Regulators in Conversation: Financial Risk and Climate Change
"If you look at the S & P, close to 86% of companies today report on Environmental, Social, and Governance (ESG) compared to a decade ago" said Anat Levin, CEO, BlackRock Israel, on the topic of how the global financial market adapts itself to ESG
As part of the Israel Democracy Institute’s Eli Hurvitz Conference on Economy and Society, a panel was held this afternoon (Dec. 14th) with the participation of regulators who deal with financial risks in the shadow of the climate crisis. For the past two years, the Israel Democracy Institute, in collaboration with the Ministry of Environmental Protection, the Ministry of Transport, the Ministry of Energy, the Ministry of Economy, the Ministry of Finance, the planning director, and the OECD, has been working on a multi-sectoral and cross-office process for formulating a vision for a transition to a pollution-free and prosperous economy by 2050.
On the topic of how the global financial market adapts itself to ESG, Anath Levin, CEO of BlackRock Israel said: “If you look at the S & P, close to 86% of companies today report on environmental, social, and corporate governance (ESG) compared to a decade ago. In a Blackrock study that examined the effects of close to $25 trillion in investments across 27 countries, Europe was found significantly more advanced in the importance given to ESG than the US and Asia. When investors are asked what motivates them about ESG, in Europe they say “it’s the right thing to do,” while in the US and Asia they say they need to manage risk and “our boards demand it,” meaning their investors demand it. Another dramatic statistic: when these investors are asked what their investments will do in five years time, their answer is “five times growth.” This means that this tectonic movement is far more powerful in Europe than in the US and Asia.”
Regarding the effects of climate change on investments, Levin said: “Today there are five times more ESG compliant funds in the stock than any other field. The data explicitly shows that over the next five years these issues will also affect our credit and investments in bonds. The numbers will double in the next five years. Anyone who does not take this into account regarding their bonds and IPOs will be openly harmed. There are already tenders in the world that companies cannot access, and Israeli companies should pay attention to this, because they do not meet the European definitions of these issues for a period of three to five years.”
Yair Avidan, the Bank of Israel’s supervisor of banks, who promotes financial regulation around ESG risks and climate risks: “We have recently joined NGFS, a leading organization with dozens of central banks, whose role is to strengthen sustainable environmental management over time, and in the last few days we have issued a forward-looking letter of clarification on the subject.”
Dr. Moshe Barkat, head of the Ministry of Finance’s Capital Market, Insurance, and Savings Authority said: “Climate risks have been defined since the 2015 Geneva Conference, which defined climate risks as the most significant alongside cyber risks and technological risks in the insurance world. Insurance companies need to be more targeted, as awareness of climate risks is not as significant as financial risks and other emerging risks. In the last year, we have been working on this level of guidelines according to international methodologies.”
Adv. Meir Levin, deputy attorney general (Economic Law): “It is increasingly clear that companies must take the environmental factor into account and manage and invest resources in it and that investors are willing to invest in companies that take environmental considerations into account in order to profit.”
On the question of whether cooperation should be acted upon for ESG risks in general and climate risks in particular in order to advance financial regulation in these areas and apply standards similar to those developing in the EU, Yair Avidan replied: “There should be cooperation between regulators to set standardization. An appropriate common denominator must be found for the treatment and management of physical risk and transition risks and the treatment of extreme scenarios. In as much as it affects the areas of vulnerability and stability of the financial system, we need to work together.”
Anat Guetta, chair of the Israel Securities Authority: “I think that it is especially critical to cooperate and work together on this issue, because the three of us (the supervisor of banks, the commissioner of the Capital Market, Insurance, and Savings Authority, and the Securities Authority) are parts of one whole. Without cooperation this will not happen. The added value of such cooperation will be, first of all, the ability of corporations to receive investments at reduced costs and, second, the production of a more dominant and significant presence of foreign investors in Israel, whose radar does not know how to read anything that is not ESG.
Dr. Moshe Barkat, head of the Capital Market, Insurance, and Savings Authority said: “We must remember that we are not dealing with values; we are dealing with financial risks and the values have to be translated into financial risks. If we lose the connection between the financial considerations and the introduction of other considerations, there will be competition between these. We will then enter a world of personal preferences and not one of financial risks. As financial regulators, this line should be noticed and not crossed.”
Deputy Attorney General Adv. Meir Levin (Economic Law): “Environmental regulation must set the standards in a way that is compliant and clear to the financial regulator and to the corporations themselves and shows what dangerous behaviors are and to what extent they are dangerous. The environmental regulator should also signal the future normative change as well as the transition periods. Investment in companies should be based on the normative future of the industries in which they operate in order to calculate the risk they pose to investors, and therefore the environmental regulator should clarify those arrangements and the financial regulator should recognize those arrangements.”
The Eli Hurvitz Conference on Economy and Society – formerly the Caesarea Economic Policy Planning Forum – is widely recognized as Israel's most influential economic conference. For 27 years, the conference has served as a crossroads where public discourse and professional knowledge in economics and society meet, with the aim of improving decision-making processes in the administration and improving the quality of Israel's social and economic policy for the benefit of the entire public. The conference this year focuses on: macroeconomic policy in times of economic crisis; the labor market; the Israeli education system; governance in a time of crisis; strengthening the health system's readiness for crisis situations; and the relationship between local and central government. The conference is the apex of research and theoretical and practical research by working and thinking groups comprised of senior officials in the Ministry of Economy, Ministry of Labor, Ministry of Finance, the Prime Minister's Office, academics, IDI experts, civil society representatives, and other partners. Together, the teams led research and developed policy recommendations on issues closely related to the conference sessions, which will be presented during the conference, held online this year from December 14 to December 16.