The New War on Terror

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  INVESTING

The New War Against Terror

Socially responsible investing takes on a whole new meaning with the launch
of a list of companies, many in Asia, which do business with countries
targeted by the United States for abetting terror


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By Murray Hiebert/WASHINGTON

Issue cover-dated June 06, 2002


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THE SHARE MARKET could turn into the next battleground in the United States'
war against terror. And some of those hit could be highly respected Asian
firms that have dealings with less-than-wholesome regimes.

In late April, a research group focusing on socially responsible investing
launched a database listing companies doing business with countries
supporting terrorism and developing weapons of mass destruction. Many of the
firms named come from Asia, including such countries as Japan, South Korea,
China, Taiwan and Malaysia. At the same time, two prominent senators have
begun drafting legislation that will mandate closer scrutiny of the
activities of foreign companies raising money in U.S. capital markets.

The new database, called the Global Security Risk Monitor, coupled with
possible new legislation, could over time begin to knock the share prices of
companies that do business with unsavoury regimes. "Any company exposed as
being associated with a terror effort is going to suffer a huge reputational
hit," says Stephen Davis, head of Davis Global Advisers, which specializes
in international corporate governance.

"In a world where money is fungible and portfolios are global, any barrier
to investment steers money to someone else. Companies interested in global
capital will have to make sure they have their house in order."

The list of about 260 firms worldwide that have business dealings with
countries involved with terrorism and weapons of mass destruction was
compiled by Washington-based Investor Responsibility Research Centre. IRRC
provides independent research on corporate governance to some 500 clients,
including fund managers, pension funds and investment firms that control
assets totalling more than $5 trillion.

IRRC and its partner, the Conflict Securities Advisory Group, which
researches global security risk factors, used the U.S. Department of State's
list of regimes involved in terrorism and the Defence Department's roster of
countries involved in production of weapons of mass destruction. By their
criteria, six countries were identified: Iran, Iraq, Libya, North Korea,
Sudan and Syria.

IRRC used press reports and company documents to identify the firms linked
to these "bad actors." Rather than make the list public, IRRC has chosen to
sell the database to subscribers at $12,500 a year. IRRC officials say that
a quarter of the companies named come from Asia, while a third are European
and nearly 20% come from the U.S. Energy companies dominate the list,
followed by telecoms firms and financial institutions.

A quick Internet search turns up a diverse list of reputable listed
companies that have dealings in the targeted countries. Japanese giants
Marubeni, Mitsubishi and Tomen are partners in a consortium of firms
searching for oil in Iran. Australian Oil and Gas pumps oil in Libya, while
logistics firm Korea Express is taking over a large-scale water project in
the North African country. PetroChina, which is listed on the New York Stock
Exchange, and Petronas of Malaysia are developing oil resources in Sudan.

The developers of the database insist that they are not charging any of the
companies with doing anything illegal. Most of the firms are engaged in
"benign commercial activity," the two groups said in an April press release
announcing their new product. But they warn that this does not "mitigate the
terrorism- or proliferation-related risk" these companies may face to their
reputation or share value.

"A firm's securities can be depressed by public charges of environmental
risk, but they could be electrocuted in the case of an egregious
national-security abuse," says Roger Robinson, head of Conflict Securities
Advisory Group and a former National Security Council adviser in the Reagan
administration.

Some analysts expect an exodus of U.S. investment in the companies named as
having dealings with the targeted regimes. "American investors may now be
voting with their dollars and telling South Korean or Japanese companies
that 'you now face a different decision matrix,'" says an American fund
manager, who invests in Asian stocks. "You may have a reason for doing
business in these countries, but you may be punished because we'll be less
interested in buying your stocks. There will be a trade-off for doing
business in those countries."

Fund managers and analysts cite the example of the movement in the 1980s to
boycott corporations involved in South Africa during apartheid. "Companies
began to feel pressure to get out of South Africa," says Davis, who edits
Global Proxy Watch, a weekly newsletter. "This contributed to the fall of
apartheid." A more recent parallel is the setback to the initial public
offering of PetroChina two years ago when human-rights groups in the U.S.
began protesting against the company's involvement in oil exploitation in
Sudan.

IRRC officials say they developed the database, which will be updated
quarterly, at the request of their clients. The group used the U.S.
government's roster of "bad actors" because these are the only comprehensive
lists available. "If another country came up with a list, we'd evaluate it
and consider using it for our research," says Catherine Sheehy, director of
IRRC's corporate-benchmarking service.

Sheehy says she expects clients to use the new security-risk monitor "to get
themselves up to speed on the issue of global security" and then develop
their own criteria for investing.

IRRC is still waiting to make its first sale, but several potential clients
are looking seriously at the new investment screen. One of those is the
comptroller of New York City, who has oversight of billions of dollars of
pension funds in the city where hijackers brought down the World Trade
Centre on September 11. "We're aware of the index," says the comptroller's
spokesman, Scott Taffet. "It's under consideration whether to buy the
index." The state of California is also said to be looking at it.

MAKING TERROR EXPENSIVE
Pennsylvania State Treasurer Barbara Hafer, president of the National
Association of State Auditors, Comptrollers and Treasurers which controls
trillions of investment dollars, has repeatedly called on state governments
to wage economic war on terrorism. "We need to make it expensive for
terrorist groups to do business--take away their ability to launder money
and to intertwine their activities with legitimate enterprises," Hafer said
in October after convening a teleconference of state officials from across
the U.S.

Some private global fund managers say they would be open to developing
special investment funds that exclude companies linked to terrorist
supporting regimes. "[IRRC's] data tool is potential raw material which
investors and pension funds could use . . . to develop a terrorism-free
benchmark," says Steven Schoenfeld, managing director of Barclays Global
Investors in San Francisco. "We would be happy to explore with our clients
how such portfolios might be structured."

Two legislative measures under consideration in Congress could put
additional pressure on foreign companies operating in countries involved
with terrorism and weapons of mass destruction. In mid-May, the Senate
Intelligence Committee adopted an amendment, introduced by Republican
Senator Fred Thompson of Tennessee, to the 2003 funding bill for
intelligence agencies, requiring that they investigate whether foreign firms
engaged in the proliferation of weapons of mass destruction are raising
funds in U.S. capital markets. The Senate is expected to vote on the bill in
the next few weeks.

A second measure intended to amend two securities exchange acts first passed
in the 1930s is being proposed by Democratic Senator Robert Byrd of West
Virginia. If Byrd's amendments are passed, they would require all companies
to report "each investment or transaction in excess of $10,000" in countries
that are sanctioned by the U.S. Office of Foreign Assets Control. Many of
the countries on this list are similar to those named in the IRRC database.

Many analysts believe that IRRC's new database, coupled with legislative
moves in Congress, could alter the landscape of global investing and prompt
U.S. fund managers to unload stocks of companies active in countries
involved with terrorism and weapons of mass destruction. "There will be
political pressure on funds to ensure that they're not easing the financial
life of an organization that's engaged in terrorism," says Davis. "No fund
manager in America is going to want to get caught with an article on the
front page of a local newspaper reporting that his fund is invested in a
company that abetted terrorism."