Australian Ethical Investment
Annual Report 2023

Plain-text annual report

2023 Annual Report About the report Welcome to the Australian Ethical Investment Limited (Australian Ethical) Annual Report for 2023. 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 2022 to 30 June 2023 (‘FY23’) in this report. 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 Karen Hughes, Chief Risk Officer & Company Secretary, Australian Ethical Investment Limited on 0406 753 535 or at khughes@australianethical.com.au. Australian Ethical acknowledges the Traditional Owners of the country on which we work, the Gadigal people of the Eora Nation, and recognise and celebrate their continuing connection to land, waters and culture. We pay our respects to Elders past and present and thank them for protecting Country since time immemorial. Our Corporate Governance Statement is available at australianethical.com.au/shareholder/ corporate-governance/ ANNUAL REPORT 2023Contents Message from the CEO Message from the Chair Financial year highlights CIO’s Report Investment performance Key Management Personnel Financial report Shareholder information Company directory 2 4 6 8 12 14 17 120 121 1 Message from the CEO John McMurdo, Chief Executive Officer & Managing Director This year marks the twentieth since scientists linked extreme weather to climate change, and we’re seeing this play out with devastating heat waves and forest fires in the Northern Hemisphere, as well as severe floods which have left thousands of people homeless. World leaders agree that emissions must be reduced, and that by 2030, annual investment for clean energy alone will need to be running at around three times the current pace. The International Energy Agency (IEA) also said this pace would need to be maintained through to 2050 to meet the net-zero commitment.1 This energy transition presents both risks and opportunities from an investment perspective, and we believe that we have a place to create a virtuous cycle of investment. Good investment returns are dependent on the continuing good health of the planet and society. By investing in companies and assets that we believe are part of the solution for a sustainable economy, and restricting investments in companies that aren’t, we see opportunities for growth and lower risk in the medium to long term. And the more we invest with heart and conviction, the earlier we believe we’ll set in motion a cycle that continuously reinforces and amplifies positive results, for investors and planet, creating long-term prosperity and sustainable outcomes. So, while the macroeconomic conditions over the past year weren’t kind to any investors, in particular responsible ones, I’m proud that not only have we stayed the course we’ve held for 37 years during volatile market conditions but, with the cycle beginning to turn in more recent months, we have continued to deliver positive investment returns for our customers. Australian Ethical has grown significantly over the past year through continued new customer growth and positive net-flows, augmented by the successful integration of the Christian Super fund. To achieve 48% growth to reach $9.2 billion in funds under management, is a clear demonstration of the resilience of our business and the sound execution of our growth strategy. But it hasn’t just been about growth. We were honoured, as the first public company in Australia to achieve B Corp certification many years ago, to be recertified on 13 July 2023 as the highest scoring Certified B Corporation in Australia and Aetoroea New Zealand. We’ve also won multiple industry accolades and awards, and finished the year with a strong balance sheet. And we’re delighted to have allocated a further $1 million to the Australian Ethical Foundation to continue to support our strategic grants, as well as innovative early-stage projects that are all directly working to combat climate change. So, while the past year has presented an array of challenges it has also reaffirmed our purpose. Our commitment to doing good by people, animals, and the planet has never been stronger, and we have invested in our own business over recent years to ensure we can scale and grow as we help lead the charge toward a more sustainable future. We stand at the forefront of ethical investing, driving change through responsible allocation of capital. And, as we look ahead, we remain resolute in our pursuit of a more sustainable and ethical future, one where our investments not only yield financial returns but also contribute to a world that thrives for generations to come. I extend my heartfelt gratitude to our shareholders, investors, super fund members, stakeholders, and the entire team for their unwavering support and dedication. Together, we shall continue to shape a tomorrow that aligns with our values and paves the way for a brighter future. 1 iea.org/reports/energy-efficiency-the-decade-for-action 2 ANNUAL REPORT 2023And the more we invest with heart and conviction, the earlier we believe we’ll set in motion a cycle that continuously reinforces and amplifies positive results … 3 Message from the Chair Steve Gibbs, Chair This year marked a significant period of growth and expansion for Australian Ethical, including the successful super fund transfer of Christian Super into our superannuation business, assisting us to reach record levels of both funds under management and customer numbers. This, combined with our strategic investments in technology, research and talent have allowed us to scale our operations efficiently. We have successfully broadened our investment offerings, while maintaining our rigorous ethical standards in line with our Ethical Charter. As an ethical investor, it was disappointing to see some investment managers walk back their ESG commitments following the short-term energy and resources rally in the aftermath of the Russian invasion of Ukraine. In the face of this same market volatility, we steadfastly kept focus on our core strategy of investing for a better world. It is true that our alignment with positive, future-building companies does not provide immunity from short-term volatility, but for more than 37 years our approach has demonstrated resilient performance over the longer term. Indeed, the investment performance of many of our funds and super options showed considerable improvement in the second half of last financial year. It is pleasing to see some governments taking concrete action to transition away from fossil fuels. The US ‘Inflation Reduction Act’ provisions US$783 billion to energy security and climate change. Europe is undergoing an unprecedented shift in the scale and ambition of its climate policy following the announcement of the European Green Deal and the passage of the European Climate Law. In Australia, our new Federal Government has also taken some positive steps with emissions’ reduction legislation; tightening the emissions’ safeguard mechanism on our 214 largest-polluting companies; the establishment of a new Net Zero Authority and changes to the Petroleum Resource Rent Tax. But I have to say that overall the actions of the new Federal Government around climate change has, in my view been disappointing. I have written and spoken about greenwashing for many years. It is encouraging to see the increased focus of regulators and some sections of the media on the practice of some investment managers and super funds claiming to invest in, or more usually not invest in, companies and/or industries when the truth is actually the opposite. We continue to take our obligations to be transparent about our ethical investment process very seriously and strive to ensure that our disclosures remain fit for purpose. Our credentials as one of the leading ethical investment management companies were recently endorsed when Morningstar released their latest assessment of asset managers’ ESG commitment levels. Morningstar evaluated 108 firms globally and only eight were crowned as ‘Leaders’ in the field. Not only was Australian Ethical named as one of the eight, and though others in the top eight have operations in Australia, we were the only Australian company rated as a global ‘Leader’ for ESG commitment. Looking ahead, our purpose-driven model, the global emphasis on sustainability and the increasing awareness of responsible investing, provides us with a fertile ground to cultivate positive change. As we continue to expand our investment strategies, embrace innovation, and collaborate with partners who share our vision, we are confident in our ability to navigate the evolving landscape and generate meaningful, lasting value for all our stakeholders. Whilst climate change is a major issue and one which does have the potential to drastically affect human and non-human life on the planet, as an ethical investment manager and superannuation provider we will continue to focus our investment activities across a range of issues impacting people, animals and the planet. Thanks to our shareholders, our investors, our super fund members, our Board of directors, our CEO and his senior leadership team, all employees and our service providers. Everyone should be proud to be associated with Australian Ethical. 4 ANNUAL REPORT 2023Looking ahead, our purpose-driven model, the global emphasis on sustainability and the increasing awareness of responsible investing, provides us with a fertile ground to cultivate positive change. 5 Financial year 2023 highlights $0.65bn Positive net flows (excluding institutional)1 $0.47bn Positive net flows (including institutional)1 $0.60bn Positive super net flows1 +48% growth in FUM to reach a record of $9.2bn funds under management +15% growth $11.8 million in underlying profit2 +54% growth in customers to >127,0003 The Christian Super SFT delivered +28,000 members +$1.93bn in FUM Accolades Financial Newswire Fund Manager of the Year 2022 – Responsible Investments (ESG) for International Shares Fund Finder – Green Superannuation Fund of the Year 2020-2023 Morningstar – 1 of only 8 asset managers globally to achieve ‘ESG Commitment Level: Leader’4 RIAA – Responsible Investment Leader (2019-2022) B Corp – Highest scoring Certified B Corporation in Australia & Aotearoa NZ as at 13 July 20235 Top 10 NPS for super6 #4 70% for customer advocacy6 employee engagement 1 Represents organic net flows. Excludes Christian Super uplift of $1.93bn 2 Attributable to shareholders 3 Includes funded super members and managed fund customers 4 The Morningstar ESG Commitment Level: Our assessment of 108 asset managers' white paper. © 2023 Morningstar, Inc. All rights reserved. 5 We achieved a record score of 168.5 in our reassessment making us the highest scoring of the 560+ Certified B Corps in Australia and Aotearoa New Zealand as at 13 July 2023. 6 Investment Trends Super Member Engagement Report 2023. Independent research with 25 major super funds 6 ANNUAL REPORT 2023Our listed share portfolio -78% 2.4x 4.3x 4.1x 78% lower CO2 intensity compared to benchmark7,8 2.4x revenue from sustainable impact solutions than benchmark7,9 4.3x revenue from sustainable water & agriculture and pollution prevention than benchmark7,9 4.1x investment in renewables and energy solutions than benchmark7,9 In pursuit of positive change for planet, people & animals 250+ companies engaged for change10 4 engagements resulted in divestment11 Our Foundation $9m+ allocated to not- for-profits in total12 $1.1m provisioned to the Australian Ethical Foundation in FY23 7 Compared to a blended sharemarket benchmark of S&P ASX200 Index (for Australian and NZ shareholdings) and MSCI World ex Australia Index (for international shareholdings). Based on shareholdings at 30 June 2023 and analysis tools provided by external sources which cover 92% of the listed companies we hold shares in by value. 8 Carbon/CO2e intensity of listed companies whose shares we invest in across our funds and options, measured as tonnes CO2e per $ revenue. This should not be considered representative of individual funds or options which will have their own mix of share and other investments. 9 Based on the revenue from sustainable impact solutions earned by listed companies whose shares we invest in across our funds and options, and the proportion of those listed share investments in renewables and energy solutions. This should not be considered representative of individual funds or options which will have their own mix of share and other investments. Sustainable impact data is provided by external sources and aims to measure revenue exposure to sustainable impact solutions and support actionable thematic allocations in line with the U.N. Sustainable Development Goals (SDGs), EU Taxonomy of Sustainable Activities, and other sustainability related frameworks. More information available at https://www.msci.com/documents/1296102/16472518/ ESG_ImpactMetrics-cfs-en.pdf/7a03ddab-46fd-cef7-5211-c07ab992d17b See pages 38 and 122 for more information. 10 We count one engagement where we engaged with a company on a topic or series of topics. There may be multiple activities within that engagement. For example, our engagement with Westpac is counted as one engagement which included meetings, emails and co-filing a shareholder resolution. We may count two engagements with a company if there were separate activities on entirely separate topics. For example, we had one engagement with CBA in relation to its fossil fuel exposure and a separate meeting with CBA to discuss its exposure to deforestation in Australia. See page 25. 11 Not including companies excluded from initial investment 12 Before deducting bonus and grant expense 7 CIO report Ludovic Theau, Chief Investment Officer I am delighted to present the Chief Investment Officer’s (CIO) report to you for the first time on behalf of Australian Ethical Investment. This report provides insights into our investment strategies, portfolio performance, and vision for the future. I feel privileged to have joined during this period of robust growth and looking forward to building upon the strong foundation laid by my predecessor, David Macri, and Australian Ethical’s experienced and talented investment team. Prior to my current role, I served as the Chief Investment Officer of the Clean Energy Finance Corporation (CEFC), the Australian Government- owned ‘Green Bank’, for 10 years. In this role, I focused on developing a diversified suite of investments across various asset classes, particularly in private markets, with a strong emphasis on transitioning toward a more sustainable economy. The strong alignment with Australian Ethical’s purpose of investing for a better world meant joining Australian Ethical as CIO was a logical and simple decision for me. 2022-23 FY Investment Performance Looking back at the financial year ending 30 June 2023, I am proud to report that Australian Ethical’s suite of investment funds performed broadly in line with expectations, and performed particularly strongly in the latter half of the fiscal year that saw attractive annual returns across the large- and small- cap domestic equities, international shares, and fixed income categories. This achievement was attained despite market volatility and significant challenges driven by high inflation and rising interest rates. The financial year can best be described as comprising two distinct investment environments over two halves, underscoring the importance of remaining composed under pressure and adhering to our long-term investment objectives through established principles and processes. The first half was marked by increasing anxiety over inflation, higher interest rates, and geopolitical uncertainties, including the ramifications of the continuing war in Ukraine on European economies. This generated a perfect storm for responsible investment firms due to three key factors: • Resources and materials, where our investments are underweight, saw stand-out performance. • Bond prices dropped significantly as central banks aggressively tightened policy. • Valuation of growth stocks, particularly small-cap stocks in the technology and healthcare sectors faced pressure. As the year progressed however, the market responded positively to improvements in inflation data, leading to the US Federal Reserve and Reserve Bank of Australia (RBA) pausing their hiking cycles to assess the impacts of their monetary policy decisions to date. Market expectations of near-peak rates coincided with a renewed demand for risk assets, particularly in the US large-cap technology and artificial intelligence sectors. A broadening of market performance in the final quarter of the fiscal year included smaller capitalised equities – where we tend to be overweight – began to take hold resulting in very favourable returns for our investors. Fixed income markets also began to moderate during this period. For example, the 10-Year US Bond Yield peaked in late October 2022 at 4.25% and ended the fiscal year at 3.88%. Similarly, Australian 10-year bonds reached peak yields in October 2022 and remained relatively stable for the rest of the year. 8 ANNUAL REPORT 2023Resources and Material sectors enjoyed a reprieve over the second half of the financial year as many commodity markets experienced mean reversion. For example, Crude Oil had fallen from US$81 to $71 or -12% over the 12 months to June 30, 2023. This represented a significant retracement from prices over US$110 during May 2022, following the impacts from the war in Ukraine. Other commodities, including Wheat (-23.5%) and Natural Gas (-51%), saw significant corrections over the year as supply chain worst-case concerns did not materialise and markets saw demand destruction. We see the stronger performance in the latter part of the year as an endorsement of our responsible investment strategy and ethical approach, with this rebound in performance a testament to the resilience of our funds through investment cycles. The Australian economy continues to slow, although the probability of a recession remains lower than in the Northern Hemisphere. The high levels of immigration continue to support economic activity, and we will continue to closely monitor the impact of interest rates on consumer spending and overall economic performance, particularly as many on fixed mortgages come off historically low rates. Portfolio Resilience We have continued to bolster the resilience of our investment portfolios over the last financial year to maximise returns across market cycles and absorb short-term shocks. We also embedded a new asset allocation model for our multi-asset funds, and have continued to follow a systemised and evidence-led approach to understanding the opportunities and risks across different asset classes with a focus on reducing the magnitude of negative outcomes. By identifying diversifying exposures and managing meaningful risks, we have already reduced our portfolio risk and improved our ability to take advantage of our long-term investment horizon and liquidity. Allocations that have been introduced or increased to diversify risk include: • Insurance Linked Securities (ILS) – as an uncorrelated asset class that provides defensive income. • Short-dated credit – to enhance risk adjusted returns from our shorter dated fixed income holdings. • Global sovereign bonds – as higher interest rates have increased the defensive features of bonds. Although our base case remains a slowdown rather than a recession for Australia, we believe that these added levers will stand us in good stead if we do slip into a recessionary environment. Impact Investments The Christian Super Successor Fund Transfer has enriched our investment team with experienced personnel and granted increased access to diverse asset classes, including both growth and defensive alternatives, and an increased portfolio of impact- focused investments including: • Triodos Microfinance Fund – a strategy investing in companies or projects dedicated to creating concrete and measurable positive social or environmental impact through their products or service in the developing world. • Circularity Capital LLP – a strategy that seeks to capitalise on an opportunity for value enhancement in European small and medium enterprises (SME’s) that are adopting or enabling the shift to a circular economy focused on efficiency, and climate impact through renewable energy and materials. • Leapfrog Emerging Consumer III – a growth strategy that invests in companies of SE Asia and Africa providing relevant, affordable and high- quality financial and healthcare products and services to emerging consumers. 9 Opportunities Looking forward, we continue to see demand both locally and internationally for impact and sustainable investment solutions. For example, RIAA’s Responsible Investment Benchmark Report Australia 2022 showed that the amount of Australian assets managed using a leading rigorous approach to responsible investment had risen to a record high of $1.54 Trillion. An increasing number of investors are interested in generating measurable positive social and environmental impacts alongside financial returns. Government regulations are also driving meaningful change within corporate actions and investments. Governments worldwide have been implementing policies and regulations to encourage sustainable practices. These measures often include incentives for green initiatives, carbon pricing, and reporting requirements on environmental and social impacts, creating a favourable environment for sustainable investments. For example, in June 2023, the Australian Government released the Australian Carbon Credit Unit (ACCU) implementation plan to ensure the scheme continues to help Australia reach net-zero by 2050. Other jurisdictions have developed regulated carbon markets to address emissions. These developments represent both continued global actions to address climate risk and potential investment opportunities, which we are actively evaluating. We believe that Australian Ethical is uniquely positioned to provide our investors with attractive and innovative investment solutions within the growing areas of impact investing, carbon transition, renewable energy infrastructure, and sustainable investments. As a leader in ethical investing since 1986, we have long been focused on supporting outcomes that are beneficial to society. Furthermore, the overall track record of our funds against their objectives underscores our belief that investing ethically can provide attractive risk-adjusted returns. As we navigate these dynamic market conditions, I assure you that our investment decisions will remain firmly grounded in our ethical principles and focused on achieving sustainable growth. Thank you for your unwavering support and trust in Australian Ethical. Together, we can continue to help drive the positive change the world needs through responsible investing. 10 ANNUAL REPORT 2023We believe that Australian Ethical is uniquely positioned to provide our investors with attractive and innovative investment solutions within the growing areas of impact investing, carbon transition, renewable energy infrastructure, and sustainable investments. 11 Investment performance Managed Funds returns to 30 June 2023# Our Australian Shares Fund was above benchmark6 for all periods of five years or greater and our Emerging Companies fund was above benchmark7 for all periods of two years or greater. 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 High Growth Benchmark3 High Growth (Wholesale) Benchmark3 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 High Conviction (Wholesale) Benchmark6 3.1 2.9 3.1 2.9 0.8 1.2 1.0 1.2 9.6 11.1 10.4 11.1 14.7 15.5 15.3 15.5 15.9 16.8 16.4 16.8 19.3 22.6 19.8 22.6 12.8 14.4 13.4 14.4 8.6 9.5 9.2 9.5 9.8 14.4 1.4 1.5 1.4 1.5 (5.3) (4.8) (5.1) (4.8) 0.6 2.7 1.3 2.7 1.9 4.6 2.4 4.6 1.3 4.6 1.7 4.6 4.6 7.1 5.0 7.1 (3.7) 3.3 (3.1) 3.3 (8.6) (8.8) (8.2) (8.8) n/a n/a 1.1 1.0 1.1 1.0 (4.1) (3.5) (3.8) (3.5) 6.2 7.1 7.0 7.1 10.6 11.8 11.3 11.8 10.2 11.8 10.8 11.8 11.6 13.5 12.2 13.5 9.6 11.1 10.3 11.1 7.9 3.4 8.4 3.4 n/a n/a 1.2 1.1 1.3 1.1 (0.3) 0.5 0.1 0.5 6.0 6.3 6.9 6.3 7.8 8.4 8.7 8.4 7.6 8.4 8.4 8.4 9.7 11.5 10.5 11.5 7.8 6.1 8.7 6.1 10.4 1.7 11.0 1.7 n/a n/a 1.3 1.3 1.5 1.3 (0.2) 0.8 0.4 0.8 6.1 7.2 n/a n/a 8.1 9.3 9.1 9.3 7.9 9.3 8.9 9.3 10.2 12.5 11.1 12.5 8.4 8.0 9.4 8.0 11.0 4.8 11.7 4.8 n/a n/a 1.6 1.7 n/a n/a 1.4 2.4 n/a n/a 7.0 7.7 n/a n/a 9.6 9.9 10.8 9.9 9.4 9.8 10.5 9.8 10.9 12.4 n/a n/a 10.4 8.9 11.7 8.9 n/a n/a n/a n/a n/a n/a 2.6 2.6 n/a n/a n/a n/a n/a n/a 5.7 6.9 n/a n/a n/a n/a n/a n/a 7.1 8.9 n/a n/a 6.1 10.0 n/a n/a 8.9 6.8 n/a n/a n/a n/a n/a n/a n/a n/a 3.2 3.5 n/a n/a n/a n/a n/a n/a 6.1 7.1 n/a n/a n/a n/a n/a n/a 7.9 8.7 n/a n/a n/a n/a n/a n/a 9.9 7.6 n/a n/a n/a n/a n/a n/a n/a n/a Past performance is not a reliable indicator of future performance. References to ‘wholesale’ funds indicate the class of pricing above a minimum investment threshold, which varies by fund # 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/ASX 300 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 12 ANNUAL REPORT 2023Super and pension returns to 30 June 2023# Our MySuper option (Balanced accumulation) outperformed its benchmark9 over 1, 5, 7 and 10 years, while our Australian Shares accumulation option met or exceeded benchmark6 for all periods of three years or greater. Accumulation options performance 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. Defensive Benchmark1~ Conservative Benchmark8 Balanced (accumulation) Benchmark9 Growth Benchmark10 Australian Shares Benchmark6~ International Shares Benchmark5~ High Growth Benchmark11 2.4 2.3 4.0 5.0 9.2 9.0 11.0 10.6 12.5 12.6 17.2 19.7 13.5 13.2 0.8 1.1 (1.8) 1.2 1.1 2.6 2.2 2.8 (2.4) 2.8 4.0 6.1 2.2 3.1 0.5 0.6 0.2 3.3 6.3 7.5 8.0 8.9 9.8 9.8 10.7 11.8 10.3 9.8 0.6 0.7 2.1 3.0 6.3 5.6 7.0 6.3 8.3 5.5 9.1 9.9 7.9 7.0 0.8 0.8 2.4 3.1 6.9 6.3 7.7 7.6 9.3 7.2 10.1 10.7 8.5 7.9 1.0 1.2 2.9 3.6 7.0 6.1 7.8 7.3 10.4 6.5 9.5 11.0 9.2 8.8 1.8 2.2 n/a n/a 5.6 5.3 5.8 6.0 9.0 1.5 5.4 9.1 n/a n/a 2.5 3.2 n/a n/a 5.9 5.7 6.8 6.5 9.8 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 Benchmark12 Balanced Benchmark13 Growth Benchmark14 Australian Shares Benchmark6< International Shares Benchmark5< 2.7 2.6 4.3 5.1 8.5 7.8 12.7 12.2 13.8 14.1 19.1 22.3 0.9 1.2 (2.1) 0.8 0.2 1.8 1.9 3.1 (2.7) 3.0 4.1 6.8 0.6 0.7 0.2 3.3 4.9 5.6 8.6 9.6 10.5 10.8 11.3 13.2 0.7 0.8 2.2 3.1 5.4 4.5 7.5 6.9 9.0 6.0 9.6 11.1 0.9 1.0 2.6 3.3 6.0 5.0 8.4 8.2 10.1 7.8 10.8 12.1 1.1 1.3 3.1 3.9 6.5 5.5 8.4 7.9 10.9 7.2 9.6 12.0 2.2 2.3 n/a n/a 5.5 5.0 6.6 6.5 9.8 2.1 4.9 9.8 2.9 3.3 n/a n/a 6.0 5.6 7.5 7.0 10.7 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 SR25 High Growth (91-100) Index 12 SuperRatings SRP50 Capital Stable (20-40) Index 13 SuperRatings SRP25 Conservative Balanced (41-59) Index 14 SuperRatings SRP50 Growth (77-90) Index ~ Net of tax and % administration fees < Net of % administration fees 13 Key Management Personnel 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 20 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. Karen Hughes Chief Risk Officer and Company Secretary BSc (Hons), ACA (ICAEW), GAICD, FGIA Karen is Company Secretary and is also responsible for the Risk Management Framework at Australian Ethical. Karen has over 25 years’ experience in risk and compliance in Australia and the UK. Ludovic Theau Chief Investment Officer MEng, GAICD Ludovic joined Australian Ethical in April 2023 as Chief Investment Officer. He has over 30 years of experience in ESG investing, funds management, commercial and investment banking and financial advisory. Prior to joining, Ludovic was the Chief Investment Officer for the Clean Energy Finance Corporation, Australia’s Green Bank. He also had previous roles at Hastings Funds Management, Westpac, ABN AMRO, Macquarie Bank, UBS and BNP Paribas. Ludovic holds a Master of Engineering from Ecole Centrale de Paris, France, and is a graduate of the Australian Institute of Company Directors. 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. 14 ANNUAL REPORT 2023Mark Simons Chief Financial Officer B Bus, CA, GAICD Mark is responsible for business performance, financial control and fund accounting. In addition, he currently manages the Product and Operations functions. Mark has more than 30 years’ experience in financial services, having previously held senior roles within Australian Ethical, Challenger, Perpetual, Tyndall and KPMG. Marion Enander Chief Strategy & Innovation Officer BCom, MBA Marion is driving and championing Australian Ethical’s strategic direction and innovation agenda. 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). Ross Piper Chief Executive, Superannuation GradDipEd, MBA Ross has end-to-end responsibility for Australian Ethical’s superannuation offering, with a focus on growth and profitability; and building the operational backbone for the broader business. Ross has more than 25 years’ executive leadership experience, including in investment management, having previously held senior roles within Macquarie Bank, World Vision, Christian Super and AgroInvest. He currently sits on various other boards for organisations focused on social enterprise and technology and is the Chair of the Responsible Investment Association of Australasia (RIAA). 15 Extended leadership team Alison George Head of Impact and Ethics CA (Fellow), M (Env), BA (Juris) Alison joined Australian Ethical in May 2023 to ensure our investments continue to meet our Ethical Charter and grow our positive outcomes for animals, people, and planet. Alison has more than 20 years’ experience in responsible investment and stewardship, working with numerous industry leaders in her prior roles with Pendal and Regnan. A Chartered Accountant, Alison also completed a Master of Environment and was previously a corporate sustainability advisor with EY. Conrad Tsang Chief Technology Officer BEng (Hons) Conrad is responsible for developing Australian Ethical’s technology and data capabilities, and aligning them to deliver positive impact and client outcomes. He has extensive experience in Investment Management, OTC Markets, Securities Services and Retail Banking having previously held roles in HSBC, Credit Suisse and UBS. Eveline Moos Chief People & Culture Officer BCom Eveline is responsible for people and culture strategy and execution at Australian Ethical, aligning our people to AE’s purpose, business strategy and client outcomes. Eveline has extensive experience encompassing strategic and operational leadership with previous roles at First Sentier Investors, AMP Capital and Perpetual. 16 ANNUAL REPORT 2023Australian Ethical Investment Limited and its Controlled Entities Financial Report 30 JUNE 2023 Directors’ Report Remuneration Report Auditor’s Independence Declaration Statements of comprehensive income Statements of financial position Statements of changes in equity Statements of cash flows Notes to the financial statements Directors’ declaration Independent Auditor’s Report ABN 47 003 188 930 18 45 72 73 74 75 77 78 114 115 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 ‘Australian Ethical’, the ‘Company’ or ‘Parent entity’), Australian Ethical Superannuation Pty Limited (‘AES’) and Australian Ethical Foundation Limited (the ‘Foundation’), being the entities it controlled at the end of, or during, the year ended 30 June 2023. 18 ANNUAL REPORT 2023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 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 two organisations: Bowerbird Collective, a chamber music ensemble dedicated to nature conservation through performance and asset consultants Australian Impact Investments. She is a Non-Executive Director of the Boards of GreenCollar and The Conversation Brazil. 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 Product Disclosure 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. 19 Australian Ethical Investment Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2023 Sandra McCullagh Non-Executive Director since 2023 BA, BSc, GAICD, MBA Sandra is Chair of the Investment Committee and a Member of the People, Remuneration and Nominations Committee. Sandra is a director of Workcover Queensland and is on the New Zealand Stock Exchange Corporate Governance Institute. She has a strong background in ESG and experience on both the buy-side and sell-side. She was the former top-rated head of ESG and utilities equities research at Credit Suisse Australia. Sandra was a former trustee and Chair of the Investment Committee of QSuper, leading up to its merger with SunSuper. Sandra is a former director of the Board of the Investor Group on Climate Change, whose scope includes Australia, New Zealand and Asia. Sandra is a Graduate of the Australian Institute of Company Directors and a member of Chief Executive Women. 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 Audit, Risk & Compliance Committee and the Investment Committee. She is also a director of Australian Ethical Foundation Limited and AvSuper and a member of the NSW Biodiversity Conservation Trust and SAAFE Audit and Risk Committees. 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 as 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 EY. Julie’s prior board experience includes Perennial Value Management, Ord Minnett, Tax Payers Association (NSW Division), Masters Swimming NSW 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 20 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. 20 ANNUAL REPORT 2023Company secretary Karen Hughes BSc (Hons), ACA (ICAEW), GAICD Karen is the Company Secretary and is also responsible for the Risk Management Framework at Australian Ethical. Karen has over 25 years’ experience in risk and compliance in Australia and the UK. 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 to 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. 21 Year in review Soaring energy and food prices, spiralling inflation and the monetary tightening policies meted out by central banks in response, were the economic hallmarks of FY23. Sanctions by the West on Russia, one of the largest fossil fuel producers in the world, drought in Europe and China, along with broader supply chain disruptions amplified by protracted Covid-zero lock-downs in China, made food and energy harder to access and more expensive. This contributed to burgeoning inflation across much of the globe. Central Banks around the world responded to this challenging environment with the fastest monetary tightening in recent history. In Australia, after increasing rates in May 2022 for the first time since November 2010, the Reserve Bank of Australia raised interest rates 10 times in the 2023 financial year from 0.85% to 4.10%. Similarly, as it battled to stabilise prices, the US Federal Reserve raised rates from near zero (0.08%) in February 2022 to 5.08% by the end of FY23, the highest level in 16 years.1 Significantly higher food and energy prices, along with the ratcheting up of mortgage and rent payments, placed great stress on households and communities in Australia and internationally. To add insult to injury, many of these citizens were also dealing with the destruction of their homes and communities through the impact of war, floods or wildfires. The year was also a demanding one for investors as the ballooning interest rates impacted equity valuations and dampened the bond market. Of all sectors, fossil fuels and resources performed better than others, making the first half of the year a challenging one for ethical investors. The recovery of China after Covid Zero proved slower than expected, interest rates continued to bite and by March there were concerns of recession and of more banking failures in the US and Europe. We maintain our long-held view that the transition to renewable energy is a compelling economic as well as ethical proposition. Indeed, by its illegal actions, Russia has served to highlight that dependence on fossil fuel imports is an untenable security risk for many countries, and has helped to supercharge investment in renewable energy around the world. The International Energy Agency (IEA) tells us that 2023 will be remembered as a tipping point: the year global investment in renewables exceeded that of fossil fuels for the very first time.2 Even more than Covid or the war in Ukraine, climate change has the potential to destabilise the normal functioning of the financial markets for decades to come. We continue to see more frequent and severe weather events, rising ocean temperatures and environmental changes leading to significant losses for citizens, insurance companies, banks and other finance organisations and the planet's ecosystem. Many of the most populated areas of the world are low-lying and according to the Intergovernmental Panel for Climate Change (IPCC)3, there is no question that sea levels will rise by more than 0.8 metres, the only question is whether this will happen before or after 2100. As we enter a year of predicted El Nino climate conditions and the potential of the globe being temporarily pushed above 1.5-degree warming,4 we must keep our eyes firmly on the big picture. In the face of the market volatility we have further diversified our portfolio to include a broader array of asset classes, including additional defensive assets aligned to our Ethical Charter. We maintain our 1 macrotrends.net/2015/fed-funds-rate-historical-chart 2 iea.org/news/clean-energy-investment-is-extending-its-lead-over-fossil-fuels-boosted-by-energy-security-strengths 3 Summary for Policymakers. In: IPCC Special Report on the Ocean and Cryosphere in a Changing Climate [H.-O. Pörtner, et al (eds.)]. (2019). 4 public.wmo.int/en/media/press-release/global-temperatures-set-reach-new-records-next-five-years 22 ANNUAL REPORT 2023steadfast focus on the longer-term trend towards decarbonisation – not just by restricting investment in mining and energy stocks, and our advocacy activities with banks who lend to the energy sector – but by positioning the portfolio to capitalise on the companies and projects that are at the forefront of this trend. In the second half of the year – and in particular the last three months – market sentiment demonstrated an increased appetite for risk assets, especially the Artificial Intelligence (AI) and specialist technology sector. This positive sentiment flowed on to other industries aligned with our Ethical Charter and as a result, we were able to deliver positive performance for all our investments over the full year. Greenwashing, the practice of misleading consumers by promoting environmentally-friendly initiatives or products that do not fully deliver on those claims, is a growing global concern for the financial services industry as a whole, and responsible investors in particular. Not only does greenwashing erode consumer confidence in responsible investment products,5 but it means money is supporting investments with less beneficial outcomes for people, the planet and animals. We were therefore encouraged to see the Australian Securities and Investments Commission (‘ASIC’), the Australian Competition and Consumer Commission (‘ACCC’) and the Australian Prudential Regulation Authority (‘APRA’) make greenwashing an area of focus for their 2023 enforcement and compliance priorities. ASIC in particular, issued stricter guidelines on how to avoid greenwashing when communicating financial products, and has carried out 35 interventions this financial year to 31 March 2023, including initiating civil penalty proceedings. As a pure-play ethical fund operating under strict frameworks reflecting our Ethical Charter, we are mindful of the need to carefully explain our ethical approach to prospective and existing investors. We work hard to continuously improve the quality of our communications and the transparency of our disclosure. Review of operations Through these challenging times we, as always, remain firmly focused on our key principles. Ethical investing is all we do, and we’ve been investing this way since 1986, through all market cycles. Our long-term performance helps demonstrate the power of this conviction. Our flagship wholesale Australian Shares Fund (‘ASF’) remains above the Benchmark6 for all periods of five years or greater and our wholesale Emerging Companies Fund continues to outperform its Benchmark7 for all periods of two years and above, whilst ranking in the third quartile compared to peers for one year and three years.8 For our super members the Balanced option performed on or above Benchmark9 for the full year and for every time period of five years and above. Australian Ethical continued to experience strong growth, more than doubling our funds under management (‘FUM’) in just over two and a half years since November 2020. In FY23 we reached the significant milestones of more than $9 billion in FUM across all product types, with more than $7 billion of that in super alone. This was the largest absolute one-year growth in FUM in Australian Ethical’s long history. Though the volatility of the last 12 months presented challenges for investment teams everywhere, it also provided an opportunity for us to seek out value in the future-building sectors that we support. The Christian Super Successor Fund Transfer (‘SFT’) and subsequent expansion of diversified asset classes for super members during FY23 also contributed to positive returns. 5 Banhalmi-Zakar, Z & Parker, E. 2022. From Values to Riches 2022: Charting consumer demand for responsible investing in Australia, RIAA, Melbourne 6 S&P/ASX 300 Accumulation index. References to ‘wholesale’ funds indicate the class of pricing above a minimum investment threshold, which varies by fund 7 S&P/ASX Small Industrials index. References to 'wholesale' funds indicate the class of pricing above a minimum investment threshold, which varies by fund 8 Mercer quarterly performance survey – June 2023 9 SuperRatings SR50 Balanced (60-76) Index as at 30 June 2023 23 Christian Super SFT The Christian Super SFT completed in November 2022 was our major strategic deliverable for the financial year. The transaction grew our FUM by $1.93 billion, added 28,000 superannuation customers and enhanced our asset allocation to alternative assets. Pleasingly, more than six months in, member and FUM retention remains above our original expectations. We have been able to quickly pass on the benefits of our greater scale through fee reductions to all our 110,000+ members, further increasing our competitiveness. Our larger scale has also enabled reinvestment in initiatives to improve our customer experience and accelerate our ongoing growth and impact. The retained Christian Super capability has boosted our alternatives investment capability, supported high member engagement standards in the contact centre team, underpinned employer channel retention, enhanced product management capability and investment administration to support increased transaction volumes, and strengthened risk management and governance. In addition, the transaction has enhanced our merger and acquisition capability, giving us further confidence in executing future acquisitions in line with our inorganic growth strategy. With the initial integration program delivered according to plan, we have now consolidated into a single investment management platform, operating under Australian Ethical’s brand with all investments guided by the Australian Ethical Charter. Our focus now turns to leveraging middle and back-office synergies, initially through the transition of the two incumbent superannuation administrators to a single provider. As we announced in June 2023, GROW Technology Services Ltd (‘GROW’) has been selected as our new superannuation administrator. This decision was based on the strong alignment of the two companies’ innovative cultures and GROW’s modern technology stack. This solution is expected to deliver an enhanced member experience, compelling commercial rate-card and the flexibility to support Australian Ethical’s ongoing growth. The multi-year project is underway, with all members expected to transition to GROW’s platform by FY25. Strategic highlights in FY23 The growth strategy we highlighted in FY21 is now reaping genuine benefits and presents a much brighter future. This strategy identifies four key pillars and one foundation that we are investing in and pursuing in tandem, to strengthen our business for impact and leadership. While our major strategic milestone in FY23 was the successful completion of the Christian Super SFT, we continue to make significant progress against our many strategic deliverables. The capability of our business has lifted materially during the year and continues to improve, as we invest in and embed new talent, systems and processes, and drive the cultural shifts required to deliver our aspirational growth targets. This year we have created a stronger executive leadership team and enhanced governance at the Board level with the addition of a new Australian Ethical Super board member and changes to our Investment Committee. Our key strategic highlights are outlined below: Principled investment leadership We have brought strong new leadership to the investment team with the appointment of Ludovic Theau as Chief Investment Officer in April 2023. Ludovic brings more than 30 years’ experience in ESG investing, including private markets, funds management, commercial and investment banking and financial advisory. Prior to joining, Ludovic was the Chief Investment Officer for the Clean Energy Finance Corporation, Australia’s Green Bank. We have also refreshed our ethics capability with the appointment of Alison George as Head of Impact and Ethics. Alison’s role is key to ensuring our investments continue to meet our Ethical Charter and grow our positive outcomes for animals, people, and planet. Alison has more than 20 years’ experience in responsible investment and stewardship, working with numerous industry leaders in her prior roles with Pendal and Regnan. Dr Stuart Palmer has taken on the role of Ethical Futures Lead, continuing to be a strong voice for more sustainable business and investment models and practices. This new capability, together with an expanded investment committee, positions us to even more strongly adapt to and present investment opportunities in asset classes, and solutions that are part of what we expect to be a vastly changing investment landscape as the world responds to climate change and other existential threats. 24 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023DHFKSJHDFS level of engagement and therefore announced our divestment from Lendlease in March 2023. This announcement reached a potential audience of 8.5 million Australians through 110 unique pieces of earned media coverage, including the ABC, Channel 9 News, the Guardian, The Australian and Bloomberg. Following our request for support, 1,795 people copied us in on their letters to the NSW Minister for Environment and Heritage, James Griffin, requesting a public consultation regarding the proposed koala corridors at Mt Gilead. We have continued to engage on the issue post divestment, including with the incoming NSW Government. We commissioned the research ‘A little goes a long way’ with the UTS Business School and Lonergan Research to uncover Australians’ perceptions of the carbon challenge and to help identify effective ways to contribute to a reduction of an individual’s carbon footprint. Coverage generated by the research reached a potential audience of four million Australians through 153 articles and mentions including the front page of the Money section of the Sydney Morning Herald / The Age. The associated marketing campaign reached a total of two million people, across YouTube and social media. The first Australian Ethical Reconciliation Action Plan (‘RAP’) was submitted to and approved by Reconciliation Australia in the financial year. This largely wraps form and structure around a number of activities that we have been carrying out for many years. During the period, we were also able to provision $1.1 million for the Australian Ethical Foundation, to enable its future work supporting innovative and effective charities combatting climate change in Australia and overseas. Utilising funding provisioned in FY22, the Foundation made 20 strategic grants totalling over $1 million and 12 Visionary Grants totalling $500,000 during the period. These grants were made to a variety of projects across the Foundation’s focus areas: Stopping Sources of Carbon, Supporting Carbon Sinks and Empowering Women and Girls. Meanwhile our Head of Asset Allocation, John Woods, was promoted to Deputy Chief Investment Officer and Head of Multi-Assets and we further bolstered our alternatives capability through the appointment of two new senior investment analysts. During the period, we also undertook a significant project to in-house and uplift our asset allocation methodology and capability. Further, we enhanced our asset allocation through greater exposure to alternatives post the SFT. This provides greater diversification and enables flexibility for future product design. We continued to work on our product pipeline, with our new Moderate Fund due to launch in early FY24. This new product will enhance our current multi-asset product suite, by offering a compelling lower-growth asset allocation fund to address the requirements of advised, direct, high net worth and mezzanine investors with a medium risk profile. In November 2022, our custodian NAB Asset Servicing (‘NAS’) announced its intention to wind down operations by end of 2025. In response, we mobilised a custody migration project to seek a scalable long-term partner to provide ongoing support to our Investment Management platform. And, as already mentioned, we are particularly pleased with the solid investment performance we achieved for the year in one of the most tumultuous periods for a true-to-label responsible investment manager. Advocates for a better world In FY23 we made a deliberate choice to be more focused with our stewardship, delivering more than 250 engagements for people, animals and the planet. To provide a detailed account of our stewardship activities we extended the content of our sustainability reporting with our first dedicated Stewardship Report. Our ongoing Stewardship engagement with Lendlease regarding its housing development at Mt Gilead and the impact on one of the last healthy koala colonies in NSW, has been a key focus area for our Ethics Research team. Despite multiple engagements with the company, encouraging them to improve their plans for koala corridors, which did lead to some improved outcomes for the koalas, we were ultimately dissatisfied with the 25 Uplifting our digital experience Our technology backbone is a critical part of our investment roadmap to support our growing scale. Our aspiration is to provide direct customers with a best-in-class digital experience to manage their super and investments. Conrad Tsang joined us in the new role of Chief Technology Officer in October 2022 and is responsible for developing and overseeing a sustainable technology strategy across the business. With more than 20 years’ IT experience across a variety of financial sectors, including banking, markets and funds management, Conrad is well- placed to drive these enhancements across our technology stack to enable our five-year growth strategy. Our transformational transition to GROW super administration will deliver an improved member experience and deliver further synergies following the Christian Super SFT. Compelling client experience Delivering a compelling client experience that consistently lives up to customers' expectations is a critical component of our growth strategy. We continue to build our internal and external capabilities and develop our systems so we can deliver on this promise every time. In December 2022 we welcomed Ross Piper as the new Chief Executive, Superannuation. Ross brings to the role more than 25 years of executive leadership experience, having previously held senior roles within Macquarie Bank, World Vision, and Christian Super. Ross has end-to-end responsibility for Australian Ethical’s superannuation business, along with oversight of the ongoing transformation of the operational backbone of the broader business. As testament to his sustainable investing credentials, Ross was appointed Chair of the Responsible Investment Association of Australasia (‘RIAA’) in November 2022. There has been a significant emphasis this year on enhancing our Contact Centre leadership, resourcing, process automation and telephony. We have listened deeply to customer feedback and are measuring outcomes more tightly. Pleasingly, in recent months, post integration of the Christian Super business and despite record levels of interaction, our grade of service, quality measures and abandonment rates are back at high-quality pre-SFT levels. Our most recent sustainability report is a detailed and thoughtful representation of our brand and purpose. When combined with recent improvements to member statements, investment commentary and other communications to our customers, we continue to lift and enhance the quality of our customer engagement. In recognition, our Net Promoter Score (‘NPS’) and customer advocacy rankings remain in the Top 10 in Australia for super members.10 10 Investment Trends Super Member Engagement Report 2022. Independent research with 25 major super funds 26 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Building a larger and more impactful business In support of the adviser channel, we delivered a number of initiatives including an online CPD- accredited Ethical Investing Masterclass, which brought together leading industry professionals to share insights, analyse the significant opportunities in responsible investing and discuss the implications for advice. We launched a new ‘Advisers’ Voice’ series on LinkedIn which was supported by paid, organic and in-trade press, and saw a pleasing number of views and click-throughs. We also continued to sponsor or present at a number of important adviser events throughout the year. These efforts have been paying off and we have seen significant improvements in the latest adviser research results from Investment Trends11, with our overall brand profile rank climbing 23 places from two years ago, a continued increase in advertising recall and solid improvements in key attributes such as investment excellence, communication and innovation. Our growth strategy recognises brand as critical building block to scale our business. We continue to build our brand through high impact campaigns that communicate our unique value proposition and as a result we have seen further uplifts in awareness and consideration. Overall, we believe we have taken a big step forward in how we present ourselves to market across a number of dimensions including brand identity, website, collateral, advertising, adviser material and member communication. Our growth remains strong. In FY23 we achieved a significant 48% uplift in FUM from both organic and inorganic growth. This was a remarkable achievement considering our lack of exposure to the strongly performing sectors of the period – mining and energy. As we operate in an increasingly competitive direct acquisition space, we continue to optimise our existing channels whilst building greater channel diversity for future growth. As such, we continue to explore new channels to reach prospective customers. During the year we partnered with a number of employment platforms as a channel diversification opportunity for super growth. These platforms enable us to engage with prospective customers as they change employer, a common trigger point for switching, mitigating the potential impact of super ‘stapling’ laws in reducing member choice. We have decided to narrow our focus to a single provider, to maximise ongoing financial viability. We are also increasing our sales focus on ‘values- aligned’ organisations, not-for profits including charities and foundations as well as values-aligned businesses and have created a new role to lead this channel. They will be managing a panel of values aligned organisations as well as ultra-high net worth individuals and will be prospecting for new opportunities. We believe our new Moderate Fund, described above, will assist the growth of this channel and we are exploring other new product offerings which will be attractive to this segment. The adviser channel achieved positive, but modest flows this year, reflective of challenging market conditions. Net flows of $87 million have contributed to growth in the adviser channel FUM to exceed $1.5 billion. We have a capable team, clear strategy and strong execution in the adviser channel. The team has achieved more than 50 significant additions to the Approved Product Listings and model portfolios of national dealer groups, boutique dealer groups and large IFA practices during FY23, a great outcome. 11 2022 Investment Trends Adviser Product and Marketing Needs Report 27 Awards and accolades Australian Ethical continues to receive awards and accolades recognising our leadership in the responsible investment space. RIAA identified us in their elite list of Responsible Investment Leaders 2022. Further awards included Winner Responsible Investments (ESG) for the International Shares Fund in the Financial Newswire Fund Manager of the Year 2022 - awards; Finder Awards Green Superannuation Fund of the Year 2023 (for the fourth year in a row); productreview.com.au’s Best Retail Super Fund 2023 and one of the Financial Review Sustainability Leaders 2022. In addition, SQM Research provided our Balanced Fund with a ‘Superior’ Four-Star rating. We were honoured to again receive one of the highest accolades for a responsible investor: the ‘Leader - ESG Commitment’ by Morningstar. We were one of only eight chosen from the long list of 94 global asset managers that were assessed.12 As a founding B Corporation (‘B Corp’) member and the first listed B Corp in Australia in 2014, we were delighted to achieve a record score of 168.5 in our reassessment in 2023. This made AEI the highest scoring Certified B Corp in Australia and Aotearoa New Zealand as at 13 July 2023. Leadership and innovation Our purpose is investing for a better world – helping to support a sustainable future where people and nature thrive, by investing in companies and assets that we believe are part of the solution for a sustainable economy, and restricting investments in companies that aren’t. For many, it stands to reason that there is a compelling investment thesis for companies that are well positioned for this transition. By creating as well as meeting increased demand for responsible investing, we believe we can help set in motion a cycle that continuously reinforces and amplifies positive results for investors and planet, driving long-term prosperity and sustainable outcomes. As temperature records are broken all over the world, and thousands of people have been affected by fires and floods globally, this shift can’t come soon enough. We therefore continue to build our capability and scalability to continue to take a leadership position in term of our investment approach including the influence we can create outside our FUM through our advocacy with markets, companies, governments and general public. To that end, we made a number of significant strategic hires during the period. Along with those already mentioned, we have made several additions to our expert inhouse investment team to manage a larger and more diversified portfolio, including expansion of our unlisted and impact investing capability. Our people Our purpose-driven, high-performance culture allows us to attract and retain top talent and is led from the top. As set out in our Corporate Governance Statement, our Board plays a critical role overseeing all aspects of our human capital. The Board’s People, Remuneration and Nominations Committee (PRN Committee) has been tasked by the Board to fulfil its responsibilities to shareholders and regulators in relation to our key people governance activities.13 The PRN Committee therefore oversees the people and culture policies and practices designed to attract, retain, develop and motivate employees. It reviews and oversees the effectiveness of initiatives designed to achieve our desired organisational culture. From a diversity and inclusion perspective, the PRN Committee sets the targets, monitors our ongoing progress and assesses the effectiveness of our diversity and inclusion policy and initiatives.13 In FY23 we continued to nurture our culture by embedding a flexible hybrid working structure. Demonstrating our commitment to diversity, equity and inclusion, we introduced Flexible Public Holiday Leave. This allows employees to apply to work on a gazetted public holiday and swap it for another day that better reflects their beliefs or observations. This has been very well received by our staff and places us at the forefront of this work-place evolution. 12 Morningstar Manager Research and Morningstar Direct. At 30 November 2022 13 The full PRN charter is available at: australianethical.com.au/shareholder/corporate-governance/ 28 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023We continue to invest in our people and high- performance culture with the rollout of further leadership training across the business. Our Leadership residential programs have been incredibly powerful in teaching skills and conveying mindset learning. Approximately 80% of our employees have participated in this program. Board changes In March 2023, Michael Monaghan retired from the Boards of Australian Ethical Investment Ltd and Australian Ethical Superannuation Pty Ltd. Sandra McCullagh, already an independent member of the Australian Ethical Investment Committee was appointed as an independent and non-executive director of Australian Ethical Investment Ltd on 1 March 2023 and succeeded Michael as the Chair of the Investment Committee on 1 April 2023. Sandra brings 15 years of financial services experience. She is presently a board member of WorkCover Queensland and the New Zealand Stock Exchange Corporate Governance Institute. Michael Anderson joined the Australian Ethical Investment Committee in March 2023 and is also an independent non-executive director of Australian Ethical Superannuation Pty Ltd. Michael brings 37 years of investment management experience and significant board and governance experience. A stronger Investment Committee, our new Valuation Committee and our relatively new Unit Pricing Committee are all indicators of an organisation seeking to continuously improve their risk environment and culture. Australian Ethical strives for diversity at all levels of our business. The Australian Ethical Investment Board has 67% female membership and the Executive Leadership team is comprised of 50% female team members. Overall, FY23 has seen us build a much stronger and more capable business, with a much stronger performance orientation culture. Profit After excluding SFT integration costs and the Sentient investment fair value adjustment, underlying profit after tax was $11.8 million, up 15% compared to the prior corresponding period, and up 17% on prior period excluding the impact of performance fees. The net profit attributable to shareholders was $6.6 million, compared with $9.6 million for the 12 months to 30 June 2022. The net profit for the Group amounted to $6.6 million. To execute our growth strategy, we continue to invest in our business and capability to seize the opportunities presented by a growing shift towards responsible investment, and to build a robust business platform capable of supporting a much larger business. Despite these increased expenses and the challenging operating environment which tempered FUM and revenue growth in the first half, subsequent stronger revenue and FUM growth along with disciplined cost management have contributed to the emergence of operating leverage and underlying profit increase in the second half. Second half UPAT was 38% higher than the first half FY23. In FY23, though down on FY22, we were able to donate $1.1 million to the Australian Ethical Foundation, which will allow the Foundation to continue its impactful philanthropic work delivering positive impact via its Visionary Grant programme and other initiatives. Sentient Impact Group On 9 December 2021, we acquired a minority equity stake (10%) in the start-up Sentient Impact Group for $5.2 million. This investment was undertaken to extend our capability in the impact investing arena. As a result of slower than anticipated FUM growth and refinement of its strategy, a fair value decrement of $2.6 million was recognised in the first half. In determining the change, we adopted a similar valuation process as that applied to the assets held in our funds supported by an external expert valuer’s assessment. We continue to monitor the asset's fair value and remain informed on Sentient's updated strategy. 29 In terms of the SFT, further synergies are expected to be realised in the medium term as third-party providers are integrated and other operating efficiencies are implemented. Key drivers of our cost base in FY23 were: Employee expenses Employee expenses increased 9% following several strategic executive hires and talent acquisition as part of the growth strategy as we continue to build capability in the areas of investment excellence, offering a compelling client experience and building an impactful business. FTE increased from 99 at 30 June 2022 to 118 at 30 June 2023. The employee expense increase reflects both new hires during the period, retained Christian Super employees as well as the run rate of hires in FY22. In addition, employee remuneration increases contributed to the overall increase. Fund-related expenses Fund-related expenses increased by 38%, representing half of the 15% growth in overall expenses. This was driven by higher customer numbers and FUM, offset by savings achieved through reaching scale thresholds. Marketing As we continue to drive growth to achieve a much larger, more impactful business, marketing costs have increased to support this strategic focus. Marketing costs have increased 29% year on year (which accounts for approximately a third of the uplift in overall expenses). The increase is driven by: • acquisition costs in the new employer platform channel • higher spend on brand to continue to drive greater brand awareness • offset by lower marketing spend on direct acquisition as we rationalised spend during challenging market conditions Revenue Operating revenue increased by 15% over the period to $81.1 million driven by higher average FUM following the SFT, and continued positive net flows and solid investment performance. Second half revenue at $44.5 million, was up 22% compared to the first half of FY23, primarily driven by the full impact of the Christian Super SFT, which was completed towards the end of the first half, as well as significantly higher investment performance in the second half, and continued growth in positive net flows. Revenue growth was partially offset by fee reductions that were delivered to members to improve member experience and increase the competitiveness of Australian Ethical’s offering in line with our fee strategy. In September 2022, we reduced the dollar- based administration fee for super and pension members. Following the Christian Super SFT, the increased scale allowed further fee reductions to be implemented for all members. We will continue to monitor our fees compared to competitors on an annual basis with the aim of sharing the benefits of scale with all stakeholders and accelerating profitable growth of our business. Since 2015 we have seen FUM increase almost eight-fold as our total fee margins have reduced by 99 basis points. The revenue margin across all products reduced from 1.05% at 30 June 2022 to 1.00% at 30 June 2023 reflecting the fee reductions and product mix. Expenses Expenses, excluding Christian Super SFT integration costs and the Sentient fair value adjustment, increased by 15% reflecting the retained Christian Super employees, additional capability costs, variable fund-related expenses, increased customer acquisition costs relating to the new employment platform channel and inflationary increases. As market volatility continued, we conducted a prudent assessment of our cost base to enable disciplined cost management, while continuing to focus discretionary investment in areas that will generate medium term growth. 30 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023 Funds under management We were very pleased to see FUM grow 48% over the year to finish the year at $9.20 billion – an increase of $3 billion since 30 June 2022. We also achieved a new milestone in super with FUM exceeding $7 billion for the first time. The key drivers of this growth were the successful completion of the Christian Super SFT, ongoing positive net flows and solid investment performance. Despite very challenging market conditions we achieved organic net flows of $467 million for the year – this included a $183 million redemption by an institutional client early in the year, that internalised the management of its sustainable option following its successor fund transfer into another fund – the loss of this client was reported in FY22, however the redemptions were phased, with the final redemption occurring in early FY23. Excluding this redemption, net flows were $650 million. Whilst super net flows remained strong, managed funds flows have been impacted by the cautious market sentiment relating to the market volatility. Super net flows were $605 million with managed funds flows of $45 million (excluding the institutional redemption). Our well diversified product set has ensured we remain resilient during the challenging market conditions and continue to grow total FUM. Investment performance Australian Ethical’s suite of investment funds delivered strong performance in the second half of the fiscal year, resulting in attractive annual returns across large-cap domestic, small-cap domestic, international shares, and fixed income categories. This was achieved despite overall market volatility and significant challenges driven by high inflation, rising interest rates and lack of exposure to the rally in commodity prices. These factors directly impacted investors, leading to increased living costs, including higher mortgage payments, rent, energy, and grocery prices. As a result, a more pessimistic outlook prevailed throughout most of the year, and the markets experienced slowing economic activity, heightened volatility, and the failure of several US regional banks and Credit Suisse. However, following the US banking issues in March 2023, the market anticipated the end of peak interest rates, a sentiment further supported by the US Federal Reserve’s decision to pause in June and the Reserve Bank of Australia’s pause in early July regarding interest rate policy. Although inflation remains a concern, there have been notable improvements over recent quarters. Market sentiment began to shift, particularly in the final three months of the financial year, with an increased appetite for risk assets emerging. Initially, this trend was evident in the Artificial Intelligence (‘AI’) and specialist technology sectors but gradually extended to other industries. For the year ended 30 June 2023, our Australian Shares Wholesale Fund (‘ASF’) achieved a return of 13.4%, 1.0% below its benchmark over one year but above the benchmark14 for all periods of five years or greater. In the last quarter of the year, ASF outperformed its benchmark by 5.2%, indicating a shift in sentiment, particularly within smaller-cap technology. Our Emerging Companies Wholesale Fund returned 9.2% over one year, just 0.3% lower than its benchmark15 and has outperformed its benchmark for all periods greater than two years. Our Diversified Shares, International shares and Income Funds delivered strong returns over one year of 16.4% (vs 16.8% benchmark), 19.8% (vs 22.6% benchmark) and 3.1% (vs 2.9% benchmark), respectively (all wholesale). Lastly, our Balanced Wholesale Fund delivered a first quartile16 return of 10.4% for the financial year. Christian Super SFT and the subsequent expansion of diversified asset classes for super members during FY23 also contributed to positive returns. According to SuperRatings, a leading source for Superannuation performance; the Balanced option ranked 17th out 47 Australian balanced funds for the 12-month period ended 30 June 2023 in the SR50 Balanced (60-76) Index. 14 Benchmark changed from S&P/ASX Small Industrials Index to S&P/ASX 300 Accum Index from 13 Aug 2019. The historical benchmark returns are calculated by linking two indices. References to ‘wholesale’ funds indicate the class of pricing above a minimum investment threshold, which varies by fund 15 S&P/ASX Small Industrials. References to 'wholesale' funds indicate the class of pricing above a minimum investment threshold, which varies by fund 16 Mercer June 2023 quarterly performance report – Wholesale Funds. References to 'wholesale' funds indicate the class of pricing above a minimum investment threshold, which varies by fund 31 For our super members, our Australian Shares option ranks 1st of 43 funds rated over 10 years (10.46%) in the SuperRatings SR50 Australian Shares Index and has outperformed the same SuperRatings SR50 index over five years. Further, the Australian Ethical Balanced option has outperformed its benchmark, the SR50 Balanced (60-76) Index over 1, 5, 7 and 10 years. Despite disappointing claims of 'responsible investing' credentials by those who are at best confused about what Responsible Investing is and at worst are deliberately greenwashing, the category of those using a 'Leading Responsible Investment' approach continues to grow. According to RIAA,17 Australian assets managed using a rigorous, leading approach to responsible investment has hit a record value of $1.54 trillion. Further, government policy initiatives both globally and locally are expected to support continued focus on ESG metrics, particularly on climate issues, and therefore introduce potential areas of investment. For example, The Australian Carbon Credit Units (‘ACCUs’) Implementation Plan was announced in June of 2023 by the Australian Government to ensure the scheme continues to help us reach net zero by 2050. While carbon markets have been developed globally, this ACCU scheme increases the prospects of establishing a local carbon market, an area of continued research for our investment team. Australian Ethical is well positioned to provide our investors with attractive and innovative investment solutions within the growing areas of transition, new energy infrastructure, and sustainable investments. Material business risks Australian Ethical’s approach to risk management is based on the Risk Appetite Statement set by the board, which sets out the overall appetite and tolerance levels and defines limits for each material risk category. The board holds the ultimate responsibility for setting strategic direction, the risk management framework (‘RMF’) and determining the risk appetite/tolerance for the activities of the business. The board forms a view of the risk culture of the Group and any desirable changes required and monitors implementation of these changes. The Board recognises that risk management is an integral part of good management practice and is integrated into the Australian Ethical philosophy, practices and business planning processes. A risk aware culture and operation within the Boards’ risk appetite and tolerances is promoted throughout the organisation through regular communications from management and within the provision of training and ongoing support from the Risk and Compliance team. The Audit Risk and Compliance Committee (‘ARCC’) oversees and reviews the RMF, and reviews internal and external audit results. This oversight includes the identification, treatment and monitoring of: • The use of risk appetite • Current and emerging material risks, including (but not limited to) investment, data, technology and cyber risks • Exceptions, incidents and breaches • Complaints • The results of control testing The full ARCC charter (and other board charters) can be found on the Australian Ethical website at: australianethical.com.au/shareholder/corporate- governance/ The RMF is supported by the Three Lines of Defence model with the first line being Senior Leadership Team (‘SLT’) who foster and enhance development of risk culture within the Group, monitor risks, report breaches and review risk register. The SLT have day to day responsibility and accountability for risk management in their area and ensure an appropriate risk culture. Australian Ethical's (‘AE’) second line, the Risk and Compliance team, facilitates the RMF, including review and update of the risk register and RMF, reports on exceptions and control effectiveness. The third line of defence is Internal Audit, (which is outsourced to PricewaterhouseCoopers in accordance with ARCC approved annual audit program) who provides assurance over the RMF and independent review of the design and operation of the control environment, as well as External Audit (KPMG) who provide assurance, through the annual audits and reviews as required by SPS 310 and the Corps Act, that internal controls are designed appropriately and operating effectively. 17 Responsible Investment Benchmark Report Australia 2022, RIAA 32 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Risk category Risk description/impact Risk mitigants Risk Management Risk that AE breaches its corporate, fund and superannuation regulatory and legal obligations or industry standards (including licence conditions, governing documents). Risk that AE’s insurance policies are not appropriate to cover business risk levels. Financial Risk that AE’s profitability, capital reserves or liquidity are inadequate to support ongoing business activities. This includes inappropriate accounting, financial reporting and related disclosures (for both the funds and corporate entities), as well as incorrect calculation and payment of tax, and poor financial control and operational processes. Risk arising from low netflows or poor investment performance as a result of exposure to equity markets resulting in potentially volatile earnings (revenue linked to FUM), and poor customer outcomes. Environmental, Social and Governance (‘ESG’) Risk arising from inadequate or inappropriate ESG considerations in business and investment decision- making. Risk may arise due to unclear employee accountabilities, inadequate board reporting, inadequate identification and management of conflicts, non-compliance with ethical charter, inadequate experience levels of staff and board. • Dedicated risk and legal teams • Internal & external reviews of public documents • Mandatory compliance training for all staff • Policies, procedures and clearly defined roles and responsibilities • Embedded controls assurance framework • Compliance obligations are documented and monitored • Independent assurance • Annual review of insurance program • Annual budgeting, regular forecasting • Regular reconciliation and review processes • Regular monitoring of regulatory capital requirements • Appropriate policies and procedures, quality control, management approval frameworks • Appropriate financial control processes, including monitored cashflows and cash position • Internal and external audit, professional reviews • Scenario planning processes • Agile management of resource allocation, prudent cost control • Regular monitoring of key financial metrics • Monitoring of external market drivers eg interest rates, inflation, and refinement of business activities in response • AE’s Ethical Charter forms part of AE’s constitution and informs all aspects of company operations • All investments are screened through the positive and negative Ethical Charter screens • Embedded governance framework including board and committee charters and key policies and controls, board and committee reporting • Board oversight responsibilities are underpinned by the Ethical Charter, which is embedded in Board Charter. In addition, Ethics is a regular Board agenda item • Ongoing compulsory employee training on key policies • B Corp certification status maintained 33 Risk category Risk description/impact Risk mitigants Investment & ethical screening Risk arising from inappropriate investment strategies, non-adherence to investment governance, non-adherence to fund governing documents, non- adherence to ethical criteria and screening or inadequate management of market, credit and liquidity risks within the funds. • Disciplined ethical screening and investment processes • Regular ethical reviews of investments • Embedment of Ethical Charter • Segregation of Ethical Research and Investment Teams • Established investment governance frameworks Risk arising from underperformance of Managed Funds and Super Options relative to stated investment objectives. in place • Embedded policies Customer Risk arising from inaccurate, misleading or inadequate PR, marketing, brand, sustainability reporting or advocacy activities leading to reputational damage, regulatory penalties and negative stakeholder sentiment. Risk arising from inadequate processes, systems, outsourced suppliers, quality standards, product offering resulting in poor customer experience, reputational damage and financial impacts. Strategic Risk arising from poor strategic decisions, inadequate development and execution of strategic initiatives, a lack of responsiveness to regulatory change or external market and economic trends that could affect Australian Ethical's offering or market position. • Investment performance analytics • Stress testing • Reviews, reconciliations and monitoring of key metrics • Investment Committee (‘IC’) in place with independent members appointed • Quarterly review of performance (including attribution) by IC • Annual review and approval of Strategic Asset Allocations * IC approved Trust Investment Parameters • Regular monitoring of brand awareness • Media monitoring • Policies including ESG policy, Outsourcing policy • Mature ethical stewardship activities embedded • Embedded reviews and quality assurance controls • Vendor & supplier monitoring • Monitoring of key metrics • Employee training • Comprehensive insurance program • Product guidelines, frameworks and policies • Robust and embedded strategy and business planning processes • Dedicated Chief Strategy & Innovation Officer role • Dedicated PMO and program management framework for effective execution of strategic and regulatory initiatives • Senior Leadership variable remuneration linked to strategic metrics • Regular monitoring of progress against strategy through reporting to Senior Leadership Team and Board, incorporating agile reprioritisation of initiatives • Regular review and monitoring of external market trends and metrics 34 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Risk category Risk description/impact Risk mitigants Operations Risk arising from inadequate processes, systems, quality standards, data management or from external events. This includes (but is not limited to) processing errors, human error, fraud, unauthorised advice or an event which disrupts business continuity. Risk that AE enters into untenable contracts and servicing agreements with vendors and suppliers, or selects an unsuitable vendor or supplier. Risk that services provided by external service providers are not managed in line with contractual obligations and service level agreements. • Embedded policies, methodologies, procedures, roles and responsibilities • Board subcommittees e.g., PDS committee • Robust documented risk management processes for new product delivery and product management (including regulatory compliance) • New vendor due diligence processes • Embedded outsourcing policy • Controls assurance framework • Effective issues management processes • Embedded reviews, reconciliations and quality assurance controls • Business continuity planning and disaster recovery programs (including by outsourced providers) • Independent assurance program • Comprehensive insurance program • Employee training • Segregation of duties • Robust recruitment screening processes • Monitoring of key metrics, contractual arrangements and service delivery Unit Pricing Risk arising from incorrect unit prices for Managed Funds and Super Options • Regular reconciliation and review processes for units on issue and applications/ redemptions • Appropriate policies and procedures for asset valuations, distributions, fees and expenses, management approval frameworks for unit prices • Appropriate segregation of duties • Periodic Internal audit reviews of unit pricing controls • Confirmation and recording of asset valuations including Valuation Committee for unlisted assets • Unit Pricing oversight model including Unit Price Committee 35 Risk category Risk description/impact Risk mitigants IT & Cyber security Risk arising from inadequate, failed, • Embedded IT security policies and procedures breached or corrupted IT systems resulting from poor infrastructure, data management, applications, cloud services, business continuity plans, security controls, IT support or unauthorised access. Includes (but is not limited to) confidentiality or privacy breaches, loss of data integrity, loss of sensitive or critical data as well as business disruption or financial loss resulting from a cyber security event, disaster or failure of technology service provider to meet business needs. People Risk arising from an inability to hire, engage, develop, empower and retain quality and appropriate capability (including Senior Leadership and Board) to meet performance objectives and execute AE’s business strategy. Risk arising from inadequate work health and safety (‘WH&S’) practices. Risk arising from unethical conduct by directors or employees, or from behaviours that are not aligned with Australian Ethical’s values, culture and expectations. • Mandatory IT policy compliance training • Operational technology security in place (including firewalls and antivirus) • IT system penetration testing; Password integrity testing • Cyber security is a key risk focus area which has regular board oversight • Business continuity planning and disaster recovery programs including testing (including service providers), incident response plans • AEI Board monitors IT Disaster Recovery Plans and Business Continuity Plans and annual testing • The Board and/or ARCC receives reports on cyber risk, threats, uplift programs, cyber incidents (if any), and information security testing results that identify material information security control deficiencies requiring remediation (if any) • Independent assurance over the integrity of our cyber security infrastructure • Embedded People policies and procedures (including WH&S policies, procedures and training) • Succession planning, talent identification programs, retention and hiring strategies, embedded performance review processes, remuneration benchmarking and reporting to the People, Remuneration and Nominations Committee • Mandatory compliance training • Remuneration framework to ensure senior management alignment to medium- and longer- term strategic goals. • Investment team remuneration structure aligned to performance objectives and retention • Regular employee engagement and turnover monitoring; dedicated employee engagement business representatives • Employee assistance program • Inclusion of risk metrics and thresholds as well as values alignment assessment in performance management framework 36 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Climate change Strategic implications Climate change awareness is contributing to growth in responsible and ethical investing, leading also to both competition and regulation accelerating. There is also rapid growth in climate investment opportunities both in decarbonisation and adaptation. Imperfect information on climate attributes creates challenges to investment management as well as opportunities for outperformance. Our growth strategy recognises that our strong early position on climate change is core to our brand and reputation, with customers, partners and employees. Under our strategic pillar ‘advocates for a better world’ climate change is a priority topic. While we consider our business is well positioned under both low and high temperature scenarios, we believe that sustainable, risk adjusted returns will be greater in a low-warming world overall. High- temperature scenarios are expected to bring lower overall economic output and higher variability of returns, undermining trust in investment markets and demand for investment management. Our approach to climate change All of our investments are made considering our Ethical Charter, which is embedded in our Constitution and overseen by our Board. The Charter’s 23 principles are applied using our ethical frameworks, policies and measurement systems. These ensure we prioritise action to avoid dangerous climate change and its serious impacts on the planet, people, and animals. This priority is pursued through the way we invest, including through negative and positive screening, engagement and advocacy, and climate performance measurement and reporting. Our investment screening and company engagement guides us to sectors and companies which are aligning their businesses with the transition needed to limit climate change consistent with the global goals set out in the Paris Agreement. We believe these investments are better positioned to manage many climate-related risks, such as the risk of introduction or increase in carbon pricing. Our approach can also strengthen specialist investment capabilities to navigate technological change associated with climate disruption and transition. While our investment approach focuses on the need to reduce emissions to limit dangerous climate change, we also recognise it is crucial that companies have business models and strategies which are adaptable to the physical impacts of current and future climate change. Real estate and infrastructure are particularly exposed to many physical impacts of climatic change. 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 across the globe 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 sustainability reporting. Responsibilities Our Chief Investment Officer and Head of Impact & Ethics are responsible for implementation of our Ethical Charter across our investment activities. They approve new and updated ethical frameworks, which include our climate-related ethical screening criteria. We report quarterly to the Board, via the IC, of changes to frameworks and critical ethical issues. Climate change related topics are regular agenda items and the board includes members with climate change expertise. Our ethics research team applies our Ethical Charter on a day-to-day basis in our investment processes. The team includes members with expertise in climate change. Using diverse company, industry, government, responsible investment, scientific, civil society and news 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. 37 The below diagram outlines our investment approach: Emissions profile Our climate ambition We report portfolio carbon footprint measures for our share investments in our sustainability report annually. While data is not available across all our investments, and involves some limitations (discussed in our reporting), we believe this measurement remains a useful demonstration that our Ethical Investing approach – which is applied consistently across all investments – results in our portfolio maintaining an emissions intensity well below the relevant benchmark. Beyond our investments, our operations produce a small amount of emissions (e.g., from our offices and staff travel). We measure and report these (scope 1, 2 and 3) in our annual sustainability report. We seek to first minimise emissions (for example by purchasing renewable energy), and fully offset residual emissions. When offsetting our operational emissions, we look for opportunities for carbon abatement which also deliver additional benefits to people, planet and animals. Through our investments and stewardship we are working towards the emissions reduction needed to achieve a 1.5°C temperature limit – consistent with the most ambitious aims of the Paris Agreement. We report on the action we are taking to pursue our climate ambition, including indicators of progress, in our annual sustainability report, which is developed with reference to the recommendations of the Task Force on Climate-Related Financial Disclosures (‘TCFD’). Action in pursuit of our climate ambition includes: • Engagement and advocacy to help stop finance for expansion of the fossil fuel sector; to help stop and reverse land clearing and deforestation for animal agriculture; to help increase the development and use of low carbon building materials supporting the net zero transition of the real estate sector. 38 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023• Seeking to leverage the collective power of aligned investors by leading and participating in collaborative engagements with high emissions companies, including through the global initiative Climate Action 100+. • Work to encourage better government climate policy, including contributing to the policy engagement and advocacy of the Investor Group on Climate Change. • Applying and communicating our climate-related Ethical Criteria for investment in key sectors including the energy, finance, food, transport and mining sectors. The impact of these actions is uncertain, and it is uncertain whether we will achieve our climate ambition. There are many factors outside our control including climate policy and regulation in Australia and globally, as well as the action of companies, other investors and individuals. While we aim to influence stronger climate action by others, we do not control their actions. Obstacles to achievement of our climate ambition include the current lack of climate ambition and action from many companies and governments. Analysis by expert groups like the IPCC and IEA makes clear the world is falling short of the scale of action needed for global net zero by 2050. We’re also concerned by the risk of greater emissions increase and climate disruption than has been predicted by many climate models. Despite these obstacles, there are more ambitious decarbonisation pathways which would support achievement of our climate ambition. Pathways where we see more urgent transformation of our energy and transport systems; where land is restored to capture carbon and boost sustainable agriculture; where innovative building materials and techniques radically lower the footprint of our homes and infrastructure. Investors have a key role to play supporting and accelerating these pathways and transformations. These pathways and transformations also create low carbon investment opportunity for investors seeking to accelerate the decarbonisation of their own portfolios. Outlook The medium-term market opportunity remains compelling as we build the path that will help deliver our aspirational FUM growth targets. We expect that the challenging market conditions of FY23 will continue in FY24, but even so, are targeting $100 million in annualised revenue by the end of FY24, driven by the full-year revenue effect of the SFT, ongoing positive flows and market performance – subject to market conditions. Having achieved the milestone of $9 billion in FUM, our larger scale presents us with a range of additional opportunities. With disciplined prioritisation of effort, resources and diligent cost control, we believe we can invest judiciously to capture the future growth opportunities, whilst also delivering further operating leverage as we target a lower cost to income ratio in FY24 and look ahead to solid profit growth in FY24. In FY24 our investment focus will be on a handful of critical inflight projects. These include selection and transition planning to a new custody and investment administration provider as our current custodian exits the market; progression of day-two SFT activities which will help deliver synergies along with a new modern technology stack and customer experience uplift through the transition to GROW. This transformational piece of work will be led by our new Chief Executive Superannuation, Ross Piper, with full transition expected to be completed in FY25. We plan to roll out the next stage of our Data and Technology strategy to further enhance our technology infrastructure, deliver greater internal efficiencies, enhance the use of data and business intelligence and continue to enhance cybersecurity to continue to manage this risk in the rapidly evolving external environment. 39 Many values-aligned organisations are investing their assets with Australian Ethical in order to meet their financial needs, whilst seeking to avoid harm and create positive change to align with their values and mission. We aim to capitalise on this opportunity by expanding our distribution capability with a dedicated ‘Values-Aligned’ organisations channel. This initiative will have a continued focus on retention of existing clients as well as drive further growth in not-for-profit organisations including universities, foundations, and religious organisations. We will progress our new product pipeline with the delivery of new products to address adviser and ‘values aligned’ organisation demand, including further impact investment vehicles to build on the capabilities which were bolstered during the Christian Super SFT. We also plan to invest further in our brand to maintain our reach and to underpin our ambitious growth strategy across all segments. Investment capability is key to our ambition, and we will be further investing in this area to build on our ethical investing competitive advantage and enhance our investment management platform. This will continue to enhance operational, product development and trading capability and systems, fitting for an investment management business of much larger scale. We believe this will translate into an enhanced investment capability across all asset classes, strong investment performance outcomes as well as increased innovation through new investment products and business initiatives. This initiative will be a major focus of the business through FY24 and FY25. Overall, we expect these initiatives to result in a more diversified platform for growth going forward. And, as a business, we remain well-positioned with no debt, well-managed cash flows and significant momentum, and look forward to the opportunities that lie ahead in FY24. 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: Due diligence costs in relation to mergers & acquisition activity Change in fair value of investment SFT integration costs (refer Note 16) Tax on adjustments Underlying profit after tax (UPAT) including performance fee Performance fee (after tax and community grant) Underlying profit after tax (UPAT) excluding performance fee Diluted EPS on NPAT attributable to shareholders (cents per share) Diluted EPS on UPAT attributable to shareholders (cents per share) 2023 $’000 6,576 – 6,576 – 2,600 3,733 (1,120) 11,789 – 11,789 5.84 10.46 2022 $’000 % Increase (Decrease) (31%) (31%) 15% 17% 9,511 86 9,597 982 – – (295) 10,284 (240) 10,044 8.55 9.16 * refer to Note 46 for additional details in relation to The Foundation’s financial results. 40 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2022 of 3.00 cents (2021: 4.00 cents) per ordinary share – fully franked Special performance dividend for the year ended 30 June 2022 of nil cents (2021: 1.00 cents) per ordinary share Interim dividend for the year ended 30 June 2023 of 2.00 cents (2022: 3.00 cents) per ordinary share – fully franked 2023 $’000 3,372 – 2,256 5,628 2022 $’000 4,495 1,124 3,372 8,991 Since year end the Directors have declared a final dividend of 5.00 cents per fully paid ordinary share (2022: 3.00 cents final dividend). The aggregate amount of the declared dividend expected to be paid on 21 September 2023 out of profits for the year ended 30 June 2023, but not recognised as a liability at year end, is $5,639,000 (2022: $3,372,000). All dividends paid during the year were fully franked based on tax paid at 30.0%. The final dividend to be paid in September 2023 will be fully franked at 30.0%. Changes to contributed equity during the year and prior to the issue of the report During the year and prior to the release of this report the following changes to contributed equity occurred: Details Balance Date 1 July 2022 Shares 112,387,138 Weighted Average issue price $’000 8,969 Vesting of deferred shares in the Employee Share Plan (525,972 shares), and deferred STI shares (88,613 shares) to the Investment team Vesting of FY20 deferred STI shares (5,193 shares) – CEO Vesting of deferred STI shares (24,626 shares) for FY20 Performance fee, and FY21 deferred STI shares (7,459) for the CEO 1 September 2022 1 September 2022 1 September 2022 Purchase of deferred shares in the Employee Share Plan – on-market 30 September to 6 October 2022 – – – – $2.15 1,322 $4.53 24 $9.80 314 $5.26 (349) Issue of deferred shares to the Employee Share Plan Vesting of deferred shares in the Employee Share Plan (5,131 shares) Vesting of deferred shares in the Employee Share Plan (2,959 shares) Vesting of deferred shares in the Employee Share Plan (22,496 shares) Vesting of deferred shares in the Employee Share Plan (8,308 shares) 13 December 2022 394,914 $5.29 16 December 2022 16 December 2022 20 February 2023 20 February 2023 – – – – $4.53 $9.80 $4.53 $9.80 – 23 29 102 81 Balance 30 June 2023 112,782,052 10,515 No amounts are unpaid on any of the shares. Refer to Note 45 for additional information and a detailed breakdown of the shares vested during the year. 41 Significant changes in the state of affairs The Christian Super SFT was completed in November 2022. The SFT added $1.93 billion to our funds under management, 28,000 new superannuation customers and enhanced our asset allocation to alternative assets. There were no other 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 in Note 35, no other matter or circumstance has arisen since 30 June 2023 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. Likely developments and expected results of operations Information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Environmental regulation To the best of the Directors’ knowledge, the relevant environmental regulations under Commonwealth and State legislation have been complied with. Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) held during the year ended 30 June 2023, 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 Bûn Michael Monaghan Julie Orr John McMurdo Sandra McCullagh 12 12 12 9 12 12 3 12 12 12 8 12 12 3 8 8 8 6 8 – 2 8 8 8 6 8 – 1 5 6 6 – 6 – – 5 6 6 – 6 – – Product Disclosure Statement Committee Investment Committee Eligible Attended Eligible Attended Steve Gibbs Kate Greenhill Mara Bûn Michael Monaghan Julie Orr John McMurdo Sandra McCullagh 6 – – 6 – – – 6 – – 6 – – – – – 6 – 6 – 6 – – 6 – 6 – 6 42 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Indemnity and insurance of officers 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. 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. Indemnity and insurance of auditor 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 has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. 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 39 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 39 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. 43 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 24 August 2023 Sydney 44 Australian Ethical Investment Limited and its Controlled Entities Directors’ Reportfor the year ended 30 June 2023ANNUAL REPORT 2023 Remuneration Report 45 Remuneration Report For the year ended 30 June 2023 Dear Shareholder, On behalf of the Board, I am pleased to present our Remuneration Report for the financial year ended 30 June 2023 (FY23). The remuneration report provides our shareholders and stakeholders with a thorough and transparent outline of our remuneration framework and the philosophies behind the remuneration arrangements and other employee benefits. It specifically focuses on the remuneration outcomes of Non-Executive Directors, the Chief Executive Officer (‘CEO’) and senior executives, collectively referred to as Key Management Personnel (‘KMP’), and how it aligns with our performance and strategic goals for the year and beyond. Financial year 2023 was a challenging one to navigate. In the early part of the year global instability contributed to some sectors that Australian Ethical does not invest in e.g., oil and gas, performing relatively well, meaning our short-term investment performance initially lagged. In the second half our performance was very strong, enabling Australian Ethical to deliver another year of positive investment returns, and further cement our reputation as an Investment Manager able to deliver strongly through various investment cycles. Volatile financial markets generally, caused many investment managers to record outflows and decline in overall funds under management over the last year. Australian Ethical by contrast has been resilient. The business has continued to grow organically, and the completion of the Christian Super Successor Funds Transfer (SFT) in November 2022 has contributed to us finishing the year with record customer numbers and a remarkable 48% growth in funds under management to a new record high of $9.2bn. 46 These results have been achieved through the incredibly disciplined performance of our staff, and with high levels of engagement, a testament to the shared purpose that underpins the strength of our business, and the commitment of our people. Each year, the Board and its People, Remuneration & Nominations Committee (‘PRN’) reviews the remuneration framework and has had oversight of remuneration arrangements for all employees, setting key performance objectives to influence the work ethic and behaviour of employees and the remuneration outcomes. There are no significant changes to compensation structures contemplated for FY24, and none made in FY23. The short and long-term incentive programs currently in place drive our growth aspirations which will amplify our impact and realise our purpose of better outcomes for all stakeholders, including people, planet and animals. FY23 variable remuneration outcomes 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. 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 as well as incentivising ethical behaviour and positive customer outcomes. Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023The PRN and the Board spend considerable time each year evaluating the contributions and performance of the company, CEO and other KMP to arrive at the variable incentive outcomes for each KMP, measuring achievements against the balanced scorecard and individual objectives. The Board has awarded the CEO a variable incentive of 72% of maximum opportunity, and the individual outcomes for other KMP range from 53% to 81% of maximum opportunity. After completing the highly successful integration of the Christian Super transaction, which significantly lifted funds under management, revenue and underlying profit after tax from the second half of the year, the Board has exercised its discretion to fully vest the current tranche of the Employee Share Plan. Looking forward We annually review our remuneration framework to ensure it remains contemporary and is aligned with the Company’s strategy, industry trends and regulatory changes, including the Financial Accountability Regime (‘FAR’) and Australian Prudential Regulation Authority (APRA) prudential standard on remuneration (CPS 511). 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 47 1. Key Management Personnel Name Position Key Management Personnel (KMP) Term as KMP in FY23 John McMurdo Managing Director & CEO Marion Enander Chief Strategy & Innovation Officer Full year Full year Karen Hughes Maria Loyez Eveline Moos Ross Piper Mark Simons Chief Risk Officer & Company Secretary Full year Chief Customer Officer Chief People & Culture Officer Full year Full year Chief Executive Superannuation Commenced 25 November 2022 Chief Financial Officer Full year Ludovic Theau Chief Investment Officer Commenced 3 April 2023 David Macri Chief Investment Officer Departed 31 December 2022 Non-Executive Directors Steve Gibbs Chair Katherine Greenhill Non-Executive Director Mara Bûn Non-Executive Director Full year Full year Full year Michael Monaghan Non-Executive Director Departed 31 March 2023 Julie Orr Non-Executive Director Full year Sandra McCullagh Non-Executive Director Commenced 1 March 2023 During the year, we welcomed Sandra McCullagh to the AEI Board following the retirement of Michael Monaghan. Ms McCullagh brings with her a wealth of experience in ESG and financial services and is also Chair of the Investment Committee. Mr Monaghan, who was previously a non-executive director of AEI and AES and Chair of the Investment Committee retired on 31 March 2023. Subsequent to the completion of the Christian Super SFT, Ross Piper joined as Chief Executive Superannuation and a KMP. Effective 1 July 2023, the CEO and Board re-assessed the key roles that drive the strategic decision-making within the business to be Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, Chief Executive Superannuation, Chief Strategy and Innovation Officer, Chief Risk Officer, and Chief Customer Officer. 48 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 20232. Our People 2.1 AE People Plan Success in achieving our strategic goals is largely contingent on the quality and performance of our people, and the health of our organisation’s culture. Our People Plan (people strategy) is focused on delivering people and culture solutions that will enable the growth of our business and transform our operating model to become a global role model in responsible investing. The AE People Plan priority areas are: • Diversity, Equity and Inclusion (“DEI”) to foster a DEI led organisation to enable better performance • Talent and Capability to secure talent and capability now and for the future • Performance and Reward to motivate and reward our people to act in the best interests of our stakeholder groups • Culture and Employee Experience to bring to life our ‘Purpose Driven and High Performing” culture 2.2 FY23 achievements During FY23 there were a number of market and external forces impacting talent attraction and retention generally, including high inflation and an uncertain economy, tight labour market, and a demand for human centric working environment. Key People Plan initiatives and achievements are outlined below. Diversity Equity & Inclusion • Undertook a diversity census to better understand the profile of our workforce today so that we focus on initiatives that will drive meaningful and sustainable change across Australian Ethical. • Introduced Flexible Public Holiday Leave because we understand that public holidays in Australia may not reflect each person’s observations, beliefs and lifestyle and we believe everyone should have the opportunity to celebrate what’s important to them and feel included in doing so, regardless of who they are, what they believe in, where they come from. • Submitted our Reflect Reconciliation Action Plan with Reconciliation Australia. • Investment team participated in 2 Future IM/pact events to support early career female talent to increase female representation in the investment management industry. • Further improved our female gender representation at Board level (67%), executive leadership level (56%) and investment team (28%). 49 Talent & Capability • Enhanced our talent management and succession planning approach. • Completed the roll out of leadership and team membership training program. • Successfully integrated a number of ex-Christian Super employees as a result of the Successor Fund Transfer, including Ross Piper as our new Chief Executive Superannuation. • Enhanced key leadership capability in impact and international investing with the appointment of our new Chief Investment Officer, Ludovic Theau, and Alison George as Head of Impact and Ethics. The appointment of Conrad Tsang as our first Chief Technology Officer has further enabled our strategy in data and technology. Performance & Reward • Held education sessions with managers and employees to improve their understanding on the link between performance and reward and to further embed our performance framework (introduced in FY22). Culture & Employee Experience • Launched Wellbeing@AE program to encourage employees to engage with their financial, physical, emotional, and social wellbeing so that they can bring their best selves to work. • Recognising the increasing cost of living pressures this year we ran a financial wellbeing workshop, facilitated by external experts, to empower employees to make smarter financial decisions. • Conducted a Risk Culture pulse check survey aligned to APRA questions to gain a better understanding of how our people thought about risk and how those thoughts played out in their day-to-day roles. 50 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 20233. Remuneration Philosophy and Structure 3.1 Remuneration guiding principles Australian Ethical’s remuneration approach is designed to facilitate the attraction, retention and engagement of talent, within the organisation’s capacity to pay, to achieve Australian Ethical’s corporate objectives and purpose of Investing for a Better World. Our remuneration approach is guided by the following principles: • Pay fairly and equitably, and market competitively, to attract and retain talented people, • Align and balance the interests of clients, shareholders, and employees, • Recognise and differentiate for contribution to the Group’s performance, • Promote our values, behaviours, risk and conduct expectations, • Be simple to administer and to communicate to stakeholders, • Adhere to all applicable legislation and regulations, and • Supports the long-term financial soundness of AEI Group. Australian Ethical’s remuneration philosophy is consistent with the principles of the Australian Ethical Constitution and Charter contained in the AEI and AES Constitutions. 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 gender in employment, marketing, or advertising practices” – Charter element (x) The Board before declaring any dividend, is required by the Company's Constitution to provide a bonus or incentive for employees of up to 30% of what the profit for that year would have been had not the bonus or incentive payment been deducted. 3.2 Elements of Remuneration The following framework applied to all permanent employees of Australian Ethical Investment Limited (not including Non-Executive Directors and Investment Committee members) for the financial year ended 30 June 2023. 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. There were no significant changes to the remuneration framework in the FY23 year. 51 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 motivating and rewarding employees for achievement of annual performance objectives. Applies to all employees who have satisfied the risk and values gate. Paid as Cash and superannuation • 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. • Actual outcome is linked to performance and contribution against annual financial and non-financial KPIs. Cash and deferred shares • Maximum achievable for KMPs is two times the target incentive, based on a percentage of Fixed Remuneration. • For KMPs (except CEO and CIO), STI in any given year that exceeds $100,000 will be deferred for up to 3 years, is not subject to further hurdles and is paid in shares. The CEO and CIO have other deferral components within their remuneration. • On an annual basis the PRN will consider an additional discretionary bonus paid in deferred shares for specified members of the Investment team, connected to any 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. Employee Share Plan (‘ESP’) – Aimed at aligning employee performance and behaviour with the long- term success of the Company, to encourage employees to share in the ownership of the company and to support the retention of employees. Applies to all employees who have satisfied the risk and values gate. • 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. 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. 52 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Paid as Performance Rights Element Description Quantum Executive Long-Term Incentive (‘ELTI’) Designed to align the business strategy with specific KPIs to drive long- term growth, encourage the achievement of AEI’s long-term strategic goals, and to support the retention of key senior talent. • Awarded as percentage of Fixed Remuneration, ranging from 10% to 50% for selected senior executives. • Issued as performance rights and vest as ordinary shares after 4 years, provided that: • employee remains employed; and • achievement of all financial (FUM, net inflows and/or cost to income ratios) and non-financial (NPS scores, employee engagement and compliance with Ethical Charter) performance hurdles are required for the rights to vest. Refer below for the specific performance hurdles relating to each grant. • The multiplier mechanism applies only to the ELTI tranche vesting 1 September 2025. • During the vesting period, ELTI participants are not entitled to receive dividends nor hold voting rights. • On cessation of employment, all performance rights are forfeited unless the Board in its absolute discretion determines otherwise. In addition, Australian Ethical offers a comprehensive range of employee benefits across personal development, and financial, health and community wellbeing so employees can bring their best selves to work. Both short and long-term incentives 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. 53 3.3 ELTI Performance measures There are different performance measurements for the tranches granted on 1 December 2021 and 1 December 2022, outlined below. Performance measures Granted 1 December 2021 Granted 1 December 2022 Financial measures: Financial measures: • $15bn of FUM as at 30 June 2025, and with • Net flows, including no more than 50% from each incremental increase in FUM of $2.5bn, a multiplier to the base award is applied ranging from 2 to a maximum of 7 times at $30bn; M&A activity, over the 4-year vesting period of $6.05bn • Cost to income ratio of no more than 75% • Operating costs to Income ratio of no more than 75%; Non-financial measures: Non-financial measures: • Median NPS score for both super and managed funds to measure customer satisfaction, • Median employee engagement score for financial services companies, and • Ongoing compliance with our Ethical Charter. • Median NPS (Net Promoter Score) for Financial Services companies in Australia • Median employee engagement score for financial services companies in Australia; and • Continued compliance with our Ethical Charter. Four years, ending 30 June 2025 Four years, ending 30 June 2026 A multiplier of the base award will apply at each FUM target achieved. If the maximum stretch FUM target of $30bn by 30 June 2025 (along with other KPIs) is achieved, then the maximum multiplier of 7 times the base award will apply. No multiplier applies to this grant Vesting period Multiplier mechanism In considering the implementation of the ELTI opportunity, the Board has been cognisant of the remuneration philosophy remaining consistent with the Ethical Charter and ensuring that the structure of the new ELTI closely aligns the interests of senior talent with those of shareholders. The ELTI opportunity was designed to drive greater business impact and purpose and reward those key to that success. 3.4 FY24 Changes and considerations There are no significant changes to compensation structures contemplated for FY24, and none made in FY23. The existing discretionary performance fee sharing structure has been modified to further align our investment team with the performance outcomes of our investors. The arrangement will reward select investment team members with up to 33% of the performance fee, granted in the form of a cash component and a deferred shares component. Two thirds (2/3) paid in cash in line with the normal remuneration review payments, and one third (1/3) to be awarded in unhurdled deferred shares to vest after 3 years. This enhancement will be offset against a reduction in short-term incentive opportunity for relevant team members. There was no performance fee earned in FY23. The Board are in the process of considering a new FY24 ELTI grant with a vest date of 1 September 2027. It is expected to be based on a similar percentage of fixed remuneration for KMPs as in FY23. Like the FY23 ELTI grant, this is not expected to include a multiplier mechanism. The performance hurdles for this grant are yet to be determined. 54 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 20233.5 Performance measures for Short Term Incentives Performance measures for Short Term Incentives (STI) 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 2023. The following outcomes have been taken into account when assessing short term incentives for KMPs. Measure Metric Why this metric is appropriate Incentive Award Achievement for FY23 Financial • Underlying profit after tax attributable to shareholders (‘UPAT’) and statutory Net profit after tax attributable to shareholders (‘NPAT’) • Net growth in Funds under Management. Provides alignment to the Group’s financial performance. The target was set in context of investment required to underpin the High Growth strategy outlined in August 2021, and to successfully complete the Christian Super SFT. 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. Client experience Compelling client experience measured by client and adviser advocacy and satisfaction. Customer satisfaction with product and service is measured using customer surveys conducted by survey tools and independent industry consultants, and by monitoring quality of service in our customer contact centre. Target: UPAT attributable to shareholders of $7.0m NPAT attributable to shareholders of $4.3m Actual: UPAT attributable to shareholders of $11.8m NPAT attributable to shareholders of $6.6m Target: Net growth >$2.25bn FUM Actual: $3.0bn • $473m ($650m excluding a low value institutional client redemption) of net-flows • $1.93bn from (Christian Super SFT) • $610m from net positive investment returns Target: • Super – >25% of members have recommended AE to other potential members. • Adviser Net Promoter score (NPS) – Top 25 Actual: • Super – recommended by 52% of members • Adviser NPS – rank #20 Source: Investment Trends data 55 Measure Metric Why this metric is appropriate Incentive Award Achievement for FY23 Brand familiarity and reputation • Increased brand recognition and familiarity. Strong brand familiarity and resonance is a key foundation to future growth. Target: • Prompted brand awareness of >20% of Australians. • B Corp 'Best for the World' status Our preferred standing as a for purpose and for profit business is a key proof-point of our brand. Delivering long term competitive investment returns for our customers is core to our offering. Investment performance • Balanced Fund (‘BF’), Australian Shares Fund (‘ASF’) & Emerging Companies Fund (‘ECF’) performance against market benchmarks. • BF, ASF & ECF performance relative to peers. • Super Fund Balanced option (‘MySuper’) relative to peers. Providing a motivating and inspiring workplace and high employee engagement has been proven to drive better business outcomes for customers and shareholders. Employee engagement • Employee annual engagement score (as surveyed by Culture Amp). Assessed against market comparisons • Executive KMP development (application of leadership training, collaboration and 360 degree feedback ) • Adherence to the Company’s values is treated as a gate to short term incentive awards. 56 • Achieve B Corp 'Best for the World' (top 5%) certification. Actual: • Prompted brand awareness increased to 23% (source: yougov) • Certified as B Corp 'Best for the World' Target: • Exceed relevant benchmark performance (after fees) over 1, 3 and 5 years for BF, ASF and ECF 3 years Actual: • 1 year – below target for each option • 3 years – above target for ECF • 5 years – above target for all options Target: • 2nd quartile vs peers over 1, 3 and 5 year horizons for BF, ASF and ECF Actual: • BF – met for all time horizons • ASF – met for 5 year horizon • ECF – met for 5 year horizon Target: • 2nd quartile vs peers over 1,3 and 5 year horizons for MySuper Fund Actual: • Met for 1 and 5 year horizons Target: • Top quartile Employee Engagement across Financial Services organisations. • People Plan achievements to be assessed by the Board. Actual: • 70% Employee Engagement score • Significant progress in KMP training, leadership capability and depth of team • Values strongly adhered to. Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Why this metric is appropriate Incentive Award Achievement for FY23 It is critical for our Executive KMP to have a high degree of ownership for risk management. Target: • Maintain strategic risk appetite and embed risk culture across the organisation. Actual: • Strong risk environment and culture observed by Board and third-party audit. • No material risk breaches. • SFT and all regulatory projects satisfactorily delivered. • No KMPs had a reduction in their STI due to risk. Measure Metric Risk • Managing incidents and risks out of tolerance back within Board approved risk appetite for business activities. • Risk management on strategic projects • Risk will also have a “detractor” measure, based on behaviour, risk culture in team, failure to meet requirements, or behaviour that results in AEI not acting or appearing not to act in the best interests of clients and of AERSF members. If triggered, the impact will be a reduction in total STI allocation for the person of at least 5% up to 100%, and/or for the company factor if considered an organisation wide concern. In assessing the performance of the business and the CEO, the Board acknowledges the transformational nature of the successfully completed SFT, the significant progress on a number of our long-term strategic projects, competitive investment returns for customers, despite the backdrop of challenging financial markets for Responsible Investment Managers, and the robust risk culture the company continues to enhance. 48% growth in funds under management, with other key indicators in sound condition, sets the company up exceptionally well for FY24 and beyond. The CEO’s performance is assessed on the Company balanced scorecard and a number of strategic initiatives such as: • Company balanced scorecard and key result areas, • Leadership and team development, • Strategy development and execution, • Brand and reputation, • Strategic partnerships including mergers and acquisitions. 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. In addition to the balanced scorecard, each SLT is also assessed on a range of individual objectives relevant to their role and responsibilities. The awards reflect recognition of the performance of each SLT, their team and the achievement of the many strategic initiatives. 57 4. Executive KMP Remuneration Outcomes 4.1 Corporate performance In considering the Company’s short and long-term incentive payments, regard is had to the following measures which reflect Australian Ethical’s performance across a range of metrics over the last five years: FUM at year end ($ billion) Net inflows ($ billion) – organic growth Net inflows ($ billion) – M&A Operating Revenues ($’000) 2019 2020 2021 2022 2023 3.42 0.33 - 4.05 0.66 - 6.07 1.03 - 6.20 0.94 - 9.20 0.47 1.93 40,977 49,902 59,110 70,784 81,096 Performance fees ($’000) included above 769 3,640 2,895 375 Underlying Profit After Tax (UPAT) ($’000)2 Net Profit After Tax attributable to shareholders ($’000) UPAT excluding performance fees NPAT excluding performance fees Diluted Earnings Per Share (cents per share) 6,540 6,465 6,024 5,949 5.84 9,279 9,457 7,028 7,206 8.42 11,052 10,284 11,261 9,597 9,167 9,377 10.02 10,044 9,356 8.55 - 11,789 6,576 11,789 6,576 5.84 Diluted EPS growth excl performance fees (3 years) 25.3% 36.4% 23.2% 16.2% (3.2%) Dividends (cents per share, restated for share split) Special performance fee dividend (cents per share)3 Staff engagement scores 5.00 - 71% 5.00 1.00 86% 7.00 1.00 82% 6.00 - 79% 7.00 - 70% 2 Underlying Profit After Tax is a non-IFRS measure and is not audited 3 The Special performance fee dividend is linked to the performance fee achieved on the Emerging Companies Fund outperformance in FY20 and FY21. 4.2 Weighting of remuneration components The following are the weightings of the various components of target remuneration for the CEO, CIO and all other KMP. Target remuneration is the remuneration that KMP expect to be paid if all of their strategic initiatives are achieved. Target Remuneration includes ELTI performance rights granted on 1 December 2022. The ELTI performance hurdles will be assessed at the end of 2026 and will only then be awarded if the performance hurdles are achieved. Opportunity for stretch targets and additional remuneration are available under certain conditions and these are outlined in the ELTI section below. Target Remuneration by Component CEO CIO 43% 44% 16% 16% 4% 21% 23% 10% 4% 18% Other KMPs 61% 14% 6% 19% 0% 20% 40% 60% 80% 100% Fixed Remuneration STI Deferred STI ESP ELTI 58 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023STI bonus The below table shows for each KMP how much of their STI bonus was awarded, in relation to the maximum incentive pay they were entitled to. The percentages equate to the ratio of bonus components against fixed salary. Deferred shares vest a third per year over 3 years. The KMP bonuses are subject to Board approval and all other bonuses subject to CEO discretion, minimum is 0%. Total STI Bonus (Cash and Deferred Shares) Name J McMurdo M Enander K Hughes M Loyez D Macri (dep 31 Dec 2022) E Moos R Piper2 M Simons L Theau3 Opportunity as a % of Fixed Remuneration Target Opportunity Target % Max % 75% 25% 15% 25% 75% 25% 25% 25% 75% 150% 50% 30% 50% 150% 50% 50% 50% 150% $ 393,750 92,500 47,250 95,000 333,100 80,364 64,163 105,000 - Maximum Opportunity as % of Fixed Remuneration (2 x Target) Achieved as % of Maximum Opportunity1 Awarded $ $ 787,500 570,000 185,000 94,500 92,500 70,000 190,000 100,000 666,200 160,727 128,325 - 86,000 70,000 210,000 170,000 - - % 72% 50% 74% 53% - 54% 55% 81% - 1 Forfeiture %, in accordance with Corporations Regulation 2001 – Reg 2M.3.03 clause 12(f), is calculated as 100% less the Achieved % 2 Target Opportunity for R Piper is adjusted to reflect the time employed with Australian Ethical. 3 L Theau is not yet eligible for STI bonus in FY23 due to his start date. ESP Vesting In considering the vesting of the Employee Share Plan, the Board advises that in strategically positioning the business to capture accretive growth for stakeholders, it agreed a business plan with management for FY23 that prioritised growth in funds under management and revenue, above current year profit. This was substantially (but not only) to achieve the transformational opportunity presented for the business in completing the Christian Super successor fund transfer. In the 3-year vesting period for the current employee share plan tranche, the Board was delighted to have observed 3-year FUM growth of 127% (32% CAGR) and 3-year revenue growth of 63% (18% CAGR). Both of these key measures materially exceeding a 10% CAGR. FUM growth in FY23 alone was 48%. The NPAT and UPAT targets set by the Board for FY23 were exceeded, as per the balanced scorecard detailed above. Further, after running a highly successful integration of the Christian Super transaction, second half underlying profit was $6.8m ($13.6m annualised) - materially above the implied 10% 3-year compound annual growth in diluted earnings per share (pre-performance fees), required for the employee share plan to vest. On this basis, and also noting the increase in second half dividend approved by the Board given the significant uplift in earnings post the Christian Super SFT, the board has exercised its discretion to fully vest the current tranche of the Employee Share Plan. 59 ELTI - Performance Rights Rights to ordinary shares under the Executive LTI program are granted each year on 1 December, with the first grant in 2021. The number of performance rights allocated to each KMP was determined using an allocation price based on the 60-day variable weighted average price following the annual results announcement in August. On vesting, each right automatically converts into one ordinary share. The fair value of the Performance Rights was determined based on the market price of the company’s shares at the grant date, with an adjustment made for dividends foregone during that period. Granted 1 December 2021 Granted 1 December 2022 Allocation Price Fair Value Price $10.34 $5.29 $13.54 $4.54 The table below shows the number of rights granted on 1 December 2021 and the grant value of those rights based on the assumption that the first performance hurdle of $15bn is achieved (1 times multiplier). For each incremental FUM hurdle of $2.5bn, a multiplier of 2 through to 6 would be applied. The maximum opportunity is 7 times the base number of rights granted, which would only vest if $30bn FUM is achieved along with other KPIs in 2025. Therefore, the maximum fair value of rights would be 7 times the fair value presented in the table below. Refer to Elements of Remuneration table above for detailed vesting requirements. 4% At this time, the performance hurdles for the Performance Rights granted 1 December 2021 have not yet been met. The Board's assessment is that the likelihood of meeting the performance hurdles by the vest date is less likely than more likely given the growth still required to achieve the threshold, ongoing uncertainty around the outlook for world economies, and on the basis organic growth only can be assumed. Accordingly, the fair value of these rights has been written down to nil. This probability assessment does not change the ambitious growth that is still being targeted including both organic and inorganic growth. Should the assessment be probable at a future date, then this write-back will be revisited. Statutory expense in the ‘Remuneration Outcomes – Statutory Basis’ table below includes the impact of the write-back. Granted 1 December 2021 Granted as % of Fixed Remuneration J McMurdo M Enander K Hughes M Loyez D Macri (departed 31 Dec 2022) R Piper M Simons 50% 40% 10% 40% 40% 25% 40% Potential Multiplier 1 to 7 times 1 to 7 times 1 to 7 times 1 to 7 times 1 to 7 times 1 to 7 times 1 to 7 times No. of Rights Granted (based on 1 times multiplier) Grant Value of Rights (based on 1 times multiplier) Fair Value of Rights 24,178 13,540 2,901 13,926 16,248 10,517 15,474 $327,369 $183,327 $39,284 $188,565 $219,992 $142,406 $209,516 - - - - - - - Performance rights granted on 1 December 2021 to David Macri were forfeited upon resignation and the statutory expense reversed. The table below shows the number of rights granted on 1 December 2022 and the grant value of those rights. Board's assessment is that it is probable that the performance hurdles for this tranche will be achieved. The multiplier mechanism does not apply to the ELTI tranche vesting 1 September 2026. 60 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023Granted 1 December 2022 Granted as % of Fixed Remuneration No. of Rights Granted Fair Value of Rights J McMurdo M Enander K Hughes M Loyez E Moos R Piper M Simons L Theau (commenced 3 April 2023, after grant date) 50% 40% 10% 40% 10% 40% 40% - 49,622 27,977 5,955 28,733 6,077 32,892 31,758 - $225,284 $127,017 $27,034 $130,450 $27,588 $149,331 $144,181 - The following two tables set out Executive KMP remuneration. • The table ‘Executive KMP Remuneration Outcomes – Statutory Basis’ is aligned to the way the Company expenses (accrues) the remuneration of the senior team under the accounting standards and the Corporations Act. • The table ‘Executive KMP 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 2023. The movement in the Executive KMP remuneration outcomes (statutory basis) between FY22 and FY23 is due to: • CEO – The increase is attributable to an increase in salary in line with industry benchmarking and performance-based bonuses. • Other KMP: – Increase in individual salaries in line with responsibilities and industry benchmarking to ensure reward remains competitive and fair. – Whilst changes in STI is based on individual performance, bonuses in general were more modest in the current year. • Performance rights (ELTI) expense reflects the write-back of the rights granted on 1 December 2021 to reflect the probability of the rights achieving the performance hurdles. This write-back was offset by the expense relating to additional ELTI granted on 1 December 2022. • New Chief Executive Superannuation (‘CES’) commenced in November 2022, and new Chief Investment Officer (‘CIO’) commenced in April 2023. Amounts disclosed for these roles reflect the period of time employed. • The KMP group was redefined on 1 July 2023 at which time the General Counsel and the Head of Ethics were no longer part of the KMP. 61 m e R e b a l i r a V l a t o T f o % a s a n o i t a r e n u m e R n o i t a r e n u m e R $ d e x i F f o % a s a I T S l a t o T $ $ – I T L – I T L 4 s t h g R i 3 y t i u q E $ – I T S 2 y t i u q E $ $ $ i e c v r e S n o i t a n m r e T i - r e p u S e v a e L s t fi e n e B n o i t a u n n a $ – I T S 1 h s a C $ y r a l a S s t fi e n e B m r e T g n o L d e r r e f e D 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 m r e T t r o h S s t fi e n e B 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 u r c c a ( 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 n e m e r i u q e r . s I P K d e e r g a r e h t o d n a d r a c e r o c s d e c n a a b e h t l 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 P M K e v i t u c e x e 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 P M K e v i t u c e x E 62 % 6 5 5 . % 7 9 2 . % 8 3 2 . % 5 7 2 . % 7 2 2 . % 0 9 1 . % 0 3 3 . - % 8 2 1 . % 6 2 3 . % 6 5 5 . % 4 3 3 . % 4 6 2 . % 6 . 1 3 - % 8 5 2 . % 7 4 3 . - % 8 2 4 . % 7 0 1 . % 7 . 3 3 - - . % 2 3 0 1 % 7 . 1 3 % 4 2 2 . % 2 8 2 . % 8 6 2 . % 1 . 7 2 % 0 0 4 . , 7 8 3 7 4 1 , 1 9 7 6 8 7 4 , 0 6 1 , 0 2 4 0 2 0 4 1 5 , 6 7 3 , 1 3 4 1 7 9 0 8 , 9 9 4 8 6 3 , 4 5 0 2 2 6 , - - ) 5 1 3 , 1 2 ( ) 7 5 7 , 1 1 ( ) 8 5 5 2 ( , ) 4 3 1 , 2 1 ( 0 6 7 5 , 9 7 1 , 1 3 - 9 3 7 9 9 , 0 0 0 4 3 , 0 0 0 0 3 , 6 0 9 4 3 , 7 7 9 , 1 1 - - - 0 5 2 6 , 5 2 6 5 1 , 4 0 0 3 5 2 , ) 1 4 6 3 1 ( , 7 6 6 8 3 , 7 6 6 6 6 , - - % 6 8 3 . 6 7 3 , 4 0 4 , 4 ) 8 9 3 0 7 ( , 3 3 8 , 2 9 2 6 4 5 , 1 4 3 % 4 7 5 . % 2 9 2 . % 1 . 4 2 % 1 . 8 2 - % 7 0 2 . % 5 5 2 . - - % 0 3 3 . % 8 . 5 2 3 8 1 , 6 2 1 , 1 3 2 0 6 2 5 , 7 6 2 4 1 4 , , 0 1 8 0 3 5 2 5 4 3 3 , , 2 6 6 6 5 4 0 6 1 , 9 1 6 5 0 6 , 1 3 3 , 7 5 5 3 6 7 9 2 1 , 7 3 3 2 5 3 8 6 , 7 7 2 8 3 , 2 0 2 8 , 1 7 3 9 3 , - 5 4 0 8 1 , 5 4 7 3 4 , - 9 2 9 7 , 2 3 9 5 4 , - 9 3 2 2 8 , 7 6 6 , 1 2 0 0 0 9 2 , 0 4 2 2 2 , 7 6 6 , 1 3 0 0 0 6 3 , ) 2 8 6 , 1 4 ( 4 5 7 7 2 1 , 0 0 0 8 2 , - 0 5 2 6 , 4 2 6 5 1 , , 1 8 4 4 9 1 - - - - 1 1 3 6 1 , 0 0 0 5 3 , 8 4 8 , 8 3 1 , 5 , 3 5 8 9 6 2 3 8 8 6 3 3 , 6 6 6 , 7 6 2 9 2 2 , 1 4 3 ) 2 3 9 5 4 ( , 3 4 5 3 4 , 7 4 7 9 , 5 5 3 7 , 1 9 9 9 , 8 5 0 8 , 4 8 1 , 6 1 5 5 8 , 4 5 5 , 1 3 9 3 3 1 , 9 8 7 7 , 1 2 6 2 7 , 1 6 7 9 , 5 5 5 7 , 4 9 3 6 , 7 4 4 7 , 1 3 6 9 0 0 , 1 1 8 1 0 3 1 , ) 8 7 4 5 1 ( , 3 5 7 3 2 , 0 7 5 2 1 , 0 6 6 6 7 , - - - - - - - - - - - - - - - - - - - - - 0 0 5 7 2 , 0 0 5 7 2 , 2 9 2 5 2 , 0 0 5 7 2 , 0 0 5 7 2 , 9 8 5 4 2 , 0 0 5 7 2 , 3 2 3 6 , 0 0 5 7 2 , 5 0 2 , 1 2 2 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 4 8 9 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 7 9 0 5 1 2 , - - 5 0 0 0 5 8 2 , 0 0 5 2 9 , 0 0 0 0 7 , 0 0 0 6 8 , 0 0 0 0 7 , 0 0 0 0 0 1 , 0 0 0 0 0 1 , , 2 1 7 3 9 4 5 5 4 3 1 3 , 5 3 4 7 8 2 , 9 3 4 9 4 3 , 5 5 9 3 9 2 , 0 8 1 , 4 3 2 , 0 7 4 9 8 3 4 9 0 3 7 , , 9 2 3 8 0 3 ) 2 2 0 2 v o N 5 2 d e c n e m m o c ( s o o M E r e p P R i ) 3 2 0 2 l i r p A 3 d e c n e m m o c ( u a e h T L ) 2 2 0 2 c e D 1 3 d e t r a p e d ( i r c a M D s n o m S M i i m a e t p h s r e d a e l t n e r r u C r a e y l i a c n a n fi 3 2 0 2 e m a N o d r u M c M J r e d n a n E M s e h g u H K z e y o L M 0 0 5 , 3 0 8 , 1 7 0 3 4 7 , 2 3 2 0 2 l a t o T 5 0 5 2 , 1 8 2 0 0 0 0 0 1 , 0 0 0 2 7 , 0 0 0 0 0 1 , - 0 0 0 8 6 , 0 0 0 0 0 1 , - - 0 0 5 6 3 1 , , 2 3 5 6 6 4 2 3 3 9 1 3 , 3 0 1 , 5 7 2 4 3 9 , 1 3 3 7 3 8 9 2 , , 3 7 3 4 0 3 9 2 8 7 6 3 , 7 9 1 , 5 6 3 , 9 3 7 9 8 3 2 6 0 5 6 2 , ) 2 2 0 2 y a M 8 1 d e c n e m m o c ( s o o M E s n o m S M i l r e m a P S ) 2 2 0 2 e n u J 1 2 d e t r a p e d ( g n e H K i r c a M D y a M T i m a e t p h s r e d a e l t n e r r u C r a e y l i a c n a n fi 2 2 0 2 o d r u M c M J r e d n a n E M s e h g u H K z e y o L M 0 5 7 , 7 5 8 , 8 3 9 4 1 1 , 3 2 2 0 2 l a t o T d e v o r p p a e r e w s t n u o m a 3 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 . ) s t n e m e r i u q e r l f a r r e e d r e h t o e v a h o h w O C d n a O E C e h t I f o n o i t p e c x e h t i w ( s e r a h s d e r r e e d n f i i d a p s i , 0 0 0 0 0 1 $ f o s s e c x e n i I T S . d r a o B e h t y b s i s e r a h s f o t s o c e h T . s t n a r g 2 2 Y F d n a 1 2 Y F e h t n i s e r a h s d e r r e e d f f o t c a p m i 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 3 2 0 2 r o f e s n e p x e ) ’ I T S D ‘ ( e v i t n e c n i m r e t - t r o h S d e r r e e D e h T f . s r a e y 3 o t 1 m o r f i s e g n a r h c h w d o i r e p g n i t s e v e h t i r e v o s s a b e n i i l - t h g a r t s a n o d e s n e p x e d n a t n a r g f o e m i t e h t t a d e x fi g n i t s e v e h t f o d n e e h t i t a 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 s e r a h s f o t s o c e h T . l n a P e r a h S e e y o p m E e h t l r e d n u s t n a r g 2 2 Y F d n a 1 2 Y F , 0 2 Y F e h t f o h c a e f o t c a p m i e s n e p x e 3 2 0 2 t n a v e e r e h t s e d u c n l l i 3 2 0 2 r o f e s n e p x e ) ’ P S E ‘ ( e v i t n e c n i m r e t - g n o L e h T . 3 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 0 2 Y F e h T . d o i r e p . 4 5 3 1 $ f o e c i r p t n a r g e h t n o d e s a b , 2 2 Y F d n a 1 2 Y F n i d e t n a r g ) ’ I T L E ‘ ( I T L e v i t u c e x E e h t f o t c a p m i 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 e s n e p x e s t h g i r e v i t n e c n i m r e t - g n o L e h T i d a p s i d r a w a s h t i f o % 0 5 . 3 2 0 2 e n u J 0 3 t a I T S t e g r a t s h s e m i i t 2 s i e v i t n e c n i i m u m x a m e h T . d r a o B e h t y b e v i t n e c n i i m u m x a m s h i f o ) % 5 7 : 2 2 0 2 ( % 2 7 d e d r a w a s a w O E C e h T . 4 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 i i % 0 5 g n n a m e r e h t i d n a h s a c n i . l i l n s a d e s s e s s a s a w s e d r u h e c n a m r o f r e p e h t i g n v e h c a f i o y t i l i b a b o r p e h t s a k c a b n e t t i r w s a w t n a r g 1 2 Y F e h t o t l g n i t a e r e s n e p x e e t a d - o t - e f i l e h T . l y e v i t c e p s e r 4 5 4 $ d n a . . 1 . 2 . 3 . 4 . 5 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023 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 P M K e v i t u c e x E % d e t a l e R e c n a m r o f r e P $ l a t o T - - % 3 . 1 3 % 3 2 2 . % 7 2 3 . % 6 0 2 . - % 8 0 3 . % 4 5 6 . % 0 2 3 . % 9 4 3 . % 9 3 2 . % 0 8 4 . % 6 . 1 2 - % 7 5 4 . % 3 8 4 . % 6 2 2 . % 4 3 7 . % 8 3 4 . , 2 3 4 9 9 8 , 8 7 0 9 4 4 2 8 7 , 1 8 4 , 1 1 7 5 8 4 , 4 7 7 7 2 3 , 3 6 7 0 0 3 , 1 5 0 6 2 6 1 7 9 0 8 , , 5 2 5 2 0 0 , 1 , 9 8 0 4 5 6 4 , 5 4 0 6 7 7 , 2 9 0 , 1 6 4 6 4 8 9 8 5 , , 1 0 6 3 6 4 2 5 4 3 3 , 8 8 9 7 2 6 , 7 6 5 5 8 7 , , 7 9 6 5 8 4 8 3 1 , 9 3 5 , 3 3 2 8 6 6 , 1 $ - - - - - 6 3 5 5 8 , - 3 2 9 2 9 , , 1 1 4 8 9 4 , 0 7 8 6 7 6 - - - - 5 2 1 , 5 2 2 - 7 3 2 7 2 2 , 3 6 1 , 9 4 2 , 1 8 9 8 9 8 , 1 4 3 6 9 1 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 , 8 5 6 0 3 4 , 6 , 7 4 8 6 9 7 , 1 i e c v r e S g n o L n o i t a n m r e T i - r e p u S $ e v a e L $ s t fi e n e B $ $ 1 n o i t a u n n a y t i u q E $ h s a C s u n o B $ 1 y r a l a S 7 4 7 9 , 5 5 3 7 , 1 9 9 9 , 8 5 0 8 , 4 8 1 , 6 4 9 9 , 1 4 3 9 3 3 1 , 4 5 5 , 1 9 8 7 7 , 4 6 0 6 0 1 , 1 6 7 9 , 5 5 5 7 , 4 9 3 6 , 7 4 4 7 , 1 3 6 9 0 0 , 1 1 8 1 0 3 1 , ) 8 7 4 5 1 ( , 3 5 7 3 2 , 0 7 5 2 1 , 0 6 6 6 7 , - - - - - - - - - - - - - - - - - - - - - 0 0 5 7 2 , 0 0 5 7 2 , 2 9 2 5 2 , 0 0 5 7 2 , 0 0 5 7 2 , 9 8 5 4 2 , 0 0 5 7 2 , 3 2 3 6 , 0 0 5 7 2 , - - - - - - - - 8 3 6 , 1 8 4 0 2 , 1 2 2 8 6 3 , 1 8 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 4 8 9 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , 8 6 5 3 2 , - - - - - - - - - 6 5 7 , 1 5 0 5 2 , 1 8 2 0 0 0 0 0 1 , 0 0 0 2 7 , 0 0 0 0 0 1 , - - 0 0 0 0 0 1 , - 0 0 5 7 5 1 , 0 5 7 , 0 1 8 - 0 0 3 9 1 2 , 0 0 0 0 1 1 , 0 0 0 8 5 , 0 0 0 0 0 1 , 0 0 0 0 6 , 0 0 0 0 3 1 , 0 0 0 0 1 1 , 0 0 0 0 4 , 0 0 0 5 2 3 , , 7 9 2 9 9 4 3 2 2 4 1 3 , 3 6 9 8 8 2 , 3 5 1 , 0 5 3 , 1 9 0 4 9 2 0 8 1 , 4 3 2 , 5 3 2 2 9 3 4 9 0 3 7 , 6 2 3 , 1 1 3 2 6 5 , 7 5 7 , 2 0 6 6 , 1 7 4 8 6 9 9 1 3 , , 9 5 7 6 7 2 , 7 8 5 2 3 3 7 3 8 9 2 , 4 7 1 , 6 0 3 , 7 1 8 9 6 3 7 0 6 7 6 3 , , 0 3 9 6 9 3 0 6 6 6 6 2 , 6 9 0 5 1 2 , 6 5 7 , 1 5 0 0 3 , 2 5 1 , 1 9 9 9 , 7 3 1 , 3 s t fi e n e B m r e T g n o L s t fi e n e B t n e m y o p m E - t s o P l s t fi e n e B m r e T t r o h S . l s n a p e r a h s e e y o p m e e h t l 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 i m a e t p h s r e d a e l t n e r r u C r a e y l i a c n a n fi 3 2 0 2 e m a N o d r u M c M J r e d n a n E M s e h g u H K z e y o L M s o o M E ) 2 2 0 2 v o N 5 2 d e c n e m m o c ( r e p P R i s n o m S M i ) 3 2 0 2 l i r p A 3 d e c n e m m o c ( u a e h T L ) 2 2 0 2 c e D 1 3 d e t r a p e d ( i r c a M D 3 2 0 2 l a t o T i m a e t p h s r e d a e l t n e r r u C r a e y l i a c n a n fi 2 2 0 2 ) 2 2 0 2 y a M 8 1 d e c n e m m o c ( s o o M E ) 2 2 0 2 e n u J 1 2 d e t r a p e d ( g n e H K s n o m S M i l r e m a P S o d r u M c M J r e d n a n E M s e h g u H K z e y o L M i – n o i t a r e n u m e r d e x F i 2 2 0 2 l a t o T i r c a M D y a M T . 1 . 2 r e b m e t p e S n i l d e t n a r g s e r a h s n a p e r a h s e e y o p m e o l 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 s t n e s e r p e r 3 2 0 2 y t i u q E – s e v i t n e c n i m r e t g n o L . ) 5 1 . 2 $ s a w t n a r g t a e c i r p . ( 5 4 6 $ 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 . 9 1 0 2 r e b m e t p e S n i l d e t n a r g s e r a h s n a p e r a h s e e y o p m e o l 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 s t n e s e r p e r 2 2 0 2 y t i u q E – s e v i t n e c n i m r e t g n o L . 3 . ) 2 3 . 1 $ s a w t n a r g t a e c i r p ( . 7 9 9 $ 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 . 8 1 0 2 63 . 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 3 2 0 2 e n u J 0 3 l d o s t a e c n a l a B f o . o N s e r a h s f o . o N s e r a h s d e t s e v f o . o N f o . o N e r a h S d e t i e f r o f d e t n a r g 2 2 0 2 y u J 1 l e t a D t n a r G e t a D s t h g i r / s e r a h s s t h g i r / s e r a h s t a e c n a l a B t a e c i r P g n i t s e V t n a r G e t a D . l l w o e b e b a t e h t n i d e n i l t u o s i s e i t r a p d e t a e r l r i e h t i g n d u c n l i , n o s r e p t n e m e g a n a m y e k o d r u M c M J e m a N - 2 0 6 8 4 , - 9 5 4 7 , 1 6 5 2 1 , 2 2 7 7 1 , 2 2 7 7 1 , 6 4 6 7 2 , 5 4 8 7 1 , 8 7 1 , 4 2 2 2 6 9 4 , 7 5 3 , 3 2 2 0 2 6 6 , 1 7 5 3 , 4 9 9 6 , 7 0 9 5 , 0 4 5 3 1 , 7 7 9 7 2 , 9 0 6 4 6 , - 9 8 2 6 , 1 6 0 3 , 5 5 9 5 , 5 3 8 8 1 , 1 0 9 2 , 5 5 9 5 , 6 6 9 , 2 4 - - - - - - - - - - - - - - - - - - - - - - - - - - - - ) 3 9 1 , 5 ( ) 9 5 4 7 ( , - - - - - 2 5 6 2 1 , - - - - - - - - - - ) 6 5 2 3 1 ( , - - - - - - 6 5 2 3 1 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 2 7 7 1 , 2 2 7 7 1 , 6 4 6 7 2 , 2 2 6 9 4 , 2 1 7 , 2 1 1 - - - 4 9 9 6 , 7 0 9 5 , 7 7 9 7 2 , 8 7 8 0 4 , - - - - - 5 5 9 5 , 5 5 9 5 , 0 1 9 , 1 1 - - - 3 9 1 , 5 2 0 6 8 4 , 9 5 4 7 , 9 5 4 7 , 1 6 5 2 1 , - 3 9 1 , 5 8 7 1 , 4 2 5 4 6 0 1 1 , - - 0 2 6 6 , 1 7 5 3 , 0 4 5 3 1 , - 1 3 7 , 3 2 6 5 2 3 1 , 9 8 2 6 , 1 6 0 3 , - - 9 7 5 5 , 1 0 9 2 , 6 8 0 , 1 3 3 5 4 . 3 5 4 . 0 8 9 . 0 8 9 . 0 8 9 . 9 2 5 . 9 2 5 . 9 2 5 . 4 3 0 1 . 9 2 5 . 3 5 4 . 0 8 9 . 9 2 5 . 9 2 5 . 4 3 0 1 . 9 2 5 . 5 1 . 2 3 5 4 . 0 8 9 . 9 2 5 . 4 3 0 1 . 9 2 5 . 2 2 - p e S - 1 0 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U 3 2 - p e S - 1 0 2 - p e S - 1 P S E & s e r a h s I f T S d e r r e e D d e t s e v n U 2 2 - p e S - 1 1 2 - p e S - 1 3 2 - p e S - 1 1 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s I f T S d e r r e e D d e t s e v n U 4 2 - p e S - 1 1 2 - p e S - 1 P S E & s e r a h s I f T S d e r r e e D d e t s e v n U 3 2 - p e S - 1 2 2 - p e S - 1 4 2 - p e S - 1 2 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s I f T S d e r r e e D d e t s e v n U 5 2 - p e S - 1 2 2 - p e S - 1 P S E & s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s y r a n d r O i 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U 3 2 - p e S - 1 0 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 2 2 - p e S - 1 9 1 - p e S - 1 3 2 - p e S - 1 0 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U r e d n a n E M l a t o T s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s y r a n d r O i s e h g u H K l a t o T 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U l a t o T h c a e y b , y l l i a c fi e n e b r o , y l t c e r i d d e h l , y n a p m o C e h t n i i s e r a h s y r a n d r o d n a s e r a h s d e t s e v n u f o r e b m u n e h t n 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 t n e m e v o m e h T i s e r a h S y r a n d r O d n a d e t s e v n U 64 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023       3 2 0 2 e n u J 0 3 l d o s t a e c n a l a B f o . o N s e r a h s f o . o N s e r a h s d e t s e v f o . o N f o . o N e r a h S d e t i e f r o f d e t n a r g 2 2 0 2 y u J 1 l e t a D t n a r G e t a D s t h g i r / s e r a h s s t h g i r / s e r a h s t a e c n a l a B t a e c i r P g n i t s e V t n a r G e t a D 5 6 4 , 1 2 ) 8 1 7 , 1 1 2 ( 9 7 7 6 , 3 7 6 3 , 3 8 1 , 7 3 6 3 2 , 6 2 9 3 1 , 3 3 7 8 2 , 7 5 6 2 6 , - - - - - - - 5 6 4 , 1 2 3 9 7 6 , 7 7 0 6 , 0 7 8 , 2 1 7 1 5 0 1 , 2 9 8 2 3 , 9 0 4 3 4 , - 3 0 5 7 , 2 8 0 4 , 0 4 9 7 , 2 5 4 9 , 1 7 6 5 , 0 0 0 0 4 , 4 7 4 5 1 , 8 5 7 , 1 3 0 8 8 , 1 2 1 - - - - - - - - - - - - - - - - - - - - ) 6 1 6 ( ) 6 1 6 ( ) 5 1 6 ( ) 8 9 8 6 5 ( , ) 6 9 4 2 2 ( , ) 7 7 0 7 ( , ) 8 1 7 , 1 1 2 ( 8 1 3 8 8 , - - - - - - - - - - - - - - - - - - - - - - - - - - ) 4 1 8 5 1 ( , - - - - - - ) 4 1 8 5 1 ( , 4 1 8 5 1 , - - - - - - - ) 9 9 4 4 ( , ) 6 6 0 7 ( , ) 8 4 2 6 1 ( , ) 3 1 8 , 7 2 ( - - - - - - - - - - - - - - - - - - - 3 8 1 , 7 3 6 3 2 , 3 3 7 8 2 , 9 7 2 , 8 3 - - - - - - - - - 3 9 7 6 , 7 7 0 6 , 0 7 8 , 2 1 7 1 5 0 1 , 2 9 8 2 3 , 9 0 4 3 4 , - - - - - 0 4 9 7 , 2 5 4 9 , 1 7 6 5 , 8 5 7 , 1 3 1 2 8 , 4 5 - - 9 7 7 6 , 3 7 6 3 , - 6 2 9 3 1 , 8 7 3 , 4 2 8 9 8 6 5 , 5 9 9 6 2 , 3 4 1 , 4 1 6 1 6 6 1 6 5 1 6 8 4 2 6 1 , 5 6 8 4 4 1 , 6 9 9 0 6 2 , - - - - - - - - - 4 1 8 5 1 , 3 0 5 7 , 2 8 0 4 , 4 7 4 5 1 , 0 0 0 0 4 , - 3 7 8 , 2 8 3 5 4 . 0 8 9 . 9 2 5 . 9 2 5 . 4 3 0 1 . 9 2 5 . 5 1 . 2 3 5 4 . 0 8 9 . 0 8 9 . 0 8 9 . 0 8 9 . 3 2 - p e S - 1 0 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 2 2 - p e S - 1 9 1 - p e S - 1 3 2 - p e S - 1 0 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 2 2 - p e S - 1 1 2 - p e S - 1 3 2 - p e S - 1 1 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U i r c a M D l a t o T s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s y r a n d r O i s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U z e y o L M e m a N 4 3 0 1 . 5 2 - p e S - 1 1 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U 9 2 5 . 9 2 5 . 4 3 0 1 . 9 2 5 . 5 1 . 2 3 5 4 . 0 8 9 . 9 2 5 . 9 2 5 . 9 2 5 . 4 3 0 1 . 9 2 5 . 5 2 - p e S - 1 2 2 - p e S - 1 6 2 - p e S - 1 2 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U s e r a h s P S E d e t s e v n U s o o M E l a t o T 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U r e p P R i l a t o T 2 2 - p e S - 1 9 1 - p e S - 1 3 2 - p e S - 1 0 2 - p e S - 1 4 2 - p e S - 1 1 2 - p e S - 1 5 2 - p e S - 1 2 2 - p e S - 1 3 2 - p e S - 1 2 2 - p e S - 1 4 2 - p e S - 1 2 2 - p e S - 1 s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s I f T S d e r r e e D d e t s e v n U s e r a h s y r a n d r O i s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s e r a h s P S E d e t s e v n U s n o m S M i l a t o T 5 2 - p e S - 1 1 2 - c e D - 1 6 2 - p e S - 1 2 2 - c e D - 1 s t h g i r e c n a m r o f r e P d e t s e v n U s t h g i r e c n a m r o f r e P d e t s e v n U l a t o T 65       Contract terms All KMP’s, except the Managing Director are permanent employees with a 12-week notice period. The Managing Director & CEO remuneration structure is outlined below: Salary Term Notice period STI LTI Malus Provision No fixed term Fixed salary from 1 September 2023 is $552,000 inclusive of superannuation 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 – 10% of fixed remuneration. The shares are subject to the rules and terms of the Employee Share Plan. Executive LTI – performance rights at 50% of fixed remuneration. Only the ELTI rights granted on 1 December 2021 have a 1 to 7 times multiplier mechanism. 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 The below graph summarises the structure of the variable incentive compensation paid or granted to the CEO in FY23. The graph depicts the combination of short and long term incentives granted and the upcoming vesting dates. Performance Rights (long term) Executive long-term incentives (ELTI), 4-years to vesting and subject to various performance-based hurdles Performance Rights (long term) ELTI, 3-year to vesting and subject to various performance-based hurdles Deferred Shares (long term) Employee share plan (ESP), subject to 3-year CAGR hurdle Deferred Shares (short term) 1/3 subject to 3-year vesting period Deferred Shares (short term) 1/3 subject to 2-year vesting period Deferred Shares (short term) 1/3 subject to 1-year vesting period Performance Year for Variable Incentives y t i u q E h s a C 1 July 2021 30 June 2022 1 Sep 2023 1 Sep 2024 1 Sep 2025 1 Sep 2026 Vesting Dates September September 66 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 20235. Non-Executive Director Arrangements 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 $1,000,000, which was approved at the AGM in October 2021. A review of NEDs’ remuneration is undertaken annually by the Company Board, taking into account recommendations from the PRN. The following table sets out the agreed remuneration for NEDs by position for a full year, with effect from 1 November 2022. NEDs do not receive performance-related pay and are not provided with retirement benefits apart from statutory superannuation. In total, directors’ fees of $804,803 was paid during the year out of the director fee pool approved at the 2021 AGM of $1,000,000. 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 Chair of Australian Ethical Superannuation Ltd does not receive any additional fees for chairing this Board. From 1 November 2022 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 $ 145,559 83,176 27,292 15,596 27,292 15,596 5,199 5,199 – – – – 36,390 36,390 18,195 10,397 – – – – 5,199 5,199 – – – – – – – – – – – – – – 67 7 7 8 5 1 2 , 3 1 5 0 2 , 3 3 3 8 6 1 , 5 9 9 5 1 , 8 3 3 9 5 1 , 1 4 1 , 5 1 9 2 3 2 1 1 , 4 7 6 0 1 , 8 4 8 5 3 , 6 0 4 3 , 8 7 0 3 1 1 , 5 4 7 0 1 , 7 2 2 , 1 2 7 1 0 2 , – – – – – 2 5 6 4 , 2 5 6 4 , 2 5 6 4 , – – 5 7 4 3 , – – – 0 3 0 6 2 8 , 2 9 4 , 8 7 3 0 3 9 , 7 2 1 , 8 6 0 5 , 3 5 , 2 7 7 0 9 1 4 0 3 7 1 , 3 0 0 , 1 5 1 8 2 7 3 1 , 9 4 0 2 3 1 , 5 0 0 2 1 , 3 3 9 8 3 1 , 0 3 6 2 1 , 3 1 5 6 9 , 4 7 7 8 , – – – 1 7 9 3 , 1 7 9 3 , , 0 7 2 9 0 7 1 4 4 , 4 6 2 4 9 , 7 – – 7 5 6 3 , 7 5 6 3 , – 4 1 3 , 7 4 4 0 3 , 4 4 0 3 , 5 3 1 , 2 1 5 7 4 0 2 , 5 3 1 , 2 1 3 3 8 0 5 , $ – – – 5 5 9 3 1 , 6 4 2 8 1 , 1 5 3 7 , 5 5 9 3 1 , $ – – – – – – – – – – – – – – $ – – 8 5 2 3 2 , 1 0 7 0 4 , 8 5 2 3 2 , – 5 5 9 3 1 , 1 7 1 , 1 0 1 5 3 8 0 2 , 2 6 4 6 3 , 1 1 1 , 4 1 3 7 3 8 , 3 3 9 , 1 1 4 1 7 , 1 9 $ e e F 3 0 8 2 6 1 , 5 8 9 6 0 1 , 5 8 9 6 0 1 , 4 3 9 9 7 , 1 9 0 5 2 , 4 2 4 4 7 , 0 1 2 9 1 , 2 3 4 , 5 7 5 1 6 9 , 1 4 1 8 9 7 3 9 , 8 9 7 3 9 , 8 9 7 3 9 , 1 7 6 3 6 , 6 2 0 , 7 8 4 ) 3 2 0 2 r a M 1 3 d e r i t e r ( n a h g a n o M M ) 3 2 0 2 r a M 1 p p a ( h g a l l u C c M S 2 ) 2 2 0 2 c e D 1 p p a ( n o s r e d n A M 1 r r O J e m a N 3 2 0 2 s b b G S i l l i h n e e r G K n û B M l l i h n e e r G K s b b G S i n û B M n a h g a n o M M 1 r r O J l a t o T l a t o T 2 2 0 2 $ l a t o T $ $ $ n o i t a u n n a r e p u S e e t t i m m o C e e t t i m m o C e e t t i m m o C e e t t i m m o C e e t t i m m o C r o f 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 d r a w e r e v i t u c e x E - n o n s e n l i l t u o w o e b e b a t e h T l s t fi e n e B e c n a r u s n I S D P t n e m t s e v n I s n o i t a n m o N & i e c n a i l p m o C d r a o B , l e p o e P n o i t a r e n u m e R & k s i R , t i d u A . 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 . p u o r g d e t a d i l o s n o c e h t f o s r o t c e r i d e h t n o i t a r e n u m e r ’ s r o t c e r i D e v i t u c e x E - n o N 1 . 5 68 . d e t i i m L y t P S E A f o r o t c e r i d a t o n s i e h S . e e t t i m m o c t n e m t s e v n I d n a C C R A , N R P s ’ I E A f o r e b m e m a d n a d e t i i m L I E A f o r o t c e r i d a s i r r O J . 3 2 0 2 h c r a M 1 n o d e t n o p p a i , l y n o S E A f o r o t c e r i d a s i n o s r e d n A M 1 2 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 2023 During the year, the following changes to Boards and committee memberships occurred: • From 1 March 2023 Ms McCullagh was appointed a Director of AEI and a member of the People, Remuneration and Nominations Committee. Prior to this, Ms McCullagh was an independent member of the Investment Committee but was not a director or KMP. Ms McCullagh was paid $34,071 for her role as an Investment Committee member prior to becoming a director of the Company. Ms McCullagh is not a director of AES. • Mr Monaghan resigned his roles as Director of AEI and AES, and Chair of the AEI Investment Committee, with effect from 31 March 2023. • From 1 April 2023 Ms McCullagh was appointed Chair of the AEI Investment Committee. • The Investment Committee also includes Sean Henaghan and Steven Rankine who were appointed on 22 February 2022, and Michael Anderson who was appointed on 1 March 2023. Mr Henaghan and Mr Rankine are not Directors of AEI and are not KMP. Their remuneration is not included in the Director fee pool. Mr Anderson is a Director of Australian Ethical Superannuation but is not a Director of AEI and is not a KMP. His remuneration is not included in the Director fee pool. 5.2 Shares owned by Non-Executive Directors Name Non-Executive Directors M Bûn Purchase date Balance at 1 July 2022 No. of shares purchased No. of shares sold Balance at 30 June 2023 AEF Ordinary shares 13-Nov-17 Total 57,000 57,000 – – – – 57,000 57,000 69 6. Governance 6.1 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 2023 were: • Steve Gibbs (Chair), • Mara Bûn, • Kate Greenhill, • Julie Orr, • Michael Monaghan (departed 31 March 2023), and • Sandra McCullagh (appointed 1 March 2023). The PRN met eight times during the year. Attendance at these meetings is set out in the Directors’ Report. At the PRN’s invitation, the Managing Director and Chief People & Culture Officer 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 engaging remuneration consultants from time to time. However, no remuneration consultants were engaged in FY23. Annually, the PRN assesses the eligibility for vesting of deferred shares. 6.2 CEO and SLT Performance The CEO is responsible for reviewing the performance of KMPs 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 Chair 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 oversight of SLT performance. 6.3 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. 70 Australian Ethical Investment Limited and its Controlled Entities Remuneration Reportfor the year ended 30 June 2023ANNUAL REPORT 20236.4 Hedging Policy Senior executives participating in the Company’s equity-based plans are prohibited from entering into any transaction which would have the effect of hedging or otherwise transferring to any other person the risk of any fluctuation in the value of any unvested entitlement in the Company’s securities. 6.5 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 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 24 August 2023 71 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 2023 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 Jessica Davis Partner Sydney 24 August 2023 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with 56 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. 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. 72 Australian Ethical Investment Limited and its Controlled Entities Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023 Australian Ethical Investment Limited and its Controlled Entities Financial Statements for the year ended 30 June 2023 Statements of comprehensive income For the year ended 30 June 2023 Revenue Operating revenue Expenses Employee benefits Fund related Marketing IT expenses External services Community grants expense Depreciation Other operating expenses Occupancy Finance costs Due diligence & transaction costs Integration costs Total expenses Change in fair value of investment Profit before income tax expense Income tax expense Net Profit for the year Consolidated Parent Note 2023 $’000 2022 $’000 2023 $’000 2022 $’000 5 6 7 8 9 10 11 12 13 14 21 15 16 17 81,096 70,784 69,604 63,167 (27,454) (14,038) (11,694) (3,536) (2,728) (1,116) (1,265) (1,816) (446) (88) – (3,733) (67,914) (2,600) 10,582 (4,006) 6,576 (25,260) (26,938) (24,824) (10,194) (9,094) (3,831) (2,842) (1,580) (1,205) (1,646) (335) (41) (982) – (57,010) – 13,774 (4,263) 9,511 (4,835) (11,694) (3,430) (2,282) (1,099) (1,265) (1,353) (446) (88) – (2,357) (55,787) (2,600) 11,217 (4,196) 7,021 (4,034) (9,094) (3,497) (2,301) (1,509) (1,205) (1,313) (335) (41) (982) – (49,135) – 14,032 (4,085) 9,947 Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain/(Loss) on revaluation of investments 26 Other comprehensive income for the year, net of tax 4 4 3 3 – – – – Total comprehensive income for the year1 6,580 9,514 7,021 9,947 Basic earnings per share Diluted earnings per share 44 44 Cents Cents 5.89 5.84 8.57 8.47 1 Comprehensive income includes the results of The Foundation (refer to Note 46) The above statements of comprehensive income should be read in conjunction with the accompanying notes. 73 Statements of financial position As at 30 June 2023 Assets Current assets Cash and cash equivalents Term deposits Trade and other receivables Prepayments Right-of-use assets Income tax refund due Total current assets Non-current assets Deferred tax Property, plant and equipment Right-of-use assets Term deposit Investments in subsidiary Intercompany loan Financial assets through profit or loss Financial assets through other comprehensive income Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employee benefits Deferred payable on investment Tax payable Lease liabilities Total current liabilities Non-current liabilities Lease liabilities Employee benefits Provisions Deferred tax Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity Consolidated Parent Note 2023 $’000 2022 $’000 2023 $’000 2022 $’000 18 19 20 21 17 17 22 21 23 24 25 26 28 30 29 17 21 21 31 32 17 33 34 27,134 5,600 2,475 1,475 30 – 21,787 5,600 1,737 1,346 626 249 20,498 5,000 5,404 1,080 30 – 19,313 5,000 4,443 1,315 626 249 36,714 31,345 32,012 30,946 3,974 911 2,284 749 – – 2,600 72 10,590 47,304 9,832 6,258 871 605 379 3,338 1,401 46 504 – – 5,200 106 10,595 41,940 8,568 5,997 1,300 – 787 3,450 911 2,284 749 316 240 3,207 1,401 46 504 316 – 2,600 5,200 1 10,551 42,563 5,821 6,214 871 605 379 1 10,675 41,621 9,403 5,954 1,300 – 787 17,945 16,652 13,890 17,444 1,823 444 324 14 2,605 20,550 26,754 10,515 2,301 13,938 26,754 47 284 258 34 623 17,275 24,665 8,969 2,706 12,990 24,665 1,823 428 324 14 2,589 16,479 26,084 10,515 2,293 13,276 26,084 47 284 258 34 623 18,067 23,554 8,969 2,702 11,883 23,554 The above statements of financial position should be read in conjunction with the accompanying notes. 74 Australian Ethical Investment Limited and its Controlled Entities Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023Issued capital $’000 Share-based payment reserve $’000 FVOCI1 reserve $’000 Retained profits $’000 Total equity $’000 Note 33 Note 34 Note 34 10,676 1,033 Transactions with owners in their capacity as owners: Statements of changes in equity FOR THE YEAR ENDED 30 JUNE 2023 Consolidated Balance at 1 July 2021 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Dividends provided for or paid Shares vested under deferred shares plan during the year Employee deferred shares & rights Employee share plan – shares purchased on-market Revaluation of investments Balance at 30 June 2022 Consolidated Balance at 1 July 2022 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Dividends provided for or paid Shares vested under deferred shares plan during the year Employee deferred shares & rights Employee share plan – shares purchased on-market Revaluation of investments Balance at 30 June 2023 Transactions with owners in their capacity as owners: – – – – – – – – 985 – (2,692) – 8,969 1,895 – (349) – 10,515 – – – – (985) 2,654 – – 2,702 – – – – (1,895) 1,486 – – 2,293 Issued capital $’000 Share-based payment reserve $’000 FVOCI1 reserve $’000 Retained profits $’000 Total equity $’000 Note 33 Note 34 Note 34 8,969 2,702 1 – – – – – – – 3 4 12,470 9,511 24,180 9,511 3 3 9,514 9,514 (8,991) (8,991) – – – (3) – 2,654 (2,692) – 12,990 24,665 4 – – – – – – – 4 8 12,990 6,576 24,665 6,576 4 4 6,580 6,580 (5,628) (5,628) – – – (4) – 1,486 (349) – 13,938 26,754 1 Fair value through other comprehensive income (FVOCI) The above statements of changes in equity should be read in conjunction with the accompanying notes. 75 Statements of changes in equity FOR THE YEAR ENDED 30 JUNE 2023 Parent Balance at 1 July 2021 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 deferred shares & rights Employee share plan – shares purchased on-market Balance at 30 June 2022 Parent Balance at 1 July 2022 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 deferred shares & rights Employee share plan – shares purchased on-market Balance at 30 June 2023 Share- based payment reserve $’000 Issued capital $’000 Note 33 Note 34 10,676 1,033 – – – – 985 – (2,692) 8,969 Issued capital $’000 – – – – (985) 2,654 – 2,702 Share- based payment reserve $’000 Note 33 Note 34 8,969 2,702 – – – – – – – – 1,895 (1,895) – (349) 10,515 1,486 – 2,293 Retained profits $’000 Total equity $’000 10,927 9,947 – 9,947 22,636 9,947 – 9,947 (8,991) (8,991) – – – 11,883 – 2,654 (2,692) 23,554 Retained profits $’000 Total equity $’000 11,883 7,021 – 7,021 23,554 7,021 – 7,021 (5,628) (5,628) – – – – 1,486 (349) 13,276 26,084 The above statements of changes in equity should be read in conjunction with the accompanying notes. 76 Australian Ethical Investment Limited and its Controlled Entities Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023Statements of cash flows FOR THE YEAR ENDED 30 JUNE 2023 Consolidated Parent Note 2023 $’000 2022 $’000 2023 $’000 2022 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Community grants paid Income taxes paid Net cash from operating activities 43 Cash flows from investing activities Payments relating to Christian Super SFT integration Payments for investment in Sentient Impact Group Purchase of bank guarantee Payments for property, plant and equipment 22 Proceeds from sale of investment property held for sale Return on investment in SVA unit trusts Dividends received from subsidiary Net cash from investing activities 79,668 (57,973) 21,695 728 (1,607) (4,612) 16,204 73,201 (50,731) 22,470 51 (1,425) (4,934) 16,162 68,087 61,002 (54,687) (40,946) 13,400 20,056 574 (1,509) (1,210) 11,255 42 (1,519) (1,550) 17,029 (3,233) – (1,857) – (429) (245) (203) – 39 – (3,900) – (764) 504 36 – (429) (245) (203) – – – (3,900) – (764) 504 – 765 (4,071) (4,124) (2,734) (3,395) Cash flows from financing activities Purchase of employee’s deferred shares Dividends paid Payments on lease liabilities Loan to subsidiary entity - AES 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 35 21 27 (349) (5,627) (810) – (6,786) 5,347 (2,692) (8,991) (781) – (12,464) (426) (349) (5,627) (810) (550) (7,336) 1,185 (2,692) (8,991) (781) – (12,464) 1,170 21,787 22,213 19,313 18,143 18 27,134 21,787 20,498 19,313 The above statements of cash flows should be read in conjunction with the accompanying notes. 77 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’) consisting of Australian Ethical Investment Limited (referred to hereafter as ‘Australian Ethical’, the ‘Company’ or ‘Parent’ entity), Australian Ethical Superannuation Pty Limited (‘AES’) and Australian Ethical Foundation Limited (the ‘Foundation’), 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 24 August 2023. 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 Australian Securities and Investments Commission Corporations (Parent Entity Financial Statements) Instrument 2021/195. 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 2023 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. 78 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023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. 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. The adoption of these new standards did not have an impact on the financial statements. These include: • Onerous Contracts – Cost of Fulfilling a Contract – Amendments to IAS 37 • Annual improvements to IFRS Standards 2018-2020 • Property, Plant & Equipment: Proceeds before Intended Use – Amendments to IAS 16 • Reference to the Conceptual Framework – Amendments to IFRS 3 • Classification of Liabilities as Current or Non-Current – Amendments to IAS 1 • Disclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2 • Definition of Accounting Estimate – Amendments to IAS 8 • Deferred Tax related to Assets and Liabilities arising from a Single Transaction – Amendments to IAS 12 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. 79 NOTE 3. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) 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 transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is yet to be finalised. 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. 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. Lease term – Note 21 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. Employee benefits provision – refer to Note 30 and Note 31 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 32 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 45 The group 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 60-days VWAP price post year end results announcement if the shares are issued. Judgement is used in estimating the probability of performance hurdles being met in determining the value of equity instruments expensed in profit or loss. Performance rights are measured at fair value at the date at which they are granted and the likelihood of performance conditions being met. The probability assessed grant date fair value x FUM target multiplier (applicable only to the rights granted on 1 September 2021) is recognised as an expense over the vesting period. 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. 80 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023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. NOTE 5. REVENUE Operating revenue Management fees Performance fees Administration fees (net of Operational Risk Financial Reserve contributions) Principal investment advisory fee Member fees (net of rebates) Interest income Other income Dividends Revenue Consolidated Parent 2023 $’000 62,465 – 12,542 – 5,108 780 201 – 2022 $’000 55,188 375 10,424 – 4,730 67 – – 2023 $’000 50,172 – 12,738 5,876 – 617 201 – 81,096 70,784 69,604 2022 $’000 48,470 375 9,220 4,278 – 59 – 765 63,167 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 nine Managed Funds and Australian Ethical Retail Superannuation Fund (‘AERSF’) Product Disclosure Statement (‘PDS’). The Group recognises revenue as the services are provided. The parent entity earns investment management and administration fees from its subsidiary Australian Ethical Superannuation Pty Limited (‘AES’) in accordance with arms’ length service agreements. The parent entity also earns a principal investment advisory fee from AES for the provision of services relating to developing, implementing and maintaining investment strategies including strategic advice and portfolio construction for the AERSF. The Group recognises these revenues as the services are provided. AES earns member fees from AERSF from the provision of services to members. The administration fee entitlement in accordance with the Product Disclosure Statement (‘PDS’) is net of $2,934k (2022: $1,711k) paid directly to the Operational Risk Financial Reserve (‘ORFR’) of the superannuation fund. Performance fees Performance fees in relation to the Emerging Companies Fund and High Conviction 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. Fund performance hurdles had not been achieved and as such there were no performance fees recognised in the current year. Interest income Interest revenue is recognised as interest accrues. Dividends Dividends are recognised as revenue when the right to receive payment is established. Other income The parent entity received a transition services fee from Christian Super for the provision of wind-up and administration services during the year. 81 NOTE 6. EMPLOYEE BENEFITS Employee remuneration Directors’ fees Strategic project contractors Other committee member fees Other employment related costs Consolidated Parent 2023 $’000 24,396 826 234 154 1,844 27,454 2022 $’000 22,136 709 729 53 1,633 25,260 2023 $’000 24,136 621 234 154 1,793 26,938 2022 $’000 21,914 528 729 53 1,600 24,824 Other employment related costs include payroll tax ($1.2m), employee training and development, workers compensation insurance and other benefits of employment with Australian Ethical. 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 fair value of equity-settled share-based payment arrangements is recognised as an employee remuneration expense based on the value at grant date, with a corresponding increase in equity. The amount recognised as an expense is adjusted to reflect the number of awards expected to vest based on the likelihood that the performance conditions are met at the vesting date. NOTE 7. FUND RELATED Administration and custody fees Licence, ratings and platform fees Regulatory & industry body fees Ethical research Regulatory projects Custody transition project Consolidated Parent 2023 $’000 11,191 1,317 500 135 767 128 2022 $’000 7,822 1,149 476 57 690 – 2023 $’000 3,105 985 267 135 215 128 2022 $’000 2,597 876 328 57 176 – 14,038 10,194 4,835 4,034 Regulatory projects in the current year include ongoing regulatory projects such as RG271 (Internal Dispute Resolution) and RG98 (Strengthening Breach Reporting) carried and finalised from the prior year as well as Digital License ID Verification, Advice Fee Framework and CP234 (Information Security for APRA-regulated entities). Custody transition project relates to costs incurred in the change of custodian and investment administration for the managed funds. Recognition and measurement Expenses are recognised at the fair value of the consideration paid or payable for services rendered. 82 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 8. MARKETING Distribution costs Brand awareness Other Consolidated Parent 2023 $’000 5,761 4,295 1,637 11,694 2022 $’000 3,974 3,535 1,585 9,094 2023 $’000 5,761 4,295 1,637 11,694 2022 $’000 3,974 3,535 1,585 9,094 The increase in distribution costs includes spend on the employer platform channel. Higher spend on brand to drive greater brand awareness continued through the year. Other marketing costs include events, sponsorships, marketing & public relations content, media agents’ fees and annual & sustainability reports. NOTE 9. IT EXPENSES Investment and client-facing systems Support systems, infrastructure and security Strategic projects Consolidated Parent 2023 $’000 2,067 1,205 264 3,536 2022 $’000 1,606 1,153 1,072 3,831 2023 $’000 1,961 1,205 364 3,430 2022 $’000 1,507 1,153 837 3,497 Strategic projects include investments in technology platforms including continuous upgrades to the online member experience, and minor enhancements to the Application Programming Interface (API) for the mobile app. Costs relating to building the app were capitalised as an intangible asset. NOTE 10. EXTERNAL SERVICES Internal & external audit and tax services Consultants Legal services Other Consolidated Parent 2023 $’000 902 1,067 355 404 2,728 2022 $’000 819 1,133 511 379 2,842 2023 $’000 2022 $’000 712 862 310 398 623 833 471 374 2,282 2,301 Consultants include advisory services in relation to strategic projects including product development, investment governance and on-going projects such as reviews of outsourced service providers. In the prior year, these included a new strategic asset allocation model, implementation of the new finance general ledger, payroll and human resources reporting systems, strategy & innovation initiatives, and new product development. 83 NOTE 11. 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 gifted or provisioned for gifting an amount equivalent to 10% of what the profit for that year would have been had bonuses and amount gifted not been deducted. Community grants amounting to $1,099,000 (2022: $1,509,000) have been expensed and gifted from the parent entity to The Foundation. The Foundation has committed to granting all of its income (including interest income) of $1,116,000 (2022: $1,580,000) to community organisations through its grants program. NOTE 12. DEPRECIATION AND AMORTISATION Depreciation of property, plant and equipment Amortisation of intangible asset – CMS website and mobile app Total Depreciation of right-of-use asset – Sydney office lease Depreciation of right-of-use asset – IT infrastructure Total Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 462 231 693 526 46 572 1,265 470 108 578 580 47 627 1,205 462 231 693 526 46 572 1,265 470 108 578 580 47 627 1,205 Refer to Note 22 for additional information on depreciation and amortisation. NOTE 13. OTHER OPERATING EXPENSES Insurance Travel ASX listing fees and registry costs Printing and subscriptions Other Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 767 476 229 169 175 768 231 266 191 190 338 476 229 135 175 1,816 1,646 1,353 498 227 266 132 190 1,313 84 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 14. OCCUPANCY Occupancy costs in relation to Sydney office Short term premises lease Consolidated Parent 2023 $’000 233 213 446 2022 $’000 293 42 335 2023 $’000 233 213 446 2022 $’000 293 42 335 Occupancy costs include cleaning services, utilities and repairs & maintenance costs relating to the Sydney head office. Short term premises lease relates to our Melbourne office which is predominantly used for the customer services centre. The lease on the Sydney office is recorded in accordance with AASB 16 and as such rent expense is included in depreciation of the right-of-use asset. Refer to Note 12 and Note 21. NOTE 15. DUE DILIGENCE & TRANSACTION COSTS Consultants Legal Contractors Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 – – – – 266 655 61 982 – – – – 266 655 61 982 Due diligence & transaction costs include consultants, legal services and contractors engaged in relation to the investment in Sentient Impact Group, the successor funds transfer with Christian Super and ongoing investment opportunities. NOTE 16. SFT INTEGRATION COSTS Project management and Project Team employment costs Legal and consulting Fund related transition costs Marketing and member communications Other Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 1,626 802 1,172 115 18 3,733 – – – – – – 1,626 802 1,172 115 18 3,733 – – – – – – Successor Funds Transfer (SFT) integration costs includes the project management, business analysts and project team costs, legal services, and consultants engaged in relation to the SFT project with Christian Super. Also included are marketing and communications, IT, business insurance and audit fees arising from the integration project. 85 NOTE 17. INCOME TAX Income tax expense Current tax Deferred tax asset – temporary differences Deferred tax liability – temporary differences Aggregate income tax expense Deferred tax included in income tax expense comprises: Increase in deferred tax assets Decrease in deferred tax liabilities Deferred tax – temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Consolidated Parent 2023 $’000 4,662 (636) (20) 4,006 (636) (20) (656) 2022 $’000 4,702 (438) (1) 4,263 (438) (1) (439) 2023 $’000 4,459 (243) (20) 4,196 (243) (20) (263) 2022 $’000 4,676 (590) (1) 4,085 (590) (1) (591) Profit before income tax expense 10,582 13,774 11,217 14,032 Less: Tax exempt loss attributable to the Foundation Taxable profit before income tax Tax at the statutory tax rate of 30% (2021: 30%) 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-deductible items Income tax expense – 10,582 3,175 – 831 4,006 86 13,860 4,158 – 105 4,263 – 11,217 3,365 – 14,032 4,209 – (229) 831 4,196 105 4,085 The applicable weighted average effective tax rate for the consolidated group is 37.9% (2022: 30.8%) and for the parent entity is 37.4% (2022: 29.1%). The higher effective tax rate is primarily due to non-deductible expenses incurred in relation to the write-down of the investment in Sentient which is on capital account and not deductible. Excluding the impact of the change in fair value of the Sentient investment, the effective tax rate is 30.4% for the consolidated group and 30.4% on profit attributable to shareholders. 86 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 17. INCOME TAX (CONTINUED) Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Employee benefits Accruals Community grants Provision for employee leave Integration costs 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 Income tax refund due 976 207 330 855 896 97 592 21 1,111 179 453 773 – 77 696 49 965 160 330 853 566 97 458 21 1,104 148 453 767 – 77 609 49 3,974 3,338 3,450 3,207 3,338 636 3,974 2,900 438 3,338 3,207 243 3,450 2,617 590 3,207 14 14 34 (20) 14 605 – 34 34 35 (1) 34 – 249 14 14 34 (20) 14 605 – 34 34 35 (1) 34 – 249 Recognition and measurement Tax expense comprises 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. 87 NOTE 17. INCOME TAX (CONTINUED) 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 Deposits at call Consolidated Parent 2023 $’000 242 26,892 27,134 2022 $’000 242 21,545 21,787 2023 $’000 229 20,269 20,498 2022 $’000 236 19,077 19,313 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. NOTE 19. CURRENT ASSETS – TERM DEPOSITS Term deposits Recognition and measurement Consolidated Parent 2023 $’000 5,600 5,600 2022 $’000 5,600 5,600 2023 $’000 5,000 5,000 2022 $’000 5,000 5,000 Term deposits held with maturities greater than 3 months, earning interest at a higher rate than cash at bank and deposits at call. 88 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 20. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Receivable from subsidiary Performance fee receivable Consolidated Parent 2023 $’000 2,475 – – 2,475 2022 $’000 1,362 – 375 1,737 2023 $’000 624 4,780 – 5,404 2022 $’000 685 3,383 375 4,443 Recognition and measurement Trade receivables are initially recognised when they are originated and are measured at the transaction price. 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 2023 (2022: nil) and management have not identified any additional concerns regarding collectability of the receivables as the receivables are predominantly due from related parties. NOTE 21. LEASES Leases includes the lease for the Sydney office premises, printing and copying equipment for the office, and other IT hardware and infrastructure. The Group entered into a new long-term lease for a 5-year term commencing 1 July 2023 for the Sydney office. The new lease includes the existing space and an additional half floor. The Group does not have an option to purchase the premises at the expiry of the lease period. A bank guarantee of $749,000 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 from 1 March 2023 in relation to the lease of level 8, including the remaining unamortised lease incentive. The respective right-of-use asset and a lease liability for the half floor on level 7 will be recognised in the Statement of Financial Position from 1 July 2023. The Group entered a 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 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 Financial Position in relation to this lease. Consolidated & Parent Right-of-use assets Balance at 1 July 2021 Additions Depreciation Balance at 30 June 2022 Comprising of: Current Non-current Office premises $’000 IT hardware & infrastructure $’000 1,160 – (580) 580 580 – 580 138 – (47) 92 46 46 92 Total $’000 1,298 – (627) 672 626 46 672 89 NOTE 21. LEASES (CONTINUED) Consolidated & Parent Right-of-use assets Balance at 1 July 2022 Additions Depreciation Balance at 30 June 2023 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 $’000 580 2,214 (526) 2,268 – 2,268 2,268 92 – (46) 46 30 16 46 Total $’000 672 2,031 (572) 2,314 30 2,284 2,314 Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 88 566 41 426 88 566 41 426 Consolidated Parent 2023 $’000 2022 $’000 2023 $’000 2022 $’000 Amounts recognised in statement of cash flows Total cash outflow for leases 810 781 810 781 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. These includes a short-term lease for offices in Melbourne. These are not included in Right-of-use assets or lease liabilities as the terms of these leases are 12 months or under. Lease payments on these assets are expensed to profit or loss as incurred. 90 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 21. LEASES (CONTINUED) Consolidated & Parent Lease liabilities Balance at 1 July 2021 Additions Payments Interest on lease liabilities Balance at 30 June 2022 Comprising of: Current Non-current Consolidated & Parent Lease liabilities Balance at 1 July 2022 Additions Payments Interest on lease liabilities Balance at 30 June 2023 Comprising of: Current Non-current Office building $’000 IT hardware & infrastructure $’000 1,435 – (734) 40 742 742 – 742 139 – (48) 1 92 45 47 92 Office building $’000 IT hardware & infrastructure $’000 742 2,090 (763) 87 2,156 342 1,814 2,156 92 – (47) 1 46 37 9 46 Total $’000 1,574 – (781) 41 834 787 47 834 Total $’000 834 2,090 (810) 88 2,202 379 1,823 2,202 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. 91 NOTE 22. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation Software development – at cost Less: Accumulated amortisation Consolidated Parent 2023 $’000 2,332 (2,278) 54 309 (175) 134 1,204 (481) 723 911 2022 $’000 2,332 (1,900) 432 364 (284) 80 1,140 (251) 889 1,401 2023 $’000 2,332 (2,278) 54 309 (175) 134 1,204 (481) 723 911 2022 $’000 2,332 (1,900) 432 364 (284) 80 1,140 (251) 889 1,401 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 30 June 2021 Additions Disposals Depreciation expense Amortisation expense Balance at 30 June 2022 Additions Disposals Depreciation expense Amortisation expense Balance at 30 June 2023 Leasehold improvements $’000 Plant and equipment $’000 Software development $’000 763 39 – (370) – 432 – – (378) – 54 122 62 (4) (100) – 80 138 – (84) – 134 334 663 – – (108) 889 65 – – (231) 723 Total $’000 1,219 764 (4) (470) (108) 1,401 203 – (462) (231) 911 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. 92 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 22. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT (CONTINUED) 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. The increase in software development costs during the year is due to building the mobile app in line with our growth plans with respect to digital platforms. 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 2023 $’000 749 2022 $’000 504 2023 $’000 749 2022 $’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. The deposit increased with the new lease over the Sydney office – refer to Note 21. 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 2023 $’000 2022 $’000 2023 $’000 2022 $’000 – – 316 316 93 NOTE 25. NON-CURRENT ASSETS – FINANCIAL ASSETS THROUGH PROFIT OR LOSS Investment in Sentient Impact Group Consolidated Parent 2023 $’000 2,600 2022 $’000 5,200 2023 $’000 2,600 2022 $’000 5,200 On 9 December 2021, AEI acquired a minority equity stake (10%) in Sentient Impact Group Pty Ltd (Sentient). The investment is $5,200,000, payable in multiple instalments, with $4.33m currently paid. In addition, Australian Ethical has three future dated call options equating to an additional 30% of the equity, exercisable over the next three years. Sentient is a Melbourne based impact investment manager. Sentient was established following the in-specie transfer of management rights for $200m of renewable infrastructure assets from Impact Investment Group. Sentient is a start-up entity with an Impact investing purpose aligned to AEI. Refer to Note 37 for further information on fair value measurement. NOTE 26. 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 value is adjusted for return of capital and 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. Consolidated Parent 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 Return of capital Revaluation increments/(decrements) Closing fair value 2023 $’000 70 2 72 106 – (38) 4 72 2022 $’000 105 1 106 141 – (37) 2 106 2023 $’000 2022 $’000 – 1 1 1 – – – 1 – 1 1 2 – – (1) 1 Refer to Note 37 for further information on fair value measurement. 94 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 26. NON-CURRENT ASSETS – FINANCIAL ASSETS THROUGH OTHER COMPREHENSIVE INCOME (CONTINUED) 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. The Group elected to recognise these as FVOCI as the assets are not part of the Group’s core investment strategy. On disposal of these equity investments, any related balance within the FVOCI reserve is reclassified to retained earnings. NOTE 27: NON-CURRENT ASSETS – RELATED PARTY LOAN Loan to Subsidiary Consolidated Parent 2023 $’000 – 2022 $’000 – 2023 $’000 240 2022 $’000 – The loan was provided to subsidiary AES to support the ongoing costs of the super fund administrator transition to GROW. The loan is non-interest bearing until completion of the transition, expected to be in the financial year ended 30 June 2025. On completion, the loan becomes interest bearing and due to be repaid over a 5 year period. The parent entity support for AES includes waiving any loan repayment obligations to ensure AES continues as a going concern at all times. NOTE 28. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables and accruals Payable to subsidiary Community grant payable Consolidated Parent 2023 $’000 8,509 – 1,323 9,832 2022 $’000 6,753 – 1,815 8,568 2023 $’000 4,722 – 1,099 5,821 2022 $’000 7,812 82 1,509 9,403 Refer to Note 36 for further information on financial instruments. Recognition and measurement Trade payables and accruals represent liabilities for goods and services provided to the group 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 29. CURRENT LIABILITIES – DEFERRED PAYABLE ON INVESTMENT Deferred payable on investment Consolidated Parent 2023 $’000 871 2022 $’000 1,300 2023 $’000 871 2022 $’000 1,300 This obligation relates to the remaining instalment payment for the acquisition in Sentient Impact Group in line with instalment notices issued by Sentient. Payment has been deferred to the second half of 2023. Refer to Note 25 for additional details. 95 NOTE 30. CURRENT LIABILITIES – EMPLOYEE BENEFITS Annual leave Long service leave Employee benefits Consolidated Parent 2023 $’000 1,556 1,294 3,408 6,258 2022 $’000 1,224 1,070 3,703 5,997 2023 $’000 1,548 1,294 3,372 6,214 2022 $’000 1,215 1,059 3,680 5,954 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 31. NON-CURRENT LIABILITIES – EMPLOYEE BENEFITS Long service leave Recognition and measurement Consolidated Parent 2023 $’000 444 2022 $’000 284 2023 $’000 428 2022 $’000 284 The liabilities 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. NOTE 32. NON-CURRENT LIABILITIES – PROVISIONS Lease make-good Recognition and measurement Consolidated Parent 2023 $’000 324 2022 $’000 258 2023 $’000 324 2022 $’000 258 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 right-of-use asset and the provision. Reductions in the provision due to exceeding the carrying amount of the asset will be recognised in profit or loss. 96 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 33. EQUITY – ISSUED CAPITAL Ordinary shares – fully paid 112,782,052 112,387,138 Consolidated 2023 Shares 2022 Shares 2023 $’000 10,332 Movements in ordinary share capital Details Balance Vesting of deferred shares in the Employee Share Plan (730,200 shares) Date 1 July 2021 1 September 2021 Vesting of deferred STI shares (5,193 shares) 1 September 2021 Purchase of deferred shares in the Employee share plan – on-market (274,762 shares) 16 September to 2 February 2022 2022 $’000 8,969 $’000 10,676 962 23 Shares Issue price 112,387,138 $1.32 $4.53 – – – $9.80 (2,692) Balance 30 June 2022 112,387,138 8,969 Vesting of deferred shares in the Employee Share Plan (525,972 shares), and deferred STI shares (88,613 shares) to the Investment Team Vesting of FY20 deferred STI shares (5,193 shares) – CEO Vesting of deferred STI shares (24,626 shares) for FY20 Performance fee, and FY21 deferred STI shares (7,459) for the CEO 1 September 2022 1 September 2022 1 September 2022 Purchase of deferred shares in the Employee Share Plan – on-market 30 September to 6 October 2022 – – – – $2.15 1,322 $4.53 $9.80 24 314 $5.26 (349) Issue of deferred shares to the Employee Share Plan Vesting of deferred shares in the Employee Share Plan (5,131 shares) Vesting of deferred shares in the Employee Share Plan (2,959 shares) Vesting of deferred shares in the Employee Share Plan (22,496 shares) Vesting of deferred shares in the Employee Share Plan (8,308 shares) 13 December 2022 394,914 $5.29 16 December 2022 16 December 2022 20 February 2023 20 February 2023 – – – – $4.53 $9.80 $4.53 $9.80 – 23 29 102 81 Balance 30 June 2023 112,782,052 10,515 The following events occurred during the year: • On 1 September 2022, 525,972 shares that were granted to employees under the employee share plan for 1 September 2019 vested on achieving the performance hurdle. • A further, 24,626 deferred shares in relation to an FY20 performance fee sharing arrangement for specified investment team members vested. • 5,193 shares and 7,459 shares which were a deferred component of short-term incentives granted to the CEO on 1 September 2020 and 2021 respectively, also vested. • In September and October 2022, 66,320 shares were purchased for allocation to the CEO/Managing Director under the FY23 employee share plan. The remaining shares to be allocated to employees under the employee share plan were issued on 13 December 2022. The Company measures the value of deferred shares at the price at which the shares were purchased on- market, or a 60-day VWAP post results announcement where shares are issued. The Company recognises share grants as a reduction in Issued Capital. 97 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. 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 3-year average responsible entity revenue (uncapped). The current minimum NTA is $6.1m as at 30 June 2023. 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. The Board may declare a dividend outside that range with due consideration to retained earnings. Refer also to Note 11 which discusses the provisioning of staff bonuses and community grants prior to recommending or declaring a dividend under the Group’s constitution. NOTE 34. EQUITY – RESERVES Share-based payment reserve Fair value through other comprehensive income (‘FVOCI’) reserve Consolidated Parent 2023 $’000 2,293 8 2,301 2022 $’000 2,702 4 2023 $’000 2,293 – 2,706 2,293 2022 $’000 2,702 – 2,702 98 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023 NOTE 34. EQUITY – RESERVES (CONTINUED) Share-based payment reserve This reserve relates to shares granted by the Group to its employees under its share-based payment arrangements. Further information about share-based payments to employees is set out in Note 45. 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 26). 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 2021 Shares vested under deferred share plan during the year Employee deferred shares & rights* Revaluation of investments Balance at 30 June 2022 Shares vested under deferred share plan during the year Employee deferred shares & rights* Revaluation of investments Balance at 30 June 2023 Share-based payment reserve $’000 FVOCI reserve $’000 1,033 (985) 2,654 – 2,702 (1,895) 1,486 – 2,293 1 – – 3 4 – – 4 8 * includes employee share plan and deferred shares and ELTI rights granted to employees Parent Balance at 30 June 2021 Shares vested under deferred share plan during the year Employee deferred shares & rights* Balance at 30 June 2022 Shares vested under deferred share plan during the year Employee deferred shares & rights* Balance at 30 June 2023 Share-based payment reserve $’000 FVOCI reserve $’000 1,033 (985) 2,654 2,702 (1,895) 1,486 2,293 – – – – – – – * includes employee share plan and deferred shares and ELTI rights granted to employees Total $’000 1,034 (985) 2,654 3 2,706 (1,895) 1,486 4 2,301 Total $’000 1,033 (985) 2,654 2,702 (1,895) 1,486 2,293 99 NOTE 35. EQUITY – DIVIDENDS Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2022 of 3.00 cents (2021: 4.00 cents) per ordinary share – fully franked Special performance dividend for the year ended 30 June 2022 of nil cents (2021: 1.00 cents) per ordinary share Interim dividend for the year ended 30 June 2023 of 2.00 cents (2022: 3.00 cents) per ordinary share – fully franked 2023 $’000 3,372 - 2,256 5,628 2022 $’000 4,495 1,124 3,372 8,991 Since year end the Directors have declared a final dividend of 5.00 cents per fully paid ordinary share (2022: 3.00 cents final dividend). The aggregate amount of the declared dividend expected to be paid on 21 September 2023 out of profits for the year ended 30 June 2023, but not recognised as a liability at year end, is $5,639,000 (2022: $3,372,000). All dividends paid during the year were fully franked based on tax paid at 30.0%. The final dividend to be paid in September 2023 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% (2022: 30%) 2023 $’000 12,667 2022 $’000 10,716 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 36. 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 (‘FUM’), 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 Committee (‘ARCC’). 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. 100 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 36. FINANCIAL INSTRUMENTS (CONTINUED) 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 ARCC. 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 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 $6,924,000 (2022: $4,369,000). 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, and trade receivables. 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 6 months. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents). The Group 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 and cash flows, and profit & loss statements 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. 101 NOTE 36. FINANCIAL INSTRUMENTS (CONTINUED) Consolidated – 2022 Non-derivatives Non-interest bearing Trade payables and accruals Deferred payable on investment Total non-derivatives Consolidated – 2023 Non-derivatives Non-interest bearing Trade payables and accruals Deferred payable on investment Total non-derivatives Parent – 2022 Non-derivatives Non-interest bearing Trade payables and accruals Deferred payable on investment Total non-derivatives Parent – 2023 Non-derivatives Non-interest bearing Trade payables and accruals Deferred payable on investment Total non-derivatives 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Remaining contractual maturities $’000 Over 5 years $’000 13,489 1,300 14,789 – – – – – – – – – 13,489 1,300 14,789 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Remaining contractual maturities $’000 Over 5 years $’000 14,462 871 15,512 – – – – – – – – – 14,462 871 15,512 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Remaining contractual maturities $’000 Over 5 years $’000 10,939 1,300 12,239 – – – – – – – – – 10,939 1,300 12,239 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Remaining contractual maturities $’000 Over 5 years $’000 10,917 871 11,788 – – – – – – – – – 10,917 871 11,788 Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. 102 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 37. 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. Relate to the Company’s nominal holdings of shares in listed entities held for advocacy purposes. Relate to the Foundation’s investment in the Social Ventures Australia (SVA) Diversified Impact Fund (DIF) unlisted unit trusts. 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). Relate to the Company’s investment in Sentient Impact Group. There were no transfers between levels during the financial year. Fair value measurement of investment in Sentient As a result of slower than anticipated FUM growth and an ongoing review and refinement of its strategy, a fair value decrement of $2.6 million has been recognised, reflecting 50% of its value. In determining the fair value, the Directors' valuation was supported by an independent expert's indicative valuation range. The Directors will continue to assess the fair value in light of any significant changes in the business and its future growth. Sensitivity of fair value measurement of investment in Sentient Although the Directors believe that the estimate of fair value is appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For the fair value measurement in Sentient, a 20% favourable (unfavourable) effect of using reasonably possible alternative methodologies for the valuation would increase (decrease) equity for the Group by $520,000. 103 NOTE 37. FAIR VALUE MEASUREMENT (CONTINUED) Consolidated – 2022 Financial assets measured at fair value Investments Total assets Consolidated – 2023 Financial assets measured at fair value Investments Total assets Parent – 2022 Financial assets measured at fair value Investments Total assets Parent – 2023 Financial assets measured at fair value Investments Total assets Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 1 1 1 1 105 105 71 71 Level 1 $’000 Level 2 $’000 1 1 1 1 – – – – 5,200 5,200 5,306 5,306 2,600 2,600 Level 3 $’000 5,200 5,200 2,600 2,600 2,672 2,672 Total $’000 5,201 5,201 2,601 2,601 NOTE 38. 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 2023 $ 2022 $ 2023 $ 2022 $ Short-term employee benefits 4,294,110 4,914,352 4,108,700 4,749,673 Post-employment benefits Long-term benefits Share-based payments 299,697 72,621 563,980 279,537 184,353 336,883 280,229 72,621 563,980 263,069 184,353 336,883 5,230,408 5,715,125 5,025,530 5,533,978 Information regarding key management personnel’s remuneration and shares held in Australian Ethical Investment Limited is provided in the Remuneration Report. 104 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 39. 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: Audit services – KPMG Audit and review of financial statements – Group* Audit and review of financial statements – managed funds for which the Company acts as Responsible Entity** Audit and review of financial statements –superannuation fund for which the subsidiary entity acts as Responsible Superannuation Entity** Assurance services – KPMG Regulatory assurance services – Group Regulatory assurance services – managed funds and superannuation fund** Assurance services in relation to CPS 234 Tripartite SFT assurance procedures ATO Assurance review consulting services Assurance services in relation to the Sustainability Report Other services – KPMG Tax compliance and advisory services Accounting advice Total remuneration of KPMG Consolidated Parent 2023 $ 2022 $ 2023 $ 2022 $ 136,917 110,617 114,562 83,958 216,439 173,450 216,439 173,450 47,027 37,310 – – 400,383 321,377 331,001 257,408 52,771 74,444 94,583 30,000 66,625 20,500 49,089 69,250 – – 18,113 48,216 44,852 – 94,583 30,000 66,625 20,500 – – – 18,113 338,923 136,452 259,924 62,965 104,909 – 104,909 844,215 122,198 25,300 147,498 605,327 83,538 – 83,538 674,463 113,588 25,300 138,888 459,261 * These fees include a fee of $25k for audit procedures associated with the dual administration arrangements in place following the Christian Super SFT. ** These fees are incurred by the Company and are effectively recovered from the funds via administration or management fees. The addition of new funds and audit work relating to the expanded asset base following the SFT have contributed to the increase in audit fees. The Board considered the other non-audit / assurance 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. 105 NOTE 40. COMMITMENTS As at 30 June 2023, the Group did not enter into any capital commitments other than as disclosed in Note 21. NOTE 41. RELATED PARTY TRANSACTIONS Parent entity Australian Ethical Investment Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 42. KMP remuneration Disclosures relating to key management personnel are set out in Note 38 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 Balanced Fund • Australian Ethical Income Fund • Australian Ethical Fixed Interest Fund • Australian Ethical International Shares Fund • Australian Ethical High Growth Fund • Australian Ethical Emerging Companies Fund • Australian Ethical High Conviction Fund (unlisted and listed) • Australian Ethical Alternatives Fund (unregistered) • Australian Ethical Defensive Alternatives Fund (unregistered) • Australian Ethical Unlisted Property Fund (unregistered) • Australian Ethical Global Credit Fund (unregistered) 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. 106 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 41. RELATED PARTY TRANSACTIONS (CONTINUED) Transactions with related parties The following transactions occurred with related parties: Consolidated Parent 2023 $ 2022 $ 2023 $ 2022 $ Receipts from Australian Ethical Superannuation Pty Limited: Administration fees Investment management fees Principal investment advisory fee Transactions between the parent and subsidiary entities under tax consolidation and related tax sharing agreement Dividends from the subsidiary Receipts from the Australian Ethical Trusts: Provision of investment management services to the AETs in accordance with the PDS – – – – – – – – – – 12,737,692 9,219,458 30,339,077 26,483,078 5,875,915 4,278,309 3,529,431 3,357,440 – 764,982 19,675,964 20,599,317 19,675,964 20,599,317 Performance fee – 375,278 Receipts from Australian Ethical Retail Superannuation Fund: Provision of investment management / administration services to AERSF in accordance with the PDS 55,173,306 43,625,200 Provision of member administration services to AERSF in accordance with the PDS 5,108,403 4,729,633 Provision of transition services as part of the Christian Super integration 193,500 Payments to Australian Ethical Foundation Limited: Community grants paid to The Foundation – – – – – – 193,500 375,278 – – – 1,099,329 1,509,368 Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Receivables: Amounts receivable from the AETs 555,527 358,057 555,527 358,057 Consolidated Parent 2023 $ 2022 $ 2023 $ 2022 $ 375,278 – 375,278 Amounts receivable from the AETs – performance fee Amounts receivable from AES – trade payables and tax provision Amounts receivable from AES – loan – – – – – Amounts receivable from AERSF 1,841,445 675,911 Payables: Amounts payable to AES Amounts payable to The Foundation – – – – 4,780,482 9,767 239,899 – – – – (81,597) (1,099,329) (1,509,368) 107 NOTE 41. RELATED PARTY TRANSACTIONS (CONTINUED) Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. NOTE 42. 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 Level 8, 130 Pitt Street Sydney NSW 2000 Australia Level 8, 130 Pitt Street Sydney NSW 2000 Australia Level 8, 130 Pitt Street Sydney NSW 2000 Australia Ownership interest 2023 % 2022 % 100% 100% 100% 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. Refer to Note 46 for further details about the Foundation’s activities. The Parent entity acquired August Investment Pty Limited in 2020 for the purpose of preventing 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. 108 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 43. RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES Consolidated Parent Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Non-cash employee benefits expense - deferred shares Change in fair value of investment Christian Super SFT integration costs Dividend received from subsidiary Change in operating assets and liabilities: (Increase)/Decrease in trade and other receivables (Increase)/Decrease in lease assets (Increase)/Decrease in other current assets (Increase) in deferred tax assets (Increase)/Decrease in other non-current assets Increase/(Decrease) in trade and other payables Increase in employee benefits Increase in other provisions Increase/(Decrease) in current tax liability (Decrease) in deferred tax liability Net cash from operating activities 2023 $ 6,576 1,265 2,837 2,600 3,733 – (738) (1,642) 118 (636) (245) 1,264 422 65 605 (20) 16,204 2022 $ 9,511 1,205 1,321 – – 2,480 627 (437) (437) 465 1,316 1,470 6 (1,364) (1) 16,162 2023 $ 7,021 1,265 2,837 2,600 2,357 – (960) (1,642) 480 (243) (245) (3,269) 404 65 605 (20) 11,255 2022 $ 9,947 1,205 1,321 – (765) 1,857 627 (575) (589) 465 3,412 1,483 6 (1,364) (1) 17,029 Costs relating to the Christian Super SFT have been reported as investing cashflows. NOTE 44. 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 2023 $’000 6,576 2022 $’000 9,511 Cents Cents 5.89 5.84 8.57 8.47 Number Number 111,552,062 111,013,492 1,127,974 1,276,329 112,680,036 112,289,821 109 NOTE 44. EARNINGS PER SHARE (CONTINUED) 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 45. SHARE-BASED PAYMENTS Share-based payments includes shares issued to employees under the employee share plan (ESP), deferred short-term incentives, and rights granted under the Executive long-term incentives plan (ELTI). As at 30 June 2023, the Employee Share Trust holds 1,118,541 shares (30 June 2022: 1,348,064 shares) on behalf of employees until vesting conditions are met. In the current year, $349,000 was paid to purchase deferred shares on-market to be granted to the CEO under both the Deferred Shares – ESP and Deferred Shares – STI share grants. The remaining shares granted to employees under the ESP were issued as new shares. In the prior year, $2,692,000 was paid to purchase all deferred shares on-market. The Board has discretion to decide whether to issue new shares or purchase shares. The below table provides a reconciliation of the number of deferred shares in the Employee Share Trust. 2022 Grant date Vesting date 01/09/2018 31/08/2021 01/09/2019 31/08/2022 01/09/2020 31/08/2021 01/09/2020 31/08/2022 Balance at the start of the year 730,200 636,238 5,193 5,193 01/09/2020 31/08/2023 396,310 01/09/2021 31/08/2022 01/09/2021 31/08/2023 01/09/2021 31/08/2024 Unallocated treasury shares – 1,773,134 Granted Vested Forfeited Balance at the end of the year – – – – – 32,088 32,086 253,279 317,453 (730,200) – – – (21,653) 614,585 (5,193) – – – – – (735,393) – – (9,299) – – (14,457) (45,409) – 5,193 387,011 32,088 32,086 238,822 1,309,785 38,279 1,348,064 Total deferred shares in the Employee Share Trust at 30 June 2022 110 Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 45. SHARE-BASED PAYMENTS (CONTINUED) 2023 Grant date Vesting date 01/09/2019 31/08/2022 01/09/2020 31/08/2022 01/09/2020 31/08/2023 01/09/2021 31/08/2022 01/09/2021 31/08/2023 01/09/2021 31/08/2024 01/09/2022 31/08/2023 01/09/2022 31/08/2024 01/09/2022 31/08/2025 Unallocated treasury shares Balance at the start of the year 614,585 5,193 387,011 32,088 32,086 238,822 – – – 1,309,785 Granted Vested Forfeited Balance at the end of the year (614,585) (5,193) (27,623) (32,085) – – – – – (34,450) 324,938 – – – – – – – – (11,267) (20,416) 41,351 29,300 445,061 515,712 – – – (690,759) – – (17,640) (72,506) - 32,086 207,139 41,351 29,300 427,421 1,062,235 56,306 1,118,541 Total deferred shares in the Employee Share Trust at 30 June 2023 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. The following share-based payment arrangements existed as at 30 June 2023. Deferred Shares - ESP Under the Group’s long-term incentive employee share plan (ESP), participants are granted shares annually based on a fixed percentage of their fixed remuneration. 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. The deferred shares are subject to 3-year vesting periods after which time, the shares vest to the employee as ordinary shares. Vesting is subject to meeting specified performance criteria over the performance period, service hurdles and Board approval. Included under employee benefits expense in the Consolidated Statement of Comprehensive Income is $1,308,000 (2022: $1,443,000) relating to the deferred shares granted under the long-term employee share plan. Deferred Shares – STI For certain employees a portion of their short-term incentive is also paid in deferred shares which vest subject to meeting service conditions. Depending on the grant, deferred STI shares have a 3-year vesting period and no further performance hurdles. Other deferred shares granted to the CEO and for performance fee sharing vest 1/3 per year over 3 years. All share vesting is subject to Board approval. Included under employee benefits expense in the Consolidated Statement of Comprehensive Income is $1,010,000 (2022: $845,000) relating to the deferred portion of the short-term incentive plan. 111 NOTE 45. SHARE-BASED PAYMENTS (CONTINUED) Executive Long-Term Incentives (ELTI) The ELTI was introduced to retain key senior executives and provide reward for future outstanding performance to the period ending 30 June 2025 and 2026. Under the plan, the CEO and select senior executives invited to participate are issued with Hurdled Performance Share Rights that represent the number of AEI shares that will vest subject to the achievement of certain performance hurdles. If all minimum company performance hurdles are met at vesting date, then the base level award will vest. The hurdles are measured in the years ending and as at 30 June 2025 and 2026, with vesting after the release of the FY25 and FY26 annual results respectively. The FUM target for the tranche vesting at the end of FY25 includes a multiplier mechanism that provides a stretch target for AEI’s leadership team. The multiplier mechanism does not apply to the tranche vesting at the end of FY26. The aggregate base hurdled performance share rights issued at 1 December 2021 was 136,510 rights. The ELTI expense is based on the grant date of 1 December 2021. Each share right was fair valued at $13.54, being the share price on 1 December 2021 discounted for forecast dividend yield. These share rights will be equity settled at the end of the vesting period. At this time, Board’s assessment is that the likelihood of meeting the performance hurdles by the vest date is less likely than more likely given the recessionary outlook for world economies, and as such the fair value of these rights has been written down to nil. The FY26 tranche comprises 245,495 hurdled performance share rights issued, which were issued on 1 December 2022. The ELTI expense is based on the grant date of 1 December 2022. Each share right was fair valued at $4.54, being the share price on 1 December 2022 discounted for forecast dividend yield. These share rights will be equity settled at the end of the vesting period. Board’s assessment is that the performance hurdles for these rights are likely to be met by the vest date. During the vesting period, employees are not entitled to receive dividends nor hold voting rights. Vesting is subject to meeting specified performance criteria over the performance period, service hurdles and Board approval. Included under employee benefits expense in the Statement of Profit or Loss and Other Comprehensive Income is a credit of $125,000 (2021: $339,000 expense) under the executive long-term incentives plan due to the write-back of the ELTI granted 1 December 2021 being fair valued to nil. Additional details are available in the Remuneration Report on these employee incentive plans. NOTE 46. 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 2023, 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 112 2023 $’000 1,099 28 (1,116) (11) – (4) (4) 2022 $’000 1,509 2 (1,580) (17) (86) 1 (85) Australian Ethical Investment Limited and its Controlled Entities Notes To The Financial Statementsfor the year ended 30 June 2023ANNUAL REPORT 2023NOTE 46. RESULTS OF THE FOUNDATION (CONTINUED) 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: Community grant payables Trade payables Net assets Equity: Retained earnings FVOCI reserve Total Equity 2023 $’000 2022 $’000 597 1,099 8 71 (1,323) (12) 440 435 5 440 652 1,509 1 105 (1,815) (17) 435 434 1 435 NOTE 47. EVENTS AFTER THE REPORTING PERIOD Apart the dividend declared as disclosed in Note 35, no other matter or circumstance has arisen since 30 June 2023 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. 113 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 2023 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 24 August 2023 Sydney 114 ANNUAL REPORT 2023 This is the original version of the audit report over the financial statements signed by the directors on 24 August 2023. 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 43 to 71 as opposed to pages 29 to 55 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 audits of the Financial Reports Report on the audits of the Financial Reports Opinions Opinions We have audited the Financial Report of Australian Ethical Investment Limited (the We have audited the Financial Report of Group Financial Report). We have also Australian Ethical Investment Limited (the audited the Financial Report of Australian Group Financial Report). We have also Ethical Investment Limited (the Company audited the Financial Report of Australian Financial Report). Ethical Investment Limited (the Company Financial Report). In our opinion, each of the accompanying Group Financial Report and Company In our opinion, each of the accompanying Financial Report are in accordance with Group Financial Report and Company the Corporations Act 2001, including: Financial Report are in accordance with the Corporations Act 2001, including: • giving a true and fair view of the • giving a true and fair view of the Group’s and the Company’s financial position as at 30 June 2023 and of Group’s and the Company’s financial their financial performance for the position as at 30 June 2023 and of year ended on that date; and their financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations complying with Australian Accounting Regulations 2001. Standards and the Corporations Regulations 2001. • • The respective Financial Reports of the Group and the Company comprise: The respective Financial Reports of the Group and the Company comprise: • Statements of financial position as at 30 June 2023; • Statements of financial position as at 30 June 2023; • Statements comprehensive income, Statements of changes in equity, and • Statements comprehensive income, Statements of cash flows for the year then ended; Statements of changes in equity, and Statements of cash flows for the year then ended; • Notes including a summary of significant accounting • Notes including a summary of significant accounting policies; and policies; and • Directors’ Declarations. • Directors’ Declarations. The Group consists of Australian Ethical Investment Limited (the Company) and the entities it controlled at The Group consists of Australian Ethical Investment the year-end or from time to time during the financial Limited (the Company) and the entities it controlled at year. the year-end or from time to time during the financial year. Basis for opinions Basis for opinions We conducted our audits in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. We conducted our audits in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audits of the Financial Reports section of our report. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audits of the Financial Reports section of our report. We are independent of the Group and Company in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of We are independent of the Group and Company in accordance with the Corporations Act 2001 and the Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of our audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to accordance with these requirements. our audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with these requirements. 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 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and a scheme approved under Professional Standards Legislation. 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. 99 99 115 Key Audit Matters 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. This matter was 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 this matter. Management Fees – ($62.5m) and Administration fees ($12.5m) – Group; and Management Fees ($50.2m), Administration fees ($12.7m) and Principal Investment Advisory fee ($5.9m) - 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, Administration and Principal Investment Advisory fees were a key audit matter due to the: Our procedures included: For Group and Company • • 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 fees to the Group and Company, constituting 92% and 99% of total revenue, respectively. Funds under management (“FUM”) used in the calculation of fees is dependent on information sourced from a third party service organisation which is both the custodian and the administrator. This required us to understand and assess the key processes and controls in determining the FUM, including that of the third party service organisation. • We assessed the appropriateness of the Group and Company’s accounting policies against the requirements of Australian Accounting Standards and our understanding of the business and industry practice. • We read and understood the individual Management 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 and Administration fees charged using the fee percentages and FUM, obtained from each of the PDS and underlying fund financial records respectively as the basis for revenue recognition in accordance with the Group and Company’s accounting policy. • We compared the independently calculated Management and Administration 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 and Company’s fund management system such as daily price movement checks performed by management; - reconciling daily FUM sent by the custodian to the FUM used by the Group and Company in the calculation of revenue; - obtaining and reading the custodian service organisation’s Guidance Statement 007 Audit Implications of the Use of Service Organisations for Investment Management Services assurance report to 100 116 ANNUAL REPORT 2023 understand the processes and assess the controls relevant to the determination of the FUM; - checking the quantity of assets held to external custodian service provider reports at balance date; and - using valuation specialists, testing the fair value of a sample of investments held by underlying funds by comparing the value to market data such as global and domestic equity prices. • We assessed the disclosures in the Financial Reports using our understanding obtained from our testing and against the requirements of the accounting standards. For Company: • We read and understood the Management and Administration fee arrangements in the Investment Management and Trustee Service Agreements and the Principal Investment Advisory Agreement (collectively referred to as Agreements) between the Company and its subsidiary, Australian Ethical Superannuation Limited (AES); and • We performed a recalculation of the Management, Administration and the Principal Investment Advisory fees between the Company and AES, using the fee percentages obtained from the Agreements and FUM as a basis for revenue recognition in accordance with the Company’s accounting policy. • 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. The Message from the CEO, Message from the Chair, Investment update, Investment performance and Highlights section 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. 101 117 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. Auditor’s responsibilities for the audit of the Financial Reports Our objective is: • • to obtain reasonable assurance about whether each of 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 opinions. 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 audits 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. 118 102 ANNUAL REPORT 2023 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 2023 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 29 to 55 in the Financial Report for the year ended 30 June 2023. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Jessica Davis Partner Sydney 24 August 2023 103 119 Shareholder information Shareholder information as at 1 September 2023 Security Number of holders Number on issue Voting rights Fully paid ordinary shares 15,448 112,782,052 One vote per share Top 20 shareholders of fully paid ordinary shares Shareholders HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited James Andrew Thier Citicorp Nominees Pty Limited Ms Caroline Le Couteur Mrs Judith Margaret Boag Mr Trevor Roland Lee Mrs Ann Marion McGregor & Mr Bruce Allan McGregor Mrs Patty Bik Yuk Tse Mr Howard Pender Daisy Thier HB Sarjeant & Assoc Pty Ltd National Nominees Limited Mr Anthony Scott Cook Mr Phillip Andrew Vernon Mr Michel Beuchat & Mrs Ann Beuchat Dr Judith Ingrouille Ajani Pacific Custodians Pty Limited BNP Paribas Nominees Pty Ltd BNP Paribas Noms 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 Friday, 1 September 2023: • AEF shares closed at $4.54 Securities 70,328,162 24,324,697 5,514,480 8,941,843 3,672,870 112,782,052 Balance 10,754,331 6,578,021 5,066,920 4,789,938 4,154,855 2,300,000 2,150,000 2,014,827 1,899,650 1,785,249 1,529,700 1,507,000 1,323,451 1,061,800 977,379 966,700 964,654 920,773 841,154 833,523 52,419,925 60,362,127 112,782,052 % 62.36 21.57 4.89 7.93 3.26 100.00 % 9.54 5.83 4.49 4.25 3.68 2.04 1.91 1.79 1.68 1.58 1.36 1.34 1.17 0.94 0.87 0.86 0.86 0.82 0.75 0.74 46.48 53.52 100.00 Holders 83 905 752 3,888 9,820 15,448 • Accordingly, 110 or more shares constituted a marketable parcel • The Company had 1,790 shareholders whose holding was not a marketable parcel, these shareholders owned a total of 135,039 shares 120 ANNUAL REPORT 2023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 Share Registry 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 Security Exchange Listing Australian Ethical Investment Limited is listed on the Australian Securities Exchange ASX Code: AEF Steve Gibbs (Chair) Mara Bûn (Non-Executive Director) Kate Greenhill (Non-Executive Director) Sandra McCullagh (Non-Executive Director) Julie Orr (Non-Executive Director) John McMurdo (MD & CEO) Company Secretary Karen Hughes 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 Media enquiries BlueChip Communication Level 7, 333 George Street Sydney NSW 2000 Contact us Phone 1800 021 227 Email enquiries@australianethical.com.au Reply Paid GPO Box Centre Sydney GPO Box 8, Sydney NSW 2001 australianethical.com.au 121 More information Investment Restrictions Our investment restrictions include some thresholds. Thresholds may be in the form of an amount of revenue that a business derives from a particular activity, but there are other thresholds we can use depending on the nature of the investment. We apply a range of qualitative and quantitative analysis to the way we apply thresholds. For example, we may make an investment where we assess that the positive aspects of the investment outweigh its negative aspects. For information on how we make these assessments for a range of investment sectors and issues, such as fossil fuels, nuclear power, gambling, tobacco, human rights, and many others, please read our Ethical Criteria australianethical.com.au/why-ae/ ethics/ethical-criteria/ External tool and data providers MSCI ESG Research LLC We have used data and tools provided by MSCI ESG Research when calculating the sustainability information for our listed share portfolio in this report about sustainable impact revenue, carbon intensity, carbon footprint and investment in renewables and energy solutions. We used the MSCI tools and data for our calculations on 12 August 2023, for our listed shareholdings at 30 June 2023. More information on MSCI methodology and metrics is available here: msci.com/ documents/10199/2043ba37-c8e1-4773-8672- fae43e9e3fd0 and here: msci.com/documents/1296102/16472518/ESG_ ImpactMetrics-cfs-en.pdf/7a03ddab-46fd-cef7-5211- c07ab992d17b 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. 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. 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 2023 financial year. Use of sustainability information The sustainability information in this report does not relate to specific financial products and may or may not be relevant to individuals' investment decisions. 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. Investing ethically and sustainably means that the investment universe will generally be more limited than non-ethical, non-sustainable portfolios in similar asset classes. This means that the Portfolio may not have exposure to specific assets which over or underperform over the investment cycle. This means that the returns and volatility of the Portfolio may be higher or lower than non-ethical, non-sustainable portfolios over all investment time frames. 122 ANNUAL REPORT 2023Image credits COVER: Top right iStock, Alex Aleshin / Top left iStock, Lyndon Stratford / Bottom right iStock, phototrip.cz p1 iStock, Shannon Stent / p3 iStock, Shaiith / p5 iStock, Ida Jarosova / p11 iStock, AH Design Concepts p 17 Unsplash, Franco Mariuzza / p18 Unsplash, David Clode / p21 iStock, Pedro Salaverria / p22 Charlie Blacker p45 Unsplash, Caleb Kastein / p123 istock / pixeldeluxe Together, we shall continue to shape a tomorrow that aligns with our values and paves the way for a brighter future. The information in this report is general information only and does not take account of your individual investment objectives, financial situation or needs. Before acting on it, consider its appropriateness to your circumstances and read the Financial Services Guide (FSG), the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the relevant product available on our website for information on the benefits and risks of our Funds. You should consider seeking advice from an authorised financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance. 123 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. 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. 

Continue reading text version or see original annual report in PDF format above