Analysis: investor-loving Israel tarnished by Palestinian conflict, but still pulling hard

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(Clarifies investor status of NZ Super Fund in paragraph 12)

LONDON (Reuters) – As the bloodiest chapter in the Israeli-Palestinian conflict unfolded last month, the world’s largest sovereign wealth fund said it was removing two Israeli companies from its investment portfolio on humanitarian grounds.

Acting on a recommendation by the ethics committee of the $ 1.3 trillion Norwegian fund made in late 2020, the timing of the announcement was a coincidence.

But occurring during an 11-day battle in which hundreds of Palestinians have died, it was a stark reminder of the ethical choices global investors must make in return for parking money in a country that offers the rare combination of high, financially secure returns and an anything but coronavirus-proof economy. The Norwegian heritage fund holds one of the largest stakes in companies listed by the Office of the United Nations High Commissioner for Human Rights (OHCHR) as causing the most concern due to their operations in the Palestinian territories, according to Reuters findings based on Refinitiv data at the end of March.

Like other large investors in Israeli assets, the fund shows no signs of widespread withdrawal from a country not subject to international sanctions, and the tech and financial-rich Tel Aviv stock market has hit a low. record Monday.

But the actors draw lines, the distance from active participation in companies linked to possible abuses being a common criterion.

The Norwegian fund has abandoned Shapir Engineering and Industry for the construction of houses in the Israeli settlements in the West Bank, and Mivne Real Estate KD for the rental of industrial buildings linked to these settlements.

Both investments have created “an unacceptable risk that companies will contribute to systematic violations of the rights of individuals in war or conflict situations,” said the board of directors of the central bank of Norway – which makes decisions on the basis of the fund’s ethical watchdog recommendations – in its May 19 report. declaration.

A spokesman for Shapir said the investment had been around $ 1 million, adding that there was no Israeli company that was not “operating or profiting” from the territories of the West Bank.

A spokesperson for Mivne said his settlement properties had a mix of Jewish, Palestinian and Arab Israeli tenants and were “a symbol of coexistence” between different populations.

Israel views the West Bank settlements as legitimate, and OHCHR does not comment on the legality of corporate activities in its database, which it updated last year.

Other prominent investors in these companies, which are mostly Israeli, include New Zealand sovereign wealth fund, NZ Super Fund, US asset management giants BlackRock and Vanguard Group, fund manager Charles Schwab Investment Management (CSIM) and CalPERS, the largest US public pension fund.

PASSIVE TRACERS

The NZ Super Fund said in March it had excluded five Israeli-owned banks on the grounds of responsible investing.

He said he used information other than the OHCHR list to make his investment decisions. “A key factor is the proximity and importance of the company’s actions to this illegal or unethical activity,” the fund told Reuters. “We make a distinction between a company that is directly and materially involved… and a supplier of materials or services in the ordinary course of business. ”

He owns other Israeli companies flagged as a risk by OHCHR, while data showed his Norwegian counterpart had investments worth $ 1.3 billion in 81 Israeli companies at the end of 2020, more double what they were ten years 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 the exposure of its exchange-traded index funds (ETFs) and mutual funds to companies on OHCHR’s list was motivated by passive tracking of a benchmark. “CSIM does not currently apply any social screens or similar restrictions for industries or companies specific to index funds or ETFs,” he added. A large proportion of investments in Israeli stocks are likely to come from these passive funds, which track indices that include them. Israeli stocks have a 0.18% weight in the MSCI World Index, which has $ 3.7 trillion in assets compared to it. Israeli equity funds attracted capital during the conflict last month, according to data from Refinitiv Lipper.

“YELLOW LIGHT” APPROACH

From an environmental, social and corporate governance (ESG) perspective, Israel also remains attractive.

Its two largest banks, cited by OHCHR for settlement funding, rank in the top third of global banks on ESG, according to data from Sustainalytics, an ESG rating firm that said it would not put not updating its country risk assessment for Israel following last month’s violence. .

The United Nations Human Rights Council voted last week to launch an investigation into the allegations of crimes committed during it.

Israel has said it will not cooperate, having also dismissed as “absurd” an April accusation by New York-based Human Rights Watch that Israeli officials committed “crimes of apartheid.”

“The more mainstream this (term) is, the more difficult it will be for companies and investment review agencies to physically separate what is happening in Israel from what is happening with its activities in the occupied territory,” Michael Lynk, the UN special rapporteur on the situation of human rights in the Palestinian territories told Reuters.

Meanwhile, Israel’s robust economy and its investment grade credit rating are on track to withstand the impact of the conflict, the ensuing political upheaval and the weakening of the coronavirus epidemic against which 80% of adults are fully immunized.

So, just like the Saudi debt investors who took stock after the 2018 murder of investigative journalist Jamal Khashoggi at the country’s Turkish embassy, ​​the financial argument for staying put remains compelling.

“Most investors dodge the problem and are likely to continue to do so until asset allocators take a stand,” said Hasnain Malik, head of emerging and frontier markets strategy at Tellimer.

Most international companies were following the “yellow light” approach to the economy of the settlements, which means they were cautious but kept moving forward, UN Lynk added.

Social movements have sought to exert pressure, with Axa facing some of the loudest appeals.

“Our investments in Israeli banks have absolutely no vocation to finance the expansion of the occupied territories,” the French insurer said in a statement. Retail investors also seem unfazed. Israel-based equity fund manager Alpha LTI has seen few signs of any significant exits or entries over the past month, said managing partner Sagi Ben Yosef.

He is partnering with an Australian fund manager providing high net worth retail investors with exposure to Israeli stocks and is in talks to strike similar deals in South Africa and the United States. “The interest in Israel is far greater than anything that happens,” he said.

(Additional reporting by Toby Sterling in Amsterdam, Gwladys Fouché in Oslo and Steven Scheer in Jerusalem; editing by John Stonestreet)

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