How states are Aiming to keep Dollars out of Sudan

By Carla Fried

Feb 19, 2006 (NEW YORK) — The latest American initiatives to put pressure on the government of Sudan are centered many thousands of miles away from its capital, Khartoum. A handful of state legislatures in the United States have passed laws that bar their public pension funds from investing in companies with ties to Sudan, which has been accused of extensive human rights abuses in a long-running civil war.

The United States State Department has also labeled Sudan a state sponsor of terrorism.

While a 1997 executive order by President Bill Clinton bars American companies from conducting business in Sudan – except for a few technical exceptions, like a humanitarian mission – foreign businesses do not fall under that restriction. But in this age of global asset allocation, it is not uncommon for investors in the United States to have a link to Sudan through foreign stock holdings. Such foreign holdings would be the most affected by the recent state legislation.

The New Jersey Legislature passed a law in August that requires its public pension funds to divest itself of holdings in businesses that have equity stakes, including investments, facilities or employees, in Sudan. A similar law went into effect in Illinois last month, requiring its pension funds to be fully divested of any company with a Sudan tie by July. Oregon has also passed such a law for its public investment funds, while Louisiana has approved legislation that permits, but does not require, its public funds to shed investments linked to Sudan.

In December, the biggest public pension hammer, the California Public Employees Retirement Plan, or Calpers, took aim at three companies in which it has invested. The Calpers board voted 9 to 2 to call for the companies, ABB, Alcatel and Siemens, to cease business operations in Sudan.

A Calpers spokesman said that “our board believes that an engagement process with the companies is the best avenue if we are going to effect some change.” Last week, Calpers reported that the three companies would not sever their Sudan ties; Calpers is considering its next step.

Phil Angelides, the California state treasurer and a Calpers board member, says he is prepared to pursue divestment if those companies do not pull out of Sudan. “The U.S. government has told Americans to have no business in Sudan,” he said, “so why should California invest in companies that are supporting the regime?”

Spokesmen for the three companies say that leaving Sudan would do more harm than good. Ron Popper, a spokesman for ABB, for example, said the company had sought comment from many individuals and organizations within Sudan. “We have unanimously heard one message: do not withdraw because the country needs international investment,” Mr. Popper said.

The states have left it to their money managers to figure out who belongs on the divestment list. Money managers have relied on private research firms that scour publicly available documents, trade journals and news accounts, and that conduct independent research to compile databases of companies involved in Sudan. Among the firms providing this research are KLD Research and Analytics, Institutional Shareholder Services and the Conflict Securities Advisory Group.

For example, KLD started its Sudan Compliance Service last November. Noel Friedman, managing director of KLD, said that 124 companies were currently on its Sudan list, including eight American businesses that he declined to name.

The lists, however, are far from definitive. Some companies that appear on them declare that they do no business in Sudan, and for at least one, 3M, the involvement was described by the company as aiding the United Nations. A spokesman at 3M said the United Nations bought 3M’s Scotchshield Ultra Safety and Security Film, used to protect windows.

Steven Schoenfeld, chief investment strategist for quantitative investments at Northern Trust, is responsible for determining the companies his firm will exclude from the six “Sudan free” index funds it has started for institutional clients, including the State of Illinois. More than $8 billion of Illinois pension money has already moved into the six portfolios.

Mr. Schoenfeld’s goal is to track closely the performance of traditional indexes even after he has removed stocks with ties to Sudan. He says his fund that tracks the MSCI EAFE index, a popular benchmark for developed countries across Europe and Asia, as well as Australia, will pose his biggest challenge. He said that more than 25 companies, representing more than 9 percent of the index’s market capitalization, could be booted from the fund.

Among the big names that could be dropped from the portfolio are Royal Dutch Shell, which represents more than 2 percent of the EAFE index; Total, the French energy giant, about 1.5 percent; Toyota, about 1 percent; and Siemens of Germany and Ericsson of Sweden, both about 0.5 percent.

The six Northern Trust funds are to complete Sudan divestment by the summer.

While Sudan has been in a two-decades-long civil war that has claimed thousands of lives through fighting and famine, the state initiatives picked up momentum after Colin L. Powell, then the secretary of state, said in late 2004 that the United States viewed violence in the Darfur region of western Sudan as genocide.

Agreement over the gravity of the situation in Sudan has not meant a united push for divestiture. It stalled in the Arizona Legislature and didn’t get far in Maryland. William C. Thompson, the New York City comptroller, has identified 24 stocks in the city pension system’s holdings in which the parent company has some operations in Sudan. A spokesman for Mr. Thompson said his preferred course – echoing the stance of Calpers and others – was discussion with those companies, not divestment.

Mutual funds that call themselves socially responsible routinely screen out companies that they regard as having poor records on humanitarian issues and thus have generally avoided investing in companies with Sudan ties. But Julie Gorte, director of social research at Calvert Investments, which specializes in socially responsible funds, says she can still appreciate the complexity of the issue.

“You have to ask yourself what your goal is with divestment,” she said. “What’s there if the government falls? Is there a government there that will take over and be better? If the companies that pull out provide money, goods and services, is there an understanding that will make the people poorer in the short run?”

Before the states’ recent push, there were other moves to exert pressure. In 2002, Talisman Energy of Canada decided to end its Sudan investment after American investors steeply discounted its stock. In 2000, many college endowments and public pension funds, including Calpers, did not participate in the initial public offering of PetroChina, a subsidiary of the China National Petroleum Company, because of PetroChina’s involvement in oil extraction from Sudan.

THE nation’s largest mutual fund companies have remained on the sidelines so far. A spokesman for Vanguard said it was “taking an ‘analyze and see’ approach before making any broad policy changes to either our internally or externally managed funds,” while a spokesman for Fidelity said the Sudan issue was not currently a concern.

The $9 million Bull Moose Growth fund, which calls itself a “terror free” fund, is an exception. The investment manager relies on a database, maintained by the Conflict Securities Advisory Group, that tracks public companies with business ties to countries designated as state sponsors of terrorism; about 450 companies are listed in Conflict Securities’ global security risk monitor, including about 120 with ties to Sudan. The fund’s gain of 12.8 percent in 2005 was more than double that of the Standard & Poor’s 500-stock index.

(The New York Times)