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Investing

States acting to deflate movement that seeks to hurt Israeli economy

Alicia Munnell said she’s firmly against social investing laws or policies with the goal of restricting investment.

Alarmed at what they say is a coordinated effort to damage Israel's economy, legislators and governors in approximately half the states have acted to punish companies that support the boycott, divestment and sanctions movement.

Through legislation and executive orders, the states' responses include laws that restrict public pensions plans from investing in companies deemed to support anti-Israel economic boycotts. Some states authorize pension plans to divest from companies that violate their respective laws. Other states, through laws and governors' executive orders, prohibit state agencies from doing business with BDS supporters, according to data compiled by several sources including a state government trade group and legal and public interest organizations.

Most laws and executive orders have been in effect for less than four years, and a sampling of state action by Pensions & Investments reveals few divestitures by public pension plans.

Still, the broad actions by these states have prompted some pension experts to argue that politics shouldn't interfere with the fiduciary duties of public plan managers.

"I don't like any of this," said Alicia Munnell, director of the Center for Retirement Research at Boston College.

"The appropriate place for this to play out is not the pension plans for public workers," she added. "They're trying to make foreign policy through the pension funds." Ms. Munnell said her disapproval is not restricted to states' anti-BDS laws. Any form of "social investing" law or policy restricting pension funds' investment strategies represent "diversions" from plan managers' fiduciary duties.

Although the number of anti-BDS laws and executive orders has grown, "I've heard very little from my membership," said Keith Brainard, the Georgetown, Texas-based research director at the National Association of State Retirement Administrators. "This relative absence indicates there may be more symbolism than substance."

In some cases, the laws directed at public pension plans can create tension for the plan managers.

Colorado's law requires the board of trustees of the Colorado Public Employees Retirement Association, Denver, to prepare a list of restricted companies and prohibit future investments in them and, if warranted, divest from the companies.

In January, trustees of the $49 billion plan issued a statement saying that although they will follow the law, they worry about interference with their fiduciary duties.

"Once a divestment mandate is imposed to address one issue, the resulting 'slippery slope' makes differentiation among the remaining issues contentious and divisive," they wrote.

Ordering a divestment "comes with significant associated costs," the trustees added. They cited hiring a search firm to check for possible violators, buying and selling securities, conducting due diligence for finding replacement securities or funds, and creating strategies that exclude certain investments.

Few divestitures

According to a PERA September 2018 report, the latest public document, one company was placed on its restricted list in September 2017 but removed it in April 2018. The report provided no explanation. PERA hasn't divested any companies.

Like other public pension plans subject to Israel boycott laws, PERA has a process for researching and identifying suspected violators. It hires an independent research firm, uses publicly available information, contacts asset managers and talks to peers.

A company can be removed from the restricted list "If PERA becomes aware, through further research and engagement, that a restricted company has ceased activity of economic prohibitions against Israel," according to PERA regulations. If a company remains on the list for 180 days, the law says PERA must divest.

New Jersey has a law that requires the $70.9 billion New Jersey Pension Fund, Trenton, to divest companies that violate the BDS law, which was enacted in 2016.

In November 2017, the state Division of Investment, which manages investments for the pension fund, announced the divestment of one company for "engaging in actions that are intended to penalize, inflict economic harm on, or otherwise limit commercial relations with Israel." The report didn't discuss specific actions by the company.

The division and the State Investment Council conduct research that includes "utilizing an external consultant that regularly checks for potentially prohibited companies and (that) updates its findings periodically," said William Skaggs, a spokesman for the state treasurer's office. "Those companies are not identified publicly, although the divestments are reported annually to the Legislature."

New Jersey and Colorado illustrate how the same company can receive different treatment due to different laws. The New Jersey Pension Fund in 2018 said it would divest Danske Bank, which was placed on — and then removed from — the Colorado PERA restricted list.

Iowa enacted a law in 2016 that requires the $31.4 billion Iowa Public Employees' Retirement System, Des Moines, to prohibit new investments with companies that support BDS, and, if warranted, divest existing investments.

According to a November 2018 report, the latest public document, IPERS has placed one company on a restricted list and has set a divestment date of Nov. 11, 2019. The report didn't describe why the company — DNB ASA, a Norwegian financial services company — was cited. The IPERS investment is through a collective trust.

When IPERS conducts research, it also contacts "scrutinized companies," asking them to explain their practices regarding Israel. If they are placed on a "prohibited companies list," they can be removed "based on the receipt of new information," says an IPERS website describing the system's policies.

"IPERS is also required to divest of any securities issued by companies on the list that IPERS holds directly within 18 months," according to the website. For indirect holdings, the IPERS board has discretion for divesting.

Making the list

North Carolina's 2017 law, "Divesting From Companies Boycotting Israel," requires the state treasurer to prepare a restricted company list, giving the companies a chance to explain their policies and practices before being placed on the list.

Inclusion "would make the company ineligible for state investment, may result in the company becoming subject to divestment by the North Carolina Retirement Systems, and may affect the company's ability to conduct business with the state and its subdivisions," the law says.

A company may be removed from the list if it ceases its engagement in a boycott of Israel, the law says.

According to an October 2018 state report, 13 companies are on the restricted company list, which affects both state contracting and the $98.2 billion North Carolina Retirement Systems, Raleigh.

But the pension system did not have any investments in these companies, said Stephanie Hawco, communications manager for the state treasurer's department.

In Florida, a 2016 law requires the $194.1 billion Florida State Board of Administration, Tallahassee, to create a list of "scrutinized" companies that boycott Israel or whose actions "limit commercial relations with Israel or Israeli-controlled territories in a discriminatory manner."

According to the latest public records, six companies are on the BDS list, some going back to August 2016 and one just added as of January 2019.

"There is no divesting," said Tracy Stewart, corporate governance manager of research. "Our law is a future investment prohibition law."

The law covers direct holdings. Indirect holdings — such as index funds or mutual funds — are exempt.

If companies remain on the list for 90 days or more, public fund investments are prohibited. Companies can be taken off the list — several have been removed — if they prove they have ceased their boycott of Israel, the law says.n