Israeli banks are in a perfect storm for ESG and transparency is fading away

Israeli banks are located in the midst of a perfect storm: Continuous erosion in their public stature; digital platforms that threaten to disrupt business models; social challenges in the ability to reorganise and to improve efficiency; cyber threats; workers unions who are prepared for change but wish to preserve their rights; decrease in the employees’ sense of belonging; a serious blow to the management remuneration capability in light of new regulations and last but certainly not least, a regulator which indeed protects their stability, yet also protects the stability of their social license to operate, with a significant increase in “social” guidelines.

Israeli banks are aware of their exposure to environmental, social and corporate governance risks, and are working to reduce them while some, even succeed in taking advantage of the inherent opportunities in these channels.

Still we cannot ignore that while compliance issues, ethics and corruption are dealt with a firm hand, transparency is fading away regarding local subsidiaries and overseas branches. One can see in several cases, the lack of uniformity in different policies towards sectors, or lack of reference to unique (Non-commercial banking) activities such as underwriting. These produce unnecessary compliance and reputation risks on core activities.

Kaima rates Israeli banks on numeric scale (1 to 100), while to the total score joins a qualitative ranking to the level transparency, for example – 83A. Each bank is examined in five major categories. Every category is analysed on between 4 to 6 aspects (unequal in weight, score again is between 0 and 100). The rating encourages transparency and provides a decisive weight in the mix of the scores-to performance.

For most banks, the ranking has a high transparency.Our take on the five major banks:

Bank Ha’poalim: There is no doubt that the circumstances that led to the chairman of the board resignation and the investigations of the US Justice Department, are burdensome on the overall risks, but the bank still manages to retain its relative advantage. We believe that the bank is ready to make the next step in reducing the high social risks to which it is exposed, alongside taking advantage of opportunities through its Stakeholders division.

Leumi: The determination and vision of the management in preparing Leumi for new challenges, have been successful but without a doubt, as much as new opportunities are created, a new internal challenges and social risks increase.

Mizrahi Tfahot: The shadow of the DOJ investigation in the United States hangs over the scores, but the third place indicates more than anything, its relative strength. Now a much broader view is needed as the new strategic plan is expected to generate additional challenges in several key aspects.

Discount: If there is a bank that demonstrates the importance of sustainability aspects analysis, then Discount Bank is an excellent example. The steps taken by the Bank’s management are paying off, but the road is long and requires collective measures on a broader level (bank & subsidiaries) in several essential aspects.

First International: An examination of sustainability aspects in First International Bank is slightly different since the bank needs to navigate between several unique stakeholders eco systems which should be coordinated, and therefore the importance of an integrated group approach here is crucial.

Amir Adar is Founder & CEO of Kaima Research.