A Tip for Wall Street: Don't Help the Bad Guys(Archive)
RISK IS THE MANTRA of the investment world. It defines everything from the timing and size of a transaction to its potential for payoff or collapse. Wall Street, however, has stubbornly refused to expand the measurement of risk beyond the transaction. Who is on the other side of a transaction has never been as important to Wall Street as whether or not a transaction pays off. In today’s world, that is too big a risk to take.
In 1998, Trillium Asset Management Corp. attended a shareholder meeting at California-based Unocal Corp. We were protesting a gas pipeline deal that would have put millions of dollars into the hands of a regime that oppressed women and ethnic minorities, sponsored the opium trade and had connections to terrorists. The proposed pipeline partner was Afghanistan’s fledgling Taliban regime. The pipeline would have transported natural gas from Turkmenistan to Pakistan’s Arabian Sea ports. Two months later, Unocal suspended the project, and by year’s end, ended it altogether.
By Unocal’s own admission, the deal would have meant $50 million to $100 million in annual revenues to the Taliban, more than $250 million by the time of the September 11 attacks on the World Trade Center and the Pentagon. At the time, the only groups protesting the deal were a coalition of activists and Trillium Asset Management. Not the State Department (sanctions had yet to be imposed), nor Wall Street.
Unfortunately, Unocal’s ill-fated deal with the Taliban was not an isolated incident. The world is littered with similar partnerships. Just last year, social investors, human rights activists, environmental groups and national security experts joined forces to protest the initial public offering of PetroChina Co., a subsidiary of China’s mammoth state-owned oil company, China National Petroleum Corp. China National owns 90 percent of PetroChina Co. Investors in the Goldman Sachs-led Initial Public Offering now own the rest.
China National has ties to Sudan, a one-time haven of Osama bin Laden and a state subject to sanctions by the United States. Because PetroChina is controlled by China National, the IPO freed up capital for China National’s operations in Sudan and elsewhere. It is estimated that China National has invested more than $700 million developing Sudanese oil fields — a boon to that war-torn nation. Under pressure from activists, however, the IPO raised only $2.9 billion, half of what China National was expecting.
Policing companies that do business with oppressive regimes is a matter of principle for socially responsible investment managers such as Trillium, but it is also an investment strategy. Companies are faced with these decisions all the time. More often than not, they fail the test. In Germany, U.S.-owned companies helped Adolf Hitler rather than oppose him. After World War II, Swiss banks made no effort to find heirs of slaughtered Jews who had accounts with them; they simply took their money. It took years for Nike to recognize that the people protesting working conditions in their Asian plants had a legitimate gripe. And so it is today with the oil fields beneath Sudan and those accessible through Afghanistan.
Arguments are always made that capitalism fosters democracy. In reality, it is more often the reverse. Capitalism, by itself, is just a system to make money. If it is imposed without respect for basic human rights, it lacks the restraint to create a balance between human and natural resources.
Capitalism worked in America because its democratic institutions were strong enough to create labor unions, environmental protection and education. Yet even here, corporate interests have a tight grip on our political system. On the frontier of the global economy, that grip makes the possibility of self-governance or the evolution of democratic institutions unlikely. Totalitarian regimes can always advance the global economy. They will never advance global democracy.
For socially responsible investment managers, the September 11 attacks underscored the importance of putting pressure on companies that support oppressive regimes or don’t uphold the ideals of democracy, freedom and human rights. Some things are always worth fighting for.