Agenda Item 6A
October 25, 2016
Introduction
MEMORANDUM
October 21,2016
TO:
FROM:
SUBJECT:
County Council
Robert H. Drummer, Senior Legislative Attorney
~
Introduction:
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions, sponsored by Lead Sponsors
Council Vice President Berliner and Councilmember Navarro and Co-Sponsor Councilmember EIrich, is
scheduled to be introduced on October 25,2016. A public hearing is tentatively scheduled for November
22 at 1:30 p.m.
Bill 44-16 would restrict the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees from investing in certain businesses holding the largest amount of fossil
fuel reserves under certain circumstances. The Bill would also require both Boards to research and adopt
a socially responsible policy for investing.
Background
The Board of Investment Trustees (BIT) manages prudent investment programs for the trust fund
established to pay retirement benefits guaranteed under the Employees' Retirement Plans. The
Consolidated Retiree Health Benefits Trust Board of Trustees (CRHBT) Board is responsible for investing
the funds designated to pay for all or a portion of benefits provided under the County retiree benefit plans
or a County-funded agency retiree benefit plan, such as retiree health insurance.
.
Bill 44-16 would be the third time the County enacted a law requiring the BIT to sell certain types
of investments to further important government objectives. In 1986, the Council, in Bill 23-86, restricted
certain investments in companies doing business in the Republic of South Africa or Namibia due to the
racial segregation or apartheid laws in those nations. This restriction was repealed when those nations
repealed their apartheid laws. The Maryland Court of Appeals upheld a similar restriction on investments
in companies doing business in the Republic of South Africa and Namibia in
Board ofTrustees
v.
Mayor
&
City Council ofBaltimore City,
317 Md. 72 (1989).
In 2008, the Council, in Bill 3-08, restricted certain investments in companies doing business in
Sudan in order to influence the Government of Sudan to end the atrocities in Darfur. State and local laws
requiring the divestment of holdings in companies doing business in Sudan or other nations had been
challenged in court on the basis of Federal preemption. The Supreme Court struck down a Massachusetts
statute that required the state to boycott certain companies doing business with or in Burma in
Crosby
v.
National Foreign Trade Council,
530 US 363 (2000). The Supreme Court struck down the state law,
holding that it was preempted by federal statutes imposing sanctions on Burma and therefore violated the
Supremacy Clause of the U.S. Constitution. Similarly, the U.S. District Court in Illinois issued an
injunction against the Illinois Sudan Act in
National Foreign Trade Council
v.
Giannoulias, 523
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F.Supp.2d 731 (N.D. Ill. 2007). The Illinois statute in question prohibited the state from depositing funds
in any financial institution unless it could certify that it did not loan money to the government of Sudan
or certain companies doing business in Sudan and also prohibited state and local pension funds from
investing in certain companies doing business
in
Sudan. The Court held that this statute violated the
Supremacy Clause and the Foreign Commerce Clause of the U.S. Constitution.
In response to these decisions, Congress enacted the Sudan Accountability and Divestment Act of
2007. The President signed this Act into law on December 31, 2007. The Act expressly authorizes state
and local governments to divest in companies doing business in Sudan and grants investment managers
who implement these laws immunity from suit under certain circumstances. The Act establishes
guidelines for the state or local government to follow in taking these divestment actions. The Act also
requires a state or local government to submit written notice describing a Sudan divestment law to the
Attorney General of the United States within 30 days after the enactment of the law. Bill 3-08 was
consistent with the guidelines for divestment laws authorized by the Sudan Accountability and Divestment
Act of2007.
Both the BIT and the CRHBT Board hire professional investment managers to buy and sell
securities. Bill 44-16 would limit the restriction to actively managed separate accounts and would exclude
investments in an index fund, private equity fund, real estate fund, mutual fund, or other commingled or
passively managed fund. The Bill would define a fossil fuel company as:
...
a company listed in the 200 publicly traded coal, oil, and gas companies that hold
reported fossil foels reserves with the largest potential carbon emissions, as ranked in the
Fossil Free Indexes US (FFIUS) published by Fossil Free Indexes LLC or a successor
index, as updated annually.
The Bill would also require the Boards to divest in these companies gradually over the next 5 years
and would permit the Boards to delay the sale of any individual security if necessary due to its fiduciary
duty.
The Lead Sponsors, Council Vice President Berliner and Councilmember Navarro explained their
reasons for introducing Bill 44-16
in
©8-9.
This packet contains:
Bi1144-16
Legislative Request Report
Berliner and Navarro Memorandum
Circle #
1
7
8
F:\LAWlBILLS\1644 Retirement - Fossil Fuel Investments - Restrictions\Intro Memo.Docx
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Bill No.
44-16
Concerning: Retirement - Fossil Fuel
Investments - Restrictions
Revised: October 21,2016 Draft No. _5_
Introduced:
October 25,2016
Enacted:
April 25, 2018
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: _ _ _
~
_ _ _ __
Ch. _ _' Laws of Mont. Co. _ _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsors: Council Vice President Berliner and Councilmember Navarro
Co-sponsor: Councilmember EIrich
AN
ACT
to:
(1)
(2)
(3)
prohibit the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees from investing in certain businesses holding certain
amounts of fossil fuel reserves under certain circumstances;
require the Boards to research and adopt a socially responsible investing policy; and
generally amend the law governing the investment of funds held in trust for the
employees' retirement system and the consolidated retiree health benefits trust.
By adding
Montgomery County Code
Chapter 33, Personnel and Human Resources
Section 33-60C
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-61A and 33-165
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill,
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unqffected by bill.
The County Council for Montgomery County, Maryland approves the following Act.'
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BILL
No. 44-16
1
Sec.
1.
Section 33-60C is added and Sections 33-61A and 33-165 are
amended as follows:
33-60C. Fossil
- -
Investments - Restrictions
Fuel
-
2
3
4
W
Definitions.
In this Section, the following words have the meanings
5
indicated:
Actively managed separate account
means assets held in
~
6
7
8
9
separate
Actively
account Qy an investment manager hired Qy the Boards.
managed separate account
does not include an index fund, private equity
fund, real estate fund, mutual fund, or other commingled or passively
managed fund.
Boards
means the Board of Investment Trustees established Qy Section
10
11
12
13
14
15
16
17
18
19
33-59 and the Consolidated Retiree Health Benefits Trust Board of
Trustees establishedQy Section 33-160.
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 any wholly-owned subsidiary, majority-owned
subsidiary, and parent company of any of them, or business association,
that exists for profit-making purposes.
Divest
means selling, redeeming, transferring, exchanging, or otherwise
20
21
disposing
Q£.
and refraining from further buying
Q£.
certain investments.
Fossil Fuel Company
means
~
company listed in the 200 publicly traded
22
23
24
25
coal, oil, and gas companies that hold reported fossil fuels reserves with
the largest potential carbon emissions, as ranked in the Fossil Free
Indexes US (FFIUS) published Qy Fossil Free Indexes LLC or
~
successor
index, as updated annually.
26
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BILL
No. 44-16
27
Trustfunds
means the assets held for the Employees' Retirement System
and the assets held for the Consolidated Retiree Health Benefits Trust.
(Q)
28
29
30
31
32
33
34
35
Review
Qj
investments.
Each Board must review the investment holdings
in each actively managed separate account ofthe trust funds and identify
each investment in any fossil fuel company. Each Board must review its
investment holdings in these accounts periodically and update the list of
fossil fuel companies at least every
§
months.
(£}
Divestment.
Except as provided in subsection
(Q1
each Board:
ill
within 1 year after the date this law takes effect, must divest
at
least
20% of its investments in fossil fuel companies held in an actively
managed separate account as of the date this Act takes effect:
36
37
38
39
ill
within 2 years, must divest at least 40% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect;
40
41
42
43
44
45
ill
within
1
years, must divest at least 60% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect;
ill
within
1.
years, must divest at least 80% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect; and
46
47
ill
®
@
within
~
years, must divest 100% of its investments in fossil fuel
companies held in an actively managed separate· account; and
must not make any new investment in an actively managed
separate account in any fossil fuel company.
48
49
50
51
Divestment delay.
Nothing in this Section must require
~
Board to take
52
53
---
action as described in this Section unless the Board determines in good
faith that the action described in this Section is consistent with the
e--
-
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BILL
No. 44-16
54
55
fiduciary responsibilities of the Board described in Section 33-61C or
Section 33-163. If the Board determines that
~
delay in divesting from
~
fossil fuel company is necessary due to its fiduciary
~
the Board must
report this delay within 30 days to the Executive and the Council along
with an estimated timeline for the resumption of divestment.
56
57
58
59
liU
Research on socially responsible investing.
Each Board must:
60
61
ill
ill
ill
review academic
and professional
literature
on
socially
responsible investing;
investigate the benefits and disadvantages of socially responsible
investing ofpublic trust funds; and
adopt
~
Socially Responsible policy for investments.
62
63
64
65
66
67
68
ill
Exemption.
The divestment or investment prohibition under this Section
must not
mmlY
to
~
company that can demonstrate that it:
ill
ill
ill
has stopped exploring for new hydrocarbons;
agrees contractually to not develop or sell 80% of its current
proven fossil fuel reserves; and
has stopped lobbying or attempting to influence government
officials to preserve its special treatment, including subsidies, tax
breaks, or competitive advantage with respect to clean, renewable
energy.
69
70
71
72
73
74
75
(g}
Notice.
Each Board:
ill
before divesting from
~
fossil fuel company under this Section,
76
77
must provide written notice and an opportunity to comment in
writing to each company subject to the action;
78
ill
must not divest until 90 days after written notice is provided to the
company; and
79
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BILL
No.
44-16
80
81
82
83
84
85
86
87
ill
ili)
must not divest if the company shows that
divestment under subsection
.c.t1
i!
is exempt from
Report.
The Board must report annually to the Council and Executive on
the operation of and compliance with this Section. The report must:
ill
ill
ill
®
33-61A.
identify each investment in
~
fossil fuel company held in an
actively managed separate account of the trust funds;
list each divestment action taken under this Section
describe each decision to delay investment under Subsection
@;
and
calculate the administrative cost of compliance.
88
89
90
Indemnification of trustees
91
(a)
Authorized
The County must indemnify every member ofthe Board who
is or may become a party to any action, suit, or proceeding, including
administrative and investigative proceedings, because of service as a
member of the Board, including any action taken to comply with
[Section] Sections 33-60A and 33-60C, subject to the conditions stated in
this Section.
92
93
94
95
96
97
98
99
*
(a)
*
*
33-165. Indemnification
of Board
Members.
General.
The County must indemnify each member ofthe Board who is
or may become a party to any legal action, including any administrative
or investigative proceeding, because of service as a Board member,
including any action taken to comply with Sections 33-60A and 33-60C,
subject to the conditions in this Section.
100
101
102
103
104
105
106
*
*
*
Sec. 2. Initial review.
Each Board must complete its initial review of the
investment holdings in all actively managed separate accounts of the trust funds and
G
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BILL
No. 44-16
107
108
identify all investments in fossil fuel companies within 90 days after the date this Act
takes effect.
Approved:
109
110
Nancy Floreen, President, County Council
111
Date
Approved:
112
Isiah Leggett, County Executive
113
Date
This is a correct copy o/Council action.
114
Linda M. Lauer, Clerk of the Council
Date
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LEGISLATIVE REQUEST REPORT
Bill 44-16
Retirement
-
Fossil Fuel Investments
-
Restrictions
DESCRIPTION:
Bill 44-16 would restrict the Board of Investment Trustees and the
Consolidated Retiree Health Benefits Trust Board of Trustees from
investing in certain businesses holding the largest amount offossil fuel
reserves under certain circumstances. The Bill would also require both
Boards to research and adopt a socially responsible policy for
investing.
Investing in fossil fuel companies is inconsistent with the County's
established policies to be environmentally responsible.
Encourage fossil fuel companies to move into more environmentally
responsible renewable energy sources.
Board of Investment Trustees, Office of Human Resources, County
Attorney.
To be requested.
To be requested.
To be requested.
To be researched.
Robert H. Drummer, Senior Legislative Attorney
Not applicable.
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
None.
F:\LAW\BILLS\I644 Retirement - Fossil Fuel Investments - Restrictions\LRR.Docx
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MEMORANDUM
October 11,2016
TO:
Council President Nancy Floreen
Council Colleagues
Council Vice President Roger Berliner
GO Chair Nancy Navarro
Fossil Fuel Divestment and Socially Responsible Investing
FROM:
SUBJECT:·
Colleagues, we are writing to ask for your support for legislation we plan on introducing
that more closely aligns our values with our role as a major financial investor of nearly $4 billion
--
without sacrificing the returns on those investments.
We would do this in two distinct ways:
(1)
directing the county's Board oflnvestment Trustees (BIT) to divest from the 200 publicly
traded fossil fuel companies that hold reported reserves with the largest potential carbon
emissions; and (2) directing the BIT to study adopting a Socially Responsible Investing screen
for its portfolio.
We are proposing this measure fully aware of the Board's fundamental fiduciary
responsibilities. Our legislation would address this explicitly by allowing the BIT to waive the
divestment requirement if the Board were to certify
to
the Council that in its judgment alternative
investments in non-fossil fuels are not available that would meet or exceed the returns of the $65
million in fossil fuel stocks currently in its portfolio. Given the strength of portfolios without
fossil fuels, and the relatively poor performance of fossil fuel stocks, we are confident that the
Board will be able to harmonize our county's values with its fiduciary duties.
We are also very mindful of the "slippery slope" argument - i.e., that there are a host of
serious moral and ethical issues that have been put forward over the years as ajustification for
divestment, and we have said no. We believe climate change is different: it represents an
existential threat to the entire planet.
It
is, in our view, in a class by itself, and its correlation
with the companies principally responsible for creating climate change is direct. We know it is
caused by the burning of carbon-heavy oil, coal, and natural gas. It is why our Council has
passed literally dozens of measures to support clean energy and energy efficiency. We should
not be investing in the very companies that undermine our commitment to sustainability.
Specifically, this legislation would prohibit the BIT from purchasing any new stocks or
bonds in the fossil fuel industry and phase in over a 5 year time line divestment ofthe $65
million worth of holdings in the coal, oil and gas companies in the Carbon Underground 200, a
list of fossil fuel companies ranked by their potential carbon emissions. As noted, the 5 year
phase-in would be subject to an off-ramp if the Board can certify divesting these funds would
reduce the return ofthe portfolio.
CD
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More broadly, this legislation would also address longer tenn issues related to how we
invest our money by requiring the BIT to study the impact on its portfolio of adopting a Socially
Responsible Investing (SRI) approach, expanding on its current policies in this area. This
approach considers environmental, social and corporate governance issues in determining
whether to make an investment while seeking to maintain strong returns for investors. It is
widely used today by investors: more than $6.57 trillion in the United States is already invested
using socially responsible practices.
SRI is based on the belief that we should use our investments to bring about positive
change by aligning our investments with companies that achieve good returns by being a good
corporate citizen. Given the ever increasing role corporations have in our world today,
exercising that prerogative is important. The latest example of this can be seen in the Wells
Fargo scandal in which more than 2 million bank accounts or credit cards were opened without
customers' knowledge or permission. An SRI "screen" could result in shifting investments from
companies like Wells Fargo to more socially responsible companies, and that would be a good
thing.
We thank you in advance for your consideration of this legislation and we look forward
to working with you as it moves forward.
Roger Berliner
Nancy Navarro
Council Vice President
Chair, GO Committee