Morningstar trimmed a list of companies it flags for doing business in Israel-controlled territory from 26 to seven, JNS reported exclusively last week. Now, a JNS analysis and conversations with the Chicago-based investment giant shed light on the seven remaining companies, which largely operate in infrastructure projects, potentially affecting land access.
The “controversy ratings,” which Morningstar and its environmental, social and corporate governance (ESG) ratings subsidiary Sustainalyics have applied to allegedly-offending companies attach an element of risk, which can sway investors away from those companies.
Morningstar has been under fire for alleged anti-Israel bias in its ratings methods and sources, and at least 20 U.S. states are investigating it for potential violations of anti-BDS (boycott Israel) laws. Morningstar has consistently denied being anti-Israel, and it has worked since October to fulfill an agreement with a coalition of U.S. Jewish and pro-Israel organizations to root out potential bias.
Sarah Wirth, a Morningstar spokeswoman, told JNS that the company trimmed its controversy rating list of companies, which operate beyond the 1949 armistice line, in agreed-upon methodological changes, including eliminating biased and pro-BDS sources. She cited Morningstar’s progress tracker, which she said shows the process is nearly complete.
That includes “identifying ineligible sources, adding a third-party source evaluator, strengthening our criteria for assessing source relevance and timeliness and creating methodology around sourcing to promote consistency,” Wirth told JNS.
“By strengthening source criteria in terms of sources’ relevance and timeliness across the human rights category, we saw a removal of 704 incidents, including 78 incidents related to the Israeli-Palestinian conflict area, thereby affecting the controversies,” she added.
The seven companies that Morningstar still flags are B Communications, Bezeq, Construcciones y Auxiliar de Ferrocarriles SA, Elbit Systems, Elco, Electra and Shapir Engineering and Industry.
Bezeq, an Israeli telecommunications giant, is assigned a category three controversy rating, on a scale of one to five. Wirth told JNS that Bezeq’s rating is due to its telecom activities, which “enable the maintenance and expansion of settlements in Area C” of Judea and Samaria, which is under full Israeli civil and military control under the terms of the Oslo Accords.
“Many international organizations have reported that the development of infrastructure and the provision of services that contribute to the maintenance and expansion of settlements might reduce the land available to Palestinians, negatively affecting their livelihoods and restricting their right to equality and non-discrimination and freedom of movement,” Wirth told JNS.
“Our rating reflects the fact that these allegations create risk for the company,” she said.
B Communications is Bezeq’s largest shareholder, which is why it has a category two rating, according to Wirth.
Construcciónes y Auxiliar de Ferrocarriles (CAF) also has a category two rating, after it won a tender to build and operate trains used in the Jerusalem Light Rail project. Anti-Israel advocates alleged the project would expropriate Palestinian land, although studies and news suggest otherwise. Palestinian Arab residents of eastern Jerusalem use the light rail often and have generally praised its benefits, including easier access from the Arab-heavy eastern part of the city to its center.
Infrastructure projects in an “Israeli-Palestinian conflict area allegedly contributes to the maintenance and expansion of settlements and might reduce the land available to Palestinians, negatively affecting their livelihoods and restricting their right to equality and non-discrimination and freedom of movement,” Wirth told JNS.
CAF is also hampered by its “involvement in rail projects that support Myanmar’s junta as it uses trains to move its troops, arms and other supplies,” Wirth told JNS
Especially notable is Elbit Systems’ rating, which was upgraded from category four to two following Morningstar’s reassessment of its sources methodology. That resulted in removing a controversy related to Elbit’s “provision of services to the Israeli security forces for surveillance purposes at military checkpoints and the wall within the area of the conflict,” Wirth said.
But Elbit, Israel’s largest weapons manufacturer, remains on Morningstar’s separate and also damaging Global Screening Standards (GSS) watchlist. The next quarterly update to that watchlist will be in August, Wirth believes.
Morningstar critics pointed to Elbit and Motorola—which Morningstar removed from the watchlist and whose controversy rating it canceled earlier this year—as especially egregious examples of the investment giant’s bias and potential lack of understanding of the conflict. Morningstar flagged both companies for providing anti-terror warning and surveillance equipment to Israel following the Second Intifada.
Although upgraded, Elbit’s controversy rating remains in place due to the company’s exposure “to some minor reputational risks following allegations of delivering weapons that are used by the Israeli military and have caused civilian casualties,” Wirth told JNS.
Elbit critics claim the company’s weapons have been used during fatal incidents in the Gaza Strip. Israeli officials say that they take great care to minimize civilian deaths and injuries, but Hamas and other Gaza terror groups use densely-populated areas for military operations, which makes civilian casualties unavoidable at times.
Morningstar pulled Motorola from its watchlist in the spring after it could no longer verify the telecommunications company had contracts for surveillance equipment with the Israeli military. The GSS list assesses “the extent to which a company causes, contributes or is linked to violations of international norms and standards,” per Morningstar.
The investment firm previously acknowledged that “some clients may use GSS as a so-called ‘do not invest’ list in order to comply” with investment policies that demand divestment from companies deemed to breach international standards of business conduct.
Electra remains flagged at category two due to its tender to build four tunnels in the northern part of Jerusalem to help traffic flow. The tunnel at the French Hill junction allows for road access to Jewish communities in Judea and Samaria, drawing criticism and a Morningstar controversy rating, according to Wirth.
“Building infrastructure projects in the Israeli-Palestinian conflict area allegedly contributes to the maintenance and expansion of settlements and might reduce the land available to Palestinians, negatively affecting their livelihoods and restricting their right to equality and non-discrimination and freedom of movement,” she said. “Our rating reflects the fact that these allegations create risk for the company.”
Elco, which owns more than 47% of Electra, is tagged with a category two rating as a result.
Shapir Engineering, which is also tagged with a controversy two rating, is part of the TransJerusalem J-Net Consortium, which in 2019 was awarded a 15-year concession to operate and expand the Jerusalem Light Rail. That includes connecting Jewish communities over the 1949 armistice line.
Wirth provided JNS with the same explanation for Shapir’s listing as she did for Bezeq’s.
It is unclear if the remaining items to be fulfilled on Morningstar’s progress tracker, including hiring independent experts to advise the company and adding new staff focused on human rights and conflict zones, will affect the seven companies’ controversy ratings.
Both Morningstar and the Jewish and pro-Israel coalition aim to hire an outside expert, or experts, to review the changes Morningstar already made and to suggest additional changes. Despite the slow process, both sides told JNS discussions are progressing in good faith.
It is more important to bring on the right expert than to move with great speed, one coalition source said.