Church of England, Wonga and ethical investment: what the last week has taught us

It’s a week since it was revealed the Church of England invested indirectly in Wonga – the payday lender that the archbishop of Canterbury had vowed to “compete” out of business through credit unions backed by the church.

In the immediate aftermath, a frenzied British media asked such questions as, “Can investments ever be ethical?” and made such unsubstantiated comments as, “There is no such thing as an ethical investment.”

The church’s Ethical Investment Advisory Group (EIAG) justified the Wonga investment by saying it was in a pooled fund that it had little control over, and amounted to just £75,000 – or 0.3% of the fund.

To shed further light on the situation, and to assess what the last seven days have taught us, Blue & Green Tomorrow spoke with Simon Howard, chief executive of the UK Sustainable Investment and Finance Association (UKSIF).

What do you think is the key lesson that private and institutional investors should take from the last week?

The key lessons are the need both for transparency and for good process. Institutional asset owners should ask managers for full reporting and be prepared to pay for support in assessing that reporting and ensuring compliance with their requirements.

Individual investors should ask to see full lists of portfolio holdings and look to see up to date reporting/detailing of fund manager policies on websites.

The BBC asked, “Can investments ever be ethical?” and the Telegraph’s Questor column answered, “There is no such thing as an ethical investment.” How would you respond to Questor’s answer?

I don’t think ethics are an absolute; everyone must develop their own views. As such, the BBC and Questor questions fall into the definitional category rather than the practical.

I believe that investment can do good or ill, that some activities should not be funded because of their environmental – including climate – or social impact, and that anyone who tries to reflect this in their investments is doing the right thing.

Increasingly too, fund managers and companies understand the risk to share prices from poor practice in terms of environmental and social behaviours. The need for sustainable as well as ethical investment is becoming better recognised across the investment chain.

Does the presence of unsustainable and unethical industries in ethical funds damage the reputation’s industry?

As I say, I think ethics are not an absolute in the real world, and I would imagine most of the investments will only be unsustainable and unethical in the eyes of some people.

I would be surprised if anything generally held to be unethical were in the funds. Clearly holdings that are debateable can be used to undercut the practice of ethical investment but I don’t think they undercut the need for it or its aspirations.

Ethical funds often say they hold potentially unsustainable or unethical stocks so they can change that particular firm from within – using their rights as a shareholder to make it more sustainable and ethical. What are your thoughts about this justification for this kind of investment?

I think engagement of the type envisaged can be productive. The impact would mainly depend on the particular company, the objectives of the engagement and the vigour with which it is pursued.

Some fund managers prefer not to give details of their engagement; clearly that wouldn’t be appropriate in the situation you outline.

We often ask, and are asked, how we make sustainable and ethical investment mainstream, but what we want to know is how we make mainstream investment sustainable and ethical.

There is nothing wrong with seeking to engage with a fund manager on ethical issues, but it does run the risk of getting bogged down in definitions.

In the context of making sustainable investment mainstream, I think a sensible approach is to focus on financial risk. There are clearly discernible financial risks in many sectors stemming from climate change and resource depletion and fund managers can be asked to explain how they handle these.

There are also clear risks inherent in supply chains and production methods from social issues such as child labour and human rights, and there are very potent PR risks from sourcing from counterparties where the investee company isn’t on top of health and safety issues.

Managers should be able to answer how they assess and mitigate these risks. UKSIF wants all owners to be better able to reflect their values in their investments – that’s what our National Ethical Investment Week and Ownership Day campaigns are all about – and engaging on ethics or risk are simply two ways of doing that.

Creating a stable, clear policy framework that rewards long-term investment decisions is also vital for creating the signals that encourage mainstream investors to look more closely at sustainable and ethical investment.  This is why it is so important for the industry to engage with politicians, regulators and officials on these issues.

Further reading:

Archbishop ‘embarrassed’ at Church of England investment in Wonga backer

Wonga, the archbishop and the Ethical Investment Advisory Group: interview

For a church, fiduciary responsibility should not trump social responsibility

Is a little sin tolerable? Ethical investment and searching for the good

Wonga (5,853% APR), Wongate, Wronga or just plain wrong