Now established as an award-winning fund with investments based on strong ethical principles, Australian Ethical has grown from an idealistic concept to a vehicle with A$460 million funds under management. Recognised as winner of the Standard & Poor’s 2005 Australian Fund Award in the Balanced Funds (Neutral Category), it’s been a long journey for those behind the fund.

In 1985, a group of idealists came up with the concept of creating a fund that would base its investments on ethical principles. The group, led by funds manager and share trader Damien Lynch, raised capital among friends and associates. About 50 people invested between A$2,000 and A$50,000 each.

One investor was James Thier, economist/town planner and who is now executive director of Australian Ethical. By 1987 they created a private investment trust, with an investment philosophy based on an ethical charter still used today. The charter espouses seeking out investments that alleviate poverty, preserve eco-systems and develop sustainable land use and food production, among others. It also seeks to avoid investments that unnecessarily pollute, waste non-recurring resources, entice people into financial over-commitment and other criteria.

The group worked with the then-NSW Corporate Affairs to obtain the necessary licences for a public capital raising, resulting in a public launch in 1989. It first operated out of an office in Broadway in Sydney. “We had initial inflow projections that we would receive A$10 million of investment in the first six months,” says Thier, reflecting on the group’s optimism. “But it took six years – not six months –to get to that level of investment.”

“We almost went out of business”

Thier concedes that although the fund’s investments were sound, the venture’s operating costs were onerous. “We almost went out of business in 1991,” says Thier. “Costs were running above revenues. There were a lot of people who loved the company but who didn’t have the abilities or knowledge to run it as an investment company.”

The board was revamped, and, to cut costs, headquarters moved from Sydney to Canberra, where most of the new board were located. The fund needed more money to continue and existing shareholders managed to raise about A$150,000. The extra funds were enough to pay for an office administrator and operating expenses. The five executive directors were largely unpaid.

Considering its low starting base, growth has been exponential. In 1987, funds under management were A$500,000. By 1989, this had grown to A$2 million. In 2006, the figure was A$460 million.

James says there have been three waves of investment. “In the early days, the first generation of people were investors who liked the idea but who almost treated it like a charity. The second generation of investors realised our returns were pretty reasonable but also liked the fact we had ethics, so they wanted to get involved. The third generation is far more from people who are attracted by the great returns first and then they learn about the ethics. It used to be the other way around.

“It’s taken perseverance. It’s been a slog to keep on going sometimes. We had to change people’s mindsets, to show people this can be profitable.”

One of the reasons it’s been a long road for Australian Ethical is because its funds are largely derived from individual investors – the mums and dads of the investment world – as opposed to institutional investors.

Thier points out that most other funds which now label themselves socially responsible or sustainable are spun off from a parent fund from a mainstream institution – with the exception of Hunter Hall. “Also most funds still only invest in large listed companies but we invest in smaller companies as well, internationally and locally. We also invest in some unlisted private companies and we do loans and property too.”

Influencing business practices

Apart from the knowledge that investment dollars go into ethically-run businesses, Australian Ethical also hopes to influence investment thinking and practices of mainstream companies. “There are some major blue chip companies who continually ask us if their sustainability reports are okay, who ask us to invest in them because now they want the imprimatur of Australian Ethical,” says Thier.

He also points to how the fund may influence the business decisions of companies in which it currently invests. “Australian Ethical has a long tradition of engagement with the companies that we invest in,” says Thier. “In 2000 we became aware that Timbercorp had cleared remnant timber that had been marked as nesting sites for an endangered species of cockatoo. Following discussion with Birds Australia, Australian Ethical notified Timbercorp of our concerns about their remnant timber policy, and subsequently divested.

“This situation was explained to our unit-holders through a newsletter, and our divestment was reported in local newspapers. We continued to monitor Timbercorp’s activities, and were pleased to note in 2004 that the company had become the first plantation manager in Australia to achieve the highly regarded Forest Stewardship Council certification.

“This program is an international initiative involving NGOs as well as industry and government interests, and represents best practice in terms of environmentally friendly plantation management. Timbercorp’s certification motivated Australian Ethical to review our position on the company, and we have held shares in them at various times since then.”

Thier adds: “Initially, people used to tell us that government should be responsible for influencing the ethics of companies. We think people are meant to do it.”

He summarises Australian Ethical’s aim with a quote from anthropologist Margaret Mead: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.”

www.austethical.com.au

From permaculture to profits

Most of the people in the core group of initial investors had known each other through their interest in permaculture – referring to systems of land-use based upon ethics for caring for the earth and using resources in a sustainable way. According to James Thier, this posed the question: “If we care for the earth in an ethical way and, for example, don’t want exogenous inputs such as fertiliser and pesticides, why doesn’t our capital do the same thing?”

Thier says this was the kernel that formed the first trust, which was initially called August Investments, followed by the tag line: An ethical investment.

The name changed to Australian Ethical in 1994.