The Chicago-based financial services firm Morningstar, which reported nearly $570 million in revenue and more than $3.56 billion in total assets in the third quarter of 2024, announced on Dec. 31 that its subsidiary Sustainalytics had put reforms in place to address concerns of anti-Israel bias.
The announcement finalized a multi-year process by a coalition of U.S. Jewish and pro-Israel organizations to bring about reforms in the anti-Israel methodology at a leading U.S. investment ratings firm.
Critics have long noted that Sustainalytics issued damaging scores to companies operating in eastern Jerusalem and Judea and Samaria—what it formerly referred to as “occupied” Palestinian territories. The firm appended a disproportionate number of negative “human rights controversy” ratings to the Israeli companies, or those operating in Israel, using unfair assumptions, sourcing and models, the critics said.
The update makes “research on human rights issues connected to disputes concerning contiguous territories, which includes relevant issues pertaining to Israeli-Palestinian conflict area, ineligible for analyst coverage,” stated Morningstar, whose more than 12,000 employees in 32 countries cover more than 620,000 investments.
“This means we won’t cover those areas because human rights issues, when related to contiguous territorial disputes, are less likely to be objective, reliable or consistent, and subject to complex geopolitical factors, divergent views and conflicting partisan media reports,” Morningstar stated.
It added that “third-party independent experts” gave “actionable recommendations to address concerns of anti-Israel bias in Sustainalytics’ research,” noting the “complexity” of the Israel-controlled areas, “the disparate legal and policy frameworks that apply and that even relying on credible sources does not in itself sufficiently ensure that only credible information is applied to such research.”
“With the issuance of the supplemental report by the experts, we have completed our work to address the experts’ recommendations to address concerns of anti-Israel bias in Sustainalytics’ research,” the company added.
The Jewish Federations of North America, Louis D. Brandeis Center for Human Rights Under Law, American Jewish Committee, Anti-Defamation League and JLens, which collectively pushed to reform Morningstar’s environmental, social and governance ratings “welcome the assessment that the company’s ratings no longer reflect anti-Israel bias,” the Federation told JNS in a statement. The group “has worked for nearly three years to ensure ratings fairness,” it added.
The “controversies” that Sustainalytics attached to companies operating in Israel were part of the ratings that socially conscious investors use in their decision-making processes, and they include determinations about how companies address climate change, treat their employees and comply with international law.
Sustainalytics leaned heavily on anti-Israel sources, which support boycotting the Jewish state publicly, and the firm automatically flagged companies just for doing business in eastern Jerusalem or Judea and Samaria as human rights violators in a method that has been dubbed “backdoor BDS.”
Some 20 agencies from states across the country investigated whether Morningstar, which manages and advises upon about $264 billion in assets, was violating anti-BDS state laws. In mid-2022, Morningstar began working with the coalition of Jewish groups to address their concerns. As of December, it has removed the human rights controversies from its environmental, social and governance (ESG) reports of all the companies doing business in Israel-controlled areas. (It had collectively flagged more than 100 such companies over the years.)
“It’s really a model process, and we urgently hope that this is not the last ESG company that does it,” Elana Broitman, a Federation consultant, told JNS.
Looking under the hood
Broitman said that direct talks between Morningstar and the group—which also includes the Foundation for Defense of Democracies, Conference of Presidents of Major American Jewish Organizations, Hadassah, Jewish Funders Network, Combat Antisemitism Movement, Jewish United Fund of Metropolitan Chicago and UJA-Federation of New York—had been fruitful to a degree. (JLens, a Jewish investment advisory hub, was the first to raise the issue about the problematic Sustainalytics approach.)
But bringing in independent experts provided a level of expertise, consistency and trust that pushed the negotiations across the finish line, she told JNS.
The coalition’s conversations with Morningstar opened the latter’s “eyes to the way Sustainalytics was naturally biased,” a source familiar with the process told JNS.
After its 2020 purchase of the Amsterdam-based Sustainalyics, Morningstar allowed the subsidiary to run the ESG ratings business without understanding the complexity of the product. Morningstar “hadn’t looked under the hood that much, because they didn’t really have people who work for them who were experts in these particular issues, and so they were quite surprised at some of the things we uncovered,” the source, who spoke on the condition of anonymity, told JNS.
Morningstar was “also surprised to learn the lack of understanding of the entire context that some of the Sustainalytics people were operating from,” the source added.
JNS asked if Sustainalytics analysts were anti-Israel or unaware of the nuance of the region.
“I think we encountered people who are anti-Israel. I think we encountered a lot of other people, who just didn’t understand and didn’t know in the Sustainalytics world,” the source told JNS. “I didn’t really encounter anybody anti-Israel in the broader Morningstar leadership at all. I think that they were, in fact, kind of aghast at some of what they heard.”
Clean bill of health
A supplemental report issued on Dec. 20 by Michael Newton, a professor at Vanderbilt University and director of its international legal studies program, and retired U.S. envoy Alejandro Wolff, gave Morningstar and Sustainalytics a clean bill of health on its changes concerning Israel-controlled areas.
“After careful review, we conclude that Morningstar has implemented a set of systematic reforms designed to address the potential risk of anti-Israel bias in Sustainalytics research and products,” the duo wrote. “Morningstar’s reforms are consistent with our overall intentions and our specific mandate.”
“We found no examples of Israeli companies or companies doing business in Israel whose ratings reflect biased processes or anti-Israeli bias,” they added.
The experts wrote that they also received assurances from Morningstar that it is committed to ensuring that the research and reporting it uses in its ratings won’t support political agendas, including boycotting Israel, and that Sustainalytics “will continue to refine internal standards designed to avoid the risk of analysis being based on conjecture or framing by interested parties.”
Morningstar also committed to employing a designated human-rights resource to provide expertise to management and research analysts. The experts wrote that Sustainalytics “eliminated gratuitous references to Israel or companies with business operations in Israel associated with unrelated incidents or events.”
Human rights issues in conflict areas are a small fraction of Sustanalytics’ overall work, and “it is a complex area that’s extremely difficult to get right,” Morningstar told JNS in a statement.
“Since our founding 40 years ago, Morningstar has been dedicated to independent, comprehensive research that investors can trust. Our role is to advance transparency, promote access to valuable insights and enable investor choice to support successful investor outcomes,” the firm told JNS.
“We remain committed to delivering consistent, reliable and actionable research in human rights issues, backed by a rigorous methodology, and we look forward to continuing to provide investors with the information they seek to guide successful investing outcomes,” it added.
JLens, which became part of the ADL in late 2022, told JNS that Morningstar deserves praise for how it handled the issue.
“We commend Morningstar for commissioning independent experts, removing dozens of biased controversy ratings and pledging further reforms—steps that should serve as a model for the entire ESG industry,” Ari Hoffnung, managing JLens director and senior ADL adviser on corporate advocacy, told JNS.
“JLens believes investors are entitled to research that is both objective and uninfluenced by boycott, divest and sanctions activists seeking to deter companies from doing business with Israel,” Hoffnung told JNS. “We encourage all ESG data providers to adopt transparent, consistent and rigorous practices so that companies operating in Israel are held to the same standards as those worldwide.”