Here are two companies that have been through our rigorous screening process: one that currently passes our Ethical Charter, and one that doesn’t (yet).
Before a company can be added to our investment portfolios it must pass the Australian Ethical Charter. The Charter is a list of 23 principles – 12 positive and 11 negative – that have been unchanged since we were founded 33 years ago. Our Ethics team interpret the Charter to determine whether a company creates a positive impact and avoids unnecessary harm. If the Ethics team gives it the all clear, it’s over to the Investment team who evaluate the risk versus potential return of the company and ultimately decide whether we will invest.
Domain is an example of a company that passes both our ethical screening process and our stringent investment criteria. The company provides residential and commercial property marketing services through its Domain listings portal via desktop, mobile and social media (along with a relatively small amount of print advertising). It was a wholly owned subsidiary of Fairfax Media until it was listed on the Australian Securities Exchange (ASX) as a public company in November 2017. Fairfax (now Nine) has retained a 60% ownership of shares in Domain.
Domain’s digital advertising platform is positive under our Charter as an efficient medium of advertising compared to print advertising. We also believe the platform enables the efficient filtering and searching for properties for sale or rent. Because it helps people secure housing, Domain attracts a positive adjustment under principle h. of our Charter (ie, activities which contribute to human happiness, dignity and education).
Advertising may be assessed as negative where it encourages over-consumption or mis-consumption. In this case the informational content of Domain’s online property advertising is relatively high, and it can play an important role helping people looking to buy or rent property. Although there are legitimate concerns about people taking on excessive debt through home acquisition and property investment, and/or being misled about the merits of specific properties, we do not consider online advertising platforms like Domain to be responsible for this.
From an investment point of view, Domain is firmly established as the number two in digital property advertising in Australia behind REA Group. There are structural tailwinds supporting these businesses as property listings continue to flow out of print and into online platforms. We believe Domain has a strong management team backed by Nine’s ownership of the company and healthy cashflows with the potential for higher earnings growth.
Prospa is an online lender to small businesses (also known as small and medium-sized enterprises, or SMEs). While SME lending is not regulated in the same way as consumer lending, a group of SME lenders have signed up to an industry Code of Lending Practice. While Prospa is a signatory to the code, it has also promoted its loans using non-standard terminology and phrases like ‘annual simple interest rates’. This is an interest rate calculated on the initial loan balance, without taking into account the reducing balance over the life of the loan. That means they promoted ‘rates from 9.9% p.a.’ when the effective interest rate was double this amount. We thought it likely that borrowers would confuse this rate with things like home loans and credit card rates, which are applied to the outstanding loan balance.
Ultimately, we decided the way Prospa has disclosed its interest rate created a risk that borrowers could misunderstand the cost of credit. As a result, we have excluded the company on ethical grounds.
Prospa has also had to contend with concerns from ASIC that its standard form contracts may contain unfair clauses in breach of consumer laws – something that derailed the company’s attempt to list on the ASX in June 2018. Prospa subsequently amended its contract terms in September 2018 in a move that was welcomed by Small Business Ombudsman Kate Carnell.
In addition to pressure from Ms Carnell, we have written to Prospa about its promotion of ‘rates from 9.9% p.a.’. Since then, Prospa appears to have removed the claim from their website. This is an encouraging development and we’ll continue to keep them under review. In particular, we’ll be looking to see whether they communicate their interests rates honestly across all channels (ie, not just on their website). No company is perfect, and it’s great to see innovative new companies like Prospa show they are willing to do the right thing.
Mark Williams is an equities analyst at Australian Ethical.