#1State of Alaska Department of Revenue HB401-Divestment regarding Russian Entities Department of Revenue Presentation to House State Affairs March 22, 2022 Governor MIKE DUNLEAVY 1#2HB 401 Bill Summary • Sanctions and Status • Market Overview Alaska Russian Investments ● Treasury Investments • Actions by Institutional Investors Fiduciary Standards Q&A Appendix A-Additional slides presented to House State Affairs on 3/10/22 SEAL OF OF ALALI THE STATE of ALASKA Governor Mike Dunleavy 2#3• HB 401 Bill Summary Prohibits investment in and requires divestment of Russian assets in funds subject to AS 37.10. • • Assets include all sovereign debt of the Russian Federation and publicly traded securities of a company identified by the United States Department of Treasury, Office of Foreign Assets (OFAC). Provides for a 180-day exit from the assets once identified. Divestment is not required for comingled funds, but the fiduciary is required to request that fund managers consider divestment annually on January 31. Precludes the Commissioner of Revenue or other fiduciary from conducting business with banks who are "profiteering" from the Russian invasion of Ukraine. ALAT THE STATE "ALASKA Governor Mike Dunleavy 3#4• • • • • ALAT HB 401 Bill Summary (continued) May allow investments if not doing so would be inconsistent with applicable fiduciary responsibilities but requires at least three alternative investment opportunities to be considered. Excludes Alaska Permanent Fund Corporation (APFC) and the Alaska Retirement Management Board (ARMB), allowing divestment decisions by these entities' boards. Exempts those taking divestment actions or inactions, in good faith, from liability for doing so. Provides reporting mechanisms to the Legislature as to the divestment activity undertaken. Expires on July 1, 2023. THE STATE "ALASKA Governor Mike Dunleavy 4#5ALAT Unprecedented Global Sanctions Category Banks and Financial Services Significant Sanctions (1,274 sanctions since February 2022) • • Russian Central Bank restrictions imposed by US, UK, Canada and EU Swift ban enacted on seven Russian banks Sanctions imposed on Sberbank and VTB Bank, Russia's largest banks US persons prohibited from investing in new debt or equity issuance from certain OFAC Russian institutions Oil and Gas Corporate Other THE STATE "ALASKA Governor Mike Dunleavy . • • US bans import of Russian energy products including oil, liquified natural gas, and coal Over 300 companies have withdrawn from Russia including Boeing, Airbus, Visa, Mastercard, FedEx, UPS, Apple, Netflix, and McDonalds Google, Meta (Facebook), and TikTok have blocked Russian state media channels BP, Shell, Exxon, and Equinor are divesting from billions in oil and gas developments US bans Russian aircraft from US airspace Foreign-held asset freeze and travel bans for some politicians, officials, oligarchs and family members LO#6ALAT Current Status of Russian Equity Investments Russian equities decreased by 53% in value in February. Trading halted on February 25th for all Russian-listed equities. Valuations are now highly speculative since they are no longer provided by the market. All major stock indexes are taking Russian securities out this month and passive index funds are holding Russian securities at low-to-no-value. 12/31/2021 - 02/28/2022 1D 3D 1M 6M YTD 1Y Last Px Local CCY 5Y Max Daily ▼ ++ Track Mov Avgs Table Annotate Key Events + Quick-Add▾ Add Data << Edit Chart * News QZoom -800 MXRU Index -700 Last Price 325.37 High on 01/03/22 771.72 Average 672.86 Low on 02/28/22 325.37 THE STATE "ALASKA Governor Mike Dunleavy Jan 7 -52.75% (-99.99%ann.) Jan 14 Jan 24 Jan 31 2022 Feb 7 Feb 14 21 Feb 28 600 500 -400 325.37 300 6#7International Equity in Russia Most institutional investors invest in a diverse basket of global securities. The Morgan Stanley All-Country World Index Investable Market Index (MSCI ACWI IMI) is a common institutional index that incorporates 99% of globally publicly traded equities. The index is diversified across 48 countries - 23 developed and 25 emerging market- and includes roughly 9,300 securities. The index is a reasonable proxy for many institutional investor portfolios: # Country MSCI ACWI IMI # Country MSCI ACWI IMI MSCI Cumulative # Country Russian Sectors (GICs) %/Total ACWI IMI Total 1 United States 58.3% 11 India 1.6% 21 Saudi Arabia 0.4% Energy 51.1% 51.1% 2 Japan 5.9% 12 South Korea 1.4% 22 South Africa 0.4% Materials 18.3% 69.3% 3 United Kingdom 4.2% 13 Netherlands 1.2% 23 Singapore 0.4% Financials 16.6% 85.9% 4 China 3.1% 14 Sweden 1.0% 24 Finland 0.3% Communication Services 8.0% 93.9% 5 Canada 3.1% 15 Hong Kong 0.9% 25 Russia 0.3% Consumer Staples 3.2% 97.1% 6 Switzerland 2.7% 16 Ireland 0.9% 26 Israel 0.3% Utilities 1.3% 98.4% 7 France 2.6% 17 Denmark 0.6% 27 Belgium 0.3% Consumer Discretionary 0.7% 99.0% 8 Germany 2.1% 18 Spain 9 Taiwan 1.9% 19 Italy 0.6% 28 Norway 0.6% 29 Mexico 0.2% Industrials 0.6% 99.6% 0.2% Health Care 0.2% 99.8% 10 Australia 1.8% 20 Brazil 0.6% Remaining 1.9% Real Estate 0.2% 100.0% Cumulative Totals: 85.8% 95.2% 100.0% THE ALAT THE STATE ALASKA Governor Mike Dunleavy https://www.msci.com/www/index-factsheets/msci-acwi-imi/09234846 7#8ALAT Treasury Russian Equity Investments - 1/31/22 Treasury Russian equity investments - 0.23% of $50.6 billion in assets: State Investments - 0.10% of $7.7 billion in assets 0.10% of state assets had Russian equity exposure on 1/31/22 ($7.4 million). • 1 passive/index investment manager. Defined Benefit Retirement Systems - 0.28% of $33.9 billion in assets 0.28% of the retirement funds had Russian equity exposure on 1/31/22 ($93.5 million). ⚫ 7 investment managers - 4 active, 3 passive/index. Participant Directed -0.15% of $9.0 billion in assets ⚫ 0.15% of participant directed assets had Russian equity exposure on 1/31/22 ($13.4 million). • 4 investment managers - 2 managers active, 2 passive/index funds. • All of the Russian exposure is through commingled funds where the ARMB is not the direct fiduciary for the funds. Treasury has directed a halt to the purchase of Russian securities at this time due to illiquidity and risk uncertainty. THE STATE "ALASKA Governor Mike Dunleavy 00 8#9States • What are others doing? Research and surveys administered by The Pennsylvania Treasurer show that as of 3/12/22, there were a total of 37 states currently looking into or currently freezing state money or pension funds going to Russian companies, investments or oligarchs. • Other actions taken by other states include the following: . • Looking into or currently banning state agencies from doing business with Russian state-owned firms and subcontractors. Blocking Russian businesses and nonprofits from acquiring property in their state for 1 year. • Looking into or ending sister state relationship with Russia. • Officially condemned Russia's invasion. • • Welcoming refugees. Calling on businesses to ban Russian made goods. Norway Sovereign Wealth Funds Norway announced that they are divesting from Russia. . Russian assets at the end of 2021 made up 0.2% of Norway fund ($3 billion in total). SEAL OF • OF ALALI Recognize that divestment takes time because they want to ensure sales are not made to sanctioned individuals/entities. THE STATE of ALASKA Governor Mike Dunleavy 9#10● . Guiding Statutes for Investing Prudent Investor Rule Summary • In additional to other considerations, a fiduciary shall exercise the judgment and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion, and intelligence exercises in the management of large investments. ARMB/Treasury Statutes • • AS 37.10.071(c) - In exercising investment, custodial, or depository powers or duties under this section, the fiduciary of a state fund shall apply the prudent investor rule and exercise the fiduciary duty in the sole financial best interest of the fund entrusted to the fiduciary. Among beneficiaries of a fund, the fiduciaries shall treat beneficiaries with impartiality. - AS 37.10.210(a) – Consistent with standards of prudence, the board has the fiduciary obligation to manage and invest these assets in a manner that is sufficient to meet the liabilities and pension obligations of the systems, plan, program, and trusts. APFC Statutes SEAL OF OF ALALI • 37.13.120. Investment responsibilities. (a) The board shall adopt regulations specifically designating the types of income-producing investments eligible for investment of fund assets. When adopting regulations authorized by this section or managing and investing fund assets, the prudent-investor rule shall be applied by the corporation. The prudent-investor rule as applied to investment activity of the fund means that the corporation shall exercise the judgment and care under the circumstances then prevailing that an institutional investor of ordinary prudence, discretion, and intelligence exercises in the designation and management of large investments entrusted to it, not in regard to speculation, but in regard to the permanent disposition of funds, considering preservation of the purchasing power of the fund over time while maximizing the expected total return from both income and the appreciation of capital. THE STATE of ALASKA Governor Mike Dunleavy 10#11ALAT THE STATE "ALASKA Governor Mike Dunleavy Questions or Comments? 11#12ALAT Appendix A Additional slides presented to House State Affairs on 3/10/22 THE STATE "ALASKA Governor Mike Dunleavy 12#13State Investment Summary Alaska Investments in Russia Assets Stocks Bonds $ Millions Private Equity Total Assets APFC & Mental Health 153 63 3 219 ARMB Retirement 94 94 State Funds 7 7 All Participant Directed 13 13 AHFC 0 0 0 AIDEA 0 0 0 0 Totals $ 267 $ ՄՌ 63 $ 3 ՄՌ $ 333 Estimated valuation rate 2% 20% 0% Estimated Valuation as of 3/7/22 $ 5 $ 13 ՄՌ $ 18 SEAL OF OF ALALI THE STATE of ALASKA Governor Mike Dunleavy Valuations are no longer provided by the market and are highly speculative. 13#14APFC Russian Securities - As of December 31, 2021 APFC's exposure to Russian securities totals to $219 million which accounts for 0.3% of Alaska Permanent Fund's $82 billion assets under management. Millions $200 $153.1 mm $150 $100 $63.2 mm $50 $2.7 mm $0 Fixed Income Public Equity Private Equity SEAL OF OF ALALI THE STATE Fixed Income Public Equity Private Equity of ALASKA Governor Mike Dunleavy $63 million in Russian and Ukrainian governments bonds in the Fixed Income portfolio. Less than $10 million of that under internal management. $153 million in publicly traded Russian stocks, traded on the Moscow Stock Exchange. All public stocks held in APFC's name are in externally managed accounts. $2.7 million represents Private Equity stakes in portfolio companies held by funds in which APFC is one of many investors. APFC does not maintain control of the investments in these portfolio companies. 14#15APFC Current Situation - Global Complexity Markets Closure Valuations Uncertain Divestment strategies are complicated. Given the market conditions, selling Russian assets today would be challenging. The vast majority of APFC's Russian securities are blocked from trading due to Russian and US sanctions. External and internal managers have been directed not to purchase any Russian securities. APFC Board and Staff are and will comply with all policy directives from federal and state levels. SEAL OF OF ALALI THE STATE of ALASKA Governor Mike Dunleavy 15