CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE

Date: July 19,2012

To: Retirement Board and Committee Members

Fro4 Sangeeta Bhatia, Retirement Plan Manager

Subject: Agenda Item NO.7: Report on the Plan's Exposure to Sudan (July 25, 2012, Retirement Board Meeting)

At the Governance Committee meeting held on May 25, 2011, Staff provided an update to the Retirement Board on the Plan's exposure, as of March 31,2011, to companies classified by the Contlict Risk Network (CRI\J) as "Scrutinized" and "1\Jon-Targeted". As directed by the Retirement Board, Staff continues to engage "Non-Targeted" companies by sending them formal letters addressing the Board's concerns about their ongoing business operations in Sudan.

Since the last report to the Governance Committee, there were important developments concerning Sudan. On July 9, 2011, southern Sudan seceded from northern Sudan to form the independent Republic of South Sudan (RoSS). Key issues such as border demarcations, contested regions, and oil revenue sharing remain unresolved. Recently, violence has escalated between Sudan and RoSS concerning the oil rich town of Heglig. CRN has provided updates on the current situation and implications on the South Sudan independence (see attached).

On May 31,2012, the CRN released its new list of "Scrutinized" and "Non-Targeted" companies. A notable addition to the "Scrutinized" list is Caterpillar (CAT), a U.S. public company. U.S. publicly listed companies seldom appear on CRN's divestment list due to existing U.S. sanctions on Sudan; however, according to CRN, several of CAT's non-U.S. subsidiaries have sold CAT products to independent dealers and distributors in Sudan. This helps to facilitate projects in Sudan's mining, oil, and power production sectors. For these reasons, CRN has classified CAT on its "Scrutinized" list (please see attached CRN's research memo on CAT).

According to CRN's May 31, 2012, list, the Plan's exposure across all investment managers to "Scrutinized" companies was approximately $7.66 million (0.09%) as of May 31, 2012 (Attachment 1). This is an increase by 0.04% of total Plan assets from the previous reporting period. For the Retirement Fund (RF), exposure to "Scrutinized" companies was in two of the RF's commingled emerging market equity funds, The Boston Company (TBCEM) and T. Rowe Price (T.Rowe) and in one separately managed U.S. large cap growth account, Fred Alger Management, Inc. (Fred Alger); which in aggregate represented approximately $7.20 million (0.10%) of the RF's total assets. For the Retiree Health Benefits Fund (RHBF), all exposure to "Scrutinized" companies was with Fred Alger's separately managed U.S. large cap growth account, representing approximately $460 thousand (0.04%) of the RHBF's total assets.

Since the last update, the TBCEM commingled fund added a new "Scrutinized" company (Reliance Industries Ltd., with a market value of approximately $2.41 million as of May 31, 2012) to the Plan's portfolio. As for existing exposures, TBCEM's exposure to PetroChina has decreased 51 % to approximately $1.23 million. TBCEM fully divested its exposure to Sinopec

7.1 during this reporting period. T. Rowe has added to its portfolio Reliance Industries, ltd., with a market value of approximately $755 thousand as of March 31, 2012*. Although the Plan has no direct control over the investments made in its commingled fund accounts, Staff regularly provides all of the Plan's commingled account equity managers with the new list of restricted securities from CRN.

As noted above, CRN added the domestic equity CAT, a bellwether stock in the Dow Jones Industrial Average index, to its "Scrutinized" list; therefore Staff queried the Plan's domestic equity managers for their portfolio holdings across CRN's lists. As of May 31, 2012, only Fred Alger's separately managed account had exposure to CAT, with a market value of $2.8 million in the RF (0.16% of RF's total active U.S. domestic equity assets) and $464 thousand in the RHBF (or 0.16% of RHBF's total active U.S. domestic equity assets).

Total Plan exposure to "Non-Targeted" companies (Attachment 2) was approximately $4.75 million, a 39% decrease from the previous reporting period. Exposure to "Non-Targeted" companies represents approximately $4.1 million of the Retirement Fund (0.06%), a 38% decrease from the previous reporting period, and approximately $600 thousand of the RHBF (0.05%), a 43% decrease from the previous reporting period. The significant decrease in "Non­ Targeted" company exposure is mainly attributable to full divestments in MAN SE and MTN Group and lower market value in Saras SPA. The Plan's exposure to its only remaining "Non­ Targeted" company, Saras SPA, was concentrated in one account, The Boston Company's separately managed International Developed Value account (TBCDEV).

Staff will continue to monitor the Plan's exposure to Sudan and provide annual updates.

*T.Rowe Price releases information on portfolio holdings every quarter and therefore could only provide information as of March 31,2012.

The following documents are attached:

• Attachment 1: Plan's Exposure to "Scrutinize" as of May 31,2012 • Attachment 2: Plan's Exposure to "Non-Targeted" as of May 31, 2012 • CRN South Sudan independence briefing • CRN report on the current situation in South Sudan • CRN Caterpillar research report • WPERP Policy on Social, Political, and Human Rights Issues

SB:JW:SV:AL

7.2 WATER AND POWER EMPLOYEE'S RETIREMENT PLAN AND HEALTH BENEFITS PLAN Holdings in Companies with Operations in Sudan Under Catergory: SCRUTINIZED (Companies Identified by the Conflict Risk Network as of May 31, 2012) ATTACHMENT 1: WPERP Exposure as of May 31, 2012

Total % Tolal % of ofRF MVof RHBF RHBF Company Country Industry MV of RF Holdings Holdings Holdings Holdings Manager Strategy Account Alstom France Power Alslom Projects India Ltd."" Areva T&D India Ltd. Wuhan Boiler Co."" 2 AREF Energy HOlding Company Kuwait Oil and Mining 3 AviChina Industry & Technology Ltd. China Mililary Equipment Hatei Aviation Industry Co"" Harbin Dongan Auto Engine Co"" US Large Cap 4 Caterpillar Inc. USA Mining I Power $2,803,840.00 38.94% $464,386.00 100% Fred Alger Growth SMA 5 China Gezhouba Group Company Ltd. China Power 6 China Hydraulic and Hydroelectric Construction Group (Sinohydro) China Power Sinohydro Group China National Petroleum Corporation (CNPC) China Oil Daqing Huake Group Co. Ltd.." Jinan Diesel Engine Co. Ltd.." Kunlun Energy Co. Ltd.." PetroChina Co. Ltd.." $1,226,764.53 17.04% TBC Emerging Commingled 8 China North Industries Group Corporation (CNGCINORINCO) 'China Mililary Equipment NORINCO International Cooperation Ltd .." Liaoning Huajin Tongda Chemicals Co. Ltd .." Sichuan Nilrocell Co. Ltd." China North Optical-Electrical Technology Co. Ltd.." AKM Industrial Co. Ltd.." 9 China Petrochemical Corporation (Sinopee Group) China Oil ...... China Petroleum and Chemical Corporation (Sinopec Corp)"" " Kingdream PLC"" Go) Sinopee Kanton Holdings Ltd.." Sinopec Shanghai Petrochemicals Ltd.." Sinopec Yizheng Chemical Fibre Co. Ltd .." 10 Dongfeng Molor Group Co. Ltd China Mililary Equipment 11 Egyptian Kuwait Holding Company Egypt Oil 12 Electricity Generating Company (EGCO) Thailand Power 13 Glencore International PLC Switzerland Oil Blopetrollndustrles AG Chemoil Energy Limited 14 Indian Oil Corporation Limited (iOCL) India Oil Chennai Petroleum Corporation Limited (CPCL)" Lanka 10C Ltd .." 15 Jiangxi Hongdu Aviation Industry Co. Ltd. China Military Equipment 16 JX Holdings Inc. Japan Oil Nippo Corp 17 KEPCO Plant Service & Engineering Co., Ltd. South Korea 18 LS Industrial Systems Co., Ltd. South Korea DELISTED 19 Managem Morocco Mining Societe Metallurgique D'imiter"" 20 Mercator India Oil Mercator Ltd Mercator Lines Singapore" 21 Oil & Natural Gas Corporation India Oil Mangalore Refinery and Petrochemicals Ltd. 011 & Natural Gas Corp. Ltd. 22 Oil India Limited India Oil 23 Petroliam Nasional Berhad (Petronas) Malaysia Oil KLCC Property Holdings Bhd"" Malaysia International Shipping company (MISC Bhdr" Petronas Dagangan Bhd"" Petronas Chemicals Group Berhad"" Petronas Gas Bhd"" 24 PTT Public Company Ltd. Thailand Oil PTT Exploration & Production PCL"" 25 Reliance Industries Ltd.' India Oil $2,414,604.08 33.53% TBC Emerging Commingled $755,248.56 10.49% T Rowe' Emerging Commingled 26 Scomi Group Berhad Malaysia Oil Scomi Engineering Bhd" TOTAl $7,200,457.16 100.00% $464,386.00 100%

Note: Companies in Bold are new: companies in Bold & Ital/zed were previously classified as "Non-Targeted." 'T Rowe's Reliance Industries holdings is as of 3/31/12. Corporate Structure Clarifications: • Majority-owned subsidiary with Sudan related business operations •• Majority-owned pUblicly traded subsidiary ••• Wholly-owned subsidiary with Sudan related business operations •••• Wholly-owned subsidiary

RF - MAR K E T V A L U E RHBF MAR K E T V A L U E

RHBF RF Retiree Health Retirement Fund RF Holdings in Holdings in RHBF Holdings Benefits Fund Investment (RF) above Companies above Holdings (%) (%) Investment (RHBF) Companies

WPERP Active Developed Markets Assets $ 1,118,140.615 $ - 0.00% $ 165,445,007 - 0.00% (Boston Co., Invesco, Pyramis, Transition) WPERP Active Emerging Markets Assets $ 348.025,305 $ 4.396,617 1.26% $ 50.146.144 ­ (Boston Co., T. Rowe Price. Transition) WPERP Total Active Intemational Assets $ 1,466.165.919 $ 4.396,617 0.30% $ 215,591.150 - 0.00%

WPERP Active US Large Cap Assets. $ 1,569,455.553 $ 2.803.840 0.18% $ 261,540.049 $ 464,386 0.18% (Boston Co., Fred Alger. T. Rowe Price, MFS) WPERP Active US Small Cap Assets $ 194,366.969 $ - 0.00% $ 31.735,638 $ - 0.00% (Earnest Partners. Frontier) WPERP Total Active US Domestic Assets $ 1,763,822.522 $ 2,803.840 0.16% $ 293.275,687 464,386 0.16% ...... ~ WPERP Total Retirement Fund $ 7.131.809.005 $ 7,200,457 0.10% $ 1,159,737,119 464,386 0.04%

RF as% RHBF as % Total Commingled Total Commingled RHBF RF Investment of Total of Total Fund Value Fund Value Investment Fund Fund

T Rowe Price Emerging Markets Equity Trust $ 1.289,204,161 $ 112.531.905 8.73% The Boston Company $ 2.173,315.775 $ 104,536,489 4.81% $ 3,462,519.936 $ 217.068,394 6.27% WATER AND POWER EMPLOYEE'S RETIREMENT PLAN AND HEAL TH BENEFITS PLAN Holdings in Companies with Operations in Sudan Under Calergory: Non~Targeted (Companies Identified by the Conflict Risk Network es of May 31, 2012) AnACHMENT Z: WPERP Exposure as of May 31, 2012

Tolal % of RF Tolal % of RHBF Company Country Industry MIl of RF Holdings Holdings MIl of RHBF Holdings Holdings Manager Strategy Account 1 Andritz AG Austria Power 2 AUas Copco AS Sweden Mining 3 Sharat Electronics Limited India Military Equipment 4 Sharal Heavy Electricals India Power 5 China Poly Group Corporation China Mining Poly (Hong Kong) Inves[ment Limited·­ Citadel Capital Egypt Oil GAZ Group Russia Military Equipment GAl Auto Plant AvlodizelOAO" Pavtovsky Bus Plant·· Tverskoy Excavator OSJC'" Yaroclavsky Diesel Equipment Plant OAO'" Harbin Electric Co. LId. China Power Kamaz Russie Military Equipment Nettekamsky Avlozavod (NEFAl)" 10 MAN SE Germany Power RenkAG·· 11 MTN Group South Africa. TelecommunicaUons 12 Saras S.p.A. llaly Oil $4,145,454.00 100.00% $609.418.oo 100.00% TBC Developed SMA 13 Shanghai Electric Group Co. ltd. China Power Shanghai Mechanical and Electrical Industry Co. Ltd.·* 14 ZAlN Group Mobile TelecommunicatIons Co. TOTAL $4,145,454.00 100.00% $609,418.00 100.00% Note: Companies in Bold are new; companies in Bald & Ital/zed were previously classified as ·ScrutiniZed," Corporate Structure ClartficaUons: Majority-owned subsidiary with Sudan related business operations •• Majonty.awned publidy traded sUbsidiary .­ Wholly-

RF-MARKET VALUE RHBF MAR K E T V A L U E RHBF ~ Retiree Heallh Retirement Fund RF Holdings in RF Holdings Holdings in RH BF Holdings Benefits Fund Investment (RF) above Companies (%) above (%) C11 Investment (RHBF) Companies WPERP Active Developed Markets Assets $ 1,118,140,615 $ 4,145,454 0.37% $ 165,445,007 $ 609,418 0.37% (Boston Co.. Invesco, Pyramis, Trensition) WPERP Active Emerging Markets Assets $ 348,025,305 $ 0.00% $ 50,146,144 (Boston Co., T. Rowe Price, Transition) WPERP Total Active International Assets $ 1,466,165,919 $ 4,145,454 0.28% $ 215,591,150 $ 609,418 0.28%

WPERP Active US Large Cap Assets $ 1,569,455,553 $ 0.00% $ 261,540,049 $ 0.00% (Boston Co.. Fred Alger, T. Rowe Price. MFS) WPERP Active US Small Cap Assets $ 194,366,969 $ 0.00% $ 31,735,638 $ 0.00% (Earnest Partners, Frontier) WPERP Total Active US Domestic Assets $ 1,763,822,522 $ 0.00% $ 293,275,687 $ 0.00%

WPERP Tolet Retirement Fund $ 7,131,809,005 $ 4,145,454 0.06% $ 1,159,737,119 $ 609,418 0.05%

Total Commingled Fund RF as %of Total Commingled RHBF RHBF as % of RF Investment Value Total Fund Fund Value Investment Total Fund T Rowe Price Emerging Markets Equity Trust $ 1.289.204,161 $ 112,531,905 8.73% The Boston Company $ 2.173,315,775 $ 104.536,489 4.81% $ 3,462,519,936 $ 217,068,394 6.27% Briefing Paper: Southern Sudan's Independence and Potential Implications for u.S. Investors

Contact:

Kathy Mulvey Director, Conflict Risk Network 202.556.2123 [email protected]

April 23, 2012

About this briefing paper

After conflict erupted in Sudan's Darfur region in 2003, the United States government deemed the situation genocide. Numerous states, municipalities and other entities in the U.S. subsequently restricted their investments linked to Sudan. Many institutions and most of the 23 states that implemented Sudan-related policies based their legislation or resolutions on what is known as the "targeted Sudan divestment model" (discussed further below). Following the creation of the independent Republic of South Sudan (RoSS) on July 9,2011, many institutions implementing these policies have asked what effect this momentous event has for their Sudan-related investment policies. This briefing paper addresses this question with regard to policies based on the targeted Sudan divestment model. To the extent that this paper discusses U.S. sanctions, it is primarily as they relate to or affect this question.

Independence of the Republic of South Sudan

Sudan's Comprehensive Peace Agreement (CPA), a 2005 accord which brought an end to 22 years of civil war between Sudan's north and south that cost two million lives, called for a January 2011 referendum on self-determination for southern Sudan. Between January 9 and 15, 2011, the people of southern Sudan voted overwhelmingly to create a new state.1 Accordingly, under the terms of the CPA, the new Republic of South Sudan officially came into being on July 9,2011.

After southern secession, are concerns about Sudan over?

In addition to inquiring about the legal implications southern secession may have for targeted model divestment policies, many institutional investors have asked whether the region's independence

1 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.6 represents an end to major concerns about the Darfur conflict (the original impetus for U.S.-based divestment legislation) and the region more generally.

The short answer is.no. While the 2005 CPA ended the long-running civil war between Sudan's north and south, conflict in Darfur is ongoing. In 2003, as the Government of Sudan was negotiating an end to the 22-year civil war between Sudan's north and south, attacks in Darfur were beginning. Between 2003 and 2005, an estimated 300,000 people lost their lives due to the Darfur conflict, which is separate and distinct from the issue of southern secession. More than two million remain displaced by the conflict and face a dire humanitarian situation. Renewed aerial attacks and fighting between government troops and rebel groups in Darfur have displaced at least 348,000 Darfuris since 2010, and violence increased this spring.2 Sudan Armed Forces conducted airstrikes on villages in Darfur as recently as this month.3

While violence is ongoing in Darfur - the region whose conflict inspired most Sudan-related investment policies in the U.S. - southern Sudan's secession continues to raise its own concerns. A number of contentious post-referendum issues have increased the potential for renewed conflict between the north and south. Questions regarding the sharing of oil revenue and debt, border demarcation, and ownership of the contested Abyei region remain unresolved despite the intention for agreement on these issues before secession.

The resolution of questions regarding oil revenue is particularly urgent. Prior to independence, oil revenue provided the Government of Sudan and the regional Government of South Sudan with 63% and 98% of their revenue, respectively.4 With an estimated 85% of that oil located in southern Sudan, s the north stood to lose around 45% of its revenue without some sort of wealth sharing agreement. In January 2012, follOWing increasingly contentious negotiations over oil revenue sharing and transit fees, as well as accusations that northern Sudan had stolen six million barrels of southern oil, the Government of South Sudan halted oil production. Following the recent fighting over the oil fields in Heglig, there is a distinct possibility of a prolonged suspension of oil production - which could have disastrous effects on the two countries' already fragile economies.

In addition to the tensions and threats raised by these outstanding questions, violence between the north and south has been on the rise. Although the January 2011 referendum itself was relatively peaceful, clashes continue between government troops, militias and other groups (sometimes along ethnic lines) in the still-contested border regions where many oil concessions are located.6 Last May, more than 113,000 people were displaced when the Sudanese army occupied the contested border town of Abyei.7 The so~th's seizure and occupation of the oil-rich Heglig fields near Abyei in early April 2012, resulted in the severest fighting between the two countries since the south's independence and threatens to reignite war between north and south.8

With the continued targeting of Darfuri civilians, the concerns that led to the passage of most Sudan­ related investment policies are ongoing. While southern Sudan's secession was momentous, it has not changed conditions in Darfur. Rather, it raises its own set of concerns. As Conflict Risk Network has outlined in its research and publications, both of these situations create special challenges for corporate actors. Areas affected by genocide, mass atrocities or other conflict differ significantly from stable operating environments. They exhibit instability, unpredictable conditions, and contexts in which rights violations are ongoing, presenting companies with greater challenges in ensuring that they do not infringe on human rights. Not only is it more difficult for companies to do no harm in such settings, but the failure to adhere to standard corporate responsibility practices carries the potential for heightened impacts on communities and on companies themselves.

2 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.7 A review of existing u.s. policies relating to Sudan and investment

The U. S. has listed Sudan on its State Sponsors ofTerrorism List (SSTL) since 1993, and maintained sanctions against Sudan since 1997. While these sanctions prohibit business activities between U.S. companies and Sudan, they do not prohibit investments in non-U.S. companies doing business there.9 Filling this gap are divestment policies and legislation passed at federal, state and local levels.

In 2007, Congress passed the Sudan Accountability and Divestment Act (SADA), which authorizes state and local governments to adopt a targeted model of Sudan divestment legislation, which focuses its restrictions on investments in companies with oil, power production, mineral extraction and weapons­ related activities.10 SADA also requires companies seeking contracts with the U.S. government to certify that they do not have certain business activities in these same sectors. As authorized by SADA, 22 U.S. states currently have enacted targeted Sudan divestment legislation (note that other entities have adopted non-targeted model legislation or policies, which this memorandum does not address).

Are state and local-level policies based on the targeted divestment model still in affect following southern independence?

It seems most likely that targeted model divestment policies remain in effect with regard to northern Sudan but that they do not apply with regard to the new southern state. This would not represent any real change for investors implementing these policies. Currently, SADA and the targeted model's restrictions apply only to companies involved in certain business activities and projects (to generalize, those related to oil, mineral extraction, power production and weapons) connected to the northern Government of Sudan, which is defined as "the government in Khartoum."n Specifically, companies subject to the targeted model's divestment measures are those with "Business Operations that involve contracts with and/or provision of supplies or services" to:

(a) the Government of Sudan, (b) Companies in which the Government of Sudan has any direct or indirect equity share, (c) Government of Sudan-commissioned consortiums or projects, or (d) Companies involved in Government of Sudan-commissioned consortiums or projects.12

SADA and the targeted model already explicitly exempt the "regional government of southern Sudan." Presumably, the government of the new state would be considered exempt as well.

Even with the south now independent, one of several things would have to take place to end the application of policies based on the targeted model to Sudan's north. The model contains a sunset clause which provides for its expiration under any of the following circumstances:

(a) The Congress or President of the United States declares that the Darfur genocide has been halted for at least 12 months; or (b) The United States revokes all sanctions imposed against the Government of Sudan; or

3 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.8 (c) The Congress or President of the United States declares that the Government of Sudan has honored its commitments to cease attacks on civilians, demobilize and demilitarize the Janjaweed and associated militias, grant free and unfettered access for deliveries of humanitarian assistance, and allow for the safe and voluntary return of refugees and internally displaced persons; or (d) The Congress or President of the United States, through legislation or executive order, declares that mandatory divestment of the type provided for in this Act interferes with the conduct of United States foreign policy."13

Relative to clause "b," there was speculation in the lead-up to the January 2011 referendum that the U.S. sanctions against the Sudanese government might be removed. President Obama renewed sanctions against the government in November 2010, but his administration offered sanctions-related incentives to the Government of Sudan in an effort to ensure a smooth referendum process. For example, the U.S. relaxed sanctions on the provision of farm equipment, as well as equipment necessary to facilitate the referendum, such as computers.14 President Obama renewed the remaining sanctions on the Government of Sudan in November 2011.

In November 2010, U.S. Secretary of State Hillary Clinton stated publicly that the U.S. was prepared to lift its sanctions if the Government of Sudan committed to the referendum, committed to a peaceful resolution ofthe conflict in Darfur, and severed links to international terrorist organizations.15 However, following the north's seizure of Abyei on May 21,2011, U.S. Special Envoy for Sudan Princeton Lyman explained that it would "be hard" to remove Sudan from the SSTL if Khartoum continued to occupy the contested region.16 Subsequent attacks in South Kordofan and Blue Nile states and the fighting in Heglig make it increasingly unlikely the U.S. would take Sudan off the SSTL.

It is important to note that while removing Sudan from the SSTL would lift some sanctions (primarily on dual use items); it would not remove all sanctions. Only once the Government of Sudan has taken every step outlined by Secretary Clinton would the U.S. lift all current sanctions, triggering the sunset provisions for state- and local-level divestment policies based on the targeted model. Until or unless that occurs, the targeted Sudan divestment model would seem to be unaffected by the secession of the southern region of the country.

Potential minor changes to the targeted model Sudan screen

Though southern independence in itself does not invalidate or remove targeted model divestment policies, it could mean that some companies currently implicated would no longer be targeted. Most of Sudan's oil is in the south, as are numerous consortia. While most of these companies have activities in areas both above and below the north-south border, a few fall only in the south.

Recent changes to U.S. sanctions

Until recently, certain activities - in particular those related to oil- would continue to trigger application of U.S. sanctions, even if they were conducted wholly within the new Republic of South Sudan. In December 2011, the U.S. government amended its sanctions to authorize activities and transactions related to the petroleum or petrochemical industries, as well as the shipment of goods, technology and services, to the Republic of South Sudan through Sudan. 17 These technical changes do not have a significant impact on the application of the targeted Sudan divestment model. With the exception of the French oil company Total SA, all oil companies in southern Sudan also have operations in northern 4 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.9 Sudan and will therefore continue to be implicated by the model. It remains to be seen what effect the eased sanctions will have on the ground in South Sudan. Foreign companies must be approved by the Government of South Sudan's Ministry of Petroleum and Mining in order to operate in the country, a process that is still being developed. Additionally, insecurity in the country and the current suspension of oil production make it an unsure environment, which might slow the entrance of foreign oil companies.

About Conflict Risk Network

Conflict Risk Network (CRN) is a network of institutional investors, financial service providers and related stakeholders calling on corporate actors to fulfill their responsibility to respect human rights and to take steps that support peace and stability in areas affected by genocide and mass C!trocities. Our goal is to increase such behavior by corporate actors, and thereby reduce conflict risk.

CRN is a project of United to End Genocide (UEGj, a non-profit organization that seeks to empower individuals, communities and other actors with the tools to prevent and stop genocide and mass atrocities. In support of UEG's overall mission, CRN acts as an intermediary between the business and investment communities, engaging companies operating in UEG's Areas of Concern, including Sudan. By coordinating and conducting our engagement on behalf of a network of institutional investors, we harness the collective weight of trillions in assets when encouraging corporate behavior that reduces conflict risk.

1 Magdi Mofadal, "Sudan: Referendum Results is a New Dawn," Nairobi Star, March 7, 2011, at http://allafrica.com!stories!201103080193.html. 2 "Sudan jets bomb Darfur village, says UN," BBC News Africa, May 18, 2011, at http://www.bbc.co.uk!news!world-africa-13446911: "Briefings and Statements: 24 Dec 10 - Update on security situation," UNAMID website, December 24, 2010, at http://unamid.unmissions.org!Default.aspx?tabid=900&ctl=Details&mid=1073<emlD=117S1; "Sudan Weekly Humanitarian Bulletin 11-17 March 2011," United Nations Office for the Coordination of Humanitarian Affairs, March 17, 2011, at http://www.reliefweb.int!rw!RWFiles2011.nsf!FilesByRWDocUnidFilename!MUMA-8F72NM-full report.pdf!SFile!full report.pdf; and "Sudan Weekly Humanitarian Bulletin 24 -30 June 2011," United Nations Office for the Coordination of Humanitarian Affairs, June 30, 2011, at http://reliefweb.int!sites!reliefweb.int/files!resources!OCHA%20Sudan%20WeeklY%20Humanitarian%20Bulietin%2024%20­ %2030%20June%202011%20%281%29.pdf. 3 "Sudan carries out air strikes in Darfur: UNAMID," Reuters Africa, July 28,2011, at http://af.reuters.com!article!topNews!idAFJOE76R02620110728. 4 "Sudan-Macroeconomic Policy," African Economic Outlook, August 3,2010, at http://www.africaneconomicoutlook.org!en!countries!east­ africa!sudan!#macro economic policy; Paul J. Sullivan and Natalie Nasrallah, "Improving Natural Resource Management in Sudan," p. 3, United States Institute of Peace, June 2010, at http://www.usip.org!resources!improving-natural.resource-management-in-sudan. 5 Maram Mazen, "Sudan Braces for Protests, Violence as Oil-Rich South Secedes," Bloomberg News, July 7, 2011, at http://www.bloomberg.com!newsI2011-07-07!sudan-braces-for-protests-violence-as-oil-rich-south-secedes.html. • "Abyei a 'f!ashpoint'," United Press International, March 18, 2011, at http://www.upi.com[Top News!SpeciaI!2011!03!18!Abyei-a-flashpoint­ in-Sudan!UPI-820313004S8S48!. 7 "Sudan Abyei Crisis Situation Report No. 13," United Nations Office for the Coordination of Humanitarian Affairs, June 16, 2011, at http://reliefweb.int!sites!reliefweb.int!fiIes!resources!OCHA%20Situation%20Report%20%2313%200n%20Abyei%20Crisis%2016%20June%202 011.pdf. 8

9 "What you need to know about U.S. sanctions," U.S. Department of the Treasury, Office of Foreign Assets Control, at http://www.treasury.gov!resource-center!sanctions!Documents!sudan.pdf. 10 Sudan Accountability and Divestment Act of 2007. Pub. L. 110-174. S.2271. 31 December 2007, at http://www.govtrack.us!congress!billtext.xpd?bill=sl10-2271. 11 Targeted Sudan Divestment: Model Legislation, Section 2(f), at http://www.responsible­ investor.com!images!uploads!resources!research!1120966469ltask force targeted divestment model.pdf: and Sudan Accountability and Divestment Act, Section 2(4), at http://www.govtrack.us!congress!billtext.xpd?bill=s110-2271. 12 "Targeted Sudan Divestment: Model Legislation," Section 2(0), at http://www.responsible­ investor.com!images!uploads!resources!research!1120966469ltask force targeted divestment model.pdf. 13 Id. Section 6. The sunset provisions of the Targeted Sudan Divestment Model Legislation are similar to the criteria for removal of sanctions set out in the Darfur Peace and Accountability Act passed by Congress in 2006.

5 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.10 14 "Obama lifts Sudan sanctions to allow computers for vote," Agence France-Presse, November 20, 2010, at http://news.yahoo.com!s!afpI20101120!wl africa afp!sudanreferendumusunsanctions. 15 "US Offers to Lift Sanctions, Remove Sudan From Terrorism Blacklist On Condition," RTT News, November 17, 2010, at http://www.rttnews.com!Content!Policy.aspx?ld=14830S3&SM=1. 16 "US: hard to drop Sudan from terror list given Abyei," Reuters, May 23, 2011, at http://www.reuters.com!articleI2011!OSI23!sudan-abyei­ usa-idUSWAT01S12820110S23. 17 Ashish Kumar Sen, "U.S. eases sanctions on Sudanese oil industry," The Washington Times, December 9,2011, at http://www.washingtontimes.com/news/2011/dec/9/us-eases-sanctions-on-sudanese-oil-industry/?page=all

6 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.' , Update: The Current Situation in Sudan and the Republic of South Sudan

April 23, 2012

The implications of the independence of southern Sudan in July 2011 and recent changes to U.s. sanctions on the new country for U.S. divestment legislation are addressed in a separate memorandum. This update is intended to provide a brief overview of the current issues on the ground that may have implications for businesses operating in Sudan or the Republic of South Sudan (RoSS).

Situation Since South Sudan's Independence

Tensions between Sudan and the RoSS have continued to grow since southern Sudan emerged as an independent nation on July 9, 2011. Many of the issues that have plagued relations between the two for decades remain unresolved. More than nine months after independence, oil revenues, border demarcation and ownership of the Abyei region continue to strain the tenuous relationship between the two nations. Added to these hotly contested topics is the escalating violence across both countries that exploded into open conflict over the Heglig oil field in early April.

Areas affected by genocide, mass atrocities and other conflicts differ significantly from stable operating environments. They exhibit instability, unpredictable conditions and contexts in which rights violations are ongoing, presenting companies with greater challenges in ensuring they do not infringe on human rights. Not only is it more difficult for companies to do no harm in such settings, but the failure to adhere to standard corporate responsibility practices carries the.potential for heightened impacts on communities and on companies themselves.

Fighting over Heglig

The worst fighting between the two countries since the south's independence last July began at the end of March when the Southern military, the Sudan People's Liberation Army (SPLA) attacked the oil producing region of Heglig which is on the contentious north-south border in Sudan's South Kordofan state. The SPLA claimed they were repelling a Sudanese attack on the South's Unity State and accused Sudan of bombing southern oilfields.1 On April 9, the SPLA

1 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.12 seized control of Heglig. The move was condemned by the international community and Sudan called the move an act of war and mounted an offensive to retake the area. 2 Southern forces withdrew from Heglig on April 20, with the RoSS claiming it was a voluntary withdrawal to avoid all-out war and Sudan claiming a counterattack by its armed forces drove the South out.3 There is fear that despite the recapture of Heglig this will not be the end of hostilities, and that the fighting might continue to escalate.4

While there had been ongoing negotiations over several of the disputed areas on the border, Heglig had not previously been a major point of contention. In 2009, the Permanent Court of Arbitration ruled that it was not a part of Abyei and instead belonged to the North although the South still maintains that it culturally belongs with them. Prior to the fighting, the oil fields in Heglig, operated by a consortium led by China National Petroleum Corporation, accounted for almost half of Sudan's oil production. The South shut down production while in control of the field and it is being reported that the fighting resulted in significant damage to oil facilities. The loss, even temporarily, of 70,000 barrels of oil per day is a significant blow to Sudan's economy which was already reeling from the loss of the oil-rich south in July.s

The RoSS Pipeline Shutdown

On January 20, 2012 the RoSS made the drastic decision to shut down all oil production indefinitely.6 This extreme measure was a tactical move as a response to government's accusation that Sudan illegally confiscated its oil. Sudan is accused of stealing over six million barrels of oil, valued at over $800M. Sudan denies that it stole oil from the RoSS, claiming that it took the oil to offset unpaid fees.

Negotiations continued amidst the shutdown and a summit between the two heads of state was scheduled for April 3. Sudan's President Bashir canceled the summit and cut off negotiations when fighting first broke out around Heglig at the end of March. While efforts are underway by the international community to restart talks around security between the two countries, Bashir declared this week that Sudan will never allow the RoSS to again use northern infrastructure to export its oil.

The decrease in the supply of oil as a result of the south's shutdown has had a global impact. China and Japan have relied on the Dar and Nile blend crudes from the country but now have had no choice but to procure the oil elsewhere, straining the world market and increasing oil prices.7 While China has been an ally of Sudan,8 post-independence China has attempted to approach the countries equally and has recently facilitated engagement between the two countries in an effort to bring the oil back online.9

The RoSS has threatened to take legal action to prevent the unauthorized sale of its oil, warned that it may expel Chinese oil companies if found complicit in the theft of its oil and has held up delivery of oil for at least one company, Trafigura. lO Some companies involved in the sale of southern oil have claimed that their contracts with the government in Khartoum required they purchase the oil regardless of its origin.ll Others maintain that they were unaware of the oil's 2 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.13 true origin.12 Additionally, in February, the government expelled the head of Petrodar, a joint venture between China National Petroleum Corporation (CNPC) and Petronas, from the RoSS for its alleged complicity in the theft of its oil.13

In an effort to sever dependence on Sudan, the RoSS has been working with Kenya to construct a pipeline to transport oil directly from the RoSS to the port of Lamu. The RoSS has also discussed a new pipeline project with Ethiopia and Djibouti. However, plans have not been finalized and some experts argue that a new pipeline may not be feasible, at least in the short 14 term. Building a pipeline would take years and the RoSS is already feeling the effects of its shutdown. Approximately 98% of its revenue came from oil sales, leaving the already financially 1s troubled country in a dire economic situation. In order to cope with the loss, the government cut non-salary spending by 50%.16 The United Nations noted that the oil shutdown has led to increased need for food aid dependence.17 Experts have speculated that the RoSS is unlikely to be able to continue the shutdown for more than a few months as the country lacks any other viable economy beyond its oil industry.ls After three months, the RoSS is reported to be running low on dollars, weakening the South Sudanese pound; driving up the cost of imports and straining the economy.19

Returning South Sudanese

Sudan has set what is considered by many to be an almost impossible deadline of May 8, 2012 for southern Sudanese to either register as foreign residents or to leave the country.20 Since October 2010, over 372,000 southerners have already returned to the RoSS from Sudan. The RoSS is already facing critical food insecurity and has implemented drastic austerity measures, risking dire consequences if hundreds of thousands of southerners are forced to return by May 21 without proper mechanisms and assistance in place. Of the approximately 500,000 southern 22 Sudanese currently living in Sudan the U.N. High Commissioner for Refugees estimates that up to 100,000 may require emergency assistance.23

Abyei

Adjacent to the oil-rich town of Heglig, Abyei has political and economic significance for the north and south, both of which have claimed it. In June 2011, an agreement was reached between the Sudan People's Liberation Movement (SPLM) and the National Congress Party 24 (NCP) to withdraw all armed troops from Abyei. Sudan has yet to actually remove its forces and a March UN report stated that both Sudan and the RoSS appear to have unauthorized 2s armed forces still in Abyei.

South Kordofan/Blue Nile

The oil shutdown coupled with the acrimonious history between northern and southern Sudan prompted the signing of a non-aggression and cooperation memorandum of understanding in 26 February 2012. Despite this recent pact, fighting has increased, with the conflict around Heglig spilling over into the neighboring states and with both sides accusing each other of 3 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.14 recruiting and funding armed militias to attack across the border.27 Sudan has blocked aid from reaching civilians in South Kordofan and Blue Nile, claiming that the assistance is used to fortify rebel groups, which prompted the U.N. Security Council to issue a statement in February 2012 28 asking Sudan to allow humanitarian aid to conflict areas. The U.S. has warned that Sudan's 29 blockade on aid is risking a full-scale famine.

Since May 2011, violence has escalated in contentious regions along Sudan's border with the newly independent republic. The Government of Sudan has utilized its military forces to launch attacks in civilian areas of South Kordofan and Blue Nile. There are widespread reports from South Kordofan that churches and schools have been targeted, and civilians have been arrested and even executed on the basis of their ethnic and political identity. The Sudanese army has also bombed refugee areas in South Sudan where civilians from Blue Nile and South Kordofan 3D fled to avoid government attacks. The UN estimates that more than 417,000 people have 31 been displaced since the fighting began. Attacks on civilians disrupted the crucial cultivation season which has already resulted in emergency levels of food insecurity for 300,000 people in 32 South Kordofan.

Internal Conflict

Internal conflict in the RoSS remains a grave concern as fighting between warring ethnic groups continues to escalate. Tribal fighting and cattle raids in Warrap, Jonglei and Lakes states have contributed to thousands of deaths and highlight the ongoing insecurity throughout the country. In late December 2011 U.N. troops were stationed in Pibor in Jonglei state to prevent 33 6,000 armed Lou-Nuer (also known as Nei Ti Naath) from attacking their rival, the Murle. Despite the presence of U.N. troops in Jonglei state, attacks by Lou-Nuer displaced more than 34 100,000 thousand. After this attack, the Murle responded, despite calls from humanitarian groups to the government to handle the situation. Even before the suspension of oil production the southern government lacked the resources and capacity to deal with the rebels and to protect its civilians. The RoSS deployed a force of 15,000 in mid-March to conduct a forcible 35 disarmament process which has so far collected around 10,000 weapons.

Attacks on Foreign Workers

Kidnapping and hostage situations continue to be a problem in Sudan. In late January 2012 36 members of the SPLM-N in South Kordofan attacked 47 Chinese workers employed by CNPC. One worker was killed and 29 were taken hostage. All 29 were eventually released in February 2012. In September 2011, five Turkish engineers were captured while purportedly working on a water project (though Turkey claims the engineers were on their way to Chad at the time).37 The workers were released in early February 2012 after being held for five months in North Darfur by armed men. In February 2012, a 55-person peacekeeping patrol was abducted in Darfur by the Justice and Equality Movement (JEM).38 JEM claimed the peacekeepers had entered their territory without authorization. All were eventually released.

Darfur 4 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.15 The situation in Darfur continues to deteriorate. In 2003, as the Government of Sudan was negotiating an end to the 22-year civil war between Sudan's north and south, attacks in Darfur were beginning. Between 2003 and 2005, an estimated 300,000 people lost their lives due to the Darfur conflict, which is separate and distinct from the issues between Sudan and the RoSS. About 1.9 million people remain internally displaced by the conflict and face a dire humanitarian situation.

Fighting between rebels and the Sudanese Armed Forces continues. Ongoing reports of bombings by the Government of Sudan, along with the continued arrest and detention of human rights advocates, civil society leaders and UNAMID staff are extremely troubling. There is also concern that rebel groups might be trying to exploit the current conflict between Sudan and the RoSS. There have been four separate rebel attacks in South Darfur in the last week alone.39 Since 2010, the United Nations has reported over 200 attacks in Darfur which have displaced over 380,500 civilians, with some 80,000 newly displaced due to fighting in 2011. There continues to be concern about the limited access that both humanitarians and peacekeepers have in the region.

Amnesty International released a report, Sudan: No End to Violence in Darfur, in February 2012 documenting the negative impact arms sales to Sudan trom countries such as China and Russia continue to have on the conflict in Darfur.4o Despite an arms embargo, weapons sold to Sudan are still making to make their way into Darfur, fueling attacks on civilians. The international community has stepped up efforts to block arms from reaching Darfur and suggested that the arms embargo be amended to cover all of Sudan, not just Darfur.

About Conflict Risk Network

Conflict Risk Network (CRN) is a network of institutional investors, financial service providers and related stakeholders calling on corporate actors to fulfill their responsibility to respect human rights and to take steps that support peace and stability in areas affected by genocide and mass atrocities. Our goal is to increase such behavior by corporate actors, and thereby reduce conflict risk.

CRN is a project of United to End Genocide (UEG), a non-profit organization that seeks to empower individuals, communities and other actors with the tools to prevent and stop genocide and mass atrocities. In support of UEG's overall mission, CRN acts as an intermediary between the business and investment communities, engaging companies operating in UEG's Areas of Concern, including Sudan. By coordinating and conducting our engagement on behalf of a network of institutional investors, we harness the collective weight of trillions of assets when encouraging corporate behavior that reduces conflict risk.

1 Hereward Holland, "South Sudan says Sudan bombs oil fields in border region," Reuters, March 27, 2012, at http://uk.reuters.com!article!2012!03!27!uk-sudan-southsudan-bombing-idUKBR E82QOBV20120327.

5 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.16 2 "Bashir says South Sudan opted for war, vows retake of Heglig," Sudan Tribune, April 13, 2012, at http://www.sudantribune.com!Bashir-says-South-Sudan-opted-for,42224. 3 "Sudan's VP Taha rules out quick return to negotiations with south, reveals Heglig damage," Sudan Tribune, April 22, 2012, at http://www.sudantribune.com!Sudan-s-VP-Taha-rules-out-quick,42341. 4 Alan Boswell, "Sudan's Bashir, in Heg/ig, vows no peace talks as jets hit Bentiu in South Sudan," Kansas City Star, April 23, 2012, at http://www.kansascity.com!2012!04!22!3571940!sudans-bashir-in-heglig-vows-no.html. 5 "Sudan's VP Taha rules out quick return to negotiations with south, reveals Heglig damage," Sudan Tribune, April 22,2012, at http://www.sudantribune.com!Sudan-s-VP-Taha-rules-out-quick,42341. 6 "South Sudan shuts down its oil production nationwide:' Sudan Tribune, January 20, 2012, at http://www.sudantribune.com!South-Sudan-shuts-down-its-oi1,41353. 7 "South Sudan oil shutdown pushes up prices:' United Press International, February 17, 2012, at http://www.upLcom!Business· News!Energy-Resources!2012!02!17!South-Suda n-oil-shutdown-push es-u p­ prices!UPI-53871329509073/' 8 "China stresses ties with Sudan:' United Press International, June 30, 2011, at http://www.upLcom/Top News!World-News/2011/06!30!China-stresses-ties-with-Sudan!UPI-59391309407708!. 9 "China urges north and south Sudan to keep oil flowing:' Reuters, November 29,2011, at http://uk.reuters.com!article!2011!11!29!china-sudan-oil-idUKl4E7MTl0820111129. 10 "5. Sudan oil minister warns Trafigura over seized oil," Reuters Africa, February 22, 2012, at http://af.reuters.com!article!sudanNews!idAFl5E8DM1GU20120222. 11 Julius N. Uma, "Khartoum orders foreign company to 'steal'S. Sudan's oil," Sudan Tribune, January 14, 2012, at http://www.sudantribune.com!Khartoum-orders-foreign-company-to.41296. 12 Rupert Neate, "Trafigura in S. Sudan oil row," The Guardian, February 8, 2012, at http://www.guardian.co.uk/world!2012/feb!08!trafigura-in-south-sudan-oil-row. 13 "South Sudan gives PetroDar President 72 hours to leave Juba," Sudan Tribune, February 22,2012, at http://www.sudantribune.com!South-Sudan-gives-PetroDar.41686.. 14 Ulf laessing, "5. Sudan Kenya pipeline not feasible short term: Norway," Reuters Africa, February 22, 2012, at http://af.reuters.com!article!investingNews!idAFJO E81l0C720120222. 15 "South Sudan fears impact of oil shutdown," Financial Times, February 21, 2012, at http://www.ft.com!intl!cms!s!0!3c3b50b6-5c92-11el-911f­ 00144feabdcO.html?ftcamp=published links!rss!companies africa!feedl!product#axzz1n2MSPcGd. 16 "5. Sudan cuts non-salary spending by 50 pct," Reuters, February 19, 2012, at http://www.reuters.com!article!2012!02!19!southsudan-spending-idUSl5E8DJOE020120219. 17 Hereward Holland, "5. Sudan oil shutdown to increase food aid dependence - UN," Reuters, February 3, 2012, at http://www.reuters.com!article!2012!02!03!sudan-south-food-idUSl5E8D31UY20120203, 18 South Sudan fears impact of oil shutdown," Financial Times, February 21, 2012, at http://www.ft.com!intl!cms!s!0!3c3b50b6-5c92-11e1-911f­ 00144feabdcO.html?ftcamp=published links!rss!companies africa!feed/lproduct#axzz1n2MSPcGd. 19 Ulf laessing, "Gas stations run dry in Juba as Sudan oil fight persists," Reuters, April 15, 2012, at http://www.reuters.com!article!2012!04!15!us-southsudan-petrol-idUSBRE83EOBT20120415. 20 "Sudan: Southerners in Khartoum Increasingly Fearful," IRIN News, April 23, 2012, at http://allafrica.com!stories/201204231307.html. 21 "We cannot fail the South Sudanese: UN Humanitarian Chief," ReliefWeb, February 2, 2012, at http://reliefweb.int!node!474740. 22 "Sudan and South Sudan Sign Return Deal, but April Deadline 'Massive logistical Challenge' says 10M," International Organization for Migration, February 14, 2012, at http://www.iom.int!iahiafjahia!media!press­ briefing-notes!pbnAF!each e!offonce!lang!en ?entryld=31274. 23 Gabe Joselow, "Returnees Could Present South Sudan's Next Big Crisis," Voice of America, February 10, 2012, at http://www.voanews.com!english!news!africa!Returnees-Could-Present-South-Sudans-Next-Big-Crisisn 139097219.html. 24 "World welcomes North-South accord on Abyei," Sudan Tribune, June 20, 2011, at http://www.sudantribune.com!World-welcomes-North-South-accord.39284. 6 This document is being distributed for informational purposes only. It does not constitute legal or investment adVice and should not be used as such.

7.17 25 Ngor Arol Garang, "South Sudan's Biong to visit Abyei displaced as political impasse continues," Sudan Tribune, April 9, 2012, at http://www.sudantribune.com!South-Sudan-s-Biong-to-visit-Abyei,42172. 26 "Sudan: Ban Welcomes Signing of Non-Aggression Pact Between Sudan and South Sudan," AIiAfrica, February 13, 2012, at http://allafrica.com!stories!20120214028l.html. 27 Mary Ajith Goch, "Sudan: Juba Accuses Khartoum of Using Militias to Sabotage Oil Fields," AIiAfrica, February 15, 2012, at http://allafrica.com!stories!201202150916.html. 28 "Sudan: UNSC Raises Concern Over Blue Nile and South Kordofan," AIiAfrica, February 15, 2012, at http://allafrica.com!stories!201202160534.html. 29 Flavia Krause Jackson, "Sudan's Aid Block Risks 'Full-Scale Famine: Rice of U.S. Says:' Bloomberg Businessweek, January 17, 2012, at http://www.businessweek.com!news!2012-01-17!sudan-s-aid-block-risks-full-scale-famine­ rice-of-u-s-says.html. 30 "Sudan army says seizes rebel-held area in border state," Reuters Africa, February 11, 2012, at af.reuters.com/article!sudanNews!idAFl5E8DBOVP20120211: "Sudan: Amnesty International Calls for Humanitarian Access to South Kordofan and Blue Nile:' AIiAfrica, February 17, 2012, at http://allafrica.com!stories!201202170704.htmI. 31 "Sudan: U.S. Continues to Press Govt On Delivery of Humanitarian Aid:' Sudan Tribune, AprilS, 2012, at http://allafrica.com!stories!201204060617.htmI. 32 "Sudan: Humanitarian Snapshot:' OCHA, March 31, 2012, at http://reliefweb.int!sites!reliefweb.int!files/resources!sud07 humanitariansnapshot a3 31Mar12.pdf. 33 "UN tries to block South Sudan violence:' United Press International, December 30, 2011, at http://www.upLcom/Top News!World-News!2011!12!30!UN-tries-to-block-South-Sudan-violence!UPI­ 19721325267943!?spt=hs&or=tn. 34 "Jonglei: Villagers asked to return home, start farming," Sudan Tribune, April 8, 2012, at http://www.sudantribune.comlJonglei-Viliagers-asked-to-return,42155. 35 "Jonglei: Villagers asked to return home, start farming:' Sudan Tribune, April 8, 2012, at http://www.sudantribune.com/Jonglei-Villagers-as·ked-to-return,42155. . 36 "Sudan rebels say holding 29 Chinese workers:' Reuters, January 29, 2012, at http://uk.reuters.com!article!2012/01/29!uk-sudan-china-idUKTRE80S0AW20120129; "ICRC intervenes to release Chinese hostages in Sudan:' Sudan Tribune, January 5, 2012, at http://www.sudantribune.com!ICRC-intervenes­ to-release-Chinese,41519. 37 "Five Turkish engineers freed in Darfur after five months:' Reuters Africa, February 3, 2012, at http://af.reuters.com!article!topNews!idAFJOE812003 20120203. 38 "Darfur rebels & UNAMID confirm release of all peacekeepers, but have two versions," Sudan Tribune, February 21,2012, at http://www~sudantribune.com/Darfur-rebels-UNAMID-confirm.4168l. 39 "Sudan: UN-AU Peacekeepers Attached in Darfur, Four Wounded:' Sudan Tribune, April 22, 2012, at http://allafrica.com/stories/201204230744.html. 40 Amnesty International, Sudan: No End to Violence in Darfur, February 9, 2012, available at http://amnesty.org!en!library/asset!AFR54!007!2012!en!c1037da2-Of54-4343-8325­ 461d80e751c2/afr540072012en.pdf.

7 This document is being distributed for informational purposes only. It does not constitute legal or investment advice and should not be used as such.

7.18 49

COMPANY CATERPILLAR INC.

COUNTRY SECTOR CRN Classification USA I MINING/POWER I WATCH LIST

TARGETED SUDAN DIVESTMENT LEG1SLATIVE MODEL CATEGORY SCRUTINIZED

CORPORATE STRUCTURE RELEVANT TO TARGETED SUDAN DIVESTMENT LEGISLATIVE MODEL CATERPILLAR CREDITO, S.A. DE C.V. SOFOM E.N.R. (wholly owned subsidiary, bonds issued) CATERPillAR FINANCE CORPORATION (wholly owned sUbsidiary, bonds issued) CATERPILLAR FINANCIAl.AUSTRALIA LTD. (wholly owned subsidiary, bonds issued) CATERPILLAR FINANCIAL SERVICES CORPORATION (wholly owned subsidiary, bonds issued) CATERPILLAR INTERNATIONAL FINANCE LTD. (wholly owned SUbsidiary, bonds issued) CATERPILLAR USED EQUIPMENT SERVICES INTERNATIONAL SARL (Wholly owned subsidiary with Sudan-related operations) F.G. WILSON ENGINEERING LTD. (wholly owned subsidiary with Sudan-related operations) PERKINS ENGINEERS CO. LTD. (wholly owned subsidiary with Sudan-related operations)

CO~TIE){l OVIEu:l~!EW as well as the current violence in South Kordofan and Blue Nile states which has displaced 468,000.6

Industry In addition to gold, Sudan is also reportedly rich in silver, lead, zinc, copper, iron and barium. Sudan's Sudan is believed to have significant mineral Mining Minister has said that the country is experi­ resources, but it is not a significant mineral producer. encing "a rush" from foreign firms interested in gold The country's mining industry is relatively under­ exploration, including firms from Australia, Europe, developed,1 with mining and quarrying operations and the United States. Currently, Sudan has awarded responsible for only 0.2% of the national GOP. 2 This more than 200 exploration licenses to foreign and local may change, given the northern government's increas­ firms.7 • ing efforts to diversify its economy following the secession of southern Sudan. The Republic of South Unlike many of Sudan's oil-related projects, mining Sudan (RoSS) held an estimated 85% of the country's activities thus far have taken place primarily in largely oil, which provided the north with 63% ofits revenue unpopulated areas in the northeast. Though displace­ and 15.5% ofits GOP. J ment, security, and impacts on local communites have not yet been of concern, as they are with oil projects, As part ofits efforts to offset the loss ofoil revenue, artisanal mining is an important source ofincome the northern government has emphasized gold for some Sudanese, and fatal violence has broken out production. Government officials have optimistically when the government has sought to remove miners projected gold production revenue to reach U.S. $3 from promising tracts allocated to foreign mining billion in 2011, up from U.S. $70 million in 2010.' This firms. B To achieve this ambitious increase in gold increases the overall importance ofgold as a revenue production, the government plans to continue expand­ stream fOf the Sudanese government, which is said ing concessions to foreign mining companies and to funnel much ofits income to the military. Sudan's possibly tighten regulations on small-scale miners, armed forces have been connected directly to violent creating potential for increased tension and similar conflict in Darfur, a recent civil war between Sudan's conflicts in the future." north and south that resulted in two million deaths,5

CONFLICT RISK NETWORK I Sudan Company Report Quarter 1 I February 29, 2012 CATERPILLAR INC. 50

The "rush" to sign more mining agreements may lead Peoria, Illinois-based Caterpillar Inc. (CAT) is the to activities in areas other than Sudan's northeast, world's leading manufacturer of construction and meaning concerns about displacement, security and mining equipment, as well as diesel engines and local impacts could rise. Sudan's Ministry ofMinerals industrial gas turbines. Several of the company's non­ announced recently that five companies are interested U.S. subsidiaries sell Caterpillar products in Sudan for in concessions iJ? South Darfur state.1O Darfur has been use on heavy construction, mining, drilling and power the site of targeted violence against civilians (identified generating projects. 14 as genocide by the U.S. government), the deaths of at least 200,000 since 2003, and ongoing clashes between Because sales of such equipment in Sudan are consid­ armed groups and government forces. ered "Mineral Extraction," "Power Production" and "Oil-Related" activities under the targeted Sudan Power projects have the potential to provide a much­ divestment legislative model, Caterpillar is classified needed increase in the production ofelectricity in as "Scrutinized." Sudan, where only 36% ofthe population has access to electricity.lI Sudan's National Electricity Corporation (NEC), the government body responsible for the trans­ HiS10RY OF SU[]A~-RlElA1IED mission and distribution of electricity in Sudan, states BUSINIESS ACrl\fllllES that it endeavors to connect the entire country to a stable electric network by 2030. 12 As of2007, completed transmission lines primarily connect Khartoum and CAT and its U.S. subsidiaries do not sell products other major northern cities, leaving most of Sudan's or services to, nor have offices, assets, employees marginalized populations excluded from the benefit of or operations in Sudan; however, several non-U.S. power production projectsP subsidiaries ofthe company have sold CAT products to independent dealers and distributors in Sudan Because the NEC-a subcomponent of Sudan's and continue to do so. CAT's net sales to Sudan in Ministry of Energy and Mining-is charged with the fiscal years 2008-2010 plus Ql of2011 totaled U.S. supplying electrical power in Sudan, companies $256.5 million (out of CAT's total net sales during that involved in power production projects will most likely period ofU.S. $139.2 billion).!" be contracting directly with that government body or on government-commissioned projects. The Swiss subsidiary Caterpillar SARL (CSAR L) is responsible for the sale of Caterpillar products in Power projects are underway in dozens of locations, Africa. DAL Group-owned Earthmoving Services Ltd. including some regions that have experienced instabil­ (ESL) has, through its operating subsidiary Sudanese ity in recent years, as well as those that may become Tractor Company Ltd. (Sutrac), been CSARL's dealer in increasingly insecure given the ongoing conflict in Sudan.16 Sutrac sells and rents equipment to custom­ South Kordofan and Blue Nile states. ers in the mining, oil drilling and power generation industries, amongst others. It is the largest rental Power production projects-with the exception of operator in Sudan. In addition to renting equip­ certain hydropower projects-are generally not ment, Sutrac offers its services in site supervision associated with displacement, security concerns and and contract management. The company maintains other serious impacts linked with the extractive sector. a number offield branches in Sudan, including in However, companies involved in such projects may Port Sudan, Higleig and Merowe. As of2008, the face increasing challenges due to the recent outbreaks company was scheduled to open a facility in Tuba ofviolence in Sudan. dedicated to serving the RoSS. It is unclear if this site was completed.'7 According to CAT, CSARL stopped accepting orders from Sutrac and ESL in 2010. 10 Company

CONFLICT RISK NETWORK I Sudan Company Report Quarter 1 I February 29, 2012

7.20 CATERPILLAR INC. 51

CSARL has a separate, ongoing dealership agreement In 2010, at least five people died in clashes in northern covering the areas exempt from U.S. sanctions with Sudan's Gabgaba district after the Sudanese govern­ Ezentus FZE, which is owned by principals of the DAL ment awarded a Moroccan mining company exclusive Group and operates as Sutrac South.19 rights to an area believed to be laden with gold. 23

For the last three fiscal years, CAT sales to Sudan As a seller ofequipment (as opposed to an actor consisted primarily of earthmoving and construc­ operating a consortium or conducting exploration), tion machinery, engines and generator sets to the CAT's association with these concerns is less direct. respective dealers of CSARL, Perkins Engines Co. Ltd. It could, however, be seen as facilitating and enabling (Perkins) and EG. Wilson Engineering Ltd. (Wilson). operations linked with detrimental impacts and other Both Perkins and Wilson are indirect U.K. subsidiar­ concerns highlighted above. ies of Caterpillar. Perkins manufactures and markets diesel and natural gas reciprocating engines, while Potential for general instability and conflict Wilson does the same for electric power generation as a result of conflict along the north-south systems. Currently, both subsidiaries have distribu­ border tion agreements with Sudanese distributors. Small amounts of earthmoving machinery and repair While power production projects-with the exception services were sold to Sudan by other non-U.S. CAT· of certain hydropower projects-are generally not subsidiaries in 2008-2009. 20 associated with displacement, security concerns and other serious impacts linked with the extractive sector, According to the company, the sale of Caterpillar companies involved in such projects may face increas­ products to Sudan by non-U.S. subsidiaries is permit­ ing challenges due to recent events in Sudan. Follow­ ted under U.S. trade sanctions and regulations; ing a referendum on independence in January 2011, however, the Securities and Exchange Commission southern Sudan seceded and became the independent (SEC) is currently seeking clarification of the nature of Republic of South Sudan on July 9, 2011. Shortly before CAT's foreign subsidiary, dealer and distributor sales independence, northern Sudan invaded the contested and its dealings with Sudan and Syria. 2 ( Abyei region, and has since attacked southern-aligned forces and civilians in the border states of South Kordofan and Blue Nile, displacing 468,000 people.24 POTENTIAL CONCERNS AND RIS~S Human rights advocates, political leaders and the international community are concerned that the violence could reignite conflict between Sudan's north General potential for instability and violence and south. in more populated areas and as a result of government efforts to expand mining operations The potential for fall-out from fighting along the north-south border holds significant implications While most mining activities take place in a largely for the private sector in Sudan, including companies unpopulated area in the northeast where displace­ involved in power production projects. Areas affected ment, potential for insecurity and impacts on local by conflict differ significantly from stable operating communities are ofless concern than they might be environments. They exhibit instability, unpredictable in.other regions, the government's efforts to expand conditions, and contexts in which rights violations mining operations might raise these concerns. are ongoing, presenting companies with greater challenges in ensuring they do not infringe on human Artisanal mining is an important source of income for rights. Not only is it more difficult for companies to do some Sudanese, and fatal violence has broken out when no harm in such settings, but the failure to adhere to the government has sought to remove miners from standard corporate responsibility practices carries the promising tracts allocated to foreign mining firms. 22 potential for heightened impacts on communities and

CONFLICT RISK NETWORK I Sudan Company Report Ouarter 1 I February 29, 2012

7.21 CATERPILLAR INC. 52

on companies themselves. Conduct policy; however, other than non-discrimi­ nation, it makes no reference to existing international human rights codes. In its 2010 Sustainability Report, Revenue stream supporting government the company says its code of conduct is sufficient capacity for violence and CAT does "not see a need to become signatories to other voluntary conventions, frameworks and With the secession of southern Sudan, the Government standards that offer direction on how to promote the of Sudan stands to lose 60% to 75% of its revenue. As rights and freedoms of people, including those brought part of a strategy to diversify its revenue stream, the forward by the United Nations and the International government has placed an increased emphasis on Labor Organization."26 its output ofgold ore. It hoped to double its annual production in 2011. 25 As Sudan's government seeks 2. Impact Assessments to increase its revenue from gold production, CAT's equipment might be tied to an increasingly significant No information is available on whether CAT has revenue stream that facilitates the Sudanese govern­ conducted an impact assessment to determine the ment's capacity for violence, whether in Sudan's Darfur actual and potential impacts ofits Sudan-related busi­ region or in the border states of South Kordofan and ness activities. Blue Nile. 3. Human Rights Integration

ACTIVITiES SPECifiC TO There is no information available detailing what TARGETIED SUDAN DmESTMENl efforts, if any, are being made to integrate human LEGISLATIVE MODEL rights principles into company practices.

4. Human Rights Tracking and Reporting Facilitating projects in Sudan's mining, oil andpower production sectors, including by providing supplies There is no information available detailing what and services, constitutes "Mineral Extraction," "Oil­ efforts, if any, are being made to track and report the Related" and "Power Production" activities under the integration of human rights principles into company targeted Sudan divestment legislative model. For these practices. reasons, CAT is classified as "Scrutinized" under the model. RlElEVANT POUC~ES & PRACTiCIES fNGAGIEMIE~T UN Global Compact

CRN reached out to Caterpillar in February 2012 Caterpillar Inc. is not a UNGC participant. requesting dialogue and further information regard­ ing the company's Sudan-related operations. Board-Level or Executive Committee Involvement on Human Rights-Related Risks fOUR-STEP DUE DiliGENCIE PROCIESS and Concerns

No information is available on board or executive­ 1. Human Rights Policy level involvement on human rights-related risks and concerns. CAT has Our Values in Action, its Worldwide Code of

CONflICT RISK NETWORK I Sudan Company Report Quarter 1 I February 29, 2012

7.22 CATERPILLAR INC. 53

NOTES: CATERPILLAR INC.

1 "Background Note: Sudan," U.S. Department of State, June 29, 2010, at http://www.state.gov/r/pa/ei/bgn/5424.htm; "Industrial Investment," Republic of Sudan-Ministry of Industry website, 2003, at http://www.industry.gov.sd/ennn/main/invest.htm.

'Thomas R. Yager, "The Mineral Industry of Sudan," p. 38., U.S. Geological Survey, December 2009, at http://minerals.usgs.gov/minerals/pubs/country/2008/myb3-2008-su.pdf; "Sudan: Recent Economic Developments and Prospects," African Economic Outlook, August 3, 2010, at http://www.africaneconomicoutlook.org/en/countries/east-africa/sudan/.

31d. and "Sudan-Macroeconomic Policy," African Economic Outlook, August 3,2010, at http://www.africaneconomicoutlook.org/en/countries/east-africa/sudan/#macro_economic_policy; Paul J. Sullivan and Natalie Nasrallah, "Improving Natural Resource Management in Sudan," p. 3, United States Institute of Peace, June 2010, at hltp:llwww.usip.org/resources/improving-natural-resource-management-in-sudan.

• Salma EI Wardany, "Sudan Sees $3 Billion in Revenue from Gold, AI-Tayar Reports," Bloomberg, September 18, 2011, at http://www.bloomberg.com/ news/20 11-09-18/sudan -sees-3 -bi Ilion-in-revenu e-from -901d -al-tayar-repo rts. html.

'Jeffrey Gettfeman, "War in Sudan? Not Where the Oil Wealth Flows," New York Times, October 24, 2006, at http://www.nytimes.com/2006/10/24/world/africa/24sudan.html?pagewanted =1 &_r= 1.

'Abyei: 113,000; Blue Nile: 155,000; South Kordofan: 200,000. "Abyei Crisis Situation Report No. 13," United Nations Office for the Coordination of Humanitarian Affairs, June 16, 2011, at http://reliefweb.intlsiteslreliefweb.intlfileslresources/OC HA%20Situation%20Report%20%2313%200n%20 Abyei%20Crisis%2016%20June%202011.pdf; "South Kordofan and Blue Nile Situation Report No. 18," United Nations Office for the Coordination of Humanitarian Affairs, Septem ber 12, 2011, at hltp:llreliefweb.intlsites/reliefweb.intlfiles/resources/SKS-Blue%20Nile%20Situation%20report%20no.pdf; "South Kordofan Situation Report No. 15," United Nations Office for the Coordination of Humanitarian Affairs, September 25,2011, at http://reliefweb.intl sites/reliefweb. intlfiles/resources/O CH A% 20So uth %20 Kordofan% 2Osituati on %20report% 20no% 20 15.pdf.

'Maram Mazen, "Sudan Signs 10 Gold, Iron Mining Exploration Agreements, Minister Says," Bloomberg, November 7,2010, at http://www.bloomberg.com/news/2010-11-07/sudan-signs-l0-gold-iron-mining-exploration-agreements-minister-says.html; "Sudan hands out 50 more gold exploration licenses," Reuters, October 30, 2011, at http://www.reuters.com/article/2011/10/30/us-sudan-gold-idUSTRE79T2B620111030.

8 "Media Monitoring Report," UNMIS website, March 4,2010, at http://unmis.unmissions.org/Portals/UNMIS/MMR/MMR%20-%2004%20Mar%2010.pdf; Ulf Laessing, "FEATURE-Sudan hopes gold rush will soften loss of southern oil," Reuters Africa, October 19, 2011, at http://af.reuters.com/article/sudanNews/ idAFL5E7LC23120111019?sp=true. oAndrew Heavens, "Sudan hopes to double gold output to offset oil risk," Reuters, September 6, 2010, at http://af.reuters.com/articl e/topNews/idAFJOE 68 50 K8 20100906. .

'0 Ish raga Abas, "Gold and the Government: When coincidence is better than a thousand dates," Sudan Now Magazine, September 28, 2011, at http:// sudanow.info/en/en-main-story.php?ID=388&show=sc.

11 "Country Analysis Brief: Sudan," U.S. Energy Information Administration, October 1,2011, at http://www.eia.gov/EMEU/cabs/Sudan/pdf.pdf.

12 "Our Vision," National Electricity Corporation, at http://www.necsudan.com/en/home.php.

13 "Transmission Lines," Dams Implementation Unit, Merowe Dam Project website, at http://www.merowedam.gov.sd/en/transp-Iines.html.

14 Caterpillar Inc. FY 2010 Form 10-K, as filed with the United States Securities and Exchange Commission, February 22, 2011, at http://secfilings.nyse.com/ filing.php?doc=1&attach=ON&ipage=7698248&rid=23; "Sutrac Profile," Sutrac website, at http://www.sutrac.com/downloads/Sutrac_Profile.pdf.

"Id.

" "Sutrac Profile," Sutrac website, at http://www.sutrac.com/downloads/Sutrac]rofile.pdf.

"Id.

18 Caterpillar Inc. FY 2010 Form 10-K, as filed with the United States Securities and Exchange Commission, February 22, 2011, at hllp:llsecfilings.nyse.coml filing.php?doc=1&allach=ON&ipage=7698248&rid=23.

'Old.

2°ld.

21 Stephen White, "SEC probing Cat dealer Iran, Syria and Sudan sales," Construction Week Online, December 14,2011, at http://www. constructionweekon line. com larticle-14 996 -sec- probing -cat- deal er- iran -syria-and -su dan -sales/.

22 "Media Monitoring Report," UNMIS website, March 4,2010, at http://unmis.unmissions.org/Portals/UNMIS/MMR/MMR%20-%2004%20Mar%2010.pdf.

CONFLICT RISK NETWORK I Sudan Company Report Quarter 1 I February 29, 2012

7.23 CATERPILLAR INC. 54

"Alsanosi Ahmed and Jeffrey Fleishman, "In Sudan, seeking buried treasure in a land of poverty," Los Angeles Times, June 17, 2010, at http://articles.latimes.com/201 0/jun/17/world/la-fg-sudan-gold-diggers-201 0061 B.

24 Abyei: 113,000; Blue Nile: 155,000; South Kordofan: 200,000. "Abyei Crisis Situation Report No. 13," United Nations Office for the Coordination of Humanitarian Affairs, June 16,2011, at http://reliefweb.int/sites/reliefweb.int/files/resources/OCHA%20Situation%20Report%20%2313%200n%20 Abyei%20Crisis%2016%20June%202011.pdf; "South Kordofan and Blue Nile Situation Report No. 1B," United Nations Office for the Coordination of Humanitarian Affairs, September 12, 2011, at http://reliefweb.int/sites/reliefweb.int/files/resources/SKS-Blue%20Nile%20Situation%20report%20nO.pdf; "South Kordofan Situation Report No. 15," United Nations Office for the Coordination of Humanitarian Affairs, September 25, 2011, at http://reliefweb.int/ sites/reliefweb.int/files/resources/OCHA%20South%20Kordofan%20situation%20report%20no%2015.pdf.

25 Andrew Heavens, "Sudan hopes to double gold output to offset oil risk," Reuters, September 6,2010, at http://af.reuters.com/article/topNews/i dAFJ0E6850KB 20100906.

28 "2010 Sustainability Report," Caterpillar website, at http://www.caterpillar.com/cda/files/2838620/7/201 OSustainabilityReport.pdf.

CONFLICT RISK NETwORK I Sudan Company Report Quarter 1 I February 29, 2012 I 7.24 .'.

.. -_1 MORRISON. POe.RSTER LLP MORRISON I FOERSTER

MEMORANDUM

TO: File .(& FROM: Joseph L. Wyatt, Jr. - 61577/1

DATE: April 9,2007 ~ FILE: LA Dept of Water & Power Retirement Plan

RE: WPERP Board Policy When Addressing Social, Political and H~an Rights Issues .

This policy addresses the fmancial and administrative risks that the WPERP Board may face

ifone of the companies it has invested in has made corporate decisions that cause

"substantial 60ciai injury". It defmes that term and describes what the WPERP Board can do

about it and how to act quickly.

The Risk: Background

The WPERP Board is made up of lay volunteer people who are the sole protectors ofthe

funds that provide retirement money for current and future employees ofthe Los Angeles

Department of Water and Power. The Board members all serve in the City ofLos

Angeles - an international city that is deeply concerned with world-wide political, social

and human rights issues. Some of those issues, like the SudanlDarfur genocidal strife, occur

in countries where companies that WPERP may invest in may do business, directly or

indirectly.

When the WPERP Board invests WPERP funds, they must follow the standards set for all

retirement board members by California Constitution Article XVI § 17. The Constitution

13-895589 4-9-07

7.25 MORRISON I FOERSTER imposes fiduciary responsibility on the Board for investing WPERP's money, requires them to exercise a high degree ofcare, skill, prudence and diligence, requires them to diversify investments to avoid risk, and says that their duty to WPERP's members comes fIrst, before any other duty.

The Board invests for the long term in companies that they expect will ultimately attain better investment performance by (among other things) operating their businesses with high ethical, social and legal standards. However, WPERP's owne~hip interest in a cQmpany does not mean it approves - or even knows about - all ofa company's polieies, products, or actions. A company's possibly risky political and social conduct can only be taken into consideration to the extent that the conduct affects the financial health of the company, or to the extent that divestment ofa prior investment (or a decision not to make a particular investment) on accoWlt oftlJe company's conduct will not hurt the fund.

Substantial Social Injury

What is "substantial social injury"? Substantial soCial injUry is any specific action (including inaction) by a company that directly injures its employees, consumers, or other individuals or groups. It includes actions that violate, subvert, or frustrate the enforcement of American or intemationallaw aimed at protecting the health, safety, basic freedoms or human rights of individuals or groups. The term includes support of (i) govemnient-endorsed genocide (as identified by the United States Department of Treasury, Office of Foreign Assets Control

(OFAC» or (ii) other human rights violations that inflict substantial injury to health, safety or freedom.

2 Ja-895589 4-9-07

7.26 MORRISON \ FOERSTER

The company's action must be directly responsible for identifiable social injury to fall within

this definition. Company action that creates only a chance that social injury might occur is

not included. Likewise, a company doing business with other companies that are themselves

engaged in the substantial socially injurious activities is not included except in unusual

circumstances, as where the first company's business with the other companies is itself I I substantial and readily identified with the "substantial social injury" caused by the others. I I I The WPERP Board will examine any claim ofsubstantial social injury on a case-by-ease I basis, usitig the best available evidence and allowing parties to the claim reasonable time to I gather and present that evidence. The Board Will decide whether to address these issues in a I particular case, based on 1) the size ofthe interest that WPERP holds in the business; and I . - . 2) how serious is the business's violation ofWPERP policies. As stated above, a company's I- I l . possibly risky political and social conduct can only be taken into consideration to the extent that the conduct affects the financial health ofthe company, or to the extent that divest~ent

ofa prior investment (or a decision not to make a particular investment) on account ofthe

company's conduct will not hurt the fund.

What The WPERP Board Can Do

When informed ofa company's actions that violate WPERP policies, the Board will

promptly direct its-investment staffto seek a change in the company's behavior, using the

four steps described below, and to report on the status ofprogress at each subsequent Board

meeting until the issue is resolved to the Board's satisfaction. Each ofthese steps will be

undertaken promptly.

3 la-895589 4-9-07

7.27 ' .., ..:-:.:..:.::. ..;~.t:

MORRISON I FOERSTER

First, the WPERP Board will direct its investment staff to engage, in a constructive manner,

corporate management whose company's actions are reported to cause substantial social

injury. All forms ofengagement may be used ---: letter-writing, working with advocacy

groups, proxy voting, etc. The most important feature is for the engagement to start right

away and to request and obtain prompt replies from third parties. to all questions throughout

the process ofengagement.

Second, ifafter reasonable efforts have been made to constructively engage management, it

. is still clear that the action complained of has in fact occurred and is continuing and, in the

Bo~d's opinion, the responses and remedies are insufficient or nonresponsive, the Board

will direct its investment staffto tell its equity investment managers that, to the extent that

suitable investment alternatives are available and that substituting them in the investment

portfolio will result. in no loss in portfolio return or increase in risk, the managers shall

dispose ofthe interest (or avoid investing) in the violating company and invest in the

altemative(s) until such time as the violations ofthis policy cease.

Third, the Board will direct its investment staffto advise the Board when and ifth~ policy

violation has been remedied.

Fourth, upon the Board's concurrence that the policy violation has been remedied, the Board

will direct its investment staffto promptly inform the equity investment managers that the ". securities can thereafter be purchased.

4 la-895589 4-9-07

7.28