Community advocate and ethical fund CEO Phil Vernon believes in the transformative power of capital, the individual investor and music. His performance at Australian Ethical has transfixed the market, its strong returns and booming share price busting the myth that doing good with your money comes at a cost.
Rock star CEO Phil Vernon is wowing city markets by day with upbeat spreadsheets and music tragics by night as a punk guitarist in a heavy metal Alternative Anthems gig. One of the nation’s largest and fastest growing ethical super funds, Australian Ethical is disrupting investment markets in much the same way alternative music rose from the '80s underground fringe to peaks of mainstream popularity.
With its Australian Shares option consistently outperforming peers over the past decade and savvy digital marketing tapping into rising consumer demand for sustainable products, new members are flocking to Australian Ethical at a rate of over 600 a month, encouraged they can both help save the planet and turn a profit from new-world, environmentally sensitive investments.
As demonstrated by commitments made at last year’s Paris Climate Summit, political and shareholder demand for responsible investment is at a tipping point, destined, Vernon says, to shift capital out of “the old fossil-fuel-based economy into a new economy based around renewable energy, improved energy efficiency and sustainable products”.
Australia’s tipping point is officially at 47%, with Responsible Investment Association Australasia (RIAA) reporting in July that 47%, or $633 billion, of assets under management in Australia in 2015 were invested in ‘responsible’ investment funds, outperforming mainstream funds by more than 5%. RIAA’s Benchmark Report 2015 found the average return for responsible investment funds was 8.3% over the past year, compared with a Large Cap Australian Share fund average return of 3.2% and the ASX 300 Accumulation Index return of 2.6%.
“As investors become increasingly concerned about the effects of climate change,” Vernon says, “they become more frustrated with the lack of political action and look for opportunities to use the power of their investments to drive positive change.
“Increasing numbers of fund members are moving their money to Australian Ethical because they want their money do good both for them and the planet. Our net in inflows reflect this, reaching $319 million during the 12 months to 30 June 2016, 78% higher than in 2015.
“We have busted the myth that investing ethically comes at the cost of good returns. Our Australian Shares option has returned 8.7% for the past 10 years, beating its benchmark by 9%. Recent performance has also been particularly impressive, returning an average of 12.9% per annum over the three years to June 2016.”
A strong ethical compass
Vernon’s ethical compass was largely set by his parents, both of them “hardworking, community-minded, principled people,” Vernon says. He was just 12 when his father, then-editor of the Campbelltown-Macarthur Advertiser, died unexpectedly of a stroke, catapulting the family into a single-parent household living o a pension in Sydney’s outer south west.
“My father’s early death left me with two characteristics,” Phil explains, “one, realising you have to pull yourself up by your bootstraps and find your own way, and two, a strong sense of equity and social justice; for example, I would not have made it to uni without the Whitlam reforms.”
Vernon’s mother Stella received an Order of Australia Medal for her community work, The Advertiser describing her as a “one of Campbelltown’s human treasures” when she passed away last year at 88.
“My mother’s legacy was to teach us all the value of wisdom, compassion and the drive to make change and get things done. She had all three in spades and all three working in unison is what creates a strong society and will lead to a better world,” says Vernon.
Much of Stella Vernon’s philosophy is mirrored in the Ethical Charter that guides Australian Ethical’s approach to investment and community advocacy. Her son’s decision in 2009 however, to leave a 22-year career in mainstream financial services and move into what was then the niche area of ethical investment, was prompted in part by insider exposure to the carnage of the global financial crisis (GFC) and the corporate misjudgments of the likes of insurer giant HIH and the behemoth Tasmanian logger Gunns.
Vernon worked two stints at Perpetual, initially managing corporate governance and later building its securitisation business, which coincided with the GFC and his chairmanship of the industry association, the Australian Securitisation Forum.
As a trustee for corporate debt at Perpetual, Vernon says he developed a keen eye for “cutting through to the heart of what was really going on within a company”, giving him more clarity in his securitisation role, which, “in the eye of the GFC storm, gave me a whole set of perspectives about what was working with the market and what wasn’t.
“The markets were operating so unsustainably, focused on the short term and driven by individual self-interest with no view of the collective impact that decisions were having on the broader system. Many people were concerned but were powerless to prevent it. I developed a belief that given its increasing influence on the future of our planet and society, global capital had a broader stewardship responsibility and needed a ‘moral compass’ to instil this collective responsibility into individual decision making. There had to be a better way.”
A philosophical tree-change
Initially, Vernon defended Perpetual’s position as the largest shareholder of Tasmanian logger Gunns on the basis that Perpetual investors could choose to opt out of its mainstream investment management and put their money in the firm’s ethical portfolio option if they wanted to. His faith in this system of choice and fiduciary priorities began to waver, however when the logger issued writs seeking more than $6 million in damages against 20 protesters, including a claim against a family member who had been actively involved in campaigning against logging native forests and wood chipping.
Vernon could only agree with the sentiments of the group of 40 British lawyers who wrote to The Guardian newspaper to express their concern at Gunns’ decision to sue the protesters, an act that they said could financially cripple individual defendants and have a chilling impact on freedom to protest. Australian lawyers also called for legislative reform, warning that increased litigation against community participation in public issues silenced voices that should be heard. Then a senior Perpetual executive, Vernon spoke out but “it was early days in the development of the concept of responsible investing and these sorts of concerns were not heard in the same way they may be today,” Vernon says. Gunns, like HIH before it, soon fell from market darling to public disgrace and bankruptcy.
Working out how to fix the system
“I was seeing something wrong with the system: For me it was a social justice issue as much as an environmental one. Gunns was widely condemned from a governance point of view and could survive only with the support of its shareholders. Despite governance filters however, the big end of town kept providing that support.”
Seven years into a more sustainable future at Australian Ethical, Vernon is a leading voice in a rapidly growing global responsible investment movement worth $US21.4 trillion in 2014, according to the Global Sustainable Investment Alliance.
As demand for more sustainable food, clothing, power and other consumables spills over into investment choices, Australian Ethical’s savvy digital marketing and focus on delivering “real, honest content” resonates with investors who want to “do good” with their investment dollar, but need to know it won’t come at a financial cost, believes Vernon. The firm has picked up nearly 100,000 Facebook followers in just over two years and has a highly engaged digital audience.
“From our market research, we’ve found 40% of the Australian adult population is ethically active in some way: they may consume organic or sustainable products, donate to charities or volunteer. About 10% of the population is highly ethical: making ethics a key consideration in their consumption and investment choices. at is our target market and it is huge.”
Well beyond target, Australian Ethical’s share price almost doubled this year to more than $91 when it forecast an 86% jump in annual profit and a 67% increase in net flows over the previous year.
Vernon says his greatest achievement at Australian Ethical has been to persevere through an often painful transformation to make the company live up to its mission. “I came in to make the transition from what could be described as a ‘club’ type culture to put it on a more commercial footing. We were under-invested in systems, our administration and service was poor and our fees were high. We were ethical in conviction but not doing the best for our members in many areas of practice and needed to set some goals to fix a lot of fundamental issues. It took longer than expected and didn’t come without pain. In the last three years however we, and our members, have reaped the benefit of those changes.”
Vernon’s vision for the future is to grow Australian Ethical’s FUM from $1.56 billion to $5 billion with a net-zero carbon emissions portfolio by 2050. The fund has always excluded coal, oil and unconventional gas from its investment portfolios, which partly explains its outperformance during the commodities’ downturn, but last year it became the first Australian member of the Portfolio Decarbonisation Coalition – a global alliance to decarbonise portfolios by 2050.
A “mad” Sydney Swans and Radiohead fan who is devoted to two sons, studying economics and finance at the University of Sydney, and his wife Helen who works in financial planning, Vernon lets off steam playing guitar and bass in classic rock and punk bands. He sees ethical business as the new normal. “At Australian Ethical I like to say we are part of the mainstream but simply 20 years ahead of everyone else. We are professional investment managers delivering strong returns, but without damaging the planet in the process. Sooner or later everyone will need to invest like us, otherwise we won’t have a planet left.”
This piece was originally published in Superfunds magazine, a publication of The Association of Superannuation Funds of Australia (ASFA). Written by Carolyn Swanson.