By Sophia Collier
In recent months there has been growing momentum for divestiture of companies doing business in Sudan. The country, only 80 miles across the Red Sea from Saudi Arabia, is the site of extreme ethnic and economic conflict where militias, sponsored by the dominant Arab government, are actively driving non-Arab Africans from their homes and property.
More than 2 million people have died in this conflict, 4 million have been displaced and more than 600,000 have fled the country, according to the United Nations. Despite these tragic events, world attention has been largely focused elsewhere. Indeed, a number of multinational companies are providing goods and services to the ruling Sudanese government and are thus, arguably, empowering the perpetrators of genocide.
Frustrated with world inattention, activists have now called for Sudan divestment. This effort is reminiscent of the South Africa divestiture campaign in the 1980s and 1990s. In social terms, the South African divestiture was a spectacular success. Nelson Mandela credited the campaign as one among several crucial factors in the end of the racial separation and injustices of apartheid. South Africa divestiture showed that, in the right circumstances, passionate economic action could replace war as a means of fostering positive social change. But is Sudan another South Africa? And what is the best way for institutional investors to participate, consistent with fiduciary duties?
Recent interest in Sudan screens has been stimulated by new laws or policies that call for, or could lead to, Sudan divestment by public pension funds and other institutional funds. Laws already have been adopted in Illinois, Oregon, New Jersey, Arizona and Louisiana, and are under consideration in New York, Vermont and North Carolina. The University of California regents recently approved divesting nine companies from separately managed accounts of its $43.2 billion pension and $5.5 billion endowment funds, contingent on an indemnification beingenacted into state law. Other universities, such as Stanford, Harvard and Dartmouth, have begun or are considering divestment plans. Amherst College recently asked the money managers for its $1.1 billion endowment fund to divest some multinational companies doing business in Sudan.
In order to carry out a Sudan-free strategy, institutions need to define criteria for divestment. Depending on the definition, there are between 130 and 170 publicly traded companies that could be excluded.
One strategy that investors use for divestment is called a "minus" strategy. In this approach, target names are simply excluded from existing portfolios. There are already several Sudan-free indexes based on the Standard & Poor's 500 and other benchmarks. The minus index strategy is appealing in its simplicity, and mirrors similar South Africa-free index products that used to be offered. Yet, as an investment solution, all minus strategies risk being suboptimal.
Minus strategies, where social screening is performed as the final step in portfolio construction, have the potential to increase tracking error with no corresponding alpha opportunity. Instead of using minus strategies, investors should consider using social screening as one of the first steps in portfolio construction. Properly constructed investment portfolios are greater than the sum of their parts and they work as a whole to moderate risk and harvest returns. Only by constructing screened portfolios from the ground up will the most optimal solution be found for a specific investment objective.
These and other issues will be hotly debated as the Sudan divestiture campaign gains steam. I do not know if Sudan divestiture will have the same tremendous positive impact as the South Africa campaign, but with few other options available to address the horrific situation in Sudan, divestment is definitely worth full consideration. Divestment strategies need not hurt investment returns. Participating in the Sudan campaign will give investors the opportunity to earn returns while building a better world.
Sophia Collier is president of Citizens Advisers Inc., Portsmouth, N.H. The company manages social responsible investing mutual funds.