Analysis: Major pension funds grapple with Israel – a question of interpretation?

A series of recent decisions by major European institutional investors about whether to exit or stick with Israeli companies has thrown the spotlight on how – and why – decisions about whether to “stick or twist” are made.

First up at the start of the year was Dutch pension management giant PGGM’s exclusion of five Israeli banks for financing construction in the West Bank – a decision that led to a diplomatic incident and which has also led to something of a backlash.

This was followed by the Norwegian government’s decision to exclude two firms from the Government Pension Fund that it said were linked to construction in the area (Africa Israel Investments and its subsidiary Danya Cebus). It has led to some in the Israeli media to speak of a “creeping boycott”.

Then, yesterday (February 6) came ABP’s statement that it was sticking with its stakes in three Israeli banks, in contradiction of its Dutch peer.

Let’s take a look at each decision in a little more detail.

PGGM’s announcement that it was exiting the Israeli banks came as a surprise but it probably shouldn’t have done. The investor had been engaging with them – and publicly saying so – for years. In 2013 it spoke of the “often arduous dialogue” it was having with Israeli firms.

The Dutch giant says it made the decision in the third quarter of 2013 and added the banks to its exclusion list published on January 1 this year. But then on January 8, it put out a press release announcing the decision, suggesting it wanted to draw attention to its decision.

PGGM – spun out of the renamed healthcare and social work pension fund PFZW (Pensioenfonds Zorg en Welzijn) in 2008 – stresses it is not a “boycott” of Israel and that it still has more than €60m investing in a “few dozen” Israeli companies. And it denies any political motivation, saying instead that the decision is its way of showing that “compliance with international treaties bythe businesses we invest in for our clients is of great importance to us as a responsible investor”.

It first disclosed in its 2010 responsible investment report (published in April 2011) that it had been approached about investments in companies operating in the occupied territories of Palestine. It said at the time: “We too see the conflict between Israel and Palestine as a worrying situation, because it poses a continuing threat to international peace and security.”

It decided to focus its engagement on companies closely involved in activities which appear to contravene international law: the banks financing the construction of settlements in occupied territory and firms supplying surveillance equipment or machines used to demolish Palestinian homes. A year earlier PGGM had revealed that it had started discussions with Veolia and Alstom over their role in a controversial tram line in Jerusalem.
The law in question is the Fourth Geneva Convention which bars occupying powers from transferring their populations into the occupied territories. This was backed up by an Advisory Opinion by the International Court of Justice in 2004.
This is at the heart of the issue: PGGM and Norges see it one way and ABP sees it another.
Exclusion is explicitly regarded as the last resort in PGGM’s exclusions policy and the investor only undertakes engagement when it’s deemed likely to produce “tangible results”. But the question arises: what other outcome would PGGM expect? A bit of background: Hapoalim, state-owned until 1996 and now controlled by the Arison family, was founded in 1921 by the Israeli trade union congress and the World Zionist Organisation. Bank Leumi, which traces its roots to the Jewish Colonial Trust, is currently 14.8% owned by the Israeli state. So it is questionable how receptive the banks would ever be to calls for them to stop financing construction in the West Bank.

In 2012 PGGM made contact with Maala (Business for Social Responsibility, Israel’s leading CSR organization, which has promoted the UN Global Compact in Israel since 2008), with which it discussed holding a round-table discussion with Israeli and international companies operating in the occupied territories, though the idea came to nothing as they concluded it was “not feasible at present.”

PGGM’s engagement also involved travel to Israel and the Palestinian territories to “gain a better picture of the situation on the ground.”

PGGM says it was “enlightened” by the dialogue with Bank Hapoalim and Israel Discount Bank. But engagement with other firms, such as the subsequently excluded Elbit Systems for example, was sometimes “very laborious”. But PGGM maintains that exclusion “is not an end in itself”.

Turning to the Norwegian divestment, it’s interesting for the role played by the Ethical Council, the body which advises the government on divestments – although that advice is not always taken.

The panel had originally recommended excluding Africa Israel/Danya Cebus in August 2010, though they were re-admitted to the fund’s investment universe three years later. But that decision was itself overturned last month after further information came to light.

The future of the panel is currently under discussion after a high-level body chaired by London Business School Professor Elroy Dimson advised that it be absorbed into Norges Bank Investment Management, the arm of the central bank which runs the fund’s assets. Norges recently came out in favour of this idea.

The giant fund holds more than 9,000 companies in its equity portfolio and excludes just 60. It’s a valid question to ask whether and why Africa Israel is any worse than some of the companies that lurk elsewhere in its portfolio.For example, the Ethical Council recently recommended putting Shell and Eni on formal watch over their operations in the Niger Delta – which was overruled by the Finance Ministry.

The Dimson report warns against the fund being seen as an “agitator or as an opportunist” or to be pursuing unclear agendas as it could undermine its capacity to invest on the best terms globally. It was preferable to be a “professional and predictable asset owner”.

Dimson also highlights the lack of a formal process of appeal or “public defence” for excluded companies. The analysis is based on public information, but descriptions and analysis may highlight situations and connections not absorbed by markets or regulators. Then there’s the problem that exclusions could lead to “unmerited reputational damage” for the companies affected.

Turning to ABP, the first point to note is that the statement came from… ABP itself, the pension fund for government employees, and not its asset management subsidiary APG which administers the fund.

The 2.8m-beneficiary ABP said it was responding to requests to explain why it doesn’t exclude its Israeli bank holdings. Its conclusion is that the banks themselves aren’t in breach of international laws and regulations, and that there are “no judicial rulings that should lead to their exclusion”. The giant fund also concludes that the UN Global Compact has not been violated and that there’s no cause to start a formal engagement process. Which is interesting considering PGGM’s involvement with Maala.

The Global Compact is the UN’s corporate sustainability initiative under which companies commit to 10 principles in the areas of human rights, labour, environment and anti-corruption. Bank Hapoalim, Israel Discount Bank and Bank Leumi are all currently listed as corporate participants.

APG’s stated policy is that it expects companies to act “with respect for the principles” of the UN Global Compact. It also does not invest in products which are banned under Dutch law or international regulations. This means it does not invest in companies that are directly involved in the manufacture of landmines, cluster ammunition and their firing systems, or chemical or biological weapons. The minimum standards for companies in the fields ofhuman rights, labor standards, the environment and corruption are specified in the UN Global Compact. APG does exclude on Israeli company: Aryt Industries, in connection with cluster weapon production.

As the Dimson panel noted: “The central questions surrounding exclusion or divestment are the questions of the associated benefits and costs.” That’s an advisory panel speaking, not an asset owner having to make decisions that can have far-reaching consequences.