Ethical Performance
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corporate responsibility and investment strategy

October 2001

Investment strategy trends are driving the growth of interest among investors in the environmental and social performance of companies, says Rob Lake

The terrible events of 11 September in the United States were an appalling human tragedy. The political and economic consequences are still emerging. In investor circles, the adverse implications for insurance companies have been the subject of much comment. Yet even before the attacks, US insurance companies were under close scrutiny.

‘The decline in US company profits in the second quarter was entirely due to the impact of Tropical Storm Alison on insurance company profits’. So says the global strategy team at Henderson Global Investors, the hard-nosed number crunchers who advise us on economic trends. This was a key point in one of their recent weekly briefings. The prediction that climate change will lead to more frequent and serious storms is familiar. And the insurance industry has warned for some time that this could hurt their business. Investors base key decisions on indicators such as US companies’ profit figures. Is the impact of climate change starting to wink on the mainstream investor’s radar screen?

A number of things are happening to make at least some City investors take the business implications of CSR more seriously. Conventional investment strategists talk of trends like globalization and technological innovation. Firms that can exploit these trends are good investment prospects. But such megatrends are paralleled by CSR issues. Globalization has environmental implications. Technological innovation is accompanied by ethical dilemmas – over genetically modified organisms, for example.

Companies grappling with this agenda are finding a range of benefits. Some of them are tangible – direct gain to the bottom line from increased resource efficiency, for example. But many are intangible. Strong CSR performance enhances corporate reputation – no small matter in a world where 25 per cent of the world’s financial wealth is in the form of reputations and brands, according to the consultancy Interbrand. Aligning a company’s values with those of its employees makes for a more highly motivated and productive workforce.

Communicating the benefits of CSR is crucial to getting investors to support leading companies and encourage the laggards. The Association of British Insurers’ guidelines launched this month mean that companies can expect more questioning from investors on their CSR strategy and what it is delivering in business terms. The challenge to companies is to demonstrate clearly to their shareholders how they are capturing all the benefits, and managing all the risk, of the CSR agenda.

Rob Lake is head of socially responsible investment
at Henderson Global Investors




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