How we manage your money
Australian Ethical offers investors something extra to conventional collective investment. It applies its unique combination of financial and ethical objectives to the selection of investments. These objectives are:
- to obtain a financial return commensurate with any risk taken
- to avoid investment in activities which are socially or environmentally detrimental, and
- to participate financially in commercial activities which bring social or environmental benefits.
The application of the Australian Ethical Charter defines the universe of investments for the trusts. We invest across a broad spectrum of sectors ranging from new environmental and energy technologies to education and health (see ethical company profiles).
What the trusts invest in
Investments that meet the Australian Ethical Charter are in a range of sectors, including renewable energy, health care, education, waste management and food production. Industries such as uranium mining, armaments, tobacco and gambling are avoided.
The trusts’ constitutions permit investment in a wide range of investments. The trusts can invest in various types of shares, debentures, hybrid debt/ equity investments, managed investments, loans and other securities in Australian and overseas markets.
The provision of private loans by the trusts and investments in unlisted equity helps domestic enterprises fostering social change.
Where an Australian Ethical trust maintains cross-holdings in another Australian Ethical trust, this provides cost-efficient access to diversified portfolios.
Overseas investment gives the trusts the opportunity to participate in ethically attractive sectors which are small or undeveloped in Australia - for example, wind turbine manufacturers.
In order to limit the impact of large adverse movements in international exchange rates, the trusts undertake a partial currency hedge for each trust holding international shares.
Australian Ethical believes that sustainable returns will come from the support of businesses that are sustainable both financially and environmentally. Society will increasingly require businesses to meet the full environmental costs of production and will have an enhanced willingness to pay higher prices for those goods and services which lower environmental costs. There will be increasing demand for products which are made in an environmentally sustainable way.
Investment management
Investments are selected and portfolios constructed within the range of investments that meet the charter, based on a detailed assessment of financial soundness and value. Candidate investments are assessed on fundamental analysis of management, products, markets, cash flow, profitability and balance sheet.
Portfolios are actively managed, with constant monitoring and assessment of new market information. Portfolios are adjusted in order to buy more of those investments which are assessed as better value.
How we take labour standards, environmental, social and ethical issues into account
You will see that the Australian Ethical Charter includes matters related to labour standards, environmental and social considerations. The charter sets out the types of activities Australian Ethical seeks to support, and the types of activities it seeks to avoid. Thus, for example, it is supportive of companies whose business or activities involve the efficient use of waste, but would avoid investment in companies considered to unnecessarily promote products or services in a misleading manner.
Researchers from the Centre for Australian Ethical Research, in association with investment analysts from Australian Ethical, investigate potential investee enterprises to assess their ethical merits with reference to the charter. This work, which is appraised in detail through Australian Ethical’s investment management processes, combines with financial analysis to determine selection priorities.
Whilst there are certain types of stocks in which Australian Ethical will not invest at all because of the negative screens (for example, stocks in companies which produce tobacco, uranium or gambling), it is very active in its positive screening approach to stock selection. This differs from most ethical fund managers as Australian Ethical goes beyond merely applying negative screening to the range of possible investments.
The monitoring of investments is also very stringent. If a company Australian Ethical invests in diversifies into an excluded industry or engages in unacceptable practices, a review will be performed which may involve discussions with a company both prior to and after the event. If, on the weight of evidence, the stock is no longer appropriate, it will be divested as soon as practicable.
Debate is an integral part of this decision making process. For this reason Australian Ethical is keen to hear from you. While Australian Ethical reserves the right to exercise its judgment regarding investment selection, your opinions or any information you may give will be considered. Normally, comments about ethical profiles of investments in the underlying trusts are referred to the Centre for Australian Ethical Research, which reports regularly to Australian Ethical about communications received.
How we manage risk
Trust investments are subject to an extensive risk management framework overseen by the Australian Ethical Investment Committee. The risk management framework has at its core the principles of risk spreading through adequate diversification and risk control through the maintenance of minimum standards of financial viability of companies invested in. Once candidate investments have been identified from a wide range of sources, they are subject to detailed ethical and financial analysis by an experienced research team before a limit is approved. Investments are continuously monitored and fully reviewed regularly by the research team.
Exposure limits
The trusts’ constitution prohibits more than 10% of trust assets being invested in any one company. Through our investment processes we generally set significantly lower limits for individual company investments based on assessment of credit and business risk, market capitalisation, liquidity and ethical attractiveness. In some cases, limits are also set for asset classes, industry sectors, geographic areas and other types of correlated risk. Our investment limits are strictly observed, which means that investments are sold (or sold down) as soon as possible when these limits are exceeded (this usually occurs because of share price rises).
For more details of specific risks see the Product Disclosure Statements.