What the CofE's Wonga stake means for responsible alternative assets

There has been pressure on pension schemes to become responsible investors – taking into account environmental, social and governance issues when making investments – to produce more stable, long-term returns on assets.

Experts have warned negative screening could pose difficulties for private market investments. The Law Commission is currently reviewing whether trustees’ fiduciary duties should be expanded to include ethical factors when making investment decisions. 

Last week, the Archbishop of Canterbury, Justin Welby, revealed plans to take on payday lenders, which he described as “morally wrong”. It was later revealed the Church's pension fund had indirectly invested in Wonga – through Accel Partners, a venture capital firm – which is against its ethical investment guidelines.

The Church’s Ethical Investment Advisory Group recommends screening out investments in certain types of business, including payday lenders, tobacco, pornography and weaponry.

In its annual report the Church Commissioners stated: “In all areas of investment – whether equities, property or alternatives – we seek to avoid profiting from, or providing capital to, activities that are materially inconsistent with Christian values.”

A spokesperson for the Church said they are still committed to private equity, including venture capital, as a long-term investment. The current ethical policies allows for the blind commitment of capital associated with private equity - both buy-out and venture capital - investments. "As a result of this we are carrying out a review of our policies to see if any changes need to made."

Negative screening

It is not uncommon for a faith-based organisation or charity to include negative screening in its investment principles to prevent their mission being compromised by investments.  

However, applying responsible investment principles to alternative assets can be trickier than with public market assets such as equities. Stephen Hine, head of responsible investment research at think-tank Eiris, said: “The engagement would have to be with the alternative investment provider – the private equity or hedge fund manager. In a sense it is harder to engage with the underlying asset."

As the investment in Wonga was “two layers removed, it wouldn’t have even hit the Church’s responsible investment threshold, but that said… in private equity, investors should be asking [managers] what approach they take to a series of core ESG,” he said.

Schemes that do not want to be exposed to certain industries can make that part of the due diligence when appointing managers.

Craig Williamson, partner at private equity firm SL Capital, said private equity can be a good medium for responsible investment because it can hold managers accountable for the underlying portfolio companies and their adherence to principles of social responsibility.

But he added: "It can sometimes be difficult to establish the extent to which a company meets the exclusion principles.

"An aviation company, for example, that develops parts for commercial aviation but which can also be used in defence aircraft would be such an example. In these instances an investment decision will usually be down to the discretion of the manager."

Fiduciary duty

The Church’s trustees are in a difficult position, as it is their fiduciary duty to invest in the best financial interests of members, with ethical issues a secondary consideration, said Ian Cormican, partner at law firm Sackers.

“The key is that trustees can take into account ethical, social and responsible investing,” he said. “The principle that arises is that trustees cannot completely close their minds to particular investment due to some extraneous ethical policy.”

The Law Commission will conduct a review into trustees’ fiduciary duties, addressing to what extent trustees can consider ethical factors in investment decisions. A report is expected in June 2014.