Might motivated investors bring a more responsible corporate environment to Israel?
Investors,government officials and activists gathered at the Tel Aviv StockExchange on Monday to discuss how Environmental, Social and CorporateGovernance (ESG) issues could find a respectable place alongsidefinancial bottom lines, stock prices and quarterly financial reports.
Israel's first-ever seminar to debate the growing field ofResponsible Investment was sponsored by the Environmental ProtectionMinistry; the European Commission; Life and Environment, theenvironmental umbrella organization for nongovernmental organizationsin Israel; Eiris and Greeneye, which advises financial firms onenvironmental issues; and the Maaleh advocacy group.
Responsible Investment advocates the inclusion of ESG issues inanalyses and investment decisions to reduce risk, increase investmentgains and bring investments more in line with the investor's worldview.
International guest speakers included DonaldMacDonald, the chairman of the UN's Principles for ResponsibleInvestment (PRI) Program.
Responsible Investment (RI) is the notion that ESG issues,while hard to quantify, have a growing effect on investments and levelsof risk and therefore should be factored into investment analyses anddecisions. While proponents do not say that investors should refrainfrom investing in companies that pollute, for example, they say thatthat information should be made available to investors because itaffects the long-term value of the asset.
Some of the biggest proponents of RI areinstitutional investors such as pension funds, foundations andendowments. While pension fund managers' chief priority will always beto make money for their clients, more and more are saying that otherissues should be taken into account alongside financial information.
The PRI was formed three years ago by the UN to provide aframework and network for those looking to incorporate ESG issues.Since its start with just 50 members, it has grown to 580 signatorieswith assets of over $18 trillion, MacDonald told The Jerusalem Post on the sidelines of the conference Monday.
Environmental Protection Minister Gilad Erdan (Likud) said theministry had sponsored the conference because it was an issue "ofunparalleled importance, one which was only going to become moreimportant rather than turn into a passing fad."
Erdan pointed to an array of environmental legislation inrecent years that could impose serious costs on violators, such as the"polluter pays" law, boosted local authority enforcement, and freedomof information requirements expanded to include reporting onenvironmental issues.
Erdan also announced that he had worked out an agreement withthe Israel Securities Authority to put in place standardizedenvironmental disclosure procedures for all public companies. The newregulations are expected to go into effect sometime in 2010, he said.
Throughout Monday's seminar, the question of whetherResponsible Investment should be voluntary or imposed by governmentregulation was touched on again and again. Finance Ministry capitalmarket, insurance and savings supervisor Yadin Entebbe opined thatregulations were necessary because "somehow, like a lot of other thingshere, what should emerge naturally from the market doesn't."
However, Stock Exchange CEO Ester Levanon compared RI to thecampaign to train the public not to pick wild flowers. That campaignwas perhaps one of the most successful in Israeli history and it wasvoluntary, she said.
The UN's PRI is a voluntary organization and MacDonaldchampioned that position. While "regulations set the setting, the realdrivers are the investors," he said.
In the aftermath of the financial crisis of last year, moretransparency and accountability are needed, he added. Part of the PRIapproach is to encourage complete transparency so investors are awareof the decisions of the companies in which they invest.
Dr. Daniel Summerfield, co-head of Responsible Investment forthe UK's Universities Superannuation Scheme (USS), argued that byincluding ESG issues, "we will be in a better position to make informeddecisions. We can turn risk management into value creation. Right now,there is perhaps too much focus on the short-term and not whether acompany will last. And as we know now, numbers can be misleading andthe 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 achange in the near future, where pollution costs became internal ratherthan external. At present, many companies can pollute air, water or theground and the public picks up the tab to rehabilitate it or justsuffers from it. However, that will increasingly change and companieswill have to take more financial responsibility for cleaning up suchproblems, 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 raisetheir standards to meet the higher expectations of overseas investors.Instead of being compared to South Korea, they'll be compared toGermany or Spain."
Idit Reiter, a partner at Tel Aviv law firm Yuval Levy &Co., concurred that Israel would most likely have to comply more andmore with this international trend, because of both domestic andforeign pressures. Domestically, new regulations and new lawsuits arehighlighting the relevance of environmental risk. Reiter pointed to anumber of recent cases in which local residents launched multi-millionshekel lawsuits against companies in their region for polluting thearea.
"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, likethat which forced the closure of Carmel Chemicals factory last week, asmore evidence of the increasing importance of Environmental, Social andCorporate 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-Lapidotand Ela Alkalai of IBI, both investment firms, were adamant thatResponsible Investment was impossible to implement in Israel.
Lapidot in particular scoffed at notions that his company wouldmake any investment decisions on a "moral" basis rather than afinancial one. He stressed that his company took its obligations veryseriously and all employees were of a high moral quality, but ridiculedthe idea that investments should not be made in companies who pollutedif they had done so within the limits of the law, for example. Hestated again and again that moral considerations in where to invest,such as not investing in tobacco companies, had no place among theconsiderations of "mainstream investors."
While Alkalai said it would be very hard to implement, she saidshe welcomed regulations that would increase transparency and requiremore 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 asResponsible Investment continues to pick up momentum amonginstitutional investors around the world, Israel may need to be draggedkicking and screaming.