An Illinois state board tasked with ensuring that public money is not invested in entities that promote boycotts, divestment or sanctions against the State of Israel has faced criticism in recent weeks over its response to a company found to have anti-Israel bias.

In May the law firm White & Case released a report that investigated Morningstar—a Chicago-based financial services firm that provides investment overviews to governments, businesses, and individuals—for potential anti-Israel bias. The report was prompted by the seven-member Illinois Investment Policy Board (IIPB) claiming that one of Morningstar’s acquisitions, Sustainalytics, which informs investors about non-financial criteria including environmental, social, and governance (ESG), routinely used problematic criteria and sources that singled-out Israel over human rights abuses, while neglecting serious abuses in other countries.

The report claimed that the business ties of companies to Israel were denoted in Sustainalytics’ Human Rights Radar risk ratings more frequently than compared with areas like Saudi Arabia or Tibet, which are often noted by experts as locations rife with human rights abuses. The report noted fewer related problems with Sustainalytics’ other products. It included 40 recommendations for Morningstar to implement that would address and mitigate potential anti-Israel bias.

However, following a June 21 board meeting, the board’s chair, Michael Mahoney, told JNS that IIPB’s investigation was closed by a unanimous decision and that it appreciated “Morningstar’s openness and transparency on the issue.”

Members of IIBS’s Israel committee, including its chair, oppose this decision. In an interview with JNS, chair Andy Lappin said that IIPB held two votes on Morningstar’s investigation. The first was to clear Morningstar of wrongdoing, which failed. The second, which passed, was to keep Morningstar off its do-not-invest list subject to Morningstar implementing not only the recommendations from the investigative report but responding to a memo by Foundation for the Defense of Democracies (FDD) senior adviser Rich Goldberg, the architect of Illinois’s anti-BDS law, written ahead of the June 21 board meeting.

In Goldberg’s memo, he accused Sustainalytics of serving “as a conduit for the BDS campaign targeting Israel.”

He argues that the White & Case recommendations are superficial and that they don’t address the heart of the matter, which is Sustainalyics’ overreliance on source material from organizations promoting BDS and corporate culture at Sustainalytics which too often defaults to anti-Israel thinking and coziness with BDS proponents.

“There’s is nothing in the White & Case report that provides a blueprint for how they’re going to verify implementation of those recommendations. The Morningstar CEO said in a moment of frustration [at the June 21 meeting] that they just want to get out from under this cloud, that they’ve done what they’ve been asked to do and been transparent. But the FDD findings show completely different conclusions than the White & Case report. It shows major systemic problems that need to be addressed,” said Goldberg.

‘Peripheral in nature’

Morningstar came away from the meeting seemingly satisfied with the vote, telling JNS in a statement that “on June 21, Morningstar participated in the Illinois Investment Policy Board June meeting, where the IIPB voted ‘no’ to placing Morningstar on the ‘Prohibited Investment List’; Morningstar is committed to working collaboratively with external stakeholders such as the IIPB and leading Jewish advocacy organizations as we implement the White & Case report’s recommendations.”

The statement also claimed that Morningstar officials offered to meet with Goldberg to discuss the issues in the FDD article “in person at the meeting last Tuesday.” They added that “Morningstar is committed to working collaboratively with external stakeholders such as the IIPB and leading Jewish advocacy organizations as we implement the White & Case report’s recommendations.”

Goldberg disputed that notion, telling JNS that he was the one who went to introduce himself to Morningstar’s CEO and Sustainalytics’ president and that there has been no follow-up from either unit since the introduction. “Morningstar came to that meeting on one mission, and that was to get a clean bill of health. But they didn’t get it,” Goldberg told JNS.

Lappin was also concerned about Morningstar’s public statements since the meeting because it did not acknowledge any commitment to consider or implement Goldberg’s recommendations.

Lappin, who has access to the minutes of the June 21 meeting, disputes the official characterization of the votes taken by the board that day and has filed a dissent, which he was told would be included in the official publication of the meeting minutes. The minutes are not legally available for public dissemination until September.

In his dissent, Lappin says “what I thought I had voted for was consistent with our vote in the previous meeting of 3/21/22, a willingness on the part of the board to hold off putting Morningstar on the list of restricted entities.”

Lappin also says that there were issues with the White & Case report because it fails to address Morningstar using Who Profits, Human Rights Watch and Amnesty International as prime sources for its ESG rating process. According to Lappin, all four of these sources are “conclusively shown to be anti-Israel,” thus making the rating process “anything but biased.”

“Until this core question is satisfactorily addressed, all other tweaks by Morningstar to methodology and associated algorithms will be peripheral in nature,” reads Lappin’s submission to the board’s executive secretary.

Further complicating matters is that the term of all seven IIPB members expired on July 1, shortly after the votes. There has been no announcement about the fate of any of those members—four of which are appointed by the governor, and one each from three separate state pension funds or investment boards.

Last year, IIPB put Morningstar on notice and was prepared to place it on its blacklist of companies after its acquisition of a full ownership stake in Sustainalytics, a Netherlands-based investment research firm that grades investment opportunities based on social factors. Sustainalytics has been accused of voicing anti-Israel bias within their research findings.

JLens, which represents a network of Jewish investors, put Morningstar on its “do not invest list” due to its alleged support of the anti-Israel BDS campaign.

The IIPB warned Morningstar that the Sustainalytics unit was focusing disproportionately on the Israeli-Palestinian conflict while making recommendations to potential investors who take into account social concerns while making financial decisions.

The board intimated that Morningstar would face divestment in its home state of Illinois if a course correction was not undertaken, and Morningstar—after initial denials of anything amiss—decided in December to hire the law firm White & Case to investigate the matter and produce a report with recommendations. It was seen by the IIPB as a good-faith effort that bought Morningstar more time.

Company had been ‘overly dismissive’

In a letter on Morningstar’s website, executive chairman Joe Mansueto and CEO Kunal Kapoor acknowledged that the company had previously been “overly dismissive” when Jewish groups and others raised their concerns about biased Sustainalytics research.

As a result of the White & Case report, Morningstar cut ties to a research product that provides information on companies involved in regions where human-rights violations allegedly occur.

The decision was made because Human Rights Radar, an outside vendor for Sustainalytics, exhibited “bias in its outcomes by over-representing firms linked to the Israeli-Palestinian conflict,” according to Mansueto and Kapoor.

Additionally, Morningstar announced that Sustainalytics will take other steps recommended by White & Case, including making its research more transparent and adding an ombudsperson. In all, the report made 40 recommendations.

Morningstar officials made their case to the IIPB at its regularly scheduled meeting on June 21 that the outside investigation, combined with its findings and a promise to implement its recommendations, should warrant a vote by the IIPB to take Morningstar off its watchlist.

Critics, however, say, even if the White & Case recommendations were implemented, Morningstar’s proprietary methods in how it develops its risk ratings, which are unseen by investors, will continue to leave a cloud over how it arrives at its decisions.

“You can recommend 40 nothingburgers, but that doesn’t mean you solved the problem. The White & Case report essentially just pushes Sustainalytics to use an asterisk or some other below-radar method to let a customer know that some sources used may be considered pro-Palestinian,” said Goldberg, adding in his memo that “such a boilerplate disclaimer is insufficient to cure the fact that the inputs being used by Sustainalytics to evaluate Israel-connected companies are, in many cases, devoted to boycotts of the Jewish state. These inputs are deeply embedded in all Sustainalytics research products and make the research itself systemically biased against Israel and unreliable.”

There is also the larger issue of why Sustainalytics places such a high reputational risk rating on companies doing business with Israel when at least one recent study shows microscopic support for the BDS movement in America.

Goldberg claims that Sustainalytics’ processes and products are “infected by systemic bias against Israel.”

“In its evaluation of Sustainalytics’ flagship product, its ESG Risk Ratings reports, the White & Case Report found that “the Israeli-Palestinian conflict is responsible for a majority [70%] of the Occupied Territories/Disputed Regions incidents that led to a [heightened] human-rights related Controversy rating. FDD has previously documented other disputed territories that get little to no attention from Sustainalytics,” writes Goldberg.

His memo claims that Sustainalytics relies heavily on documented anti-Israel sources and should “prohibit the use of sources that support or participate in the BDS campaign, including Who Profits, Human Rights Watch, Amnesty International, and the United Nations.

Who Profits is a BDS proponent and was instrumental in helping the Office of the U.N.High Commissioner for Human Rights construct its controversial blacklist of Israel-connected firms. Goldberg’s research indicates a particularly close relationship between Sustainalytics and Who Profits, and Sustainalytics’ reliance on the U.N. blacklist for its ratings.

Meanwhile, Amnesty International was recently blasted by U.S. politicians, including a number of Congressional Democrats, after labeling Israel an apartheid state and claiming Israel should not exist as a Jewish state.

“Members of Congress on both sides say that what is being peddled by some of these human-rights organizations is pure anti-Semitism,” said Goldberg.

Furthermore, according to Goldberg, the companies that are involved in any manner with the Israeli economy are automatically labeled as being complicit in human-rights abuses in all of Sustainalytics’ core products, thereby disproportionately punishing those companies in Sustainalytics’ ratings, compared to companies doing business anywhere else in the world.

Goldberg also claimed in his memo that even the terminology adopted by Sustainalytics, largely taken from U.N. definitions and resolutions, was problematic, creating underlying assumptions that merely operating in “occupied Palestinian territories” is a human-rights violation.

The next meeting of the IIPB is scheduled for Sept. 21.


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