Sudan-Divestment Laws Draw Attacks From Fund Managers, Business Groups

A campaign to persuade universities and public pension funds to shed investments in companies doing business in Sudan is generating a backlash from fund managers and business groups.

To protest ethnic violence in the Darfur region, at least six states, including Illinois, New Jersey and Oregon, have passed legislation or policies in the past year requiring state-employee pension funds to sell or re-evaluate holdings in companies with links to Sudan. Texas, California, New York and about a dozen other states are considering such legislation.

In April, the California State Teachers' Retirement System pension fund said it would move forward with plans to divest itself of more than $11 million in holdings in three foreign energy companies operating in Sudan. The same month, Providence, R.I., became the first U.S. city to vote to divest itself from Sudan. Friday, Columbia University announced plans to prohibit future investments in 18 foreign companies with business in Sudan, joining Harvard, Yale, Stanford, the University of California system and other schools with such policies.

DARFUR DEADLOCK

The campaign, the largest such divestment effort since similar tactics were used to protest South Africa's Apartheid government in the 1980s, is aimed at putting pressure on Sudan's Khartoum regime. The United Nations has accused the regime of supporting a brutal campaign against villagers in the Darfur region, where some 200,000 have died. The U.S. has labeled the civil violence genocide.

Pension-fund managers say the divestment laws could cause their funds to take a hit.

"Our ability to construct an effective, adequately diversified international equity portfolio is severely hampered by this law," wrote William G. Clark, director of the New Jersey Department of the Treasury's Division of Investment, in a March memo.

Mr. Clark said the New Jersey law doesn't adequately differentiate between companies with major operations in Sudan and those with indirect business links. About $2 billion of the state's $73 billion pension fund is invested in companies that the bill links to Sudan. Despite the concerns, the state plans to be fully divested two years ahead of the statutory deadline.

American companies have been barred from operating in Sudan since 1997. But some of the most stringent new divestment policies could affect dozens of major U.S. corporations.

Illinois's new law requires public pension funds to divest themselves of any company that is active in Sudan, including companies that work with Sudanese distributors. The state hasn't listed the companies affected, but the law could be read to include PepsiCo Inc. and Coca-Cola Co., which are allowed to sell ingredients to Sudan-based bottlers under U.S. Treasury licenses.

Both companies say they have no investments in the Sudan companies or employees there. (Coke was recently fined $136,500 for violating U.S. Sudan sanctions in 2002 to 2004; the company says it has improved its sanctions-compliance efforts.)

Foreign companies that aren't covered by the U.S. sanctions also could be affected by some such laws. Dozens of multinational corporations market products or services in Sudan, including Alcatel and Siemens AG.

Illinois fund managers worry the law could force them to pull money out of almost all private-equity funds, which hold about 5% of the state's $100 billion in pension assets. Under the law, private-equity firms that do business with the state must sign a sworn affidavit certifying that no company in their funds operates in Sudan.

Even divestiture-movement leaders say some divestment laws are too restrictive. "We have very large concerns about the Illinois bill," says Adam Sterling, national policy director of the Sudan Divestment Task Force, a student group spearheading the nationwide effort. "We're afraid that it targets too many firms and that many of these firms may in fact be helping the people of Sudan."

The new laws likely will face legal challenges. The National Foreign Trade Council, a business lobbying group that represents about 300 companies, says some of them may unconstitutionally trample on the federal government's exclusive right to handle foreign-policy matters.

Supporters of the Illinois law counter that public funds routinely adopt policies to avoid investments in companies or nations where human rights are violated. "We're not setting foreign policy," says Joseph Clary, an attorney for the Illinois State Senate. "We just don't want to be associated with genocide and terrorism."

The Sudan Divestment Task Force advocates "targeted divestment" that encourages cutting investments only in companies that provide revenue to Sudan's government, especially foreign oil companies.

Companies have heard from investors about Sudan, including Siemens, the German electronics and engineering company, which does business in Sudan. "Obviously it's a concern for us," says Siemens spokeswoman Paula Davis. But the company's work there, she added, is "helping the people of Sudan by providing critical infrastructure."

Sudan, for its part, opposes the campaign. Expressing "deep concern" last month, Sudan's ambassador to the U.S., Khidir Haroun Ahmed, said the campaign will "impede development [by] hampering foreign investment that is vital to rebuilding the country."

The campaign has itself spawned business ventures. Two private research firms, KLD Research & Analytics, of Boston, and Institutional Shareholder Services, of Rockville, Md., sell clients lists of companies with any Sudan links.