State Focus: Moving beyond ESG; Florida wades into restrictions in certain China-linked investments

In November 2023, Ropes & Gray published a white paper that focuses on the current trends in ESG regulation with respect to the investment of state retirement plan assets.  The white paper is intended to be a companion piece to our award-winning Navigating State Regulation of ESG website.

While the website offers detailed summaries of ESG-related developments in all 50 states, the white paper is meant to provide both an overview of the pro- and anti-ESG dynamics playing out in the public pension arena and executive summaries of the overall investment climate in each state.  This series of posts is intended to serve as an extension of that white paper, covering recent updates in various states.

Officials in many states have picked up right where they left off last year, introducing new bills and initiatives to:

• Further rein in the use of ESG considerations in investment decision-making by public pension boards and other governmental entities; or
• Promote the role of ESG factors in such decisions.

Last month, the Florida legislature passed, and Governor Ron DeSantis approved, technical corrections to the state’s restrictive anti-ESG law (HB 3), which requires managers that invest state funds to make investment decisions based solely on “pecuniary factors.” 

A pecuniary factor is defined as one that is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy, and it does not include the consideration of social, political, or ideological interests. The amendments came on the heels of Governor DeSantis’s announcement in January that his administration would step up its enforcement of the law (See our alert here for further discussion).   

Florida lawmakers have now widened their focus on investment restrictions to include public investments in companies linked to China. As highlighted in a recent article in Pensions & Investments (“Florida Legislature passes China divestment bill,” March 15, 2024), both chambers of the Florida legislature recently passed HB 7071 (“An Act Relating to Foreign Investments by the State Board of Administration”), which requires the State Board of Administration (SBA) to divest holdings by the Florida Retirement System (FRS) in any business that is publicly known to be at least 50.1% owned by the government of the People’s Republic of China, the Chinese Communist Party, or the Chinese military.  

The bill applies to the FRS Pension Plan and the FRS Investment Plan, which combined represent approximately $190.8 billion of the $225.4 billion in assets managed by the SBA as of October 31, 2023. The SBA also manages over 25 other investment portfolios that are not subject to these restrictions, with combined assets of approximately $34.6 billion, including the Florida Hurricane Catastrophe Fund, the Florida Lottery Fund, the Florida Prepaid College Plan, and Florida PRIME.

HB 7071 requires the SBA to develop a divestment plan for all “direct holdings” in China-owned companies by September 1, 2024. The divestment plan must be developed and implemented consistent with the SBA’s fiduciary standards, and the SBA must complete divestment no later than September 1, 2025, or at such later time if necessary for it to implement the divestment plan consistent with its fiduciary duties.  

“Direct holdings” in a company refers to all securities of that company, which are held directly by the FRS or in an account or fund in which the FRS owns all shares or interests. The term does not include indirect holdings in actively managed investment funds, including a private equity fund, or holdings in exchange-traded funds.  

Under Florida law, SBA fiduciaries charged with investment decisions must maintain a diversified portfolio and act as a prudent expert would under similar circumstances, considering all relevant substantive factors. As mentioned above, investment decisions must be based on pecuniary factors, and fiduciaries may not sacrifice investment return or undertake additional risk to promote any nonpecuniary factor. 

HB 7071 (and similar divestment statutes that Florida has previously enacted, as described below), provides that if divestment is warranted, the SBA is exempted from its typical fiduciary duty to only invest based on pecuniary factors.  But to be clear, there is no other statutory exception from having to comply with the pecuniary factors requirements under Florida law. 

Florida’s history of suspicion regarding investments in certain foreign countries

Although HB 7071 may seem like a new front in the very recent push by states to restrict the investment of public funds based on political issues, this is not the first time that Florida has sought to divest state assets linked to a foreign country:

• In 1993, Florida enacted the “1993 Free Cuba Act,” Fla. Stat. § 215.471–2, which requires the SBA to divest its holdings in obligations of any U.S.-domiciled institution or company doing business in or with Cuba in violation of the federal Cuban Democracy Act of 1992. 
• In 2007, Florida enacted the “Protecting Florida’s Investments Act,” Fla. Stat. §215.473, which requires divestment from certain entities in Sudan and Iran. 
• In 2011, new legislation further prohibiting state and local government agencies from entering into contracts with certain entities in Sudan and Iran (Fla. Stat. § 287.135) was enacted, and in 2012, an amendment was adopted that added Cuba and Syria as well.
• In 2018, Florida amended the 1993 Cuba law to require divestment from entities doing business in or with Venezuela in violation of federal law.

Several years ago, Florida’s public officials began hinting that they were targeting China for divestment purposes. In May 2020, the state’s Chief Financial Officer, Jimmy Patronis, sent letters to contractors that did business in or with Florida in an attempt to “identify state vendors who are owned or controlled by the Communist Party of China” (“Communist Influence? Florida CFO Jimmy Patronis on Guard against Chinese Government,” June 16, 2020). The letters requested that recipients verify within 30 days whether they were domiciled in the United States and at least 50% owned by U.S. citizens and entities.

Then in December 2021, the SBA trustees ordered an investigation of the Florida Retirement System to determine the scope of its investment in Chinese companies (“Governor Ron DeSantis Takes Action Against Communist China and Woke Corporations,” December 20, 2021). Subsequently, the SBA announced that although the investigation showed that the FRS’s exposure to Chinese investments was less than 3%, the SBA would nevertheless pause new investments in China, as well as other emerging markets, in light of “increasing risks and uncertainty” (“Florida SBA Halts Funding to Chinese Investments,” April 6, 2022).

Initial efforts at anti-China lawmaking

Governor DeSantis signed a trio of bills last year that reflected Florida’s “commitment to crack down on Communist China.” The most prominent was SB 264 (“The Conveyances to Foreign Entities Act”), which forbids foreign principals from China—including governments and officials, political parties and their members, foreign-organized business ventures, and certain other non-U.S. residents—from acquiring more than a de minimis indirect interest in agricultural land in Florida or any real property within ten miles of certain infrastructure facilities or five miles of a military installation (See our alert about SB 264 here as well as our summary of a recently proposed amendment to the law here).

SB 264 also forbids, as of July 1, 2025, any state governmental entity from entering a contract with an entity owned by the government of China if the contract would give the Chinese entity access to an individual’s personally identifiable information. 

As of February 1, 2024, the 11^th U.S. Circuit Court of Appeals has enjoined the state from enforcing the law against a group of Chinese individuals, noting that the U.S. Supreme Court has questioned the constitutionality of such restrictions based on country of origin.

The two other bills that Governor DeSantis signed into law last year prohibit:

• Public employers from using certain software owned by foreign principals (SB 258); and
• State secondary education institutions from accepting any gift from a school based in a foreign country of concern (SB 846).

Are anti-China Divestment Bills a growing trend?

Florida is not alone in targeting China through divestment legislation. HB 7071 exemplifies the measures that state legislatures have considered in order to address their concerns about globalization and the growing influence of government-level actors such as China, which Governor DeSantis has described as “the United States’ greatest geopolitical threat.” 

Several states have introduced bills targeting Chinese entities in 2024, including:

• Missouri HB 1869, introduced January 3, 2024; 
• New Jersey SB 1365, introduced January 9, 2024; 
• Illinois SB 3494, introduced February 9, 2024; 
• Arizona SB 1340, introduced February 29, 2024; and 
• Kansas HB 2739, introduced March 4, 2024.

Separately, legislative activity at the federal level, such as the passage of the TikTok bill in the U.S. House of Representatives with broad support last week, demonstrates that these concerns are not localized and may be bipartisan in at least some cases. 

As these types of divestment bills typically carve out exceptions for fiduciaries and for commingled funds or other indirect investment vehicles, it is unclear what the consequences are if a pension fund refuses to divest (or, by contrast, how a challenge on fiduciary grounds to a pension fund’s divestment would play out in the courts). 

Once HB 7071 takes effect, other states will be closely watching Florida to see how the legislation gets implemented. 

For further insights or information on what is happening on the ground in Florida or other states, please reach out to one of us, or any other member of the Ropes & Gray state ESG team.

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