SB2155 SD1.DOC

SECTION 1. The legislature finds that the employees' retirement system should divest its investment portfolio of all coal, oil, and gas companies to demonstrate the State's commitment to addressing climate change, and to disassociate the State's interests from that of the fossil fuel industry.

At the 2010 United Nations Climate Change Conference in Cancun, Mexico, the nations of the world agreed that climate change presents a palpable danger that must be addressed, and agreed that the permissible increase in global average temperature is 3.6 degrees Fahrenheit (two degrees Celsius) over the preindustrial average temperature.

Despite the findings of the 2010 Climate Change Conference, the International Energy Agency recently reported that carbon emissions have increased to record levels since 2010, and the agency has projected that continuing this current trend of carbon emissions will lead to approximately double the agreed upon 3.6 degree Fahrenheit limit by 2050, which will result in drastic changes in the earth's climate.

Noting the International Energy Agency's report, Bevis Longstreth, a former Commissioner of the United States Securities and Exchange Commission, has recommended divestment of fossil fuel companies as an important strategy to help control carbon emissions and to reduce the financial impact on investment funds resulting from the inevitable policy changes that will be needed to reduce carbon emissions.

At the 2015 United Nations Climate Change Conference in Paris, France, the nations of the world again recognized the importance of keeping the increase in the global average temperature from pre-industrial levels to less than 3.6 degrees Fahrenheit, but also added an aspirational goal of keeping the increase in the global average temperature below 2.5 degrees Fahrenheit (1.5 degrees Celsius).

In May 2015, the University of Hawaii board of regents incorporated a policy to divest its endowment funds of fossil fuel investments citing the need to show leadership on the issue of climate change, and the need to address concerns that fossil fuel company values may decrease because the measures taken to address climate change in the future may impede fossil fuel assets from being developed.

Additionally, it is the judgment of this legislature that investment in coal, oil, and gas companies can discourage investment in competing renewable energy technologies, and therefore impedes Hawaii from achieving its renewable portfolio standard goal of one hundred per cent by 2045.

The purpose of this Act is to require the employees' retirement system to divest its investment portfolio of coal, oil, and gas companies within five years of this Act's effective date.

SECTION 2. Definitions. As used in this Act, the following definitions shall apply:

"Business operations" means engaging in commerce in any form, including by acquiring, developing, maintaining, owning, selling, possessing, leasing, or operating equipment, facilities, personnel, products, services, personal property, real property, or any other apparatus of business or commerce.

"Company" means any sole proprietorship, organization, association, corporation, partnership, joint venture, limited partnership, limited liability partnership, limited liability company, or other entity or business association, including all wholly-owned subsidiaries, majority-owned subsidiaries, parent companies, or affiliates of such entities or business associations, that exists for profit-making purposes.

"Direct holdings" means all securities of a company held directly by the public fund or in an account or fund in which the public fund owns all shares or interests.

"Indirect holdings" means all securities of a company held in an account or fund, such as a mutual fund, managed by one or more persons not employed by the public fund, in which the public fund owns shares or interests together with other investors not subject to this Act.

"Public fund" means the employees' retirement system of the State of Hawaii or the board of trustees in charge of the employees' retirement system.

"Scrutinized company" means a company identified by a Global Industry Classification Standard code in one of the following sectors:

(1) Coal and consumable fuels;

(2) Integrated oil and gas; or

(3) Oil and gas exploration and production.

SECTION 3. Identification of companies. (a) By January 1, 2017, the public fund shall make its best efforts to identify all scrutinized companies in which the public fund has direct or indirect holdings. Those efforts shall include, as appropriate:

(1) Reviewing publicly available information regarding scrutinized companies. In conducting the review, the public fund may rely on information provided by nonprofit organizations, research firms, international organizations, and government entities;

(2) Contacting asset managers contracted by the public fund that invest in scrutinized companies; and

(3) Contacting other institutional investors that have divested from or engaged with scrutinized companies.

(b) By the first meeting of the public fund after January 1, 2017, the public fund shall assemble a scrutinized companies list of all identified scrutinized companies in which the public fund has direct holdings.

(c) The public fund shall update the scrutinized companies list on a quarterly basis based on evolving information from, among other sources, those listed in subsection (a).

SECTION 4. Required actions. (a) The public fund shall take the following actions in relation to the companies on the scrutinized companies list in which the fund owns direct or indirect holdings:

(1) The public fund shall sell, redeem, divest, or withdraw all publicly-traded securities of each company identified in section 3 according to the following schedule:

(A) By July 1, 2017, at least twenty per cent of such assets shall be removed from the public fund's assets under management;

(B) By July 1, 2018, at least forty per cent of such assets shall be removed from the public fund's assets under management;

(C) By July 1, 2019, at least sixty per cent of such assets shall be removed from the public fund's assets under management;

(D) By July 1, 2020, at least eighty per cent of such assets shall be removed from the public fund's assets under management; and

(E) By July 1, 2021, one hundred per cent of such assets shall be removed from the public fund's assets under management.

(b) At no time shall the public fund acquire new assets or securities of companies on the scrutinized companies list.

(c) Notwithstanding anything herein to the contrary, subsections (a) and (b) shall not apply to indirect holdings in actively managed investment funds; provided that the public fund shall submit letters to the managers of such investment funds containing scrutinized companies requesting that they consider removing such companies from the investment fund or create a similar actively managed fund with indirect holdings devoid of such companies. If the manager creates a similar fund, the public fund shall replace all applicable investments with investments in the similar fund in an expedited timeframe consistent with prudent investing standards. For the purposes of this section, private equity funds shall be deemed to be actively managed investment funds.

SECTION 5. Reporting. (a) The public fund shall file a publicly-available report to the legislature that includes the scrutinized companies list within ninety days after the list is created.

(b) Annually thereafter, the public fund shall file a publicly-available report to the legislature that includes:

(1) All investments sold, redeemed, divested, or withdrawn in compliance with section 4;

(2) All prohibited investments under section 4; and

(3) Any progress made under section 4.

SECTION 6. Other legal obligations. With respect to actions taken in compliance with this Act, including all good faith determinations regarding companies as required by this Act, the public fund shall be exempt from any conflicting statutory or common law obligations, including any obligations in respect to choice of asset managers, investment funds, or investments for the public fund's securities portfolios. Nothing in this Act requires the public fund to take action as described in this Act unless the board of trustees of the public fund determines, in good faith, that the action is consistent with the responsibilities of the board as described in section 88-22.5(a)(1), Hawaii Revised Statutes.

SECTION 7. Reinvestment in scrutinized companies. Notwithstanding anything in this Act to the contrary, the public fund may cease divestment in a company on the scrutinized companies list and may reinvest in a company on the scrutinized companies list from which it divested pursuant to section 4 if, in the good faith judgment of the board of trustees of the public fund, the value for all assets under management by the public fund becomes equal to or less than 99.50 per cent (fifty basis points) of the hypothetical value of all assets under management by the public fund assuming no divestment for any company occurred under section 4. Cessation of divestment, reinvestment, or any subsequent ongoing investment authorized by this section is strictly limited to the minimum steps necessary to avoid the contingency set forth in the preceding sentence. For any cessation of divestment, reinvestment, or subsequent ongoing investment authorized by this section, the public fund shall provide a written report to the legislature, accompanied by supporting documentation that includes objective numerical estimates, of its decisions to cease divestment, reinvest, or remain invested in companies on the scrutinized companies list. The public fund shall update the report annually thereafter as applicable.

SECTION 8. If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 9. This Act shall take effect on January 7, 2059.

THE SENATE	S.B. NO.	2155
TWENTY-EIGHTH LEGISLATURE, 2016		S.D. 1
STATE OF HAWAII