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The Illinois Effect In Two Parts: How Faith and Policy Shaped Sudan Divestment Legislation

Illinois made few headlines when it became the first state to mandate divestment of public funds from Sudan. But with the potential to affect billions of state pension dollars and legislation throughout the nation, this polarizing bill may soon attract attention. Part two of two..

Click here to read Part I.

The List

The apparent lack of cohesion between politicians and managers has led to additional legislative deficiencies. According to Atwood the act's failure to specify not just those companies targeted for divestment but also which third parties are qualified to make such a determination has resulted in "concern that managers may use different lists."

In fact the legislation refers only once to the process of identifying targeted companies, stating that a "forbidden entity" is to be "identified by an independent researching firm that specializes in global security risk." Compounding the issue of Sudanese divestment is that, as opposed to the South African example, US companies were banned from Sudan by President Clinton and nearly all affected corporations are foreign. 

"I thought the bill was very poorly drafted," said Representative Black. "It was a knee-jerk reaction attempting to model what states did with South Africa but really missing the clarity and focus of that legislation."

Meg Voorhees, director of Social Issues and former director of South African Service at Washington, DC-based Investor Responsibility Research Center, agrees that there are some critical differences between Sudanese and South African divestment campaigns. 

Voorhees points out that despite the relative transparency of determining which companies were operating in South Africa at the time of divestment, some U.S. legislation still specified those groups qualified to determine targeted corporations.  Such specificity – which frequently identified IRRC as a qualified third party – is precisely what Atwood feels is missing from the Illinois legislation. And it is considerably more difficult to determine operators in Sudan than it was in South Africa.

"I think Sudan is a tougher nut to crack through divestment policies aimed at corporations than South Africa was," said Voorhees. "In Sudan you don't have those same U.S. companies because we imposed sanctions on them. With no real U.S. presence there the large companies in Sudan are really not sensitive to outside pressure. Sudan is a different landscape: South Africa is a frame of reference, perhaps. But it's a different landscape."

To cope with the nebulous chore of determining forbidden entities as defined by the act, managers like Atwood, Slack and Rupnik created an informal "association of Illinois pension funds" which reviewed global security risk groups and ultimately selected one to generate a universal list of targeted companies. 

After the managers spent what Rupnik called "a lot of time trying to figure this out," the association selected Boston-based KLD Research & Analytics to cope with the arduous task of distilling Sudanese exposure of European, Russian and Chinese companies.  In a recent press release KLD stated that their selection may "ease the manager's compliance burden by having them use a single divestment list."

KLD was quick to recognize the opportunity for their services and in the summer began work on a Sudanese product specifically designed for compliance in Illinois. "The association [of pension funds] was trying to get their arms around the Illinois legislation and how it was going to be enacted," said Randy O'Neil, managing director of KLD.  "There definitely is a concern that there is no consistent list."

"Managers of public funds, retirement systems and investment managers are all concerned about their responsibility to report," agreed Nahla Ivy, director of Maryland-based Institutional Shareholder Services, an independent research group that also vied for the association of pension funds. "Illinois really didn't provide specifics such as a common list of who's involved."

Consistency is particularly challenging because of the various reporting standards – regarding both requirements and accuracy – within the global group of companies operating in Sudan.  To cope with the obtuseness of Chinese or Russian oil companies, KLD utilizes a "top-down approach" – beginning with a search through thousands of trade journals, magazines and newspapers and ending with public filings and company interviews. 

"When we hear from asset managers the line is the same: there were definite logistical issues with the Illinois legislation and in meeting its requirements," said Adam Pener, chief operating officer of Conflict Securities Advisory Group.  "No data providers could simply give a list. We were consulted and made that clear." 

If the fears expressed by representatives Black and Cultra are realized, the loss to the Illinois pension system may correspond with only a modest divestment from Sudan.  With no official figures it is hard to gauge U.S. exposure, but KLD reported 130 publicly held forbidden entities, of which Pener estimates only one to two percent of the average U.S. public pension portfolio would be exposed. Although some of these companies are relatively conspicuous, such as PetroChina or European Siemens, Alcatel and ABB, as Voorhees pointed out they are nearly all foreign and the effect of U.S. divestment may be muted.

'The Illinois Model'

Considering the potential detriment to the state pension system and the limited influence divestment may actually have on Sudan, some have questioned how the legislation passed so soundly in Illinois.

"There was no upwelling of support in Illinois for this bill," argued Chapin Rose, a republican state representative who voted against the act. "The sponsors had all the support they needed from their own constituencies and everyone else was just afraid about the negativity. The problem with the way this bill was perceived is endemic of how politicized the country at large has become.  It was simple enough to me though: I represent a lot of state workers who need these pensions and I refuse to let them take such a hit."

Despite significant complications and what appear to be some major pitfalls on the horizon, the Illinois legislation may indeed be endemic. In addition to the bill recently passed in New Jersey, similar legislation regarding Sudan is pending in several states – including New York and Texas – and politicians claim that several more are "looking at the Illinois model." 

Describing the growing popularity of Sudanese divestment movement, analysts point to a unique confluence of disparate interests. Commenting that the Sudanese movement may not be as "universal" as the South African divestment campaign, Voorhees noted that Sudan gave common cause to a coalition including African Americans, religious Christians, human rights advocates and policy hawks concerned about terrorism. 

Some experts go a step further, indicating that divestment from Sudan may reflect a new pattern of activism as state legislation is increasingly created in an "axis of evil-shaped geopolitical outlook."

Senator Collins does admit that the idea of divestment "came on the radar screen" after President Bush and former Secretary of State Powell began referring to the situation in Sudan as genocidal. "Issues of genocide compel people of faith and goodwill to action," said Collins.

With several states – including Arizona, Louisiana and Oregon - having legislated the reporting of all public holdings of companies doing business in terror sponsoring states such as Sudan, Syria and North Korea, the framework for a broader nationwide divestment mandate may have already been laid.

"This issue is now on the radar screen mainly due to Illinois and New Jersey," said Pener of CSAG. "I believe you will also see divestment legislation focusing broadly on terror sponsoring states. Sudan may be the tip of the iceberg. It has Wall Street and the pension systems very focused which makes people realize the larger issue of terror sponsorship."

To meet this potentially massive demand, groups like KLD, ISS and CSAG have already begun rolling out novel products and courting new clients including investment banks, individual investors and public funds.

"We are not at end, I think we are at the beginning," said Pener, who added that there has been increasing interest in CSAG's terror-free investing products. "The problem was that most people didn't now about exposure to places like Sudan, but now the word is getting out and trajectory is on the up."

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