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AN IMMANENT CRITIQUE OF UK CHURCH ETHICAL INVESTMENT © Niklas Kreander, David Molyneaux and Ken McPhail Working Paper 2003/1

Department of Accounting & Finance University of Glasgow Working Paper Series

The Department should like to acknowledge the help and support of the Wards Trust Fund set up in 1980 after the untimely death of James Cusator Wards.

Published 2003 by the Department of Accounting and Finance, University of Glasgow, Glasgow G12 8LE ISBN 0 85261 7291

An Immanent Critique of Church Investments

An Immanent Critique of UK Church Ethical Investment by

Niklas Kreander; David Molyneaux & Ken McPhail

Glasgow University Working Paper 15/03/03 Abstract While the literature contains a number of studies of ethical investment funds, relatively little is known about church investment processes and practices. This paper attempts to address this lacuna by studying the ethical investment programmes of three UK churches: the Methodist Church, the Church of England and the Church of Scotland, The paper initially explores the relationship between the Judeo-Christian church and the development of the ethical investment movement across Europe. This history reveals an engagement both at the institutional and individual level that challenges the assumption of a sacred secular divide now commonplace within the literature (see for example Laughlin, 1988; 1990; 1991; Booth, 1993; 1995; Parker 2000) and the more recent guardianadvocate dichotomy (Lightbody, 2000). Secondly, the paper delineates both the forms this engagement has taken in the three churches in our sample and its theological bases. The final section of the paper provides an immanent critique of church investments both at a performative and theological level. The objective of the final section is to contribute towards our understanding of the practice of accountability within the religious context of church ethical investment programmes (See Laughlin, 1988).

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INTRODUCTION To date the literature on ethical investment contains a significant number of studies which focus on the financial performance of ethical funds (Luther et al., 1992; Mallin et al., 1995; Gregory et al., 1997), the operation of ethical investment funds, and their information needs (Rockness and Williams, 1988; Harte et al., 1991; Perks et al., 1992; Friedman and Miles, 2001). The paper defines as ethical those funds which, in addition to conventional financial criteria in their security selection also employ one or more ethical criteria such that some companies are excluded from their portfolios for ethical reasons. However, as yet little is known about church investment processes and practices, despite the fact that the first example of ethical investment by churches predates the first European retail ethical fund by more than 30 years. There is also a lack of research into church accounting in general (see Booth 1993; Duncan et al 1999; Parker 2001; 2002). This paper attempts to address both of these gaps in the literature by studying the ethical investment programmes of three UK churches: the Methodist Church, the Church of England, and the Church of Scotland. The study contributes to the literature in three different ways. Firstly the paper adds to the debate within the accounting literature on the apparently secular nature of the accounting and finance function within churches (Laughlin, 1988; 1990; Booth, 1993; Lightbody, 2000). Secondly the paper contributes to the ethical investment literature by providing a detailed study of the ethical investment programmes of the three churches. As such the paper represents a response to Duncan et al’s call for more cross-denominational studies. The paper draws lessons from these processes for ethical funds and other church investors. Finally the paper provides an immanent critique of the investment process with a view to contributing towards the extant literature on accountability as it is practiced within its social context (Laughlin, 1988; 1990; 1996). The paper is split into three sections. The first section provides a brief introduction to the historical relationship between the church and the ethical investment movement. This history indicates that the sector has its roots in the Judeo-Christian church. Section two focuses on Church ethical investment and in particular delineates the ethical investment programmes of the three UK churches in our study. The final section presents an immanent critique of their engagements.

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SECTION ONE: THE CHURCH & ETHICAL INVESTMENT This section provides a brief review of the historical development of ethical investment across Europe. Its primary aim is to investigate the role that Judeo-Christian religious organisations have played in the development of the sector. The Role of the Church In Pioneering Ethical Investment The role of the Quakers in pioneering ethical investments in the UK is well established within the literature (Sparkes, 1995; Gray et al., 1996; Kinder and Domini, 1997; Hancock, 1999). Two of the leading ethical fund providers (Friends Provident and NPI) were established by Quakers and individual Quakers had a key role in establishing both the Ethical Investment Research Service (EIRiS) in 1983 and the Friends Provident Stewardship ethical fund in 1984. The Quakers continue to influence the ethical fund sector (Friends Provident, 1998).1 It is also well established that the Methodist Church played a key role in establishing ethical funds in the UK and the USA (Kinder et al., 1993; Sparkes, 1995). The following interview quote illustrates the role of the Methodists in fostering ethical investment in the USA. ‘Two pacifist ministers concerned over the Vietnam war endeavoured to invest in a fund which excluded shares in companies producing armaments. They found no such fund existed. As a result, in 1971 they set up their own, aptly named Pax.’

The Methodist Church began investing on the stock market with ethical criteria in the early 1900’s (EMG, 2002). In 1960, the Methodist Church in the UK set up a fund which avoided investments in sectors such as: armaments, alcohol, gambling and tobacco and later, the apartheid regime in South Africa. The Methodists also established a discussion group on ethical issues in investments in 1973 which may have served as a model for subsequent ethical committees for ethical funds.2 Indeed, the proposal for the Stewardship Fund from 1973 and subsequent Stewardship proposals suggested similar ethical criteria as those employed by the Methodist Church and the formation of a similar ethical advisory committee.

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For example, a recent survey of UK “ethical investors” by Lewis and Mackenzie (2000) found that 10.3% of 1146 respondents were Quakers. This Quaker influence is remarkable given that the Society of Friends is a very small religious group with only 17000 adult members in the UK in 2001 (UK National Statistics, 2002). 2

The joint advisory committee of investments and ethics was formally established in 1983 to monitor investments from an ethical viewpoint (Sparkes, 1995). It had evolved from a committee established in 1973 which focused on South Africa in the 1970;s and gradually expanded into other ethical issues.

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The Lutheran Church has also been active in ethical investment across Europe. For example, an ethical fund available to private investors was established by the Church in Sweden in 1980; The Church of Finland was involved in launching the first two ethical funds in Finland. The Church of England has been investing with ethical criteria since 1948 and the Church of Scotland Trust, which was established in 1932, is the oldest ethical fund in the UK, and possibly Europe. The Church of Scotland has also produced some of the most comprehensive reports on ethical investment among the European Churches (Church of Scotland, 1988; Centre for Theology and Public Issues, 1992). The first ethical fund in Europe which was available to all investors was Ansvar Aktiefond Sverige in Sweden. This fund, which still exists today, was established in 1965 by the insurance company Aktie-Ansvar. Some Churches in Sweden such as the Baptists were involved in setting up of this fund (Aktie-Ansvar, 1999).3 This Swedish fund is thus six years older than the US based Pax World fund, set up in 1971 by Methodists and Quakers and sometimes mistakenly referred to as the first ethical retail fund in the world.4 The Church of Sweden has also been a pioneer in the development of ethical investment funds. Together with the financial institution, Robur, the Church of Sweden launched Svenska Kyrkans Värdepappersfond (Church of Sweden Equity Fund) in 1980. This fund is available to the public and is thus the second oldest retail ethical fund in Europe.5 The first ethical fund in France, Nouvelle Strategie was started in 1983 by Nicole Reille, the finance officer of the Notre-Dame Order in Paris. It mainly served the needs of the Catholic Church and Quakers however non-religious investors were also encouraged to invest in the fund (NPI, 1995: Politische Ökologie, 2000). In Germany some of the early ethical funds were launched by local Church banks (Kirchenbanken), examples include the KD Fonds Ökoinvest launched in 1991 and the Luxinvest Oekolux ethical fund founded in 1992 (Deml and Baumgarten, 1998). The theologian and Greenpeace activist Dr Homolka was involved in the launch of the ethical fund HYPO Umweltfonds in 1990 which was aimed at Church investors and the environmental 3

Aktie-Ansvar was the insurance company of the anti-alcohol movement, hence the avoidance of alcohol was important to them. The tobacco and weapons criteria also reflected the involvement of the Churches. 4

Indeed, other American Christians such as Evangelicals and Quakers had launched ethical funds in 1928 and in the 1950’s, but these funds were not widely known to be ethical funds (Melton and Keenan, 1994, p.38).

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The Church of Sweden and Robur have launched at least four other ethical funds in addition to Svenska Kyrkans Värdepappersfond. An indication of the significance of the ethical matters for these early Swedish funds may be that Aktie-Ansvar and the joint venture between the Church of Sweden and Robur only offer ethical funds; ethical funds are not seen as a nische product along many non-ethical funds.

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movement (Deml and Baumgarten, 1998). In the Netherlands the first ethical fund available to the public was ABF het andere beleggingsfonds; it was launched in October 1990. As in Sweden, the demand for this fund came from the Churches – which still directly own 25% of the fund assets of ABF – and the environmental movement.6 The first two Finish ethical funds were both launched in 1999. Gyllenberg Forum was launched after 5 years of planning by the small asset management company Gyllenberg. The Church of Finland had been a long time customer and pledged to invest in the fund. The second ethical fund Leonia Arvo was also launched in co-operation with the Church of Finland by the bank, Leonia. The main investor in these Finnish ethical funds is the Church of Finland (Kuisma, 2001). In the UK, Charles Jacob, who became the first Methodist fund manager in 1972, had been asked by many other Methodists about the possibility of investing ethically in the late 1960’s and early 1970’s.7 He developed the first UK ethical fund Stewardship, which was launched by Friends Provident in 1984. Examples of other early UK ethical funds with a religious background include the Credit Suisse Fellowship Trust; the Allchurches Amity and the NPI Global Care funds. Credit Suisse based their Fellowship fund on 40 years of experience in investing money for religious organisations with ethical restrictions (Simpson, 1991). The Allchurches Amity fund launched in 1988 was offered through the Ecclesiastical Insurance Group (EIG) which was founded in 1887 to meet the financial needs of the Church of England and its clergy.8 NPI had been founded by Quakers in 1835 and launched its first ethical fund in 1991. However, it was not before the environmental research team from Jupiter Ecology moved to NPI in 1994 that a strong emphasis on the ethical funds started with three more ethical funds launched within 2 years.9 The Role of The Church in The Development of Some Key Organisations The Apartheid regime in South Africa represented an early campaigning issue for ethical investors. To address the concerns relating to lending and investing in South Africa a group

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These points emerged in an interview with Mr Engelsman, President of ABF in October 2000.

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As Jacob (1996) reports: “Indeed it was the Church’s attitude to investments that had a profound effect on my thinking which was accentuated as various ministers and others approached me seeking the means to invest in a similar ethical fashion.”

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A proportion of any surplus generated by EIG goes to the Church of England (Lang, 1996).

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One reason for the move was disillusion with the attitude towards ethical investment the Chairman of Jupiter had at that time. A second reason was that the investment officer at NPI was very positive and had promised support for the ethical funds (Interviews with Jupiter and NPI).

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called Christian Concern for South Africa (CCSA) was founded in the UK in 1973.10 This group campaigned and lobbied banks and investors on the South Africa issue; members of this group were later involved in founding the Ethical Investment Research Service (EIRiS) and subsequently the Ecumenical Committee for Corporate Responsibility (Sparkes, 1995; Mackenzie, 1997).11 EIRiS was initially set up by grants from the Church of England, the Church of Wales, the Methodists, the Presbyterian Church of Ireland and the Society of Friends and charities such as Oxfam, the Rowntree Charitable Trust and the Rowntree Social Services Trust (Mackenzie, 1997), however EIRiS has been self financing since 1992. The majority of the UK ethical funds use the services of EIRiS (EIRiS, 2000). Around the time the CCSA was established, the Church Commissioners of the Church of England and the Methodists founded the Church Investment Group to exchange views on ethical investment and related issues; it was later opened up to all Church investors (Jacob, 1996). In 1998 when this group had its 25 year anniversary it comprised 10 denominations with assets exceeding £5 billion compared to the £2.2 billion in ethical unit trusts at the time (Church Commissioners, 1998; EIRiS 1998; Shepherd, 2001).12

The Christian Ethical

Investment Group (CEIG) was set up in 1988 to promote a stronger ethical investment policy in the Church of England.13 The Ecumenical Committee for Corporate Responsibility (ECCR) was founded in 1989 and together with CEIG and PIRC initiated one of the first shareholder resolutions in the UK on an environmental issue at the Shell AGM in 1997.14 This section has presented some contextual information for our study of the investment practices of three Churches in the UK. The short history indicates that two of the churches in our sample, the Methodists and The Church of England were significantly involved in the development of ethical investment in general and its supporting organisations. This history also indicates how religious investors have attempted to put their beliefs into practice. One can conclude with Gray et al. (1996) that “in the UK…religious groups were to the fore in the development of the social investment movement…” (p.246). However this observation seems 10

This followed the publication of a report advocating shareholder action on companies operating in South Africa by the British Council of Churches (Mackenzie, 1997).

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Some activists in CCSA had hoped that EIRiS would actively campaign and engage in shareholder activism. As this did not happen ECCR was founded 6 years later (Simpson, 1991).

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In addition to Christian groups, Jewish investors attended the meetings (Jacob interview).

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CEIG assisted the Bishop of Oxford when he mounted his legal challenge to the investment policy of the Church of England in 1991 (Sparkes, 1995).

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to challenge the way in which the accounting and finance function in religious organisations has been presented within the church accounting literature. This literature has generally presented a tension between the perceived secular orientation of finance and accounting in contrast with the sacred activities of the church (see Laughlin, 1988; 1990; 1991; Booth, 1993; 1995; Lightbody, 2000). Laughlin (1988) for example comments, ‘Accounting systems, in this context, are … not part of the sacred agenda and should not interfere with the more important spiritual endeavours of the Church of England.’

Booth (1993) similarly comments, ‘The sacred and secular divide, therefore, separates the legitimate part of the church from the profane support activities. Accounting is seen as a support activity, and is thus profane. It is regarded as an irrelevancy to the life of the organisation and only tolerated to the extent that it supports the sacred.’

Indeed Booth identifies this dichotomy as a key element in his proposed ‘framework for accounting research on religious organisations.’ ‘this was based on an argument that such belief systems were based in transcendental ends, which are of a different order and type, and usually seen as incompatible with the rational means-ends analysis that underlies secular management practices such as accounting; also that the application of such secular practices and forms of analysis required the substitution of temporal, empirical ends for transcendental ends, with the legitimacy of the former always open to question against the criteria of the latter.’

Laughlin (1988) similarly presents the sacred secular split as, ‘symptomatic of all religious organisations.’ However, the introduction above indicates that these two functions, the sacred mission of the church and the secular financing of those activities have been melded together in the ethical investment agenda. The way in which the churches in our sample reconciled both these positions will be explored in more detail in section two. From our research it seems quite clear that Judeo-Christian churches have played a significant role in the development of the ethical investment movement across Europe. They were initially involved in the development of ethical investment criteria for their own church funds. They were involved in the development of publicly available ethical investment funds and they helped establish organisations in order to support these funds. However, while the literature contains quite a number of studies which focus on ethical investment funds relatively little is known about church investment processes and practices, despite the prominent role they played in the development of the ethical investment movement. The remainder of the paper

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ECCR members include: The Church of England, The Methodist Church, Scottish Episcopal Church, The Society of Friends, United Reformed Church and more than 70 associate members including ethical fund providers Friends Provident and Scottish Equitable (ECCR, 2000). 8


attempts to address this gap and the following section describes in some detail the ethical investment practices of three UK churches. SECTION TWO: CHURCH FUNDS This section delineates the ethical investment practices of the Church of England, the Church of Scotland and the Methodists in the UK. However before the investment practices are outlined, the section provides a short description of the data collection methods we employed. Method Several researchers have argued for more field research into ethical (retail) funds (Harte et al., 1991; Lewis and Cullis, 1990). As the largest and oldest ethical funds in the UK are operated by Church investors we argue that this paper represents one significant way of addressing this call. In addition, Booth (1993) and Duncan et al., (1999) have argued for extending research on church financial practices to all main denominations. We argue that this paper also goes some way towards answering this call because previous studies in the UK have primarily focused on the Church of England (Laughlin, 1988; 1990). The data for this paper was drawn from three different sources. One of the authors was involved in the ethical investment process of a Church in our sample for a number of years. This ethnographic data was supplemented by in depth semi-structured interviews with five key Church investment professionals (Moser and Kalton, 1971; Borg and Gall, 1986; Gillham, 2000). The interview protocol we used is provided in Appendix 1. It consists of 16 common questions for the different Churches and one denomination specific question detailing the importance of theology and reports on ethical investment by that particular denomination. The interviews focused on how ethical values are integrated into the investment process and how the Churches engage with the business community.15 Some of the interviewees played significant roles in the development of the ethical investment movement and all were actively involved in church investments. The interviewees included two Church investment managers, a senior fund manager, a senior ethical researcher and a retired church investment manager. The interviews provided the opportunity to construct an oral history of the development of church investments (Collins and Bloom, 1991). The oral history approach involves interviewing principal participants who were “eyewitnesses” of history. For this reason, individuals with a particularly long experience of church investment 15

Preliminary interviews were also held with 5 financial institutions which manage funds for Churches. The main focus of these interviews were their ethical retail funds, but Church clients were discussed.

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management were interviewed: three had more than fifteen years of experience of Church investment management, while the other experts had more than seven years of experience.16 The section of the paper pertaining to a specific church was then sent to the relevant interviewee for a check on the accuracy. Later on a draft version of the paper was sent to the interviewees and comments were integrated into the paper. Over and above the ethnographic and interview data, information was also collected from a large number of documents collected from the respective Churches and the interviewees. Materials such as annual reports, speeches by investment managers and bishops and policy documents were obtained.17 The remainder of this section outlines the findings of our study. The following narrative describes and discusses the operation of each of the church investment programmes and also outlines the underlying assumptions on which they are based. The Methodist Church. The Methodist Church has a history of social engagement. It has been active in ethical and social causes such as education and children’s homes (Jones, 1984). It has also engaged in the wider ethical consumer movement. The UK Methodist Church has established its own financial institution to deal with all its investment requirements. This institution is the Central Finance Board (CFB). The CFB manages around £900 million in 9 funds. These funds include two UK Equity funds, a Managed equity fund, two overseas funds, a managed mixed fund, a long fixed interest fund, a managed fixed interest fund and an inflation linked fund. There is also a deposit fund which churches can use as a “bank account”. Roughly half of the money managed by CFB is pension money, the other half is Church; Charity and Missionary Society money. The modern origins of this structure dates back to 1960 when parliament approved the “Methodist Church Act”. This act enabled the Methodist Church to pool their assets into a single fund. However, the first Methodist fund manager, was not appointed until 1972. Prior to this appointment most Methodist funds were managed by secular financial institutions. 16

All the interviews were conducted during 2002 and in most cases lasted for around one hour. Four of the interviews were tape recorded and fully transcribed. All the researchers read the transcripts and compared notes about the findings from these interviews. Notes were taken at all interviews and a first write up was completed shortly after each interview.

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For example for the Central Finance Board of the UK Methodist Church annual reports (1999; 2000 and 2001), policy documents and other sources were studied prior to the interview.

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Performance & Investments In many of their annual reports, the CFB claims superior performance compared to average UK funds or the average pension fund (CFB, 2002). For many years the CFB has claimed that their respective funds have been in the top 25% in their segment despite the fact that most funds have no ethical constraints (CFB, 2001).18 While CFB investments are concentrated primarily in UK shares and UK government bonds, significant amounts are also invested in foreign shares (especially in US stocks). The growth in the funds has been exceptional; the CFB had less than £10 million under management in 1972; by 2001 this had grown to almost £900 million. Within the investment objectives of the particular fund and the general ethical policy of the CFB the fund managers can buy and sell shares however, the CFB has a policy of investing in firms for the long term. The CFB investment policy is one of “maintaining a widely diversified value based portfolio”. For example the UK equity fund had 167 securities in 31 sectors in 2002 and the overseas fund had 205 securities in more than 20 countries in 2002. Investment information is gathered in many ways; both internal research and external research is used. The CBF and its staff are also members of many networks such as the Church Investors Group (CIG), ECCR, the Institutional Investors group on Climate Change and UK Social Investment Forum (UKSIF).

Accountability The CFB discharges its accountability in a number of different ways. The CFB Annual Report details all the portfolio holdings and as such is quite transparent.19 This report is sent to all 7000 Methodist charity clients. Investment matters are also discussed at monthly Council meetings and a report is submitted to the annual Methodist Conference by the Joint advisory committee for Investment and Ethics. A bi-annual newsletter is sent to all unit holders and short commentaries on the performance of the funds are occasionally included in the Methodist Recorder newspaper. As such the sacred ethics of the secular investment process appears to be embedded within the church organisation and structure.

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Some Methodist had told the CFB investment manager early on that if the funds did not perform well financially he would be sacked. 19 For example £32 million in BP; 14 million in Shell; 0.74m in GE and £372000 in Worldcom.

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Ethics & Governance The ethical values of the CFB are drawn principally from the Judeo-Christian tradition and are, as such, rooted firmly in traditional Biblical interpretation. These values are proceduralised through a number of exclusionary screens, including alcohol, mining, gambling, tobacco, pornography and weapons (and for many years South Africa). There is also a policy of selling firms guilty of major misconduct in any sector. In clear cases the fund managers buy and sell shares directly, however more problematic cases are referred to the Joint Committee of Investment and Ethics. Some retail ethical funds have more extensive ethical criteria than the CFB funds but very few other pension funds would have as many ethical criteria and as active engagement and voting policies. Shares are voted on ethical issues and if necessary companies are divested. Before these harsher options are invoked however the CFB would have written to the firm to ask for their response and a dialogue between CFB staff and company management would generally have taken place. For example there has been an ongoing dialogue between CFB and BP and Shell for many years. This dialogue however is not always public. The work of the CFB is monitored by the CFB Council which meets 11 times per year. The council consists of 9 members.20 An audit committee was established in 2002. Responsible Share Ownership The Methodist investment ethic is presented as one of responsible share ownership. This ethic is translated into engagement and the exercise of voting rights. Engagement is a key part of the Methodist ethical investment philosophy. For example the Methodist CFB has been encouraging supermarkets to stock fair trade products since 1994. The church has also been in discussion with supermarkets over the issue of low price cigarette brands. In 1995 the Methodist CFB visited WH Smith in relation to their selling of adult magazines. This dialogue was continued in 1996 and it was noted that some adult magazines were being withdrawn from their shops. In 1997 the Methodist CFB again engaged with UK retailers over the issue of Alcopops. The CFB has also been in dialogue with Shell over its operations in Nigeria. Indeed, the church helped to arrange a meeting between Shell Nigeria, local churches, Ogoni representatives and government and military officials. There was also dialogue with Shell on oilfields in Peru and East Timor. In 1998 dialogue was maintained with Shell on a proposed oilfield in Chad and a pipeline through Cameroon. In 1999 the Church raised the issue of the safety of mobile phones with BT and Vodaphone. The issue of genetically modified foods was discussed with AstraZeneca. The Methodist team also 20

Up until April 2002 the council consisted of 22 members + 3 district representatives.

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considered the environmental problems with BP’s initiatives in Alaska and the Human Rights issues with its operations in Colombia. The CFB discussed BP’s 2% stake in PetroChina in 2000, in relation to alleged human rights abuses in a Sudanese company. The Methodist church also exercises its voting rights and indeed published a voting policy in 1999. For example the CFB voted for a resolution recommending British Gas to revise executive remuneration in line with best practice in 1995. In 1997 they voted against the reelection of a Granada director in protest of excessive compensation. Together with the US Methodist church CFB co-sponsored a resolution urging Atlantic Richfield to pull out of Burma. The Methodists also voted against Shell by supporting a resolution calling for more openness about environmental policies and improved corporate responsibility in 1997.21 The CFB voted against Vodaphone management on extra compensation related to the Mannesmann acquisition in 2000. On similar grounds the Methodists voted against additional compensation for Royal Bank of Scotland executives. The Methodist Church supported resolutions by ECCR against BP management on human rights in 2000. However BP avoided these resolutions by referring to legal technicalities. The CFB voted in favour of a resolution calling for greater environmental disclosure by BP in 2001. The CBF also voted against the re-election of two Royal Bank of Scotland executives in protest against the payment of takeover bonuses to executives. Divestments If ethical criteria have been clearly contravened or where engagement has not worked the CFB has sold companies. For example Racal electronics was sold due to its involvement with the National Lottery in 1994 and it’s links to the defence sector. GKN was sold due to its acquisition of Westland, a defence company. The CFB sold its shares on BskyB following its decision to program a Playboy channel in 1995. In 1996 the CFB contacted the French oil company Total about their operations in Burma and after receiving an unsatisfactory answer sold their shares. The church also sold its shares in the oil companies Petrofina (Belgium) and Elf Aquitanie (France) in 1999 following their takover by Total. The main reason given was the involvement of Total in Burma. An IT firm with increasing exposure to the gaming industry was also divested. CFB sold TI Group following its merger with Smiths industries in 2000. After the merger more than 20% of sales from the new group were related to the military.

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The Church of England There are 3 main investment bodies within the Church of England: The Central Board of Finance for the Church of England (Hereafter CBF); the Church Commissioners (hereafter CC) and the Pensions Board (PB) (see figure 1). The total assets of these bodies amounted to around £6 billion in 2001. In practice most assets of the first two bodies are managed by the Churches, Charities and Local Authorities fund managers (Hereafter CCLA). The majority of CCLA (60%) is owned by the CBF. The funds of the Pension Board are managed by Merrill Lynch and UBS. The pension board is responsible for pensions earned after 1998. Pensions before 1998 are managed by CC and nowadays therefore mainly by the CCLA. According to Sparkes (1995) these organisations are vital for the clergy of the Church of England. For example, the second biggest contribution to clergy salary after parish donations are stipends from the Church Commissioners. The Church Commissioners supported the church with around £150 million/year in 1991-1993 (Sparkes, 1995) and around £160 million/year in 2000/2001 (CC Annual Report, 2001). Most of this money went to pensions. CCLA/CBF of Church of England Church, Charity and Local Authority fund managers (CCLA) manages assets of around £5.8 billion of which £200 million is real estate (May 2002). In 1993 about half of CCLA assets were from the church of England, hereafter C of E, and half from charities and local authorities (Sparkes, 1995). CCLA was incorporated in 1987, but a previous body had existed since the 1950’s. In addition to the main owner CBF, the Charities investment fund owns 25% and the Figure 1.

£1.7 CBF of C. of E.

£4

CCLA £0.3

Church Commissioners

4 fund management firms

UBS, Merrill Lynch

PB

EIAG

21

Later on Shell withdrew from the Global Climate Coalition (an industry lobby group opposing measures to handle climate change) and announced increased investment in solar power. They also produced a group environmental report. 14


Local authorities mutual investment trust owns 15% of CCLA. CCLA has a staff of 83 people and offers four funds for CBF clients. The funds and their asset values in 2001 were: (1) an investment fund (£829 million); (2) a fixed interest security fund (£140 million); (3) a property fund (less than £50 million) and (4) a deposit fund (£649 million). The first and the fourth fund were formed in 1958; the investment fund operates like a unit trust. They were constituted by the Church Fund investment measure (1958) which is like an act of parliament. The second fund was launched in 1977 and the third in 1999. The trustee of these funds is the CBF of the Church of England. The group has the same members as the archbishops council. Its investment committee meets quarterly to discuss relevant issues. The CBF provides money for churches, parishes and cathedrals. As with the Methodist CFB none of these funds are available to individuals. The CBF of the Church of England was established in 1920 as the financial arm of the Synod to manage central church funds for the dioceses (see Laughlin 1988). In 1958 CBF was enabled to set up its own finance office and since 1987 CCLA has managed the CBF funds. In addition CCLA has managed the CC UK equity portfolio of £1.9 billion since 2000. All in all CCLA manages around £3.5 billion of C of E money. The assets of the Charity funds amounted to £500 million in 1994 (Sparkes, 1995).

Church Commissioners The Church Commissioners was established in 1948 to look after historic church assets. All pensions earned before 1998 are paid by CC. In 2001 this amounted to £95.3 million. In 2001 CC assets amounted to £4 billion of which property accounted for £1.1 billion and UK and overseas equities to £2.6 billion (800 million in stocks and 400 million in bonds in 1993). Income from these assets were used to pay clergy salaries (50%), housing costs and pensions (Sparkes, 1995). The CC still run the payroll for 18000 active and retired clergy (CC annual report 2001). For example £95 million was spent on pensions in 2001 by the CC. Since 2000 the CC UK equities and some other funds (e.g. majority of the assets) have been managed by CCLA. CC also uses 4 other financial institutions. There are about 26 Church Commissioners including the archbishops and four Bishops.

Pension Board The pension board was established in 1926. It runs eight residential homes and one nursing home. It is responsible for the pensions earned after 1998. At the end of year 2001 there were almost 8000 members in the pension scheme plus 4250 in the widow fund. The value of the pension fund in 2001 was £315 million. The pension fund is invested primarily in UK equities.

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Half of the assets are managed by Merrill Lynch and the other half by UBS (formerly Phillips and Drew).

Performance & Investments The investment fund fell by more than £130 million from 30.11.2000 to 30.11.2001 (CCL|||A|, 2001). This was mainly due to poor performance in general of UK, US and European equities which make up about 77% of the fund. The fund is mixed and includes bonds (9%) and property (6%) The other funds have matched their benchmarks and had positive performance and growth of assets. In the last two years alcohol and tobacco shares have performed well which has been a drag on performance compared to a market benchmark as C of E does not invest in these sectors (C of E EIAG, 2002). CBF has stated in the past that significant ethical exclusions have a negative effect on financial performance (Sparkes, 1995). By contrast an interviewee stated that “we believe that a company which manages all of its responsibilities well is more likely to be financially secure in the long run”. In 1992 there was some controversy over the fact that CC assets under management had fallen by hundreds of millions between 1989-1992 due to poor investments in property. Information sharing happens through various channels such as meetings with the SRI community or other church investors. The C of E is in regular contact with firms forming a large part of the portfolio. Most bishops and clergy have little or no role in the investment process. However in some cases local churches can provide valuable information; for example Anglican churches in Nigeria and Sudan share information concerning how oil companies operate in these countries. The ethical investment advisory group advises all these bodies on ethical issues. The largest holdings for all 3 C of E investment bodies in 2001 GlaxoSmithKline (£229.3m); Vodaphone (£194.4m); BP (£167.6m). These investment bodies are legally bound to seek good returns for their beneficiaries. One interviewee mentioned that “there isn’t really any legal possibility for them to divert funds into social housing or other projects”. He continued by stating that “there are other areas of the Church which will do that”. Accountability The CCLA annual report which details all CBF investments is sent to all bishops; cathedral deans and every diocese secretary. However if these individuals don’t share the information, the parishes and therefore individual priests and church members will not know much about the investments. An interviewee stated that “We don’t have the resources to actually send a

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copy of the report to every Priest. But the Diocese has the ability to send what we produce to anybody that wants it”. The pension board discloses the top ten investments, but investments in other firms do not seem to be reported. Ethics & Governance The same ethical policy applies to all the C of E funds. For example the assets under the Church Commissioners have avoided alcohol, gambling, newspapers and tobacco since 1948. In 1993 these exclusions affected about 12% of the UK stock market (Sparkes, 1995). In July 2002 47 UK firms were subject to ethical exclusion (C of E EIAG, 2002). The Ethical Investment Advisory Group (EIAG) was established in 1994 to advise all C of E organisations on the ethics of investment. This group has 18 members of which 2 are full time ethical analysts.22

There are five key areas which EIAG research: Environmental Performance;

Employment policies and practices; Human rights; Community work and Corporate Governance. If there is a suspicion that a firm in the portfolio would not be in line with the ethical policy then it is considered by EIAG which would make a recommendation to sell or keep the firm. These recommendations are often followed, for example Provident Financial was recently divested by all C of E funds. However, an interviewee mentioned that generally the “financial case always overrides the SRI case”. The Church of England funds do engage with firms on ethical issues and they also vote their shares on these issues.23 Their engagement approach “tends to be in terms of encouraging and promoting best practice rather than criticising and influencing”. Engagement & Voting As with the Methodists, engagement is a key characteristic of the C of E’s investment ethic. For example the EIAG engaged with GEC management regarding their weapons business at the AGM in 1997. The EIAG also met with management of GKN in relation to weapon sales to Indonesia and dialogue with GKN and GEC continued throughout 1998. In 1997 the C of E engaged with Boots, Granada, National Power and Safeway on directors remuneration. In 1998 the EIAG also attended the Rio Tinto AGM. The EIAG continued to press GEC (renamed Marconi) for a code of ethical conduct in 1999. They also engaged with Provident Financial in 22

Two bishops and some other clergy are members this group. Five of the members represents CC, two the C of E board of social responsibility, two represent the pension board, two represent CBF/CCLA, one represents the archbishops council and one represents the general synod

23

In 1991 the Bishop of Oxford challenged the Church Commissioners in court. In particular the Bishop argued for a more stringent screen on South Africa. The Bishop lost the case but the Church of England’s ethical policy has been tightened up substantially in recent years. 17


2000 to establish if it was a suitable investment, the outcome of this was that the C of E sold its shares in the company. Church of England representatives attended AGMs of BP, Marks & Spencer, Rio Tinto and Vodaphone in 2001. Discussions were held with BP and Shell about the situation in Sudan and BP’s stake in PetroChina. A number of firms were also approached on the issue executive compensation. The Pension Board voted on executive remuneration in 1997, although the CBF or CC did not vote in 1997 or 1998. The C of E voted against WPP group management cash bonuses in 2000. All Church bodies voted against Vodaphone’s excessive executive compensation in 2000. The C of E decided to support BP management rather than the resolution advocating sale of the stake in PetroChina in 2001. A common voting policy for the two main Church of England investment bodies was agreed in 2002. Divestments Shares in British Aerospace were received in 1999 due to a sale by GEC of Marconi Defence Electronics to British Aerospace. The shares were received in September and were sold by December. GKN was sold by CBF Church of England and Church Commissioners in 2000 due to its involvement with armaments.24 Provident Financial was also sold due to a concern that its operations could lead to hardship for the poor. This divestment was preceded by two years of review and engagement. The Church of Scotland The principal means to make investments both by Church of Scotland congregations and by its centrally organised committees (known as Boards) is through the Church of Scotland Investors Trust. This was established by the Church of Scotland (Properties and Investment) Order Confirmation Act 1994, although a precursor to the fund was established in 1932. The assets under management by this trust were just under £3 billion at 31 December 2001, slightly down from 2000. Governance & Ethics The Trust has twelve trustees all of which are appointed by the ‘General Assembly,’ the Church of Scotland’s supreme governing body. The General Assembly is an annual gathering of several hundred ‘commissioners’, drawn from presbyteries and congregations across Scotland. It meets for a week each May to receive reports, debate and make major decisions regarding all aspects of ‘the Kirk’. Commissioners are drawn roughly equally from clergy and

18


laity. They are not representatives but come in a personal capacity. Composition of the Assembly changes almost completely each year. The Assembly is advised as to potential trustees by an appointments committee. In practice, if not constitutionally, all trustees are nonclerical, being predominantly retired accountants, bankers or fund managers. They serve for at least three years. The trustees have established three unit trusts, the Growth Fund, the Income Fund and the Deposit Fund, intended for long, medium and short-term investment respectively. Their principal duties are to select fund managers for each of these trusts, to set them benchmarks and to monitor their performance. The largely autonomous congregations and the various semi-autonomous Boards can decide, usually through their own specialist finance committees, which of these three investment vehicles best suits the needs and purposes of their own activities and assets. Dealing rates are fixed monthly. Reports and annual financial statements are co-terminus with the Church’s own 31 December year-end. A ‘deliverance’ is also made to the General Assembly where the chairman may be questioned by commissioners. Reports since 1998 have included a specific statement on ethical policy. It is interesting to see how this has subtly developed between 1998 and 2001, suggesting an increasingly overt awareness and pro-active stance on ethical issues. However, both contained the information to the effect that, “The managers have been instructed to vote without reference to the trustees for resolutions which support or enhance good corporate governance and to refer back to the trustees any other issues which might be considered of a contentious nature.” (1998)

These latter situations would involve consultation with the secretary of the ‘Church and Nation Committee’, an Assembly appointed body that seeks to monitor and comment on contemporary political and social subjects. Investments were avoided in any company substantially involved in gambling, tobacco products, alcohol and armaments. ‘Substantially’ in this context is interpreted as resulting in more than 15% (1998: ‘10% to 15%’) or more of turnover being derived from these sectors. The Investors Trust was represented at the ‘Church Investors Group’, an ecumenical gathering comprising the principal Christian denominations in the UK, which confers on ethical 24

The C of E tightened its defence policy in 2000, this resulted in 5 new exclusions. including GKN. 19


investment issues. This not only helps with determining best practice but also leverages the shareholder power of the individual religious entities. The 2001 statement reflects something of an extension of the ethical dimension, explicitly emphasising that trustees recognise a broader remit than exclusively financial criteria for investments, for, “ In general, investment is sought in companies that demonstrate responsible employment and best corporate governance practices, have regard to environmental performance and human rights and act with sensitivity to the communities in which they operate. Investment is not permitted in any company whose management practices are judged by the trustees to be unacceptable.”

In short, the Trustees make clear that they give formal consideration to ethical expectations with a regular review undertaken to ensure that the fund managers receive guidance from Trustees to take account of views expressed by the General Assembly. Summary of the approach to investing by the sample Churches Table 1 below summarises the approaches taken by the 3 Churches in our sample. The Methodist Church and the Church of England have similar approaches. They engaged with firms on ethical issues. They employed positive and exclusionary screens. Both of these churches had sold shares and voted for ethical reasons. They also had some “in house” ethical research capability. The Methodist Church also actively used research from external sources such as EIRIS and Innovest. The Church of Scotland also had ethical screens but seemed to be less active in the other areas compared to the other two churches. Table 1 The Ethical Processes in different Churches Church C of E C of S Methodist

Engagement Yes No(?) Yes

Screening Yes (+) (-) Yes (-) Yes (+) (-)

Divesting Yes ? Yes

Voting Yes ? Yes

Research Yes (in) No Yes (in)(ex)

Theological Comparisons At the performative level all three church’s (the Methodists and C of E in particular) ethical investment programs represent a challenge to the now established dichotomy in the church accounting literature between the secular mission of the church and it’s profane financing function (Laughlin, 1988, Booth, 1993; Lightbody, 2002; Parker, 2002). We contend that the case of ethical investment represents a significant challenge to Booths (1993) claim that, ‘The sacred and secular divide, therefore, separates the legitimate part of the church from the profane support activities.’ In all three cases, to a different extent, the practice of ethical

20


investment is viewed as part of the churches sacred mission (see Flesher and Flesher, 1979) although the attitude of the Churches have changed over time. Up to the mid 1970’s for example secular institutions managed most Methodist funds. Booth (1993) for example says, ‘the sacred represents the transcendental nature of church ends while the secular expresses the secondary position of the more temporal, surrogate means sometimes used to achieve these ends.‘ However the ethical investment programmes represent a temporal proceduralisation of the transcendental values of the sacred agenda.

All three churches base their ethical

investment programs on theological principles as they are revealed in their sacred writings: the Bible. The Methodists for example claim, ‘We try to ensure that our ethical philosophy is rooted in Biblical principles and Christian theology’ (Seddon, 2000b). ‘The activities with which we are involved through our ownership of investments should be consistent with God’s nature and values,’ (Seddon, 2000b). In the remainder of this section we will explore the relationship between these sacred tenets and the churches ethical investment programmes. Booth (1993) for example stresses the importance of religious and belief systems in understanding the function of finance and accounting within religious organisations. The churches in our sample all drew on similar theological principles in order to explain their ethical investment programmes. This is perhaps not surprising given that all three churches are based in a similar Judeo-Christian tradition however it would also seem likely that the similarities are related to the closely knit nature of the church ethical investment movement. For example all three churches were active members of the church investors group and all churches associated with ECCR. The ethical investment programmes were based on five biblical principles in particular: creationism; stewardship; agapism; witness and engagement. Creationism The fundamental starting point for the churches understanding of their ethical investment programmes is a belief that they are, ‘living in Gods world’ (Church of Scotland 1988). As a Church of Scotland (1988) document on the ethics of banking and finance puts it, ‘the Christian ethic is based on the assurance that men and women live in a world governed not by blind chance but by a faithful creator.’ This principle is seen to apply not only to the physical environment but to individual human beings also (see Hay, 1989).25 It is from this basis that the principles of stewardship and agapism in particular seem to be derived (Davis, 2002).

21


Stewardship The 2001 annual Report of the Ethical Investment Advisory Group of the Church of England states that, ‘The idea of stewardship is grounded in the doctrine of creation. The world is God’s and we are entrusted with it, not to exploit it, but to care for it.’ A Church of Scotland report on the Ethics of Banking and Finance (1988) elaborates on what this kind of custodianship involves, ‘Human beings have been given dominion over the earth … but with these privileges comes the responsibility to exercise this God given dominion and intelligence as stewards called to serve God’s purposes by sharing the earths resources with others, showing special concern for the poor, caring for living creatures and conserving the environment for future generations.’

At the core of this belief lies an accountability

relationship which transcends all others. ‘We are encouraged to make fruitful use of economic resources. They are after all a blessing from God which were created to be used, enjoyed and shared. However, we are accountable for their proper use’ (Seddon 2000a). Agapism The ethical investment programmes of all three churches seemed to be motivated by an ethic of agapism. A Church of Scotland report (1988) for example says, ‘Men and women are not meant to live and work only for their own interests and gain. They are members of families and communities and the human race called to love their neighbours as themselves.’

Elements of Agapism can be found in the theology of Anglican, Methodist and Presbyterian Churches (Church of Scotland, 1988; CEIG, 1992; Macquerrie and Childress, 1997). Calkins (2000) argues that agapism has two key components, firstly the love and worship of God and secondly the service of the disadvantaged. John Wesley, the founder of Methodism, contended that “one must devote the whole of one’s life to love of God and neighbour” (Macquarrie and Childress, 1997). Wesleyan (see Wesley 1760) agapism would seem to have played some part in establishing ethical funds in the UK, through key individuals such as Charles Jacob who developed the Stewardship proposal and Elliott Kendall who helped to establish EIRiS (Sparkes, 1995). The Presbyterian theologian Professor Davis connects agapism with creationism and stewardship in his claim that: ‘Love for the neighbour includes love for and care of creation, and love for God requires the stewardship of creation for the glory of God and the welfare of humanity’ (Davis, 2002).

25

Increasingly theologians are advocating that the doctrine of creation needs to address the environmental crises (Park, 1992; Northcott, 1996). 22


Engagement The Methodist and Anglican churches in particular also identified an ethic of engagement in their Christian beliefs. This prerogative of engagement with the world by the church appears to take two forms: a Prophetic ministry of denunciation, where the church stands outside and speaks out against injustice and secondly a pragmatic engagement with a view to seeking practical solutions. Instead of denouncing injustice practical engagement seeks to encourage economic justice. While all of the churches advocated both forms of engagement their ethical investment programmes were presented as an attempt at the later. All of the churches saw ethical investment as a way of supporting attempts to improve business practice and social justice (The Church of England, 2001; Methodist CFB, 2001). For this reason the first and foremost priority of all the funds is a ‘high quality investment service with above average returns.’ (Seddon, 2000a). Seddon (2000) explains why, ‘unless we are able to provide this nothing else we say will cut much ice as trustees would be unlikely to entrust their funds to our keeping’, (Methodist CFB 2001).26 While it might be tempting to view the ethical investment programmes of the churches as an attempt to sacredize the secular (Booth, 1993), attitudes like those expressed above would seem to caution against such an interpretation of the churches activities. Morgan (1990, in Booth 1993) suggests that the legitimacy of the actions of churches are established by reference to transcendental values. However, the ethical investment movement seems to provide an example where the church has melded together both transcendental and temporal values. The nature of the financial investments are appraised against the sacred agenda and normal economic values (Booth, 1993). Witness The final theological value that seemed to drive the churches engagement was witness. Seddon (2000b) for example says, ‘overall as church investors we should attempt to be ethically distinctive and allow the position we take to be a witness to the rest of the world.’ He further elaborates, ‘Much of the Old Testament is concerned with exploring the tensions of the relationship between a creator God, his people and the rest of creation placed under their stewardship. This I believe to be the nub of Judeo/Christian ethics, in which we accept with gratitude the responsibilities of being Gods people. Following the example of Israel, the Christian community is called to witness to the rest of humanity by embracing the ethical principles of Old Testament law and living by Gods values and priorities.’

26

Much of this discussion seems similar to the debate within the critical accounting literature over accounting and change. 23


Indeed, “to be a Christian witness in the investment community” is part of the Methodist CBF mission statement. Similar thoughts were also expressed in Church of Scotland (1988). Reflections The programmes outlined above contribute towards the literatures on church accounting and ethical investment. Applied Faith In principle at least the ethical investment programmes developed by the churches in our sample represent an attempt to unite the sacred world of the church with the secular world of its finances (Seddon, 2000a). The Methodist literature calls this ethical engagement with the world of finance ‘applied faith.’ This unified conceptualisation of the Methodist churches engagement in the financial realm stands in stark contrast to the dichotomised way in which accounting and financial management have been viewed in other studies of religious organisations (Laughlin, 1988, 1990; Booth, 1993; Parker, 2002).

Laughlin (1988) for

example contends of the Central Board of Finance of the C of E, ‘They were and are simply there to provide the requisite resources so that the sacred work of, primarily, parishes should continue.’ However within the context of the ethical investment movement the C of E CBF can be seen to be actively involved in the sacred agenda of the church and not simply a financer of it. Although some historical studies of accounting in the Society of Friends have indicated that accounting can play a prominent supportive role within religious organisations (See Swanson and Gardner, 1986; Faircloth, 1988; Fuglister and Bloom, 1991) the ethical investment agenda presents a case where the financial and accounting systems have become intertwined. As Booth (1993) comments, ‘there were some boundaries on the penetration of accounting into the spiritual sphere of the life of these sects.’ Laughlin (1988) concludes, ‘accounting in this context, are legitimate aids to this resourcing problem, but they are not part of the sacred agenda and should not interfere with the important spiritual endeavours of the Church of England.’ The ethical investment movement indicates that accounting and accountability systems can be and are part of the sacred agenda. We suggest that these disparities stem from a tendency to view religious organisations from a sociological rather than a theological perspective and ultimately represents a failure to take theology seriously (Gorringe, 1999). Laughlin (1988) for example bases his study of the Church of England on the work of Durkheim and the French religious historian Mircea Eliade. The development of accounting systems within the C of E are consequently understood within a sociological context, and in this instance particularly in relation to a resource funding

24


problem.27 However, the broader systems of accounting and accountability within churches find their meaning not only within the sociological and historical traditions of the organisations but in their theological traditions also. Laughlin (1990) claims that the signification structures in the C of E were dominated by the ’sacred secular divide’. He says, ‘In essence this is a ‘signification (meaning) structure’ which prioritises particular activities (the sacred) in preference of other concerns (the secular or profane).’ We contend that our study indicates that the signification processes are more complexly intertwined than Laughlin suggests. There is however some evidence that this combined signification process has yet to filter down to the congregational level. The Methodist CFB seems to have been the most active in voting their shares on ethical issues and in selling shares for ethical reasons. It is encouraging that the Churches to an extent put “their money where their mouth is” and vote and divest on ethical issues. However, Bruyn (1991) details how American Churches presented 82 shareholder resolutions on corporate social responsibility to 69 corporations in 1979 alone. In light of the successful activities of their US counterparts there would seem to be scope for more shareholder activism among UK Churches (Kowalewski and Leonard, 1985). Many ethical retail funds could also follow this example. The Methodist CFB also demonstrates that Churches can successfully manage their own funds. Many churches, for example the Church of Finland confer responsibility for managing their funds on outside financial institutions. The analysis in this paper indicates that churches can increase their ethical influence by internalising the asset management. This may have implications for those churches who view their finances as something outside of their spiritual responsibilities. The voting patterns and the way the investment function is organised confirm the findings in Duncan et al., (1999) of significant differences depending on denominational affiliation. For ethical funds this suggests that to influence firms on ethical and corporate governance issues some internal expertise on these issues is necessary. A third lesson which retail ethical funds can learn lies in the area of transparency and accountability.

All of the churches we studied disclosed details of their portfolios. The

Methodists and the Church of England also disclosed their voting practices. This practice stands in contrast to many institutional and retail funds who’s voting practices remain secret (see for example Mallin, 2001). Some churches could also improve on their disclosures and transparency on investment matters.

27

If this observation is credible then it may represent a challenge to the presumed neutrality of grounded research approaches in general and in church accounting in particular (Parker, 2002). 25


SECTION THREE IMMANENT CRITIQUE. This concluding section presents an immanent critique of church based ethical investment. The objective of this section is to contribute to the accountability literature (see Parker, 2001). This literature contains many calls for studies of how notions of accountability are worked out in practice (see for example Roberts and Scapens, 1985; Laughlin, 1990) and this paper represents a response to those calls. Furthermore, Parker (2001) argues that such research is particularly rare in church organisations. The majority of the discussion within the literature has tended to view the concept of accountability from a sociological perspective and has ignored the possibility of metaphysical perspectives. However, as our investigation has shown, the churches in our sample, and the Methodist church in particular view their finance function as an integral part of their sacred mission, and therefore we argue that as such it has a metaphysical dimension.

We contend that this has important implications for our

theorisations of the concept of accountability. Before embarking on our critique we think it is important to indicate that ethical investment through the stock market is only one of many forms of engagement undertaken by the churches in our sample (Church of Scotland, 1988; Melton and Keenan, 1994).

The UK Social

Investment Forum, of which most UK ethical funds and many church linked organisations such as CCLA, CEIG and Epworth are members, also devotes substantial resources to community/social investment. Community investment is however more common in the USA, where Churches have a long tradition of alternative investments aimed at helping the disadvantaged. For example, the Methodist Church has allocated $100 million of its pension funds to low and moderate income housing development. Arguments for investing in lowincome housing are also made by the CEIG (1992). The C of S (1988) recommended investing in microcredit schemes financing enterprise in Africa. Perhaps one reason why alternative and community investment is more unusual in Europe than in the US is that the state has traditionally played a substantial role in this area. This section focuses specifically on the churches involvement in the ethical investment movement and the critique is undertaken at two levels: firstly at a performative level and secondly at a theological level. Taking the ethical investment programmes as a given, we assess the consistency with which church funds apply the values and criteria they purportedly operate. However the section also explores various aspects of the underlying metaphysical accountability at the core of the church investments.

26


Performative Critique All of the churches in our sample operate exclusionary screens, avoiding investments in alcohol, tobacco, gambling and weapons (Church of Scotland, 1988; Kinder et al. 1993). Shares in these sectors are often termed “sin stocks” (Kinder et al. 1993; Melton and Keenan, 1994; Mackenzie, 1997). The Methodist church in particular has taken a strong stance avoiding products related to addictions such as alcohol and tobacco, while evangelical Christians have opposed gambling for many years (Kinder and Domini, 1997).28 Other common criteria among religious investors include oppressive regimes and pornography (Inskeep 1992). However, the issue which perhaps united activists in different campaigning organisations, Church investors and other ethical investors more than any other was human rights. This manifested itself in the avoidance of oppressive regimes in general and South Africa in the 1980’s in particular (Purcell 1979). However it is questionable whether these forms of engagement go far enough. The Finnish theologian Dr Eskola for example has claimed that if ethical funds do not address issues such as product pricing and safety, employee rights and the plight of the disadvantaged it is questionable whether such funds are truly ethical? However, while there may be similarities in the ethical screens employed by church funds, it is apparent from their shareholdings firstly that the churches apply these screens in different ways and second that they do not preclude companies which other ethical funds, operating similar screens, would not invest in. For example all the Churches have controversial holdings such as Shell, a company avoided by some retail ethical funds due to their operations in countries such as Nigeria. One difference between the Churches is that the Church of England avoids newspaper companies in order not to be associated with a particular political viewpoint or poor reporting standards. However, both the Church of Scotland and the Methodists hold several newspaper companies in their portfolios. Unlike the other Churches the Church of Scotland does not have an explicit criterion for pornography. The Methodist CFB has invested in British Energy, a company unacceptable to environmentalists due to its exposure to nuclear power. For many years the Church of England had exposure towards the defence sector although this changed with its new and tightened defence policy launched in 2000. Other controversial holdings sold in 2000 by the Church of England included Enron and PetroChina. The Church of England still however, invests in TotalFinaElf, a company that was sold by the Methodists due to its involvement with oppressive regimes such as Burma. Another controversial Church of England holding is Nestlé due to it’s activities in the third world. The 28

According to Kinder et al. (1993) the first fund in the world with ethical criteria, The Pioneer fund which was launched in 1928 “served evangelical Protestants in the United States who opposed consumption of alcohol and tobacco”(p.13) and avoided gambling (Harrington, 1992). 27


Church of Scotland invested in GKN (bonds) a firm avoided by the Church of England and the Methodists due to their military links. Since defence is a criterion for the Church of Scotland also this holding may contradict their own policy. The Methodist CFB had also sold TI Group due to its exposure to gaming. However, this company is held in the Church of Scotland growth fund. All the churches appear to be quite pragmatic with their exclusions. For example British Airports Authority (BAA) is included in their portfolios despite 18% of sales being generated by alcohol and tobacco. Similarly Whitbread is also approved by the Church of England and the Methodists despite 15% of sales relating to alcohol. All Churches also invest in firms involved in genetic engineering such as AstraZeneca. Many ethical retail funds have more extensive and strict ethical criteria than these Churches (Kreander, 2002). For pension funds, however the Churches have exceptionally extensive ethical criteria. There are then both discrepancies in the different ways in which the churches apply their exclusionary screens and also controversy in the companies that are included in their portfolios. However, in many instances the churches are aware of these discrepancies. The investment manager of the Methodist CFB, for example has said, ‘we do not claim that our portfolios are free from any taint which is an unrealistic and perhaps unbiblical goal. Rather we seek to progressively lessen the taint, by investing in companies that are attempting to improve their business practice.’ While this attitude is consistent with a policy of engagement, when financial returns are foremost there is an obvious danger that the distinction between engagement and compromise becomes blurred (see Parker, 2001). The possible danger in engagement is that certain corporations may influence the churches with their values more than the other way around. Theological Critique At the most basic level, theological questioning of the churches involvement in the ethical investment movement relates to the extent to which the grand narrative of Capitalism, with it’s grounding in financial utilitarianism, the distinction between capital and labour, the promotion of competition and it’s underpinning theory of distributional justice is compatible with a Christian ethical perspective. Sociologists like Max Weber have suggested that Capitalism developed in tandem with the spread of Judeo-Christian religious practice and many might view the development of church ethical investment as a further stage in the church’s ethical legitimation of the broader capitalist project. However this concern has also been expressed within the churches in our sample. For example a recent resolution at a Methodist conference expressed concern that the CFB operates, ‘with the mind set of global capitalism.’ This comment reflects a similar concern highlighted in Parker (2001) of the Uniting Church of 28


Australia (UCA). Parker identified a concern amongst some church members that aspects of Australian culture, such as materialism, individualism and immediacy, had, ‘infiltrated,’ the sacred culture of the UCA. Parker explains that some members of the congregation felt that the cost benefit form of decision making that was emerging within the church represented a challenge to more traditional covenant29 based notions of action.

Northcott (1999) has

highlighted the challenge that capitalism represents to some of the most basic of Christian values. He has argued, that the poor in Latin America are ensnared in international economic structures which generate dependency and he refers to these structures as “structural sin”. If some economic structures are “sinful” as some theologians claim, then this prompts the question; to what extent is church ethical investment a part of unethical structures? (Sider, 1987; Northcott, 1999; Eskola, 2000). Gorringe (2001) for example contends that active stock market investment is often similar to gambling and that there is “a vast chasm” between profit maximisation and “meeting human needs”. A radical Christian perspective may therefore not approve of stock market investments. Ultimately Jacob (1979) Moore (1988), Eskola (2000) and Gorringe (2000), all make the same point: the values underlying financial utilitarianism, which tend to give money primacy can be challenged as fundamentally unethical from a theological perspective (Centre for Theology and Public Issues, 1992). Jones (1984) concludes that recent theology is pressing the Church of England to regain a sense of “God’s bias towards the poor” while Sider (1987) argues that “Christians of all theological labels have bowed the knee to mammon”. Angus (1992) however makes the distinction between the positive activity of wealth creation and the negative activity of “amassing riches”. A positive view towards wealth creation (but not towards amassing wealth) with some reservations is also taken in Church of Scotland (1988). Yet the question remains as to whether the process of wealth creation can be separated from it’s uses so easily. From a theological perspective the process by which wealth is produced within a capitalist system: the separation of capital and labour and competition for example are problematic. Some sayings of Jesus within the Christian Gospels appear to pose a challenge to church ethical investment. For example, Jesus said: “You cannot serve both God and Money” (Matthew 6:24). In the context of this verse it is argued by Gorringe (2001) that although individuals within financial institutions need not be greedy at all, “the system is greedy on their behalf”. The Lutheran theologian Dr Eskola has argued that “the stock market driven capital democracy” leads to inevitable conflicts with Christian ethics because moderation and wealth distribution are normative biblical criteria which cannot always be reconciled with financial profit maximisation (Eskola, 2000). Sparkes states about ethical (retail) funds, 29

This covenant relationship is based on faith and trust in the guidance of God.

29

An Immanent Critique of Church Investments ‘I know of no example of such a fund making an investment purchase in expectation of below average returns. Nor do I know of any example of a retail ethical/SRI fund publicly stating that it was doing something likely to be unpopular among its clients on the grounds that it was the ethically correct thing to do (Sparkes, 2001).‘

This raises the question of whether the impressive financial returns earned by some Christian investors have been earned at the expense of a truly Christian ethic? This debate is primarily related to the way in which accountability is to be discharged it does provide some insights into the context within which notions of accountability are developed and employed within a religious setting. While the literature has focused primarily on stockholder (Laughlin, 1990) and stakeholder models, notions of accountability within church ethical investments do not fit easily into these models. This is because church accountability is not based on contractual obligations as in agency models, neither is it based on broader social contract theories which underpin stakeholder models. The church ethical investments are principally based on a metaphysical covenant relationship (Parker 2002). As such the discussion highlights the limited extent to which both these models of accountability can be applied to religious organisations when theological possibilities are taken seriously (see Laughlin, 1988). However secondly, it would seem that the development of notions of accountability, within a religious context at least, may relate to the organisational structure of the church. We note that it is in the Methodist Church, an organisation with a much flatter organisational structure than the other two churches in our sample where the most sophisticated ethical investment programmes have been developed. Conclusion This paper has attempted to do three things. Firstly it has explored the relationship between the Judeo-Christian church and the development of the ethical investment movement. It was suggested that this history reveals an engagement both at the institutional level, in the form of church investments, and at an individual level in the sense of providing individuals with the opportunity to invest their personal savings ethically. Secondly the paper has delineated both the theological thinking behind this form of engagement and the forms it has taken in three different churches. Our findings suggested that the Methodist Church in particular had made an effort to harmonise its investments with some theological principles. All the sample churches had a long history of utilising ethical criteria in their investment process. Consistent with Duncan et al., (1999) we found significant differences in the approach to investments

30


depending on denominational affiliation. The final section of the paper attempted to undertake an immanent critique of church investments both at a performative and a theological level. Ultimately the paper contends that while the development of the church ethical investment movement represents a genuine example of theological praxis it has yet to fully address the challenge that the values at the core of a truly Christian ethic are ultimately incompatible with the values of Capitalism. Some of the church accounting literature focuses on the increasing financial pressures faced by some churches and the role of accounting in the churches response to that challenge (Laughlin, 1988). The issue of ethical investment indicates that some churches are beginning to appreciate that their continued existence depends more on how clearly and relevantly they can commend their faith through applying their Christian values to societal problems rather than through developing better accounting or financial systems. Perhaps it will not be very long before corporations will have to do the same.

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