Information Item
1 Date: April 6, 2022
To: Mayor and City Council
From: Gigi Decavalles-Hughes
Subject: Report on the City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
Introduction
On March 8, 2022, the Council approved Agenda Item 13-A condemning the invasion of Ukraine by Russia. As part of the approved action, Council directed the City Manager to research any sanctions or steps the City of Santa Monica might take to deplete the power of the Russian leader, Vladimir Putin, and any Russian Oligarchs, including divesting any city fund possessing Russian assets, and lobbying CalPERS in favor of divesting any state funds possessing Russian assets and the termination of state contracts with Russian firms.
Background
The City’s investment policy has historically included socially responsible guidelines.
Examples of this include the prohibition of investments in fossil fuel-related companies and banks that lend to those companies, in tobacco or tobacco-related products, and in weapons systems or nuclear power. Also, the environmental, social, and governance (ESG) profile of corporations is a component of credit analysis when considering investments in corporate medium-term notes. Additionally, Council has at times directed divestments based on certain geopolitical and/or humanitarian reasons.
Examples of these are South Africa during apartheid and Myanmar following a military coup and subsequent human rights violations.
Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
2 The City’s general investment portfolio has no direct investments in Russian companies and holds no sovereign Russian debt. The City also oversees the Cemetery and Mausoleum Perpetual Care funds through the use of an outside investment manager.
This portfolio also has no direct investment in Russian companies or Russian debt.
Discussion
As of February 28, 2022, the book value of the City’s investment portfolio (exclusive of cash in bank accounts) was $572.8 million. The City of Santa Monica holds no investments in any Russian companies or Russian sovereign debt. The City does own bonds in companies that had business operations in Russia at the time of the Ukraine invasion.
Corporate Debt
As of February 28, 2022, the City’s portfolio included approximately $124.8 million in corporate debt. Of this amount approximately $17.8 million was in bonds from United States based non-profit entities that do not have business in Russia. The remaining $107 million was bonds issued by 23 private corporations and the endowment funds of two universities. One of the corporate bonds ($2 million) matured in March 2022 reducing the outstanding amount to $105 million issued by 22 corporations. Staff has attempted to ascertain the level of divestment from Russia of the entities from which it holds investments. It can be difficult to get the complete picture since many companies’ operations in Russia are through third party arrangements with other corporations.
The two business sectors with the most exposure to and business relationship with Russia are the oil and banking sectors. Since the City has already divested from fossil fuel companies and banks lending to such companies, the current investment portfolio has no investments related to Russia from these sectors. Two of the companies that have bonds included in the portfolio do not appear to do business in Russia. The two university endowment funds mentioned, Yale University and Texas A&M University, have announced plans to pull all investments in Russian entities.
Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
3 Of the remaining 18 companies for which the City holds bonds in its investment portfolio, 12 have publicly announced either a termination, suspension, or limiting of business activities in Russia. The other four are insurance companies. Since insurance companies maintain large investment portfolios, the exposure to Russia could be to Russian businesses or the holding of investments in Russia. Staff has not been able to determine the extent of Russian involvement of these companies in Russia and have seen no public statements regarding divestment.
Supranationals
The portfolio also includes approximately $25.6 million in bonds issued by World Bank related institutions such as the International Bank for Reconstruction and Development and the International Finance Corporation. These bonds, also known as Supranationals, provide funding for projects related to clean water, climate change, and infrastructure enhancement. Russia is a member of the World Bank. On March 2, 2022, the World Bank halted all programs in Russia due to their war on Ukraine.
Local Agency Investment Fund (LAIF)
LAIF is a short-term investment pool managed by the California State Treasurers Office used by over 400 local agencies in California, including Santa Monica, for short-term cash and liquidity needs. LAIF has announced that it has no investments in Russian entities.
Cemetery and Mausoleum Perpetual Care Funds
The City oversees the Cemetery and Mausoleum Perpetual Care funds through use of an outside investment manager. This portfolio follows the same socially responsible investment guidelines included in the City’s Investment Policy. This portfolio has no direct investment in Russian companies or Russian debt and is also divested from the Russia-heavy sectors of fossil fuels and banking.
Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
4 CalPERS
The California Public Employees Retirement System (CalPERS) is the United States' largest public fund. CalPERS has reported that it has over three quarters of a billion dollars in Russian investments, consisting of $420 million in public stocks and $345 million in illiquid real estate assets. None of CalPERS holdings include Russian government debt.
Although these are sizable amounts, CalPERS claims that combined they represent only
0.17% of its total investment portfolio.
In response to Russia's attack on Ukraine, CalPERS has announced the following actions:
• CalPERS has ceased all transactions in Russian publicly traded equity and has stopped the flow of any new investments into the country. • CalPERS is actively assessing its real estate investments and determining a path forward.
• CalPERS is reviewing all its investments in emerging markets, including Russia, due to the impacts the crisis has had on all financial markets. • CalPERS is following all regulatory requirements promulgated by U.S. Office of Foreign Assets Control and the sanctions that are in place.
SB 1328, recently introduced in the State legislature, would require CalPERS to divest from Russian and Belarusian assets and companies. SB 1328 would prohibit CalPERS (and other public retirement systems) from investing public employee retirement funds in a company with business operations in Russia or Belarus or a company that supplies military equipment to Russia or Belarus. It would also prohibit future State investments in Russia or Belarus until the invasion is over and sanctions removed.
Summary and Recommendations
Santa Monica has no direct investments in Russian companies or the Russian government. The City does own bonds issued by a number of companies that have historically done business in Russia, but not from the most heavily invested sectors of fossil fuels and banking. For the most part, entities in which the City does hold Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
5 investments have announced plans to either terminate, suspend, or limit business in Russia.
Based on staff’s review, the following actions are recommended:
1. No current investments will be sold based on the Russian invasion. Sale of all the bonds of companies that were doing business with Russia would result in a loss of approximately $2.7 million which would cause fiscal harm to the City. Sale of the Supranationals would add another $0.7 million to the loss. Attachment A includes a listing of the bonds, their involvement in Russia, and includes the estimated loss the City would realize if the investments were sold.
2. Until such time either (1) Russia halts the invasion and occupation of Ukraine as determined by the U.S. Department of State; or (2) The United States revokes all sanctions against Russia imposed because of its participation in the February 24, 2022, invasion of Ukraine, no new investments should be made in companies that have not announced a termination, suspension, or limitation of business in Russia.
3. Staff will continue to monitor the status of entities and their Russian business activity and may restrict future new investments in companies that resume business operations in Russia or do not adequately reduce their business operations in Russia before 1) Russia halts the invasion and occupation of Ukraine as determined by the U.S. Department of State; or (2) The United States revokes all sanctions against Russia imposed because of its participation in the February 24, 2022, invasion of Ukraine.
4. The City supports SB 1328 calling for the CalPERS divestment of all Russian assets.
On March 21, 2022, Mayor Sue Himmelrich sent a letter of support for SB 1328 on behalf of the City. The letter is attached as Attachment B.
Prepared By: Gigi Decavalles-Hughes, Director of Finance Attachments: A. SB 1328 Letter to Senator McGuire
B. City of Santa Monica Corporate Investments with Status of Russian Exposure
Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
6 ATTACHMENT A
SB 1328 LETTER TO SENATOR MCGUIRE
Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
7 Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
8 ATTACHMENT B
CITY OF SANTA MONICA CORPORATE INVESTMENTS WITH STATUS OF RUSSIAN EXPOSURE Information Item: City of Santa Monica’s Direct and Indirect Investments in and Divestment from Russian Assets
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