Australian Ethical’s John McMurdo says ‘culture is everything’

Controversies at Rio Tinto and AMP underscore key risks around destruction of value, says Australian Ethical Investment CEO.

Australian Ethical Investment CEO John McMurdo. Picture: Jane Dempster/The Australian.

Australian Ethical Investment chief John McMurdo says a company’s culture and governance is “intrinsically linked” to financial performance, with controversies at Rio Tinto and AMP underscoring key risks around the destruction of value.

His comments came as ASX-listed Australian Ethical, which has almost $4.1bn in funds under management, targeted at least a five-fold increase in that figure by the end of 2025 to capitalise on heightened interest in the investment style.

Mr McMurdo said Australian Ethical held a strong view that “culture is everything”, applying it across investment screens and when its staff engage with more than 400 companies annually. That is an attempt to weed out any “time bombs” in the investment portfolio.

“It does cause serious destruction of value when these issues flare up, so that’s exactly what we have an eye on,” he said.

“Rio, and AMP before it, clearly show where society’s and investors’ expectations are at. They want action, which translates into real change that will stop the same terrible mistakes and misconduct recurring. That means action well beyond an apology and a few bonus cuts.”

Earlier this month, Rio announced the exit of CEO Jean-­Sebastien Jacques and two executives as a result of an investor backlash against its destruction of the ancient Juukan Gorge rock shelters in the Pilbara.

Investor pressure also recently sparked the departure of AMP chairman David Murray, a result of how the company handled a 2017 sexual harassment complaint by deciding to promote perpetrator Boe Pahari to lead its capital division.

Mr Pahari was demoted at the same time Mr Murray’s exit was announced, and the events followed the resignation of AMP executive Alex Wade in August for inappropriate conduct, casting a further shadow over the group’s culture.

Conduct issues also cost QBE Insurance CEO Pat Regan his job early this month.

“Often deep cultural change is needed if there’s a history of just paying lip service to social and environmental responsibilities,” Mr McMurdo said. “Holding senior leaders accountable helps send a message that these things genuinely matter, and can be an important step on the way to an ethical business culture.” He said Australian Ethical had divested its AMP holding in 2018.

The firm focuses on investments that meet its 1986 charter, and span environmental, social, and governance (ESG) metrics.

As a sector, ESG investing has outperformed this year during the pandemic, as traditional energy industries and investments were hard hit by reduced demand and COVID-19 price volatility.

While Australian Ethical doesn’t completely avoid investments in fossil fuel industries, it opts for those that don’t count them as their main business and have targets to transition to newer forms of energy, or offset carbon exposures.

Mr McMurdo said companies were not “automatically ruled out”, but Australian Ethical engaged closely on their approach to the environment.

“We are overweight new world sectors and businesses, and certainly renewable energy businesses but also tech businesses, data, healthcare, health advancement, growth sectors and businesses that offer attractive returns and are good for the people and the planet,” he said.

Mr McMurdo, who started in the top job in February, sees Australian Ethical capitalising on increased demand for ESG managers across the direct consumer, financial adviser and institutional market segments.

Interest in ESG investing has been buoyed by the pandemic, but also by the devastating bushfires that swept Australia in late 2019 and early this year.

While initially sceptical of ethical investing, Mr McMurdo said he had been converted several years ago to its benefits and financial results, noting a recent “seismic change” in the domestic market. “Ethical investing is just smart investing,” he said.

Mr McMurdo said the federal government’s plan for the economy to emerge from COVID-19 and recession was an opportunity to rethink future growth drivers.

“What are the economy and the sectors we build on a 20, 30 and 50-year view that can set this country up well for decades?” he said. “Companies and investors are still looking for the clarity of a long-term energy and climate policy framework. Two of the biggest missing pieces are a target of net zero emissions by 2050 and a price on carbon emissions to drive innovation and investment.

“The government can promise money for research on carbon capture and storage, but that won’t drive private sector investment in the technology.”

Globally, the ESG sector across active managers and exchange traded funds is getting traction. In the US, a Morningstar report in July showed continued record net flows into sustainable investment funds in the second quarter, taking the first-half 2020 total to $US20.9bn and just shy of 2019’s annual record of $US21.4bn.

The latest Responsible Investment Association Australasia report showed assets under management in the category climbed 17 per cent last year.

Australian Ethical posted robust results for the year to June 30, with annual profit surging 46 per cent, funds under management up 19 per cent and customer numbers rising.

Australian Ethical’s MySuper fund ranked second last fiscal year with returns of 2.8 per cent, trailing only Suncorp’s multi-manager fund, according to Chant West data. Those rankings look at the growth category defined as those allocating 61-80 per cent of funds to growth assets, net of investment fees and tax but before administration fees.

Over seven years, Australian Ethical’s returns in that category drop into the second quartile. The firm’s emerging companies fund booked performance fees last financial year, due to outperformance relative to its benchmark.

Australian Ethical’s shares fell on Tuesday, but are up 19.3 per cent since the start of the year.