Psagot Poses Ethics Test, and Most Major TASE Companies Fail

Psagot is expanding its investment criteria in publicly traded companies to factor in corporate governance in ethical matters. The investment house, Israel's largest, evaluated 48 companies listed on the Tel Aviv Stock Exchange's TA-100 index for environmental, social and governance (ESG ) performance - with disheartening results.

The highest "grade" achieved in the sample was in the 70-80% range, with a mere seven of the 48 evaluated companies reaching a grade of 50 out of 100. These results indicate that the vast majority of Israeli companies fail to meet the generally accepted level of ethical standards that firms meet in developed countries.

The testing included environmental protection and human rights issues, relating to exploitation of workers and safety and hygiene throughout the supply and production chain. It also evaluated relations with other parties and corporate governance with regards to corruption, application of a company ethics code and establishing the responsibilities of board members.

Psagot engaged the services of Greeneye, a company providing research and consulting for responsible investing, to conduct the study. Greeneye is the Israel partner of Ethical Investment Research Services (EIRIS ), a leading global company in this field. Corporate governance issues they examine include nepotism in management and boards of directors, proportion of independent directors, external audit procedures and company policy regarding related parties.

The study involves evaluating companies according to criteria that in the past belonged entirely to the world of ethics. Investors have been coming to the realization that ESG performance can have economic ramifications.

The results will serve analysts in evaluating companies and will be factored into investment recommendations. The goal of the analysis is to promote awareness of sound corporate policy and governance, environmental practices and overall corporate responsibility among companies and investors alike.

Psagot intends to bring the study's results to the attention of the companies tested to make it clear that the investment criteria for their securities have been broadened and to give them a chance to improve their performance. The rationale is that a company's behavior vis-a-vis its employees, suppliers, the environment and society at large can be expected to have an impact on its bottom line.

The survey included 20 companies at high risk in environmental protection, particularly those in the chemicals industry. While seven of these had a satisfactory environmental policy, the other 13 were found to not have any environmental policy whatsoever. Of the 20 companies, 11 received an unsatisfactory grade in managing environmental risk, with the other nine found managing this risk correctly.

Aspects of environmental protection examined included the tracking of energy use and measuring emissions of pollutants and effluents into the air, soil and water. Many companies worldwide have begun to monitor themselves, tracking these measurements over time with the aim of reducing pollution. Israel has committed to this practice as a condition for joining the OECD. But 16 of the 20 companies with high pollution risk don't provide any information on steps taken to control their pollution. Without measurements tracking pollution levels to monitor progress in this regard, it is doubtful if any of these 16 companies is doing anything to reduce their emissions.

The study also looked at human rights. It found that 12 of the 48 companies examined are exposed to risk of rights' abuse, lacking any policy in this sphere.

As for corporate governance, issues examined included bribery and corruption, ethics codes and directors' environmental, social, and corporate governance responsibilities. Almost half of the companies, 23 in all, reported paying their directors.

Only five of the 48 surveyed companies were found to have adopted the Goshen Committee recommendations for requiring the majority approval of non-controlling shareholders for company transactions with controlling shareholders. Only eight of the companies have adopted preset standards for bonus payments to top management, and only seven report their criteria for distribution of management bonuses.

The study shows that a vast improvement is needed among the TASE TA-100 index companies in everything connected to company values. Despite the many companies found exposed to risks within the parameters of the study, the evidence suggests most do not manage these issues in an appropriate way.