The Claremont Institute is a leading California-based research institute that studies public policy issues ranging from state budgetary concerns to national security. In the aftermath of 9/11, we launched a project to educate state officials on how they could play a meaningful role in the financial war against terrorism. Under the auspices of our Investment Security Program, we reviewed the state pension systems of California and found that the retirement dollars of firefighters, police officers, teachers, and other public employees are being used to underwrite some of the world's most dangerous terrorist sponsoring governments (i.e., Iran, Iraq, Libya, North Korea, Sudan and Syria).
I write today to brief you on this critical policy issue in the hope that you will begin to consider the public investments of your state and how you might address this serious challenge. To that end, I strongly urge you to watch the enclosed, five-minute NBC-New York broadcast segment and review four brief attachments including a Barron's article and recent remarks by Arizona Treasurer David Petersen.
Over 400 publicly traded firms, many of which are owned by your public pension systems, help generate billions of dollars in revenues and introduce advanced, dual-use equipment and technology to governments that sponsor terrorism. The list of companies includes some U.S. corporations operating through their overseas subsidiaries, but is primarily comprised of European and Asian entities. Scores of these now operate in, for example, North Korea and Iraq. Investments in these companies help provide crucial financial life-support for some of the world's worst tyrannies and our country's most dangerous adversaries. Yet unbeknownst to most Americans, their own retirement dollars may currently be doing just that.
For example, the California Public Employees Retirement System (CalPERS) has over 18 billion dollars invested in companies with business ties to these countries. Other states follow very similar investment patterns. We believe considerable resources from your state's pension systems may also indirectly aid and abet these odious regimes.
Some in the human rights and national security communities are calling for divestment from companies with certain ties to terrorist-sponsoring states. Such an initative would be similar to the South African divestment campaign of the 1980s. In that case, publicly traded companies were legally partnering with the South African government despite that government's policy of apartheid. Neither the pension systems themselves nor the federal government were willing to take direct action, but many state officials sought ethical, legislative remedies that also protected the investments of the state. In so doing, states sent a clear signal to the South African government and those companies willing to do business with that country. In that case, divestment was a tool to express opposition to human rights abuses in another country. Today, we are discussing the endangerment of our own.
The current crisis involves far more than just the morality of investing in terrorist sponsoring nations. Investments in these countries pose considerable financial risks to the value of state pension funds. Companies that invest in governments that sponsor terrorism can have their share values adversely impacted by official sanctions, lawsuits, divestment campaigns, negative publicity, investment screens and even military action against these countries.
For example, Talisman Energy, a commonly held company which until recently played an integral role in the development of Sudan's energy industry, traded for years at what was termed in the markets a "Sudan Discount." According to industry experts, the stock traded at as much as a 30% devaluation due to a divestment campaign and the negative publicity associated with its ties to a country that sponsors terrorism, slavery and genocide. More recently, PetroCanada had its corporate rating downgraded by Moody's following its purchase of Veba Oil. Veba has extensive operations in Libya and Syria that are viewed as raising PetroCanada's risk profile.
Despite these risks and the significant ethical issues at stake, most public pension systems have not even taken steps to identify those companies in their portfolio with links to terrorist-sponsoring countries, let alone adopt policies to assess what is known as "global security risk" and make appropriate adjustments to investment policies. CalPERS and some other pension systems have argued that this is a job for the federal government. Regrettably, most financial and political experts concur that the U.S. government will only advise states on those business operations that are legal or illegal and will not provide guidance with respect to the ethical or risk dimensions of corporate activities in these countries.
Right now two options are being pursued in various states. Both are sensible, non-disruptive legislative remedies that your state can undertake, based on your best judgment, to protect pensioners' financial security and contribute to the national security of the United States. Both would allow state officials to take an ethical and financially prudent stand against terrorism without negatively impacting portfolio value.
- The first and most obvious option would require state pension systems and their asset managers to divest select companies that operate in, or have material links to, terrorist sponsoring governments. Such divestment would send a powerful message to terrorist-sponsoring states and provide guidance for pension systems that may feel ill-equipped or reticent to make ethical decisions on behalf of the state. It is also important to note that divestment legislation could be structured to include a staggered schedule and other measures to help ensure the continued profitability of state retirement systems.
- Short of divestment, a second option is to create a legislative oversight function that would require pension systems and their asset managers to provide detailed reports to relevant legislative committees of portfolio company ties to terrorist sponsoring states and actions being taken to mitigate this risk. Legislative oversight would prompt pension system action and provide law makers with additional tools to make more informed judgments concerning these types of investments. It would also leave operational decision-making to pension system officials. The Arizona State Senate is reportedly expected to introduce this type of legislation within the coming weeks.
This aspect of the financial war on terrorism is rapidly emerging as a key state and local issue in our country. Last year, Pennsylvania's Assembly passed a bill by a unanimous 143-0 margin that would force plan sponsors to divest all companies with ties to terrorist sponsoring governments. On January 6, Arizona Treasurer David Petersen addressed this issue in some detail in his inaugural speech, excerpts from which I have enclosed. Colorado State Treasurer Mike Coffman also initiated a disclosure-oriented initiative this past fall.
The Claremont Institute stands ready to come to your state and offer detailed briefings on actions you could take to help address this urgent challenge. Should you be interested in pursuing this issue, we will place our research and intellectual capital at your disposal. To arrange a policy briefing or if you have any questions, please contact Tom Karako, the Institute's Director of National Security Programs, at (909) 621-6825, or by e-mail to firstname.lastname@example.org.
Best personal regards.
Brian T. Kennedy
The Claremont Institute