SEIU Responds to the Wall Street Journal

As part of SEIU’s ongoing effort to ensure more transparency and accountability in the relationship between private equity and sovereign wealth funds (SWFs), SEIU supported a bill introduced in California by Assemblymember Alberto Torrico that would have prohibited the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) from investing with private equity firms partly owned by SWFs from countries that refuse to sign certain basic human rights treaties.  The bill – AB 1967 – would also have required CalPERS and CalSTRS to consider transparency, human rights, and other factors before investing with private equity firms partly owned by SWFs. 

Although AB 1967 was not passed by the California Legislature this year, SEIU remains committed to the principle of transparent and accountable investing.  This approach makes sense from a risk reduction perspective, just as it makes sense to ensure that public employees’ retirement funds do not earn money for regimes that abuse fundamental human rights, including workers’ rights. 

On April 28, 2008, the Wall Street Journal published a letter from Stephen Lerner, Director of SEIU’s Private Equity Project, responding to an earlier Journal editorial about AB 1967 and articulating SEIU’s views on this important issue.  Read the letter here.

In addition to the points made in SEIU’s April 28 letter, it is important to note a few additional facts about AB 1967:

• AB 1967 articulated a human rights-related test for SWFs that would be workable in practice.  Because countries are so rarely rated according to their record with respect to human rights, AB 1967 looked to whether countries had signed certain “core” human rights treaties (as identified by the United Nations).  Adherence to these treaties is critical to the project of protecting human rights, and a country that refuses even to sign onto basic treaty protections is not a country committed to respecting human rights.
  
  Although some have pointed out that China would have passed the bill’s test, the reality is that China has signed onto the treaties in question and that a test that looked to treaty status made sense for this first legislative step.  SEIU is committed to the enforcement of human rights everywhere, including in China, and hopes that future reform efforts will include that country as well.
  
  
• The purpose of AB 1967 was to address the situation of a private equity firm that knowingly chooses to partner with a government-controlled investment vehicle from a human rights abusing regime.  The bill did not affect publicly traded companies.  Firms with stock that trades openly have no control, in most cases, over who buys their stock on the public markets.  This means that a publicly traded fund does not choose its partners; that decision is made for it in the market.
  
  
• AB 1967’s treaty-based rule targeted egregious human rights violators -- those that have not signed five of six core treaties and that do not “generally respect” the human rights of their citizens, according to the State Department.  CalSTRS concluded that this provision would only have affected two of the private equity firms in its current portfolio.
  
  AB 1967 also recognized that transparency and respect for human rights are factors relevant to an investor and that may affect investment risk.  CalPERS has taken a similar view with respect to its investments in emerging markets.  Its principles governing those investments identify lack of respect for human rights as an indicator of political instability and potential investment risk.
  
  Some reported estimates of the potential cost of AB 1967 ignored these benefits and the bill’s specific focus on egregious human rights violators.  One estimate mentioned in connection with CalSTRS appears to have assumed that pension funds would no longer be able to make any private equity investments, even though the bill’s treaty-based rule would have affected only a very small number of the top private equity firms (two in CalSTRS’ current portfolio).  The estimate also assumed that all current private equity investments would be transferred to risk-free investment vehicles, even though many top-quartile private equity funds would have remained available under the bill.  Finally, the estimate assumed that future private equity returns would match those in the recent past, even though many industry experts believe that is unlikely to be the case. 
  

• AB 1967 did not require any divestment of existing commitments and it explicitly preserved the right and duty of both CalPERS and CalSTRS to make all investments that their boards determined to be required in order to satisfy their fiduciary obligations.