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Page 12, 3rd August 2013

3rd August 2013
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Page 12, 3rd August 2013 — The £8 billion question EDWARD MASON question Archbishop of Canterbury
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The £8 billion question EDWARD MASON question Archbishop of Canterbury

Justin Welby has ordered the Church of England to tighten up its investment criteria after it was revealed it had indirectly invested £75,000 in the controversial payday lender Wonga — the company the archbishop had just vowed to run out of business

With 16,000 churches, 12,000 parishes and 8,500 full-time paid priests, the Church of England costs in the order of £1.3 billion a year to run. While most of this money continues to come from the generous giving of parishioners, managing the finances of an organisation this size brings the Church of England into the world of institutional investment.

The Church Commissioners manage an investment fund of X5.5bn. They support poorer dioceses with ministry costs, provide funds to support mission activities, pay for bishops' ministry and some cathedral costs, and pay clergy pensions for service prior to 1998. Meanwhile, the Church of England Pensions Board manages investment funds of X1.2bn. It pays clergy pensions for service from 1998 and assists more than 32,000 people with their retirement provision.

In addition, the CBF Church of England Funds hold the investments of many thousands of smaller Church of England investing bodies such as parishes, dioceses, schools and church charitable trusts. The assets of the CBF Church of England Funds take the total investments of the national investing bodies of the Church to above X8bn.

How does the Church of England invest X8bn ethically? To meet the challenges of doing this, the national investing bodies fund the Church's Ethical Investment Advisory Group (EIAG) and its staff.

Ethical investment by the Church of England has always involved avoidance of some areas of investment. Restrictions are applied to direct investments in the areas of armaments, tobacco, gambling, alcohol, pornography and high-interest-rate lending.

Of course, these restrictions aren't fail-safe, as last week's revelation that we had £75,000 invested with a company that co-funded the launch of payday lenders Wonga shows. The £75,000— a tiny amount of money is part of a pooled fund, meaning one that other investors invest in as well, which is the only way you can invest in venture capital. Our investment was made with a fund of funds; the fund then invested in a venture capital fund and that venture capital fund then helped fund Wonga.

The investment is not a breach of the ethical policies, because our policy is to tolerate limited investment in restricted areas. The investment in Wonga is less than 0.3 per cent of the allocation to that fund of funds, so my colleague who was monitoring it didn't deem it to be material as a pooled fund investment.

But immediately after that investment was reported in the press, the Archbishop of Canterbury asked the Church Commissioners to carry out a review of inconsistencies between pooled fund holdings and direct holdings. They will be working on it as quickly as possible.

Increasingly, however, the ethical investment practised by the Church focuses not only on what shouldn't be owned, but also on the responsibilities and possibilities arising from what is owned. Being an investor gives the Church a huge opportunity to talk to companies and the investment community about issues of ethics. In developing its advice for the national

investing bodies, the EIAG seeks always to develop distinctly Christian policies that do justice to complicated ethical issues. The defence investment policy developed by the EIAG is a good example. Incorporating justwar theology, it prohibits any investment in manufacturers of indiscriminate weaponry (nuclear weapons, landmines and cluster munitions). However, it does allow for exposure to companies for whom conventional defence sales are a small part of their business, as long as defence sales do not account for more than 10 per cent of a company's turnover. So that allows us to invest in a company such as Volkswagen, which makes a few military trucks, or IBM, which does some computer modelling and IT services for defence, but not an arms manufacturer such as BAE Systems.

The Church of England tries to use its shareholdings to promote high standards of business conduct in the areas of governance and their environmental and social track record. If the EIAG is not satisfied that a company is behaving according to the standards the Church expects, the EIAG can recommend disinvestment.

In 2010 we had a big impact on the international mining company Vedanta Resources when, after a long period of engagement, we decided that the company was not responding to our concerns about its treatment of local communities, and recommended that the investing bodies disinvest. The two bodies that held shares, the Church Commissioners and the Church of England Pensions Board, immediately agreed and disposed of their holdings.

Faced with this challenge to the legitimacy of its business practices, Vedanta reacted swiftly by appointing a new chief sustainability officer and commissioning an independent review into its approach to environmental and social issues. We are tracking carefully whether it is making progress. Recently the EIAG has worked hard to

contribute constructively to the debate on executive remuneration. In 2012, the EIAG pulled together a coalition of investors with more than £1.5 trillion of investments to write to the press to express concern about remuneration practice. The letter was published in The Daily Telegraph in April 2012. In the year April 2012-March 2013 the national investing bodies voted at more than 2,000 company meetings and supported no more than one-third of UK company remuneration reports. The EIAG on behalf of the Church Commissioners and the pensions board wrote letters to more than 200 companies on the issue, and follow-up meetings were held with non-executive directors who chair remuneration committees where companies wished to explore our views further.

The EIAG and its staff engage with many companies every year on a wide range of issues. Our main engagement over the last 12 months has been with Barclays in the wake of the Libor scandal. We have been encouraged by the determination of the bank's new leadership to turn a corner and foster a more ethical culture. In June, the bank's chief executive, Antony Jenkins, shared a platform at St Paul's Cathedral with the Archbishop of Canterbury, Justin Welby, to discuss "Good Banks". He noted the Church Commissioners' comment in their 2012 annual report that Barclays had "repeatedly let down society with its conduct':

Jenkins said that the commissioners were right.

Barclays was only one of 50 companies with whom the EIAG engaged in meetings in 2012-13. We do a significant proportion of our engagement in partnership with other church investors such as the Methodists, the United Reformed Church and some Catholic dioceses, such as Westminster and Plymouth, and are also increasingly working with church investors internationally. Gone are the days when most of our investment assets were in the UK.

Gone, too, are the days when ethical investment was confined to shares, bonds and property. Between them, the national investing bodies now also have investments in private equity, private credit, hedge funds, infrastructure such as roads and renewal power generation, and forestry.

The EIAG collaborates widely in responding to the challenges posed by the increasing complexity of investment. In particular, we follow developments in responsible investment practice through involvement in the United Nations Principles for Responsible Investment, the Institutional Investors Group on Climate Change and UK Sustainable Investment and Finance. The EIAG has given its own detailed and practical advice to the investing bodies on questions such as when short-selling is ethical (that is, when it is not aggressive) and when

it is not, and when trading in commodities may cause harm to the poor and vulnerable. These issues are discussed with fund managers to whom the investing bodies are considering giving investment funds.

We intend that our engagement with the investment community will help to shape thinking on ethics by practitioners in the financial sector. Too often in the markets, reflection is limited to consideration of whether a practice is legal, not whether it is ethical.

The Church of England is far from being the only investor in the City working hard to be responsible, but uniquely as Christian institutional investors we try and invest in a way which is consistent with our beliefs, so we can draw on the Scriptures, centuries of theology, and a moral authority.

Investing X8bn ethically is a challenge. We don't always get it right and you cannot be a perfect investor in an imperfect world. But we seek to meet the challenge through avoidance where necessary and engagement where possible. We believe we can have an impact on business, the investment community, and wider society and public opinion. As the national Church, that's where we want to and must position ourselves.

• Edward Mason is secretary to the Church of England Ethical Investment Advisory Group.