Last December, the Tel Aviv Stock Exchange, in conjunction with the Clean Money (Kessef Naki ) Forum, launched the Tel Aviv 125 Fossil Free Index, a green version of the existing Tel Aviv 125 Index. The new index consists of the Tel Aviv 125 stocks excluding fossil fuel companies.
The only way to gain exposure to stock market indices is via tracker funds, but for six months the public had no way of becoming exposed to the new index because no financial institution was interested in it. A month ago, Migdal Capital Markets became the first financial institution to offer a fund tracking it. There are sixteen funds that track the standard Tel Aviv 125 Index.
The Clean Money Forum approached all Israel's financial institutions and tried to persuade them to do the same as Migdal Capital Markets, but they are not rushing to take up the idea. "The investment houses were skeptical about such a fund. Forming one involves costs and legal work, and the investment starts to pay back when total investment in the fund reaches the tens of millions of shekels. At the moment the amount invested in the fund is small; it's just getting going," says Roy Mimran, chairperson of the Israel Forum for Pension Saving and a member of the Clean Money Forum. "Investment houses say that they need to see greater demand from consumers before deciding that the idea is attractive. They're sitting on the fence, but Migdal Capital Markets was sufficiently decisive to take this step."
Mimran adds that the low level of awareness is not just on the part of consumers, and that the local market's doziness in relation to what is happening overseas is liable to have a price later on. "Most investment advisers still don’t know about this fund, and are altogether ignorant of the subject of fossil free indices," Mimran says. "Meanwhile, the new government is about to impose a carbon tax, and clearly, those investors who don't invest in polluting companies are the ones who will not be hurt by the carbon tax. The market has not digested this yet. I hope that we'll start to see its effect on pricing of stocks soon, and anyone who has listened to us will discover they have saved money and avoided losses, and whoever has not, will discover that they have lost."
Investment in the Tel Aviv 125 Fossil Free Index makes resources available to green energy and represents support from the capital market for the country's goals for switching to renewable energy. Besides the environmental and social return, it looks as though the Tel Aviv 125 Fossil Free Index also provides a decent economic return over time. According to a simulation carried out by the Tel Aviv Stock Exchange before the new index was launched, in comparison with the regular Tel Aviv 125 Index, the Tel Aviv 125 Fossil Free Index yielded aggregate extra returns of 65% over five years and 14% over three years. This is similar to the performance of environmental indices around the world, which present higher returns that the regular benchmark indices.
A senior capital market source told "Globes": "We saw that there was a wide gap between declared commitments to ESG and the maturity of demand on the part of the end customers, the investors. Marketing people sell what's easy to sell, and not what they have to educate the market about. It's a long haul. When energy prices moderate or fall, it could be that there will be a boost for the clean index. It's a matter of time."
Investor flight
Why, in that case, did Migdal Capital Markets decide to launch the tracker fund? Joseph (Yossi) Mavor, head of Quantitative Investments at Migdal Capital Markets, explains that the decision was a business one, with a view to the long term. "There is a flight of investment from fossil fuel companies, and the ability of these companies to raise capital is shrinking. Unless these companies succeed in making the switch to renewable energy, they will not survive in the long run.
"Fossil fuel companies are the new tobacco companies. In business, it never pays to be first, unless the writing is on the wall, and that's the case here. The Israeli public does not yet give high priority to the climate crisis, but when we get to 45 degrees in the summer, Israelis too will ask themselves 'What happens now?', and not just the Canadians. As far as we are concerned, it's future-oriented thinking."
Why is the change happening more rapidly overseas? Public awareness is augmented by regulation, which is pushing markets towards ESG investment. For example, from October 2022, all investment products and investment advisers in the EU will be obliged to take ESG considerations into account. For European financial institutions and funds, 50% of the companies on Nasdaq will not be fit for investment. It is not inconceivable that the US, under the Joe Biden administration, will start to hurry to come into line with the European standards.
In Israel, the matter is still in its infancy. In April this year, the Israel Securities Authority called on public companies to comment on ESG risks in their reports, but this is still only voluntary.
"The clearer that regulation of the financial institutions becomes, the greater will be the demand for products such as the Tel Aviv 125 Fossil Free Index," says Mavor. "Since the Securities Authority's call to companies is a voluntary guideline, it will presumably be a long time before there are enough Israeli companies that implement it, and only then will it be possible to launch local ESG-based indices. This means that, for the present, the Tel Aviv 125 Fossil Free Index represents a very important interim solution for linking the local market to the global trend of responsible investment. This is the only stock market index that relegates companies from a leading index and in effect boycotts polluting industries. We see great importance in raising awareness of the matter among all the decision makers, among them investment institutions and regulators, in order to come into line with the US and Europe."
Published by Globes, Israel business news - en.globes.co.il - on July 7, 2021
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