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Laws target 'terror stocks'

More states are cutting financial ties to nations linked to terrorism. Is it empowering or meddling?

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / August 27, 2007

Federal and state lawmakers are developing a taste for ethical investing – and stirring debate about whether the movement stands to benefit from government playing a larger role.

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Terrorism is the catalyst. So far this year, 10 states have passed laws restricting the investment of public funds in companies with business ties to one or more nations accused of sponsoring terrorism, according to an analysis from the National Conference of State Legislatures. At least five other states already had such laws on their books, and lobbyists on the issue are targeting more than a dozen state legislatures in upcoming sessions.

On the federal level, the US House of Representatives in July approved a bill limiting the legal repercussions public pension funds may face from financial losses resulting from divesting from firms with ties to Iran. Also, the Securities and Exchange Commission is refining a Web tool that helps investors determine if a company has ties to terror-linked countries. First launched June 25, the tool attracted more than 150,000 hits over three weeks before the SEC removed it on July 16 for troubleshooting. The tool is due to resurface on later this year.

Today's government-based initiatives echo efforts of the late 1980s, when a host of cities and states mandated that public funds divest from apartheid South Africa. But some supporters of current efforts believe that this time they're carving out a new frontier and expanding the range of what ethical investing can do.

As supporters see it, capital markets are advancing the war on terror by drying up cash flow to nations on the State Department's list of five terror-sponsoring regimes: Cuba, Iran, North Korea, Sudan, and Syria. Investment professionals heard the implications explained last month at the Green Mountain Summit on Investor Responsibility in Newport, R.I.

"This is going to be a privatization of international security policy," said Roger Robinson, president and CEO of Conflict Securities Advisory Group, a Washington-based research firm that aims to supply Wall Street with terror-free investing guidelines. On a panel, he said new investment products, sometimes created in response to legislative mandates, are "going to empower average Americans who have not found a way to join the war on terror and have not been able to find any 'voice' in terms of nonmilitary options."

But others worry that, with government prodding, the private sector is treading where it doesn't belong. Many firms implicated on the SEC watch list were foreign firms, including some government-sponsored companies, which trade on US exchanges. Demands made by the $1 trillion public pension fund industry could disrupt delicate relations among other countries, according to Curtis Verschoor, a research fellow at DePaul University's Institute for Business and Professional Ethics.

"You're trying to influence a company, not to change its behavior, but to use the company as a lever to change the behavior of a government," Mr. Verschoor says. "It's not realistic.… The government of France may take offense at the fact that one of its companies, through its foreign shareholders, is trying to influence France's relationship with another country."

Public pension funds have in recent decades increasingly lobbied the firms where they own stock to set policies with an eye toward myriad social issues, from the environment, to labor conditions, to human rights in developing countries. Such funds routinely do so voluntarily, in response to concerns raised by directors and stakeholders, and bristle anytime lawmakers try to set rules for investing.

Terror-free investing "is part of this big, huge, exploding panorama of environmental, social, and governance issues" of concern to pension-fund investors, says Tim Smith, president of the Social Investment Forum, a network of organizations that practice socially responsible investing (SRI).