Archbishop Justin Welby, leader of the world's 80 million Anglicans, told the BBC he would urgently review the church's investment after a report by the Financial Times that the church's pension fund had invested in Accel Partners, an American venture capital firm that led the 2009 fundraising for payday lender Wonga.
"I was irritated," he said of learning about the investment. "But these things happen."
The amount of church money indirectly invested in Wonga was 75,000 pounds ($115,000), out of investments totalling 5.2 billion pounds. But the revelation is still awkward for Welby, who told Total Politics magazine earlier this week that he was ready to compete with payday lenders in hopes of putting them out of business.
He claims the firms, which offer small, short-term loans at sky-high interest rates, prey on the most vulnerable in society.
He said that even his own staff had fallen for the promises of such lenders in deprived areas.
"I've seen it," Welby told the BBC. "I've lived in these areas and worked in them. I've had staff who have got caught up in it and have had to be helped and had their lives destroyed by it. This is something that really matters to me."
Wonga — whose name is a slang term for money — has used aggressive advertising and sports sponsorships to become one of Britain's best-known payday lenders, and one of the most controversial.
Earlier this month Senegalese soccer player Papiss Cisse, who plays for Premier League club Newcastle United, said he would not wear a team jersey bearing the logo of sponsor Wonga, because it went against his Muslim faith and personal beliefs. He later backed down and agreed to wear the shirt.
But Bolton Wanderers, a team in northwestern England, was last month forced to scrap a deal for lender Quick Quid to appear on its jerseys, saying it "underestimated the adverse reaction."
London team Millwall pre-empted a public outcry by backing out of talks for a similar sponsorship.
Chief executive Andy Ambler said the team put "morals before commerciality."
"This is a dilemma for football because the backlash against payday loan companies is mounting," Ambler told a legal seminar on Thursday. "It's becoming political."
Welby seemed more conciliatory toward Wonga on Friday, though he insisted he wasn't backtracking on his criticism. He said the firm was well-managed and that its chief executive, Errol Damelin, was a clever man who "runs it extremely well."
Wonga has an annual interest rate of 5,853 per cent, according to its website — but Welby said loan sharks that operate outside the law are an even greater problem.
However, the former oil company executive said he remains committed to having the church develop plans to help expand credit unions — member-owned financial co-operatives — as an alternative to the lenders.
The church's investment guidelines say it should not invest in firms that make more than 25 per cent of their income from industries such as gambling, alcohol or high-interest-rate loans, more than 10 per cent from the military or more than 3 per cent from pornography.
Welby said he was not embarrassed by the church engaging in capitalist activities, though he acknowledged that it raised complex ethical issues.
"We can't say that we tolerate bad things, but we have got to live in the real world, and living in the real world means that life is often very complicated and you can't escape the complexity," he said.
Welby conceded that it was almost impossible for the church to make an investment that was not somehow tainted because of the complexity of investment funds and the multiple activities of some companies. He asked, for example, what should be done about an investment into a sock maker who might make products for soldiers going into combat.
"If you exclude any contact with anything that directly or indirectly gets in any way bad, you can't do anything at all," he told the BBC.
Welby suggested all of the church's finances might be examined and said he couldn't promise all the rules had been followed.
"I don't know the answer to that, because I don't know how the detail processes work in the Church Commissioner's investment management arm," he said. "What's clear is that ... this is an embarrassment."
Associated Press Writers Rob Harris and Jill Lawless contributed to this report.