The Decibel - Analyzing Canada’s big banks’ ties to an Israeli defence company

Episode Date: September 11, 2024

Since the 2023 Giller Prize ceremony, Scotiabank, the fiction prize’s lead sponsor, has been the target of protests over its stake in Elbit Systems, an Israeli defence contractor. Though all of Canada’s Big Six banks hold stake in Elbit Systems, Scotiabank has drawn a heightened level of scrutiny and protest since the October 7th attacks.Globe arts and business reporter Josh O’Kane and business reporter David Milstead are on the show to talk about how prominent Elbit Systems is in Canadian investment portfolios, and what sets Scotiabank’s investment in Elbit Systems apart from other Canadian banks.Questions? Comments? Ideas? Email us at [e-mail]

Last week, the Giller Prize, one of Canada's major fiction awards, announced its long list. But one name wasn't mentioned, the Giller's lead sponsor, Scotiabank. Though they remain the lead sponsor, their name was left off this year's prize. After the Hamas attacks on Israel on October 7th and the war between Israel and Hamas that followed, Scotiabank and events that it sponsors have been subject to protests. This is because of Scotiabank's stake in the Israeli defense contractor Elbit Systems. Josh O'Kane is an arts reporter for The Globe. He's been following these protests ever since they began at last year's Giller Prize ceremony. Josh and Globe business reporter David Milstead set out to answer the question

of how Scotiabank's investment in Elbit Systems compares to other Canadian banks. So today, Josh and David are here to talk about what they found and what set Scotiabank apart. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Josh, David, thank you so much for being here today. Thanks for having me back. Yes, thanks for having us. Josh, I want to start by asking you, why did you want to look into this story? So I read about the business side of the arts sector in Canada, and I've been following protests against Scotiabank since protesters stormed the stage at last November's Giller Prize.

And now, the winner of the 2017 Giller Prize is... one individual held up a sign that says and i'm quoting here scotia bank funds genocide end quote the reasoning was that at the time financial disclosure showed that a subsidiary of Scotiabank called 1832 Asset Management had about a 5% stake in Elbit Systems, which is a prominent Israeli arms manufacturer that has shown in its quarterly financial disclosures that it's seen increased demand for its products over Israel's war with Hamas. Now, Scotiabank sponsors some of Canada's biggest arts festivals and organizations, including the Hot Docs Documentary Festival and until last May, the Contact Photography Festival as well. Both of those, on top of the Giller Prize, unless, among other things, the Giller Foundation used its, and I'm quoting here, their organizational leverage to pressure their main sponsor,

Scotiabank, to fully divest from Elbit Systems, end quote. Now, that same day, the Gillers also said it would keep Scotiabank as a sponsor, saying that, again, this is a quote, while we appreciate the range of views that have been shared, the foundation is not a political tool. Now, at this point, I started having discussions with colleagues around the globe about the chances that other banks have stakes in Elbit. Scotia Bank is far from the only major arts sponsor in Canada, and defense stocks and investments in Israel are common holdings for investment funds around the world. So we wanted to figure out just how widespread investments in Elbit are around Canada, and to learn whether or

not Scotiabank and the organizations they sponsor were maybe being disproportionately targeted. Okay, so you saw this protest happening against Scotiabankank and essentially you're wondering, well, what is the situation with other banks and started exploring that. Exactly. Yeah. Okay. So you mentioned Elbit Systems, and I think this is a name that a lot of people have become a lot more familiar with over the past almost a year now. So what is Elbit Systems? Yeah. Elbit is a publicly traded arms company. It's one of Israel's biggest defense companies overall. And its products include military drones and artillery systems. It basically said, and I'm going to quote from one of its more recent financial reports, that it received material increased demand for our products and solutions from the Israel Ministry of Defense compared with demand levels prior to the war. According to some research from S&P Global Market Intelligence, it got about 20% of its nearly $6 billion U.S. dollar revenue in 2023 came from sales in Israel.

So we've been talking about Scotiabank, but do we know, have the other big banks in Canada, have they also faced similar kinds of protests? Yeah, so none of the other bank-sponsored arts events have faced as much pushback as those sponsored by Scotia, but we're seeing some other examples gradually emerge. Like just last week at one of the first premieres of the Toronto International Film Festival, which is sponsored by RBC, protesters stood up and declared, and I'm quoting here, RBC funds genocide, end quote. RBC's sponsorship of the festival has also been targeted before, including for its fossil fuel investments.

Okay. All of the large Canadian banks operate mutual fund families and investment funds. And so if someone or a group of people wants to target a specific company with a stock that trades on a major exchange, they more than likely can turn around and target one or more of the Canadian banks because that stock is going to show up in their disclosures as being owned, even if it's a small amount. Okay. So basically you set out to find out how Scotiabank's holdings of Albit systems compared to other Canadian banks then, right? So I guess first, how much is Scotiabank invested in Elbit? Yeah. So with the caveat here that the numbers I'm about to say, they could fluctuate based on stock prices and stock sales. I can share the findings we had as of the final day when we filed

our story. So 1832 Asset Management, the subsidiary of Scotiabank, was still the clear leader among Canada's big six banks in terms of the size of its Elbit holdings. It's got much more deep and deliberate holdings as well than the other banks. So at the time we reported the story, it had 642,000 roughly shares worth about 131 million US dollars. Much of this was deliberate and active investment, which differs from the other banks, which we're going to get into. We'll talk about active versus passive soon.

Yeah, yeah. So it's worth noting as well that 1832, this number that I pulled up, it actually has cut its stake in each of the last few quarters. Its ownership stake is about 1.4% of Elbit. That's down from just over 5% roughly halfway through last year. That figure is still, after all those divestments, more than 60 times bigger than the stake of the next runner-up in terms of shares that are held by the other banks in Canada. Okay, so you said more than 60 times bigger than the next Canadian bank then. That's huge. Yeah, absolutely. So the next biggest one is BMO Asset Management, a subsidiary of BMO. It had 10,182 element shares worth about 2.1 million USD. Toronto Dominion Bank had 8,839 shares worth about 1.8 million USD.

Those are the two biggest banks of the rest of the big six that had shares over a million dollars that they were holding. So when I got in touch with all the banks to try to understand the nature of their stakes in Elbit Systems, they largely got back to me with answers in two buckets. The first was that they held their shares through index funds. So funds that track an index that would include Elbit Systems and they're required as a result to have that same proportional share, roughly, of Elbit. And the other is because clients asked deliberately for shares of Elbit to be held in their accounts that they're managed by. I think we should get into this in a little bit more detail then. So David, I'm going to turn to you here. We've touched on kind of active and passive investments here. Let's just explain this a little bit. So how do, it sounds like all of these big six Canadian banks have some investment in Elbit systems.

How does this break down? Sure. And actually, all of the Canadian banks have investments in nearly every stock in the world of some kind of size. So a lot of people, a lot of Canadians are invested in the markets and they're buying funds to do that, whether that's a mutual fund or an exchange-traded fund. And there's two ways that an investment company can put these things together. One is that they can say, we're going to pick stocks. We're going to look around. We think this stock is going to go up more than other stocks. This is our pick. This is an active choice to get that stock. But an awful lot of funds are passive investing. And like Josh mentioned, they follow an index. And so just for example, let's say that you spent all your life investing just in Canadian stocks and your financial advisor tells you, you

know, you need to diversify geographically. You need to expose yourself to the United States. You need to expose yourself to Latin America. You need to expose yourself to the United States. You need to expose yourself to Latin America. You need to expose yourself to Asia. So rather than going out and trying to figure out what are the best companies in all those places, there are companies like MSCI and Standard & Poor's that create stock indexes that are designed to represent the entire stock market of a certain country. So you can go out and buy a fund that's the US S&P 500 largest companies in the US. You can buy a fund that has all the markets in Asia or just a Japan fund if you'd like.

And so those types of global passive funds are going to go out and they're just going to buy a representation of the stocks that are contained in whatever indexes they're following. So when we talk about BMO or RBC or one of the other banks having a few thousand Elbit shares, they are likely owning those in part because they have some sort of index product that needs to own Elbit because it represents the Israeli market. Okay. But then Scotiabank owns so much more than these other banks, right?

So what is the nature of Scotiabank's holding in Elbit? And that is absolutely an active choice to invest in that company. And that choice was largely made by a money manager by the name of David Fingold. Now, Scotia some years ago bought a company that had a family of funds called the Dynamic Funds. And Mr. Fingold has been managing Dynamic Funds for over two decades. So he came along and he's now part of the Scotia family by virtue of being a manager of the Dynamic funds. And we found that over a decade ago,

he made a choice to buy into Elbit Systems. And we've read some past commentary from Mr. Fingal that said that in the mid 2000s, he felt that countries were not spending enough on arms, that they were at a low point in the cycle of defense spending. So he felt that Elbit would be a good way to take advantage of that. Now, he bought quite a bit. And ultimately, Scotia had listed over 2.2 million shares of Elbit in its disclosures, most of which, but not all, came from several of Mr. Fingold's funds. He has four mutual funds that we looked at specifically, and Elwitt was in every single one of them. And it's part of a strategy to also invest in Israel because he also had significant holdings in several other Israeli companies, and his funds had a much higher

proportion of stocks from Israel than virtually every other fund in Canada. Their global funds, the mandate was to invest, to pick stocks all over the world that he thought were going to grow, in some cases some that were good at paying dividends. But for all of his funds, he found Elbit Systems to be a match, and he found several other stocks from Israel to be a match to his philosophy. We'll be right back. David, you mentioned something about how there was actually a higher stake in Elbit a little bit previously. Do we have a sense of how 1832's stake in Elbit has changed over time?

Yes, they have actually been reducing the stake. 1832 files a quarterly disclosure for the entire firm that does not specify which funds hold the stock. But the Elbit stake has been cut by several hundred thousand shares over the last three quarters. And there's some question as to whether Scotia was caving to political pressure, if you will, or responding to political pressure, if you want to look at it that way. But I could argue from an investing perspective, there are reasons why he might have sold independent of that. Because frankly, with the increased profits at Elbit from the war with Hamas in Israel, Elbit stock has gotten quite expensive by how investors measure these sorts of things. People buy a stock, you're getting a piece of the company, and you can

analyze a stock by seeing how much of the company's profits belong to you for each little share you buy. And whatever you're paying for the stock, you're paying some multiple of the profits you're getting. Well, the multiple you pay for Elbit stock now has been at all time highs in the last several months. And, you know, maybe people are bidding this stock up because they are expecting continued conflict and continued profits. Maybe it's time for me to lock in some of my gains that I've made on that stock and sell. That's a plausible explanation for what's going on. Okay. So it's interesting to hear financially plausible explanation, as you say. But I think a lot of people wonder, though, because these protests started against Scotiabank, right? And

then all of a sudden, the last three quarters, we are seeing this dropping of Albit stock. What has Scotiabank said about the reasoning behind that? So Scotiabank has basically been saying all along that their investment decisions are not tied to any protest activity. Now, that's not the only answer we're hearing out there in the ecosystem. So, a lot of the people who have been pushing against the Scotiabank-sponsored arts events, particularly those tied to a campaign called No Arms in the Arts, which has been organizing a lot of this, they've been suggesting that their pressure campaign has been working. And augmenting them is the CEO of Elbit Systems, who has said in an interview with an Israeli publication that political pressures may have prompted 1832 to divest its chairs. So there's no clear answer.

And there's certainly a mix of answers out there in the ecosystem. And I say Skosha's answer also involves the fact that Mr. Fingold has an obligation to his clients to pick the best investments. And he certainly can't go selling investments if the CEO of Scotiabank calls him up and saying, we're getting a reputational black eye. I don't care how good that stock is. Sell it. You know, it's problematic for a money manager to be told that. And there's no evidence that

Scotia has actually done such a thing. We've been talking about Elbit Systems. And David, you mentioned how it was potentially maybe a good time to sell because the value had gone up. I guess I'm wondering about other arms manufacturers. So maybe we could broaden this out at this point in the conversation. I guess, do we have a sense of how prevalent weapons manufacturers or defense contractors are in Canadians' investment portfolios? Well, as getting back to that example that I started with, you know, if you're investing only in Canadian companies, you don't have much exposure to it. But if you have any money in an S&P 500 fund, like I mentioned earlier, you know, you have exposure to defense contractors. You've got General Dynamics, which has been identified as someone who has sold weapons systems to Israel. You've got Lockheed

Martin. You've got Northrop Grumman. You've got the Boeing company. Boeing doesn't just make airplanes that we fly on. They are also a defense contractor. So if any investor in Canada that has decided to get U.S. exposure by buying an S&P 500 fund has a little bit of ownership of a defense contractor. And I actually spoke to one of my colleagues at the Globe and Mail last week who said, I've learned a lot about this situation and I don't want to own defense contractors. Can you help me understand if I do? And I said, bring in the list of mutual funds that you're that you've put into, and I'll figure out whether you have a piece of a defense contractor or not. So it sounds like it's actually more of an opt-out situation, really. Yeah, it really kind of is. I mean, you opt into your investments. I mean, but a lot of people, quite frankly, take the advice of their advisor. And if their advisor says, hey, you need to get

some exposure to the United States, you know, they'll probably say, OK, that sounds good. And, you know, you really have to have a strongly held ethical opinion to be going out and fiddling around with your funds and opting out and selling an S&P 500 fund because, you know, you don't want a defense contractor because, you know, I mean, there are gun manufacturers that are publicly traded. There are still tobacco companies that are publicly traded. And Lord knows there's lots of energy companies that are publicly traded that some people have a real problem with fossil fuels. So what I told my colleague was you may want to move from index funds to funds that are specifically managed as ethical funds.

You will probably pay a much higher annual fee for that type of money management than if you were in an index fund. But if that's what meshes with your values, that may be the choice for you. Since we're talking about investments on a bigger scale, I wonder, to come back to Scotiabank, how common is it for a Canadian bank to have such a big stake in a foreign defense contracting company? So like Scotiabank's stake in Elbit Systems. Is this something that's out of the ordinary?

Because compared to the other banks, it does seem drastically much bigger. I don't think it's terribly common for any Canadian money manager to own 5% or more of a company outside of Canada, regardless of the industry. But my sense of things from all these years being involved in business coverage is it really was kind of an unusual situation. Like you wouldn't expect to see like a 5% stake in like Lockheed Martin, for example, right? No, but that's also a function of scope because those names that I mentioned earlier, their market value as companies is somewhere from $100 billion U.S. to $180 billion U.S. There's no Canadian investor or investment family of funds that would end up with $5 to $9 U.S. billion worth of a single U.S. company. Elbit is much, much smaller, one-tenth or less the size of those

companies. So it doesn't take as many shares to build up a big stake in an Elbit Systems as it does in those big, big names. But at the same time, it is unusual for Canadian funds from just a purely investing perspective to own that much of a company outside of Canada. Just before I let you both go, I guess just wondering, after you've done all this analysis, what have you learned about the relationship really between Canada's big financial institutions and the arts and I guess weapons manufacturing companies? I already had a decent sense that the world of finance is deeply intertwined with the defense

industry as David has laid out. It's quite common. The arts world is also kind of going through an economic crisis right now, and corporate sponsorships are one of the major lifelines keeping certain festivals and organizations alive. And there's kind of an existential crisis going on in that the world of artists, they tend to be more vocal and more progressive, which can be very at odds with companies that happen to be, you know, helping the very arts organizations and events that some artists depend on to keep running. Elbit Systems is a publicly traded company. They happen to be an arms manufacturer.

There are other stocks that are arms manufacturers and plenty of people in the investment industry wouldn't bat an eye or have given a second thought to this. And what has really happened over the last year plus is the ownership of Elbit Systems has moved from a fringe far left issue and has become a mainstream topic of conversation in Canada. I mean, it caused people to say, why? You know, why is Scotiabank being targeted? And who is this Elbit Systems? And that really is kind of what led to this article, because Scotiabank had a much larger investment and a much more intentional investment in the company.

And if you don't like what the company is doing, then Scotiabank is a natural target of your of your anger. Josh, David, thank you so much for being here today. Thanks for having us. That's it for today. Today's episode was edited and mixed by Ali Graham. Our producers are Madeline White, Rachel Levy McLaughlin, Michal Stein and Ali Graham. David Crosby edits the show. Adrienne Chung is

our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you tomorrow.