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When ethical investing demands more than fluffy answers

John McMurdo is Chief Executive Officer and Managing Director and David Macri is Chief Investment Officer at Australian Ethical, a listed fund manager currently managing about $4 billion for Australian clients.


GH: A listed fund manager has multiple stakeholders. How do you balance them and what are the major metrics on the way you measure the business and your performance?

JM: Clients come first. Investment performance will always be the key test, we couple that with measuring client overall satisfaction using a Net Promoter Score. That includes both underlying investors and financial advisers. For shareholders, profit and total shareholder returns are key. But like all investment management companies, funds under management is important as it measures not only our growth as a company but also the growing impact our customers are having on the planet and people via how their money is invested. And culture is everything. We run an engagement survey with staff to test all dimensions of our culture. We apply to our own business the various tools we use to assess companies for our portfolios, including a focus on diversity and inclusion.

So balancing all those stakeholders is deliberate and we believe strongly in the interconnectedness of each measure, not just shareholder outcomes. It creates a whole that is better than the sum of the parts.

GH: Do your investors and shareholders invest with you because of your ethical position or for investment performance, or is it not possible to separate the two?

JM: We think people are attracted to us for both in some combination. Some invest for ethical reasons and enjoy the performance, while others want performance and are reassured by the ethics. We are showing you can achieve both.

DM: From an investment perspective, we don't like to separate those two things, it is just one process and one style. It doesn't work if we don't deliver investment performance and alternatively, if we're delivering investment performance without being true to the ethical charter, that’s not what our customers want.

GH: But my ethics are not your ethics and your ethics may not be the same as your portfolio managers. How does this play out internally and what if a portfolio manager says, “I liked that company and you forced me to sell it and the price rose?”

DM: Yes, I agree, everyone has different values and it's impossible for us to manage based on individual values. So we have a principles-based Ethical Charter. It states 23 principles that we abide by. So yes, a lot of work goes into interpreting the principles and how we apply them to the investment universe. A portfolio manager would not get penalised for divesting out of a company on ethical grounds and then the share price goes up.

GH: John, I realise you've only been at AE for six months but is there an example of a value or principle that has changed, that was previously acceptable to the community but is no longer?

JM: My overall comment is that the Charter has served us well since inception in 1986. Take gender issues, for example. We are one of the significant minority of ASX300 companies to have 50% gender diversity at both board and executive management level. We have documented frameworks on screening companies for discrimination, lack of inclusion, harassment. So less has changed than more as we stick to our principles.

DM: We've always been true to our values and you can finally see other examples of that as mainstream fund managers and shareholders are holding boards to account on culture and behavior.

GH: We receive articles regularly from dozens of fund managers and it's common to position their businesses around ethics and sustainable investing and ESG. When they start an article with, “Sustainable investing has come of age”, it’s as if they've just discovered something. Doesn’t that make it a crowded space for Australian Ethical to stand above?

JM: There's no doubt the competitive landscape has changed as others replicate what we do. I welcome it. A deeper, stronger ethical investing sector will be good for clients and good for the world. But we have what I call ‘ethical authenticity’. Unlike competitors who may offer one or two sustainable options, sustainability and ethics are at the heart of our business and portfolios. It's all we do.

GH: I was chatting with John Pearce, CIO of UniSuper, and he said that if he disagrees with what a company is doing, he needs to decide if it is better to stay as a shareholder and influence them from inside the tent, or go for the big divestment headline and sell the company. What’s your view?

DM: The ideal scenario is where you engage, and attempt change in a positive way. But without the threat of divestment, you find yourself in a continuous loop of discussions and there's no real motivation for the company to change. You keep putting in the questions and the fluffy answers come back.

There must be progress and a motivating factor for them to improve something. You need a lot of shares in a company to really influence, so divestment elevates the issue, sometimes in the public domain, and creates some urgency. And we find that you don’t necessarily need to own shares to engage with a company, particularly if you’re a large institutional investor. Corporates are always eager to speak to large influential investors.

JM: In FY20, we engaged with over 400 companies on environmental and people issues, and we believe at least 70 of those led to a genuine change. We take it seriously.

GH: In your results presentation, the average revenue margin has been falling for many years. Do you have a deliberate policy on reducing fees as you grow?

JM: We do, and we will continue. We're committed to making ethical investing as affordable and accessible as possible. It’s an equitable balance between stakeholders so both shareholders and clients share in the success of our growing scale.

GH: And you also called out the 638 investors who closed their superannuation accounts under the pandemic early access rules. Do you have a view on people accessing super early?

JM: Yes, I have a couple of perspectives on it. First, we believe it's the investors’ money, and if accessing it early helps their financial security, then we support it in these extraordinary times. But we’re anxious to avoid it becoming a common event with super reduced to a glorified bank account. We all know the benefits of long-term compounding and we need to make sure people's futures are protected.

GH: Accepting that in the privileged position we're all in, we can't criticise someone who's struggling to pay off a loan or put food on the table. But a lot of success in the last six months of Harvey Norman and JB HiFi and Kogan is people withdrawing super and not spending it the right way. Do you think that this early access to super has been too easy?

JM: Hindsight would tell us that’s likely the case, but I'm sympathetic to the government’s need to take drastic and fast measures without the fine detail being perfect. With more time, they may have been more tailored than the policy that was rolled out.

GH: Your flows have been strong in the last six to 12 months, what type of investor is the money coming from?

JM: Yes, we’ve had 100% growth in net flows. It's a seismic shift in investor sentiment, where people want to see their money do well and do good. The research shows that two in every three Australians want to be certain that their superannuation and investments are not harming the planet. And 62% of Australians accept that ethical investing provides better long-term performance. We're seeing it across the age spectrum from younger millennials to middle age and older. Clients were more the younger demographic three years ago but it’s now very broad.

GH: Is it adviser-led or direct?

JM: Both. A lot of clients come direct, but advisers are also saying they want to be on the front foot of the ESG change, investing in both the funds format and managed accounts on platforms. And if we see demand to deliver our funds in a different way, such as listed vehicles, we'll consider it, especially as technology improves.

GH: It’s a strange market at the moment. Your own share price has a 12-month high of around $9 and a low of $2 and it’s around $5 now. The headline in the AFR today says 'ASX rises 1.6%, GDP falls 7%'. What’s your take on what’s happening?

JM: There’s a lot of looking through to the end of the pandemic, which we do too. The world is not going to end even if it will not go exactly back to normal. We’ll still have great companies delivering great results, especially post a vaccine, but there'll be plenty of volatility still to come.

DM: Nobody likes seeing these dismal economic numbers, but the market is good at looking well ahead. We already knew we were in a recession, so the GDP fall wasn't news. We will definitely see a rebound although we don't know the duration of the downturn. So we look through it and come to a fundamental intrinsic value of a company that we hold. If they benefit from COVID, that's great. If they don't, is it an opportunity? We stick to our processes and the fundamentals of investing to construct diversified portfolios.


Graham Hand is Managing Editor of Firstlinks. John McMurdo is Chief Executive and David Macri is Chief Investment Officer at Australian Ethical, a sponsor of Firstlinks. David did a recent review of 2019/2020 here. This article is general information and does not consider the circumstances of any investor.


Warren Bird
September 11, 2020

The Uniting Church wrote its ethical investment policy not long after it came into existence as a denomination, which was in 1977. I have an original of the first version from 1980 in my drawer at work.
The principles have not changed in over 40 years. They get looked at and reviewed regularly, but they are as fresh and relevant as they were back then - probably a benefit of basing them on beliefs dating back a couple of thousand years in the first place!
What has changed - and I will take some credit for this since I became the Executive Director of UFS nearly 6 years ago - is that the policy now has a stronger emphasis on positive outcomes. Exclusions are still there, as the Church doesn't want to profit from certain kinds of activity so just won't invest in them, but we now also look to invest in companies and securities that deliver a positive social or environmental benefit.
There is an asymmetry in a sense. While we're prepared to miss out on market-beating returns if an excluded company does very well financially, we don't invest in positive programs just for the sake of it. (The Church does plenty of that in its normal day to day activities, but not in the investment portfolios that we manage.) We look for attractive financial outcomes from the positive investments - either in an above-average expected return or a reasonable return, but from a structure that provides correlation/diversification benefits to the portfolio.
Interestingly, the 14 ethical principles in our policy align very closely with the Sustainable Development Goals of the UN. We're well positioned, therefore, to be measuring our investments in an SDG framework. It seems that the rest of the world is catching up with the Church at last as the SDGs are becoming the universal language of responsible investment.
So, to address the question in the title of the article - I'd say that ethical investing always demands answers that are not fluffy. Clear principles, that are in the manager's DNA and not just a box-ticking thing, embedded in the investment decision-making in combination with strong financial investment criteria are always needed.
Yes, our ethics mightn't be someone else's. But if the ethics you're embedding in the portfolio are clearly stated, then people can either get on board or go somewhere else.
(And by the way, UFS investments are available for wholesale investors - both fixed term debentures that are liabilities on our balance sheet and units in our managed funds. If anyone's interested in finding out more, you can find me on LinkedIn and send a message.)

Gary M
September 10, 2020

But we should also acknowledge that some of our best executives who have created leading companies don't care what anyone else thinks. Gerry Harvey, Chris Corrigan, the Packers, and yes even Rupert Murdoch for all his political faults, they just get on with running their companies and you either get a board or get out.

Phil Preston
September 10, 2020

Good insights, thanks


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