SB2388

SECTION 1. The legislature finds that on February 24, 2022, the Russian Federation launched an unlawful and unprovoked full-scale invasion of Ukraine, resulting in the displacement of millions of Ukrainian citizens, allegations of war crimes and crimes against humanity, and other atrocities committed by members of Russia's forces. The unprovoked invasion of Ukraine follows three decades of Russian interference, including the illegal seizure of Ukrainian land in Crimea, armed Russian-backed separatists leading to thousands of deaths, election interference, cyberattacks and disinformation campaigns abroad, violations of international arms control agreements, and usage of chemical weapons to attempt assassinations. On March 2, 2022, the United Nations General Assembly passed Resolution ES-11/1, condemning Russia's invasion of Ukraine, demanding a full withdrawal of Russian forces, and reversal of Russia's decision to recognize the self-declared People's Republics of Donetsk and Luhansk. Concurrently, the International Criminal Court Prosecutor opened an investigation into allegations of war crimes in Ukraine, including crimes against humanity and genocide. According to the State Department's "Ukraine 2022 Human Rights Report", observers have also documented reports of mass and unlawful killings, including extrajudicial killings; forced disappearances; torture and cruel, inhumane, or degrading treatment or punishment; arbitrary arrest or detention; forced separation of families; and forced deportation and adoptions of Ukraine's children to Russian families. The ongoing invasion has killed nearly ten thousand Ukrainian civilians as of September 2023. Additionally, nearly one-third of Ukraine's population has been displaced since the Russian invasion began, with 6.6 million refugees recorded across Europe and approximately the same number displaced internally.

On February 23, 2023, the United Nations General Assembly adopted a new resolution calling for an immediate end to the war in Ukraine. Resolution ES-11/L.7 urges member states to cooperate in solidarity to address the global impacts of the war on food security, energy, finance, environmental issues, and nuclear security as a result of the ongoing conflict. The resolution also affirmed the need for accountability for serious crimes under international law committed in Ukraine through an independent national or international investigations and prosecutions. Despite domestic and international calls to end the invasion of Ukraine, the ongoing war continues to perpetuate widespread and systemic atrocities, including allegations of torture and sexual violence against civilians. As of May 2023, the progress of peace negotiations remains unclear.

The legislature further finds that since 2014, the federal government has imposed sanctions against the government of Russia relating to its illegal annexation of crimea. These actions are monitored through the United States Treasury Department's Office of Foreign Assets Control. On February 21, 2022, President Joseph R. Biden issued Executive Order 14065, prohibiting certain new investments made by United States individuals, financial transactions by foreign individuals, and importation and exportation of goods between the United States and the Donetsk People's Republic and Luhansk People's Republic. Following the invasion of Ukraine, the United States imposed over two thousand five hundred sanctions, export controls, and other economic measures, including sanctions on senior Russian government officials, Russian banking assets, and Russian military manufacturing firms. Economic action taken by the federal government has also impacted Belarus, which has supported and facilitated Russia's invasion of Ukraine. The Office of Foreign Assets Control has sanctioned nearly one-fifth of Belarus' financial sector. The Russia divestment movement encompasses nearly one thousand foreign companies who have reportedly ceased or curtailed operations in Russia since the start of the war, resulting in further material risk to remaining investors.

Therefore, it is a fundamental responsibility of the State to decide where, how, and by whom financial resources in its control should be invested, taking into account numerous pertinent factors. In respect to investment resources in its control and to the extent reasonable, it is the prerogative and desire of the State not to participate in an ownership or capital-providing capacity with entities that provide significant practical support for the unlawful and unprovoked invasion of Ukraine, including certain non-United States companies presently doing business in Russia and Belarus. It is the judgment of the legislature that this Act should remain in effect as it continues to be consistent with, and does not unduly interfere with, the foreign policy of the United States as determined by the federal government. Additionally, it is the judgment of the legislature that mandatory divestment of public funds from certain companies is a measure that should be employed sparingly and judiciously.

Accordingly, the purpose of this Act is to prohibit the employees' retirement system from acquiring securities of companies that have active business operations with Russia and Belarus.

SECTION 2. Definitions. As used in this Act:

"Active business operations" means all business operations that are not inactive business operations.

"Business operations" means engaging in commerce in any form in Russia or Belarus, 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 entities or business associations, that exists for profit-making purposes.

"Complicit" means taking actions during any preceding twenty-month period that have directly supported or promoted Russia's or Belarus' actions in the Russo-Ukrainian War, including but not limited to preventing Ukraine's victimized population from communicating with each other; encouraging Ukrainian citizens to speak out against an internationally-approved security force for Ukraine; actively working to deny, cover up, or alter the record on human rights abuses in Ukraine; or other similar actions.

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

"Government of Belarus" means the government in Minsk, Belarus, or any successor government formed on or after February 24, 2022.

"Government of Russia" means the government in Moscow, Russia, or any successor government formed on or after February 24, 2022.

"Inactive business operations" means the continued holding or renewal of rights to property previously operated for the purpose of generating revenues but not presently deployed.

"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, where the public fund owns shares or interests together with other investors not subject to this Act.

"Marginalized populations of Ukraine" means the portion of the population in the Donetsk People's Republic and Luhansk People's Republic; the portion of the population of Kherson and Zaporizhzhia oblasts illegally annexed by Russia; the portion of the population internally displaced as a result of the ongoing Russo-Ukrainian War; and other similarly underserved groups of Ukraine.

"Military equipment" means weapons, arms, military supplies, and equipment that readily may be used for military purposes, including but not limited to radar systems or military-grade transport vehicles; or supplies or services sold or provided directly or indirectly to any force actively participating in armed conflict in the Russo-Ukrainian War.

"Mineral extraction activities" means exploring, extracting, processing, transporting, or wholesale selling or trading of elemental minerals or associated metal alloys or oxides (ore), including gold, copper, chromium, chromite, diamonds, iron, iron ore, silver, tungsten, uranium, and zinc, as well as facilitating activities, including by providing supplies or services in support of mineral extraction activities.

"Oil-related activities" means owning rights to oil blocks; exporting, extracting, producing, refining, processing, exploring for, transporting, selling, or trading of oil; constructing, maintaining, or operating a pipeline, refinery, or other oil-field infrastructure; and facilitating oil-related activities, including by providing supplies or services in support of oil-related activities; provided that the mere retail sale of gasoline and related consumer products shall not be considered oil-related activities.

"Power production activities" means any business operation that involves a project commissioned whose purpose is to facilitate power generation and delivery, including but not limited to establishing power-generating plants or hydroelectric dams, selling or installing components for the project, providing service contracts related to the installation or maintenance of the project, as well as facilitating power production activities, including by providing supplies or services in support of power production activities.

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

"Scrutinized company" means any company that meets any of the following criteria:

(1) The company has business operations that involve contracts with or provision of supplies or services to the governments of Russia or Belarus; companies in which the governments of Russia or Belarus have any direct or indirect equity share; governments of Russia- or Belarus-commissioned consortiums or projects; or companies involved in government of Russia- or Belarus-commissioned consortiums or projects:

(A) A material portion of the company's revenues or assets linked to Russia or Belarus involve oil-related activities or mineral extraction activities; the company does not contract directly with governments of Russia or Belarus or a project or consortium created exclusively by that government; and the company has failed to take substantial action; or

(B) A material portion of the company's revenues or assets linked to Russia or Belarus involve power production activities; most of the activities do not include projects whose intent is to provide power or electricity to the marginalized populations of Ukraine; and the company has failed to take substantial action;

(2) The company is complicit in the Russo-Ukrainian War; or

(3) The company supplies military equipment within Russia or Belarus, unless it clearly shows that the military equipment cannot be used to facilitate offensive military actions in Ukraine or the company implements rigorous and verifiable safeguards to prevent use of that equipment by forces actively participating in armed conflict, for example, through post-sale tracking of the equipment by the company, certification from a reputable and objective third party that the equipment is not being used by a party participating in armed conflict in Ukraine, or sale of the equipment solely to any internationally-recognized peacekeeping force or humanitarian organization.

Notwithstanding anything in this Act to the contrary, a social development company that is not complicit in the Russo-Ukrainian War shall not be considered a scrutinized company.

"Social development company" means a company whose primary purpose in Ukraine is to provide humanitarian goods or services, including medicine or medical equipment, agricultural supplies or infrastructure, educational opportunities, journalism-related activities, information or information materials, spiritual-related activities, services of a purely clerical or reporting nature, food, clothing, or general consumer goods that are unrelated to oil-related activities, mineral extraction activities, or power production activities.

"Substantial action" means adopting, publicizing, and implementing a formal plan to cease scrutinized business operations within one year and to refrain from any new business operations; undertaking significant humanitarian efforts on behalf of one or more marginalized populations of Ukraine; or through engagement with the government of Ukraine, materially improving conditions for the genocidally victimized population in Ukraine.

SECTION 3. Identification of companies. (a) By January 1, 2025, the public fund shall make its best efforts to identify all scrutinized companies where the public fund has direct holdings. Those efforts shall include, as appropriate:

(1) Reviewing publicly available information regarding companies with business operations in Russia or Belarus. 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 companies with business operations in Russia and Belarus; and

(3) Contacting other institutional investors that have divested from or engaged with companies that have business operations in Russia or Belarus.

(b) By April 1, 2025, the public fund shall assemble all scrutinized companies identified where the public fund has direct holdings into a "scrutinized companies list".

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

SECTION 4. Required actions. (a) The public fund shall adhere to the following procedures for companies on the scrutinized companies list:

(1) The public fund shall determine the companies on the scrutinized companies list where the public fund owns direct holdings;

(2) For each company newly identified with active business operations where the public fund owns direct holdings, the public fund shall send a written notice informing the company of its scrutinized company status and that it may become subject to divestment by the public fund. The notice shall offer the company the opportunity to clarify its Russia- or Belarus-related activities and shall encourage the company, within ninety days, to either cease its scrutinized business operations or convert their operations to inactive business operations to avoid qualifying for divestment by the public fund;

(3) If, within ninety days following the public fund's first engagement with a company, that company ceases scrutinized business operations, the company shall be removed from the scrutinized companies list and this section shall cease to apply to it unless it resumes scrutinized business operations. If, within ninety days following the public fund's first engagement, the company converts its scrutinized active business operations to inactive business operations, the company shall be subject to all provisions pursuant to this section; and

(4) If, after ninety days following the public fund's first engagement with a company following the effective date of this Act, that company continues to have scrutinized active business operations, the company shall be subject to subsection (b), unless the board of trustees of the public fund determines that the company has made sufficient progress towards ceasing its scrutinized business operations or converting their operations to inactive business operations. The public fund shall continue to monitor and review the progress of the company on a quarterly basis until that company has ceased its scrutinized business operations or converted their operations to inactive business operations. A company that fails to cease its scrutinized business operations, to convert their operations to inactive business operations, or to continue to make sufficient progress towards cessation or conversion by the next time interval shall be subject to subsection (b).

(b) If a company on the scrutinized companies list fails to cease scrutinized active business operations in the time described in subsection (a)(4), the public fund shall sell, redeem, divest, or withdraw all publicly-traded securities of the company, except as provided below, within eighteen months after the company becomes subject to this subsection. The public fund may relax the divestment schedule if the public fund determines divestment from particular companies or funds will likely, in the good faith judgment of the board of trustees of the public fund, result in public fund losses exceeding the 99.50 per cent mark as defined in section 7. If a circumstance arises, the public fund shall submit a report to the legislature setting forth the reasons and justification, accompanied by supporting documentation that includes objective numerical estimates, for its decision to relax the divestment schedule. The report shall be updated annually as applicable.

(c) At no time shall the public fund acquire securities of companies on the scrutinized companies list that have active business operations, except as provided in subsections (d) and (e).

(d) No company that the United States affirmatively declares to be excluded from its present or any future federal sanctions regime relating to Russia or Belarus shall be subject to divestment or investment prohibition pursuant to subsections (b) and (c).

(e) Notwithstanding any provision of this Act to the contrary, subsections (b) and (c) shall not apply to indirect holdings in actively managed investment funds.

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

(b) The public fund shall submit a publicly-available report annually to the legislature that includes:

(1) A summary of correspondence with companies engaged by the public fund under section 4;

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

(3) All prohibited investments under section 4; and

(4) 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 shall require 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 certain companies with scrutinized active business operations. Notwithstanding any provision of this Act to the contrary, the public fund shall be permitted to cease divesting from certain scrutinized companies pursuant to section 4 and reinvest in certain scrutinized companies from which it previously 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 (50 basis points) of the hypothetical value of all assets under management by the public fund assuming no divestment for any company had occurred under section 4. Cessation of divestment, reinvestment, or any subsequent ongoing investment authorized by this section shall be 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, for its decisions to cease divestment, reinvest, or remain invested in companies with scrutinized active business operations. The report shall be updated annually thereafter as applicable. This section shall not apply to reinvestment in companies that have ceased scrutinized active business operations.

SECTION 8. Provisions for expiration of this Act. This Act shall be repealed upon the occurrence of any of the following:

(1) The Congress or President of the United States declares that the Russo-Ukrainian war has been halted for at least twelve months;

(2) The United States revokes all sanctions imposed against the governments of Russia and Belarus;

(3) The Congress or President of the United States declares that the governments of Russia and Belarus have honored commitments to cease attacks on civilians, demobilize and demilitarize 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

(4) The Congress or President of the United States, through legislation or executive order, declares that mandatory divestment of the type provided for in this chapter interferes with the conduct of United States foreign policy.

SECTION 9. If any one or more provisions, sections, subsections, sentences, clauses, phrases, or words of this Act or the application to any person or circumstance is found to be invalid, illegal, unenforceable, or unconstitutional, the same is declared to be severable and the balance of this Act shall remain effective and functional notwithstanding the invalidity, illegality, unenforceability, or unconstitutionality.

The legislature declares that it would have passed this Act, and each provision, section, subsection, sentence, clause, phrase or word thereof, irrespective of the fact that any one or more provisions, sections, subsections, sentences, clauses, phrases, or words be declared invalid, illegal, unenforceable or unconstitutional, including but not limited to each of the engagement, divestment, and prohibition provisions of this Act.

SECTION 10. This Act shall take effect on July 1, 2024.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	2388
THIRTY-SECOND LEGISLATURE, 2024
STATE OF HAWAII