LAND OF SORROW: The California Public Employees' Retirement System has invested in such prohibited places as Sudan, banned for its treatment of the Darfur people.
Trading the Blame
CalPERS bucks the state Legislature by profiting off Iran and Sudan
By Dave Maass
In defiance of state laws, California's public-employee pension fund has tens of millions of dollars invested in companies whose operations support the governments of Sudan and Iran.
In 2006, the California Legislature passed a law banning the California Public Employees' Retirement System (CalPERS) from investing in companies, particularly those in the energy industry, that collaborate with and fund the Sudanese government, which is accused of perpetrating an ongoing genocide of the Fur, Masalit and Zaghawa peoples of the Darfur region. In 2007, the Legislature prohibited CalPERS from investments in companies conducting business with Iran, citing the country's alleged sponsorship of terrorism and its nuclear ambitions.
The laws also lay out procedures for negotiating with these corporations to improve their humanitarian efforts. CalPERS, which holds $200 billion in global assets, is required to divest all of its holdings in corporations that refuse to respond.
At least one corporation in CalPERS' portfolio, China Petroleum & Chemical Corporation, is restricted by both laws. Also known as Sinopec Corp., the company is a publicly traded subsidiary of the Chinese-government-owned Sinopec Group, one of the largest oilfield-services providers in Sudan. Sinopec Corp. also holds energy exploration contracts in Iran and is applying for further engineering work. CalPERS holds 620,000 shares in Sinopec Corp. stock, worth an estimated $49 million.
Prior to the Sudan legislation's passage, CalPERS issued a policy statement barring investment in nine Sudan-linked corporations. Sinopec was the second on the list.
"There is no place for these companies in our investment portfolio until the atrocities and human-rights violations end," CalPERS board of administration president Rob Feckner said in a press statement in May 2006.
At the time, CalPERS wasn't invested in any of those corporations. Now California has more money tied to Sudan and Iran than it did before the legislation was enacted to curtail these investments.
CalPERS began buying stock in Sinopec in the summer of 2007 and currently holds shares in two other companies on the initial list: Bharat Heavy Electricals Ltd., an Indian corporation, and Petrochina Co., through its subsidiary CNPC Hong Kong, which also operates in Iran.
Asked why these corporations now have a place in CalPERS' portfolio, Feckner deferred to CalPERS' spokesperson Brad Pacheco. When the legislation passed without an indemnification provision protecting CalPERS from financial loss, Pacheco says, the policy "statement was essentially a moot point."
Los Angeles city councilmember Paul Koretz, who sponsored the Sudan-divestment initiative while in the state assembly, calls CalPERS' recent investments "absolutely outrageous."
"There's no question that Sinopec is definitely a bad actor," Koretz says. "It was identified as a bad actor back in 2006."
Each year, CalPERS must send the Legislature comprehensive reports on its holdings in companies covered by the Sudan and Iran divestment laws. In its Dec. 31, 2009, report, CalPERS relied on information from the investment analysis firm RiskMetrics Group to declare Sinopec a "newly identified" holding. This contradicts a RiskMetrics subsidiary's 2004 finding that Sinopec is complicit with the Sudanese government, in addition to CalPERS' 2006 policy statement and the fact it has been a shareholder for more than two years.
In its report, CalPERS listed which holdings met the laws' criteria but did not disclose the amounts. The pension board also omitted mention of a policy it passed in February 2009 banning divestment across the board in response to legislative initiatives. Instead, CalPERS told the Legislature that the board had decided only to not liquidate its holdings "at that stage."
"I'm shocked that CalPERS adopted a policy prohibiting divestment when the state passed laws that direct otherwise," Koretz says. "They should absolutely get their act together and go after this company, which is one of the clear violators propping up the Sudan government's genocide."
Koretz is a Democrat, but divestment is an issue embraced by both parties. His bill, AB 2941, passed with more than three-quarters of the legislators in both the assembly and the senate voting yes and was a subject of the 2007 documentary Darfur Now. The Iran divestment law, AB 221, the first legislation of its kind, passed unanimously in both houses.
Assemblyman Joel Anderson, a Republican representing El Cajon, sponsored AB 221 as a freshman in the Legislature. Last summer, Anderson and 19 other legislators wrote to CalPERS demanding an update on its implementation of the act. Anderson says the Assembly Committee on Public Employees, Retirement and Social Security will hold a hearing on the matter on Feb. 24.
"I believe they have a lot to disclose," Anderson says. "What many of my colleagues and I are concerned about is this general nose-thumbing they're giving to everybody in the world. They feel they're above the law, and I'm eager to have them come into committee and go on the record."
CalPERS invokes clauses that allow it to withhold action if it believes selling the stock would undermine its "fiduciary duty," its responsibility to make the best possible investment decisions for the pension fund's beneficiaries. Anderson counters that CalPERS can find other investments with similar returns. Plus, he says, investing in Iran puts the pension fund at risk.
"There are alternatives we can participate in so we have balance in our portfolio and, at the same time, obey the law," Anderson says. "If Obama gets tough on [Iran], they may have to confiscate those assets. I'm not prepared to explain to my constituents that I thought it was a good idea to invest in the Islamic Republic of Iran with their pensions."
CalPERS complies with portions of the laws that require the fund to engage these corporations in negotiations. This often takes the form of letters to executive officers. Currently, CalPERS is communicating with 24 companies doing business in Iran and 11 working in Sudan, many of which overlap. It's about to begin engagements with five more companies, including Sinopec and Bharat.
CalPERS argues that divestment is ineffective since severing ties also means abandoning its leverage. Pacheco said CalPERS purchased $3.7 million worth of shares in Bharat in order to form a connection that would allow for engagement.
But CalPERS isn't considered a leader in this area, compared with the California State Teachers' Retirement System (CalSTRS), which is subject to the same divestment laws. CalSTRS is a founding member of the Conflict Risk Network (CRN), a pool of investors that use a combined $700 billion in managed assets to pressure companies tied to Sudan.
CalPERS is not a member.
"We've always believed divestment is the prerogative of every investor, but we believe engagement can be effective," CRN director Melany Grout says. "I think divestment was built in to be teeth in some of the legislation. And in some of our engagement work, there were instances where the threat of divestment brought some companies to the table."
Since 2008, CalSTRS has not held shares of Sinopec, which it acknowledges is prohibited by both state laws. According to CRN, Sinopec has been unresponsive since the very beginning.
A recent move in the private-pension industry confirms Sinopec's unwillingness to respond to humanitarian crises. In March 2009, the $402 billion TIAA-Cref pension fund threatened to pull its investments from Sudan-linked corporations if they refused to "acknowledge the genocide and engage in a productive dialogue about how to confront it." As of Dec. 31, TIAA-Cref had unloaded $60 million in holdings in four corporations, including Sinopec, citing "insufficient progress."
"The more we shine a light on this, the more ridiculous [CalPERS] policy looks," Anderson says. "You walk down the street, and this is one of the issues that everyone gets."
Using investments to influence social change has been part of California pension policy since 1985, when the state passed a law banning investments in South Africa. The restrictions were lifted in 1994 following the end of apartheid. In 2000, CalPERS voluntarily sold its investments in tobacco companies, and current law requires the state pension funds to monitor companies in Northern Ireland for workplace discrimination and to report on companies accused of slave labor during World War II. Currently, a pro-Palestinian activist is collecting signatures to put an initiative on the ballot requiring CalPERS and CalSTRS to drop investments linked to Israel.
"Divestiture is a peaceful means to a political end," says Chris Yatooma, the Iraqi-American behind the ballot proposal.
"It worked in South Africa, and it raised consciousness around the world."
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