OSLO (Reuters) - Norway's $2 trillion wealth fund, the world's largest, said on Monday it has divested from U.S. construction equipment group Caterpillar ( CAT ) and from five Israeli banking groups on ethics grounds.

The five banks are Hapoalim, Bank Leumi, Mizrahi Tefahot Bank, First International Bank of Israel and FIBI Holdings, the fund said in a statement.

The six groups were excluded "due to an unacceptable risk that the companies contribute to serious violations of the rights of individuals in situations of war and conflict," said the fund, which is operated by Norway's central bank.

The companies did not immediately reply to requests for comment. The Israeli embassy in Oslo declined to comment.

Prior to its divestment, the fund held a 1.17% stake in Caterpillar ( CAT ) valued at $2.1 billion as of June 30, its records showed.

The stakes in the five Israeli banks were valued at a combined $661 million, also as of June 30, according to fund data.

The news was announced when the Tel Aviv and New York stock exchanges were closed.

Shares in Caterpillar ( CAT ) were down 0.4% in pre-market trading at $430.61 per share on Tuesday.

FIBI Holdings shares were up 4%, putting them on course for their best day since early 2024. Hapoalim's stock was up 3.3% and Bank Leumi, Mizrahi Tefahot Bank, and First International Bank of Israel were between 1.8% and 2.8% better off.

Israeli shares have soared since Hamas' attacks in October 2023. Bank Leumi has risen 120% since then, while the rest of the banks the wealth fund has divested from have climbed between 48% and 70%.

CATERPILLAR ( CAT )

The fund's ethics watchdog, called the Council on Ethics, said that "in the council's assessment, there is no doubt that Caterpillar's ( CAT ) products are being used to commit extensive and systematic violations of international humanitarian law".

Bulldozers manufactured by Caterpillar ( CAT ) "were being used by Israeli authorities in the widespread unlawful destruction of Palestinian property," it said.

The violations were taking place both in Gaza and the West Bank, the council said, adding that "the company has also not implemented any measures to pre­vent such use". 

"As deliveries of the relevant machinery to Israel are now set to resume, the council considers there to be an unacceptable risk that Caterpillar ( CAT ) is con­tributing to serious violations of individuals' rights in war or conflict situations."

The council, a public body set up by the Ministry of Finance, checks that firms in the portfolio of the fund meet ethical guidelines set by Norway's parliament. The fund is invested in some 8,400 companies worldwide. 

It makes recommendations to the board of the central bank, which has the final say. The board agreed with the council's recommendation.

The Norwegian fund said on August 18 that it would divest from six companies as part of an ongoing ethics review over the war in Gaza and developments in the West Bank, but declined at the time to name any groups until the stakes were sold.

BANKS

On the banks, the ethics watchdog initially scrutinised the Israeli banks' practice of underwriting Israeli settlers' housebuilding commitments in the region.

On Monday, the council said that all the banks excluded had, "by providing financial services that are a necessary prerequisite for construction activity in Israeli settlements in the West Bank, including East Jerusalem ... contributed to the maintenance of Israeli settlements".

Around 700,000 Israeli settlers live among 2.7 million Palestinians in the West Bank and East Jerusalem.

Many settlements are adjacent to Palestinian areas and some Israeli firms serve both Israelis and Palestinians.

The United Nations' top court last year found that Israeli settlements built on territory seized in 1967 were illegal, a ruling that Israel called "fundamentally wrong", citing historical and biblical ties to the land.