o i t c a p m e s n e p x e 1 2 0 2 t n a v e e r e h t s e d u c n l l i 1 2 0 2 r o f e s n e p x e ) ’ I i T L ‘ ( e v i t n e c n m r e t - g n o L e h T 3 . r a e y h c a e 3 / 1 g n i t s e v s e r a h s e h t h t i w d o i r e p r a e y - e e r h t a r e v o d e s n e p x e . 1 2 0 2 r e b m e t p e S n i l e v e l l i a u d v d n i i n a t a t s e v l l i w e h c n a r t 9 1 - 8 1 0 2 e h T i . t e m g n e b s e d r u h e h t l f o t n e m s s e s s a y t i l i b a b o r p l i a u n n a n a g n s u d o i r e p r a e y - e e r h t a r e v o d e s n e p x e d n a t n a r g f o e m i t t a d e x fi s i i i g n n a m e r e h t d n a h s a c n i i d a p s i d r a w a s h t i f o % 0 5 . 1 2 0 2 e n u J 0 3 t a y r a a s d e x fi s h l i f o % 0 0 1 s i i e v i t n e c n m u m x a m e h T i . d r a o B e h t y b e v i t n e c n m u m x a m s h i i i f o % 0 0 1 d e d r a w a s a w O E C e h T 4 . 1 2 0 2 r e b m e t p e S n i t s e v t s r fi h t i w , s r a e y 3 t x e n e h t f o h c a e r e v o s e r a h s d e r r e e d n f i i d a p s % 0 5 i t s u g u A 1 3 n o O E C s a d e n g s e r o h w n o n r e V i l i h P d n a 0 2 0 2 y r a u r b e F 9 o t 9 1 0 2 r e b m e t p e S 1 m o r f O E C m i r e t n i I s a s b b G e v e t S g n c a p e r l i , i O E C d e t n o p p a s a w o d r u M c M n h o J , 0 2 0 2 y r a u r b e F 0 1 n O 5 d n a n a m r i a h C s a e o r s h n l i i r a e y e h t g n i r u d d e n r a e n o i t a r e n u m e r s H O E C m i . i r e t n I s a w s b b G i r M e m i t f o d o i r e p e h t r o f n o i t a r e n u m e r s t n e s e r p e r e b a t e v o b a e h t n l i i l d e s o c s d s t n u o m A . 9 1 0 2 . t r o p e r s h t i f o n o i t c e s s t n e m e g n a r r A r o t c e r i D e v i t u c e x E - n o N . 5 n o i t c e s n i i l d e s o c s d e r a r e b m e m d r a o b e v i t u c e x e - n o n y c n a d n u d e r l a u t c a r t n o c s e d u c n l i t n e m y a p n o i i t a n m r e t e h T . 0 2 0 2 r e b o t c O 9 n o d e t r a p e d e r u t l u C & e p o e P l f o d a e H e h T . 0 2 0 2 e n u J 0 3 t a d e r u t c u r t s e r s a w e r u t l u C & e p o e P l f o d a e H f l o e o r e h T 7 . s t n e m e l t i t n e e c v r e s - g n o i l i g n d u c n l i s t n e m y a p y r o t u t a t s r e h t o d n a d o i r e p e c i t i o n g n n a m e r i r o f t u o y a p , i s n o s v o r p i . 0 2 0 2 r e b m e t p e S 4 o t d o i r e p e c i t i o n g n n a m e r i r o f t u o y a p s e d u c n l i t n e m y a p n o i i t a n m r e t e h T . 0 2 0 2 e n u J 0 3 n o l t n e m y o p m e d e s a e c e g d i r b w o L n o s y l l A 6 . N R P e h t y b d e v o r p p a e r e w s t n u o m a 1 2 0 2 e h T . s ’ I P K d e e r g a g n s u r a e y i l i a c n a n fi e v i t c e p s e r e h t g n i r u d e c n a m r o f r e p r o f d e u r c c a t n u o m a e h t s i e s n e p x e ) ’ I T S ‘ ( e v i t n e c n I m r e t - t r o h S e h T 1 f o e m i t e h t t a d e x fi s i s e r a h s f o t s o c e h T . t n a r g 0 2 - 9 1 0 2 e h t n i s e r a h s d e r r e e d f f o i t c a p m e s n e p x e r a e y t n e r r u c e h t s e d u c n l i 1 2 0 2 r o f e s n e p x e ) ’ I T S D i ‘ ( e v i t n e c n m r e t - t r o h S d e r r e e D e h T 2 f Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021 % d e t a e R l e c n a m r o f r e P $ l a t o T 2 y t i u q E – m r e T g n o L s e v i t n e c n I h s a C – m r e T g n o L s e v i t n e c n I n o i t a n m r e T i - r e p u S s t fi e n e B 1 n o i t a u n n a d n a r a e y t n e r r u c e h t n i h s a c n i i d a p s u n o b r a e y r o i r p g n d u c n l i i d o i r e p g n i t r o p e r e h t g n i r u d P M K h c a e y b d e v e c e r i s t fi e n e b l a u t c a s t c e fl e r l w o e b e b a t e h T l ) d e t i d u a , S R F I - n o n ( s i s a B g n i t s e V d n a h s a C – s e m o c t u O n o i t a r e n u m e R m a e T p i h s r e d a e L r o i n e S s t fi e n e B m r e T g n o L l t n e m y o p m E - t s o P s t fi e n e B s t fi e n e B m r e T t r o h S r a e y l i a c n a n fi 1 2 0 2 . y l i s u o v e r p s r a e y e e r h t m a r g o r p s e r a h s d e r r e e d f I T L e h t r e d n u d e t s e v s e r a h s f l o e u a v e h t % 8 3 1 . % 0 0 . % 8 . 1 2 % 3 0 4 . % 0 0 . % 1 . 0 7 % 1 . 5 3 % 3 8 3 . % 6 4 4 . % 0 0 . % 8 0 1 . % 8 4 1 . % 3 4 1 . % 1 . 1 6 % 6 6 2 . % 7 6 2 . % 7 0 2 . % 0 0 . % 9 3 3 . % 3 6 7 . 2 0 6 2 1 5 , , 0 4 2 0 0 3 4 9 5 , 1 2 4 , 5 5 7 5 9 4 6 7 8 8 1 3 , 6 3 5 , 1 3 3 , 1 0 5 3 7 4 4 , 2 9 5 5 2 5 , , 4 3 5 5 3 6 , 9 7 0 9 8 9 4 , $ – – – 4 0 0 0 5 1 , – 3 2 5 3 1 6 , 8 3 2 2 2 1 , 2 3 4 7 4 1 , 9 8 2 , 1 9 1 , 6 8 4 4 2 2 , 1 4 4 9 0 7 1 , , 1 6 9 3 6 3 0 4 3 8 4 3 , 6 9 5 , 1 4 3 , 1 9 7 6 2 0 , 1 , 0 2 8 0 3 4 7 3 9 7 3 4 , , 2 2 9 0 4 4 7 8 2 7 7 1 , – – – – – – , 7 1 6 8 1 3 0 9 1 , 9 6 4 8 7 2 6 , , 7 7 6 7 6 4 , 2 8 7 3 9 8 1 0 3 9 9 , 4 8 2 2 3 3 , , 7 5 0 0 0 1 , 5 6 7 1 , 2 8 8 $ – – – – – – – – – – – – – – – – – – – – 0 0 0 0 4 1 , 0 0 0 0 4 1 , $ g n o L e v a e L i e c v r e S 9 6 3 7 , 4 3 7 5 , 6 4 4 6 , 2 4 4 6 , 9 8 0 6 , 1 7 4 4 1 , 1 0 3 9 , 1 0 1 , 7 5 8 9 0 1 , 8 3 9 3 7 , 3 0 8 2 , 7 2 2 6 , 3 2 8 5 , 8 9 8 5 , 5 4 6 2 1 , 1 3 5 0 1 , 7 4 3 9 , 1 8 9 6 , – – 8 1 6 5 , 3 7 8 5 6 , $ – – – – – – – – – – – – – – – – – – – – – – $ 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 4 9 6 , 1 2 6 4 2 5 9 1 , 7 7 5 4 1 , 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 3 0 0 , 1 2 $ h s a C s u n o B - 7 9 5 0 7 , – 0 0 0 2 9 , 0 0 0 0 5 , 0 0 0 5 3 , 0 0 0 4 5 , 0 0 0 2 9 , 7 9 5 3 1 7 , 0 0 0 0 2 3 , – 9 5 3 9 3 , 9 7 5 , 1 5 8 0 0 9 4 , 4 0 6 5 4 , 0 2 1 , 4 5 5 8 1 , 1 9 , 0 2 5 8 0 3 1 y r a a S l $ 2 4 9 2 1 4 , , 2 1 8 2 7 2 4 5 4 , 1 0 3 , 5 1 6 7 6 2 3 9 0 , 1 9 2 8 4 8 , 1 6 3 3 3 4 7 5 2 , 5 6 1 , 3 9 2 0 5 4 3 2 3 , 2 1 8 , 1 8 7 2 , 4 6 5 3 5 1 , 2 7 3 7 9 2 , , 5 3 9 9 6 2 , 7 8 6 5 6 2 6 0 0 6 6 3 , 2 9 4 4 8 2 , , 3 8 6 0 9 2 3 5 7 , 1 2 3 O E C & r o t c e r i i D g n g a n a M e l t i T i m a e t p h s r e d a e l e m a N t n e r r u C o d r u M c M J & y g e t a r t S f i e h C ) l 0 2 0 2 y u J 3 1 p p a ( r e c fi f O g n i t a r e p O r e c fi f O k s R i r e c fi f O t n e m t s e v n I r e c fi f O r e m o t s u C f i e h C f i e h C f i e h C f i e h C h c r a e s e R s c h t E i f o d a e H l e s n u o C l a r e n e G r e c fi f O l i a c n a n F i f i e h C O E C & r o t c e r i i D g n g a n a M r e c fi f O g n i t a r e p O f i e h C e r u t l u C & e p o e P l f o d a e H r e c fi f O t n e m t s e v n I r e c fi f O k s R i f i e h C f i e h C h c r a e s e R s c h t E i f o d a e H l e s n u o C l a r e n e G r e c fi f O l i a c n a n F i f i e h C r e c fi f O n o i t a v o n n I ) 0 2 0 2 l u J 0 2 p p a ( z e y o L M s n o m S M i l r e m a P S 1 2 0 2 l a t o T i r c a M D y a M T m a e t t n e m e g a n a m t n e r r u C ) 0 2 0 2 b e F 0 1 p p a ( o d r u M c M J r a e y l i a c n a n fi 0 2 0 2 ) 0 2 0 2 t c O 9 g n i t r a p e d ( g n e H K n a r o H F s e h g u H K i r c a M D y a M T s n o m S M i l r e m a P S O E C m i r e t n I r e d n a n E M s e h g u H K g n e H K 2 2 9 4 1 , – 5 6 3 2 6 1 , O E C & r o t c e r i i D g n g a n a M g n i t c A 3 0 0 , 1 2 3 0 0 , 1 2 4 4 4 9 5 , , 1 3 8 9 4 3 , 1 1 3 2 8 2 4 6 6 0 5 , 6 2 5 8 1 2 , , 0 5 6 8 4 0 , 1 , 2 3 8 4 4 7 2 , O E C & r o t c e r i i D g n g a n a M r e c fi f O r e m o t s u C f i e h C ) 0 2 0 2 b e F 9 o t 9 1 0 2 t p e S 1 ( s b b G S i ) 0 2 0 2 n u J 0 3 p e d ( e g d i r b w o L A t n e m e g a n a m d e t r a p e D ) 9 1 0 2 / 8 0 / 1 3 p e d ( n o n r e V P 0 2 0 2 l a t o T e c n a m r o f r e p e h t s a d e t s e v s e r a h s e s e h t f o % 0 0 1 . 7 1 0 2 r e b m e t p e S n i d e t n a r g s e r a h s d e r r e e d o f t g n i t a e r l r a e y l i a c n a n fi e h t g n i r u d s e r a h s d e t s e v f l o e u a v t e k r a m e h t – 1 2 0 2 s e v i t n e c n m r e t i g n o L 2 . s e r a h s d e t s e v n u n o e m o c n i i i d n e d v d d n a s d n u f n o i t a u n n a r e p u s o t e d a m s t n e m y a p , l y r a a s e s a b s e d u c n l i – n o i t a r e n u m e r d e x F i 1 . ) ) t i l p s e r a h s 8 1 0 2 r e b m e c e D t s o p , d e t r e v n o c ( 9 8 0 $ s a w . t n a r g t a e c i r p . ( 7 6 4 $ s a w e t a d g n i t s e v e h t n o e u a v t e k r a m e h T l . i d e v e h c a y l l u f s a w a i r e t i r c e c n a m r o f r e p e h t s a d e t s e v s e r a h s e s e h t f o % 0 0 1 . 6 1 0 2 r e b m e t p e S n i d e t n a r g s e r a h s d e r r e e d o f t g n i t a e r l r a e y l i a c n a n fi e h t g n i r u d s e r a h s d e t s e v f l o e u a v t e k r a m e h t – 0 2 0 2 s e v i t n e c n m r e t - g n o L 3 i . ) ) t i l p s e r a h s 8 1 0 2 r e b m e c e D t s o p , d e t r e v n o c ( 8 6 0 $ s a w . t n a r g t a e c i r p ( 8 1 . 2 $ s a w e t a d g n i t s e v e h t n o e u a v t e k r a m e h T l . i d e v e h c a y l l u f s a w a i r e t i r c 47 Unvested and Ordinary Shares The movement during the reporting period in the number of unvested shares and ordinary shares in the Company, held directly, or beneficially, by each key management person, including their related parties is outlined in the table below. Name Grant Date Vesting Date Share Price at Grant Date Balance at 1 July 2020 No. of shares granted No. of shares forfeited/ expired No. of shares vested No. of shares sold Balance at 30 June 2021 1-Sep-20 1-Sep-21 1-Sep-20 1-Sep-22 1-Sep-20 1-Sep-23 1-Sep-20 1-Sep-23 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 1-Sep-20 1-Sep-17 1-Sep-21 1-Sep-18 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 Managing Director & CEO J McMurdo Unvested Unvested Unvested Ordinary shares Total Current management M Enander Unvested Ordinary shares Total K Heng Unvested Unvested Ordinary shares Total K Hughes Unvested Unvested Unvested Unvested Ordinary shares Total M Loyez Unvested Ordinary shares Total D Macri Unvested Unvested Unvested Unvested Ordinary shares Total T May Unvested Unvested Unvested Unvested Ordinary shares Total S Palmer Unvested Unvested Unvested Unvested Ordinary shares Total M Simons Unvested Unvested Unvested Unvested Ordinary shares Total 1-Sep-20 1-Sep-23 1-Sep-20 1-Sep-17 1-Sep-18 1-Sep-21 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 1-Sep-20 1-Sep-17 1-Sep-18 1-Sep-21 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 1-Sep-17 1-Sep-20 1-Sep-21 1-Sep-18 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 1-Sep-20 1-Sep-17 1-Sep-18 1-Sep-21 1-Sep-19 1-Sep-22 1-Sep-20 1-Sep-23 4.5316 4.5316 4.5316 4.5316 2.1500 4.5316 0.8873 1.3175 2.1500 4.5316 4.5316 0.8873 1.3175 2.1500 4.5316 0.8873 1.3175 2.1500 4.5316 0.8873 1.3175 2.1500 4.5316 0.8873 1.3175 2.1500 4.5316 5,193 – – 5,193 – 48,602 – – – 58,988 – – – 21,653 – – 21,653 34,100 20,900 13,256 – – 68,256 – – – 6,620 – 6,620 – 7,048 – 7,048 – – 6,289 – – 6,289 6,779 – 6,779 131,500 90,200 56,898 – 75,286 – – 26,995 – – 353,884 26,995 26,200 19,700 12,791 – – 58,691 31,600 22,800 14,419 – 19,600 88,419 41,000 25,000 15,814 – – 81,814 – – 6,068 – – 6,068 – – 6,841 – – 6,841 – – – 7,503 – 7,503 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5,193 – 5,193 – 48,602 – – – 58,988 – – – – – – – 6,620 – 6,620 21,653 7,048 – 28,701 (34,100) – – – 34,100 – – – – (34,100) – – 20,900 13,256 6,289 – (34,100) 40,445 – – – – – – 6,779 – 6,779 – – (131,500) – 90,200 – 56,898 – – 26,995 – 131,500 – 176,921 (29,865) – (29,865) 351,014 (26,200) – – – 26,200 – – – – – (8) (8) – 19,700 12,791 6,068 26,192 64,751 (31,600) – – – 31,600 – – – – (51,200) – 22,800 14,419 6,841 – – (51,200) 44,060 (41,000) – – – 41,000 – – – – – – – – 25,000 15,814 7,503 41,000 89,317 48 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021 Contract terms All KMP’s have formal contracts of employment and are permanent employees with a 12-week notice period. The Managing Director & CEO remuneration structure for FY22 is outlined below: Salary Term Notice period STI LTI Fixed salary from 1 September 2021 is $500,000 inclusive of superannuation No fixed term 6 months, however, could be terminated without notice due to negligence in carrying out responsibilities, dishonesty, breaching Company policies or criminal activity. Target STI of 75% of fixed remuneration with a maximum STI of 2 times the target, based on a balanced scorecard of KPIs, specific objectives and Board discretion. Of the amount payable each year, 50% shall be paid in cash and 50% shall be deferred in the form of Company shares vesting as follows – one third one year after grant date, one third two years after grant date and one third three years after grant date. Employee share plan – reducing from 33% to 10% of fixed remuneration effective 1 July 2021. The shares are subject to the rules and terms of the Employee Share Plan. Executive LTI – performance rights at 50% of fixed remuneration and eligible to increase subject to achieving stretch hurdles to match the Company’s growth targets (outlined in section 3). Malus Provision The Board has the discretion to reduce or cancel any STI or LTI for: • Fraudulent or dishonest conduct; • Material misstatements or omission in the financial statements; or • Circumstances occur that the Board determines to have resulted in unfair or inappropriate benefit 49 5. Non-Executive Director Arrangements 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 and the Chairman of Australian Ethical Superannuation Ltd (AES) does not receive any additional fees for chairing this Board. The director fee pool available for payment to NEDs of the Company is approved by shareholders. The maximum annual aggregate pool for directors’ remuneration is $675,000, which was approved at the AGM in October 2019. A review of NEDs’ remuneration is undertaken annually by the Company Board, taking into account recommendations from the PRN. All NEDs are directors of Australian Ethical Investment Limited (AEI), Australian Ethical Superannuation Pty Ltd, Australian Ethical Foundation Limited (the Foundation) and members of each Board’s Audit, Risk and Compliance Committee (‘ARC’) and the PRN, with the exception of Ms Orr who sits on the Board of AEI, the Foundation, and AEI’s PRN and ARC only. All NEDs also sit on the Board of AEI’s Investment Committee. AEI’s Product Disclosure Statements (‘PDS’) Committee comprises Mr Gibbs and Mr Monaghan, and AES’s Insurance Benefits Committee comprises Mr Gibbs and Ms Greenhill. The following table sets out the agreed remuneration for Non-Executive Directors by position for a full year, with effect from 1 December 2019 and have remained unchanged since this date. Non- executive directors do not receive performance-related pay and are not provided with retirement benefits apart from statutory superannuation. From 1 December 2019 Base fees Chair Other non-executive directors Additional fees ARC – chair ARC – member Investment Committee (IC) – chair Investment Committee (IC) – member PDS Committee – chair PDS Committee – member Insurance Benefits Committee (IBC) – chair Insurance Benefits Committee (IBC) – member PRN – chair PRN – member AEI $ AES $ The Foundation $ 87,241 49,885 29,288 29,288 16,337 9,335 15,000 10,000 2,060 2,060 – – – – 16,337 9,335 – – – – 3,090 3,090 – – – – – – – – – – – – – – 50 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021Non-Executive Directors remuneration The table below outlines non-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 Long Term Benefits Fees and Leave $ Cash Bonus $ Super $ Termination Benefits $ Long Service Leave $ Long Term Incentives – Equity $ Total $ Name 2021 S Gibbs K Greenhill M Bun 139,012 116,449 98,722 M Monaghan 104,934 J Orr2 Total 2020 S Gibbs1 K Greenhill M Bun 63,215 522,332 67,349 106,261 96,415 M Monaghan 114,209 J Orr2 Total 59,472 443,706 – – – – – – – – – – – – 13,044 11,063 9,379 9,969 6,005 49,460 6,287 10,095 9,159 10,850 5,650 42,041 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 152,056 127,512 108,101 114,903 69,220 – 571,792 – – – – – 73,636 116,356 105,574 125,059 65,122 – 485,747 1 S Gibbs did not receive remuneration as a director during his period of time as Acting Managing Director and CEO. His remuneration during this period appears in the Senior Leadership Remunerations tables above. Mr Gibbs resumed as Chair on 10 February 2020. 2 J Orr is a director of AEI Limited and a member of AEI’s PRN, ARC and Investment committee. She is not a director of AES Pty Limited. Shares owned by Non-Executive Directors Name Non-Executive Directors M Bun Purchase date Balance at 1 July 2020 No. of shares purchased No. of shares sold Balance at 30 June 2021 AEF Ordinary shares 13-Nov-17 Total 57,000 57,000 – – – – 57,000 57,000 51 6. Governance The Role of the People, Remuneration and Nominations Committee (PRN) The role of the PRN 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 PRN 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 PRN members for the financial year ended 30 June 2021 were: • Steve Gibbs (Chair); • Mara Bun; • Kate Greenhill; • Michael Monaghan; and • Julie Orr The PRN met seven times during the year. Attendance at these meetings is set out in the Directors’ Report. At the PRN’s invitation, the Managing Director, Chief Strategy & Innovation Officer and Head of People & Culture attended all meetings except where matters were associated with their own performance evaluation, development and remuneration were to be considered. The PRN considers advice and views from those invited to attend meetings and draws on services from a range of external sources, including remuneration consultants. Annually, an assessment is made on the eligibility for vesting of deferred shares issued under the Long-Term Incentive Employee Share Plan for which all AEI employees participate in. Malus Provisions The Board has the discretion to reduce or forfeit awards where: • the participant has acted fraudulently or dishonestly or is in breach of their obligations to the Company; • the Company becomes aware of material misstatement or omission in the financial statements of the Company; or • circumstances occur that the Board determines to have resulted in unfair or inappropriate benefit to the recipient. 52 Australian Ethical Investment Limited and its Controlled Entities REMUNERATION REPORTFor the year ended 30 June 2021ANNUAL REPORT 2021CEO and SLT Performance The CEO is responsible for reviewing the performance of SLT and determining whether their performance requirements were met. In addition, the CEO has oversight of all employees’ performance appraisals. Both quantitative and qualitative data is used to determine whether performance criteria are achieved. An annual assessment of the CEO is completed by the Chairman and is overseen by the Board, with input from the PRN. The review includes measurement of performance against agreed KPI’s and Company performance. The PRN also has oversite of SLT performance. Hedging Policy SLT 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’s shares during “blackout periods”. These periods occur between the end of the half year and two days after the release of the half-year results, and between the end of the full year and two days after the release of the full year results. In addition, where potential price sensitive information is known and not required to be disclosed to the the market, the directors and relevant employees are constrained from trading the Company’s shares. The Directors report, incorporating the Remuneration report, is signed is accordance with a resolution of the Board of Directors. STEVE GIBBS Chair People, Remuneration & Nominations Committee 25 August 2021 53 kpmg Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Australian Ethical Investment Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Australian Ethical Investment Limited for the financial year ended 30 June 2021 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Karen Hopkins Partner Sydney 25 August 2021 40 ©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 54 Australian Ethical Investment Limited and its Controlled Entities FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021 kpmg Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Australian Ethical Investment Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Australian Ethical Investment Limited for the financial year ended 30 June 2021 there have been: no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the i. ii. audit. KPMG Karen Hopkins Partner Sydney 25 August 2021 40 ©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Australian Ethical Investment Limited and its Controlled Entities FINANCIAL STATEMENTS For the year ended 30 June 2021 Statements of comprehensive income For the year ended 30 June 2021 Revenue Operating revenue Other income Total revenue Non-operating gains Gain on disposal of investment property held for sale Expenses Operating expenses Employee benefits Fund related Marketing IT expenses External services Community grants expense Depreciation – property, plant & equipment Depreciation – right of use assets Other operating expenses Occupancy Finance costs Total operating expenses Profit before income tax expense Income tax expense Net Profit for the year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain/(Loss) on revaluation of investments Other comprehensive income for the year, net of tax Total comprehensive income for the year1 Note 5 6 7 8 9 10 11 12 13 13 14 15 16 17 Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 58,711 399 59,110 49,902 – 49,175 100 45,394 – 49,902 49,275 45,394 – 178 – 178 (18,767) (9,840) (4,951) (3,263) (2,335) (1,750) (554) (615) (1,224) (258) (57) (43,614) 15,496 (4,378) 11,118 (18,191) (7,568) (4,169) (1,794) (1,721) (1,291) (453) (445) (959) (366) (58) (37,015) 13,065 (3,608) 9,457 (18,331) (3,261) (4,951) (2,648) (2,057) (1,619) (554) (615) (946) (258) (57) (17,893) (2,368) (4,169) (1,787) (1,131) (1,300) (453) (445) (794) (366) (58) (35,297) (30,764) 13,978 (3,376) 10,602 14,808 (2,978) 11,830 8 8 (3) (3) – – – – 11,126 9,454 10,602 11,830 Basic earnings per share Diluted earnings per share 41 41 Cents 10.06 9.90 Cents 8.62 8.42 1 Comprehensive income includes the results of The Foundation (refer to Note 43) The above statements of comprehensive income should be read in conjunction with the accompanying notes 55 Statements of financial position As at 30 June 2021 Assets Current assets Cash and cash equivalents Trade and other receivables Prepayments Right-of-use assets Other receivables Total current assets Non-current assets Deferred tax Property, plant and equipment Right-of-use assets Term deposit Other receivables Investments in subsidiary Financial assets through other comprehensive income Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employee benefits Income tax Lease liabilities Total current liabilities Non-current liabilities Lease liabilities Trade and other payables Provisions Deferred tax Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity Consolidated Parent Note 2021 $’000 2020 $’000 2021 $’000 2020 $’000 18 19 20 21 17 22 20 23 24 25 26 27 17 20 20 28 29 17 30 31 27,813 4,217 909 626 465 21,427 4,771 1,172 450 – 23,143 6,300 740 626 465 18,516 6,210 1,020 450 – 34,030 27,820 31,274 26,196 2,900 1,219 672 504 – – 141 2,134 1,938 847 504 440 – 133 2,617 1,219 672 504 – 316 2 2,052 1,938 847 504 440 316 2 5,436 39,466 5,996 33,816 5,330 36,604 6,099 32,295 7,250 4,593 1,364 740 6,113 3,849 852 529 5,988 4,537 1,364 740 5,632 3,831 852 529 13,947 11,343 12,629 10,844 834 218 252 35 1,339 15,286 24,180 10,676 1,034 12,470 24,180 1,112 273 246 25 1,656 12,999 20,817 11,191 784 8,842 834 218 252 35 1,339 13,968 22,636 10,676 1,033 10,927 1,112 271 246 25 1,654 12,498 19,797 11,191 791 7,815 20,817 22,636 19,797 The above statements of financial position should be read in conjunction with the accompanying notes 56 Australian Ethical Investment Limited and its Controlled Entities FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021Statements of changes in equity For the year ended 30 June 2021 Issued capital $’000 Share-based payment reserve $’000 FVOCI1 reserve $’000 Retained profits $’000 Total equity $’000 Consolidated Balance at 1 July 2019 10,634 Adjustment arising from transition to AASB 16 – Balance at 1 July 2019 – restated 10,634 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year – – – Transactions with owners in their capacity as owners: Dividends provided for or paid Shares vested under deferred shares plan during the year Employee share plan – deferred shares Employee share plan – shares purchased on-market Revaluation of investments Balance at 30 June 2020 – 557 – – – 11,191 792 – 792 – – – – (557) 1,188 (632) – 791 (4) – (4) – – – – – – – (3) (7) 5,592 17,014 (35) (35) 5,557 16,979 9,457 9,457 (3) (3) 9,454 9,454 (6,172) (6,172) – – – 3 – 1,188 (632) – 8,842 20,817 Issued capital $’000 Share-based payment reserve $’000 FVOCI1 reserve $’000 Retained profits $’000 Total equity $’000 Consolidated Balance at 1 July 2020 Adjustment arising from IFRIC guidance on AASB 138 Balance at 1 July 2020 – restated Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year 11,191 – 11,191 – – – Transactions with owners in their capacity as owners: Dividends provided for or paid Shares vested under deferred shares plan during the year Employee share plan – deferred shares Employee share plan – shares purchased on-market Revaluation of investments – 1,120 – (1,635) – 791 – 791 – – – – (1,120) 1,362 – – Balance at 30 June 2021 10,676 1,033 1 Fair value through other comprehensive income (FVOCI) (7) – (7) – – – – – – – 8 1 8,842 20,817 (185) (185) 8,657 20,632 11,118 11,118 8 8 11,126 11,126 (7,305) (7,305) – – – – 1,362 (1,635) (8) – 12,470 24,180 The above statements of changes in equity should be read in conjunction with the accompanying notes 57 Statements of changes in equity For the year ended 30 June 2021 Issued capital $’000 Share-based payment reserve $’000 Retained profits $’000 Total equity $’000 Parent Balance at 1 July 2019 Adjustment arising from transition to AASB 16 Balance at 1 July 2019 – restated Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends provided for or paid 10,634 – 10,634 – – – – Shares vested under deferred shares plan during the year 557 Employee share plan – deferred shares Employee share plan – shares purchased on-market Balance at 30 June 2020 – – 11,191 792 – 792 – – – – (557) 1,188 (632) 791 2,192 13,618 (35) (35) 2,157 11,830 – 13,583 11,830 – 11,830 11,830 (6,172) (6,172) – – – – 1,188 (632) 7,815 19,797 Issued capital $’000 Share-based payment reserve $’000 Retained profits $’000 Total equity $’000 Parent Balance at 1 July 2020 Adjustment arising from IFRIC guidance on AASB 138 Balance at 1 July 2020 – restated Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends provided for or paid 11,191 – 11,191 – – – – Shares vested under deferred shares plan during the year 1,120 Employee share plan – deferred shares Employee share plan – shares purchased on-market Balance at 30 June 2021 – (1,635) 10,676 791 – 791 – – – – (1,120) 1,362 – 7,815 19,797 (185) (185) 7,630 19,612 10,602 10,602 – – 10,602 10,602 (7,305) (7,305) – – – – 1,362 (1,635) 1,033 10,927 22,636 The above statements of changes in equity should be read in conjunction with the accompanying notes 58 Australian Ethical Investment Limited and its Controlled Entities FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021Statements of cash flows For the year ended 30 June 2021 Consolidated Parent Note 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Payments for strategic investments in insourcing the members’ contact centre and building the CRM Rental income received Interest received Community grants paid Net proceeds from insurance settlement Government grant income Income taxes paid Net cash from operating activities 40 Cash flows from investing activities Net proceeds from sale of investment property held for sale Payments for property, plant and equipment 22 Payment for purchase of SVA unit trusts Purchase of investment in August Investment Pty Limited Dividends received from subsidiary Net cash from investing activities Cash flows from financing activities Purchase of employee’s deferred shares Dividends paid Interest on lease liabilities 32 Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 59,199 (38,561) 20,638 (689) – 59 (1,321) 299 100 (3,583) 15,503 47,202 (34,169) 13,033 47,301 36,177 (32,575) (26,800) 14,726 9,377 – (357) 118 179 (840) – – (3,639) 8,851 – 54 (1,400) – 100 (1,100) 12,023 – 118 152 (937) – – (2,421) 6,289 – 1,437 – 1,437 (92) – (28) – (120) (764) (60) – – 613 (92) – (28) 1,721 1,601 (764) – – 4,016 4,689 (1,635) (632) (1,635) (632) (7,305) (57) (8,997) (6,172) (58) (6,862) (7,305) (57) (8,997) (6,172) (58) (6,862) 6,386 2,602 4,627 4,116 21,427 18,825 18,516 14,400 18 27,813 21,427 23,143 18,516 The above statements of cash flows should be read in conjunction with the accompanying notes 59 Notes to the financial statements NOTE 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. The financial statements are presented in Australian dollars, which is the Group’s functional and presentation currency. Australian Ethical Investment Limited is a listed public company limited by shares (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 Group’s registered office is at Level 8, 130 Pitt Street, Sydney NSW 2000. The financial statements were authorised for issue, in accordance with a resolution of directors, on 25 August 2021. The directors have the power to amend and reissue the financial statements. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements are set out either in the respective notes or below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the accruals basis and are based on historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets at fair value through other comprehensive income, and financial assets and liabilities at fair value through profit or loss. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s and Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. Parent entity information These financial statements include the results of both the parent entity and the Group in accordance with Class Order 10/654, issued by the Australian Securities and Investments Commission. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Australian Ethical Investments Limited (‘Company’ or ‘Parent Entity’) as at 30 June 2021 and the results of all subsidiaries for the year then ended. Subsidiaries are all those 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 de-consolidated from the date that control ceases. 60 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Intercompany transactions, balances and unrealised gains on transactions between entities in the Group 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. Interests in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. These include: • Annual improvements to IFRS 2015-2017 Cycle • International Financial Reporting Interpretations Committee (‘IFRIC’) Guidance on AASB 138 Intangible Assets Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. NOTE 3. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. Income tax & deferred tax assets/liabilities – refer to Note 17 The Group is subject to income taxes in the jurisdictions in which it operates. Estimation is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 61 NOTE 3. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) Estimation of useful lives of assets – refer to Note 22 The Group determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets based on the available information at balance date. The useful lives could change in future periods as a result of technical innovations, planned use and benefits or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Operating lease term – Note 20 The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the Group’s operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and disruption to replace the asset. The Group reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances. The group has considered its current lease term for the Pitt St office, and there are no changes as a result of COVID-19. Employee benefits provision – refer to Note 27 and Note 28 The liability for employee benefits expected to be settled more than 12 months from the reporting date is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. Lease make good provision – refer to Note 29 A provision has been made for the present value of anticipated costs for future restoration of leased premises. The provision includes future cost estimates associated with closure of the premises. The calculation of this provision requires assumptions such as application of closure dates and cost estimates. The provision recognised is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs are recognised in the statement of financial position by adjusting the asset and the provision. Reductions in the provision that exceed the carrying amount of the asset will be recognised in profit or loss. Share-based payment transactions – refer to Note 42 The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. At the date the shares are granted the fair value is determined as the on-market purchase price if the shares are purchased or a 90-day VWAP price if the shares are issued. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities but will impact profit or loss and equity. NOTE 4. BUSINESS SEGMENTS 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. 62 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 5. REVENUE Operating revenue Management fees Performance fees Administration fees (net of Operational Risk Financial Reserve contributions) Member fees (net of rebates) Interest income Rental income Dividends Revenue Consolidated Parent 2021 $’000 43,185 2,895 8,431 4,144 56 – – 2020 $’000 33,916 3,640 8,825 3,230 166 125 – 58,711 49,902 2021 $’000 37,870 2,895 2021 $’000 29,385 3,640 6,638 8,089 – 51 – – 139 125 1,721 49,175 4,016 45,394 Recognition and measurement Management, administration and member fees Fee revenue is earned from provision of funds management services to customers outside the Group. Fee revenue is measured based on the consideration specified in the eight Managed Funds and Australian Ethical Retail Superannuation Fund (‘AERSF’) Product Disclosure Statement (‘PDS’). The Group recognises revenue as the services are provided. The superannuation administration fee charged to the members of AERSF was reduced from 0.41% to 0.29% on 1 April 2020. The administration fee entitlement in accordance with the Product Disclosure Statement (‘PDS’) is net of $787k (2020: $504k) paid directly to the Operational Risk Financial Reserve (‘ORFR’) of the superannuation fund. For the parent entity, administration fees received from the Australian Ethical Superannuation Pty Limited (‘AES’) subsidiary is a FUM based fee. Performance fees Performance fees in relation to the Emerging Companies Fund are dependent on fund performance per PDS and are recognised when it is highly probable that performance hurdles have been achieved and a reversal is unlikely. Interest income Interest revenue is recognised as interest accrues using the effective interest method. Rental income Rental income in the prior year is recognised using the straight-line method over the term of the lease. Dividends Dividends are recognised as revenue when the right to receive payment is established. 63 NOTE 6. OTHER INCOME Government grant income Net proceeds from insurance settlement Consolidated Parent 2021 $’000 100 299 399 2020 $’000 – – – 2021 $’000 100 – 100 2020 $’000 – – – The Group was not eligible for and did not receive any JobKeeper payments from the Federal Government. However, the Group was eligible for and received a grant of $100,000 under ‘Boosting Cash Flow for Employers’ which was part of the Australian government’s COVID-19 support program for employing entities. This grant was received by all entities with aggregate FY20 revenue of less than $50m. The Group donated the entire grant income to The Foundation which in turn donated the funds to Pollinate Group. The Pollinate Group, which has been heavily impacted by COVID-19 in recent times, works in India and Nepal, supporting women entrepreneurs to deliver solar lights and clean energy cookstoves to communities. Refer to Note 43 for additional details on The Foundations charitable activities. During the year, the Parent Entity settled the insurance claim in respect of the unit pricing matter first disclosed in the 30 June 2017 annual report for $525,000. These proceeds were, in turn, paid to its subsidiary, Australian Ethical Superannuation Pty Limited in settlement of a claim the subsidiary had lodged with the Company in relation to the same unit pricing matter. The subsidiary paid $225,885 of the proceeds to the Operational Risk Financial Reserve of the Australian Ethical Retail Superannuation Fund to return the amount originally paid from reserve. NOTE 7. EMPLOYEE BENEFITS Employee remuneration Directors fees Other employment costs Consolidated Parent 2021 $’000 17,777 570 420 18,767 2020 $’000 17,412 484 295 18,191 2021 $’000 17,515 400 416 2020 $’000 17,259 341 293 18,331 17,893 Recognition and measurement Employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The grant-date fair value of equity-settled share-based payment arrangements granted to employees is generally recognised as an expense, with a corresponding increase in equity, on vesting of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and performance conditions at the vesting date. In the prior year, Steve Gibbs did not receive remuneration as a director during the period of time he was Acting Managing Director and CEO. 64 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 8. FUND RELATED During the prior year, the Company outsourced the investment management and general ledger record- keeping to NAB Asset Servicing, effective 1 May 2020. This included the calculation of unit prices for the managed funds, tax calculations for distributions and preparation of monthly accounting reconciliations. Whilst the outsourcing results in an increase in administration fees, this is partially offset by reduction in employment costs following the implementation. Administration fees includes implementation of the redesign of our insurance offering within the super fund of $400k. Administration and custody fees Licence, ratings and platform fees Regulatory & industry body fees Ethical research Regulatory projects Consolidated Parent 2021 $’000 7,790 907 393 79 671 2020 $’000 6,275 918 306 69 – 2021 $’000 2,176 730 244 79 32 2020 $’000 1,325 754 220 69 – 9,840 7,568 3,261 2,368 Regulatory projects relates to the cost of upgrading systems and processes to ensure compliance with new regulatory requirements in the superannuation industry including implementing RG271 (Internal Dispute Resolution), RG97 (Disclosing Fees and Costs in PDSs and Period Statements) and ATO superannuation streamlining projects (SuperStream and SuperMatch). In the prior year, these costs were paid by the Administrator in accordance with a three-year regulatory project holiday. Recognition and measurement Expenses are recognised at the fair value of the consideration paid or payable for services rendered. NOTE 9. MARKETING Distribution costs Brand awareness Other Consolidated Parent 2021 $’000 2,333 1,196 1,422 4,951 2020 $’000 1,941 1,005 1,223 4,169 2021 $’000 2,333 1,196 1,422 4,951 2020 $’000 1,941 1,005 1,223 4,169 Other marketing costs include events, market content and media agency fees. 65 NOTE 10. IT EXPENSES Front office IT systems Support systems, infrastructure and security Strategic projects Consolidated Parent 2021 $’000 1,311 1,011 941 2020 $’000 919 753 122 3,263 1,794 2021 $’000 1,230 1,011 407 2,648 2020 $’000 912 753 122 1,787 Strategic projects represent investment in the technology platforms including internalising the superannuation members’ contact centre, building the CRM and implementing improvements to member engagement channels and member statements. The cost of building the contact centre and the CRM were expensed under the accounting requirements for cloud-computing. NOTE 11. EXTERNAL SERVICES Internal & external audit and tax services Consultants Legal services Other Consolidated Parent 2021 $’000 736 1,018 299 282 2,335 2020 $’000 870 362 261 228 1,721 2021 $’000 529 950 299 279 2,057 2020 $’000 674 30 199 228 1,131 Consultants includes advisory services in relation to strategic projects delivered during the year. These initiatives included a GS007 project, strategy & innovation initiatives, and new product development. NOTE 12. COMMUNITY GRANTS EXPENSE The Group’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% 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 10% of what the profit for that year would have been had the above mentioned bonus and amount gifted not been deducted. Community grants amounting to $1,607,000 (2020: $1,300,000) have been expensed and gifted to The Foundation. Of this amount, $100,000 has already been paid to the Foundation and donated to support COVID-19 relief efforts during the year. An additional $143,000 from the Foundation’s corpus has been entirely provided for in the current year to supplement strategic, community and innovation grants. 66 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 13. DEPRECIATION AND AMORTISATION Depreciation of property, plant and equipment Amortisation of intangible asset – CMS & website Total Depreciation of right-of-use asset – Sydney office lease Depreciation of right-of-use asset – IT infrastructure Total Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 459 95 554 580 35 615 1,169 395 58 453 421 24 445 898 459 95 554 580 35 615 1,169 395 58 453 421 24 445 898 Refer to Note 22 for additional information on depreciation and amortisation. NOTE 14. OTHER OPERATING EXPENSES Consolidated Parent Insurance Travel ASX listing fees and registry costs Printing and subscriptions Other NOTE 15. OCCUPANCY 2021 $’000 509 170 276 111 158 1,224 2020 $’000 2021 $’000 2020 $’000 337 220 128 127 147 959 252 170 276 90 158 946 Occupancy costs in relation to Sydney office Occupancy costs in relation to investment property held for sale Consolidated Parent 2021 $’000 258 – 258 2020 $’000 276 90 366 2021 $’000 258 – 258 179 220 128 120 147 794 2020 $’000 276 90 366 NOTE 15. OCCUPANCY (CONTINUED) Included in occupancy costs are outgoings including cleaning services, utilities and repairs & maintenance costs. The lease on the Sydney office is recorded in accordance with AASB 16 from 1 July 2019, and as such rent expense is included in depreciation of the right-of-use asset. Refer to Note 13 and Note 22. NOTE 16. FINANCE COSTS Interest on lease liabilities Consolidated Parent 2021 $’000 57 2020 $’000 58 2021 $’000 57 2020 $’000 58 67 NOTE 17. INCOME TAX Income tax expense Current tax Deferred tax asset – origination and reversal of temporary differences Adjustment recognised for prior periods Deferred tax liability – reversal of temporary differences Adjustment due to change in income tax rate (292) Deferred tax adjustment on transition to AASB 16 – Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 5,426 3,896 (766) (304) – 10 (32) (25) 108 (35) 4,211 (565) – 10 (280) – 3,257 (290) (32) (25) 103 (35) Aggregate income tax expense 4,378 3,608 3,376 2,978 Deferred tax included in income tax expense comprises: Increase in deferred tax assets Increase in deferred tax liabilities Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% (2020: 27.5%) Tax effect amounts which are not deductible/ (taxable) in calculating taxable income: Non-taxable intercompany dividends from Australian Ethical Superannuation Pty Limited (AES) Other non-taxable items Adjustment due to change in income tax rate Deferred tax adjustment on transition to AASB 16 Adjustment recognised for prior periods Income tax expense (766) 10 (756) (329) 25 (304) (565) 10 (555) (315) 25 (290) 15,639 4,692 13,065 3,593 13,979 4,194 14,808 4,072 – (22) (292) – 4,378 – 4,378 – (26) 108 (35) 3,640 (32) 3,608 (516) (22) (280) – 3,376 – 3,376 (1,104) (26) 103 (35) 3,010 (32) 2,978 68 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 17. INCOME TAX (CONTINUED) The applicable weighted average effective tax rate for the consolidated group is 28.0% (2020: 27.6%) and for the parent entity is 24.2% (2020: 20.1%). The effective tax rate for the consolidated group excluding The Foundation is 28.0% (2020: 27.6%). The parent entity effective tax rate is lower than the consolidated group due to the receipt of fully franked intercompany dividends from its subsidiary, Australian Ethical Superannuation Pty Limited. Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Employee benefits Accruals Community grants Provision for employee leave Provision for lease make-good Other payables Lease liabilities Deferred tax asset Movements: Opening balance Charged to profit or loss Closing balance Deferred tax liability Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Property, plant and equipment Deferred tax liability Movements: Opening balance Charged to profit or loss Closing balance Provision for income tax 892 210 456 551 76 633 82 678 125 338 405 74 414 100 881 134 456 545 76 442 83 675 87 338 402 74 376 100 2,900 2,134 2,617 2,052 2,134 766 2,900 1,805 329 2,134 2,052 565 2,617 1,737 315 2,052 Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 35 35 25 10 35 25 25 – 25 25 35 35 25 10 35 25 25 – 25 25 Consolidated Parent 2021 $’000 1,364 2020 $’000 852 2021 $’000 1,364 2020 $’000 852 69 NOTE 17. INCOME TAX (CONTINUED) Recognition and measurement Tax expense comprises of current and deferred tax 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. 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. The carry forward values of deferred tax assets and liabilities have been adjusted to reflect applicable future corporate tax rates. Australian Ethical Investment Limited and its wholly owned subsidiary, Australian Ethical Superannuation Pty Limited, have formed an income tax consolidated Group under the Tax Consolidation System. Australian Ethical Investment Limited is responsible for recognising the current 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 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. The tax liability for the subsidiary entities is recognised through intercompany payable or receivable. NOTE 18. CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank Term deposits Deposits at call Consolidated Parent 2021 $’000 197 5,600 22,016 27,813 2020 $’000 159 5,300 15,968 21,427 2021 $’000 191 5,000 17,952 23,143 2020 $’000 153 5,000 13,363 18,516 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 six months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Deposits at call earn interest at a higher rate than cash at bank which are low interest earning transactional accounts. 70 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 19. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Receivable from subsidiary Performance fee receivable Consolidated Parent 2021 $’000 1,322 – 2,895 4,217 2020 $’000 1,131 – 3,640 4,771 2021 $’000 727 2,678 2,895 6,300 2020 $’000 475 2,095 3,640 6,210 Recognition and measurement Trade receivables are initially recognised when they are originated and are measured at the transaction price. Subsequently, trade receivables are measured at amortised cost. Specific consideration has been given to the impact of COVID-19 on the ability of customers to pay their debts when assessing the recoverability of trade receivables. Expected credit losses on trade and other receivables are estimated to be nil as there are currently no past due receivables as at 30 June 2021 (2020: nil) and management have not identified any additional concerns regarding collectability of the receivables. The performance fees were received on 7 July 2021. NOTE 20. LEASES Operating leases relate to leases of office premises, a lease for printing and copying equipment for the office, and a lease over IT hardware and infrastructure. The group entered a long-term operating lease for its Sydney office for a period of 7 years on 1 July 2016. The Group does not have an option to purchase the premises at the expiry of the lease period. A bank guarantee of $504,000 has been provided by the Group to the property owners over the rental of building premises at 130 Pitt Street, Sydney. A right-of-use asset and a lease liability have been recognised in the Statement of Financial Position in relation to this lease including the remaining unamortised lease incentive. The Group renewed its lease commitment with Harbour IT for the provision of IT hardware, software and support in April 2021 for a period of 3 years. A right-of-use asset and a lease liability have been recognised in the Statement of Financial Position in relation to this lease. The Group entered a new lease for printing and copying equipment for the office in February 2021 for a period of 5 years. A right-of-use asset and a lease liability have been recognised in the Statement of Finance Position in relation to this lease. Consolidated & Parent Right-of-use assets Balance at 1 July 2019 Additions Depreciation Balance at 30 June 2021 Comprising of: Current Non-current Office premises $’000 IT hardware & infrastructure $’000 1,682 – (421) 1,261 421 840 1,261 – 60 (24) 36 29 7 36 Total $’000 1,682 60 (445) 1,297 450 847 1,297 71 NOTE 20. LEASES (CONTINUED) Consolidated & Parent Right-of-use assets Balance at 1 July 2020 Additions Depreciation Balance at 30 June 2021 Comprising of: Current Non-current Amounts recognised in profit or loss Interest on lease liabilities Expenses relating to leases of low-value assets and variable lease components Office premises $’000 IT hardware & infrastructure $’000 1,261 479 (580) 1,160 580 580 1,160 36 137 (35) 138 46 92 138 Total $’000 1,297 616 (615) 1,298 626 672 1,298 Consolidated 2021 $’000 2020 $’000 Parent 2021 $’000 2020 $’000 57 559 58 406 57 559 58 406 Consolidated 2021 $’000 2020 $’000 Parent 2021 $’000 2020 $’000 Amounts recognised in statement of cash flows Total cash outflow for leases 740 569 740 569 Accounting policy for right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. 72 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 20. LEASES (CONTINUED) Consolidated & Parent Lease liabilities Balance at 1 July 2019 Additions Payments Interest on lease liabilities Balance at 30 June 2020 Comprising of: Current Non-current Balance at 1 July 2020 Additions Payments Interest on lease liabilities Balance at 30 June 2021 Comprising of: Current Non-current Office building $’000 IT hardware & infrastructure $’000 2,091 – (541) 57 1,607 500 1,107 1,607 1,607 477 (705) 56 1,435 694 741 1,435 – 60 (27) 1 34 29 5 34 34 139 (35) 1 139 46 93 139 Total $’000 2,091 60 (568) 58 1,641 529 1,112 1,641 1,641 616 (740) 57 1,574 740 834 1,574 Accounting policy for lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a market review; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. 73 NOTE 21. CURRENT ASSETS – OTHER RECEIVABLE Consolidated Other receivable 2021 $’000 465 2020 $’000 Parent 2021 $’000 – 465 2020 $’000 – The balance relates to the discounted present value of the receivable on settlement of the fourth unit within the Canberra Property (Trevor Pearcey House) sold in June 2020. The property is due to settle in June 2022 and the value represents the sale price less disposal and holding costs. NOTE 22. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Consolidated Parent Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation Platform development – at cost Less: Accumulated depreciation 2021 $’000 2,294 (1,531) 763 309 (187) 122 477 (143) 334 1,219 2020 $’000 2,286 (1,146) 1,140 234 (121) 113 685 – 685 1,938 2021 $’000 2,294 (1,531) 763 309 (187) 122 477 (143) 334 1,219 2020 $’000 2,286 (1,146) 1,140 234 (121) 113 685 – 685 1,938 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2019 Additions Reclassified to Right of use assets on transition to AASB 16 Depreciation expense Amortisation expense Balance at 30 June 2020 Net adjustment to write down intangible assets under IFRIC guidance on AASB 138 Restated balance at 1 July 2020 Additions Disposals Depreciation expense Amortisation expense Balance at 30 June 2021 Leasehold improvements $’000 Plant and equipment $’000 Platform development $’000 1,364 234 (127) (331) – 1,140 – 1,140 8 – (385) – 763 76 100 – (63) – 113 – 113 84 (1) (74) – 122 313 430 – – (58) 685 (256) 429 – – – (95) 334 Total $’000 1,753 764 (127) (394) (58) 1,938 (256) 1,682 92 (1) (459) (95) 1,219 74 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 22. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT (CONTINUED) During the 2019 financial year, AEI initiated a strategic project to internally develop a new Integrated Customer Experience Platform (the Platform) comprising web-based marketing automation, web CMS, data warehouse, and an integrated client relationship management (CRM) system. The project was aimed at enriching customer experiences by personalising the website to dynamically deliver relevant, engaging and inspiring content, and improve customer retention and attract new customers. Costs in relation to the development of this platform were capitalised as an intangible asset and to be depreciated over its useful life. However in accordance with the IFRIC guidance on AASB 138 cloud- based software development is to expensed as incurred. Accordingly, the costs in relation to the data warehouse and CRM are no longer capitalised as an intangible asset. Recognition and measurement Property, plant and equipment is stated at historical 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. Historical cost includes expenditure that is directly attributable to the acquisition of the items. 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. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 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 and amortisation Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives. Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives. The estimated useful lives for current and comparative periods are as follows: Leasehold improvements Plant and equipment Platform development the lesser of unexpired lease term or useful life, 2-7 years 2-7 years 5 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. NOTE 23. NON-CURRENT ASSETS – TERM DEPOSIT Long term deposit Consolidated Parent 2021 $’000 504 2020 $’000 504 2021 $’000 504 2020 $’000 504 The long term deposit is held with National Australia Bank on a rolling 6-month term as security for a bank guarantee over the Company’s Sydney office property lease. The intention is that the deposit will be held for the term of the lease. 75 NOTE 24. NON-CURRENT ASSETS – INVESTMENTS IN SUBSIDIARY Investment in Australian Ethical Superannuation Pty Limited (as trustee of the Australian Ethical Retail Superannuation Fund) Consolidated Parent 2021 $’000 2020 $’000 2021 $’000 2020 $’000 – – 316 316 NOTE 25. NON-CURRENT ASSETS – FINANCIAL ASSETS THROUGH OTHER COMPREHENSIVE INCOME The Foundation holds an investment in the Social Ventures Australia (SVA)’s Diversified Impact Fund (DIF) unit trust, in line with the Australian Ethical Charter and the Objectives of the Foundation. SVA is a social purpose organisation that works with partners to improve the lives of people in need. They offer funding, investment and advice services to social impact organisations. The Foundation has committed to an overall investment of $200,000 in the SVA DIF, of which $140,000 has been called. The investment is revalued to fair value based on the Net Asset Value (NAV) unit price. The Group also purchased nominal holdings of shares in listed entities that the Group would not normally invest in, in order to advocate change in these companies as a shareholder. Investment in Social Impact programs Listed shares in Advocacy program Reconciliation Reconciliation of the fair values at the beginning and end of the current and previous financial year are set out below: Opening fair value Additions Revaluation increments/(decrements) Closing fair value Consolidated Parent 2021 $’000 139 2 141 133 – 8 141 2020 $’000 131 2 133 76 60 (3) 133 2021 $’000 2020 $’000 – 2 2 2 – – 2 – 2 2 2 – – 2 Refer to Note 34 for further information on fair value measurement. Recognition and measurement Financial assets at fair value through other comprehensive income (FVOCI) comprise: • Unlisted unit trusts acquired by the Group’s Foundation; and • Equity securities acquired by the Group for advocacy purposes, which are not held for trading, and which the group has irrevocably elected at initial recognition to recognise in this category. These are strategic investments and the Group considered this classification to be more relevant. On disposal of these equity investments, any related balance within the FVOCI reserve is reclassified to retained earnings. 76 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021 NOTE 26. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables and accruals Payable to subsidiary Community grant payable Consolidated Parent 2021 $’000 5,590 – 1,660 7,250 2020 $’000 4,882 – 1,231 6,113 2021 $’000 4,464 5 1,519 5,988 2020 $’000 2,858 1,474 1,300 5,632 Refer to Note 33 for further information on financial instruments. Recognition and measurement Trade payables and accruals represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of an invoice being rendered. NOTE 27. CURRENT LIABILITIES – EMPLOYEE BENEFITS Annual leave Long service leave Employee benefits Consolidated Parent 2021 $’000 842 777 2,974 4,593 2020 $’000 752 492 2,605 3,849 2021 $’000 829 770 2,938 4,537 2020 $’000 744 492 2,595 3,831 Recognition and measurement Employee benefit 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. Liabilities for wages and salaries, including employee short term incentive compensation, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Non-accumulating benefits, such as sick leave, are not provided for but are expensed as the benefits are taken by the employees. NOTE 28. NON-CURRENT LIABILITIES – EMPLOYEE BENEFITS Long service leave Consolidated Parent 2021 $’000 218 2020 $’000 273 2021 $’000 218 2020 $’000 271 Recognition and measurement The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. 77 NOTE 29. NON-CURRENT LIABILITIES – PROVISIONS Lease make-good Consolidated Parent 2021 $’000 252 2020 $’000 246 2021 $’000 252 2020 $’000 246 Recognition and measurement A provision has been made for the present value of anticipated costs for future restoration of leased premises. The provision includes future cost estimates associated with maturity of the lease. The calculation of this provision requires assumptions such as application of closure dates and cost estimates. The provision is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs are recognised in the statement of financial position by adjusting the asset and the provision. Reductions in the provision due to exceeding the carrying amount of the asset will be recognised in profit or loss. NOTE 30. EQUITY – ISSUED CAPITAL Consolidated Ordinary shares – fully paid 112,387,138 112,387,138 2021 $’000 2020 $’000 2021 $’000 10,676 2020 $’000 11,191 Movements in ordinary share capital Details Balance Vesting of deferred shares in the Employee Share Trust (43,466 shares) Vesting of deferred shares in the Employee Share Trust (14,768 shares) Vesting of deferred shares in the Employee Share Trust (109,800 shares) Vesting of deferred shares in the Employee Share Trust (893,900 shares) Vesting of deferred shares in the Employee Share Trust (34,473 shares) Purchase of deferred shares in the Employee share plan – on-market Vesting of deferred shares in the Employee Share Trust (21,935 shares) Vesting of deferred shares in the Employee Share Trust (12,310 shares) Vesting of deferred shares in the Employee Share Trust (1,494 shares) Vesting of deferred shares in the Employee Share Trust (2,627 shares) Vesting of deferred shares in the Employee Share Trust (13,419 shares) Date Shares Issue price $’000 1 July 2020 112,387,138 11,191 17 August 2020 17 August 2020 17 August 2020 1 September 2020 7 September 2020 7 September to 6 October 2020 22 February 2021 22 February 2021 22 February 2021 3 March 2021 3 March 2021 – – – – – – – – – – – $1.32 $2.15 $0.88 57 32 97 $0.88 793 $1.32 46 $4.53 (1,635) $1.32 $2.15 $4.53 $1.32 29 27 7 3 $2.15 29 Balance 30 June 2021 112,387,138 10,676 78 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021 NOTE 30. EQUITY – ISSUED CAPITAL (CONTINUED) On 1 September 2020, 893,000 shares that were granted to employees on 1 September 2017 vested to employees as the performance hurdle had been met. On 17 August and 7 September 2020 and 22 February and 3 March 2021, additional shares were vested to employees impacted by staff restructuring in proportion to the period of employment. From 1 September 2020, the Company changed its approach to measuring deferred shares from 90-day VWAP price to the price at which the shares were purchased on-market. At the same time, the Company changed its accounting policy to recognise these share purchases as a reduction in Issued Capital as opposed to through the Share-based payment reserve. Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote, including deferred shares. Recognition and measurement Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Capital risk management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders. The capital risk management policy remained unchanged during the year. (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 & Investments 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 $5m); or (c) 10% of the historical 3-year average responsible entity revenue (uncapped). The Company must hold at least 50% of its minimum NTA required 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 Dividends paid to shareholders are typically in the range of 80-100% of the Group’s net profit after tax attributable to shareholders, which is in line with the historical dividend range paid to shareholders. In certain circumstances, the Board may declare a dividend outside that range. Refer also to Note 12 which discusses the provisioning of staff incentive payments and community grants prior to recommending or declaring a dividend under the Group’s constitution. 79  NOTE 31. EQUITY – RESERVES Share-based payment reserve Fair value through other comprehensive income (‘FVOCI’) reserve Consolidated Parent 2021 $’000 1,033 1 1,034 2020 $’000 791 (7) 784 2021 $’000 1,033 – 1,033 2020 $’000 791 – 791 Share-based payment reserve This reserve relates to shares granted by the Group to its employees under its share-based payment arrangement. Further information about share-based payments to employees is set out in Note 42. Financial assets at FVOCI reserve The Group has elected to recognise changes in the fair value of certain investments in equity financial instruments in OCI (refer to Note 2). These include listed shares held in the advocacy program and investment in the SVA unit trusts held by The Foundation. These changes are accumulated within the FVOCI reserve within Equity. The Group transfers amounts from this reserve to retained earnings when the relevant equity securities are derecognised. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 30 June 2019 Shares vested under deferred share plan during the year Employee share plan – shares purchased on market Employee share plan – deferred shares Revaluation of investments Balance at 30 June 2020 Shares vested under deferred share plan during the year Employee share plan – deferred shares Revaluation of investments Balance at 30 June 2021 Parent Balance at 30 June 2019 Shares vested under deferred share plan during the year Employee share plan – shares purchased on market Employee share plan – deferred shares Balance at 30 June 2020 Shares vested under deferred share plan during the year Employee share plan – deferred shares Balance at 30 June 2021 Share-based payment reserve $’000 FVOCI reserve $’000 792 (557) (632) 1,188 – 791 (1,120) 1,362 – 1,033 (4) – – – (3) (7) – – 8 1 Share-based payment reserve $’000 FVOCI reserve $’000 792 (557) (632) 1,188 791 (1,120) 1,362 1,033 – – – – – – – – Total $’000 788 (557) (632) 1,188 (3) 784 (1,120) 1,362 8 1,034 Total $’000 792 (557) (632) 1,188 791 (1,120) 1,362 1,033 80 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 32. EQUITY – DIVIDENDS Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2020 of 2.50 cents (2019: 3.00 cents) per ordinary share – fully franked Special performance dividend for the year ended 30 June 2020 of 1.00 cents (2019: nil) per ordinary share Interim dividend for the year ended 30 June 2021 of 3.00 cents (2020: 2.50 cents) per ordinary share – fully franked 2021 $’000 2020 $’000 2,810 3,362 1,124 3,371 7,305 2,810 6,172 Since year end the Directors have declared a final dividend of 4.00 cents per fully paid ordinary share (2020: 2.50 cents) and special performance fee dividend of 1.00 cents per fully paid ordinary share (2020: 1.00 cents). The aggregate amount of the declared dividend expected to be paid on 16 September 2021 out of profits for the year ended 30 June 2021, but not recognised as a liability at year end, is $5,619,000 (2020: $3,934,000). All dividends paid during the year were fully franked based on tax paid at 27.5%. The final dividend to be paid in September 2021 will be fully franked at 30.0%. Franking credits Dividends paid during the financial year were as follows: Franking credits available for subsequent financial years based on a tax rate of 30% (2020: 26%) 2021 $’000 2020 $’000 5,982 6,662 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date Accounting policy for dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. NOTE 33. FINANCIAL INSTRUMENTS Financial risk management objectives and framework 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 overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group does not have a material exposure to currency and interest rate risk. 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 Chief Risk Officer 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, Risk & Compliance 81 NOTE 33. FINANCIAL INSTRUMENTS (CONTINUED) Committee (ARC). The Board regularly monitors the overall risk profile of the Group and sets the risk appetite, usually in conjunction with the annual strategy and 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 ARC. One of the main functions of the Committee is to identify emerging risks and determine treatment and monitoring of emerging 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 contain appropriate, up-to-date content and are being maintained. The Group is complying with its licences, and there is a structure, methodology and timetable in place for monitoring material service providers. The following discussion relates to financial risks the Group is exposed to. 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 dependent on Funds Under Management (FUM) which is influenced by equity market movements. Management calculates that a 10% movement in FUM linked to equity markets would change annualised revenue by approximately $4,593,000 (2020: $3,173,000). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. 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 S&P’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. All trade and other receivables are short term in nature and are not past due or impaired. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents). The consolidated entity manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and 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 rolling forecast of liquid assets, cash flows and balance sheet are reviewed by the Board quarterly to ensure there is sufficient liquidity within the Group. Remaining contractual maturities The following tables detail the Group’s and Company’s remaining contractual maturity for its financial instrument liabilities. 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. 82 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 33. FINANCIAL INSTRUMENTS (CONTINUED) 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 Consolidated – 2021 Non-derivatives Non-interest bearing Trade payables and accruals Income tax payable Total non-derivatives Consolidated – 2020 Non-derivatives Non-interest bearing Trade payables and accruals Income tax payable Total non-derivatives Parent – 2021 Non-derivatives Non-interest bearing Trade payables and accruals Income tax payable Total non-derivatives Parent – 2020 Non-derivatives Non-interest bearing Trade payables and accruals Income tax payable Total non-derivatives 10,926 1,364 12,290 – – – – – – – – – 10,926 1,364 12,290 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 9,469 852 10,321 – – – – – – – – – 9,469 852 10,321 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 9,757 1,364 11,121 – – – – – – – – – 9,757 1,364 11,121 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 7,497 2,326 9,823 – – – – – – – – – 7,497 2,326 9,823 Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. 83 NOTE 34. FAIR VALUE MEASUREMENT Recognition and measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. This note provides an update on the judgements and estimates made by the Group in determining the fair values of the financial instruments since the last annual financial report. The following tables detail the group’s assets measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2: Fair value measurements derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial assets that are not traded in an active market is determined using valuation techniques. These include the use of recent arm’s length market transactions, referenced to the current fair value of a substantially similar other instrument or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. Level 3: Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Consolidated – 2021 Financial assets measured at fair value Investments Total assets Consolidated – 2020 Financial assets measured at fair value Investments Total assets Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 2 2 139 139 – – 141 141 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 2 2 131 131 – – 133 133 84 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 34. FAIR VALUE MEASUREMENT (CONTINUED) Parent – 2021 Financial assets measured at fair value Investments Total assets Parent – 2020 Financial assets measured at fair value Investments Total assets Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 2 2 – – – – 2 2 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 2 2 – – – – 2 2 Assets and liabilities held for sale are measured at fair value on a non-recurring basis. There were no transfers between levels during the financial year. NOTE 35. KEY MANAGEMENT PERSONNEL DISCLOSURES Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below: Consolidated Parent 2021 $ 2020 $ 2021 $ 2020 $ Short-term employee benefits 4,432,079 3,960,767 4,276,365 3,830,608 Post-employment benefits Long-term benefits Share-based payments 244,708 503,395 229,915 491,030 73,937 65,873 73,937 65,873 389,926 316,385 389,926 316,385 5,140,651 4,846,420 4,970,144 4,703,896 Information regarding key management personnel’s remuneration and shares held in Australian Ethical Investment Limited is provided in the Remuneration Report. 85 NOTE 36. REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the Company, and its network firms: Consolidated Parent 2021 $ 2020 $ 2021 $ 2020 $ Audit services – KPMG Audit or review of the financial statements 88,884 94,600 63,735 69,700 Other services – KPMG Audit services in accordance with regulatory requirements Assurance services in relation to the Sustainability Report Tax compliance and advisory services Other consulting advice 42,312 41,893 42,312 41,893 25,624 25,625 25,625 25,625 69,664 40,632 178,232 267,116 88,091 90,425 246,034 340,634 45,920 40,632 52,347 90,425 154,489 210,290 218,224 279,990 Audit Services for the non-consolidated trusts and superannuation fund* – KPMG Audit and review of managed funds for which the Company acts as Responsible Entity Audit of superannuation fund for which the subsidiary entity acts as Responsible Superannuation Entity Audit services in accordance with regulatory requirements Total remuneration of KPMG 149,127 147,651 149,127 147,651 35,199 34,850 65,330 58,088 – – – – 249,656 240,589 516,772 581,223 149,127 367,351 147,651 427,641 * These fees are incurred by the Company and are effectively recovered from the funds via administration or management fees. The Board considered the non-audit services provided by the auditor and is satisfied that the provision of the non-audit services 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. 86 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 37. COMMITMENTS The group entered a long-term operating lease for its Sydney office for a period of 7 years on 1 July 2016. The Group does not have an option to purchase the premises at the expiry of the lease period. A bank guarantee of $504,000 has been provided by the Group to the property owners over the rental of building premises at 130 Pitt Street, Sydney. A right-of-use asset and lease liability has been recognised in the Statement of Financial Position in relation to this lease. The Group renewed its lease commitment with Harbour IT for the provision of IT hardware, software and support for a further period of 2 years on 1 April 2021. A right-of-use asset and lease liability has been recognised in the Statement of Financial Position in relation to this lease arrangement. NOTE 38. RELATED PARTY TRANSACTIONS Parent entity Australian Ethical Investments Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 39. KMP remuneration Disclosures relating to key management personnel are set out in Note 35 and the remuneration report included in the Directors’ report. Other related parties Australian Ethical Superannuation Pty Limited (AES) acts as 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): • Australian Ethical Australian Shares Fund • Australian Ethical Diversified Shares Fund • Australian Ethical Income Fund • Australian Ethical Fixed Interest Fund • Australian Ethical International Shares Fund • Australian Ethical Advocacy Fund • Australian Ethical Emerging Companies Fund • Australian Ethical Balanced Fund The Funds listed above are considered structured entities that have not been consolidated by the Group, as the Group does not have control over these entities. The table below sets out the transactions that occurred during the year between the Group and these entities. Australian Ethical Employee Share Trusts (EST) acts as trustee for the employee deferred share plan. Pacific Custodian Pty Limited acts as trustee to the trust. On 17 December 2020, the Parent entity acquired 100% ownership of August Investment Pty Limited for $27,501. This acquisition prevents the brand being acquired by a third party. As the entity owned no other assets or liabilities, the investment was recognised as goodwill and amortised to nil after the acquisition was completed. 87 NOTE 38. RELATED PARTY TRANSACTIONS (CONTINUED) Transactions with related parties The following transactions occurred with related parties: Receipts from Australian Ethical Superannuation Pty Limited: Consolidated Parent 2021 $ 2020 $ 2021 $ 2020 $ Receipts from Australian Ethical Superannuation Pty Limited: Administration fees Investment management fees Transactions between the parent and subsidiary entities under tax consolidation and related tax sharing agreement Dividends from the subsidiary Director fees reimbursed by the subsidiary Receipt from the Australian Ethical Trusts: Provision of investment management services to the AETs as identified above in accordance with the Constitution and PDS – – – – – – – – – – 6,637,628 8,089,092 20,645,569 16,077,545 1,001,705 629,991 1,721,210 4,016,158 – 55,142 15,897,398 12,267,475 15,897,398 12,267,475 Performance fee 2,894,953 3,639,560 2,894,953 3,639,560 Receipts from Australian Ethical Retail Superannuation Fund: Provision of investment management / administration services to AERSF Provision of member administration services to AERSF 34,391,528 29,433,651 4,143,696 3,230,066 – – – – Payments to Australian Ethical Foundation Limited: Community grants paid to The Foundation – – 1,299,759 936,756 Government grant paid to The Foundation 100,000 – Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Consolidated 2021 $ 2020 $ Parent 2021 $ 2020 $ Current receivables: Amounts receivable from the AETs 307,096 173,280 307,096 173,280 Amounts receivable from the AETs – performance fee Amounts receivable from AES 2,894,953 3,639,560 2,894,953 3,639,560 – – 1,397,761 2,094,721 Amounts receivable from AERSF 594,026 655,622 – – Current payables: Amounts payable to AES (5,275) (1,474,088) Amounts payable to The Foundation – – (1,519,353) (1,299,759) Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 88 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 39. INTERESTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2: Name Australian Ethical Superannuation Pty Limited (AES) – Trustee of the Australian Ethical Retail Superannuation Fund (AERSF) Australian Ethical Foundation Limited August Investment Pty Limited Principal place of business / Country of incorporation Ownership interest 2020 % 2021 % Level 8, 130 Pitt Street Sydney NSW 2000 Australia 100% 100% Level 8, 130 Pitt Street Sydney NSW 2000 Australia Level 8, 130 Pitt Street Sydney NSW 2000 Australia 100% 100% 100% – Australian Ethical Foundation Limited (The Foundation) was established for the purpose of being a vehicle for the disbursement of profits that are subject to Clause 15.1(c)(ii) of the Parent entity’s constitution which requires a portion of profits to be provided for charitable, benevolent or conservation purposes. The creation of The Foundation allows for flexibility when allocating money, to manage multi-year strategic and community grants and for the creation of a corpus for long-term impact investing in worthwhile causes and organisations. All income received and net assets including cash of The Foundation are restricted to activities of the Foundation and are not available for distribution to AEI’s shareholders or to settle liabilities of other group entities. Refer to Note 43 for further details about the Foundation’s activities. NOTE 40. RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Non-cash employee benefits expense - deferred shares Reclassification of PPE from investing activities Gain on disposal of investment property held for sale Dividend received from subsidiary Change in operating assets and liabilities: (Increase)/Decrease in trade and other receivables Increase in lease assets (Increase)/Decrease in prepayments Increase in deferred tax assets (Increase) in other in current receivable (Increase) in other non-current receivable Increase in trade and other payables Increase/(Decrease) in lease liabilities Increase in employee benefits Increase in other provisions Increase in current tax liability Increase in deferred tax liability Consolidated 2021 $’000 11,118 1,169 1,157 (253) – – 2020 $’000 9,457 898 1,134 Parent 2021 $’000 10,602 1,169 1,157 2020 $’000 11,830 898 1,134 – (253) – (178) – – (178) (1,721) (4,016) 554 (2,396) (90) (4,335) (1) 263 (766) (25) – 1,137 (67) 689 6 512 10 (1,297) (725) (329) – (440) 769 1,641 242 6 44 25 (1) 280 (565) (25) – 356 (67) 653 6 512 10 (1,297) (681) (316) – (440) 1,752 1,641 222 6 44 25 Net cash from operating activities 15,503 8,851 12,023 6,289 89 NOTE 41. EARNINGS PER SHARE Profit after income tax attributable to the owners of Australian Ethical Investment Limited and its Controlled Entities Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Deferred shares Weighted average number of ordinary shares used in calculating diluted earnings per share Consolidated 2021 $’000 2020 $’000 11,118 9,457 Cents 10.06 9.90 Cents 8.62 8.42 Number Number 110,485,465 109,725,643 1,857,910 2,577,353 112,343,375 112,302,996 Recognition and measurement Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Australian Ethical Investment Limited and its Controlled Entities, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the weighted average number of shares assumed to have been issued for no consideration, which relate to deferred shares issued as part of the Company’s long term employee benefits. NOTE 42. SHARE-BASED PAYMENTS The following share-based payment arrangements existed as at 30 June 2021. Deferred Shares Under the employee long term employee share plan, 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 over the vesting period. For certain employees a portion of their short term incentive is also paid in deferred shares which vest subject to meeting service conditions. Refer to the Remuneration Report for further details of these employee incentive plans. In the current year, $1,635,000 (2020: $633,000) was paid to purchase deferred shares granted to employees. The Board continues to retain discretion to issue new shares if required. Included under employee benefits expense in the Consolidated Statement of Comprehensive Income is $1,054,000 (2020: $1,071,000) relating to the deferred shares granted under the long term employee share plan, and $163,000 (2020: $64,000) relating to the deferred portion of the short term incentive plan. As at 30 June 2021, the Employee Share Trust holds 1,808,695 shares (30 June 2020: 2,596,158 shares) on behalf of employees until vesting conditions are met. 90 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021NOTE 42. SHARE-BASED PAYMENTS (CONTINUED) 2021 Grant date Vesting date Balance at the start of the year 01/09/2017 31/08/2020 1,003,700 01/09/2018 31/08/2021 01/09/2019 31/08/2022 01/09/2020 31/08/2023 837,365 695,380 – 2,536,445 Unallocated treasury shares Total deferred shares in the Employee Share Trust 2020 Grant date Vesting date 01/09/2016 31/08/2019 03/01/2017 01/09/2017 30/11/2019 31/08/2020 Balance at the start of the year 747,300 46,500 1,004,900 28,500 01/09/2018 31/08/2021 880,100 01/09/2019 31/08/2022 – 2,678,800 – 727,346 755,846 Unallocated treasury shares Total deferred shares in the Employee Share Trust Granted Vested Forfeited Balance at the end of the year – – – 418,610 418,610 (1,003,700) (102,500) (40,497) (1,494) – – (4,665) (18,645) (10,420) 730,200 636,238 406,696 (1,148,191) (33,730) 1,773,134 35,561 1,808,695 Balance at the end of the year Granted Vested Forfeited – – (747,300) (46,500) (4,050) (1,875) – – – – (25,650) 1,003,700 (40,860) 837,365 – (31,966) 695,380 (799,725) (98,476) 2,536,445 59,713 2,596,158 Recognition and measurement Equity-settled transactions are awards of shares that are provided to employees in exchange for the rendering of services. The grant-date fair value of equity-settled transactions are recognised as an employee expense over the vesting period with a corresponding increase in Share based payment reserve. Upon vesting, the employees become unconditionally entitled to the awards and the shares are transferred from the Share based payment reserve to Contributed equity. The amount recognised as an expense is adjusted to reflect the number of awards for which the related performance and service conditions are expected to be met at the vesting date. 91 NOTE 43. RESULTS OF THE FOUNDATION All income received and net assets including cash of The Foundation are restricted to The Foundation’s activities and are not available for distribution to AEI’s shareholders or to settle liabilities of other Group entities. As at and for the year ended 30 June 2021, the impact of The Foundation before intercompany eliminations is noted below: Statement of comprehensive income Revenue from parent entity Interest income Community grants expense Audit fees and other operating expenses Profit for the year Other comprehensive income Fair value adjustment of investment Total comprehensive income for the year Statement of financial position Assets: Cash and cash equivalents Receivables from parent entity Other receivables Financial assets at fair value through profit or loss Liabilities: Payables Net assets Equity: Retained earnings FVOCI reserve Total Equity 2021 $’000 2020 $’000 1,619 3 (1,750) (15) (143) 6 (137) 1,300 5 (1,291) (14) – (3) (3) 2021 $’000 2020 $’000 534 1,519 1 139 468 1,300 – 133 (1,674) 519 (1,245) 656 520 (1) 519 663 (7) 656 NOTE 44. EVENTS AFTER THE REPORTING PERIOD Apart from the dividend declared as disclosed in Note 32, no other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. Management have considered the impact of the ongoing COVID-19 pandemic in Australia and assessed there are no changes required to the financial statements subsequent to the end of the financial year. 92 Australian Ethical Investment Limited and its Controlled Entities NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 2021ANNUAL REPORT 2021Directors’ declaration IN THE DIRECTORS’ OPINION: • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the financial statements; • the attached financial statements and notes give a true and fair view of the Company’s and Group’s financial position as at 30 June 2021 and of their performance for the financial year ended on that date; and • there are reasonable grounds to believe that the Company 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. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors JOHN MCMURDO Managing Director and Chief Executive Officer 25 August 2021 Sydney 93 This is the original version of the audit report over the financial statements signed by the directors on 25 August 2021. Page references should be read as follows to reflect the correct references now that the financial statements have been presented in the content of the annual report in its entirety: The Audited Remuneration Report is set out on pages 36 to 53, as opposed to pages 22 to 39 as outlined below. Independent Auditor’s Report Independent Auditor’s Report To the shareholders of Australian Ethical Investment Limited To the shareholders of Australian Ethical Investment Limited Report on the audit of the Financial Report Report on the audit of the Financial Report Opinion The respective Financial Reports of the Group and the Company comprise: • Statements of financial position as at 30 June 2021; The respective Financial Reports of the Group and the • Statements comprehensive income, Company comprise: Statements of changes in equity, and • Statements of financial position as at 30 June 2021; Statements of cash flows for the year then ended; • Statements comprehensive income, • Notes including a summary of significant accounting Statements of changes in equity, and policies; and Statements of cash flows for the year then ended; policies; and • Directors’ Declarations. • Notes including a summary of significant accounting The Group consists of Australian Ethical Investment Limited (the Company) and the entities it controlled at the • Directors’ Declarations. year-end or from time to time during the financial year. The Group consists of Australian Ethical Investment Limited (the Company) and the entities it controlled at the year-end or from time to time during the financial year. We have audited the Financial Report of Opinion Australian Ethical Investment Limited (the Group Financial Report). We have also We have audited the Financial Report of audited the Financial Report of Australian Australian Ethical Investment Limited (the Ethical Investment Limited (the Company Group Financial Report). We have also Financial Report) audited the Financial Report of Australian In our opinion, each of the accompanying Ethical Investment Limited (the Company Group Financial Report and Company Financial Report) Financial Report are in accordance with In our opinion, each of the accompanying the Corporations Act 2001, including: Group Financial Report and Company • giving a true and fair view of the Financial Report are in accordance with Group’s and the Company’s financial the Corporations Act 2001, including: position as at 30 June 2021 and of • giving a true and fair view of the their financial performance for the Group’s and the Company’s financial year ended on that date; and position as at 30 June 2021 and of complying with Australian Accounting their financial performance for the Standards and the Corporations year ended on that date; and Regulations 2001. complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion • • We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit Basis for opinion evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit audit of the Financial Reports section of our report. evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group and Company in accordance with the Corporations Act 2001 and the Our responsibilities under those standards are further described in the Auditor’s responsibilities for the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of audit of the Financial Reports section of our report. Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to We are independent of the Group and Company in accordance with the Corporations Act 2001 and the our audit of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of accordance with the Code. Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 80 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and 80 logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated a scheme approved under Professional Standards Legislation. with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by 94 a scheme approved under Professional Standards Legislation. The Key Audit Matter we identified is: Key Audit Matters are those matters that, in our Key Audit Matters • Management, Performance and Administration fees. professional judgement, were of most significance in our audits of the Financial Reports of the current period. These matters were addressed in the context of our audit of the Financial Reports as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Management Fees – ($43.2m), Performance Fees – ($2.9m) and Administration fees ($8.4m) – Group and Company Refer to Note 5 to the Group Financial Report and Company Financial Report The key audit matter How the matter was addressed in our audit Management, Performance and Administration fees were a key audit matter due to the: • individual fee arrangements in place for each of the managed funds and the Australian Ethical Retail Superannuation Fund (the superannuation fund) which necessitated considerable audit effort; and • significance of the revenue to the Group and Company, constituting 93% and 96% of total revenue, respectively. Our procedures included: • We read and understood the individual Management, Performance and Administration fee arrangements in the Product Disclosure Statements ("PDS") of each of the funds and the superannuation fund; • We performed a recalculation of Management, Performance and Administration fees charged using the fee percentages and funds under management, obtained from each of the Product Disclosure Statements and underlying fund financial records respectively. We compared the independently calculated fee revenue to those of the Group and Company and investigated significant differences; • We assessed funds under management (“FUM”) by: - testing key controls over the input of valuation data into the Group's system such as daily price movement checks performed by management; - checking the data output of the Group's system by selecting a sample of balances and comparing to source documentation; - checking the quantity of assets held to external custodian service provider reports at balance date; and - using valuation specialists, we tested the fair value of a sample of investments by comparing the value to market data such as global and domestic equity prices. • We read and understood the Management and Administration fee arrangements in the Investment Management and Trustee Service Agreements between the Company and its subsidiary, Australian Ethical Superannuation Limited (AES); and 81 ANNUAL REPORT 2021 Key Audit Matters The Key Audit Matter we identified is: • Management, Performance and Administration fees. Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audits of the Financial Reports of the current period. These matters were addressed in the context of our audit of the Financial Reports as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Management Fees – ($43.2m), Performance Fees – ($2.9m) and Administration fees ($8.4m) – Group and Company Refer to Note 5 to the Group Financial Report and Company Financial Report The key audit matter How the matter was addressed in our audit Management, Performance and Administration fees were a key audit matter due to the: • • individual fee arrangements in place for each of the managed funds and the Australian Ethical Retail Superannuation Fund (the superannuation fund) which necessitated considerable audit effort; and significance of the revenue to the Group and Company, constituting 93% and 96% of total revenue, respectively. Our procedures included: • We read and understood the individual Management, Performance and Administration fee arrangements in the Product Disclosure Statements ("PDS") of each of the funds and the superannuation fund; • We performed a recalculation of Management, Performance and Administration fees charged using the fee percentages and funds under management, obtained from each of the Product Disclosure Statements and underlying fund financial records respectively. We compared the independently calculated fee revenue to those of the Group and Company and investigated significant differences; • We assessed funds under management (“FUM”) by: - testing key controls over the input of valuation data into the Group's system such as daily price movement checks performed by management; - checking the data output of the Group's system by selecting a sample of balances and comparing to source documentation; - checking the quantity of assets held to external custodian service provider reports at balance date; and - using valuation specialists, we tested the fair value of a sample of investments by comparing the value to market data such as global and domestic equity prices. • We read and understood the Management and Administration fee arrangements in the Investment Management and Trustee Service Agreements between the Company and its subsidiary, Australian Ethical Superannuation Limited (AES); and 81 95 • We performed a recalculation of the Management and Administration fee between the Company and AES using the fee percentages obtained from the Investment Management and Trustee Service Agreements and the FUM. We compared the independently calculated fee revenue to the fee revenue recorded by the Company and investigated significant differences. Other Information Other Information is financial and non-financial information in Australian Ethical Investment Limited’s annual reporting which is provided in addition to the Financial Reports and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors' Report and the Remuneration Report. Message from the CEO, Message from the Chair, Strategic update, Highlights, Financial performance, Our products, Investment report and Memberships and certifications and Shareholder Information sections of the annual report are expected to be made available to us after the date of the Auditor's Report. Our opinions on the Financial Reports do not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audits of the Financial Reports, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Reports or our knowledge obtained in the audits, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Reports The Directors are responsible for: • preparing Financial Reports that give a true and fair view in accordance with Australian Accounting Standards the Corporations Act 2001; • implementing necessary internal control to enable the preparation of Financial Reports that give a true and fair view and are free from material misstatement, whether due to fraud or error; and • assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. 96 82 ANNUAL REPORT 2021 Auditor’s responsibilities for the audit of the Financial Reports Our objective is: • • to obtain reasonable assurance about whether the Financial Reports as a whole are free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Reports. A further description of our responsibilities for the audit of the Financial Reports is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Australian Ethical Investment Limited for the year ended 30 June 2021 complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 22 to 39 in the Directors’ report for the year ended 30 June 2021. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Karen Hopkins Partner Sydney 25 August 2021 83 97 Shareholder information Shareholder information as at 31 August 2021 Security Number of holders Number on issue Voting rights Fully paid ordinary shares 14,413 112,387,138 One vote per share Top 20 shareholders of fully paid ordinary shares Shareholders J P Morgan Nominees Australia Pty Limited HSBC Custody Nominees (Australia) Limited James Andrew Thier Ms Caroline Le Couteur National Nominees Limited Mr Eric Yin Wang Tse & Mrs Patty Bik Yuk Tse Mrs Judith Margaret Boag Mr Trevor Roland Lee Mr Howard Pender Mrs Ann Marion McGregor & Mr Bruce Allan McGregor HB Sarjeant & Assoc Pty Ltd Pacific Custodians Pty Limited Citicorp Nominees Pty Limited Daisy Thier Mr Anthony Scott Cook Mr Phillip Andrew Vernon Mr Michel Beuchat & Mrs Ann Beuchat Dr Judith Ingrouille Ajani BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd BNP Paribas Nominees Pty Ltd Total Balance of register Grand total Distribution of Holdings Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total On Monday, 31 August 2021: • AEF shares closed at $10.69 Balance 8,546,032 6,961,148 5,066,920 4,272,623 3,039,954 2,699,500 2,554,778 2,400,000 2,082,550 2,039,827 2,014,000 1,808,695 1,559,480 1,529,700 1,288,400 1,135,800 966,700 964,654 644,649 639,244 52,214,654 60,172,484 112,387,138 Securities 69,907,203 949,452 5,193,270 8,816,085 3,521,128 % 62.2 22.20 4.62 7.84 3.13 112,387,138 100.00 % 7.60 6.19 4.51 3.80 2.70 2.40 2.27 2.14 1.85 1.82 1.79 1.61 1.39 1.36 1.15 1.01 0.86 0.86 0.57 0.57 46.46 53.54 100.00 Holders 91 887 702 3,856 8,877 14,413 • Accordingly, 47 or more shares constituted a marketable parcel • The Company had 79 shareholders whose holding was not a marketable parcel, these 79 shareholders owned a total of 861 shares 98 ANNUAL REPORT 2021 Company directory AEI Group Directors 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 AFSL Number 526055 Australian Ethical Foundation Limited ACN 607 166 503 Offices Head Office Australian Ethical Investment Limited Level 8, 130 Pitt Street Sydney NSW 2000 Registered office 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 Centre Sydney GPO Box 8, Sydney 2001 Phone +61 1800 021 227 Email enquiries@australianethical.com.au australianethical.com.au Share Registry Steve Gibbs (Chair) Mara Bûn (Non-Executive Director) Kate Greenhill (Non-Executive Director) Michael Monaghan (Non-Executive Director) Julie Orr (Non-Executive Director) John McMurdo (MD & CEO) Company Secretaries Karen Hughes Tom May Banker and custodian National Australia Bank Limited Level 3, 255 George Street Sydney NSW 2000 Administrator For superannuation Mercer Outsourcing (Australia) Pty Ltd Collins Square 727 Collins Street Melbourne VIC Australia 3008 Locked Bag 20013, Melbourne VIC 3001 For managed funds Boardroom Pty Ltd GPO Box 3993 Sydney NSW 2001 Auditors and taxation KPMG Australia International Towers 300 Barangaroo Avenue Sydney NSW 2000 Link Market Services Limited Locked Bag A14 Sydney South, NSW 1235 Phone +61 1300 554 474 Fax +61 2 9287 0303 Email registrars@linkmarketservices.com.au linkmarketservices.com.au Media enquiries Third Hemisphere 36 Osborne Road Manly NSW 2095 Contact us Security Exchange Listing Australian Ethical Investment Limited is listed on the Australian Securities Exchange ASX Code: AEF Phone 1800 021 227 Email enquiries@australianethical.com.au Reply Paid GPO Box Centre Sydney GPO Box 8, Sydney NSW 2001 australianethical.com.au 99 More information Investment exclusions Our investment exclusions include some exceptions and tolerances. For more information on our ethical criteria including examples of revenue tolerances, visit: www.australianethical.com.au/why-ae/ethics/ethical- criteria/ Carbon intensity of our share investments Carbon intensity (tonnes CO2e per $ revenue) of Australia Ethical share investments compared to blended benchmark of S&P ASX 200 Index (for Australian and NZ shareholdings) and MSCI World ex Australia Index (for international shareholdings). Shareholdings as at 30 June 2021. Data and analysis tools provided by external sources (see below for more information). Calculation of Sustainable Development Goals (SDGs) impact The Benchmark is a Blended benchmark of S&P ASX 200 Index (for Australian and NZ shareholdings) and MSCI World ex Australia Index (for international shareholdings). Data and analysis tools provided by external sources (see below for more information). Comparison based on listed shares in those companies for which the relevant external parties provide the applicable data (80% to 90% of the companies we invest in); and using links we have determined between external categories of sustainable impact solutions and selected SDGs. External tool and data providers MSCI ESG Research LLC We have used data and tools provided by MSCI ESG Research when calculating the impact information in this report about sustainable impact revenue, carbon intensity and carbon footprint. We used the MSCI tools and data for our calculations on 14 and 19 July 2021. More information on MSCI carbon footprinting methodology and metrics is available here: https://www.msci.com/documents/10199/2043ba37- c8e1-4773-8672-fae43e9e3fd0 The information relating to ‘SDG impact’ is based on links between MSCI’s categories of sustainable impact solutions and selected Sustainable Development Goals (SDGs). We have determined these links based on our own assessment of how MSCI’s criteria for their Sustainable Impact Solutions relates to SDGs. There is more information here: https://www.msci.com/documents/1296102/1636401/ ESG_ImpactMetrics-2016.pdf/0902a64f-af8d-4296- beaa-d105b7d74dc3 MSCI ESG Research is not responsible for the impact information or the way we have used their data and tools. MSCI ESG Research (1) retains copyright in all its data; (2) does not warrant or guarantee the originality, accuracy and/or completeness of their data; (3) makes no express or implied warranties of any kind, and disclaims all warranties of merchantability and fitness for a particular purpose; (4) has no liability for any errors or omissions in connection with their data or for our reporting and use of their data; and (5) without limiting any of the foregoing, has no liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. Paris Agreement Capital Transition Assessment (PACTA) developed by 2° Investing Initiative We have used the Paris Agreement Capital Transition Assessment (PACTA) when calculating the impact information in this statement about investment in renewable energy generation. PACTA is a free online tool developed by 2° Investing Initiative (2DII) allowing investors to upload their investment portfolios (https:// platform.transitionmonitor.com/). For the renewable energy information in this statement we uploaded portfolios on 19 July 2021. 2DII is not responsible for the impact information or the way we have used their data and tools. 2DII have no liability for any errors or omissions in connection with our reporting or our use of their data and tool. Carbon footprinting and impact measurement limitations Investment carbon footprint metrics need to be used with caution. Company carbon data often includes estimates or is incomplete, and may include errors. Companies make different decisions about what they do and don’t include when measuring and reporting their operational footprints. MSCI uses estimates for some companies. There are also different portfolio measurement methodologies, and different carbon metrics which can be used to assess carbon footprint, each with different strengths and weaknesses. Similar limitations apply to measurement of other types of impact of companies. Company reporting of the revenue they earn from different products and services may be inaccurate or incomplete, and MSCI may make estimates in breaking down and categorising company revenue. There are different methodologies and frameworks for classifying sustainable products and services and for taking account of negative impacts of a company’s operations. Currency conversion for impact information Some of the impact data we use is provided in US$ terms, and some of this data has been converted to US$ using exchange rates selected by the data provider. Where we report impact information in A$ terms, we have used an average exchange rate as published by the Australian Taxation Office for the 2021 financial year. This ‘impact’ data is not the only basis upon which you should make an investment decision and this information should not be taken as a recommendation to buy, sell or hold a particular financial product. This information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Past performance is not a reliable indicator of future performance. Before acting on the information, consider its appropriateness to your circumstances and read the financial services guide (FSG) and product disclosure statement (PDS) on our website. 100 ANNUAL REPORT 2021Photography credits Cover – Erik McClean on Unsplash Page 1 – Felix Lam on Unsplash Page 3 – Manuel Meurisse on Unsplash Page 9 – Markus Spiske, Pexels Page 13 – Fox, Pexels Page 15 – Deborah Diem on Unsplash Page 16 – not credited on Unsplash Page 19 – Christian Weiss on Unsplash Page 99 – Pat Whelen on Unsplash Page 101 – Josh Withers on Unsplash 101 For over three decades we have run our business with purpose at its core. The true power of that head start lies in how we now build on it to deliver even greater impact. Find out more Phone: Email: Website: australianethical.com.au 1800 021 227 enquiries@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 the report are not real assets connected to the Australian Ethical Managed Funds 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 Funds 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 by any means: electronic, mechanical, photocopying, recording or otherwise without the permission of the publisher. 

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