Lifting of some Iran sanctions has investors reviewing options

120913 atwood
Despite the change, William R. Atwood thinks state law might keep Iran-related investments off-limits.

President Barack Obama's lifting of some economic sanctions on Iran has triggered reviews by public pension funds and specialty consulting firms on prohibitions on investing with companies doing business in the country.

Among pension funds, prohibitions on investments in companies with Iranian connections have forced the Florida State Board of Administration to divest $1.3 billion in assets and the Iowa Public Employees' Retirement to divest, as it disclosed last month, BP PLC holdings because of its Iran connections.

Despite the recent thaw, pension fund executives generally don't expect prohibitions in place for some pension funds to unravel soon.

“I don't think anything in the state statute links it to U.S. foreign policy,” said William R. Atwood, executive director of the $13.6 billion Illinois State Board Investment, Chicago. “It's conceivable the statute could be tougher than federal laws.”

The Illinois statute prohibits five state-funded retirement systems from investing in companies connected with Iranian resource extraction and energy-related industries.

With “the relaxation of sanctions you might see a renewed influx of investment in Iran and ... more companies involved in Iran,” said Joseph Williams, research team leader, global security risk group, for Portland, Maine-based IW Financial.

“Because (every) state list is not tied to the federal list (of sanctions) you might see an increase in companies prohibited on the state list” because they wouldn't have had Iranian ties until this new lifting of some economic sanctions, said Mr. Williams, who is based in Johnson City, Tenn.

IW Financial is evaluating how the changes might affect clients.

IW Financial is evaluating how the changes might affect clients.

At the $27.1 billion Connecticut Retirement Plans and Trust Funds, Hartford, David S. Barrett, communications director for state Treasurer Denise Nappier, sole trustee of the funds, agreed the lifting could lengthen the prohibited list of investments.

“We may consider additional companies, but it would be in the context of the eased sanctions,” Mr. Barrett said in an e-mailed response to questions. “All of the companies on Connecticut's list are in the energy (oil) sector, and some of the sanctions relief was specifically related to oil production and export.”

The Connecticut funds divested holdings of $18.6 million in Petroleos de Venezeula SA and $16 million in CNOCC Ltd.

At the $175.9 billion California State Teachers' Retirement System, West Sacramento, Ricardo Duran, spokesman, said in an interview that companies now entering business in Iran could “come under our review but we probably wouldn't take any adverse action” at this time. “It is early in the process,” he added.

Seventeen states and the District of Columbia have enacted legislation prohibiting public retirement systems from investments in Iran, according to IW Financial data from Mr. Williams. Aside from Illinois, they include California, Florida and Michigan.

In addition, some retirement systems have adopted internal prohibitions, often designed to head off legislation, he said.

Continue to divest

Even as some sanctions are easing, U.S. public pension plans have continued to divest companies.

At the Tallahassee-based FSBA, which oversees $171.4 billion in total assets, Michael P. McCauley, senior officer-investment programs and governance, said “it's too early to tell” the impact of the relaxation of some sanctions. “But everything we've been able to glean would lead us to believe it wouldn't have an immediate impact under the criteria of the Protecting Florida's Investment Act.”

The Florida system has divested holdings of $1.3 billion in 24 companies since the state legislation was enacted in 2007 prohibiting investments in Iran-related energy, mineral extraction and power production sectors, as well as military support activities.

“The sanctions being removed (on the federal level) aren't likely to be the same sanctions covered by the PFIA,” Mr. McCauley said.

“But it is new and we are still digesting what those changes are,” Mr. McCauley said, noting the FSBA staff plans to talk with the service providers that screen its investments. Those are MSCI Inc., IW Financial, Jantzi-Sustainalytics Inc. and EIRIS Conflict Risk Network.

At the $26.4 billion Iowa PERS, Des Moines, Karl C. Koch, chief investment officer, said in an e-mailed response to questions that IPERS placed BP on its list in April 2012. “IPERS directly owned bonds worth approximately $11.4 million and had no direct holdings in any BP PLC stock. The bonds have been sold. BP was placed on the prohibited list because of information disclosed in its annual reports indicating that it had some oil-related activities in Iran through a joint venture and a wholly owned subsidiary,” Mr. Koch wrote.

The impact on IPERS' investments of the lifting of some sanctions “is currently unknown,” Judy Akre, director of communications, said in an e-mail. Iowa statute states “the divestment law "shall not apply to Iran if the United States revokes all sanctions imposed against the government of Iran,'” Ms. Akre said. “So if only some of the sanctions are lifted, it may have no impact as far as Iowa law is concerned.” In addition, she noted the Iowa law “has a provision stating that the law will no longer apply if "the Congress or president ... through legislation or executive order, declares that mandatory divestment of the type provided for in this (state statute) interferes with the conduct of United States foreign policy.' We have not heard of either of those actions being discussed so far.”

But Ms. Akre said, “Iowa law is fairly clear that all sanctions must be revoked.”

At CalSTRS, Mr. Duran said in an e-mail that state law prohibiting Iran investments follows the U.S. sanctions “because the state is constitutionally prohibited from conducting foreign policy.”

“Just as CalSTRS increased its prohibitions when the U.S. government included banking into the list of companies covered under Iran sanctions, so too will CalSTRS relax prohibitions should U.S. policy relax sanctions, while also staying in compliance with state law. Because state law is based on U.S. law, we will wait until U.S. law is amended to act.”

The CalSTRS “board will confer with our legislative folks (about any changes) because we have to comply with state law,” Mr. Duran said.

CalSTRS' investment prohibition is mostly in the energy and banking sectors. The fund uses IW Financial and MSCI's Institutional Shareholder Services Inc. to assist with screening and compliance.

In contact with ISS

The Illinois state board uses ISS to screen for compliance. “Staff will be in contact with ISS to see if there are changes” as a result of the easing of some sanctions, Mr. Atwood said.

“We really haven't divested that much,” Mr. Atwood said, adding details weren't readily available. “It's not so much about divesting, but not acquiring,” that is, removing companies that ISBI doesn't hold from its investment opportunity set of potential investments.

ISBI has 39 companies on its Iran prohibited list.

In Illinois, its statute would expire with U.S. revocation of all sanctions on Iran or a declaration that Iran has ceased to acquire weapons of mass destruction or sponsor terrorism, according to the legislation.

In Connecticut, the law “provides proper deference for the federal role while retaining the treasurer's discretion to make decisions regarding divestment. ... It is not a mandatory divestment statute, and it specifically makes reference to U.S. sanctions programs among the factors to consider,” Mr. Barrett said.

The reviews of investment prohibitions come after the Obama administration — following work with the United Kingdom, Germany, France, Russia, and China — announced Nov. 23 easing of some economic sanctions against Iran in exchange for certain agreements on its nuclear development program.

The agreement suspends sanctions on Iran's petrochemical exports, auto sector, and gold and precious metals, as well as allowing safety-related repairs for certain Iranian airlines, according to a statement from the White House press office.

Most of the economic sanctions, including on oil and banking, remain in place, the statement said. n

This article originally appeared in the December 9, 2013 print issue as, "Lifting of some Iran sanctions has investors reviewing options".