Back in December, the Unilever conglomerate found itself in the crosshairs of an Illinois investment board. Every board member pulled the trigger, and as a result, the state divested from Unilever and its Israel-boycotting subsidiary, Ben & Jerry’s.

Another company found itself marked for removal, though it says it wants to make things right.

In 2020, multibillion-dollar Chicago-based investment research firm Morningstar acquired a full ownership stake in Sustainalytics, a Netherlands-based investment research firm. Sustainalytics has been accused of voicing anti-Israel bias within their research findings. Unlike Unilever, which refused to engage in any substantive way with the seven-member Illinois Investment Policy Board, Morningstar decided to maintain an open dialogue with the IIPB and opened up an investigation on the matter.

The IIPB meets held its quarterly meeting on Monday, and Morningstar’s counsel made a case convincing enough that a vote on the matter was pushed off until the next meeting in June.

“There is a black-and-white contrast between the way that the two companies have handled this. Morningstar retained outside counsel to go through their policies and procedures, and at the end of that process, render recommendations. That’s head and shoulders above what Unilever did,” Andrew Lappin, chair of the board’s Committee on Israel Boycott Restrictions, told JNS.

One study claimed that within Sustainalytics’ analyses, companies that operate in Israel are tagged with higher negative controversy ratings—more so than other companies based in conflicted areas like China or Tibet, with its algorithm taking into account political factors out of proportion to business considerations. The firm used to be partly owned by PGGM, the Dutch pension that touted its own divestment from Israeli banks in 2014, though later reserved its decision in 2019. Many of Sustainalytics’ scores for Israeli companies are heavily based on the large, inflammatory blacklist of companies based in Israel compiled and published directly by the U.N. Human Rights Council—the only such list compiled by that body.

A report compiled by pro-Israel activities noted that while Israel was one of 71 countries in a region encompassing Africa and the Middle East, it accounted for 50% of the companies that Sustainalytics’ has focused its negative rankings on—a finding Morningstar reportedly refused to offer a defense for.

Currently, Illinois prohibits investment in certain companies that do business with Iran and Sudan, as well as companies that boycott Israel. In 2015, Illinois became the first state in America to pass such a law in order to counter the anti-Israel BDS movement. According to Illinois law, to boycott Israel means “engaging in actions that are politically motivated and are intended to penalize, inflict economic harm on, or otherwise limit commercial relations with the State of Israel or companies based in the State of Israel or in territories controlled by the State of Israel.”

The IIPB—a seven-member board comprised of a mix of non-paid appointees of the governor and representatives of key pension systems—was created to ensure that the state is not investing public money in entities contrary to that law.

‘They know what the allegations are’

Lappin said following Monday’s meeting that Morningstar has yet to turn over to the board any findings.

“At the last meeting, they were just embarking on this investigation. They understood their timeline to be as short as possible. So, I can’t imagine this dragging on for much longer, absent some good faith effort on their part to recognize and recommend policy change,” he said.

Lappin said at December’s meeting that the IIPB would be “wholly justified in adding Morningstar to the state’s list of prohibited investments today” before giving Morningstar a reprieve to handle its investigation, which it agreed to do only about two weeks before it was set to be placed on Illinois’s blacklist alongside Unilever. Morningstar would be the first U.S.-based company to be placed on the list of companies that boycott Israel, joining 40 other firms from around the world.

Morningstar first came to the attention of the board through JLens, an investor network that looks at impact investing through a Jewish prism. According to its website, the organization purports to serve “as a bridge between the Jewish community and the Socially Responsible Investing (SRI) and Corporate Social Responsibility (CSR) arenas.

Alarmed by Morningstar’s impending acquisition of Sustainalytics, JLens approached Morningstar management, only to be brushed aside ahead of the deal’s closure. A few months later, JLens began its own dialogue with Morningstar, which culminated in January 2021 with JLens placing Morningstar on its “Do Not Invest” list and publicly accusing the company of supporting BDS.

That same month at Morningstar’s annual shareholder meeting, JLens introduced a shareholder proposal that would require Morningstar to produce a report on the risks of its “economic activism.” The proposal went nowhere, and two months later, Morningstar announced that an internal review found JLens’s claims to be false, indicating there was no systemic bias against Israel in the Sustainalytics ratings system.

JLens’s Jewish Advocacy Strategy, an investment strategy with more than $100 million in assets established by Jewish institutional investors, placed Morningstar on its own blacklist and refuses to own shares of the company.

“JLens put forth a fairly detailed series of memos that certainly I have to assume would serve as the basis for the answers that Morningstar’s report will seek to come to. It’s the same questions that have been coming up over the last year, year-and-a-quarter. So they know what the allegations are,” said Lappin.

The question is whether after two years of ignoring and deflecting the problem, Morningstar finally agreed to take action simply because of the potential of divestment or whether there was more at play.

“I believe they were very quietly approached by people in the community who told them that this is a serious problem that needs to be addressed. Look, they are acquired Sustainalytics not long ago, and I look at it as a pre-existing condition within that company,” explained Lappin. “Morningstar is now making a real effort to diagnose the problem and cure it. If we receive nothing complete or substantial from them by June, then it’s a different discussion. But the sense I got from their outside counsel is that the effort is heartfelt and sincere.”

Before Unilever, the policy board had last taken action in 2018, when online lodging marketplace Airbnb announced that it would remove listings in Judea and Samaria. Airbnb avoided Illinois divestment by backing off its decision and certifying to state regulators in 2019 that it was not violating the restriction on boycotting Israel. There are currently 40 entities listed by the IIPB as companies that boycott Israel. Six of those are currently in talks with the IIPB on the issue, according to the board’s website.

‘Business factors can legitimately keep companies out of Israel’

Morningstar is a somewhat unique case, as the company itself doesn’t boycott Israel or Israeli-controlled territories, nor does it explicitly call for a boycott. But it represents a relatively new battlefield in the Israel boycott movement. As socially responsible investing becomes more popular, pro-Israel supporters worry that companies like Morningstar will succumb to pressure from the BDS movement and add Israeli companies and companies that do business with Israel to its negative-rating lists.

The fact that a company that advises its clients of the potential pitfalls of doing business in Israel-controlled territory, without directly calling for a boycott, could still run afoul of BDS laws presents an interesting test for how far the arm of some of these laws can reach.

“The board is going to have to make a finding based on facts. The fact that Sustainalytics doesn’t explicitly call for a boycott of Israel or Israel-controlled territories for political or social reasons like Ben & Jerry’s doesn’t mean they haven’t run afoul of Illinois law,” Marc Stern, an attorney and leading expert on BDS-related legislation, told JNS. “Business factors can legitimately keep companies out of Israel. Politically motivated factors are something different when it comes to a lot of these boycott laws in various states. The Illinois board will have to make a determination.”

More than 30 states have some form of Israel-related anti-boycott laws, executive orders or other investment policies on the books, and many apply the standard to any area under Israeli control, including disputed territory in Judea and Samaria and any part of Jerusalem.

In September, Arizona sold off $93 million in Unilever bonds and announced plans to sell the remaining $50 million it has invested in Unilever. Days later, Texas started a process that will likely end with the pulling of $100 million in state pension funds invested in Unilever. Florida, which has about $139 million invested in Unilever, announced in October that it would stop buying shares in the company. Earlier this month, New Jersey began pulling $182 million in Unilever stocks and bonds. (Illinois’s investments in Unilever are reportedly comparable to New Jersey’s, though exact figures were still being researched by individual Illinois pension funds.) And just last week, Colorado’s state pension fund announced that it has initiated proceedings to divest from Unilever over Ben and Jerry’s stance on Israel.

New York State’s comptroller said his late-October decision to divest the state’s pension fund of around $111 million of Unilever holdings was made in order to protect Israel’s economy—and, therefore, the state’s massive holdings in Israeli companies—from the BDS movement. In November, New York Gov. Kathleen Hochul opened a 90-day window for Unilever to reverse its position before the state ceased investments of any kind in the company. Hochul’s office has failed to answer repeated JNS inquiries as to the current status of that process. Last week, the Colorado Public Employees’ Retirement Association, which manages a $61 billion public pension fund, announced that it had initiated proceedings to divest from Unilever.

Lappin indicated to JNS that after the Unilever firestorm, he anticipates things slowing down once the Morningstar issue is resolved. There were no other companies or items on Monday’s IIPB Israel committee agenda outside of Morningstar.

“This is going to be a challenging and very important one to work through. So, hopefully, we’ll get there,” said Lappin. “But I’m happy to say there is nothing else on the horizon for now.”


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