Ethical Hedge

At the best of times, I am often asked how I can be both an Episcopal priest with parish responsibilities and, at the same time, a senior fund manager in the City of London.

The question is really a question of ethics. Most people believe that there is a suspicious alchemy associated with the City which is automatically antithetical to the living out of a priestly vocation. The suspicion is that the two identities cannot be satisfactorily married.

In the middle of the continuing banking crisis, such an instinctive reaction is even more apparent as there is a belief that the seeds of the current meltdown lie in the greed and deception of fund managers, bankers and traders. If only ordinary people and the real economy weren't being affected, I would bet that the rolling destruction of banks and hedge funds would be cheered from the sidelines like a morality play writ large.

For many religious people there is a legitimate tension between money and the message of the Gospel. Although Jesus taught the parable of the talents and Lady Thatcher famously remarked that the Good Samaritan needed at least some personal wealth to be of any help, the sadness of Jesus at the rich young man's unwillingness to give his wealth away and St Francis' paean to Brother Sun and Sister Moon, as well as the Church's long monastic tradition, colours the Church's relationship to money. Such a tension is dealt with by acknowledging the necessary role of money both for personal well-being and institutional longevity, and then by using and investing money as ethically as possible.

Indeed, dating back to the mid-1980s, ethical investment (also known as "socially responsible investment") has been a feature of the asset-management world as a viable alternative - but what is ethical investment?

To some extent, ethical investment is in the eye of the beholder. As an example, Standard Life, one of the top 100 largest global investment companies with £134.4 billion assets under management (as of 31 March 2008), offers ethical funds and describes ethical investment as supporting companies that make a "positive contribution to the environment" and avoiding "where possible those regarded as having a harmful or negative effect".

Companies involved in testing on animals, genetic engineering, pornography, armaments, gambling, alcohol, tobacco, pollution and intensive farming are excluded. Companies with sound employment policies and good corporate governance, which are involved charitably with their communities, are included.

However, such ethical investment doesn't necessarily exclude pharmaceutical companies involved in developing and producing contraception products. And a commitment to sound employment policies would probably include recognising same-sex partnerships. In other words, would such ethical investment pass muster for obedient Roman Catholics?

Ethical objectives are seldom commonly agreed. Nuclear power may be acceptable or not, according to the individual viewpoint, and arguably armaments can also be seen as ethical if peacekeeping activities are judged valid. Many fund managers would argue that most funds are ethical in the sense that they abide with the laws and regulations set down by government and that it is up to government to decide whether an activity is so harmful that it should be outlawed - and thereby unethical.

The difficulty of defining ethical investment is reflected by the fact that Standard Life's self-defined ethical investment funds total barely £569 million (June 2008) or 0.42 per cent of Standard Life's total assets under management. Indeed, the think tank Ethical Investment Research Services estimated United Kingdom ethical funds totalled £8.9 billion at the end of 2007. It is true that they have grown phenomenally from £1.5 billion in 1997 but they are still minuscule at a mere 1.6 per cent of the total assets under management of £558.7 billion. In some ways ethical funds are as much a marketing phenomenon alongside the equally ill-defined hedge funds whose growth they have paralleled.

What is also noticeable is that there is no mention in the descriptions of ethical investment of some of the practices that are now being questioned as ethically dubious, such as short selling (selling shares that are not owned by the selling party), the use of derivatives and swaps, or gearing up a fund (that is, borrowing money to invest), but all of which have long been used to manage risk and increase the performance of a fund.

In other words, surely ethical investment is not only about the underlying investments but how money is invested and how the fund then manages its dual responsibilities both to its investor and to the company, management and employees in which it invests, while also balancing risk and reward in a prudent fashion? Should ethical investment always be supportive of a company in order to save jobs or support a blighted community - or can investments be traded aggressively, or even shorted, in order to maximise returns to its investors? Whose interests come first?

An additional complexity is the question of whether constructive engagement might not be a better long-term ethical strategy. Many of us remember the interminable debates that surrounded investing in Barclays Bank during the 1980s, given its association with South Africa during the apartheid years. The same question could be asked about investing in many businesses where the presence of an active "ethical" investor may be more effective in bringing about desired change than investing elsewhere.

And how should an ethical fund approach sovereign debt? How is the financing of governments to be set alongside ethical considerations when such instruments are considered the safest form of investment in an uncertain world? Does buying UK or US Treasury bonds equate to funding directly the war in Iraq?

Ethical investment, therefore, is fraught with complexity and must be balanced with the legal responsibility that many funds have to obtain the best possible long-term return. Indeed, in running assets worth over £5 billion, the Church Commissioners said in their annual report for 2007 that they "seek to hold financial and ethical issues together, endeavouring to maximise the return from our assets within the context of the Church's teaching".

In other words, they try their best - and looking at their accounts one can see why. With 50 per cent of income going to pay clergy pensions and much of the rest supporting parishes, any reduction of income would have serious implications for those who rely on already meagre pensions and would cripple the Church's ability to preach the Gospel.

Finally even if a major asset manager such as Standard Life did want to invest all of its funds "ethically", it is difficult to see how it could be done in a sufficiently diversified way while still producing the income necessary to meet their liabilities. The more rigid the definition that is applied, the more rapidly the investing universe melts away.

"Ethical" can become synonymous with retreating from the real world. A fund investing only in smallhold organic farming may seem safe but a recession will reduce the demand for expensive foods and the willingness of governments to subsidise energy.

The question of ethical investment is one that no church or Christian can avoid to be as true as possible to the Gospel. But hard decisions may well have to be made which result in living with the effects of lower returns and the recognition that ethical funds are not protected from economic downturns and may be more exposed if insufficiently diversified.

The good news is that the Investment Managers Association published a review of ethical funds and their relative performance in the period to the end of 2007. The results showed that they performed more or less in line with the overall market. The difficult question is how they would perform if they were more representative of the overall market as size normally brings with it reduced returns. It is also too soon to know how they are performing in the current bitter climate, particularly if their own ethical principles prevent the type of aggressive fund management that suits a fully fledged bear market.

So how does a priest operate as a fund manager? The answer comes from the primacy of lex orandi, lex credendi ("the law of prayer is the law of belief") within Anglicanism derived from its Benedictine roots. The late seminary professor and Episcopal priest W. Taylor Stevenson identified an Anglican ethos rather than a systematic theology. He argued that Anglicanism contained "a certain pragmatism and a lack of speculative interest".

Perhaps my theological hero, Karl Rahner, said it better when he described God as "ineffable darkness". He concluded that with the insight that "revelation [...] is really the presence of God as question, not as answer". In other words, it is an imperfect exercise of doing one's best when every decision can have positive and negative effects at the very same time. The answer is no different for any other Christian looking to be as wise as a serpent and as harmless as a dove in an increasingly risky world.