Recently, we have been witnessing a trend among institutional investors of preferring investment funds that take ESG (environmental, social and governance) considerations into account. ESG considerations lead to investments in such areas as job creation, renewable energy, healthcare and welfare, and improving environmental quality, concurrent with generating financial returns, of course.
The managers of such funds implement their ESG policies during the portfolio-building stage and through their influence on the funds’ portfolio companies. Considering investors’ expectations and the emerging ESG regulations, investment funds are forced (or pleased) to report their ESG methodology to potential investors as part of such potential investors’ due diligence examinations.
ESG Regulations
The European Union is leading ESG regulation worldwide by enacting strict legislation. For example, the Sustainable Finance Disclosure Regulation (EU 2019/2088 – SFDR) obligates European private equity and venture capital fund managers to comply with a variety of transparency and disclosure obligations with regard to ESG factors, including publishing information on websites and pre-contractual and periodic documentation about the relevant investments. Additionally, as of January 2024, the EU imposed an expanded reporting obligation on entities classified as “European” under the Corporate Sustainability Reporting Directive (the CSRD). This obligation compels many public and private entities with significant activities in the EU (even if not incorporated in the EU) to publish an ESG report. All ESG reports must be based on the Taxonomy Regulation (EU Regulation 2020/852), which prescribes uniform provisions for classifying, analyzing, and reporting environmental impacts of business activities.
Implications for Institutional Investors in Israel
In light of the above, certain Israeli institutional investors include in their due diligence examinations of investment funds an examination of ESG policies in order to, among other goals, prepare for future ESG regulation in Israel. Consequently, every institutional investor in Israel should consider including a paragraph in their side letters that obligates the fund to implement ESG principles.
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Barnea Jaffa Lande’s investment fund practice, headed by Adv. Roy Engel, is at your service to answer any questions about ESG investments.