This article was originally published by Matthew Smith in The Australian Financial Review on 12 March, 2016.
Philip Vernon’s world-view and his career direction changed 10 years ago when his day job in finance intersected with his family’s part-time obsession with environmentalism.
He was a senior member in Perpetual’s securitisation business at the time when environmental protesters took their fight against Tasmanian logging company Gunns to the big end of town.
Perpetual, the largest shareholder in Gunns, and a publicly listed company, became a target for the protesters who claimed native forest was being harvested for wood chipping to be exported by the company, mostly to Japan.
“I was seeing both sides. Initially, I took the view Perpetual should keep its stake. Perpetual had an ethical fund over here and a mainstream fund it invested purely for financial return over there… but as things progressed it became less about environmental issues and more about social justice issues. I started questioning why, as an investment house, we wouldn’t care,” he said.
The other side Vernon was seeing was the draconian lawsuits Gunns had slapped on the protesters. Two of his close family members were in the mix, both full-time medical professionals and part-time crusaders; one of those family members became one of the so-called “Gunns 20” who, along with Greens senator at the time Bob Brown, were the subject of writs in the Supreme Court of Victoria reportedly worth more than $7.8 billion.
The Gunns’ experience jolted Vernon, who was until then ensconced in mainstream finance, to seek out a role in what was still a fringe area in financial markets, sustainable and ethical investing. In 2010, he became the CEO of funds management firm, Australian Ethical.
Australian Ethical has now been in existence for 30 years, but as recently as six years ago, when Vernon became CEO, he admitted the ethical banner could have been as much as a hindrance as a help for getting new money in the door.
HARD TO BREAK INTO THE MAINSTREAM
Ethical and sustainable investing has always struggled to lift itself into the mainstream and today only 2% of Australia’s total investment dollars are managed under an ethical or socially responsible banner.
It’s impossible to say exactly when peoples’ attitudes to investing ethically changed – or even if they have – but the acceleration of funds under management at Australian Ethical in the past few years has dwarfed anything in the company’s history. During the three years to the end of December last year the company has more than doubled the funds it manages to $1.4 billion.
What’s telling is where the new money is coming from: Australian Ethical is having a success with individuals seeking the company out and investing directly. About 80% of new funds come to the firm directly, according to Vernon, while most funds’ managers still receive the bulk of their funds flows via financial advisers.
The company has put extra efforts into its digital presence and treats social media interactions such as Twitter and Facebook as genuine and important engagement tools to gain new investors.
This direct approach of utilising technology melds with what the rest of the finance industry is only beginning to understand – the next generation of investors wants to direct who invests their money on their behalf and they want to feel good about how it is invested.
Compared with the overall individual investor population, Millennial investors are nearly twice as likely to invest in companies or funds that target specific social or environmental outcomes, according to global research conducted by investment firm Morgan Stanley on the topic in February last year.
“People engage with us, they’ll ask questions about our position on animal welfare or fossil fuels and our answer will tip their position. Quite often it’s not the position but it’s the time we take to explain what our position is that actually gets people to invest,” Vernon says.
Because Australian Ethical has a point of difference and a story to tell, that in itself has become its biggest marketing asset, Vernon reckons. This, he points out, contrasts with the commoditised way in which financial services are generally delivered.
“Most mainstream investment firms outsource interactions with their clients to call centres. But people want to engage because they want a conversation about the underlying stocks,” he said.
Also interesting is where the new money coming into Australian Ethical is going: most new funds into the business in recent years have been put into its superannuation product, mostly roll-overs from industry funds, Vernon says. The reason its super business is growing more than three times faster than its non-super business is because most superannuation funds offer a sustainable option but the underlying holdings look too much like other mainstream funds, he said.
It used to be that the ethical banner limited the firm’s ability to grow. But now Australian Ethical has begun to find a bloody-minded adherence to its sustainability and ethical principles has opened up a world of exponential growth. By 2020 it has set an ambitious target of $5 billion of funds under management.
Within its Australian equities portfolio the firm can invest in Westpac but none of the other big four banks. Westpac has been more forthcoming with its exposure to fossil fuels through its corporate loan books than the other three, Vernon said.
Towards the end of last year the firm made the decision to divest holdings in companies with gas pipelines. Until then companies such as the ASX-listed Duet made the fund’s investable universe on the basis it provided a reasonable transitional fuel while the clean energy economy continued to evolve. Renewable energy such as large-scale solar and battery storage has evolved enough for the funds manager to steer clear of conventional energy sources entirely. It has always avoided fossil fuels but now acknowledges the world has to move further to solve climate change issues.
Recent performance figures could have something to do with Australian Ethical’s growing popularity. Steering clear of fossil fuel meant entirely avoiding the commodities rout. In the year to the end of January it’s Australian shares fund was up 11.2% while the ASX/S&P200 was down more than 10.2%.