Co-op engages its customers as ethical policy pays dividend
The development of ethical codes covering investments is becoming a marketing boon, finds Teresa Hunter
An insurance giant will tomorrow launch an ethical debate on how it should best manage its money to do the most good and least harm in the world.
Co-operative Insurance Services (CIS) will ask its five million customers – 500,000 in Scotland – to put their views on issues such as child labour, torture, animal rights and genetically-modified food.
When this research is completed, CIS will then turn its attention to developing an ethical investment strategy which reflects these views on the major social issues facing society today.
The appeal of ethical investing is growing, not least because pension fund trustees must inform members about the ethics of their investment strategies.
Many investors are unhappy at the thought of their cash being used to support individuals who grow rich through child labour, or to shore up regimes which abuse human rights, or to manufacture guns and other killing machines.
Environmental and health issues have also moved up the ethical agenda, with many consumers concerned at activities which might lead to the destruction of forests or increase the rate of global warming.
The grandaddy of ethical investing, the Stewardship Fund, run by Isis, is celebrating its 20th birthday this year, during which time it has grown to more than £500 million in value.
It was set up by Friends Provident, the insurance company established in 1832 by Quakers. Followers of the peace- loving Christian group continued to be customers through the following century, and increasingly asked the institution about whether it could offer an ethical route into share ownership.
The Co-op Bank, CIS’s sister institution, has also operated an explicit ethical policy since 1992. Spokesman David Smith explains: “We tell our customers clearly who we will or will not do business with. For example, if someone is against the fur trade, they will not want their money used to give loans to the fur industry.”
However, CIS has not been able to operate in the same way because of regulatory constraints. It has, however, been at the forefront of the “responsible shareholder” movement, whereby big institutional investors attempt to use their muscle to encourage good corporate behaviour.
Instances where its intervention has produced change, include:
Easyjet chairman Stelios Haji-Ioannou decided to step down following criticism of the board arrangements by institutional shareholders led by CIS. The CIS’s prompting also encouraged the company to produce an environment report.
The holiday company, MyTravel, agreed to provide details in future if the company’s audit firm was also employed on consultancy work.
CIS support for a motion at the 2002 shareholder meeting of Unocal helped to ensure that greater emphasis would be placed on labour standards by an oil company which operates in Burma.
CIS was active in ensuring that its customers did not lose out financially after Railtrack was placed under administration.
However, the company would now like to go one step further and draw up a detailed ethical investment strategy and, to help it do so, it has devised a detailed questionnaire. Policyholders will be asked for their views on a range of uses such as human rights abuses and governments and companies that deal with oppressive regimes. They will be quizzed about their attitudes to the protection of vulnerable workers such as children and labour exploitation.
Environmental issues such as pollution and genetically-modified crops will also be up for discussions.
Mervyn Pedelty, chief executive of Co-op Financial Services, says: “It is important that we consider the bigger picture. At a time when we are increasingly paying out claims for flooding and storm damage brought about by global warming, should we be investing the same customers’ money in companies that pollute the atmosphere, which in turn leads to climate change, without seeking to improve the environmental performance of such companies?”
When the exercise has been finalised and the data examined, CIS will then decide what kind of ethical policy its customers would want.
Ethical funds range from the harshly puritanical, sometimes called dark green, to more liberal all encompassing investments seen as lighter green.
Aegon has two funds which screen out any activity it deems objectionable.
Aegon’s Ryan Smith explains: “We will not invest in any company in any way questionable when it comes to animal rights, for example. Not only is any pharmaceutical testing strictly prohibited, but we won’t touch any firm selling meat, which excludes all the supermarkets. We are a staunchly vegetarian fund.
“We won’t touch any environmental abusers, such as firms involved in creating pollution, or those involved in the production of cigarettes, alcohol, pornography, weapons or nuclear power.”
This leaves its main Ethical Fund investing in about 35 Footsie stocks with its fixed interest fund only buying sterling-denominated gilts and bonds.
At Isis there is a broader brush approach. The original Stewardship funds screened out the “bad guys”, although not so puritanically as the Aegon ones did.
However, Isis spokesman Jason Holland explains: “Our more modern launches don’t so much screen out as attempt to engage with firms to encourage them to change their practices.”
This policy of engagement has always been more the Co-op’s style. Holland adds that the Stewardship Income Fund has been one of the best performers in its sector. Investments have grown by 31.5% over the past five years, and are up 23% over the past year. The original Stewardship Fund is only up 2.4% over five years, with big falls in the first couple of years of the century all but wiping out last year’s 27% increase in values.