© Reuters. FILE PHOTO: This June 22, 2017 illustration photo shows an Israeli shekel note. REUTERS / Thomas White / Illustration / File Photo
From Tom Arnold
LONDON (Reuters) – As the bloodiest chapter of the Israeli-Palestinian conflict in years unfolded last month, the world's largest sovereign wealth fund said it was removing two Israeli companies from its investment portfolio on humanitarian grounds.
Based on a recommendation by the Ethics Committee of the $ 1.3 trillion Norwegian Fund in late 2020, the timing of this announcement was a fluke.
But during an 11-day battle that killed hundreds of Palestinians, it was a brutal reminder of the ethical choices global investors must make to park money in a country that offers the rare combination of high and financially secure returns and an almost coronavirus-safe economy. Norway's wealth fund is one of the largest holdings in companies that, according to Reuters' results based on refinitive data from late March, raise the most concerns because of their operations in the Palestinian territories, according to the United Nations High Commissioner for Human Rights (OHCHR).
Like other large investors in Israeli assets, the fund is showing no signs of a major exit from a country that is not subject to international sanctions, and Tel Aviv's technology and finance-heavy stock market hit a record high on Monday.
But the actors draw some boundaries, with the distance from active participation in companies in connection with possible abuse being a common criterion.
The Norwegian fund dropped Shapir Engineering and Industry for building houses in Israeli settlements in the West Bank and Mivne Real Estate KD for renting out industrial buildings connected to these settlements.
Both investments presented "an unacceptable risk that companies would contribute to systematic violations of individual rights in a war or conflict situation," said the board of directors of the Norwegian Central Bank, which makes decisions based on the recommendations of the fund's ethics watchdog his opinion of the 19th statement.
A Shapir spokesman said the investment was about $ 1 million, adding that there is no Israeli company that "does not operate or benefit" in the West Bank areas.
A spokesman for Mivne said the settlement lots had a mix of Jewish, Palestinian and Israeli-Arab tenants and were "a symbol of coexistence" between different population groups.
Israel regards the settlements in the West Bank as legitimate and OHCHR does not comment on the legality of the companies' activities in its database updated last year.
Other big investors in these firms, mostly based in Israel, include the New Zealand sovereign wealth fund, the NZ Super Fund, US wealth management giants BlackRock (NYSE 🙂 and the Vanguard Group, money managers Charles Schwab (NYSE 🙂 Investment Management (CSIM) and CalPERS, the largest US public pension fund.
The NZ Super Fund said in March it had banned five Israeli banks on grounds of responsible investment.
It said it used information other than the OHCHR list in its investment decisions. "A key factor is the proximity and relevance of the company's actions to these illegal or unethical activities," the fund told Reuters. "We make a distinction between a company that is directly and significantly involved … and a supplier of materials or services in the normal course of business."
It holds other Israeli companies classified as at risk by OHCHR, while data showed its Norwegian counterpart held $ 1.3 billion in investments in 81 Israeli companies at the end of 2020, more than double what it was a decade ago . Norges Bank Investment Management, which manages the Norwegian fund, declined to comment on its investments in Israel. Vanguard and BlackRock also declined to comment.
CSIM said index exchange traded funds (ETFs) and mutual funds' exposure to companies on the OHCHR list was driven by passive tracking of a benchmark index. "CSIM does not currently apply social screens or similar restrictions for any particular industry or company to index funds or ETFs," she added. A high proportion of investment in Israeli stocks likely comes from such passive funds that track indices that contain them. Israeli stocks have a 0.18% weight in the which has assets of $ 3.7 trillion. Israeli equity funds have seen inflows from the conflict last month, according to Refinitiv Lipper data.
"YELLOW LIGHT" APPROACH
Israel still looks enticing from an environmental, social and corporate governance (ESG) perspective, too.
Its two largest banks, named by OHCHR for funding settlements, are in the top third of the world's banks on ESG, according to data from Sustainalytics, an ESG rating company that doesn't update its assessment after last month's violence would.
The UN Human Rights Council voted last week to open an investigation into allegations of the crimes committed during this period.
Israel said it would not cooperate after rejecting as "ridiculous" an April allegation by New York human rights organization Human Rights Watch that Israeli officials had committed "apartheid crimes".
"The more this (term) becomes mainstream, the more difficult it becomes for companies and investment review agencies to physically separate what is going on in Israel from what is going on in the Occupied Territory," said Michael Lynk, the UN special rapporteur on human rights in the Palestinians Areas, said Reuters.
Meanwhile, Israel's resilient economy and investment grade credit rating is on track to withstand the effects of the conflict, subsequent political upheaval, and a weakening coronavirus epidemic, against which 80% of adults are fully vaccinated.
Similar to investors in Saudi Arabian debt, who took stock after the murder of investigative journalist Jamal Khashoggi in the Turkish embassy in 2018, the financial argument for staying remains compelling.
"Most investors are dodging and likely will continue to do so until asset allocators take a stand," said Hasnain Malik, Emerging and Frontier Markets Strategy at Tellimer.
Most international companies followed the "yellow light" approach to settlement economies, which meant they were cautioned but kept going, added Lynk of the United Nations.
Social movements have tried to apply pressure, with Axa facing some of the loudest shouts.
"Our investments in Israeli banks have absolutely no purpose in financing the expansion of the occupied territories," the French insurer said in a statement. Private investors are similarly unimpressed. Israel-based equity fund manager Alpha LTI saw little sign of significant outflows or inflows in the past month, said managing partner Sagi Ben Yosef.
She is working with an Australian fund manager who offers high net worth investors exposure to Israeli stocks and is in discussions to reach similar arrangements in South Africa and the United States. "Interest in Israel is much bigger than anything that's happening," he said.