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June 28, 2006
Missouri Treasurer Implements Anti-Terrorism Screen on State Fund
    by Bill Baue

The screen excludes Sudan as a state sponsor of terrorism, not necessarily as a genocidal regime, distinguishing this strategy from other Sudan-related state divestment strategies.


While many states are divesting from companies doing business with the genocidal regime in Sudan, others are adopting anti-terrorism screens that exclude companies doing business with Sudan and five other state sponsors of terrorism identified by the US State Department. For example, last week Missouri Treasurer Sarah Steelman announced that State Street Global Advisors (SSgA) will manage an enhanced index portfolio for the Missouri Investment Trust (MIT) with an anti-terrorism screen developed by Conflict Securities Advisory Group (CSAG).

The Board of the MIT, which Treasurer Steelman chairs, voted in September 2005 to adopt an anti-terrorism screen and release a Request for Proposal (RFP) for a large cap international fund with such a screen. Four firms responded: Julius Baer, Morgan Stanley, SSgA, and UMB Bank. The MIT Board selected SSgA for its International Alpha Select Fund, an enhanced index portfolio holding about 125 stocks, with CSAG as subcontractor to provide a list of stocks with "global security risk," the term coined by the SEC for terrorism-related risks. A preliminary study found that approximately 15 percent of the 125-odd stocks would not pass the anti-terrorism screen.

One of the first priorities of the treasurer upon entering office in January 2005 as the first Republican woman treasurer in the state, was to scrutinize investments in the Missouri State Employees Retirement System (MOSERS) as a member of its board. She discovered both France-based BNP Paribas, which was embroiled in the Iraqi oil-for-food scandal and was attempting to raise $60 billion for loans for developments in Iran, and Arab Bank, which raised global security risk concerns.

MOSERS had an anti-terrorism policy in place for several years that failed to exclude these holdings, so Treasurer Steelman advocated for strengthening this policy into a formal screening process that was implemented in July 2005. This served as a model for the screen adopted by MIT, which taxes income on entertainers and athletes and directs returns from these funds to state cultural organizations.

Treasurer Steelman distinguishes between screening for socially responsible investing (SRI) criteria and screening for global security risk linked to terrorist groups and activities.

"Sometimes, those two overlap--Sudan is such a case, as it is one of five nations the US government has sanctioned as a state sponsor of terror," Treasurer Steelman told SocialFunds.com. "The human rights atrocities occurring in Sudan are unconscionable."

However, Treasurer Steelman notes that the MIT screen for Sudan is based on the fiduciary obligation of averting global security risk, not SRI human rights criteria. To illustrate the distinction, she cites the example of South Africa, where the SRI community and other activists advocated for economic sanctions and divestments to exert pressure on the South African apartheid regime to make social change.

"We are not focused on this type of change, per se," Treasurer Steelman said. "Our goal is to try and cut off support for companies that support terrorism--public dollars should not be used to invest in companies that sponsor or support terrorism or in companies with a direct financial relationship with countries that are sanctioned by the United States."

"The goal of responsible stewardship of those investments is complementary, regardless of which perspective you approach this with," she continued. "The fact is, investing in a company or a country that supports terrorist activities is unconscionable and inhumane, and it's also not a very smart investment--you don't have to invest in companies involved in countries that sanction terror to maximize returns."

The preliminary study rebalanced the SSgA MIT portfolio after applying the CSAG terrorism screens, which resulted in "a slightly better return" according to Mark Hughes, director of policy and communications for the Treasurer's Office. This performance will enhance MIT's strategy serving as a model for anti-terrorism screening, as other investors with similar concerns can adapt the framework to their own criteria. Mr. Hughes considers this precedent a major benefit for public institutional investors.

 

 
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