Page last updated at 17:12 GMT, Thursday, 25 September 2008 18:12 UK

Church may alter investment rules

By Julian Joyce
BBC News

The Archbishops of Canterbury and York
The Archbishops of Canterbury and York have launched attacks

The Church of England may rethink its rules on how it invests money after its two most senior figures condemned "short-selling" by some financial traders, a source has told the BBC.

Earlier, the Archbishop of Canterbury demanded the practice of "short-selling" be banned outright, and the Archbishop of York called traders who "undersold" shares "bank robbers and asset strippers".

The Church does not regulate the practice of "short-selling" by firms in which it invests.

However, a source close to its Ethical Investment Advisory Group said he thought the archbishops' intervention "might prompt a rethinking of the rules".

"It would not surprise me if the General Synod (the Church's governing body) did not raise concerns about investment and business practices in future," he said.

A Church spokesman said that while its fund managers were banned from short-selling, the rules do not apply to the firms it invests in.

The CofE already has an "ethical investment policy" governing how it invests its money. Examples include a ban on armament and tobacco firms, and any companies involved in the pornography industry.

Private equity

Figures released earlier this year by the Church Commissioners, who run the CofE's finances, show the Church made investments last year totalling more than 3.6bn.

The Church Commissioners' funds are used to pay the salaries of senior clergy, including the Archbishop of Canterbury, and for the pensions of retired clergy.

There were a wide range of investments - from shares, currencies and property to investment funds and private equity firms, which specialise in buying companies and turning them around or making them more efficient.

Dr John Sentamu
Dr John Sentamu called traders "bank robbers and asset strippers"
The commissioners said their private equity funds portfolio "performed strongly" and generated an annual return of 34%.

They added that they were "looking to invest more in private equity...if we find good opportunities."

Because private equity firms are not listed on the stock market, critics say they are less transparent compared to publicly-quoted firms, and are not subject to the same degree of regulation.

Some private equity companies have been accused of being asset strippers who saddle the companies they buy with huge debt while selling off the most valuable parts of the business.

Others are seen as long-term investors that take companies away from the glare of stock market analysts and their short-term investment outlook.

Some of these funds also engage in short-selling - the practice of borrowing shares and selling them on, in the hope of buying them later at a lower price to making a profit.

The practice is not illegal as such. Indeed, many see it as necessary for modern financial markets to operate. However, because of the turmoil on the world's markets it was recently suspended by many financial regulators around the world.

Now both archbishops seem to suggest that short-selling as such is a questionable activity.

It is not known if any of the firms handling the CofE investments has ever sold shares "short", because the church has not provided a full list of the firms it does business with.

But Steve Jenkins, a spokesman for the commissioners, told the BBC that while the Church's fund managers were banned from short-selling, there were "no rules on short-selling" that governed the companies the Church invested in.

He said: "What the archbishops are talking about is the abuse of short-selling. The government has said that short-selling itself is OK as a financial instrument."

Currency speculation

The Church Commissioner's 2007 financial report also reveals that the Church paid money to a currency trading firm last year.

The "hedging programme" was managed by Pareto Investment Management. Says the report: "With the sharp fall in sterling towards the end of the year, we spent 6 million on the settlement of hedging contracts."

Traders on the floor of the New York Stock Exchange
Markets have seen huge volatility recently
Mr Jenkins said: "The programme we used was as a hedge against currency fluctuations to protect the Church Commissioners' investments. It was not used to generate revenue."

Mark Robertson of EIRIS, which provides ethical investment advice to more than 100 clients - including churches and charities - said it would be possible for the CofE to regulate short-selling by firms with which it did business.

He said that private equity companies would provide "more of a challenge" because of their secretive nature.

"Any rules against short-selling would have to be very nuanced, " he said.

"You have to remember that selling short is a long-standing business practice that has been around since the 1920s.

"In some circumstances it can be seen as a legitimate business practice."

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