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March 01, 2002
CalPERS Divests from Four Emerging Countries
    by William Baue

California's public pension fund withdrew its equity from four emerging countries in response to a review that considered social and financial factors equally.

On February 20th, the California Public Employees' Retirement System (CalPERS), which manages more than $151 billion in assets, announced the results of its review of emerging countries for equity investment. CalPERS' Investment Committee revamped the criteria of the review, which has been performed by Wilshire Associates since 1987.

Before this overhaul, Wilshire considered seven factors in its review: country development; political risk; market liquidity and volatility; market regulation, legal system, and investor protection; capital market openness; settlement proficiency; and transaction costs. In the revision, CalPERS replaced the country development category with two separate factors, transparency and productive labor practices, to create eight overall factors. It also redefined political risk more broadly as political stability. The restructuring then grouped these three factors (transparency, productive labor practices, and political stability) under "country factors," and the rest under "market factors."

Based on these guidelines, CalPERS decided to end its investment of public equity in Indonesia, Malaysia, the Philippines, and Thailand.

"We're not trying to send a message to these countries," said CalPERS spokesperson Brad Pacheco. "We do believe there are things that need to be improved before we will invest there. But this is not intended . . . to try to create some ripple effect or effect some kind of change. This is really intended to make sure that we're meeting our [fiduciary] obligations to our pensioners and that we're investing in a prudent manner."

However, CalPERS' intention does not control how the global community perceives its actions.

"CalPERS has sent an important message to these governments regarding their fostering of civil society and ratification and respect for core [International Labour Organization] conventions," said Tessa Tennant, executive director of the Hong-Kong-based Association for Sustainable & Responsible Investment in Asia (ASrIA). "[The] CalPERS decision will undoubtedly . . . reinforce the reform process, although it's a fairly blunt instrument . . ."

CalPERS' analytical process relied on research provided to Wilshire by credible third party sources. For example, Verité, an Amherst, Massachusetts-based non-profit that monitors international human and labor rights standards, researched productive labor practices. Based on this and other third party research, Wilshire rated all eight country and market factors on a scale of one to three, with one representing the least able to support institutional investment and three representing the most able.

Today, ASrIA posted a page on its website that criticized this point system, questioning whether the extensive research could be reduced accurately to one of merely three numerical designations. ASrIA cited Argentina, which scored highest of all emerging countries in the overall evaluation of suitability for institutional investment, as a prime example of the potential flaws in the rating system. Argentina scored a "two" in political stability.

ASrIA questioned the broad structure of CalPERS' review, which assessed entire countries. Individual companies within those countries vary widely in their degree of social and economic responsibility. It also condemned CalPERS' use of negative exclusion instead of positive engagement with companies. CalPERS uses positive engagement to improve the social and economic sustainability of companies in the U.S.

"[R]ed-lining (withdrawing access to capital) is disempowering and could foster further resentment to western financial institutions and America. Given the events of the last six months, this is especially unfortunate in the case of moderate Islamic countries such as Malaysia," said Ms. Tennant. "The policy does nothing to reward best practice by corporations in those countries."

However, CalPERS has not determined a set response to the review, but rather intends to fine tune the actions elicited by the review.

"This is a living document subject to on-going change, not a static policy," said William D. Crist, president of CalPERS Board of Administration.

Ms. Tennant recognizes this fact, and hopes that CalPERS will take into account the shortcomings ASrIA has identified in implementing policy.


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