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April 26, 2002
New Research Tool Identifies Terrorism Risk in Institutional Investments
    by William Baue

The Global Security Risk Monitor allows investors to study risks to their investments from companies operating in countries that sponsor terrorism and weapons proliferation.


Terrorism and the proliferation of weapons of mass destruction threaten to destabilize the global political landscape. Investors increasingly realize they cannot afford to ignore the economic implications of these threats.

Earlier this month, the Investor Responsibility Research Center (IRRC), a Washington, DC-based provider of impartial research on investing, and the Conflict Securities Advisory Group (CSAG), a Washington-based firm that identifies security risks to global markets, jointly introduced the Global Security Risk Monitor. The GSRM assesses reputational and financial risks posed to publicly-held corporations operating in six countries designated by the U.S. Department of State as state-sponsors of terrorism and/or involved in the proliferation of weapons of mass destruction.

"The Global Security Risk Monitor is the world’s first global security risk profile and assessment product,” said CSAG President and Chief Executive Officer Roger W. Robinson, Jr., who is a former White House National Security Council (NSC) senior director of International Economic Affairs. “Prior to September 11th, no institutional investors or fund managers systematically incorporated terrorism- and proliferation-related concerns into their risk assessments and investment policies."

However, security-related risks to investments and fiduciaries did garner official recognition even before September 11. IRRC traces the genesis of the GSRM back to a May 2001 correspondence between Acting SEC Chair Laura Unger and Representative Frank Wolf (R-VA) regarding disclosure of “material” business activity in countries under U.S. economic sanction for terrorism. Almost immediately after September 11, investors recognized the need for risk management strategies to enable them to enact prudent investment policies.

"We now have an obligation to make sure our investments are not inadvertently funneling money into terrorist coffers," said Pennsylvania Treasurer Barbara Hafer, who is also the president of the National Association of State Auditors, Comptrollers and Treasurers, in an October 2001 conference call of state treasurers to discuss the possible impact of global security on the investment policies of public pension systems. Ms. Hafer acts as the primary fiduciary for almost $100 billion in state funds.

The GSRM identifies broader issues than just the enrichment of terrorist organizations. Companies operating in the six target countries--Iran, Iraq, Libya, North Korea, Sudan and Syria--may have quite benign activities that nevertheless put them at risk due to regional instability. Also, companies’ reputations could suffer if their mere presence in these countries, no matter how benign, generates negative publicity. The Monitor identifies such risks without dictating the political and economic implications.

“It is important to recognize that the Monitor is not an endorsement of the United States' or any other nation's policies,” said IRRC President and Chief Executive Officer Linda Crompton. “Instead, the Global Security Risk Monitor is a tool designed to help clients assess potential portfolio risk.”

The Monitor, which costs $12,500 per year, provides profiles of approximately 300 companies, security overviews of the six countries, security analyses by sector, overviews of proliferation of weapons of mass destruction and ballistic missile delivery systems, and lists of involved companies indexed by country and by company. Companies have the opportunity to review their profiles in advance of publication, and their comments are included in the report.

About a third of the listed companies reside in the European Union, and about a quarter are based in Asia, predominantly in Japan and South Korea. Less than ten percent are U.S.-based companies, more than a dozen of which appear on the Standard & Poor’s 500 LargeCap Index. However, U.S.-based companies dominate the list of companies potentially linked to proliferation, at almost 60 percent.

 

 
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