Institutional investors like Colorado PERA are mindful of the constant need to balance risk and return. Skillful investment analysis and decision making require rigorous quantitative and qualitative assessment. The former is more clearly defined, while the latter is both broader and potentially more impactful, both positively and negatively.
One factor to consider when making investment decisions is country risk, which incorporates factors like inflation, currency and political risks, among others. Inflation and currency risks are well understood by the public and the investment community; political risk, however, is less clearly defined. Many economies have political risk, but expected investment returns may justify the risk. In other instances, political risks may prove too significant for any investment.
For Colorado PERA, the political risk related to Iran and Sudan is considered. The countries were identified because of their despotic regimes’ particularly egregious actions, and both are subject to sanctions by the United States Department of Treasury’s Office of Foreign Asset Control. These documents on Iran and Sudan may be found on the Department of The Treasury’s website. PERA has restricted investment in public securities of companies active in Sudan since the Colorado General Assembly’s passage of a 2007 law, and those of companies active in Iranian investment are prohibited by a PERA Board policy enacted in 2008.
PERA employs a methodical approach to execute its divestment program. While there are some differences between the Sudan and Iran programs, the broad framework is similar. In the first stage, PERA staff works with outside groups to identify a list of companies that have active business operations in Iran and Sudan. Staff performs research to compare the operations against criteria set forth in the enacting legislation and the Board’s policy. Copies of both documents are available to the public on PERA’s website. Only companies that meet the criteria are included on the list. Once a list is compiled, it is put before the Board of Trustees for adoption. PERA then engages the scrutinized companies in a 90-day information exchange. At the culmination of the engagement period, staff will determine whether or not a company has taken steps to cease operations or has worked toward mitigation. PERA is required to divest from companies that remain active. Procedures for divestment vary by the asset class and investment vehicle, with stocks and bonds held in separate accounts uniformly subject to divestment within the defined benefit plan.
From an investor’s view, the risk profile on any investment in these countries is significant. Nations that isolate themselves from the international community imperil their potential economic growth and potentially destroy investment value. At last count, public retirement funds in 35 states prohibit investment in Iran and 24 restrict investment in Sudan.
Colorado PERA’s divestment programs attempt to avoid investing in companies doing business in these countries – not only to avoid the potential risks associated with the investment, but also to send a broader message surrounding corporate responsibility.
Click here to read a full statement from our Board of Trustees regarding this topic.