By Belinda Goldsmith and Chris Vellacott
LONDON (Reuters) - The global financial crisis has strengthened the Church of England's drive for more ethical business practices by making companies and shareholders more receptive to change, according to the man who manages its investment fund.
With about 5.5 billion pounds ($8.8 billion) of financial and property assets, the Church has greater clout than many hedge funds. But it has often struggled to make its voice heard.
That is starting to change, according to First Church Estates Commissioner Andreas Whittam Smith.
"It's on both sides," he told Reuters in his wood-paneled office in the shadows of London's Westminster Abbey. "It's not only companies considering whether they are behaving as they should as good citizens," it's also investors preparing to line up alongside the Church to promote better behavior, he said.
"Our typical holdings in companies are half percents, so in itself it doesn't make a lot of difference, but if you can represent with others 15 percent of the capital you can achieve something."
Ethical investment comes at a cost, estimated at about 0.7 percent a year of growth lost from "opportunities foregone".
But the Church's fund still made a return of 9.7 percent last year and stands firmly by its decision to sell out of News Corp (NWSA) in 2012 and mining company Vedanta (VED.L) in 2010, unhappy with how the companies were run.
Taking a moral high ground to investment has meant some public relations hiccups along the way.
Scrutiny of the Church's portfolio intensified this year after it was found to indirectly invest in short-term lender Wonga which Church leader, Archbishop of Canterbury Justin Welby, said he wanted "to compete out of business".
But Whittam Smith, a former financial journalist who founded the Independent newspaper in 1985, said ethical investment was not just about avoiding shares in firms involved in pornography, gambling, alcohol and tobacco, or the like.
"With ethical investment there are two aspects. One is to disinvest, the second is to stay and see whether you can change things," he said.
"CHANGE IN MORAL CLIMATE"
About 2.5 billion pounds of the Church's portfolio is invested in shares listed in Britain or overseas, including in drug companies GlaxoSmithKline (GSK.L) and AstraZeneca (AZN.L), miner Rio Tinto (RIO.AX), and bank HSBC (HSBA.L).
Whittam Smith said the Church had discussed its role in the banking sector after a string of scandals over mis-selling and huge compensation payouts, but decided it had more influence as an activist shareholder within to change the moral compass.