Is Israel ready for Responsible Investment?

First-ever RI seminar shows companies may require forceful push.

water treatment plant 88 248 (photo credit: )
water treatment plant 88 248
(photo credit: )
Might motivated investors bring a more responsible corporate environment to Israel? Investors, government officials and activists gathered at the Tel Aviv Stock 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 view. 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 environmental issues. 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 area. "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. However, 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.