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February 07, 2006
KLD and ISS Offer Research Tools for Divesting from Sudanese Genocide and Terrorism
    by Bill Baue

The KLD tool focuses narrowly on the Illinois law mandating divestment from companies doing business with the Sudan; the ISS tool focuses beyond divestment and on other state sponsors of terrorism.


Late last month, Illinois Senate Bill 23 entered into force as the "Act to End Atrocities and Terrorism in the Sudan." The Act requires Illinois state pension funds to divest from companies doing business with the Sudan, which has been identified by the US State Department as a perpetrator of genocide and a state sponsor of terrorism. Illinois is joined by five other states (Arizona, California, Louisiana, New Jersey, and Oregon) using public pension investments to influence global human rights abuses in Sudan and elsewhere. With five more states (New York, Maryland, North Carolina, Texas, and Vermont) headed in the same direction, the need for research on companies with ties to rogue countries such as the Sudan has suddenly arisen.

KLD Research & Analytics and Institutional Shareholder Services (ISS) have stepped up to fill this need. In fact, KLD had already developed a tool for assessing company involvement in the Sudan when it received a request for proposal (RFP) from the Associated Illinois Pension Systems, according to Randy O'Neil, KLD's managing director of global sales.

"They wanted to identify a single list of companies operating in the Sudan so that all their managers would be on the same page instead of one manager using one list and another manager using another list and having to figure out which list is more accurate," Mr. O'Neil told SocialFunds.com. "We went out to Chicago to present to the pension boards, and less than a day later they came back to us with a positive response."

The KLD Sudan Compliance Service draws on the traditional socially responsible investing (SRI) practice of exclusionary screening based on ethical criteria.

"A company is either in Sudan or it isn't: determining that is our job," said Peter Kinder, founding president of KLD. "Of course, the root cause of the screen is ethical: the Darfur and Southern Sudan genocides."

It also hearkens back to the 1980s and '90s when SRI staked its moral claims and proved the efficacy of its strategies by spearheading the campaign to divest from companies doing business in apartheid South Africa, which Nelson Mandela credited with helping topple apartheid.

"The vast majority of clients are using this product strictly for divestment purposes in response to the recent law passed in Illinois, but we also have some clients that are using our tool to try to understand better what is the best strategy for addressing the gross human rights violations going on in the Sudan," said Mr. O'Neil.

While the Illinois statute that the KLD tool is tailored to stipulates divestment, other states' directives include divestment as one potential response but prioritize comprehensive reporting on corporate involvement in the Sudan as well as other state sponsors of terrorism. ISS designed its compliance tool accordingly.

"It's not just a Sudan issue--two of these states, Arizona and Louisiana, also cover the other countries with State Department sanctions for sponsoring terrorism," said Nahla Ivy director of environmental and social analytics at ISS. "Our net is cast wide in terms of trying to find out what the nature of any company ties are to these countries, which include Libya, Syria, Cuba, Iran, and North Korea."

ISS, which initiated its "sanction/terrorism" research stream in 2001, defines two levels of company involvement in these countries. The first level, labeled an "equity tie," applies to more direct involvement such as on-the-ground facilities and employees.

"If you're operating there, whether or not you're contracting directly with the government, you're providing revenues to the government, which then enhances civil unrest or even genocide," Ms. Ivy told SocialFunds.com.

The second level, called a "non-equity tie," applies to less direct involvement, such as distributing products or services through a third party or foreign subsidiary. And ISS research delves even deeper than this second level.

"If companies are distributing humanitarian products or services to a country, we separate that out to call attention to the fact that they are benefiting people in the region," Ms. Ivy told SocialFunds.com. "Illinois has an exclusion for companies doing only humanitarian activity, but if they are also doing a revenue generating activity, then those companies would appear on Illinois' forbidden entity list."

Oregon law goes a step further than Illinois law, requiring institutional investors' asset managers to prevent negative financial impacts on the portfolio when divesting.

"What I'm hearing from them, though, is that this is not very difficult--they've been able to reposition their portfolios without a lot of adverse impact," Ms. Ivy concluded.

 

 
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