Israeli financial institutions required to factor in ESG

Moshe Bareket  credit: Yossi Zamir

Israel's financial services regulator is catching up with the global investment trend on environment, social, and governance risks.

The Capital Markets, Insurance and Savings Authority, headed by Moshe Bareket, has published a circular requiring financial institutions to consider ESG (environment, social, and governance) factors and developing risks (such as cybersecurity and technology risks) insofar as they might affect the performance of an investment portfolio.

Somewhat late, the Capital Markets, Insurance and Savings Authority thus joins a global trend. In recent years, the recognition of environmental, social and corporate governance considerations in the financial world has been growing, as financial institutions have come to understand that these factors can substantially affect investors' portfolios. Financial institutions around the world formulate policies in this area in response to changing conditions. The Capital Markets, Insurance and Savings Authority is now requiring entities that it supervises to consider these factors as they affect the performance of investment portfolios, and to consider cybersecurity and technology aspects as well.

These entities will be required to present procedures and methodologies relating to ESG, and to bring them to investors' attention by publishing them annually as part of their investment policies. They will also be required to formulate rules and policies concerning the development of internal expertise on these matters. In the interim, until they have developed the necessary expertise, financial institutions will be permitted to contract with external ESG experts, as long as this does not create any conflict of interests.

Prominent examples of ESG considerations are dealing with air, water and ground pollution, and promoting clean energy infrastructure, insofar as these factors could affect investment returns and risk. Corporate governance factors include risk management, incentives policies, conflicts of interests, and protection of shareholders' interests.

Adv. Orly Aharoni, chairperson of the Climate Investments Indices Committee at Life & Environment, the Israeli Union of Environmental NGOs, said, "Uniform methodologies and parameters for examining climate risks are still lacking. It would have been appropriate to refer in the circular to the accepted international methodology of the TCFD (Task Force on Climate-related Financial Disclosures), which requires construction of short-, medium-, and long-term strategies, and full disclosure of exposure to investments in fossil fuels, together with planning for reducing these investments. Without a uniform platform, it's impossible to know how 'climate risks' are measured, and investors will not be able make educated comparisons in order to understand which investments are more risky and which are less."

The Capital Markets, Insurance and Savings Authority has not set uniform parameters, in order to avoid determining the analysis for the institutions, and to let them set their methodology in accordance with the method that seems best to them. The Authority sees it as an evolving subject, and it may be that later on, after the initial analyses are examined, it will guide the institutions through a recommended methodology.

Published by Globes, Israel business news - en.globes.co.il - on November 21, 2021.

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

Moshe Bareket  credit: Yossi Zamir
Moshe Bareket credit: Yossi Zamir
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