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AMERICAN-STATESMAN: Texas pension funds confront the challenge of disinvestment

By Robert Elder

Sunday, December 23, 2007

In September, Gov. Rick Perry asked Texas’ two largest public pensions to sell their holdings in companies that do business in Iran, a nation that he said “seeks to harm American men and women serving in the Middle East and funds terror attacks on our allies in the region.”

Three months later, Perry’s rallying cry has fallen flat.
The pension funds, which together control $142 billion in assets for public school educators and state employees, are moving forward with plans to divest from Iran. But they are doing so on such a small scale, pension experts say, that the impact on Tehran will be negligible, if any.

Trustees of the $116 billion Teacher Retirement System voted this month to consider selling shares of just 13 companies that do business in Iran. The system held $951 million in shares in these companies as of Nov. 27, less than 1 percent of its assets.

That is a far cry from Perry’s request. The American Enterprise Institute, a Washington think tank Perry’s office has cited as an authority on Iran-linked companies, says about 300 companies, foreign and domestic, have done business in Iran since 2000.

The teacher fund holds shares in 82 of those companies, with a total value of about $3.6 billion. The list includes U.S. companies such as Coca-Cola Co., PepsiCo. and General Electric Co. and global energy leaders, including British company BP PLC, steel and manufacturing companies, like Tata Group of India, and power plants, notably France’s Alstom.

The Coke and Pepsi brands have about half of Iran’s beverage sales. U.S. sanctions generally bar domestic companies from doing business in Iran, but exceptions are made. In September 2006, for instance, the Bush administration allowed GE to sell engine spare parts to Airbus for installation on Iran Air passenger jets. And a GE subsidiary did electrical work in Iran in this decade.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said the impact of divestment “is small in any case, even with a broad list of companies.” But “with a narrow list, it’s even less.”

Munnell also said that selling the shares doesn’t have any impact in a global stock market. Shares that are sold are snapped up by other buyers. “Where we won’t go, others will,” she said.

Andrew Karolyi, an international finance expert at Ohio State University’s Fisher College of Business, said the narrowing of divestment lists is “just the practical realities dawning on the broader political objectives.”

If a pension fund wants divestment to be effective, he said, it would target a broad list of companies.

“But it’s unlikely funds are able to be that effective,” he said. “In terms of their fiduciary responsibilities, they want the most limited constraints.”

Perry’s office said he is satisfied with the teacher fund’s action. “They are sending a strong message that Texas isn’t going to invest in countries that support terrorism,” spokeswoman Allison Castle said.

Despite Perry’s call for full divestment, Castle said the governor wanted the funds “to come up with their own definition.”

“We don’t think their list is too narrow,” she said. “There’s still more than $900 million in holdings on that list. That’s pretty substantial.”

The teacher fund approved its policy on Iran using the language of the federal Iran-Libya Sanctions Act of 1996. As a result, the policy applies only to companies that invested $20 million or more in Iran’s energy sector in any year. By that standard, the fund holds shares in just 13 companies. The top five holdings are Royal Dutch Shell PLC ($211 million in shares), France’s Total SA ($197 million), OAO Gazprom of Russia ($124 million), Petrobras of Brazil ($115 million) and Eni S.p.A. of Italy ($104 million).

But the board also voted to sell holdings in the companies only if “suitable” replacements could be found.

“I think (divestment) is the right to do,” said Jim Lee, a trustee from Houston. “But I’d like to see a fuller list.”

Ronnie Jung, executive director of the teacher system, said a broad divestment strategy couldn’t be implemented.

“That would be any business in Iran,” Jung told trustees Dec. 14. “It’s GE, Coca-Cola. … You’d never be able to find comparable investments.”

Calfornia, home to the largest U.S. public pension fund, and Florida have adopted similarly narrow definitions based on the federal sanctions language.

Boston College’s Munnell said that even if there is widespread divestment among public pensions, the impact will be minimal because private pensions stay away from the issue.

In an August report on social investing, Munnell said federal regulators have consistently warned private pensions to invest only for their beneficiaries and reject “unrelated objectives” such as divestment.

Karolyi of Ohio State said he isn’t convinced the conventional wisdom on divestment is accurate. But he says large institutional investors, public and private, will have to act in concert to accomplish their objectives.

The $26 billion Employees Retirement System of Texas is developing a plan to divest from Iran. If it follows the teacher fund’s lead and considers selling only foreign-owned oil energy companies, the employee fund would shed at most $34 million in holdings — about one-tenth of 1 percent of its assets.

Iran isn’t the only divestment debate in Texas, or nationally. Under a new state law, Comptroller Susan Combs will determine by Jan. 1 which companies do substantial parts of their business in Sudan. The teacher and employee pension funds will then have to consider selling their holdings in those companies after first “engaging” the companies in a discussion of their business practices.

The Darfur region of Sudan is the center of a conflict involving the Sudanese government that the Bush administration has called genocide. Texas is one of at least 19 states that have passed Sudan-divestment laws.

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