Spotting links to Terrorism, Inc.

Does your portfolio "support" terrorism?

It's a shocking thought, but not as far-fetched as it sounds.

As companies expand their global reach, they risk smudging their reputations by linking up with less-than-savory regimes. Even firms with good reputations reach into dark corners.

Take Royal Dutch/Shell. Although highly regarded for its environmental and human rights stances, the oil giant is drilling in Iran. Or consider Swedish carmaker Volvo. Despite its nice-guy image, it has sold trucks to Iraq.

Until Sept. 11, no group formally screened publicly traded companies for their links to terrorism or the spread of weapons of mass destruction. But as the United States has focused on terrorism, so some groups have begun to look at companies linked to it, even peripherally.

Earlier this month, a socially responsible investors group announced it had compiled a list of nearly 300 such firms. The group, the Investor Responsibility Research Center (IRRC), along with the Conflict Securities Advisory Group (CSAG), prefers to sell its list to subscribers (at $12,500 a year) rather than make it public. Nevertheless, the statistics it has released make interesting reading.

For example, of the 260 or so firms linked to countries supporting terrorism and developing weapons of mass destruction, a third are European. More than a quarter come from Asia. Only 10 percent are American.

But of the 30 or so other companies linked to proliferation issues, some two-thirds hail from the US. The reason is that the US government is more likely to identify companies that export high technology with potential military uses than many foreign governments are.

Still, the long list raises a disturbing possibility. Bad publicity could hurt a broadening range of firms, including ones you invest in. "We believe terrorism and weapons proliferation merit investor attention now more than ever," says Linda Crompton, IRRC's president. "There can be enormous negative publicity."

For example: Talisman Energy, a Canadian oil company based in Calgary, has operated in Sudan since 1998. The US State Department has designated that country a state sponsor of terrorism. But after shareholders questioned the move, Talisman produced an independently audited social-responsibility report, detailing its $3.2 million effort to build schools and a hospital, train women as entrepreneurs, and provide water wells for 28 communities.

"Reputational risk is in the eye of the beholder," says Dave Mann, the company's manager of investor relations. "I don't think it's going to come as any surprise to our investors that we're operating in Sudan.... We are a force for good regionally around the oil fields, but also a voice for peace."

Now, however, the company is fighting a new threat to its reputation. A group of Sudanese have filed suit in a New York district court alleging that the company urged the government to clear villagers from its oil properties in a military operation. The group has even produced a document Â- from the government, it alleges Â- ordering various military actions to be carried out "fulfilling the request of the Canadian company." The company denies the allegations and vows to defend itself. Nevertheless, the allegations may have already hurt Talisman's reputation.

And that, security experts say, is the real risk firms run when they operate in suspect territories. "We assume that the companies have not done anything illegal," says Roger Robinson, Jr., a former member of the White House National Security Council and now chief executive officer of CSAG. But "in the marketplace there's been a perceived 'Sudan discount,' for that Canadian company."

Of course, coming up with a list of terrorist-sponsoring countries involves difficult decisions. For starters, who's a terrorist? The IRRC and CSAG are taking a cautious approach, using the State Department's roster of regimes involved in state-supported terrorism and the US Defense Department's report on countries involved in weapons of mass destruction and ballistic-missile programs.

That approach produces six countries involved in both activities: Iran, Iraq, Libya, North Korea, Sudan, and Syria. The list is admittedly tilted toward Western concerns. But few other such lists exist, IRRC officers say.

Another challenge: How much company involvement constitutes real risk? For example, oil giant BP owns 2 percent of PetroChina, which operates in Sudan. But that link, by itself, wouldn't place BP on the list, because companies need at least 10 percent ownership of a subsidiary or joint venture to qualify.

On the other hand, consider French carmaker Renault. Last month, CBS's 60 Minutes interviewed a defector from Iraq who said he bought refrigerated trucks from Renault. The sale, while legal under the United Nations' oil-for-food program, nevertheless allowed Saddam Hussein to put his biological weapons laboratories on wheels and evade UN weapons inspectors, the defector says.

That's potentially embarrassing publicity for Renault. But the automaker doesn't make trucks anymore. Last year, it completed the sale of its truck division to Volvo.

A Volvo spokesman says there's been no sale of such trucks, at least since 1996. "It's possible Iraq bought used trucks in Dubai or elsewhere in the Middle East," says spokesman Pierre-Alain Brendel. "We just sell the cabs and the chassis. If there's a refrigerated unit, it's not us who sold it."

Renault may suffer the consequences anyway, since Volvo still uses the Renault name on some of its trucks and the carmaker now owns 20 percent of Volvo. Ultimately, the market will determine who'll lose from this tangled tale. The point, social-responsibility investment experts say, is that institutional investors and mutual-fund managers now have a new tool to screen firms for such links.

Initial interest looks promising. "Definitely, our clients don't want to be inadvertently linked with countries the US sanctions," says Shelley Alpern, director of social research and advocacy at Trillium Asset Management, a socially responsible investment firm in Boston.