Charity Eyeing Divestment From Firms With Iran Ties

By Forward Staff

Published April 07, 2006, issue of April 07, 2006.
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When the Orlando Jewish community held a “Stop Iran Now” rally at the city’s Reform synagogue on March 14, the guest speaker was Brad Gordon, director of policy and government affairs of the American Israel Public Affairs Committee. In addition to warning against Tehran’s nuclear ambitions and its terrorist prowess, Gordon noted that pension funds and state governments could hurt the Islamic regime by divesting from companies doing business there.

“This started a buzz,” said Donna Rubinger, the wife of the rabbi who organized the protest. “We realized this was a way to empower people and fight terror.”

Rubinger and other activists collected about $1,600 in the community to set up a special committee and research the issue. As a result, the Jewish Federation of Greater Orlando is now considering becoming the first Jewish organization to establish a policy for divesting from corporations doing business in or with countries listed as terrorist sponsors by the State Department.

“We would like other communities to emulate us,” said Susan Bodner, the federation’s president, adding that the evaluation of the divestment option was still in the early stages of consideration and served as one way to sensitize the wider public to the Iranian threat.

What is brewing in Orlando is part of a growing campaign that is gaining traction in state legislatures, raising concerns in European and Asian corporate boardrooms and prompting leading asset managers to propose “terror-free” investment portfolios to their clients.

The effort is riding the coattails of the successful grassroots campaign to get dozens of state pension funds and universities to divest from Sudan. But while the Sudan campaign was spearheaded by liberal activists outraged by human rights abuses against civilians in the Darfur region, national security hawks and Israel supporters are training their sights on foreign corporations doing business in terrorism-sponsoring countries such as Syria, North Korea and especially Iran.

“When you have a Jewish federation, state legislatures and treasurers, Congress and major financial players getting into the act, this means a code has been broken,” said Adam Pener, chief operating officer of Conflict Securities Advisory Group, one of several private research firms offering data about companies operating in countries named on the State Department’s list of sponsors of terrorism.

Last week, California State Controller Steve Westly called on the nation’s two largest public pension funds to immediately consult with the State Department to identify holdings in companies subject to American government sanctions intended to combat the sale of technology that could aid Iran’s development of weapons of mass destruction. Louisiana enacted a bill in May 2005 authorizing the state’s 13 pension funds to divest from companies doing business in and with terrorist-sponsoring nations; the Louisiana sheriffs’ pension fund was the first to put in place a “terror-free” investment policy.

In Pennsylvania, State Rep. Josh Shapiro is pushing to toughen a 2003 law requiring state authorities to report on state holdings in companies operating in terror-sponsoring countries. Similar bills have been introduced in Alaska and Tennessee; lawmakers in Arizona passed a bill requiring the state’s pension funds to report on all their holdings in American companies active in terrorism-sponsoring countries.

At the federal level, the House International Relations Committee recently passed a bill supported by Aipac that, among other things, urges mutual funds and pension funds to divest their holdings in foreign companies investing in Iran’s petroleum sector and require them and the Securities and Exchange Commission to notify shareholders of the risks.

While American companies, with a few exceptions, are barred by law from working with or in countries listed as sponsors of terrorism, foreign companies — except for a few exceptions — are legally allowed to operate in such nations, unless their own governments prohibit such activity. This is essentially the reason federal bodies, including the SEC and the State Department, have repeatedly declined to provide investors, state treasurers and pension fund managers with a comprehensive list of companies operating in those countries.

In 2001, the SEC created an office of global security risk to provide guidance about such investments. In 2004, Congress directed the new SEC office to list all companies traded on American stock exchanges and doing business in terrorist countries. But the SEC has provided only limited information, according to several state officials and correspondence between them and the SEC.

The SEC declined comment and the State Department did not return a request for comment.

As a result of the SEC’s stance, pension funds and universities have relied on the data collected by a handful of private research companies such as Institutional Investors Shareholders, KLD and Conflicts Securities Advisory Group, which was founded after the September 11 terrorist attacks by people formerly affiliated with the hawkish Center for Security Policy. The center, which is headed by former Reagan administration official Frank Gaffney, Jr., has its own program called Divest Terror, which is aimed at promoting divestment legislation at the state level.

Several state officials have privately expressed misgivings about relying on such firms and the discrepancies between their data. More broadly, many have been reluctant to act without federal guidance and expressed concern about the cost and the complexity of divestment.

“We have a fiduciary responsibility mandated by law that is economic in nature so it is really complicated for us to deal with social considerations,” Craig Slaughter, director of West Virginia’s Investment Management Board, told the Forward.

Divestment can be a complex operation because of the companies’ varying degree of involvement and the nature of their activities in the targeted countries. The issue is further complicated by the fact that many pension funds have money invested in so-called index funds featuring hundreds of stocks.

However, the Sudan divestment campaign, which involves dozens of states, universities and pension systems around the country, provides a precedent. In recent months, the three major managers of such index funds, Northern Trust, State Street and Barclays Global Investors, have launched several special “Sudan-free” funds to comply with state legislation, proving that it was both feasible and potentially profitable.

“We have been saying all along that a terror-free screen will not hurt your profit,” said Pener of Conflict Securities. “You can invest terror-free in a cost-efficient and non-disruptive manner. So it is merely a question of will.”

One state treasurer, Missouri’s Sarah Steelman, has adopted a proactive stance, deciding not to wait for federal guidance or state legislation to push through a terrorism-free divestment policy. Last October she convinced the board of the Missouri State Employees Retirement System, which has $6 billion in assets, to unanimously adopt a policy to divest from companies with links to sponsors of terrorism. In addition, the Missouri Investment Trust, which holds some $20 million in commingled funds, is in the process of choosing a manager who would oversee a terrorism-free portfolio.

“We want to make sure we’re not subsidizing terror and this is the right thing to do,” she said, adding that projections by the bidding asset-management firms showed that weeding out companies operating in terrorist countries would have no adverse effect on revenues.

A New York-based asset management company called the Roosevelt Investment Group, which manages part of the money from former President Teddy Roosevelt’s family, reached the same conclusion. The company is the first to offer a “terror-free” mutual fund to its clients. Called the “Bull Moose growth fund,” it was launched in December 2001 and the managers decided to add a “terror-free” filter in April 2005 after some of its shareholders expressed concern over companies doing business in Iran, according to Roosevelt Group president Adam Sheer. The company is also offering separate individual accounts using a similar terrorism screen.

He stressed that the fund had tripled in size since January 2005 — it now has $10.4 million in assets— and, more importantly, earned 12.8% on its investments last year, double the return on the benchmark Standard & Poor’s 500 index.

“The reason we do it is because there is a market opportunity and the notion of security risk is making inroads among investors,” said Sheer, who is planning to travel to Orlando to meet with local wealthy Jewish investors.

Major Wall Street asset management firms are also consulting about the issue, according to officials with Conflict Securities and ISS. For instance, Morgan Stanley, State Street and UMB are among the companies bidding for the management of the Missouri Investment Trust.

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