SB801

SECTION 1. The legislature finds that factors relevant to environmental, social, and governance (ESG) investing, also known as sustainable investing, are vital to maximize the safe viability and performance of public funds. These socially responsible factors are indicative of the overall performance of an investment and are also strong indicators of an investment's long-term value. Public agencies and governments have a duty to recognize and evaluate these materially relevant factors.

The legislature also finds that sustainable investment practices include factors that contribute to the long-term health and viability of public investment funds, Hawaii's local economy, and tax revenues. This calls for the disclosure of investment fees that are paid to outside managers and other third-party entities, as well as the net economic income, including tax dollars and tax deductions, of investments in Hawaii's economy.

The purpose of this Act is to integrate sustainable investment practices and socially responsible factors into the investment decision-making, investment analysis, portfolio construction, due diligence, and investment ownership of public funds to minimize projected risks, more effectively execute ﬁduciary duties, contribute to a more just, accountable, and sustainable State, and ensure that Hawaii is getting the best economic beneﬁt possible from its investments through transparency in fee disclosure, tax payment, and local job creation.

It is the intent of the legislature that to the extent that Hawaii's public investment funds are providing capital for much-needed infrastructure and private capital investment in Hawaii, they do so only for those investments that adhere to and demonstrably uphold ESG socially responsible investment factors.

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"CHAPTER

Socially responsible investing

§ -1 Deﬁnitions. As used in this chapter:

"Alternative investment vehicle" means the limited partnership, limited liability company, or similar legal structure through which a public investment fund invests in an alternative investment.

"Carried interest" means any share of proﬁts from an alternative investment vehicle that is distributed to a fund manager, general partner, or related parties, including allocations of alternative investment vehicle profits received by a fund manager in consideration of having waived fees that fund manager might otherwise have been entitled to receive.

"Fund manager" means the general partner, managing manager, adviser, or other person or entity with primary investment decision-making authority over an alternative investment vehicle and related parties of the fund manager.

"Operational person" means any operational partner, senior advisor, or other consultant or employee whose primary activity for a relevant entity is to provide operational or back office support to any portfolio company of any alternative investment vehicle, account, or fund managed by a related person.

"Portfolio companies" means individual portfolio investments made by the alternative investment vehicle.

"Principles for Responsible Investment" means a set of six investment principles supported by the United Nations that offer actions for incorporating environmental, social, and governance (ESG) factors into investment practice of which the employees' retirement system officially became a signatory of on May 13, 2018.

"Private capital vehicle" means the limited partnership, limited liability company, or similar legal structure through which a public investment fund invests in a private capital and certain other alternative investments. "Private capital vehicle" includes private equity, venture capital, infrastructure and real estate funds, but does not include liquid assets such as hedge funds or real estate investment trusts.

"Public investment fund" means an entity with management and oversight or fiduciary responsibility over the endowment funds of the university of Hawaii, funds of the employees' retirement system, Hawaii employer-union health benefits trust fund, Hawaii tobacco prevention and control trust fund, Hawaii children's trust fund, State of Hawaii endowment fund, or any other endowment, trust, or investment fund established by statute or maintained by state agencies or offices.

"Related party" means:

(1) Any related person;

(2) Any operational person;

(3) Any entity of which more than ten per cent of the ownership is held directly or indirectly, whether through other entities or trusts, by a related person or operational person regardless of whether the related person or operational person participates in the carried interest received by the general partner or the special limited partner; or

(4) Any consulting, legal, or other service provider regularly engaged by portfolio companies of an alternative investment vehicle, account, or fund managed by a related person and that also provides advice or services to any related person or relevant entity.

"Related person" means any current or former employee, manager, or partner of any relevant entity that is involved in the investment activities or accounting and valuation functions of the relevant entity or any family member of a current or former employee, manager, or partner of the relevant entity.

"Relevant entity" means the general partner, any separate carry vehicle, the investor advisor, any of the investment advisor's parent or subsidiary entities, or any similar entity related to any other alternative investment vehicle, account, or fund advised or managed by any current or former related person.

"Socially responsible investing" means an investment strategy that considers factors that may have a material and relevant ﬁnancial impact on the safety or performance of an investment and are complementary to fiduciary duty, financial factors, and ﬁnancial accounting, including environmental impact, social impact, and governance of investment.

"Sustainable investing" includes socially responsible investing but also includes a focus on long—term sustainable business, investment practices, a three hundred sixty perspective on economic gains, stakeholder capitalism, fees, and taxes.

§ -2 Socially responsible investing. (a) Notwithstanding any other law to the contrary, each public investment fund shall develop, publish, and implement socially responsible investment policies applicable to the management of all public funds under the public investment fund's control. Socially responsible investment policies may be incorporated in existing investment policies developed, published, and implemented by the public investment fund.

(b) A socially responsible investment policy shall include material, relevant, and decision-useful sustainability factors to be considered when evaluating investment decisions, including:

(1) Corporate governance and leadership factors, including the independence of boards and auditors, the expertise and competence of corporate boards and executives, systemic risk management practices, executive compensation structures, transparency and reporting, leadership diversity, regulatory and legal compliance, shareholder rights, and ethical conduct;

(2) Environmental factors that may have an adverse or positive financial impact on investment performance, including greenhouse gas emissions, air quality, energy management, water and wastewater management, waste and hazardous materials management, and ecological impacts;

(3) Social capital factors that impact relationships with key outside parties, such as local communities, the public, and government, and may impact investment performance, including human rights, customer welfare, customer privacy, data security, access and affordability, selling practices and product labeling, community reinvestment, and community relations;

(4) Human capital factors that recognize that the workforce is an important asset to delivering long-term value, including labor practices, responsible contractor and responsible bidder policies, employee health and safety, employee engagement, diversity and inclusion, and incentives and compensation; and

(5) Innovation factors that reﬂect an ability to plan for and forecast opportunities and risks, including physical impacts of climate change.

(1) Direct ﬁnancial impacts and risks;

(2) Legal, regulatory, and policy impacts and risks;

(3) Assessment against industry norms, best practices, and competitive drivers; and

(4) Stakeholder engagement.

(d) Socially responsible policies shall support and not supplant fiduciary responsibility to the members and beneficiaries of any retirement system or trust fund affected by this chapter.

(e) A public investment fund shall adopt and implement an investment policy based on nationally recognized or internationally recognized framework that addresses socially responsible factors, including but not limited to the Principles for Responsible Investment, to satisfy the requirements of this chapter. A public investment fund that has adopted a policy that meets the same or substantially similar criteria as provided in this chapter, such as the Principles for Responsible Investment framework, may utilize that policy to satisfy the requirements of this chapter.

(f) Nothing in this chapter shall prohibit a public investment fund from integrating additional factors into its investment decision-making, investment analysis, portfolio construction, due diligence, and investment ownership of public funds.

(g) This chapter shall not apply to financial institution time deposits or financial institution processing services.

§ -3 Disclosure and reporting. (a) It is the intent of the legislature to increase the transparency of investment portfolios, fees paid, and the net economic beneﬁt or loss to the Hawaii economy by any investment made by private capital vehicles in which State public funds are invested.

(b) Each public investment fund shall submit a report to the legislature no later than twenty days prior to the convening of the regular session of 2022, and each regular session thereafter, on the following:

(1) The gross rate of return and net rate of return of each alternative investment vehicle, since inception, in which the public investment fund participates. The public investment fund shall report the gross rate of return and net rate of return; provided that for purposes of this paragraph, "gross rate of return" means the internal rate of return for the alternative investment vehicle prior to the reduction of fees and expenses described in this subsection;

(2) The gross economic benefit and net economic beneﬁt of each private capital vehicle on the local economy, including taxes and jobs, subsidies, and lobbying. The public investment fund shall report the information required by section -2;

(3) A summary of the proportion of its investments in accordance with socially responsible investment policies pursuant to this Act. If an entity has an existing annual investment report that includes a summary of the proportion of its investments in accordance with the socially responsible investment policies pursuant to this Act, it may publish that report to meet the requirements of this section;

(4) The fees and expenses that the public investment fund pays directly to the alternative investment vehicle, fund manager, or related parties;

(5) The public investment fund's pro rata shares of fees and expenses not included in paragraph (1) that are paid from the alternative investment vehicle to the fund manager or related parties. The public investment fund may independently calculate this information based on information contractually required to be provided by the alternative investment vehicle to the public investment fund, in which case the alternative investment vehicle shall not be required to provide the information identiﬁed in this paragraph;

(6) The public investment fund's pro rata share of carried interest distributed to the fund manager or related parties;

(7) The public investment fund's pro rata shares of aggregate fees and expenses paid by all the portfolio companies held within the alternative investment vehicle to the fund manager or related parties;

(8) Each private capital vehicle in which the public investment fund invests shall disclose:

(A) Any investments that the fund has made, directly or indirectly, in the State;

(B) Jobs created or lost by those investments, whether or not those jobs come with union representation, and tax revenues generated from those jobs;

(D) All tax beneﬁts, deductions, or subsidies, received by, or applied for on the part of, those investments;

(E) Any additional subsidiaries that these investments have received from the state or municipalities;

(F) Any and all lobbying fees paid in association with these investments or by any related party or entity; and

(G) An assessment of the environmental and social impact of those investments, including, where appropriate, any environmental impact study or draft environmental impact study that has been filed in association with these investments.

(b) The department or agency with oversight over the respective public investment fund shall publish an annual list of public investment funds that fail to submit a report as required pursuant to this Act."

SECTION 3. This Act shall take effect on July 1, 2021.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	801
THIRTY-FIRST LEGISLATURE, 2021
STATE OF HAWAII