By Holly Hubbard Preston

A study to be released Tuesday provides statistical evidence of what many advocates of socially responsible investing have long asserted: Companies with links to regimes with questionable human rights practices make poor investments, financially as well as ethically.

Conducted with Bloomberg by the Genocide Intervention Network, a private group based in the United States, and its Sudan Divestment Task Force project, the study will most likely bolster the growing clamor among investors for socially responsible policies and investment vehicles.

The study examined actual and forecast returns on investment of 37 multinational companies affiliated with Sudan, the resource-rich country that has been accused of bankrolling a genocide campaign against its citizenry in its Darfur region that has resulted in an estimated 450,000 deaths and some 2.5 million displaced persons.

The Sudan-affiliated multinationals analyzed in the report range from large-capitalization companies like PetroChina and Indian Oil to mid-caps like Lundin Petroleum, based in Sweden, and micro-caps like Dietswell Engineering, based in France. Trade sanctions enacted in 1997 have prohibited all but a few U.S. companies from doing business in Sudan.

Adam Sterling, director of the Sudan project, said the companies were singled out because they participate in industries known to provide “substantial amounts of financial and logistical support to the Sudanese government at the expense of marginalized populations such as the Darfurians” through areas like oil, mining, power generation and military equipment. The project estimates that up to 70 percent of oil-related revenue generated in Sudan goes toward military expenditures.

The study used two key benchmarks to evaluate the peer groups: annualized historical return on investment for the past one, three and five years and forecast return for 2008 and 2009.

Based on these benchmarks, the Sudan-linked companies – called “highest offenders” in the study – underperformed their peer group average by 46 percentage points the first year, 22 percentage points in the third year, and 7 percentage points in the fifth year. “Highest offenders” in Sudan also underperformed their peer group average for forecast return on equity by 6 percentage points.

“For years, investors could see the moral reason for taking action in Sudan but had a hard time locating a financially equivalent alternative in which to put their money,” Sterling said. “This study offers investors plenty of alternatives to being in Sudan.”

The study’s findings are likely to give weight to shareholder proposals for divestment from companies linked to troubled regimes.

Earlier this month, shareholders in Fidelity Investments, a large mutual fund company, voted for the third time to implement procedures for so-called genocide-free investing. Before a major sell-off of shares, Fidelity was one of the largest Western investors in PetroChina.

Though the proposal, in the form of a nonbinding resolution, has yet to win a majority within any of Fidelity’s shareholder fund groups, the last vote resulted in its biggest endorsement yet: a 31 percent affirmative vote by Fidelity Mutual Blue Chip Value Fund shareholders. It is a powerful minority representing “millions of shareholders,” said Eric Cohen, a former Fidelity shareholder who is co-founder of Investors Against Genocide, a private group based in Boston.

Christopher Davis, a mutual fund analyst at Morningstar in Chicago, noted that major mutual funds, unless they have a socially responsible mandate, typically vote “no” or take no position on proposals involving human rights, on the ground that such matters are outside their fiduciary responsibility. But if a quantifiable argument can be made that doing business in a problematic region like Sudan is costly, then a company must act. “When it becomes a business risk, it become a fiduciary issue,” Davis said.

The Sudan divestment campaign – a global movement supported by a wide range of institutions including the United Nations, the European Parliament and the U.S. Congress – has picked up momentum over the past two years chiefly because the more broad-based the pressure there is to sell a stock, the more potential there is for declining shareholder value.

Fidelity fund managers like Will Danoff, who manages the well regarded Contrafund, have been selling-off their holdings of Sudan-affiliated companies since last year.

Cohen of Investors Against Genocide said he believed that when a respected fund manager like Danoff sells a stock – be it for ethical or financial reasons – and still yields a 19.8 percent return, it sends an important message to other investors that “you don’t need to invest in PetroChina to make money.”

Fidelity is not alone. T. Rowe Price recently eliminated PetroChina and Sinopec, both significant players in the Sudanese oil sector, from its portfolio holdings. According to Brian Lewbart, a spokesman for that Baltimore-based fund company, T. Rowe Price made its decision “when a confluence of valuation, political and financial risks began to outweigh our assessment of the investments’ potential returns.”

Similarly, the Dutch pension fund Pensioenfonds Zorg en Welzijn, formerly Stichting Pensioenfonds, has divested its holding of PetroChina shares worth €37 million, or $58 million. The European Parliament’s pension fund took a similar action.

PetroChina’s share price peaked in November at around 20 Hong Kong dollars and has since slipped to around 11 dollars, but analysts discount the effect of shareholder activism in the decline. Yan Wang, an analyst at BCA Research Group in Montreal, said the Chinese government holds 86 percent of PetroChina through its parent company. Foreign investors hold only 11.5 percent, and the rest is held by Chinese institutional and individual investors. This shareholder structure, he said, could mitigate the effects of any sell-off by minority shareholders.

While much of the attention surrounding the Sudan divestment campaign is centered on Chinese oil and gas concerns – which stepped in when Western companies, barred by sanctions, stepped away – they are far from the only ones in the sights of the divestment campaign.

Companies like the Malaysian state-owned oil company Petronas and Oil and Natural Gas of India are attracting the attention of divestment advocates, as is Alstom, the French construction company. Alstom was criticized last month for its participation in a hydroelectric dam project intended to provide power to the Sudanese capital, Khartoum. Human rights activists said the project would displace thousands of residents and violate environmental standards.

As Arvind Ganesan, who follows the energy industry for Human Rights Watch in Washington, said: “The pressure is growing outward in the sense that there are so many points at which businesses are touched by Darfur crisis, including those companies that will be headed to China for the Beijing Olympics as sponsors.”

Even for companies that are not doing business in Sudan, there is a perceived risk. Total, the French oil company, does not have active investments in Sudan but retains an inactive stake in an oil concession in southern Sudan. The company stated in its 2007 annual report that if pension funds holding Total shares were required to divest because of the Sudan connection, “such sales, if significant, could have an adverse effect on Total’s share price.”

It is much easier for an investor to dump a stock than it is for a company to pull out of a region. Petrofac, a London-based oil services company, has so far opted not to exit from its Sudanese holdings but instead tried to use its leverage to influence the government there.

“We felt wholesale divestment, particularly by Western companies prone to stakeholder security pressure, wasn’t a good thing in that other people would enter in,” said Keith Roberts, Petrofac’s chief financial officer.

Executives and activists are frank about their doubts over what effect investment will have on the Sudanese government. They also point out that with oil trading at historically high prices, the potential for leverage is reduced.

As Ganesan noted, “a bad government with a lot of oil money is more resistant to change than one without a lot of oil money.”