Interview with Eric Cohen, Co-Founder and Chairperson of Investors Against Genocide on 3/7/09.

CH -- While the Congressional Act is titled the Sudan Accountability and Divestment Act, your organization, Investors Against Genocide, has not emphasized divestment but rather genocide-free investment. What is the difference, and why is it important to you?

EC -- The genocide in Darfur has been going on for six years now, and we’re still struggling with most of the major financial institutions making considerable investment in the very worst companies involved in the genocide. We need policies in place and ready to apply much earlier, policies that can have impact even before a genocide starts. The resolution we’ve written is an investment policy to be implemented by mutual funds requesting that the fund avoid holding stock in companies that substantially contribute to genocide. This policy applies to Sudan divestment, but it also calls for companies to avoid investment in the future PetroChinas of the world. We don’t want funds to connect their shareholders to genocide, the ultimate crime against humanity. When companies like PetroChina need capital they turn to the west and seek to raise money through public offerings. We want the response of the western world to be that companies involved in genocide are not supported, either in IPOs or in subsequent stock purchases.

CH -- While the forms required by the SEC to activate the SADA safe harbor for investment companies are publically available, it is difficult to sift through the thousands of filings to determine what companies—if any—have taken advantage of this safe harbor provision. Do you think the legislation has had any effect on fund investment?

EC -- We track the holdings of the major mutual fund holdings, for example Fidelity, Vanguard, Franklin Templeton, American Funds, and TIAA-CREF. We have not seen any major change in their holdings to suggest that they have decided to get out of stocks in these companies. If they sold, they could have taken advantage of the safe harbor in SADA, but they have not sold off their holdings. It may be that someone somewhere has filed for the safe harbor, but I haven’t heard of it yet, and have not found it from reading the filings.

What this exposes is that the reason that companies like Fidelity, Vanguard and American Funds are holding large positions in PetroChina is not because they are fearful of being sued over fiduciary responsibility, but because they are making a fund management decision that they want to hold those stocks. Further, anyone who is tracking the relative performance of oil stocks can see that while PetroChina generally follows the trend of other oil companies, it is much more volatile than its competitors. Volatility is something that professional money managers generally seek to avoid, so staying in that stock is proving to be not a good choice. Those funds that have maintained their shareholding in PetroChina are performing less well.

CH -- Do fund managers need shareholders to agree to a genocide-free investment policy or strategy?

EC -- Fund managers set policy for how their fund will invest. Every year they are required to update their prospectus so investors can see what the rules of the fund are. There is nothing preventing any fund manager from deciding to exclude companies that are substantially contributing to genocide and update their prospectus. What we’ve seen instead is that the major mutual fund companies are resisting setting any policy or taking action, which is where shareholder proposals come in. A shareholder vote forces management to engage in the question and take a position. If shareholders advocating the proposal win, we are confident that fund management will institute the policy.

CH -- To date, no shareholder votes have resulted in adopting a genocide-free investment policy; do you see this changing?

EC -- The campaign for genocide-free investing is still quite young. The first shareholder proposals were submitted just over a year ago at Fidelity, who happened to be having shareholder meetings. The proposal came to a vote at 21 different funds at Fidelity. We were surprised that in this initial go-round the proposals did as well as they did. The proposal got between 20 and 31% of the shareholder vote, even though Fidelity actively and aggressively opposed it. We know that half the Fidelity shareholders who could vote threw their materials away and recorded no vote. We think that if those ordinary investors had looked at the ballot and seen there was an issue regarding investing in genocide, they would have voted in very large numbers for the proposal. Even with Fidelity’s insiders and institutional investors voting with management against the proposal, Fidelity had as high as 31% voting against management, representing some two million shareholders of record. We think that’s a great start. It’s only a question of time before we win.

We are expecting another large batch of funds with votes coming up this proxy season. We already know that the CREF part of TIAA-CREF has a vote in July. CREF’s members focus in education, health care and cultural groups and are probably even more attuned than the population at large to the issue of genocide. Traditionally, voting at CREF only garners 15% of eligible voters, so a relatively few people have opportunity to have lots of influence. So we think that this year we are very likely to see the same or significantly better results as more people recognize the opportunity to vote their values.

CH -- The premise that fund managers are assumed to have adopted is that restricting investments to genocide-free companies reduces the universe of investment opportunities in a way that gives their fund(s) a competitive disadvantage. Is there any data to support or refute this assumption?

EC -- If you read Fidelity’s statements very carefully, they do not say that they think that investing in PetroChina and the like are better investments. They couldn’t say that. Fidelity does not make the claim that if those few stocks are eliminated from their investment universe they would be at a competitive disadvantage. What they did say in their statement of opposition is that they are legally allowed to invest in PetroChina, but the resolution if adopted would require that they not invest in stocks they are otherwise legally allowed to purchase. That is a tautology, it is true, but it is devoid of meaning.

If they do fear they would be at a competitive disadvantage, they should check the data. The Sudan Divestment Task Force has looked at the two dozen companies they consider to be serious problems because of their involvement with the Sudan government’s genocide and did a study—posted on their website—to show the relative performance of those companies compared to their competitors. There is clear data that companies involved in Sudan did worse than their competitors. So the only data on the table argues for divestment. And if you think about it, that makes sense. The best companies with best management would be avoiding partnerships with regimes involved in genocide. If companies can’t avoid those problems, they are likely to have other serious problems affecting their performance.

CH -- That being the case, why are companies still holding these investments?

EC – All the major investment companies say the same thing: what they do is legal and they try their best to make money. We agree that those are good things. We are asking for one additional rule, which is to draw the line at genocide. For funds, adding that rule would be a change, and change is always a struggle. But funds need to come to grips with the fact that they operate in the real world, as we all do, and some moral judgments are appropriate, even for financial companies.

Now, companies may fear a slippery slope that if they care about genocide, what next would they have to care about? We are not campaigning for mutual funds to care about every social issue because there are lots of opinions about most of them. But genocide is a unique and terrible crime, universally decried as the worst crime against humanity, so we think it is appropriate to treat it as the singular rule to adopt and govern investment policy.

But let me give you a few examples of actions that companies have taken. Although Fidelity refused to establish policy for its company, one of their major fund managers, who had a very large position in PetroChina ($600 million) and Sinopec ($100million), sold all those shares during 2007. That divestment resulted in sales of nearly all the shares that Fidelity owned on the NYSE, though it continues to hold very large stakes in the same companies on the Hong Kong exchange. That fund manager is Will Danoff, the manager of Fidelity’s Contra fund, who went on to win an award from Morningstar as one of the fund managers of the year. What this demonstrates is that individual fund managers can make decisions about where they put their money. Will Danoff found plenty of good places to invest and didn’t need to invest in stocks that were connected to genocide. We applaud him for that action. He did not, however, make a statement about why he did it. So we didn’t get commitment to the policy, but we did see an excellent fund manager making the moral choice.

Another example later in 2007 is funds from Allianz Global who, after Fidelity, became the largest holder of PetroChina on the NYSE. Allianz’s NFJ Investments, a large US investment firm, during 3Q2007 sold every share they owned in PetroChina, amounting to $700 million. Again, Allianz did not make a statement about why they did it, but I suspect their action was related to the emails and private contacts that expressed concerns.

One other example of healthy decisions being made is T Rowe Price. It held shares in all four of the worst offenders – PetroChina, Sinopec, ONGC and Petronas. They made a decision to sell all their holdings in those companies, and over the course of a few quarters sold off a quarter-billion in holdings. At the same time they posted a statement on their website saying they thought it was appropriate to consider environmental, political and social factors and how those might affect financial values. That is a very high-level statement without much detail, but it is not a coincidence that it was made at the same time they completed divestment. They did not make a statement about genocide-free investing, but they did the hard part and got out of those stocks, so I congratulate them for taking that action.

What we are hoping to see over time is that T Rowe Price and Allianz—and even Fidelity—will make an explicit commitment to stay out of genocide-related stocks and satisfy their many millions of customers who want to support genocide-free investments.