James Thier Executive Director Australian Ethical Investment Eco

James Thier Executive Director Australian Ethical Investment Eco Investor Forum October 2010

Disclaimer Please be aware that this presentation provides general information only, and is specifically for the purposes of professional review of the investment capabilities of Australian Ethical Investments Limited. It is not intended for general distribution or use by advisers and personal investors. You should refer to a copy of the Product Disclosure Statement and our website before considering investing. Units in the Trusts are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, Australian Financial Services Licence No. 229949). Interests in the Australian Ethical Retail Superannuation Fund are offered by Australian Ethical Investment Ltd by arrangement with its subsidiary and Trustee of the Fund, Australian Ethical Superannuation Pty Ltd (ABN 43 079 259 733, Registerable Superannuation Entity Licence No. L 0001441). The registration number of the Australian Ethical Retail Superannuation Fund is R 1004731.

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A rising tide lifts all ships Passive index, all-inclusive

Shareholder Advocacy A breakthrough way to influence corporate behaviour via ESG A constructive new way to engage with companies on environmental and governance issues Addresses the issue from the point of view of inclusion – ‘a rising tide lifts all ships’

Advocacy by asset owners

Why Climate? 'Climate change is the biggest issue facing this generation. Some would say it’s the most important issue to face all generations. The scope and potential of climate change – environmental, humanitarian, health, political - makes it an overarching issue to rival the consequences of war in magnitude. ' Climate Change Summit, 2007.

Climate Advocacy Fund What? A fund whose mission is to match or slightly better index returns and pursue improved ESG performance Why? To benefit investors, society and the environment How? • Passive portfolio construction using “economic footprint” weighting • Explicit legal obligation on RE to pursue “ESG charter” aims Who? Retail and institutional investors who want an index like return and want to have their voice heard/pursue the UNPRI principles.

How is the new fund distinct from existing screened funds? • It potentially owns all of the companies in the ASX 200 • It does no active stock selection Screened funds Climate Advocacy Fund say 1, 000 investors Fund to enhance return • It may use its shareholdings to Fund AEI RE of Fund Still one RE AEI 100 Nominees for AEI engage with any listed company • It is structured so as to “unscramble the voting power” Company Power to put resolutions lost Power to put resolutions regained

Resolution examples • Improve ASX companies reporting in accord with the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. • Seek a statement of policies from coal mining companies or electric utilities on policies they are adopting to reduce their greenhouse gas emission footprint. • Adoption of quantitative goals, based on current technologies, for reducing total greenhouse gas emissions from the company’s products and operations; and that the company report to shareholders on its plan to achieve these goals.

“Economic Footprint” is calculated using 4 fundamental measures of firm size averaged over the past 5 years • Sales • Gross dividends paid • Cash flow • Book value (Each weighted 25%) Two further enhancements are used: • Weights are reduced in firms that have low debt coverage ratios. • They are also reduced for firms that have a cumulative pattern of earnings in excess of cashflow from operations. These enhancements are measured as at the most recent annual report.

Realindex Australia Value Added 1984– 2010 simulated data Realindex Investments Source: Research Affiliates, LLC. The simulated enhanced RAFI time series are meant to illustrate the risk and return characteristics of the current set of RA quantitative enhancements applied to the RAFI strategy over the entire simulated sample period. As we research new enhancements and refine existing enhancements, the simulated time series could look different over time. These time series are not to be interpreted literally as results from a live historical portfolio. The simulated time series can only be used to give you a representative illustration of the likely strategy behavior gross of fees, implementation slippage and transactions costs. Hypothetical or simulated performance results have certain inherent limitations. Unlike actual performance records, simulated results do not represent actual trading.

Realindex Underperforms in Irrational Bubbles 1962 – June 2009 simulated data RAFI US Large vs. S&P 500: Annualized Rolling 3 Year Return Simulated RAFI Outperforms S&P 500 Outperforms RAFI Source: Research Affiliates, LLC. , based on data from Bloomberg, CRSP and Compustat. THE INDEX DATA PUBLISHED HEREIN IS SIMULATED, UNMANAGED AND CANNOT BE INVESTED IN DIRECTLY. PAST SIMULATED PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE AND IS NOT INDICATIVE OF ANY SPECIFIC INVESTMENT. ACTUAL INVESTMENT RESULTS MAY DIFFER. The simulated data contained herein is based on the patent-pending non-capitalization weighted indexing system, method, and computer program product first published in an article written by Robert D. Arnott, Jason Hsu, and Philip Moore (2005), “Fundamental Indexation, ” Financial Analysts Journal (March/April): 83– 99. Realindex Investments

Conclusion Individual • Likely better returns than the sharemarket index, same risk • Voice for improved corporate performance on ESG issues – specifically climate change Foundation/NGO/Charity etc • Likely better return, similar risk • Chance to participate in investment actions which resonate with organisational aims Super Fund/Institutional (take $ from index fund) • Likely better return, similar risk • Tangible UNPRI response

FUND NAME CLIMATE ADVOCACY FUND Fund Objectives: To enable investors to simultaneously: earn a return in excess of that paid by the ASX 200 participate in active ownership policies pursuing improved corporate performance on ESG issues. Investment Style: Portfolio management will be passive. “Economic footprint” weightings of companies listed on the ASX will be used to construct the portfolio. Legal Nature of Investment: The Trust is structured as a public unit trust. Recommended Timeframe: Minimum 7 years Volatility of Returns: Less than that exhibited by the ASX 200 Potential Return: In excess of that paid by the ASX 200 over the long term. Min Initial Investment: $5, 000 - Discounted fees available for investments in excess of $50, 000. Reporting to Unitholders: Financial - Half Yearly Statements, Unit Pricing – Daily, Engagement - website updated quarterly. Management Fee 1. 1% pa - For amounts in excess of $50, 000 – 0. 85%pa. . Fees accrue daily. Advisor Service Fee: Up to 1. 0% p. a. payable quarterly Performance Fee: Nil Entry Fee: Nil Exit Fee: Nil Buy/Sell Spread: 0. 2% each side (Not payable in regards reinvested distributions).