Dutch pension asset manager PGGM, one of the largest in the country, said on Wednesday it was divesting from five Israeli banks because they finance Jewish settlements in the occupied Palestinian territories.
The announcement comes a month after a major Dutch water supplier ended a partnership with an Israeli water company which supplies Israeli towns and Jewish settlements in the occupied West Bank.
"PGGM recently decided to no longer invest in five Israeli banks," said the company, which manages about 153 billion euros ($208 bn)in funds.
"The reason for this was their involvement in financing Israeli settlements in occupied Palestinian territories," PGGM said in a statement.
PGGM said there was "a concern, as the settlements in the Palestinian territories are considered illegal under humanitarian law," and regarded by international observers as an "important obstacle to a peaceful (two-state) solution of the Israel-Palestinian conflict."
It said it would no longer do business with the Hapoalim and Leumi banks, the First National Bank of Israel, the Israel Discount Bank and the Mizrahi Tefahot Bank.
PGGM added it based its decision on a 2004 UN International Court of Justice ruling that the Jewish settlements were in breach of the Geneva Convention relating to occupying powers transferring their own citizens into occupied territories.
The group said it had been discussing the issue with the Israeli banks "for several years" but that the banks "have limited to no possibilities to end their involvement in the financing of settlements in the occupied Palestinian territories."
"Therefore, it was concluded that engagement as a tool to bring about change will not be effective in this case," PGGM said.
All investment in the banks ended on January 1 "as concerns remain and changes are not expected in the foreseeable future," it added.
PGGM's investments in Israeli banks amount to a few tens of millions of euros, Israeli newspaper Haaretz reported.
"But its decision is liable to damage the banks' image, and could lead other business concerns in Europe to follow suit," the paper said.
Last month Dutch water supplier Vitens ended a partnership with Israeli water company Mekorot due to the "political context."
The decision came days after a visit to the Mekorot offices in Israel by Dutch trade minister Lilianne Ploumen was abruptly cancelled.
The visit was part of a larger tour of Israel by Prime Minister Mark Rutte that was marred by a dispute over a Dutch-made security scanner intended to check goods leaving Gaza for the West Bank.
Rutte was to have inaugurated the scanner on the isolated territory's border with Israel, but the ceremony was broken off after Israel said it did not want Gazan goods going to the West Bank.
Israel's defence ministry wants to isolate the two Palestinian regions, while Dutch officials had hoped the scanner might boost commerce between them.
Israeli deputy Foreign minister Zeev Elkin last month said he was "blindsided" by Vitens' pullout "and a few more European companies have made similar decisions in the past months, which have blindsided us exactly in parallel with the peace process."
Zeev, speaking to Israeli military radio, said that peace initiatives should mean "that people don't breathe down our neck", but "unfortunately this doesn't work."