With the Sudanese government making headlines for alleged genocide in Darfur, investing in Sudan may seem to contradict the principles of environment, social, governance (ESG).

As many more pension funds - at least in the US - are becoming increasingly concerned about investing in companies with ties to Sudan, pressure is increasing on them to divest and products to help are appearing.

In the US, research tools have been developed by KLD Research and Analytics and the Institutional Shareholder Services (ISS) to help pension funds divest from companies with ties to Sudan. And early last year, Barclays Global Investors launched index strategies to help US pension funds comply with new regulations requiring them to divest.

KLD launched the Sudan Targeted Divestment Compliance product in July in response to the growing number of US states adopting divestment legislation. It claims to use a targeted approach focusing on high impact companies in a few key sectors that support the Sudanese government, such as military, oil and mineral extraction, and power production.

This matches the criteria promoted by the Sudan Divestment Task Force, a project of the Genocide Intervention Network, in its Sudan divestment legislation. That legislation, while targeting industries with a direct negative impact on the situation in Sudan, exempts companies that benefit marginalised communities in Sudan or perform significant humanitarian operations.

Peter Kinder, president and co-founder of KLD Research & Analytics says with a more strategic, targeted divestment product the company has tried to accommodate the institutional marketplace's criticism that standard divestment does not differentiate between sectors and the types of products sold.

Kinder says: "The criticism is mainly that divestment takes in too many companies. But with Sudan I think there is much more differentiation than there was with South Africa."

Currently, KLD has almost 200 clients for its Sudan compliance product. However, not one European pension fund is among them. According to Kinder, the interest is primarily driven by divestment legislation in the US - currently law in 20 states, and initiated or pending in five others - that orders state public pension funds to divest holdings of companies that do business in Sudan.

But KLD also has pension funds and other institutional clients that are interested in divestment or engagement even when not required by legislation. Kinder says: "We have seen a tremendous amount of interest from pension funds. The demand we've seen is mainly from the US, but we have heard from more and more non-US money managers and institutions in the past year on this issue and we expect some growth there too."

Watson Wyatt's investment consultant Jane Goodland says that the US sanctions and laws offer protection to pension funds that want to divest from non-US companies involved in Sudan. From a fiduciary perspective this makes divestment easier for them than for European pension funds, which could potentially be affected by divesting from an extensive list of companies.

A lack of political consensus also makes divestment from Sudan a tricky issue, while a lot of US campaigns argue that the time for engagement has passed and divestment is now the only language understood.

 

mong Europe's institutional investors, the Dutch civil servants pension fund ABP does not have direct investments in Sudan, but it does follow a general policy of engagement rather than divestment, although as part of its ESG policy it uses the instruments of both exclusion - in other words divestment - and engagement.

ABP says: "In accordance with our ESG policy, our investments are subjected to national and international laws, treaties and regulations. In contrast to the situation in the US, the Dutch government does not discourage or forbid investments in Sudan, and international treaties have not been signed to forbid investments in companies that are active in Sudan."

ABP continues: "Exclusion is only a last resort and can - given the prudent person rule - only be used in a very limited way, while engagement can lead to win-win situations." An ABP exclusion working group has recently been set up to review the pension fund's ESG policy including exclusion criteria.

The Irish National Pensions Reserve Fund (NPRF) does not exclude or screen out particular companies or sectors, as such a policy would most likely not be consistent with its statutory investment mandate, as set out in the National Pensions Reserve Fund Act, of seeking the optimal total financial return subject to prudent risk management.

But Kinder does not necessarily see such disadvantages arising from divestment. "It all depends on the pension fund's holdings, its approach to divestment, the replacement of stocks and so on. There is a lot of evidence that says that divestment still allows you to get a competitive return. The skill of the manager and investment decisions affect the costs of divestment more than any other factor.

"To minimise the cost, it is very important to take a very tactical view of when and how to divest in order to minimise the administrative and the actual financial cost of divesting. But the optimisation tools that exist today allow you to minimise the cost to the portfolio, and there may well not be any."

Kinder continues: "Divestment can also bring advantages such as the minimisation of risks in the portfolio, as companies operating in Sudan face, for example, political and reputational risks. Other advantages include the alignment of values with investment and the use of investments to influence corporate change."

As a signatory to the UN principles on responsible investment, the NPRF says it follows a policy of engagement with companies where shareholders regard themselves as long-term owners of companies and raises concerns directly with company management. To implement this policy it has recently appointed Hermes Equity Ownership Services to represent its global equity interests, execute proxy votes and engage with companies on ESG issues across the NPRF's worldwide equity portfolio.

The statement says: "The Sudan Divestment Taskforce has raised the issue of investment by the NPRF in a small number of companies that operate in Sudan. The NPRF recognises that the issues raised by the Sudan Divestment Taskforce are serious and warrant attention and it has asked Hermes to evaluate the NPRF portfolio and engage with firms in relation to the Sudan issue."

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