Kansas Jumps on Sudan Divestiture Bandwagon

May 14, 2007 (PLANSPONSOR.com) - On Friday Kansas Governor Kathleen Sebelius signed a law requiring the state's largest pension fund to stop investing in companies that do business in Sudan.

Pension officials have said the Kansas Public Employees Retirement System has about $38 million invested in companies with ties to Sudan, the largest amount being $16 million in PetroChina, a Chinese oil firm, according to the AP.   The law prohibits the state pension fund from investing in certain businesses and requires it to divest from direct or indirect holdings in companies with Sudan operations.  

Legislative Response

State legislatures have responded to the divestiture campaign, with Illinois being the first state to pass legislation requiring public pension funds to divest from Sudan. However, in February U.S. District Judge Matthew Kennelly of the U.S. District Court for the District Of Illinois ruled that the portions of a divestiture law that placed those restrictions on pension investments in Illinois violated the federal government’s right to regulate foreign commerce (see  Court Blocks Illinois Sudan Law ).

Maine, Connecticut, Oregon, and New Jersey have embraced similar divestiture legislation, while California, Massachusetts, New York, Vermont, Indiana, Ohio, Maryland, Colorado, Rhode Island, and Los Angeles either have passed or are considering divestiture legislation as well.   Pension fund managers, however, take a dim view of divestiture legislation (see  Doing the Right Thing? ), and in April the California State Teachers Retirement System’ (CalSTRS) withdrew its backing for divestment legislation (See  CalSTRS Opposes Broad Investment Bans ), saying that sweeping investment bans could hurt investment returns and cost the fund money – after calls emerged for California funds to pull their investments in firms doing business with Iran.  

The Impact

In theory, Sudan divestiture should not affect plans’ domestic investments. In 1997, Congress passed sanctions that prevented U.S. companies from doing business in Sudan because of its support of terrorism. However, while federal law prohibits U.S. firms from doing business in Sudan, no such restrictions apply to foreign firms. State pension funds are permitted to invest in foreign firms, subject only to limits set by state legislatures.  

Some critics argue that forcing funds to divest money in companies with ties to the Sudanese government could cause fiduciary problems by allowing an agenda other than getting the highest returns for investors to guide investment decisions (See  Public Pension Fund Divestment: A Fiduciary Risk? ).