Wall Street: The New Front of the War on Terror
DEVELOPMENTS
As the human, financial and diplomatic costs of the War in Iraq continue to mount – five years later – America’s geopolitical equity spirals downward in inverse proportion. In this time, world leaders, influence peddlers and scholars have explored new ways to meet the threat posed by terrorism in an effective, yet sensible manner.
On March 31st they may have gotten their wish, as a new front quietly opened in the War on Terror without firing a single shot. On that day, British index provider FTSE, in concert with Conflict Securities Advisory Group (CSAG), a Washington, DC consultant specializing in identifying corporate ties to sponsors of terrorism, combined to introduce the world’s first “terror-free” index.
According to CSAG Chief Operating Officer Adam Pener, the FTSE CSAG Terror-Free Index Series excludes some 350 foreign companies with non-humanitarian business ties to four state sponsors of terrorism committed to weapons programs, or in possession of weapon stockpiles: Iran, North Korea, Sudan and Syria. The austerity with which the index was named, however, belies the true dynamism of this crucial development in the War on Terror – through this index, Wall Street and the world financial markets can generate profit while putting significant pressure on rogue nations, without risking the life of a single soldier or spending a single tax dollar.
BACKGROUND
American companies are prohibited from doing direct business with state sponsors of terrorism on account of sanction laws; though the reasons for prohibition on investment in these nations are not merely political, but financial as well. Global security risk, as loosely defined by CSAG, is characterized as “the risk to share value and corporate reputation stemming from the intersection of a publicly traded company’s international business activities and security-related concerns, such as terrorism and weapons proliferation.” In fact, as mandated by Congress, the SEC devotes an entire division toward ensuring transparency and disclosure on global security risk on behalf of American investors.
Foreign companies, however, are not subject to the jurisdiction of the United States, as corporate behemoths such as Total SA and Siemens do billions in new business each year in countries like Iran with impunity. Compounding this accountability problem is the fact that corporations lack any constituency, save their shareholders, who are often kept happy as long as profit margins remain high and dividends keep flowing.
The ingenuity of the FTSE CSAG Terror Free Index Series is that it is the first index to use the structure of the global finance industry to expose the conglomerates supporting state sponsors of terrorism in the only place they are vulnerable: their quarterly earnings. By removing offending companies from the index, they are forced to choose between their ties to terror-sponsoring states and access to the U.S. capital market. This pressure can (and has) resulted in companies pulling out of these countries, thereby affecting the solvency of their economy and, in turn, their ability to sponsor terrorism. Omission from an index can mean substantial losses measured in hundreds of millions, or billions of dollars, for corporations and asset managers alike.
Indexes are essentially menus of stocks from which the world’s leading asset managers (State Street Global, Northern Trust, Deutsche Bank) select single stocks to be grouped together into investment vehicles. Some of the world’s largest institutional investors, such as hedge funds, public pension funds and mutual funds, then invest in these products, and in turn the companies that comprise them. Last year’s Institutional Investor Report by the Conference Board shows that American institutional investors alone controlled $24.1 trillion. This underscores the tremendous influence of institutional investors, asset managers and indexes on the global finance markets. All preliminary sources indicate that this year’s figure, based on 2006 data, will be higher.
Prior to the creation of the FTSE CSAG Terror Free Index, asset managers had no international index substitute tested to perform in the market that omitted offending foreign companies. What FTSE and CSAG have done will allow investors to reap high-yield returns while ensuring for the first time that their capital will not indirectly support the economy of a nation pushing an illegal nuclear program, sponsoring genocide or funding militias bent on the destruction of sovereign nations.
Morally responsible investment products already exist in the marketplace as evidenced by tobacco-free ventures, as well as the creation of “green” investment products that allow investors the peace of mind of knowing that they’ve done right by their morals and their wallet. A very small number of mutual funds have already started down the “terror-free” road, however the FSTE CSAG effort could turn what was a trickle into a flood, thereby allowing a suite of “terror-free” vehicles to reach the marketplace. Investors such as public pension funds and police, firefighter and union retirement funds, not to mention individual investors, can then invest in market viable “terror-free” ventures, ensuring that at no point does their nest egg contribute toward making state sponsors of terrorism more comfortable as well.
In fact, this development may come sooner than we think. Reportedly, based on the creation of the FTSE CSAG index, Northern Trust has agreed to offer a “terror-free” ETF. Additionally, analysis of the FTSE CSAG collaboration reflects less than a 0.1% drop in performance once offending companies were removed, though this with less market volatility and exposure to global security risk, thus affording asset managers the flexibility necessary for developing “terror-free” vehicles that perform identically to products that include offending companies.
ANALYSIS
As a result of the genocide in Darfur, popular movements have emerged (similar to groups protesting South African apartheid in the 1980s) calling for the divestment of any foreign company doing business in Sudan from state and municipal public pension funds. Already, numerous states and cities have authorized such action. Recently, due in part to the influence of the American Israel Public Affairs Committee (AIPAC), Iran has become a similar cause.
Unfortunately, the divestment movement has reached a turning point. As well-intentioned as this legislation has been, diverging models between states, in addition to a focus on only the worst of the worst corporate offenders, has had the opposite effect necessary for influencing corporate behavior, in turn minimizing potential pressure on rogue nations.
If used wisely, the FTSE CSAG collaboration has the power to fundamentally change the debate. States pursuing divestment along these lines will target not just one or another state sponsor of terrorism, but four of the free world’s consensus worst offenders. In addition, both mega international conglomerates and smaller corporations more vulnerable to public pressure alike, across all industries, will feel the impact.
For example, Iran divestment legislation typically focuses on petroleum companies that do more that $20 million in business with Iran each year. Even by the most liberal definition, this amounts to no more than fifty companies. By contrast, the FTSE CSAG product alone excludes some 350 companies for ties to state sponsors of terrorism, highlighting the significant number of companies slipping through gaping holes in that particular approach.
Similarly, those fifty companies consist of some of the largest conglomerates in the world. So large, in fact, that high profit margins owing in part to business with states such as Iran portend that these companies would be unlikely to bow to calls for divestment, even if echoed by all fifty states. Any such effort aimed specifically at companies too entrenched to bow to pressure is inherently ill-suited to affect the broader market, let alone the offending nations. Much like punching a pillow in frustration, which may have an immediate placating effect, investors pursuing divestment through this model hoping to make a lasting impact will watch, themselves deflated, as the pillow fills back up with air within minutes (or with each economic cycle).
At the core of diplomacy and business lies the concept of leverage – and in all aspects, the FTSE CSAG Terror Free Index Series promotes leverage for individual and institutional investors both from a public policy and market standpoint. Since 9/11, the new ways that nations prosecute the War on Terror through the global finance network have been revolutionary. Though for its innovation, the FTSE CSAG product could emerge as this revolution’s “Shot Heard Round The World,” as both Wall Street and Main Street can now enlist in the War on Terror while padding profits and protecting their nest eggs.
John Sheehan is researcher with the Massachusetts House of Representatives, is an Associate with the Truman National Security Project, and an author of the “Massachusetts Model” divestment legislation making its way across the United States.
