Published by Ignites.

By Luisa Beltran

Barclays Global Investors is developing an exchange-traded fund that is genocide-free, representing a win for a Boston advocacy group that has been lobbying fund firms to divest their Sudan ties.

BGI, the nation’s largest provider of ETFs, says it will rely on a reputable third-party index provider to weed out companies that are strongly connected to genocide. BGI has yet to find that index provider and has not registered the ETF with the Securities and Exchange Commission, says Christine Hudacko, a spokeswoman.

“The fund is being developed,” Hudacko says. “We have no idea about timing.”

Client interest and discussions with the nonprofit organization Investors Against Genocide prompted the San Francisco-based iShares, which is owned by BGI, to develop a fund. iShares already manages socially responsible ETFs, but the fund will be its first claiming to be genocide-free.

IAG has been in talks with Barclays for over two years, says Susan Morgan, an IAG spokeswoman. The iShares ETF will be one of the first funds that aim to be genocide-free, she says.

“While most U.S. mutual fund companies have declined to take any action, iShares has listened to the marketplace and has taken a significant step forward by announcing plans to develop the first international genocide-free fund for retail investors,” said Eric Cohen, IAG’s chairperson, in a statement Wednesday.

Morgan says she hopes others will look at iShares’ decision and realize “that there is a market for this type of investment.”

IAG has been trying to convince mutual fund firms to change their investment strategies to avoid what they say is complicity in genocide. Most large fund companies are major investors in Chinese, Indian and Malaysian oil companies that are involved in Sudan and help fund the genocide in Darfur, IAG says.

IAG has introduced shareholder proposals at Fidelity, Vanguard and American Funds to authorize the funds’ boards to put in place procedures that would screen for companies that “substantially contribute” to genocide.

The activist group has targeted funds that invest in the Chinese oil company PetroChina. IAG claims PetroChina’s closely related parent, China National Petroleum Company, is providing funding that the government of Sudan uses to commit genocide in Darfur.

American Funds, Fidelity and Vanguard have each tried to stop the IAG proposals, claiming decisions about investments are best left to the investment managers, not the board. Fidelity has also said that allowing prohibitions on investments could open a Pandora’s box of other prohibitions.

IAG has not gotten the shareholder votes needed to pass the proposals.

TIAA-Cref is among the few firms that have publicized the measures they are taking to prevent investments linked to genocide through engagement with companies. In March, TIAA-Cref set a nine-month deadline for certain companies, including PetroChina, to take steps to end their support of genocide or risk all shares’ being divested. TIAA-Cref continues to have “meaningful dialogue” with the companies and will decide by the end of the year whether to divest, says Jennifer Compton, a spokeswoman.

iShares’s Hudacko downplayed speculation that the firm was trying to compete with other firms in its development of a genocide-free ETF. “This [genocide-free ETF] is not for competitive reasons. This is about providing choice for our clients,” she says.

The iShares fund won’t be the first genocide-free ETF to hit the market. Claymore Securities, in 2007, launched the Claymore/KLD Sudan Free Large-Cap Core fund. The ETF tracked the KLD Large Cap Sudan Free Social Index, which screened for businesses that owned or controlled property in Sudan or had employees located in the region or even issued credit or loans to companies in Sudan.

Both the ETF and index have been shuttered, says Paul Justice, Morningstar’s ETF strategist. “It never had any money in it,” he says of the ETF.

Justice says it is unclear how much interest the iShares genocide-free ETF will attract. The socially responsible investing sector is small, he says, but there is significant interest in the funds. iShares already has two socially responsible ETFs: the KLD 400 Social Index Fund and FTSE KLD Select Social Index Fund. The Select Social Index Fund, launched in 2005, invests in companies that have positive environmental, social and governance performance, and it won’t invest in the tobacco industry. The fund has $120 million in assets under management.

iShares’ other socially responsible ETF, the FTSE KLD 400 Social Index fund, doesn’t invest in companies involved in alcohol, tobacco, firearms, nuclear power, military weapons and gambling. Introduced in 2006, the ETF has $96 million AUM.

Vanguard, meanwhile, offered its first socially responsible fund in 2000. The FTSE Social Index Fund currently has $407.5 million AUM, according to Morningstar. Linda Wolohan, a Vanguard spokeswoman, writes in an e-mail that investor interest in this type of fund appears to be relatively modest. Vanguard has no plans to launch a genocide-free ETF, she writes.

TIAA-Cref also doesn’t have plans to offer a genocide-free ETF, Compton says. The firm already has CREF Social Choice, a variable annuity account launched in 1990, and the Social Choice Equity fund. Introduced in 2002, the Social Choice Equity fund has $733.6 million in assets, according to Morningstar.

Justice believes Barclays’s genocide-free ETF will have better prospects for success. “iShares has the viability to stick around with funds longer than a smaller provider might,” he says.

However, he says it’s not certain that iShares will actually end up rolling it out. “Maybe they will review the success and interest in the sector and maybe they won’t launch it,” Justice says. “Not all ideas become products.”