May 07, 2002
Debate Continues Over Effects of CalPERS' Divestment from Emerging Market Countries
by William Baue
Although CalPERS may reverse its decision to divest from the Philippines, the question of how other
emerging markets will be affected by divestment remains unanswered.
On February 20, the California Public
Employees' Retirement System (CalPERS) announced its intention to divest from four emerging
market countries: Indonesia, Malaysia, the Philippines, and Thailand. While many criticized the
decision for acting at the national level instead of the company level, the affected countries
themselves sent delegations to the U.S. to plead with CalPERS representatives to reverse the
decision. In an April 19 meeting, the Philippino delegation, led by Secretary of Finance Jose
Isidro N. Camacho, succeeded in convincing CalPERS staff and board members that the country does
indeed meet CalPERS' new guidelines for investability.
"In the course of the
discussions, it became clear that the Republic of the Philippines had achieved a level of stock
market settlement proficiency greater than that indicated in CalPERS Permissible Country Review
Criteria," said CalPERS spokesperson Brad Pacheco. "Specifically, the Philippines has achieved the
standard of settling stock exchange transactions within three days of the trade date ("T + 3"
settlement proficiency). This settlement proficiency is consistent with U.S. equity settlement
procedures. The Philippines was not given credit for this level of settlement proficiency in the
initial Review Criteria."
CalPERS staff will recommend that the Philippines be added to
the Permissible Country List at the May 13, 2002 Investment Committee meeting.
this development would seem like a major victory for critics of CalPERS' policy, it actually leaves
untouched the central issue of national versus company-level engagement. Excluding entire nations
from investment punishes all companies alike, critics argue. Better to reward companies
progressing toward best practice by investing in them, while simultaneously encouraging negative
performers to improve their financial, social, and/or environmental practices through shareowner
action or divestment.
"[CalPERS' policy] is not much encouragement for reform where it
is already occurring, as in Thailand," said Tessa Tennant, executive director of the Hong
Kong-based Association for Responsible and
Sustainable Investment in Asia (ASrIA). "[T]he quicker CalPERS can develop a policy that works
at the company level, the better."
In April, the Thailand Management Association and Sasin
Graduate Institute Business Administration of Chulanlongkorn University announced the 2001 Thailand
Corporate Excellence Awards, which promote the development of the country's management
competitiveness. Currently, Thailand ranks 44th out of 49 nations in management practice,
according to the International Institute for Management Development (IMD), lending credence to
CalPERS' divestment decision. However, divesting from Thailand as a whole punishes companies such
as Siam Cement (ticker: SCC),
which won awards in Overall Corporate Excellence, Commitment to Human Resources Management, and
Commitment to Social and Environmental Issues.
Ultimately, the question of whether
CalPERS' policy is misdirected or not may prove moot, as emerging markets may decide their own
fate. Such is the argument made by the Kingsway Fund Management, a Hong Kong-based
investment firm that committed to socially responsible investing in 2000. On its webpage entitled "The Insignificance of the CalPERS Effect" Kingsway illustrates
with a graph how the MSCI Emerging Markets Far-east Index barely registered the CalPERS divestment
decision. (The “CalPERS Effect” refers to a theory that stock markets react
discernibly to investment decisions made by the huge pension fund.)
markets merely dipped 1.2 percent [after February 20] before resuming their northward course,
rising by another 10 percent [by March 22]," states Kingsway, as a springboard to its conclusion in
support of the argument advanced by CalPERS critics. "While well intentioned, we feel that the
exclusion of entire countries by CalPERS will do little, and in fact may hamper efforts, to promote
positive changes in the affected countries. Rather, reallocating capital at the company level would
have a more desired effect."