By Carolyn Cohn
LONDON (Reuters) - Fuzzy guidelines on ethical investing and aid donors' timid response to Uganda's new anti-gay law have reassured fund managers and private equity firms about continuing to invest in the newly oil-rich east African country.
Uganda signed legislation this year which strengthened punishments for anyone caught having gay sex, imposing jail terms of up to life for "aggravated homosexuality" - including sex with a minor or while HIV-positive. It also criminalized lesbianism for the first time.
The law - slightly watered down from original plans a few years ago that included the death penalty for those considered worst offenders - drew high-profile criticism worldwide.
The White House said it was reviewing its relationship with Uganda's government, and Richard Branson, the billionaire founder of the Virgin Group conglomerate, said he had been seriously considering investing in Uganda but would not now do so. (http://www.virgin.com/richard-branson/let-people-love-whoever-they-want)
But so far, the new law has resulted in the redirection of just $118 million or so in aid, unlikely to make a big dent in the country's budget. And guidelines on socially responsible investing do not necessarily cover discrimination by sexuality.
Zain Latif, founder of investment holding company TLG Capital, which invests in frontier market companies, has two ongoing projects in Uganda.
"There has been a lot more talk than action," Latif said, pointing to a relatively muted reaction to the law in Uganda's exchange rate.
"With Africa you have a lot of noise - if you focus on why we are investing in Africa, that has not really changed."
The attractions of Uganda include a likely 7 percent growth path, according to the World Bank, and as with many other frontier markets, a young and growing population, rising middle class and consumer demand and high returns on domestic debt.
Uganda has not drawn as many foreign investors as other sub-Saharan African economies such as Nigeria or Kenya.
Its small stock market is not part of the benchmark MSCI frontiers index, and foreigners are estimated to own less than 10 percent of its domestic bond market.
But the discovery of oil in Uganda in the past few years has contributed to a 40 percent jump in foreign direct investment to east Africa in 2012, to more than $6 billion. Private equity firms see potential for juicy returns.
The government estimates reserves at 3.5 billion barrels and this year signed a deal with three oil firms, Britain's Tullow, France's Total and China's CNOOC to get the oil out of the ground. Five consortia and Japan's Marubeni are currently bidding for a $2.5 billion refinery project.
Homosexuality is taboo in almost all African countries and illegal in 37, including Uganda, where rights groups say gay people have long risked jail. Fear of violence, imprisonment and loss of jobs means few gays in Africa come out.
A total of 1,250 investors managing $34 trillion in assets worldwide have signed up to the United Nations' Principles for Responsible Investment (PRI), which encourage them to consider environmental, social and governance issues in investing.
But the UN PRI says it does not prescribe signatories to look at specific issues. Companies may choose, for example, to abide by the International Labour Organisation's convention No. 100 on equal pay for equal work, and convention no. 111 against employment discrimination.
But even these do not explicitly discuss sexuality. Foreign investors are prominent in many countries where homosexuality is illegal or laws are seen as anti-gay such as Nigeria and Russia. (For GRAPHIC on same-sex laws around the world, see http://link.reuters.com/tuh27v)
David Mcilroy, chief investment officer of sustainable Africa equity fund Alquity in London, does not have any holdings in Uganda, due to the undeveloped nature of the stock market.
His focus when looking for sustainable firms, however, is on how companies treat staff and suppliers and how they operate within local communities.
"For some institutional investors, depending on where they are based, the law might be an issue," he said. "It's not an issue for us at the moment."
Some companies have taken a local stand. Orange Uganda, a unit of France Telecom, suspended advertising in a local tabloid newspaper for its exposure of alleged gays.
But analysts said others were unlikely to follow suit, given the law is very popular in Uganda.
There also appears little reputational risk in investing in Uganda, when most of the world's governments and aid organisations are doing so.
Uganda's $20 billion economy has traditionally been heavily dependent on aid support. But the percentage of the budget which comes from aid has dropped below 20 percent, analysts say, from as much as 40 percent more than 10 years ago.
This is due to withdrawals following a corruption scandal in 2012, but also to a gradual rise in domestic financing as the country's economy has expanded and tax revenues grown.
The World Bank and donors in Sweden, Norway, Denmark and the Netherlands, have suspended or redirected aid that had been bound for government worth over $118 million due to the law.
Complicating the issue for Washington is the fact that Uganda has soldiers fighting Islamist militant group al Shabaab in Somalia, helping the United States, which wants action but not its own troops on the ground. The U.S. military last month also deployed planes, troops and air crew in Uganda to help find elusive warlord Joseph Kony.
U.S. administration officials were quoted as saying this did not signal the White House was weakening its criticism of the anti-gay legislation. But analysts were doubtful, particularly as they see superpowers such as the United States battling with China for control of Africa's resources.
"Security concerns in east Africa will temper U.S. criticism of Uganda's human rights record and provide (President) Museveni with greater legitimacy," said Sarah Collier, senior Africa analyst at political risk consultancy Maplecroft.
But some analysts thought it was too soon to be complacent about Uganda, particularly as investors can take months to make investment decisions. While the sums involved in the removal of aid may be small, more withdrawals may come as governments reconsider, or support may stop once existing projects end.
The action of withdrawing or redirecting aid, however small, also sends a warning, said Stuart Culverhouse, chief economist at frontier markets broker Exotix.
"That signal is stronger than the actual financial implications in terms of affecting what investors want to do. It's too early to say if that's (factored) in investor attitudes."
(Additional reporting by Elias Biryabarema in Kampala; editing by Anna Willard)