Israel Is Ripe For Impact Investing
"Impact investing,” the act of investing for positive social and environmental impact in addition to financial return, has attracted billions of investment dollars over the past few years. Frustrated by the limitations of government and philanthropy, global leaders have tapped into investment capital to address the world’s most intractable challenges including poverty and environmental degradation. Foundations, family offices, religious institutions, pensions, endowments and individual investors have demonstrated a growing appetite for impact-oriented investments across equity, fixed income, venture capital, real estate, and newly created assets such as social impact bonds and green bonds.
Impact investing is particularly attractive to younger generations anxious to turn the traditional models of business and investment into levers for positive impact. But don’t mistake impact investing for charity, most impact investors expect strong financial return, proven track record, skilled management, and measurable outcomes.
Impact investors are focused on alleviating poverty, protecting the environment, and increasing access to food, healthcare, and education. These same concerns have been essential to survival in Israel since the founding of the modern nation sixty-five years ago. The Israeli people have repeatedly turned obstacle into opportunity. As a tiny desert nation, they built essential infrastructure including agriculture, healthcare, and educational institutions. They advanced a population out of poverty and into an economically stable society that transitioned to a developed country in 2010. Limited natural resources led to early investment in renewable energy, water conservation, and clean technologies. The challenges confronted by Israel have increasingly become the world’s challenges today, and the primary concerns of impact investors.
In addition to Israel’s determination to tackle a myriad of obstacles, the country has developed the necessary infrastructure to support innovation. In the 1980s, a population of risk-taking entrepreneurs attracted an expansive venture capital industry. Creative government programs such as Yozma provided tax incentives and matched seed funding. Today Israel has over 50 venture capital funds managing approximately $15 billion, more companies on NASDAQ than any other country except the United States, and a highly skilled workforce. Dozens of government-sponsored Technological Incubators help entrepreneurs launch viable businesses in biotech, communication, software, and other industries. Furthermore, Israel has extensive connections and a growing understanding of developing markets in Africa and Asia due to the scarcity of regional trading partners in Israel’s hostile neighborhood. Technology for the developing world, a significant subsector of impact investing, is a natural fit for Israel.
While Israel is well suited for impact investing, the country receives a very small allocation of impact investment capital for a number of reasons.
First, Israel is the beneficiary of significant amounts of philanthropy, and historically social impact is viewed as the responsibility of philanthropy and government alone. The Israeli business sector has had a limited role in the emerging local discussion on impact investing, possibly due to misconceptions on return expectations or the fear of associating with a perceived nonprofit activity.
Second, impact investors require social and environmental metrics but Israeli companies and fund managers don’t yet speak the language of impact investors, and are less experienced with reporting beyond financial performance.
Third, many impact investors are unaware of Israel’s core competencies, as international news coverage on Israel is usually focused on the Israeli-Palestinian conflict.
Lastly, recent discoveries in Israel of sizable offshore natural gas fields may diminish the country’s focus on renewable energy, an important sector in impact investing.
Despite these challenges, Israel is well positioned to benefit from the growing asset allocation to impact investing happening globally. Israeli culture is guided by the Jewish value of tikkun olam (repairing the world). Driven by a deep appreciation for chai (life) and tzedek (social justice), Israelis are committed to helping others. Often Israel is the first country to lend assistance after a natural disaster by setting up field hospitals and aiding in the search for survivors. Pairing the capital and dedication of impact investors with Israeli culture and expertise in technology, agriculture, healthcare, and environment-friendly innovation is a winning combination.