The Church of England has introduced new restrictions on investment in the wake of the Wonga controversy, but cautions that the purpose of its ethical investment strategy is not to achieve a "morally perfect portfolio".
The Church's Ethical Investment Advisory Group (EIAG) has tightened investment restrictions by reducing the revenue threshold from 25% to 10%.
The reduction takes effect immediately and has been introduced following a review at the request of the Archbishop of Canterbury after it came to light that the Church of England had indirectly invested in payday loan company Wonga.
The Financial Times revealed in July last year that the Church of England's £5bn pension fund included a stake in a US venture capital fund, Accel Partners, which is a backer of Wonga.
The timing of the revelation was embarrassing for the Archbishop, coming just days after he had vowed that the Church of England would "compete" Wonga "out of existence".
The cap on investments was in place already to exclude companies that are involved in tobacco, gambling, high interest rate lending, and human embryonic cloning.
However, the Church of England said that the reduction to 10% would not have prevented the exposure to Wonga as this investment was in a pooled fund and "could not have been screened in the same way as direct holdings are".
The EIAG is to publish a new policy on pooled funds subject to approval from the investing bodies, but it makes clear that some restricted investments may slip through the net.
"Exposure to restricted investments, like Wonga, can occur in pooled funds and the EIAG accepts this," said EIAG secretary Edward Mason.
EIAG chair James Featherby writes in the group's newly published annual review that the Wonga controversy had highlighted "misconceptions" about ethical investment and "in particular that its objective is to achieve a morally perfect portfolio".
He said the Church's investing bodies "take reasonable measures" to avoid providing capital to or profiting from unethical business activities, but added that it was "no more realistic to desire that they invest only in morally perfect companies than it is to desire that any of us should relate only to morally perfect individuals".
The EIAG was seeking "positive momentum not perfection" from companies, he continued, and would only seek divestment "where we see no genuine desire for change".
"Difficult choices remain and it is inevitable that the investing bodies will from time to time graze their knees as they interact with a complex and ambiguous business world.
"But in our view, it is better to stay on the field of play than to sit on the sidelines," he said.
The annual review also reports successful corporate engagement by the EIAG, leading to changes in alcohol and pornography sales.
Following engagement with the EIAG, supermarket chains Tesco, Sainsbury's and Morrisons have published alcohol policies newly acknowledging the potential for alcohol to cause harm.
In another significant development, church investor engagement led to a telecommunications company deciding it would no longer promote pornographic material on its UK handsets. The Church of England did not disclose the name of the company but said it was "major".