Hitting Sudan in the pocketbook
Pension funds are taking notice of a growing push to cut ties to the rogue state
By Amy Borrus, The Business Week
WASHINGTON, Apr 26, 2005 — For the funds that make up the $2 trillion public pension system, it looks like the 1980s all over again. Back then, activists driving to get companies out of apartheid South Africa leaned on big investors to divest stocks of corporations doing business there. Now, momentum is building behind a national campaign to prod pension funds, as well as universities, to sell their holdings in companies with ties to Sudan. A coalition of activists across the political spectrum is pushing divestment in hopes of pressuring a regime that the State Dept. has accused of genocide.
On Apr. 4, Harvard University said it would sell a stake estimated by The Harvard Crimson at $4.4 million in Beijing-based PetroChina Co. (PTR ), whose parent company is the leading player in Sudanese oil development. But more far-reaching moves are under way in state capitals. A bill that bars Illinois’ five pension systems from investing in companies with Sudan links sailed through the state senate on Apr. 14 on a 59-0 vote. Observers think it has a good chance of becoming law. That would light a fire under similar legislation showing up in states from New Jersey to California. “This is an issue that has real political legs,” says Jan Fetter-Degges, senior research analyst at the Investor Responsibility Research Center Inc., which analyzes shareholder issues.
Fund officials say they too are appalled by the violence that has killed hundreds of thousands of Sudanese civilians and displaced nearly 2 million more. But many are resisting the pressure to sell. Just as they did when South Africa’s racist policies were front-page news, they argue that divestment will end their ability to influence the companies they own. “Once we divest, we’re out of the game,” warns William R. Atwood, executive director of the Illinois State Board of Investment.
This time, funds say, there’s an added twist: No one is quite sure which stocks they are expected to sell. The only known list of companies with Sudanese ties was developed by a private research firm, Washington-based Conflict Securities Advisory Group Inc. — and it makes the names available only to paying clients. Funds fret that lawmakers are dictating divestment without specifying which companies they should sell.
The required stock sales could be substantial. Conflict Securities found that 86 public pension funds collectively had $91 billion invested in 93 companies active in Sudan. The tally includes companies that just sell medicine as well as those with equity in Sudan ventures. For some funds, the numbers are large. Conflict Securities estimates the Illinois State Board of Investment had holdings in 27 companies valued at $368 million, or 3.3% of its $11 billion in total assets. Giant California Public Employees’ Retirement System (CalPERS), with total assets of $184.6 billion, had investments worth $7.5 billion in 44 companies, according to Conflict Securities. Illinois’ Atwood and CalPERS’ officials say they cannot confirm the data because it is proprietary.
Most of the holdings are in foreign companies. U.S. terrorism sanctions have kept American companies out of Sudan since 1997, except for sales of humanitarian goods. No other government has imposed curbs. Plenty of big European blue chips that are mainstays of global portfolios, such as Germany’s Siemens (SI ) and Alcatel (ALA ) of France, have ties to Sudan. A Siemens spokesman says the company has “very limited business, mainly focused on infrastructure and medical products.” Alcatel declined to comment.
Some U.S. funds are turning up the heat. Last October, Edward Smith, chairman of the Illinois investment board, sent letters to top officials at Siemens warning of growing pressure from U.S. investors. If there’s no change in its commercial support for Sudan, Smith warned, “investors will be under continued pressure to reconsider their relationship with Siemens.” The company’s response was “insufficient,” Atwood says.
But other companies are rethinking their Sudan ties. A spokesman for ABB Ltd (ABB ). says the Swiss company is “considering very carefully whether doing business [there] is the right thing.” ABB, which is upgrading greater Khartoum’s electrical grid, believes its work benefits ordinary Sudanese more than pulling out would. But ABB has sought advice from human rights advocates and even queried employees via its intranet for their views.
Some fund execs privately question Conflict Securities’ data and motives. The firm shares office space with the Center for Security Policy, a conservative think tank headed by former Reagan Administration official Frank J. Gaffney Jr. that promotes divestment in terrorist states. Roger W. Robinson Jr., Conflict Securities’ CEO, is a former center board member.
WASHINGTON ROLE
The Center hired Conflict Securities to figure out how exposed public funds were to companies that deal with terrorist states. The researchers used their own database of public companies’ dealings with six states that the State Dept. says sponsor terrorism. Adam M. Pener, Conflict Securities’ chief operating officer, says the firm has no affiliation with the center and that Robinson left the center’s board in 2003. The firm culls data from sources such as press releases and Securities & Exchange Commission filings. It charges $7,500 for data on Sudan. Pener says State and the Treasury Dept. have paid subscriptions to the broader database.
Pension fund officials would rather have an official list — and better corporate disclosure. They’re urging the SEC’s Office of Global Security Risk to impose stricter standards for disclosing ties to terrorist states. The SEC now lets companies decide which of their activities are “material” and therefore must be revealed. SEC officials say that includes politically risky ties to terrorist states.
Fund officials want help from Treasury and State, too. “We need the government to identify companies that are invested in Sudan in a way that’s bad for our country,” says a CalPERS spokeswoman. At an Apr. 13 meeting with CalPERS officials, Representative Barbara Lee (D-Calif.), a proponent of her state’s divestment drive, offered to press Treasury to identify companies with the strongest Sudan ties. CalPERS officials pledged to work with other public funds to urge those companies to pull out. Lee hailed CalPERS’ agreement as “an important step,” but didn’t back down from her belief that “ultimately, divestment will be necessary.”
For now, that’s a step the public pension systems don’t want to take. But with pressure mounting for states to take a stand against the atrocities in Sudan, funds soon may have no choice.