solution

Case study

Ethical investment policies and the ethically-orientated investor segment – the Co-operative Insurance Society Limited (CIS)

Headquartered in Manchester, England, CIS is the only Co-operative insurer in the UK and is one of the largest providers of personal financial services in the country. A particular point of interest is that the Co-op has developed a strong affinity with that section of the population that displays a strong ethical orientation towards a range of issues. Indeed, the Co-operative Bank has clearly positioned itself as the ethical bank. What is interesting is the way in which the Co-op Bank and CIS have adapted their marketing mixes in ways that are consistent with their approach to segmentation and positioning. Here, we consider how the needs of the ethically-orientated segment have been reflected in CIS’s approach to investment management.
As a member of the Co-operative movement, CIS shares this ethical underpinning which, when applied to investment, has always been construed as requiring the optimization of financial returns for customers. Recognizing the increasing sophistication of the market, in 1989 CIS introduced a range of unit trusts (mutual funds) to which was added, in 1990, a fund that screens companies on environmental, health and safety criteria. These positive criteria are supplemented by negative criteria relating to animal testing, armaments, oppressive regimes, tobacco and nuclear power. Like other CIS products, units in this fund, now known as the CIS Sustainable Leaders Trust, are sold through the Society’s direct sales-force in people’s homes. The availability of this product has extended the interest in social investment within the Society’s customer base, and the Trust has always been amongst the largest funds of its kind, although it represents less than 1 per cent of CIS’s overall assets. The managers of the fund have been able to demonstrate that the adoption of an ethical approach to a fund’s structure is financially as well as ethically sound. Indeed, the following data, supplied by S&P Micropal, show how well the Trust has performed compared with industry acknowledged benchmarks

£1000 invested on 31 December 2002 was, on 31 December 2005, worth:

● £1664 if ‘invested’ in the FTSE All-Share Index

● £1672 on the basis of the Average UK All Companies Fund

● £1733 if used to purchase units in the Trust (assuming the income was reinvested).

There is a continuing market for screened investments, although the potentially greater financial risk must be made clear to customers. Nevertheless, the trend has been towards using enhanced analysis required to integrate social, ethical and environmental (SEE) considerations with the investment mainstream. In 1999 CIS launched a programme known as ‘Responsible Shareholding’, applying to all equity funds and based on engaging with companies on matters of concern. These matters were identified through a customer consultation exercise, from which an ethical engagement policy was developed which provides the basis for approaching companies. In part, this represents a reaffirmation of the Co-operative movement’s democratic roots, but it also acknowledges the fact that SEE issues are increasingly important in establishing a company’s social responsibility and future sustainability. This does not relate only to a company’s community activities, but also to the way in which it develops its workforce, for instance, and above all how it governs itself in the relationships between management, board, shareholders and other stakeholders. Analysis of corporate governance is an important part of Responsible Shareholding, and CIS undertakes to vote on every motion put to investee company AGMs (whenever possible), supplemented if necessary by attendance to raise questions from the floor. Reporting is seen as an essential component of corporate responsibility, and detailed analysis takes place of disclosure on matters such as executive remuneration and SEES issues, in order to determine how the Society’s votes will be exercised. Along with some other UK investors, CIS has been recognized in the press as one of the foremost UK institutions practising Socially Responsible Investment (SRI). It is becoming increasingly accepted that such activities contribute to investment sustainability – UNEP’s Asset Management Working Group concluded in 2004 that environmental, social and corporate governance issues affect long-term shareholder value, sometimes profoundly. If this is proved, it will demonstrate that an active response by companies to SEE and governance concerns voiced by customers does enhance the financial returns that they receive.