Might motivated investors bring a more responsible corporate environment to Israel?
government officials and activists gathered at the Tel Aviv
Exchange on Monday to discuss how Environmental, Social and Corporate
Governance (ESG) issues could find a respectable place alongside
financial bottom lines, stock prices and quarterly financial reports.
Israel's first-ever seminar to debate the growing field of
Responsible Investment was sponsored by the Environmental Protection
Ministry; the European Commission; Life and Environment, the
environmental umbrella organization for nongovernmental organizations
in Israel; Eiris and Greeneye, which advises financial firms on
environmental issues; and the Maaleh advocacy group.
Responsible Investment advocates the inclusion of ESG issues in
analyses and investment decisions to reduce risk, increase investment
gains and bring investments more in line with the investor's world
International guest speakers included Donald
MacDonald, the chairman of the UN's Principles for Responsible
Investment (PRI) Program.
Responsible Investment (RI) is the notion that ESG issues,
while hard to quantify, have a growing effect on investments and levels
of risk and therefore should be factored into investment analyses and
decisions. While proponents do not say that investors should refrain
from investing in companies that pollute, for example, they say that
that information should be made available to investors because it
affects the long-term value of the asset.
Some of the biggest proponents of RI are
institutional investors such as pension funds, foundations and
endowments. While pension fund managers' chief priority will always be
to make money for their clients, more and more are saying that other
issues should be taken into account alongside financial information.
The PRI was formed three years ago by the UN to provide a
framework and network for those looking to incorporate ESG issues.
Since its start with just 50 members, it has grown to 580 signatories
with assets of over $18 trillion, MacDonald told The Jerusalem Post on the sidelines of the conference Monday.
Environmental Protection Minister Gilad Erdan (Likud) said the
ministry had sponsored the conference because it was an issue "of
unparalleled importance, one which was only going to become more
important rather than turn into a passing fad."
Erdan pointed to an array of environmental legislation in
recent years that could impose serious costs on violators, such as the
"polluter pays" law, boosted local authority enforcement, and freedom
of information requirements expanded to include reporting on
Erdan also announced that he had worked out an agreement with
the Israel Securities Authority to put in place standardized
environmental disclosure procedures for all public companies. The new
regulations are expected to go into effect sometime in 2010, he said.
Throughout Monday's seminar, the question of whether
Responsible Investment should be voluntary or imposed by government
regulation was touched on again and again. Finance Ministry capital
market, insurance and savings supervisor Yadin Entebbe opined that
regulations were necessary because "somehow, like a lot of other things
here, what should emerge naturally from the market doesn't."
However, Stock Exchange CEO Ester Levanon compared RI to the
campaign to train the public not to pick wild flowers. That campaign
was perhaps one of the most successful in Israeli history and it was
voluntary, she said.
The UN's PRI is a voluntary organization and MacDonald
championed that position. While "regulations set the setting, the real
drivers are the investors," he said.
In the aftermath of the financial crisis of last year, more
transparency and accountability are needed, he added. Part of the PRI
approach is to encourage complete transparency so investors are aware
of the decisions of the companies in which they invest.
Dr. Daniel Summerfield, co-head of Responsible Investment for
the UK's Universities Superannuation Scheme (USS), argued that by
including ESG issues, "we will be in a better position to make informed
decisions. We can turn risk management into value creation. Right now,
there is perhaps too much focus on the short-term and not whether a
company will last. And as we know now, numbers can be misleading and
the stock price doesn't necessarily reflect the value of the company."
USS is the third largest pension fund in the UK, managing $40 billion in assets.
MacDonald told the Post during a break that he foresaw a
change in the near future, where pollution costs became internal rather
than external. At present, many companies can pollute air, water or the
ground and the public picks up the tab to rehabilitate it or just
suffers from it. However, that will increasingly change and companies
will have to take more financial responsibility for cleaning up such
problems, he said.
So are Israelis ready to take on this challenge at home? According to Summerfield, they may not have a choice.
"As Israel gets developed-nation status, they will need to raise
their standards to meet the higher expectations of overseas investors.
Instead of being compared to South Korea, they'll be compared to
Germany or Spain."
Idit Reiter, a partner at Tel Aviv law firm Yuval Levy &
Co., concurred that Israel would most likely have to comply more and
more with this international trend, because of both domestic and
foreign pressures. Domestically, new regulations and new lawsuits are
highlighting the relevance of environmental risk. Reiter pointed to a
number of recent cases in which local residents launched multi-million
shekel lawsuits against companies in their region for polluting the
"An investor who doesn't incorporate ESG issues will be the next one to find himself being sued," she warned.
She also pointed to increased enforcement by the ministry, like
that which forced the closure of Carmel Chemicals factory last week, as
more evidence of the increasing importance of Environmental, Social and
Corporate Governance issues.
Reiter agreed with Summerfield that increased demands along these lines from trade partners would force Israel to adapt.
during the final panel of the seminar, Yair Lapidot of Yellin-Lapidot
and Ela Alkalai of IBI, both investment firms, were adamant that
Responsible Investment was impossible to implement in Israel.
Lapidot in particular scoffed at notions that his company would
make any investment decisions on a "moral" basis rather than a
financial one. He stressed that his company took its obligations very
seriously and all employees were of a high moral quality, but ridiculed
the idea that investments should not be made in companies who polluted
if they had done so within the limits of the law, for example. He
stated again and again that moral considerations in where to invest,
such as not investing in tobacco companies, had no place among the
considerations of "mainstream investors."
While Alkalai said it would be very hard to implement, she said
she welcomed regulations that would increase transparency and require
more reporting on these kinds of issues.
During lunch, conference organizer Galit Cohen, head of environmental policy at the Environmental Investment Ministry, told the Post she did not think Lapidot reflected the mindset of most investment bankers in Israel.
"I don't think he represents the mainstream," she said.
It seems that even as
Responsible Investment continues to pick up momentum among
institutional investors around the world, Israel may need to be dragged
kicking and screaming.