Living Up to ESG Expectation – Dialogue between Analysts and Israeli Companies | Maala Conference Summary 2017
Maala International Con(fair)ence 2017
Innovation for Good Life | Finance, IR and CSR Sessions
Living Up to ESG Expectation –
Dialogue between Analysts and Israeli Companies
Moderator: Philippe Sitbon, Head of Sustainability & Corporate Responsibility, BDO Consulting
Ulrika Hasselgren, Global Head of Responsible Investment Strategy and ESG Integration, ISS
Marie-Bénédicte Beaudoin, Manager Client Relations, OEKOM
Sam Block, ESG Research, MSC
Antonio Celeste, Director Institutional Relations, Sustainalytics
Cristina Daverio, Research Manager – Financials sector, VigeoEiris Group
Dror Elkayam, Environmental, Social and Governance (ESG), Bloomberg Group
Joseph Akerman, Head of Israel's Responsible Business Conduct Unit, Ministry of Economy and Industry
Noga Levtzion, CEO & Founder, Greeneye
Main Discussion Points
-There is a growth in the demand for ESG data and tools for analysis on behalf of investors, correlating to the growth in investments. There is also rising awareness to the fact that ESG data is economically material, and reviewing their relevance to the company's core business.
-Investors refer to how companies address the challenges of the future, as defined by the UN Sustainable Development Goals (SDGs).
-Disclosure is often regarded as a quality rating, and Israeli companies have room for improvement in that aspect. The challenge of disclosure can generate low ratings, not due to low performance, but as a result of lacking information. The availability of information must be ensured, and language barriers overcome.
-Dialog between companies and analysts can provide good tools for the conduct of companies and their ability to better address questions from investors.
-Perspectives and investment strategies vary in different places around the world. Possibilities include the exclusion of companies with low rating and rewarding companies with god performance.
-In the American context, there is emphasis on governance, in which Israeli companies are rated quite well, but with several problematic aspects that should be addressed.
-A change is anticipated in Israeli institutional investments following a directive of the Insurance Commissioner. Many Israeli companies have positive activities, and they should prepare and communicate the information.
Philippe Sitbon, BDO Consulting
Rating agencies are catalysts for change. They have the power to ask questions, raise awareness and as a result generate change. Our discussion will focus on helping Israeli organizations to better understand what the expectations are of rating agencies, and through them reach investors.
Dror Elkayam, Bloomberg Group
Our area of expertise at Bloomberg is the collection of data regarding ESG; and not just aggregate information, but provide clients and investors specific tools to assess risks, analysis on industry level. We see a growth in the demand for ESG functionality information in Bloomberg, and a correlation between demand and investment. Between 2014-2017, there was an annual growth of 200%. In terms of the kind of data investors are looking for: 80% are a little less sophisticated, seeking a one-stop-shop: Exclusion lists, scores, basic and easy to understand tool to assess risk on sustainability on company level.
The catalyst for SRI investment is pension funds. There is potential growth in Japan, US and Canada. Japan's governmental pension fund pledged 10% of its assets to SRI investments, and this upward trend will keep going. European investment funds, institutional funds and asset managers are leading the region in terms of SRI. What's pushing investments are investors who want just-social aspects, carbon footprint, governance.
There is a correlation of around 40% between the volume a company discloses and actual performance in terms of ESG factors of the company. Many European countries are performing well in terms of disclosure as well as quality, aligned with the portion of the money invested in SRI assets. European Investors drive European companies to disclose more, and to operate in a more sustainable way. Israel is at the bottom in terms of disclosure as well as performance, there is certainly room for improvement. The quality-transparency score is an Indication of how much companies in Israel are willing to operate in the sustainability space. In America, the push for disclosure will drive the US ranking upwards in years to come. Growth is mainly driven by Japanese and European investors.
Ulrika Hasselgren, ISS
Israel, Japan and Spain are at the top of the disclosure challenge. There is huge demand and expectation for disclosure by companies and investors – it’s a trend we cannot stop. With regard to ESG ratings and institutions, we need to be clear about what it is that we rate and what we are asking companies to disclose. There are platforms for disclosure in general, such as GRI, CDP and other initiatives that keep coming. The EU directive and other voluntary guidelines for disclosure pose a challenge, because it is in the definition of what is being asked to disclose. Investors from around the world have different investment strategies and sustainability strategies. Japan looks for inclusion and Europe on exclusion. You need to connect all the dots and be clear and transparent on what ESG analysts are rating.
Israel is Startup Nation and has fantastic innovation, business conduct and behavior and strategies that can be linked for positive impact. Many companies go global from day one. There are fantastic companies in Japan that don't disclose. There is a language barrier and they get poor ESG ratings, but you need a disclaimer that the low rating results from no disclosure, because you cannot claim it is from poor ESG rating or sustainability performance – because we don't know. With regard to the Japanese pension fund, it is the world's largest, they are outsourcing their asset fund management to external management, asking for good level of corporate governance, stewardship.
Cristina Daverio, VigeoEiris Group
The disclosure issue is challenging for companies and investors. There is a company that doesn't want to cooperate, but also the company that doesn’t understand what the investors want or are asking. Our Rating framework is stable, based on stable criteria, but integrating new emerging ESG issues that companies are facing. In order to asses companies we enter into dialog with them. We have an online platform to ensure communication day-to-day with the ESG analysts, even out of the rating process. The questions that we ask are a good management tool for the companies and tools to understand what is important to investors. Companies can raise issues as well, if they think some of the questions don't make sense regarding what they do.
In term of the Investors, the market is growing and these are good news. But also the complexity of the demand is growing. Over 20 years we observe the shifting focus of investors, from excluding what was not acceptable from a moral point of view, and there are different opinions in different countries, to situations in which investors are paying more attention to the sustainability profile of companies. There is increased awareness to the understanding that ESG is financially material. Companies that neglect social and environmental impacts are more exposed to reputational damages, conflicts with stakeholders, legal proceedings etc. that have impact on the value creation of the companies. The specific landscape in which we operate is dominated by consequences of the financial crisis and fears of economic slowdown, increased inequalities, immigration… a number of challenges well framed by UN SDGs. Investors know that and look to invest in companies that are able to address these challenges.
Our role as financial rating companies is to inform investors what is happening in this changing landscape, the issues that they need to pay attention to, and opinions on the companies, whether they can do this. We engage with companies and develop insights on what is more material for them to provide information on, complete and comprehensive information on material issues for them. We provide a most comprehensive opinion to investors. Investors in different parts of the world have different perspectives. Mainly in Europe: clients use the score either to exclude companies with low EG scores, due to the weak performance in their ability to manage and mitigate, or to reward companies with best performance in their region and sector, or mix both practices. Europe is concerned with the consequences of climate change, but also the SDGs gets a lot of attention. We provide information on companies that through their products and services are contributing to achieving these goals.
Sam Block, MSC
The history and trends of responsible investment in the US are different from Europe. 10 years ago it was based primarily on exclusions, screenings on the basis of ethical values. These are still popular in the US, though the process has evolved. We are getting requests for screens on companies involved with coal, based on activism related to climate change.
US investors see Israel rather favorably, more than Europe generally. We see activists-investors that are looking to divest from Israeli companies, but it is pretty rare. There are laws in several states determining divestment from companies that are publically pro-BDS. The screening approaches are based on SRI-based funds, with a specific mandate from a particular client. Most growth in products of ESG ratings, focus on how ESG is looking at core aspects of companies, corporate responsibility and how the company is bettering
society. Investors are looking at how the companies are managing their risks. Mainstream investors are interested in sourcing, managing product safety, in the case of banks – corruption, managing risks for clients.
In terms of how investors are using our information, we understand better the risk, what is not worth the return on investment, or point out risks you should be addressing. These are key risks, we do not regard every single different product. The most universally accepted ESG key issue is on corporate governance, which we haven’t discussed much here. In our ratings, Israeli companies generally do quite well in corporate governance, although there are clear areas Israeli companies have problems with, issues that are often flagged: aggressive accounting standards, not fully independent audit committees, related party transactions. Israeli companies should understand the expectations and differences, and present themselves to foreign investors so they will understand this narrative and how companies understand the risk and what they are doing about it.
Marie-Bénédicte Beaudoin, OEKOM
The Sustainable Development Goals – SDGs, is a framework adopted by the UN, of 17 objectives, primarily for governments but also applicable for businesses, of big challenges and risks that the world sees as rising. We identified 13 objectives with specific business implications and opportunities. Our complex methodology refers to aspects that are positive toward the achievement of SDGs. What is Important today is that SDGs have been adopted by investors, asset managers, funds created around certain SDG topics, indexes linked to SDGs and the attention of private funds. For example, when looking at banks, we look at objectives that are either social or environmental, like micro insurance, micro finance, investing or loans to increase access to housing; to students – types of products that have direct impact on education, gender equality – real economic opportunities, a framework for a better society and also a better economy. It is good for CSR and for the economic world. CSR is evolving, so it can be difficult to track it. With the maturity of the industry, within 10 years these issues could be more standardized.
Antonio Celeste, Sustainalytics
Our company has 600 clients all over the world, and we rate 8,000 companies. But we can make mistakes. Every time we analyze a company, we send a complete analysis to the company. I want to address the issue of communication: even if comprehensive information is available, in some cases it is a very practical point: you must state the contact person. It is a minor detail, but sometimes it can be difficult to identify the right person. We give 2 weeks to reply, and if we send the information to the wrong person it can be problematic.
We understand the point of view of the responsible investment company, and it is an economy of scale. By having dialog with the rating company, when you test your communication strategy with us, you can reduce the amount of time you spend with the investor and be able to tackle their most difficult questions. After all it is a beauty contest, you need to show how beautiful you are. If you don’t communicate, just innovation or having a good financial matrix is not enough.
The key issues you will face from Nordic investors (less from France) – are behavior and impact in the segment. To address the elephant in the room – it is not about a boycott of Israel, there is a scale to understand the impact of the product. If the product is increasing tension – it is bad. In the Israeli context, for example, the Bulldozer, is not bad in itself, or when used in agriculture. When used to destroy houses, it is bad to the Nordic investor. You need to improve and tackle the communication strategy in the right way.
Joseph Akerman, Ministry of Economy and Industry
CSR has economic value, and is relevant to anyone wanting to be a player in the global world. ESG refers to a theoretical sterile situation, but we need to dive to reality. No one likes exclusion or blacklists, and that pinpoints why we have problems with disclosure. Israeli companies have a lot to show the CSR world, as part of the DNA of Israeli society. Blacklisting is a reminder of something else for Israelis, it is a cultural issue. The problem is not that the companies have nothing to show, but rather what is the reason that they are being asked this question. The question should be: what is your ESG/CSR policy? And not – what is your CSR policy in the territories?
Sometimes you start looking at Israeli companies from an 'incident' starting point; starting from the negative – the company operates in the territories, which is illegal so the company is illegal. Instead of looking at it like any other company around the world, operating in a 'risk zone'. But if you start out from a conflictual issue, you will always have mistrust and confusion. You must use it in a positive way. There are difficult questions that should be answered, but it must be started with a positive note, otherwise the door will be slammed shut and it will be difficult to reopen.
Noga Levtzion, Greeneye
The new directive of Israel's Insurance Commissioner is about risk and about growth. Any institutional investor will have to say if they have a policy for responsible investments, and they don't, they will have to declare that they don’t look at those issue. It is a significant thing with a mounting impact, the institutional investors will have to address the issues. The question is where they will take it from here. It is important for companies to understand the milestones the investors will have, which will Impact our expectations from them. Institutional investors will go through 3 stages:
First – mapping the portfolio using databases from around the world and about Israeli companies. Where are we? How much risk are we exposing our clients to? second – making decisions on policy and strategy; third – product development, working with the investors that are developing products for Israeli clients. The issue of disclosure is significant, the lack of language is a very important challenge. We can go to the company and communicate in Hebrew, we know the people and the context. It is important to understand that when a company produces a document it needs to be in English. Although the legally-binding version is only in Hebrew, you still need to prepare a parallel document in English. There must be understanding that there is going to be engagement. You need to be involved and take it as a working tool, what we need to improve next, being attractive to SDGs. Many Israeli companies have SDG contributions.
We looked at 125 companies, and tracked SDG historically. The wider picture is that in terms of returns they are better than the benchmark. It will take time for institutional investors to adopt it, and first-comers will have a marketing advantage. There is public interest in promoting it.