In early 2003, rebel groups in Darfur, the western region of Sudan, took up arms over their systematic exclusion from political power and development. The government of Sudan responded with a brutal counter-insurgency campaign targeting non-Arab civilian populations in Darfur. By conservative estimates, 2.5 million people have been displaced and over 200,000 killed, but numbers are likely much higher. The conflict is known as the first genocide of the 21st century.
In 2004, several institutions identified divestment as a possible tool to exert pressure on the government of Sudan. While the Government of Sudan in Khartoum has been resistant to political and diplomatic pressure, it previously has been sensitive and responsive to economic pressure. It has to be; the government carries a debt burden as large as its GDP and garners 80% of its export revenue from oil. Sudan lacks the internal expertise or capital to extract resources itself and is therefore completely dependent on foreign companies to exploit its oil reserves. Furthermore, the majority of the oil revenues received by the Khartoum regime are spent on military expenditures.
Firms like China National Petroleum Corporation, Oiland Natural Gas Company of India, and Petronas of Malaysia provide the economic lifeline for a genocidal regime. They have the leverage with the government necessary to change the situation on the ground in Sudan. Unfortunately, these major players have proven reluctant to do so.
Developed by the Sudan Divestment Task Force, a project of the Genocide Intervention Network, the targeted model of divestment encourages shareholders to exert pressure only on companies that have a truly problematic presence in Sudan, encouraging them to adopt a substantial policy in response to the Darfur genocide. Problematic companies, particularly those involved in Sudan’s oil, power, mining, and defense sectors provide significant support to Khartoum and fail to benefit Sudan’s marginalized populations. Rather than necessarily asking these companies to leave Sudan completely, shareholders should encourage companies to remain in Sudan and to use their considerable leverage to contribute to positive change. Shareholder divestment should only be used as economic incentive for the company to change if they are unresponsive to engagement.
Targeted Sudan divestment will have two immediate outcomes. First, divestment can influence key foreign companies to cease their operations in problematic industries in Sudan, thereby increasing economic pressure on Khartoum. Reports indicate that the departure of Rolls Royce earlier this year specifically commanded the attention of the Sudanese government. Second, companies that remain in Sudan can use their leverage to push for peace, expand their humanitarian programs, and implement improved corporate social responsibility policies (specifically focusing on security, revenue transparency, corruption, labor standards, and environmental practices). These companies will contribute to an end to the Darfur conflict, and help assure a sustainable peace throughout the country.
Fiduciary duty, a paramount concern of investors, requires that financial risk be managed appropriately. Investors that hold securities in companies with links to problematic industries in Sudan face substantial material risk. These companies are subject to operational risk from spreading violence in the country, an unstable business environment created by political crisis, and substantial reputational risk posed by public campaigns highlighting their financial ties to a genocidal regime.
A widespread divestment campaign also has the ability to affect share price negatively. It has been argued that there always is a buyer for a sold share. However, if a critical mass of investors begins to sell a company, its share price will depress relative to peer competitors.Furthermore, a number of countries have threatened to sanction Sudan if the situation continues to deteriorate. Notably, a piece of legislation pending in the US Senate would prohibit companies with scrutinized operations in Sudan from receiving US federal contracts.
“By conservative estimates, 2.5 million people have been displaced and over 200,000 killed, but numbers are likely much higher.”
Some fund managers have mistakenly argued that they cannot divest because of legal restrictions or fiduciary obligations. First, it is consistent with prudent management of financial risk to exclude targeted companies because of the substantial material risk they present to investors. Second, no single market, sector, or asset class within Sudan is excluded categorically from a portfolio; therefore, financially equivalent alternatives are available. Targeted ex-Sudan market indices will have a tracking error of less than 0.3%, and the total percentage of most portfolios invested in Sudan-linked companies is less than 0.2%. Third, it also is important to consider the interests of funds’ beneficiaries, particularly whether they want their money invested in companies that subsidize a genocidal regime when financially equivalent alternatives exist. For companies in Sudan, the business case is also strong.
The absence of peace and equitable development increasingly poses a threat to profitability in Sudan.
Twenty-two US states have adopted Sudan divestment policies for their public pension funds, as have 54 university endowments, both in the US and abroad. Investors outside the United States are also beginning to address Sudan-linked companies. Many of the Dutch pension funds currently are engaging Sudan-linked companies, and PGGM has committed to exclude Sudan-linked companies that prove unresponsive to shareholder engagement. Several major mutual fund families in the US are under increasing client pressure to address Sudan-linked companies. In addition, a number of asset managers based in the UK, France, the US, and elsewhere in Europe are developing collective engagement strategies to influence company behavior.Berkshire Hathaway and Fidelity recently cut stakes in PetroChina in the midst of Sudan-related pressure, though both denied that it was because of PetroChina’s parent company’s operations in Sudan.
Investors and activists have seen the tangible results of the pressure they place on companies. A number of companies have responded to the targeted divestment campaign. Rolls Royce, CHC Helicopter, ICSA of India, and others left Sudan completely, citing as a reason the humanitarian crises in the country. Schlumberger and La Mancha Resources continue their operations, having adopted and implemented responsible business plans in Sudan. Tremendous opportunities for mainstream and SRI investors exist to engage with problematic Sudan-linked companies, and ultimately to bring about positive change for the people of Sudan.
Scott Wisor is a senior field organizer with the Sudan Divestment Task Force