Five US public sector pension funds are to divest from companies that boycott investment in Israel after a state government passed new legislation forcing the move.

The US state of Illinois saw its House of Representatives and Senate both unanimously pass legislation requiring five state-funded pension schemes to identify all companies that boycott Israel and divest their direct and indirect holdings.

The term ‘boycott’ is defined as any company that engages in actions that are politically motivated or intended to penalise or inflict economic harm on Israel or companies based within it.

With the decision, Illinois aims to block pressure groups’ attempts to further the ‘boycott, divestment and sanctions’ (BDS) movement against Israel.

The move runs counter to divestment decisions made by some of Europe’s largest institutional investors.

While European Union policy does not support any BDS movement, some investors have been accused of succumbing to pressure and divesting direct holdings in Israeli companies.

In January last year, PGGM, the €189bn asset manager and main investor for the Dutch healthcare worker scheme PFZW, divested from five Israeli banks involved in funding settlements in areas of Israeli occupied Palestine.

The NOK7trn (€806bn) Norwegian Pension Fund Global also excluded property and construction companies operating in Israel for the same reason.

The investor’s Council of Ethics said there was a risk two companies operating in Israel were “contributing to serious violations of the rights of individuals in situations of war or conflict”.

PGGM’s decision, which was made after client PFZW asked it to engage with the banks, came under fierce criticism and created a political storm resulting in the Dutch ambassador being summoned by the Israeli government, and protests outside its offices.

However, the asset manager said its decision came after repeated attempts to engage with the banks; when engagement failed, it said, divestment was its only remaining policy.

PFZW launched an extensive review of its SRI and divestment policies after facing criticism and allegations of a pro-Palestinian bias.

The pension scheme made no amendments to its policy but acknowledged that it underestimated the political nature of its decision and said it would work on its communications in future.

In the US, the Illinois pension funds will have to divest from boycotting companies by the start of 2016.

It affects the nearly $77bn (€69bn) in assets held in the Illinois Teachers’ Retirement System, Illinois State Universities’ Retirement System, Illinois State Employees’ Retirement System, Illinois Judges’ Retirement System and Illinois General Assembly Retirement System.

Writing in US newspaper The Washington Post, Eugene Kontorovich, a professor at Northwestern University, said the move by the US state should not be underestimated.

He wrote: “The Illinois bill is part of a broad political revulsion over the long-simmering BDS movement.

“While BDS has gotten most of its successes with low-hanging fruit like British academic unions and pop singers, the anti-boycott efforts are getting an enthusiastic reception in real governments, on the state and federal level.”

Topics