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1 Fr persnal use nly Crprate gvernance statement 2016 s r a e y 0 3 g in t a r b e l e C

2 Overview Our ambitin is t be the financial services cmpany f chice fr cnscius cnsumers Australian Ethical Investment Limited ( Australian Ethical ) is cmmitted t high standards f crprate gvernance. This cmmitment applies t ur relatinship with clients, emplyees, suppliers, regulatrs, sharehlders and the cmmunities in which we perate. We are cmmitted t ensuring that ur plicies and practices in crprate gvernance and the critical areas f financial and remuneratin reprting meet high levels f disclsure and cmpliance. Directrs and emplyees are required t act ethically and respnsibly at all times. The gvernance prcesses and practices adpted by Australian Ethical take int accunt the principles and recmmendatins cntained in the ASX Crprate Gvernance Cuncil Principles and Recmmendatins 3rd editin (ASX Recmmendatins). We have fllwed the ASX Recmmendatins thrugh the curse f the 2016 financial year. A cpy f the plicies and ther dcuments referred t in this reprt are als available frm the fllwing link: This Crprate Gvernance Statement is accurate and up t date at 31 August 2016 and has been apprved by the Bard. 2 Celebrating 30 years

3 Principle 1 Lay slid fundatins fr management and versight Recmmendatin 1.1 The Bard shuld disclse the rles and respnsibilities f Bard and Management Australian Ethical is gverned by a Bard f Directrs appinted by sharehlders. The Bard has tw cmmittees an Audit, Cmpliance and Risk Cmmittee and a Peple, Remuneratin and Nminatins Cmmittee. The Bard Cmmittees are delegated with all necessary authrity t carry ut their functins as set ut in Bard Cmmittee Charters which are available frm ur website. Our Cnstitutin requires us t perate in a way that prmtes the Australian Ethical Charter. The Charter requires cnsideratin f ecnmic, envirnmental and scial impact when making investments and managing the cmpany. The Cmpany has frmalised the functins reserved t the Bard and thse delegated t Management. The Managing Directr is delegated with all necessary authrity t manage Australian Ethical ther than thse respnsibilities reserved t the Bard and delegatins (general r specific) made by the Bard t the Chair, Bard Cmmittees, Directrs r ther senir executives. The divisin f rles and respnsibilities between the Bard, the Cmmittees and the Managing Directr is reviewed annually t ensure the divisin f respnsibility remains apprpriate. Recmmendatin 1.2 Fit and Prper Checks fr Directrs Candidates nminated fr electin as Directrs are subject t cmpetency and prbity assessments. As part f this prcess, candidates are asked t prvide us with details f their ther cmmitments. Candidates are als given an indicatin f the time invlved shuld they be successful and asked t specifically acknwledge that they will have sufficient time t fulfil their respnsibilities as a Directr f Australian Ethical. The Cmpany endeavurs t ensure that sufficient infrmatin is prvided t sharehlders t enable them t make an infrmed decisin n whether r nt t elect r re-elect a candidate as Directr. This infrmatin is prvided in the Ntice f Meeting issued in relatin t the meeting at which the vte will ccur. Recmmendatin 1.3 Terms f Appintment In the appintment prcess each Directr is asked t sign a letter f appintment and each senir executive signs an emplyment cntract, setting ut the terms, cnditins, expectatins and entitlements f the appintment. Independent Legal and ther Prfessinal Advice Directrs have the right t seek independent legal and ther prfessinal advice at Australian Ethical s expense in rder t fulfil their duties and respnsibilities as Directrs, subject t the fllwing: they must have the prir apprval f the Chair t seek the specific independent legal and ther prfessinal advice; they must ensure the csts are reasnable; and Celebrating 30 years 3

4 any advice received must be made available t the rest f the Bard unless either the Chair r the Bard agree that the rest f the Bard des nt need t see the advice. Recmmendatin 1.4 Cmpany Secretary The Cmpany Secretary is directly accuntable t the Bard, thrugh the Chair, n all matters assciated with the prper functining f the Bard. All Directrs are able t cmmunicate directly with the Cmpany Secretary. Recmmendatin 1.5 Diversity and Inclusin The Bard has charged the Peple, Remuneratin and Nminatins Cmmittee with respnsibility fr setting measurable bjectives fr achieving gender diversity and annually reviewing these bjectives and the Cmpany s prgress twards achieving them. Our Annual and Sustainability Reprt 2016 cntains detailed reprting in relatin t diversity amng Directrs, Senir Management and emplyees. The reprt is available frm ur website. Recmmendatin 1.6 Evaluating the Perfrmance f the Bard, the Cmmittees and Directrs The Bard appinted an external facilitatr t evaluate its perfrmance during the current reprting perid. The Bard intends t cntinue t cnduct annual evaluatins and t peridically wrk with an external facilitatr. Recmmendatin 1.7 Evaluating the Perfrmance f Senir Executives Executive perfrmance is evaluated in accrdance with ur perfrmance review guidelines. The Chair cnducts the Managing Directr s perfrmance review. The Managing Directr cnducts the perfrmance reviews f the ther Senir Executives. An evaluatin f the Managing Directr and each f the Senir Executives was undertaken in the reprting perid. 4 Celebrating 30 years

5 Principle 2 Structure the Bard t add value Recmmendatin 2.1 The Bard shuld establish an apprpriately structured nminatin cmmittee The Bard has a Peple, Remuneratin and Nminatins (PRN) Cmmittee cmprising f the Chair and three Independent Nn-Executive Directrs. The qualificatins f the members f the PRN Cmmittee are in the Directrs Reprt, as are the number f meetings and attendance at thse meetings. Frm a nminatins perspective, the PRN Cmmittee is respnsible fr the fllwing matters: a. assessing the necessary and desirable cmpetencies f prspective Directrs; b. ensuring that the current cmpsitin f the Bard demnstrates an apprpriate mix f cmpetencies t allw the Bard t discharge its respnsibilities effectively; c. ensuring that Directrs have access t apprpriate cntinuing educatin which updates and enhances their skills and knwledge; d. develping a Bard successin plan t ensure that an apprpriate balance f skills, experience and expertise is maintained n the Bard at all times; e. making recmmendatins in relatin t the appintment and retirement f Directrs; and f. seeking assurance frm Management that: prspective Directrs meet the minimum fit and prper requirements; and there is an inductin prgram in place and that new Directrs undertake the prgram within three mnths f appintment. The PRN Cmmittee Charter is available frm ur website. Recmmendatin 2.2 The Bard shuld establish and disclse a Bard skills matrix n the mix f skills and diversity f Bard members Our Bard has a brad range f financial knwledge and experience relevant t verseeing the business f an ethical investment and superannuatin cmpany and cllectively has apprpriate skills t perfrm its rles during the reprting perid. Recmmendatin 2.3 The Cmpany shuld disclse whether its Directrs are independent A Directr is an Independent Directr if they are a Nn-Executive Directr and: a. are nt a substantial sharehlder (as defined in the Crpratins Act 2001) r an fficer f, r therwise assciated directly with, a substantial sharehlder f the Cmpany; b. within the last three years has nt been emplyed in an executive capacity by the Cmpany r anther grup member, r been a Directr after ceasing t hld any such emplyment; c. has nt been a principal r emplyee f a material prfessinal adviser r a material cnsultant t the Cmpany r anther Grup member, r an emplyee materially assciated with the service prvided in the last three years; Celebrating 30 years 5

6 d. is nt a material supplier r custmer f the Cmpany r anther Grup member, r an fficer f r therwise assciated directly r indirectly with a material supplier r custmer; e. has n material cntractual relatinship with the Cmpany r anther Grup member ther than as a directr f the Cmpany; and f. is free frm any interest and any business r ther relatinship which culd, r culd reasnably be perceived t, materially interfere with the Directr s ability t act in the best interests f the Cmpany. The classificatin f Directrs wh held ffice during the reprting perid is set ut belw. Directr Stephen Gibbs (Chair) Mara Bun Tny Cle, AO Kate Greenhill Status Independent Nn-Executive Directr Independent Nn-Executive Directr Independent Nn-Executive Directr Independent Nn-Executive Directr Appinted by the Bard n 25 July 2012 and re-elected at the 2014 AGM. Appinted Chair n 1 March Appinted by the Bard n 4 February 2013 and re-elected at the 2015 AGM. Appinted by the Bard n 4 February 2013 and re-elected at the 2014 AGM. Appinted by the Bard n 22 February 2013 and re-elected at the 2015 AGM. Phillip Vernn Executive Directr Phillip is the Managing Directr and was appinted n 26 July There have been n changes t Bard membership ver the curse f the reprting year and n changes t the Independent Nn-Executive Directrs interests, psitins, assciatins r relatinships that bear n their independence. Recmmendatin 2.4 The majrity f the Bard shuld be cmprised f Independent Directrs The Bard is cmprised f a majrity f Independent Directrs which is cnsistent with the ASX Principles and Recmmendatins. The Bard intends t keep this balance as it represents best practice crprate gvernance and alignment with the Australian Ethical Charter. 6 Celebrating 30 years

7 Recmmendatin 2.5 The Chair shuld be an Independent Directr Under ur Cnstitutin, the Bard elects a Chair frm the Nn-Executive Directrs. This means that the rles f Chairman and Chief Executive Officer are nt exercised by the same individual. Stephen Gibbs was appinted as a Nn- Executive Directr n 25 July At that time, due t a frmer directrship with CAER Pty Limited, he was nt cnsidered t be independent (CAER was a material service prvider). Hwever, during the current reprting perid CAER ceased t be a material service prvider and accrdingly the Bard has frmed the view that Mr Gibbs is an Independent Nn-Executive Directr. Recmmendatin 2.6 Establish a prgram fr inducting new Directrs and prvide apprpriate prfessinal develpment pprtunities fr Directrs New Directrs are required t cmplete a directr inductin n appintment. The prgram is created fr each individual and reflects their knwledge f the cmpany and the markets in which the cmpany perates. The PRN Cmmittee is respnsible fr ensuring that the Bard has the skills, knwledge and familiarity with the Cmpany and its perating envirnment t be able t fulfil its rle effectively. Where gaps are identified, the PRN Cmmittee identifies the training and prfessinal develpment required t fill thse gaps. The time in ffice, skills, experience and expertise f each Directr during the reprting perid is set ut in the Directrs Reprt. Celebrating 30 years 7

8 Principle 3 Act ethically and respnsibly We are an ethical investment cmpany and we manage mney in accrdance with the Australian Ethical Charter. The Charter is cntained within the Cmpany s Cnstitutin and infrms all aspects f the Cmpany s peratins. The Charter is available frm ur website. Recmmendatin 3.1 Cmpanies shuld establish a Cde f Cnduct We have a Cde f Cnduct that utlines what we regard as acceptable business practices fr Directrs and emplyees. The Cde f Cnduct is addressed in inductin training fr new Directrs and emplyees and is prmted t current Directrs and emplyees during crprate and persnal develpment sessins. Cnflicts Management We have a Cnflicts Management Plicy which dcuments the prcedures in place fr identifying, managing, mnitring and reprting situatins giving rise t actual, ptential and perceived cnflicts f duty and interest fr the Cmpany and fr its Directrs and emplyees. We maintain a Register f Relevant Duties and a Register f Relevant Interests. The Registers are tabled at each meeting f the Bard and the ACR Cmmittee. A Summary f the Cnflicts Management Plicy is available frm ur website. 8 Celebrating 30 years

9 Principle 4 Safeguard integrity in crprate reprting Recmmendatin 4.1 The Bard shuld establish an apprpriately structured audit cmmittee Audit, Cmpliance and Risk Cmmittee The Bard has an Audit, Cmpliance and Risk (ACR) Cmmittee cnsisting f fur Independent Nn- Executive Directrs. The Cmmittee is chaired by an Independent Chair wh is nt the Chair f the Bard. The qualificatins f the members f the ACR Cmmittee are set ut in the Directrs Reprt, as is the attendance f cmmittee meetings during the reprting perid. The ACR Cmmittee is respnsible fr: a. Overseeing cmpliance with AEI s financial management bligatins, and in particular: acting as a channel f cmmunicatin between the Bard, the Auditr, the Internal Auditr and Management; seeking assurance frm Management that plicies relating t statutry accunting matters, internal financial cntrls and discharge f fiduciary bligatins are being carried ut and relevant accunting standards have been applied; and reviewing and apprving the managed fund financial statements and related dcuments including directrs declaratins; b. Reviewing and making recmmendatins t the Bard whether the Directrs shuld apprve and sign the Grup financial statements and related dcuments including the Directrs declaratins; c. Overseeing cmpliance with the Grup s audit bligatins, in particular: appinting the Auditr and the Internal Auditr; reviewing the scpe f the audit plans prpsed by the Auditr and Internal Auditr; and reviewing audit reprts and mnitring Management s respnses. The Cmmittee cnsiders and mnitrs the perfrmance and independence f the Auditr. In selecting an Auditr, the Cmmittee seeks cmpetence, industry experience, integrity and independence. Rtatin f audit engagement partners ccurs in accrdance with the Crpratins Act The ACR Cmmittee Charter is available frm ur website. Celebrating 30 years 9

10 Recmmendatin 4.2 CEO and CFO certificatin f financial statements The Managing Directr and the Chief Financial Officer certify t the Bard that: the financial reprts present a true and fair view, in all material respects, f the Cmpany s financial cnditin; perating results have been prepared in accrdance with relevant accunting standards; and the financial statements are funded n a sund system f risk management and internal cntrl, and that the system is perating effectively in all material respects in relatin t identifying, managing and mitigating financial reprting risks. Recmmendatin 4.3 External Auditr availability at AGM The External Auditr attends the AGM t answer audit-related questins frm sharehlders. 10 Celebrating 30 years

11 Principle 5 Make timely and balanced disclsure Recmmendatin 5.1 Cmpanies shuld establish cntinuus disclsure plicies and ensure cmpliance with thse plicies The Cmpany has a Cntinuus Disclsure Plicy designed t ensure cmpliance with cntinuus disclsure requirements. The Plicy is available frm the crprate gvernance sectin f ur website. Celebrating 30 years 11

12 Principle 6 Respect the rights f security hlders Recmmendatin 6.1 A cmpany shuld prvide infrmatin abut itself and its gvernance t sharehlders n its website Infrmatin prvided n the website Our website includes a Crprate Gvernance Page where sharehlders and ther stakehlders can access relevant crprate gvernance infrmatin including Cmpany annuncements. Recmmendatin 6.2 Cmpanies shuld design and implement an investr relatins prgram t facilitate tw-way cmmunicatin with sharehlders 12 Celebrating 30 years Investr Relatins Prgram In additin t the infrmatin cntained n its website the Cmpany prvides: an active scial media presence that keeps sharehlders and ther stakehlders cntinually updated n relevant issues; a regular sequence f cmmunicatin pints with investrs and members including a newsletter fr investrs, Gd Mney, a sharehlder newsletter and an annual investr update; a Sustainability Reprt based n the G4 Glbal Reprting Initiative guidelines; a facility fr sharehlders t be advised by when ASX annuncements are made; and the pprtunity fr sharehlders and investrs t vte n recipients f grants frm the cmmunity grants prgram. The Cmpany s Cnstitutin requires it t distribute 10% f pre-tax prfit fr a useful charitable, benevlent r cnservatin purpse befre a dividend can be declared. We are cmmitted t cntinuusly imprving ur investr relatins prgram. Recmmendatin 6.3 Cmpanies shuld disclse the plicies and prcesses it has in place t facilitate and encurage participatin at meetings f sharehlders The Cmpany recgnises the imprtance f the AGM t prvide sharehlders with the pprtunity t interact with the Bard, the Auditrs and Senir Management. T encurage participatin at the AGM, the Cmpany: annunces the date well in advance; ensures that the AGM is held at a lcatin that is easily accessible t sharehlders; prvides a facility fr sharehlders t submit written questins befre an AGM; and recrds the AGM and makes the recrding available n ur website. Recmmendatin 6.4 Cmpanies shuld prvide the ptin t send and receive cmmunicatins frm the cmpany and its share registry in electrnic frm The Cmpany encurages sharehlders t receive and send cmmunicatins electrnically.

13 Principle 7 Recgnise and manage risk Recmmendatin 7.1 Cmpanies shuld establish an apprpriately structured risk management cmmittee fr the versight f material business risks Frm a risk and cmpliance perspective, the ACR Cmmittee, described in Principle 4 is respnsible fr: a. verseeing cmpliance bligatins and cmpletin f cntrls identified in the Cmpliance Plan; b. the identificatin and management f emerging and current material risks, incidents and breaches; c. the meeting f all statutry reprting bligatins; and d. seeking assurance frm Management that the Grup: has in place systems, plicies and prcedures designed t meet and mnitr its audit, cmpliance and risk management respnsibilities and that these plicies and prcedures are apprpriate and cntempraneus; is cmplying with the cnditins f its AFSL and APRA authrisatins; and has a structured and methdical prgram in place t mnitr material service prviders. The ACR Cmmittee Charter is available frm ur website. Recmmendatin 7.2 The Bard r a Cmmittee f the Bard shuld review the cmpany s risk framewrk at least annually t satisfy itself that it cntinues t be sund We have an established framewrk fr the versight and management f material risks. The Bard versees the management f risk, including agreeing the risk management methdlgy and verseeing its implementatin, instilling a strng culture f risk identificatin and management thrughut the Cmpany. The Bard als reviews the insurance prgram, with regard t the business and the insurable risks assciated with the business. The Bard has delegated respnsibility fr verseeing the implementatin and maintenance f the risk management framewrk t the ACR Cmmittee. The ACR Cmmittee requires management t implement and maintain the risk management framewrk and reprt whether material risks are being apprpriately identified, managed and mitigated. During the reprting perid, regular reprting f risks was prvided t the ACR Cmmittee and a review f the risk management framewrk was cmpleted. The ACR Cmmittee Charter is available frm ur website. Recmmendatin 7.3 Cmpanies shuld disclse the structure and rle f its internal audit functin The Cmpany appinted Delitte t perfrm the internal audit functin. Delitte has a direct reprting line t the ACR Cmmittee. Celebrating 30 years 13

14 Recmmendatin 7.4 Cmpanies shuld disclse their ecnmic, envirnmental and scial sustainability risks and hw thse risks are managed Since listing, we have prduced a Sustainability Reprt in accrdance with the G4 Glbal Reprting Initiative. In these reprts, expsure t ecnmic, envirnmental and scial sustainability risks is addressed in detail. The reprts are available frm the Cmpany s website. We are a certified B Crpratin. B Crpratins are an emerging mvement f cmpanies that use the pwer f business t create a psitive impact n the wrld and generate a shared and durable prsperity fr all. In additin, the Australian Ethical Charter infrms all aspects f the Cmpany s peratins and investment philsphy is designed t engage with ecnmic, envirnmental and scial sustainability risks in an pen and cnstructive manner. 14 Celebrating 30 years

15 Principle 8 Remunerate fairly and respnsibly Remuneratin Cmmittee Recmmendatin 8.1 The Bard shuld establish an apprpriately structured remuneratin cmmittee Frm a remuneratin perspective, the PRN Cmmittee, described in Principle 2, is respnsible fr: a. mnitring adherence t remuneratin plicies; b. mnitring salary relativities thrughut the Grup and undertaking an annual review f remuneratin using externally surced data; c. determining, with reference t Management s recmmendatin, the remuneratin f AEI emplyees and the payment f perfrmance-based pay; d. making recmmendatins t the Bard regarding Directrs fees and fees fr Bard Cmmittees; e. cnsidering industry benchmarks and cmparatrs fr the Managing Directr s remuneratin and at least annually determining the remuneratin arrangements fr the Managing Directr. The PRN Cmmittee Charter is available frm ur website. Recmmendatin 8.2 The Cmpany shuld distinguish between Nn-Executive Directrs remuneratin and f Executive Directrs and Executives renumeratin The remuneratin paid t Directrs and Senir Executives during the reprting perid is set ut in the Directrs Reprt. Nn-Executive Directrs receive fees fr serving as a Directr in the frm f cash plus superannuatin cntributins. They d nt participate in bnus r equity schemes designed fr the remuneratin f Executives. Recmmendatin 8.3 The Cmpany shuld establish a plicy n whether participants in equity based remuneratin schemes are able t enter int transactins which limit the ecnmic risk f participating in thse schemes We have equity based remuneratin schemes in which all permanent emplyees participate. The Share Trading Plicy cntains restrictins n emplyees t prhibit them frm transferring the ecnmic risk f participating in these schemes. The Share Trading Plicy is disclsed t the ASX whenever it is updated. Further infrmatin abut the Cmpany s equity based remuneratin schemes is set ut in the Remuneratin Reprt. Celebrating 30 years 15