July 9, 2010

Pension system moves slowly on selling investments in Iran, Sudan

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By Barbara Pash
For MarylandReporter.com

Two years after the General Assembly enacted a bill with much debate and fanfare that would stop investing state pension funds in companies doing business with Iran and Sudan, the pension system has sold off stock in just one company, Royal Dutch Shell.

The pension system, currently valued at $32.4 billion, sold its holdings in Royal Dutch Shell for $38 million last September.

Over a dozen other companies in the system’s funds have been identified as eligible for divestment, but officials cite a variety of reasons for not selling them. Some companies have voluntarily stopped doing business in Iran and Sudan after being asked to do so by a coalition of pension funds that includes the Maryland system.

The General Assembly voted to stop investing in companies doing business with Sudan in 2007, and with Iran in 2008. Gov. Martin O’Malley signed both bills into law. Sudan has been accused of genocide against its non-Muslim population, and Iran is charged with sponsoring terrorism, especially against Israel.

The Maryland Jewish Alliance, a now-defunct lobbying group, was behind the push for divestiture.

At the time, both Treasurer Nancy Kopp and Dean Kenderdine, executive director of the state pension system, expressed reservations about the bill, citing their fiduciary responsibility to pension-holders and the threat of possible lawsuits.

Those concerns have not materialized. “We don’t believe that so far, the divestment bill has interfered with our ability to invest and manage the pension fund,” said Kopp.

Reducing fiscal risk

Several steps in the divestment process were designed to reduce fiscal risk to the pension funds that have already lost billions during the financial meltdown. “Our desire is not to lose money,” said Kopp.

The divestment process first identifies companies held by the state funds that meet the criteria of doing business in Iran and Sudan in the energy sector. The companies are then asked to stop doing business with the two nations. If they refuse, the investments in the companies are sold, but only if they do not represent a significant downside to the portfolio.

Only Royal Dutch Shell has satisfied all of these steps.

After contacting Royal Dutch Shell, “They didn’t want to step away,” Kopp said of the United Kingdom-based oil and gas company. “We had to weigh what the impact would be on the fund” to divest.

“We did recognize that there would be a cost to the fund, but also to hold a large company like that opened the [pension] plan to possible long-term risk, including the risk that others would divest themselves [of Royal Dutch Shell] and the holding would go down” in value, she said.

Outside investment firms are hired to manage Maryland’s pension funds, unlike some states which manage them internally.

Maryland is part of a coalition that contacts targeted companies, asking them to stop trading with Sudan and Iran via a series of letters.

Maryland also belongs to the Council of Institutional Investors, a research and resource group on divestment issues.

Kopp said that one measure of the success of divestment is the number of companies that have stopped doing business in Iran after the engagement process.

Company pulls out

For example, Petro Brasileiros, a Brazilian oil and gas company, halted work with the two nations, although its value to the pension system might have prevented it from being sold anyhow. In examining the list, fund managers consider if the sale would have a disproportionate effect on their portfolios or if the company is particularly important to certain types of investments.

If Petro Brasileiros had been sold, “you couldn’t mirror the emerging market index,” said Kopp.

The Corporate Governance Committee of the pension system’s board of trustees, which Kopp chairs, reviews the list of companies and makes recommendations.

In 2008, 31 states were reportedly considering or had passed Iran divestment bills. A 2004 report by the Center for Security Policy gave a breakdown of the public pension funds in 100 states.

While some states have taken a more aggressive position than Maryland, Kopp noted that Maryland tends to be “very prudent.”

Said Kopp, “Each state fund has a different personality and we are going about this in a serious, determined and methodical manner.