Israel’s Sovereign Wealth Fund Grapples With a Burning Problem

Funded with profits from natural gas, its launch comes as Israel is having second thoughts about further development of fossil fuels. Some argue that the money should be used to finance the transition to renewables

David Rosenberg
David Rosenberg
Energy Minister Karine Elharrar at a solar power facility in Neve Mivtah, southern Israel. She has suspended new auctions for natural gas exploration rights.
Energy Minister Karine Elharrar at a solar power facility in Neve Mivtah, southern Israel. She has suspended new auctions for natural gas exploration rights.Credit: Ilan Assayag
David Rosenberg
David Rosenberg

Years behind schedule and on a scale far more modest than had once been predicted, Israel’s sovereign wealth fund will finally get off the ground as early as this summer. But even before its launch, the Israel Citizens Fund is already finding itself enmeshed in the politics of climate change.

The fund is slowly amassing its capital from windfall-profit taxes collected from the country’s natural resources, mainly the natural gas being pumped offshore. Those tax revenues have been slow in coming, but sometime in June or July they will probably have reached the 1-billion-shekel ($310 million) minimum for the ICF to begin operations, Amir Katznelson, an adviser to Finance Minister Avigdor Lieberman and secretary to the ICF’s board, told the Knesset committee monitoring the fund earlier this month.

The idea behind the fund, which was created under a law passed in 2014, is twofold. The first is to soak up dollars earned by gas profits and invest them abroad so they don’t cause the shekel to appreciate so much that they hurt Israeli exports. The second is to benefit Israelis by using its profits to fund social and education projects.

But in the eight years since the Knesset approved the legislation, the ICF has had a tortured history of steadily lower expectations.

Seven years ago, then-Prime Minister Benjamin Netanyahu promised “hundreds of millions of shekels for education, welfare, health and for every Israeli citizen.”

The Bank of Israel, which is administering the fund to keep it out of the clutches of politicians, spoke in 2013 more precisely of $72 billion, but two years later it cut its forecast to $55 billion. The Israel Tax Authority, which collects the taxes that are going into the fund, said in 2020 that the ICF’s assets would reach $59 billion; a year later, it slashed that estimate to between $44 billion and $53 billion.

Now the Finance Ministry, in a presentation in January, is talking about the fund’s assets reaching between $32.4 billion and $41.7 billion by 2050.

Prof. Eugene Kandel, who was economic adviser to Netanyahu when the fund was being conceived, blames the bitter disputes inside the government and in the media coverage on the structure of the natural gas industry before the so-called gas framework was approved in 2015.

The effect, he says, was to cut into the taxable profits from Tamar, Israel’s first big gas field, and delay development of the giant Leviathan field. Meanwhile, energy prices declined, cutting into gas profits.

The Leviathan natural gas platform in the Mediterranean, off the coast of Israel.Credit: JACK GUEZ / AFP

“What happened is that many people did a good job of delaying the fund’s coming to fruition and accumulating [capital] reserves, so the only thing we have to be disappointed in is ourselves,” he says. “There was perhaps some overstatement of the fund’s potential by certain political figures – not because they wanted to deceive the public, but based on what they knew at the time, they wanted to create enthusiasm about it because there were so much disinformation.”

Compared to the world’s richest sovereign wealth funds, the ICF will be a pipsqueak. The biggest, Norway’s Government Pension Fund Global, has $1.3 trillion under management, the fruit of decades of North Sea oil profits. The Kuwait Investment Authority has $693 billion, and the Abu Dhabi Investment Authority counts $649 billion. Singapore has two funds with combined assets of over $1 trillion.

The ICF could grow bigger, but that hinges on whether Israel is willing to auction off more natural gas exploration rights and expand production. And that’s where the politics of climate change come in.

Energy Minister Karine Elharrar announced in December that she was suspending new auctions for 2022 while her ministry concentrates its efforts on expanding renewable energy sources.

“Discussions alone will not suffice in order to bring about this huge change. In order to ensure that 2022 will be the year of renewable energies, natural gas will wait,” she said.

Although natural gas is cleaner than other fossil fuels, using it releases large quantities of methane into the atmosphere. For that reason, many environmentalists have put gas on their energy blacklists and are calling for a halt to gas drilling. Elharrar’s announcement, reversing Energy Ministry policy until now, has aroused concerns that Israel will either ban or reduce further gas development – a move that would cap the ICF’s potential size.

Prof. Eugene Kandel. “There was perhaps some overstatement of the fund’s potential by certain political figures.”Credit: Ofer Vaknin

Prof. Glenn Yago, senior director of the Milken Innovation Center at the Jerusalem Institute for Policy Research, says the ICF could be used to square the energy circle.

A series of papers published by the center proposes devoting part of the fund’s assets to invest in renewable energy and related technology in Israel and abroad – in other words, to use natural gas profits to help pay for the transition to non-fossil fuel alternatives.

Creating a role for the ICF as a renewable-energy financier would justify drilling for more gas in order to generate more capital for it to invest. Indeed, Yago proposes going a step further by allowing the ICF to leverage its capital by issuing green bonds to finance environmental projects. He would allow it to draw on other financial sources, such as Israel’s huge foreign currency reserves.

As Yago sees it, Israel should follow the policies many of the world’s other sovereign wealth funds have been pursuing in recent years and become a strategic investor, rather than a passive one taking resources profits and investing them in securities.

“This should be our primary focus – how to fund an energy transition and accelerate it with new technologies,” Yago says.

He points to a 2020 study by Hala Abu-Kalla, then a doctoral student at the University of Haifa, that shows that if Israel maximized gas extraction between now and 2040, the income tax, royalties and levies collected by the government would have a powerful knock-on effect on the economy, not only by funding the creation of fossil-fuel substitutes but by generating new employment.

Both Kandel and Yago say Israel’s capping future gas production doesn’t make sense because renewables can’t take the place of fossil fuels fast enough to meet energy demand in the medium term, either in the country or globally. Thus, if Israel and the world will continue needing gas in the years ahead, why shouldn’t Israel provide it?

Finance Minister Avigdor Lieberman.Credit: Eliyahu Hershkovitz

“Israel could ban further development of gas and meanwhile Egypt, Cyprus or Greece – anybody who has any potential – will continue to do development work,” Yago says. Israel will end up importing gas if it isn’t producing it.

Even if the ICF takes a narrower approach, many think that it should invest its money ethically, most notably by shunning fossil-fuel companies, rather than just focusing on achieving the highest returns on its money.

“That, of course, is the prerogative of the [ICF managing] council and investment committee, but I think that we here will press that to the extent we can – there may even be a need for legislation, although I hope there won’t be and that these things can be done through consent and mutual understanding,” Knesset Member Mossi Raz (Meretz), who chairs the committee monitoring the fund, said this month at committee deliberations.

Whether that will happen remains to be seen.

Andrew Abir, a Bank of Israel official who sits on the ICF council, said there would be room for discussion on ethical investing when the ICF establishes its investment guidelines. “But you have to remember that the first principle of the fund is to concern itself with returns that have an appropriate risk ratio,” he told the committee.

The problem, Kandel notes, is that whatever proponents may say in favor of ESG (Environmental, Social and Governance) investing, the fact is the returns are lower.

While he believes the ICF shouldn’t invest in the shares of fossil fuel companies, it should be careful about adopting values-laden policies with money that belongs to the Israel public. “The word ethical is in the eye of the beholder,” he warns.

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