If you’re looking to carry out an act of charity, a portfolio of Wonga loans might not be the most obvious place to start.

Last week, it was rumoured that the Church of England’s £8.3bn investment fund would buy the loans. The idea, which had been proposed by Labour MP Frank Field, was that it would be able to benevolently engage with the borrowers, or reduce repayments.

On Friday, the church confirmed in a statement that it had considered such a move, but would not be participating in any buy out of the UK loan book, having concluded it was “not as well placed as others to take this forward”. Justin Welby, Archbishop of Canterbury, said he would continue to look at ways to help borrowers, and “if we make the economy fairer for all, we will also make it stronger. When prosperity and justice go hand in hand, every part of society benefits”.

In case anyone’s forgotten, Wonga is a payday lender that gained public notoriety as a poster child for extractive debt in an age of austerity, and then went into administration.

The Church fund has history with Wonga. It owned a stake in the company in 2013 – a fact which was publicly identified by an FT article, and awkwardly contrasted with its public criticism of payday lending as “morally wrong”. The Church subsequently divested.

The Wonga problem is part of a growing investment philosophy which distinguishes between assets according to ethical as well as financial criteria. The Church of England, in its latest annual report, says it manages its fund in a “responsible and ethical way”. It uses the proceeds for its mission, which includes supporting churches, cathedrals and dioceses throughout the country.

The ethical industry is growing rapidly. The green bond market, for example, is based on the principle that companies borrow money and use it for environmentally-friendly purposes. A similar logic can be applied to any other ethical trend you can think of.

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In the Church of England’s case, its own history in this debate includes a legal case, brought in 1991, by the Bishop of Oxford against the Church Commissioners for England. The judgement from that case – which is available here – summarises the line of argument:

For some time there have been voices in the Church of England expressing disquiet at the investment policy of the Commissioners. They do not question either the good faith or the investment expertise of the Commissioners. Their concern is not that the Commissioners have failed to get the best financial returns from their property and investments. Their concern is that, in making investment decisions, the Commissioners are guided too rigorously by purely financial considerations, and that the Commissioners give insufficient weight to what are now called “ethical” considerations.

How many degrees of separation do these considerations run through? In terms of its previous investment in Wonga, the Church held a stake in a venture capital fund which had in turn invested in the business (two degrees of separation). If some of the money from a green bond eventually flows through a supply chain to an oil company via, say, the use of unleaded petrol in company cars, the connection might pass through three or four degrees.

The task of assessing the precise ethical calibrations of a private equity fund, an area of finance to which the Church says it is looking to increase its allocation, is a difficult one. If you wanted to do it according to certain rules, it would incur a major due diligence cost on the investment process.

The Wonga divestment raises other questions, especially the approach towards debt, which makes up the bulk of all financial assets. Wonga attracted particular opprobrium because of the interest rates it charged customers. This is not an unfamiliar topic in religious circles. (Exodus, 22:25: “If you lend money to my people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.”)

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If Wonga is ethically untouchable because of the rates it charges, what interest rates, in what conditions, count as ethical? Are interest rates ethical on a nominal basis, or does their ethical status change according to the risk of the borrower? If someone is low-risk and they are charged 5 per cent, is that more objectionable than a high-risk person being charged 9 per cent?

Equities also raise problems of their own. Justin Welby, the archbishop of Canterbury, who previously worked in the oil industry, recently criticised Amazon. The church’s fund, however, continues to invest. Its global equities portfolio made investment returns of nearly 19 per cent last year.

Equity and employees may have some aligned interests, but they are also competing for returns (with the possible exception of labour that is remunerated in stock). It is not hard to imagine someone arguing that a particular equity investment should be weighted against some objective measure of that politicised conflict – the relative difference between growth in wages and growth in equity returns, perhaps.

Investment in property, which charges rents, raises its own set of questions. A rental contract, in some scenarios, might be compared to a Wonga loan, in its extractive impact on low-income household finances. Similarly, if interest rates rise, a lot of floating rate mortgage debt could conjure the same ultimate objections made against Wonga loans, which is that high interest rates lock debtors into repayment in perpetuity (this argument is already made across a range of assets, from student loans in the US to Greek sovereign debt).

One response to all of these questions is there are limits to which ethical investing can be based on any calculated rule, whether it be in debt, equity or real estate markets. There are also limits on a consistent approach to degrees of separation. The cost of doing this across all investments across just one degree of separation would be enormous. Even if it were affordable, the rules would be mediated by all kinds of biases and interests.

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The field of ethical investing therefore reverts to the intangible field of reputation. Wonga had become a household name, which completely changed the reputational implications for any investor. If anyone did come up with a set of calculations that demonstrated Wonga sat on the wrong side of the ethical interest rate line, then the application of that model would have all kinds of unintended consequences, and force ethical funds to divest from many other businesses, in many other unpredictable ways, either now or in the future. Instead, Wonga had a kind of infamy that is easy to recognise, but hard to quantify.

The entire movement around ethical investing raises the question of reputation accuracy. Some reputations might closely match measurable underlying truths, around the concept of harm, that can be somehow measured, and then used to make consistent decisions elsewhere. Other reputations might be vague, easy to manipulate, and vulnerable to misinterpretation and charges of inconsistency.

The ethical investing industry is still in its early stages. Its proponents optimistically believe social good and high returns are happily compatible with each other, and, moreover, that the many immeasurable aspects of their existing investments are not ethically tainted. There is no data set for these beliefs; they instead rely on a new kind of faith. Without it, they wouldn’t have anything to invest in.


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