"Forbidden Investment in the Era of Sudan" Panel at
IMN's ILPERS Conference

By: Noel Friedman, Managing Director of Research Products

          Earlier this month, The Information Management Network hosted a conference for the Illinois Pension Employee Retirement System (ILPERS) focused on a number of issues facing the pension system, including Sudan Divestment.

          KLD, in its capacity as a provider of Sudan research to Illinois pension fund managers, was invited to speak on the panel entitled “Forbidden Investment in the Era of Sudan”. The purpose of the panel was to discuss the challenges and opportunities associated with portfolios that have social and environmental mandates.

          Kristin Finney-Cooke from Mercer Investments served as the panel moderator. Joining me as panelists were Mark Watson of Keel Asset Management, representing the active U.S. asset management perspective; Stephanie Braming from William Blair, representing the active international asset management perspective; and Kym Hubbard from the Illinois State Board of Investments, from the pension fund perspective.

          The money managers on the panel discussed the impact and challenges of managing a Sudan-free portfolio for the state of Illinois. Both found the impact on the performance of the portfolios to be small, with minimal challenges to finding replacements for divested companies in the portfolio. This perspective was supported by the pension fund, which has found few challenges related to implementation thus far.

          My panel presentation focused on the process of researching social and environmental issues and the costs and risks associated with ensuring compliance with social investment guidelines. I noted that the key with all screens or forbidden investments is that the money manager needs to understand how to interpret and implement the guidelines. This in itself can be a challenging process, as guidelines can vary in their level of specificity. Key questions need to be asked of the client to establish a common understanding of what phrases like “no tobacco,” “egregious environmental performance,” or “involvement in Sudan” actually mean to them. Once the money manager understands a client's guidelines, the next step is to identify companies that meet the criteria. Failing to find a solution that a) meets the expectations of the client and that b) can be systematically implemented, can result in a lack of consistency across portfolios, reversed or broken trades, and ultimately, lost clients and lost money.

          I also discussed how Sudan compares to issues KLD has researched and analyzed over its 18-year history. From a research and investment perspective, Sudan involvement is no different than any other social restriction, screen, or forbidden investment. It requires interpretation, management, and implementation. What makes Sudan a unique issue is how widely it is being implemented, with divestment legislation being enacted in Illinois and considered in many other states across the country. The Sudan divestment movement was caused by a unique confluence of events that I don’t expect will happen again soon. Perhaps the most important factor in initiating divestment was the U.S. Congress condemnation of the Sudan conflict as genocide. The recent specter of the Rwanda genocide in the 1990s raised the sensitivity around Sudan and may also have increased a desire amongst institutions and legislators to act. Other factors that raised the stature of Sudan divestment as an issue facing institutional investors include the existence of a very active NGO and student activist community around the Darfur genocide, and Sudan’s status on the U.S. State Department’s list of state sponsors of terrorism.

          The Q&A session following the panel and the lively discussions throughout the conference demonstrated the interest in and on-going challenges posed by Sudan divestment. Question and discussion topics included engagement vs. divestment, the impact of Sudan divestment on the people of Sudan, how pension funds should manage Sudan divestment, and the challenges of implementing divestment for small pension funds.

          More information on the KLD Sudan Compliance service can be found at www.kld.com/compliance/sudan.html.