Altshuler Shaham backs impact investment

Gilad Altshuler

Israel's largest investment house CEO Gilad Altshuler says there is growing public pressure to invest in companies that reduce damage to the environment and society.

Some companies have begun issuing annual reports about their impact on the environment and society. These are voluntary reports with no uniform or binding standard. Some companies list annual or long-term environmental goals, and a few may detail, in part, the negative impact their business has had on the planet.

This form of reporting offers a glimpse into the impact different companies have, and is being used increasingly by investors in examining the environmental, social and governance (ESG) aspects of existing or potential investments. However, these reports do not qualify as a comparative standards between companies, nor can they quantify in economic terms, their environmental impact.

It’s hoped that a new accounting model, currently being formulated for measuring impact, will change the situation. The model will provide tools for measuring and reporting the financial aspect of a company's impact, enabling investors, managers and policymakers to receive an overall picture of a particular company's impact on the environment, and quantify financially its contribution to the climate crisis - allowing managers to make more informed decisions.

Spearheading this model is Sir Ronald Cohen, Chairman of the Global Steering Group for Impact Investment (GSG), who has joined forces with Harvard Business School and Prof. George Serafeim to create the Impact-Weighted Accounts Project. The preliminary findings of this accounting methodology - presented recently by the two and discussed at a conference held by the Israel Forum for Impact Economy (IFIE) in collaboration with the Faculty of Management at Tel Aviv University - shed light on the need for an operational measurement methodology for environmental impacts, its effect on markets, and profit margins.

Over the past year, there has been a growing trend towards diverting investment away from the pollutants and fossil fuels that are accelerating the climate crisis. In Israel, Fossil Free Israel works with institutional entities to create investment channels that steer clear of fossil fuel investment, and encourage investment diversion in the local economy.

At the IFIE conference, Gilad Altshuler, one of the owners of the Altshuler Shaham Group, may have dropped a hint as to the future and the appeal of accounting tools for measuring impact in this new area of investment. "There is market pressure," he said. "Ultimately, we manage money for the general public. The public is turning to us, en masse, pressuring us for answers as to our intentions. We’ve made decisions that haven’t yet been announced, and are about to make significant decisions in some sectors where we won’t invest at all, and other sectors where we’ll allow some time and then stop investment. The public's desire for a better and cleaner investment world is self-evident and also understandable to investment managers."

Workplace diversity also has economic value

According to the Harvard model, which has thus far examined the financial public reports of thousands of companies, many companies move from profit to loss when taking the environmental damage of their operations into account. 15% of some 1,700 companies with positive balances, dealing in aviation, paper and wood products, construction materials, electricity, container and packaging products, move from profit to loss after taking into account the environmental damage caused by their activities. In 32% of companies, operating profit was cut by 25% or more. In other words, environmental costs for many companies exceed overall profit.

The [Harvard] report also details activities of several international giants. Sasol and Solvay, two chemical companies with sales of about $12 billion each, caused environmental damage of $17 billion and $4 billion a year, respectively, while BASF, with $70 billion in sales, caused an estimated $7 billion in environmental damage.

The report reveals differences in the levels of environmental damage for other industries. In the food industry, the effect of environmental damage on profits ranges from 5% per year (at Nestle, for example), to 62% (at British Foods). When calculating environmental damage for oil and gas companies, 75% have their profits cut by more than 25%.

The Harvard model also examined a number of large Israeli companies, whose activities have an environmental effect. What would happen if Strauss Group Ltd. (TASE:STRS) took the overall environmental impact of its products into consideration? In 2019, environmental damage could have resulted in a 30% decrease in operating income, having caused a $75 million in negative environmental impact for that year. Shikun & Binui Holdings Ltd. (TASE: SKBN) was also examined; its environmental damage would have resulted in a 21% reduction in operating profit, with a negative environmental impact estimated at $58 million for 2017.

The methodology also addresses diversity and its positive economic impact for companies. Intel, which pays its 50,000 employees in the US more than $7 billion a year and promotes their wellbeing, generated about $3.6 billion in positive impact in the US in 2018, through wages and jobs offered in high-unemployment areas. On the other hand, measure Intel's diversity relative to local demographics and its positive impact diminishes by about $2.5 billion.

Lowering the ability to survive

Yaron Neudorfer, IFIE chairman and CEO of Social Finance Israel, claims that the model being developed at Harvard - to be finalized during the next two years - is "a significant milestone for the global economy." Neudorfer refers to the 1929 Wall Street crash, after which the government required all companies to produce financial statements according to uniform accounting rules. "In the same way, impact-quantifying models will become mandatory in the future; today’s market wants to know clearly the financial impact a company’s operations has on society and the environment. They are no longer satisfied with partial or wordy reports," says Neudorfer. "Various entities, including company executives, investors, regulators, and government want to make management and investment decisions based on return, risk and impact."

Dorit Salinger, former head of the Capital Market, Insurance and Savings Authority and an IFIE member, explains that as the impact accounting methodology become standard, various market entities will also use these tools to understand and assess the impact of their activities on the environment and society. They can then act to reduce the gaps they uncover, whether through structural changes or by implementing new technologies.

Regulators also have a role to play in this arena. According to Salinger, "Those companies that won’t change the products and production processes that harm the public and the environment - lower their ability to survive over time." Governments and regulators can create incentives for companies to implement such methodologies, or conversely, use models that calculate environmental damages costs, and estimate credit.

Asked how she views investor attitudes about impact, Salinger looks back a few years, to when she served as Commissioner of the Capital Market Authority. As the authority responsible for regulating entities that manage public pension funds, Salinger issued a directive that entities were required to disclose whether they had made social and environmental impact a part of their investment considerations, or that they had not taken any special measures to examine impact.

"In the first year, reporting was very poor and didn’t deviate from what the law or corporate consultants said. But the second year, things started to change and reporting started going deeper. Recently, the Capital Markets Authority has even requested the Investment Committee determine an investment policy that relates to ESC considerations, as part of determining its general investment policy," says Salinger. "This is being expressed in the field. Millennials are more aware of this issue. I get questions like, 'If I don’t want my provident fund to invest in a way that doesn’t take the environment into account, what do I do?' It’s important to offer appropriate routes, that take societal and environmental issues into account, and the carbon footprint of the companies. These channels will multiply, and eventually form the general investment fund. They will be the norm."

Published by Globes, Israel business news - en.globes.co.il - on May 31, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Gilad Altshuler
Gilad Altshuler
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