The move from Viridian and CFS to provide personal advice in a scaled manner highlights a growing willingness within the industry to fix its own problems in lieu of waiting for the government.
Private markets are worth around $14 trillion globally, ASIC believes. It’s not sure, and that uncertainty hints at the wider problem – private markets, and their effect on public ones, is still largely a mystery.
Australian Ethical hits $5 billion after 35 years
“Green-washing” and ESG may have been the most popular words in funds management in 2020, as consumers became more interested in where their capital was being invested and what it was being used to support. An extensive list of events ranging from Westpac’s money-laundering scandal, to Rio Tinto’s sacred-sites explosions and staff under-payments, has challenged even the most committed ESG investor. Increasingly, the difference between approaches is determined by what a manager doesn’t do, more so than what action they take. From this angle, Australian Ethical stood out.
After flagging the intention to reach $5 billion in assets under management in 2015 – from just $1.5 billion at the time – this ambitious target was finally reached in December 2020. While market performance was a key contributor to this achievement, strong and continuing inflows of capital have been the primary driver, with $270 million coming in the final quarter of 2020 alone.
The company has delivered by sticking to its original foundations, built in 1986, and which influence the investment approach today. Australian Ethical was one of the founding B Corporations in Australia, a movement that requires members to submit themselves to external audits and to always consider the impact of their business on all stakeholders, not just shareholders. At the core of the company’s approach is a commitment to direct 10 per cent of its annual profits, before tax and bonuses, to charitable organisations through its own Australian Ethical Foundation; close to $4 million has been distributed to charities supporting the Great Barrier Reef and endangered animal protection. The investment philosophy is dictated by the company charter, which makes the decision framework far clearer than most competitors.
When it comes to ESG investing, managers have many choices as to which direction they take. They can be negative, seeking to avoid investing in certain sectors or companies, positive in seeking to support innovative businesses, or agnostic, where they tend to justify their positions and ultimately invest the same way they always have. In Australian Ethical’s case, it avoids the latter and focuses on both avoiding the worst industries, while also seeking to back innovative businesses or those with improving credentials. It is this approach that has been a key contributor to its leading performance in 2020.
Management is extremely clear that the firm will avoid direct investment in fossil fuels, gambling, weapons manufacturing and logging, as well as companies that are proven to be exploiting workers, whether through underpayment or poor conditions. Similarly, Australian Ethical is more than willing to back companies involved in clean energy, research, medical solutions and those innovating to deliver new, more sustainable healthcare and other technologies. This approach has seen ratings agency Super Ratings award the company its ‘Infinity’ prize for having the best sustainable super fund. The Australian Ethical super products now represent some $3.3 billion of the $5.05 billion under management, and have been the fastest-growing part of its business. In fact, the balanced option was ranked third in 2020, managing to deliver a return of 7.8%, more than double the median balanced option, which returned 3.5% for the year. All this while investing into a portfolio that exhibited 75 per cent less carbon emissions than the benchmark.
This powerful performance was driven by the group’s success in the Australian equity allocation, which is managed in-house. The option and associated funds delivered massive outperformance, returning over 19 per cent compared to -1.5% for the S&P/ASX 200 across the calendar year. It was a willingness to back in some cases “expensive” companies but those involved in reducing Australia and New Zealand’s environmental footprint. The standout was data centre and cybersecurity operator, Macquarie Telecom (ASX: MAQ), which saw huge growth from the digitalisation of Australian businesses and the need to move online. Similarly, the company turned to two NZ-based energy groups, Meridian and Contact, for its energy exposure: the pair deliver 50 per cent of the country’s energy but do so with a growing amount of renewable sources.
It is within its smaller-company-focused Emerging Companies strategy that the firm’s backing of innovative, sustainable businesses truly comes to the fore. The portfolio, which grew 35 per cent for the calendar year, includes a range of high-growth companies ranging from Mach7 Technologies (ASX: M7T), which seeks to assist medical facilities to deliver more efficient services, to Cogstate (ASX: CGS), which measures brain health and seeks to identify impairment before it becomes a health risk.
As is always the case, scale matters for fund managers, and Australian Ethical appears to be getting there. The company reported revenue of $49.9 million in FY20, a 22 per cent increase on FY19, contributing to a 46 per cent increase in profit, to $9.5 million. With the company continuing to prove that sustainable investing can be profitable, both for shareholders and investors, Australian Ethical looks poised to continue its growth trajectory, as investors demand more transparency from their advisers and managers alike.
