Bonds

Israel bond lawsuit brings Florida’s anti-ESG law into play

A suit filed against the Palm Beach County, Florida, comptroller for his county’s investments in Israel bonds puts a state law targeting socially focused investments in the spotlight from a different direction.

The lawsuit filed last week against Palm Beach County Clerk and Comptroller Joseph Abruzzo cites a law Florida’s Republican government passed last year barring local governments from considering non-pecuniary factors in their investment decisions.

Break the Bonds South Florida, a group opposed to the war Israel launched in Gaza after the Palestinian territory’s Hamas rulers killed more some 1,200 Israelis in a mass terrorist attack across the border, organized the suit in the Palm Beach County Circuit Court. It is opposed to Abruzzo’s purchase of $700 million of the bonds since October, which makes the county the world’s largest holder of Israel bonds, representing 15% of its investment portfolio.

A May 16 demonstration against Palm Beach County’s purchase of Israel bonds. Some residents are using a Florida law passed last year aimed at ESG bonds to challenge the county’s investment.

Matt Abban

“In the Florida lawsuit, the plaintiff’s request for an assessment of the future risk and repayment of bonds linked to Israel is a reasonable ask as an investor, especially during an ongoing war,” said R. Paul Herman, chief executive officer of HIP Investor, an impact investment advisory and investment firm. ”For the upper limit on bond allocations to range up to 15% for a high risk geopolitically is a big bet by Palm Beach County.”

Three Palm Beach County residents with family and friends in Gaza, who are members of Break the Bonds South Florida, filed the suit. They say they have suffered psychologically from Israel’s military action there. Two of them have sent substantial sums of money to family members in Gaza to aid them and have had more than a dozen Gazan relatives die since the start of the action.

Israeli Prime Minister Benjamin Netanyahu has said 16,000 Palestinian civilians have been killed in the war, and non-Israeli sources say the civilian death toll is much higher.

Since the Palm Beach plaintiffs have suffered what Florida would consider “special injuries” from Abruzzo’s decision to purchase the bonds, they have the right to sue Abruzzo, their lawsuit states.

The plaintiffs are using anonymous names in the suit and are seeking to conceal their identity from the public, saying they are concerned they will be physically, professionally, and emotionally injured if identified.

They say Abruzzo’s decision to increase holdings of Israel bonds to 15% of the county’s investment pool is risky because it puts a single bet on a comparatively large portion of the portfolio. They say statistics show over the last few years Israel’s economy has weakened and its government’s fiscal status has worsened. “These $700,000,000 dollars are being poured into a foreign economy that has an increased risk of default,” the lawsuit says.

The plaintiffs point primarily to two parts of Florida law. One says that as a comptroller Abruzzo owed a fiduciary duty to focus on financial matters in making the investments.

The other part was added in 2023 when Florida, driven by Republican lawmakers and GOP Gov. Ron DeSantis, enacted House Bill 3.

DeSantis in touting the new law made it clear that he was targeting what he called left-wing activism to support environmental and social causes that he disdains as “woke.”

But the letter of HB3, according to DeSantis’ own words, is aimed at ending the practice of “placing politics above the fiduciary duty to make the best financial decisions for beneficiaries.”

And Abruzzo, a Democratic former state lawmaker who was elected county clerk in 2020, after October 7, 2023, sometimes spoke more like a politician than an investor when he talked about Israel bond purchases.

“I am proud to show solidarity with the people of Israel and make Palm Beach County the first county in the nation to increase its investment in Israel bonds following their declaration of war against Hamas,” he said Oct. 10 when he announced the county’s first additional $25 million investment into Israel bonds. He also argued for the quality of the Israel bond investments.

The single-A-level ratings of the Israel bonds contrast with the remainder of the county’s investment pool which, as of its annual comprehensive financial report dated Sept. 30, had 75% of its $3.8 billion in bank money market accounts and another 11% in certificates of deposit. At the date of the ACFR, before Hamas started the war, the county had $40 million in State of Israel bonds.

The average rating in the pool is AA-plus, according its most recent monthly report. The pool’s effective duration doubled compared to a year earlier, to 0.4 years from 0.2 years.

The lawsuit against Palm Beach County cites the “pecuniary factor” language in HB 3, saying a local government investment manager “may not subordinate the interests of the people of this state to other objectives, including sacrificing investment return or undertaking additional investment risk to promote any nonpecuniary factor.”

Abruzzo made several purchases of Israel bonds since the Oct. 7 Hamas attack, bringing the total to $700 million after in March he got the county commission to increase the limit on its holding of Israel bonds to 15% of the portfolio from 10%.

The plaintiffs ask the court to bar Abruzzo from investing in Israel bonds while the war is ongoing.

Palm Beach County’s 1.5 million population is more than 10% Jewish, according to a 2018 Brandeis University study, a population historically supportive of Israel.

Abruzzo told The Bond Buyer Florida law and the local county commission restricts him to investing in only a few investment types, most of them conservative. Israel bonds are the only foreign bond he is allowed to invest in. Investors can invest U.S. dollars in the Israel bonds and be paid back in U.S. dollars.

Abruzzo said Israel bonds are safe.

Fitch Ratings rates Israel sovereign debt A-plus, with an outlook revised to negative after the war started. Moody’s Ratings downgraded Israel to A2 from A1 in February, citing the impacts of the ongoing war, assigning a negative outlook. S&P Global Ratings downgraded Israel to A-plus from AA-minus in April, citing the impacts of the Hamas war and the risks of a wider conflict involving players like Hezbollah.

“Israel bonds are making a phenomenal return for Palm Beach County,” said Joseph Abruzzo, the county official who has put $700 million of the credit into the county’s investment pool.

Israel bonds provide a better return than the other alternatives Abruzzo has, he said. The $4.7 billion investment portfolio he manages for Palm Beach County is now earning 5.33% interest rate. “Israel bonds are making a phenomenal return for Palm Beach County,” Abruzzo said.

The county is invested in 2-year and 3-year maturing Israel bonds. They have yields of 4.64% and 4.68% respectively.

While the plaintiffs are complaining about an investment concentration of 15% in the bonds, his portfolio invests 78% of the portfolio’s money in money market funds, he said.

Abruzzo said he thought the suit was “frivolous” and would be dismissed with prejudice “quickly.”

“Our office has a proven track record of delivering significant investment returns for Palm Beach County residents, including a record $172 million in investment income for taxpayers in Fiscal Year 2023,” Abruzzo said in a prepared statement.

Florida’s requirement to focus on pecuniary investment factors is “reasonable” and “not necessarily that restrictive,” Municipal Market Analytics Partner Matt Fabian said. “A sole focus on pecuniary factors means looking at not just the financial return of the security but also the liquidity and other risk factors.”

Florida’s law “would seem to allow, for example, avoiding a long-term investment in companies or areas that are at undue financial or economic risk from climate change,” Fabian said.

However, the law would bar investing in a “favorite country” if the impact of the investment “didn’t directly and immediately accrue to the investor,” Fabian said.

Noting the county has chosen to invest 15% of its assets in Israel bonds, Fabian said, “concentration of any kind … is a risk that can become serious for a local government…. Without more information it’s hard to say if pecuniary and non-pecuniary factors are somehow just matching up with this investment.”

An organizer for Break the Bonds said for Palm Beach County to get its money back from the bonds, Israel needs a strong economy and there is evidence it is in decline.

The suit against the bonds takes place against the backdrop of arguments in the last few years over the role of social, political, and environmental goals in investing. Texas and Oklahoma have barred the use of certain municipal underwriters in their bond sales saying the firms are “boycotting” fossil fuel and firearm industries.

Some investors have looked to buy “green” bonds as a way of contributing to environmental goals while states like Florida have barred issuers from selling bonds with ESG labels or from paying verifiers for ESG bonds.

But many of the same Republicans trying to limit ESG in finance are happy to use public funds for the social goal of supporting a friendly foreign government.

In early May Mississippi Treasurer David McRae, a Republican who rails against ESG, said he applauded Republican Gov. Tate Reeves and the state legislature for passing a law expanding the state’s ability to invest in Israel bonds. He said this month he and financial officers from nearly 30 other states had written to President Biden to affirm their support for Israel and to assure Israel that they would continue to invest in its bonds.

In 2011-2012 there was a suit against Minnesota for its investment of pension money in Israel bonds. The suit used different legal arguments than those employed by the Florida plaintiffs. The suit was dismissed.

Muni Credit News Publisher Joseph Krist is more open to government bodies considering non-pecuniary goals in their investments. “Political arguments over how best to invest public pension money have been going on for decades,” Krist said.

“That’s one of the things that makes the whole anti-ESG thing so ridiculous for a red state,” Krist continued. “Those states generally elect free market supporters who then seek to use government to impose political values on public entities.”

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