Australian Ethical delivers slight profit growth, raises red flags over fund manager "greenwashing"

Australian Ethical delivers slight profit growth, raises red flags over fund manager "greenwashing"

Picture from Jan Kopriva (unsplash)

Having dropped more than 40 per cent in value since the start of the year, the Australian Ethical (ASX: AEF) share price has continued on its volatile path following a mixed set of results published today.

Statutory profit in the December half remained relatively unchanged growing 3 per cent to $5.5 million, as the ethical investment and super fund manager tried to calm investors’ nerves by highlighting a 38 per cent rise in operating revenue of $35.2 million due to strong investment performance and steady customer growth.

Although the results presentation was abruptly terminated without giving guests sufficient opportunities to ask questions - something a company spokesperson apologised for, attributing it to technical difficulties with the webcast provider - investors can take some comfort from funds under management (FUM) growth of 38 per cent to $6.94 billion.

Underlying profit after tax was up 12 per cent to $5.4 million as operating expenses rose by almost half, although this was in line with Australian Ethical's growth strategy outlined in its FY21 results.

"Australian Ethical has seen continuing strong momentum as growing numbers of Australians choose to invest in line with their values,” CEO and managing director of Australian Ethical, John McMurdo, said.

"It's also clear that Australians are not being fooled by companies or fund managers that only pay lip service to ethical practices.

“While the majority of the mainstream investment market now claims to be investing responsibly or following principles of ESG, it is clear that the most ESG capital is flowing to leading fund managers with a longer track record of ethical investment.”

More positive highlights include superannuation net flows increasing by 45 per cent for the half year, driven by direct channel growth, and the average FUM, the primary revenue driver of the business, growing by 47 per cent.

The bulk of managed funds in FUM came from wholesale investors, while the majority of super FUM came from direct channel retail investors.

Since 31 December 2020, Australian Ethical has grown its customer base by 22 per cent, its managed fund customers by 32 per cent and its super members by 20 per cent.

The investment company invested strongly in brand awareness and marketing, and expenses relating to implementing technology initiatives, new product launches, and M&A due diligence increased.

The award-winning business also invested in strategic hires, with headcount increasing by 15 per cent since June 2021, as it responds to more regulatory scrutiny within the sector.

Expecting a global ethical standard to emerge shortly, Australian Ethical believe it is in a strong position to take advantage.

“There is growing global unease about the risks of greenwashing of financial products – partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area,” an Australian Ethical spokesperson told Business News Australia

“We believe misrepresentation of such products poses a threat to a fair and efficient financial system and undermines the trust of investors and consumers," the spokesperson said.

“But progress is being made on rules and standards for ESG investments and companies, which will be important elements in maintaining momentum and preventing greenwashing.”

A breakdown of investments per sector shows the company invests 24.8 per cent in the financials sector, 20.9 per cent in IT, 14.3 per cent in health care and 11.4 per cent in communications. All investments referred to are from the most recent portfolio provided, dated 30 June 2021, and percentage holdings were not reported. 

The investment management company has hundreds of investments including individual holdings in Google's parent company Alphabet, Facebook owner Meta, Square and Afterpay owner Block, Netflix, PayPal, AT&T, Aon, Visa, Dexus (ASX: DXS), Mirvac (ASX: MGR), Humm (ASX: HUM), Blackmores (ASX: BKL), Sonic Healthcare (ASX: SHL), Hong Kong developer Hysan Development Co and Xinjiang Goldwind Science & Technology Co.

Australian Ethical doesn’t invest in fossil fuel companies, and it has a low exposure, roughly 3 per cent, to the materials sector, which includes mining of non-renewable resources, including investments such as Pilbara Minerals (ASX: PLS), Salt Lake Potash (ASX: SO4) and the lithium miner Allkem (ASX: AKE).

"As Australia's original and leading ethical investor, we are well-positioned to capture a significant share of this rapidly growing market,” McMurdo said.

"We are also mindful that current volatility is likely to continue. Even with restrictions easing, the sweeping impact of Omicron shows that sentiment around the pandemic can still shift quickly, while inflationary pressures and political tensions are a front-of-mind concern for investors.

“While we remain well-positioned to benefit from regulatory, policy, market, and investor tailwinds, any outlook is subject to economic and market conditions. We remain focused on implementing our long-term strategic roadmap to capture the significant opportunities amid growing demand from retail and institutional investors for quality, ethical investing solutions.”

Australian Ethical donates 10 per cent of its annual profits after tax to charitable organisations through its foundation.

An interim dividend of $0.03 per share, fully franked, was announced. 

Shares in Australian Ethical (ASX: AEF) were down 4.35 per cent, as of 14.23 AEDT, following the announcement of the results.

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