THE world is in dire need of food and therein lies a problem for the appropriately named superannuation fund Australian Ethical.
Food security is one of the world's most pressing long-term social challenges, yet the stock pickers at Australia's biggest and best known ethical superannuation fund have their hands tied when it comes to investing in agricultural and food companies.
Australian Ethical is well known for its black ban (*see correction below) on industries it deems to cause social or environmental harm, such as mining, nuclear energy, armaments, gambling and tobacco.
Marketing this stance has helped the ASX-listed super fund, founded in 1986, increase its funds under management to more than $1 billion.
However, definitions of what counts as ethical can be contentious – such as a long-running stance restricting the fund's portfolio managers from buying agricultural and food stocks.
"When I first joined Australian Ethical in 2012, I assumed given the world's rapidly growing population that food producers would be included by the ethical screen that determines my potential investment universe, and was very surprised when they weren't," said Mason Willoughby-Thomas, who heads up the fund's $316 million Larger Companies Trust.
At Australian Ethical, the ethics department's stance that farming is essentially bad means the investment team is ruled out from buying shares in home-grown producers of nutritious foodstuffs, such Tassal, Bega Cheese, Select Harvests, Bellamy's Australia and Huon Aquaculture.
Environmental degradation resulting from land clearing is the key reason why Australian Ethical has a blanket stance of not investing in farming and food production, alongside other considerations such as genetic modification of crops, said Mr Willoughby-Thomas.
"While acknowledging the very serious impacts of land clearing, my personal opinion is that anything that improves the productivity of arable land and helps the world meet its need to produce more food per acre is something we need to look at more closely," he said.
Mr Willoughby-Thomas would like to see the internal ban on food stocks reviewed, a move that would be welcomed by many Australian-listed food companies.
A spokesperson from Goodman Fielder, the distributor of packaged food brands including Helga's Continental Bakehouse and Meadow Lea, expressed sentiments shared by many in the overall food industry when he told The Australian Financial Review that investors with ethical concerns should assess each company on its individual merits.
"We take sustainability issues seriously and believe our track record speaks for itself. On water and land issues specifically, we are a member of the Sustainable Agriculture Initiative (Platform), and we are included in the Dow Jones Sustainability Index of companies," said Goodman Fielder head of corporate affairs Martin Cole.
In March 2014, Australian Ethical appointed an internal head of ethics, Dr Stuart Palmer, who works closely with the group's external ethics advisers Corporate Analysis Enhanced Responsibility (CAER) to develop the ethical framework chief investment officer David Macri and his team must operate within.
CAER is the group that advised the Australian National University's $1 billion investment fund on its decision last year to divest $16 million worth of shares in seven Australian mining and energy companies.
Despite being at loggerheads over the ethics of food, Mr Willoughby-Thomas speaks highly of Dr Palmer and describes the culture within the company, led by managing director Phillip Vernon, as "excellent".
But food is not the only sector to have sparked debate.
In recent years the fund's shifting position on the ethics of investing in the gas industry has caused major internal ructions, and led to a bunch of shareholders splintering off to set up a rival fossil-fuel-free fund. Future Super, led by former GetUp boss Simon Sheikh, launched in September with 100 members and $3.6 million in funds under management.
Mr Willoughby-Thomas said the decision to allow investment in the natural gas industry was one that kept the Australian Ethical board up at night before coming to the right decision.
"Pragmatically it is preferable that more gas is consumed and less coal," he said. "The path towards a fossil-fuel-free future is politically and commercially impossible without turning to natural gas as a transitional energy source."
Amid an outcry from some of its climate change activist members Australian Ethical is, for the moment at least, limiting most of its exposure to the gas industry to those companies that provide infrastructure to the industry rather than producers.
The Larger Companies Trust holds Duet Group, while one its biggest positions is in Australia's largest gas infrastructure business APA Group.
Australian Ethical sold out of Origin Energy and implemented a ban on investing in the coal seam gas industry in October 2011. Nuclear energy is also on the banned list.
One advantage of limitations on what the fund can invest in due to ethical considerations is that it creates a high degree of diversification from the S&P/ASX 200, which is dominated by its two biggest miners and four biggest banks.
Westpac, which historically has reported a much lower proportion of its loan book funding activities Australian Ethical is prohibited from investing in, is the only one of the big four banks that currently clears the fund's ethical screen.
The two biggest retailers on the ASX, Woolworths and Wesfarmers, are also excluded due to their earnings from liquor, tobacco and gambling.
A slew of new listings in 2014, the busiest year for initial public offers on record, provided a welcome increase in the range of companies available for Mr Willoughby-Thomas and his team to choose from.
Particularly welcome was the development of a local listed aged care sector, following floats from Japara Healthcare, Regis Heealthcare and Estia Health. The health sector has long been a favoured hunting ground for Australian Ethical, which also bought last year's IPO from Monash IVF and the government's float of Medibank Private.
The New Zealand government's decision to float two key hydro-electric power assets also provided highly sought after exposure to listed renewable energy assets.
"Meridian Energy and Mighty Power both fit the bill perfectly for us as renewable energy providers and have been terrific new investments," Mr Willoughy-Thomas said. "We weren't convinced they would trade well at their offer prices though so waited and bought both in the aftermarket after they had performed badly. He lamented that there are no significant Australian renewable energy companies for investors take under consideration.
"Like any industry that requires large- scale investment and infrastructure, there needs to be policy certainty before a local renewable energy sector can develop," he said.
"Criticisms of subsidies to help kick-start the renewable energy industry are ridiculous when the government has been implicitly subsidising the fossil fuel industry for years by not taxing carbon emissions".
As at December 30, the top five holdings in the Australian Ethical Australian Larger Companies Trust were CSL, Telstra Corp, APA Group, Westpac Banking Corp, and Brambles.
Total returns from the fund in 2014 were 15.6 per cent, beating 5.6 per cent in total returns from the S&P / ASX 200, and benchmark returns of 6.5 per cent. The fund's total returns have beaten the S&P / ASX 200 over all time periods in the past seven years, but under-performed benchmark returns on a three-, five-, and seven-year view.
The AFR reported on January 19 that Australian Ethical had a ban on agriculture and food-related investments. This was incorrect. AE has restrictions but no ban on such investments.