Israel received $30bn of orders for its $8bn triple tranche bond issue last week. A roaring success for the sovereign, an alarming insight into what investors really think about environmental, social and governance standards.
Israel tends to attract an investment grade, US-based investor crowd when it comes to the market. With ratings of A2/AA-/A+, the sovereign usually pays spreads far tighter than the regular emerging market borrowers, pricing emerging market investors out, while giving investment grade buyers that chance to pick up a bit more spread than usual.
The war with Hamas has sent Israel's sovereign spreads wider. Israel’s new 10 year tranche was priced 50bp wider than where its 10 year bonds were trading at the start of 2023, and 40bp wide of Saudi Arabia, a similarly rated, strong Middle Eastern credit.
Emerging market investors leapt at the chance. From an economic perspective, it makes sense. It’s a top rated name to put into a portfolio at wider spreads, which you know won’t renege on its debts — a pleasing opportunity in the inherently high risk world of emerging market investing, as over 300 investors from 37 countries agreed.
But the joyous response Israel achieved shows just how little investors truly care about ESG.
It’s important to note that Israel’s deal was not an environmental, social and governance-labelled deal and the investors buying it were under no mandate to only buy ESG-friendly bonds.
However, over the last five years, strong ESG credentials have become a must-have rather than a nice-to-have, even when it comes to conventional, unlabelled issuance.
Anecdotally, every investor one speaks to, either privately or in a more formal setting, will say they care about ESG. Stuart Kirk, the former global head of responsible investing at HSBC’s asset management division, quit his job after the 2022 furore that followed his questioning ― without tact or pleasantness ― the more extreme views he has heard about climate. The episode showed that allegiance to the firm's ESG principles was a requirement of being a senior officer there.
How then, does the drive for a better world through ESG investing sit alongside $30bn of money fighting over $8bn of funding for Israel?
The truth is: it doesn’t.
Casualties of war
Since it started its offensive in Gaza following the atrocious and murderous October 7 Hamas attack, Israel has killed 30,000 Palestinian civilians and combatants, according to Gaza’s Hamas-run health ministry. The World Health Organisation has described this figure as trustworthy and credible.
More than 70% of those killed so far have been women and children, the health ministry said. Starvation and unsanitary conditions have become widespread in Gaza.
It is hard to square those facts away with any sort of credible ESG investment policy, even if you take Israel's side in this conflict.
One of Israel’s biggest international supporters, the US, has started to distance itself from the violence. US president Joe Biden said in December that Israel has the support of the world, but “they’re starting to lose that support” with indiscriminate bombing. "[Israel prime minister Benjamin Netanyahu] must pay more attention to the innocent lives being lost as a consequence of the actions taken… He’s hurting Israel more than helping Israel," he said this weekend.
Contrast these levels of civilian death, not seen in Israel and Palestine for decades, to the usual concerns investors have about ESG, even in a conventional bond, and any comparison looks obtuse.
Entire cities are destroyed, society has fallen apart across much of Gaza, yet the closest comparable the governance portion of ESG has would probably be workplace injuries.
The difference is stark, and yet investors piled into the deal for the extra basis points.
This article should not be taken as implying support for Hamas or in any sense condoning the appalling October 7 attack. Should Hamas-run Gaza issue a bond that received overwhelming demand, the hypocrisy of the investors would be just as stark. But that is a hypothetical situation: the real live situation concerns Israel's bond.
When GlobalCapital asked people involved in Israel's deal, including investors, whether the buyers had raised any ESG concerns about the deal, they said it simply had not come up as a topic. But if ESG is going to work, there need to be strong, transparent standards that are upheld, otherwise it is a pointless farce. The social component of ESG, if it is to mean anything, must promote human health, safety and wellbeing. It is difficult to see how that is compatible with Israel's tactics in Gaza.
This was a real time test for investors to show whether they truly cared about ESG or not. They failed.