newsBoycott, Divestment & Sanctions (BDS)

Report: Unnecessary for Morningstar to refer to ‘occupied territory’ to assess companies

“If the remaining BDS controversies come off Israeli companies after this, we can finally say that Morningstar is BDS free,” said Rich Goldberg of FDD.

The Morningstar financial services building in downtown Chicago. Credit: Adriana.Macias/Shutterstock.
The Morningstar financial services building in downtown Chicago. Credit: Adriana.Macias/Shutterstock.

Morningstar, an investment firm headquartered in Chicago that manages and advises on about $264 billion in assets, released a comprehensive report on Wednesday that it commissioned to address concerns that one of its subsidiaries has engaged in anti-Israel bias.

Sustainalytics, which rates the sustainability of investment products, has long been accused of downgrading assets associated with companies that operate in Judea and Samaria, as well as in eastern Jerusalem. Morningstar convened a pair of independent experts—one of whom it selected and the other chosen by a coalition of organizations, including many Jewish ones, that have expressed concern about the anti-Israel bias—to assess whether there was a need to change course.

Michael Newton, director of Vanderbilt University’s international legal studies program, and Alejandro Daniel Wolff, a retired U.S. diplomat who served as ambassador to the United Nations, compiled the report, which investigated the assumptions, sources and language that Sustainalytics’s researchers and analysts used. 

It made seven core recommendations, including that Sustainalytics should stop taking into account the geographical location of Israeli companies and it ought to eliminate the category “occupied territories/disputed regions” when suggesting negative associations with an investment.

“This report reaffirms how easy it is for anti-Israel bias to become entrenched, and how important it is for our community to remain vigilant and engaged,” stated Eric Fingerhut, president and CEO of the Jewish Federations of North America, which has acted as the coalition’s point organization.

Fingerhut added that the Federations commend Morningstar “for both its active engagement with our community, its strong stance against the boycott, divestment and sanctions (BDS) campaign against Israel, and the significant progress it has made toward reinforcing the fact that bias has no place in financial ratings.”

Better conditions

Liad Ortar, director of Shibolet ESG, which assists businesses in implementing environmental, social and governance (ESG) guidelines and standards, told JNS there isn’t adequate research available to determine whether and how much damage Morningstar’s previous ratings processes may have cost businesses operating in so-called occupied territory.

“At the end, the role of ESG, or integrating human rights concerns in the supply chain, is to safeguard the human rights of the people that work in corporations and manufacturers,” he said.

Israeli-owned companies operating in Palestinian Authority-controlled areas or Arab-majority parts of eastern Jerusalem tend to provide better working conditions for their employees than the PA does, which ESG ratings firms don’t tend to recognize, according to Ortar.

“The Palestinian employees are much better safeguarded by Israeli regulation,” he said. “The workers are receiving pension and social benefits, insurance and holiday gifts, like any other Israel-based employee.”

The recommendations Morningstar says it will implement will be unique to their company, as there are no overarching ESG guidelines or standards that are uniform to the ratings industry, Ortar added.

“One of the main things you expect out of rating agencies is that if you bring to the table or examine very similar companies, you will get very similar results,” he said. “One of the things in general that is very challenging in the world of ESG ratings are the differences between the different companies and their outputs.”

A ‘complex’ topic

Morningstar and Sustainalytics have been under fire for several years for developing investment ratings which, by definition, lowered scores for businesses simply by virtue of operating in Judea and Samaria and eastern Jerusalem, labeled as “occupied territory.”

Though Morningstar has vehemently denied being engaged in practices intended to harm Israel economically, the company has come under investigation by some 20 agencies from states across the country looking into whether its practices amounted to violations of anti-BDS laws.

Investors use Sustainalytics’s ESG ratings to make decisions about where to park their money, based on factors like how companies address climate change and how they treat their employees, along with compliance with international law.

A coalition of Jewish American and pro-Israel groups pressured Morningstar into gradual changes in its use of sources and processes to develop its ratings, leading to the removal of potentially unfair controversy ratings from more than 100 firms, signaling a 94% decrease.

“The topic of human rights is complex, and while it represents a small part of Sustainalytics’s research and ratings, it is important to many investors when they evaluate risks in their portfolios,” a Morningstar spokesperson told JNS in a statement.

“Morningstar is committed to continuing rigorous, independent research in this space, and following concerns of anti-Israel bias, we engaged in a productive and transparent process to fortify objectivity, transparency, and consistency in our work,” the spokesperson added.

The recommendations of the new report are to be implemented before the end of the year, according to Morningstar.

The report found that referring to “occupied territories/disputed regions” as a negative element of a business’s profile “is neither statistically meaningful nor analytically necessary to assess a company’s engagement in human rights violations.”

The experts stated in the report that the “focus on the affected companies and the emotive issues associated with the Israel-Palestinian Conflict Area viewed primarily through the lens of ‘occupation’ or ‘dispute’ renders this incident type particularly susceptible to actual or perceived bias.”

Another key recommendation is to evaluate human rights violations by “examining facts on the ground” rather than by “relying solely on uncorroborated media accounts.”

Critics of Sustainalytics had long pointed to its propensity for incorporating material from media outlets and other sources tied to the boycott Israel movement. This sometimes meant that unfavorable media coverage of Israel could lead to manipulated ratings.

“Reliance on credible sources does not necessarily equate to credible information that should drive objective risk analysis,” per the report. “Interested parties or non-governmental actors can generate media reporting to advance their own objectives by besmirching legitimate business activities in the Israel-Palestinian Conflict Area.”

The experts recommended that Sustainalytics “establish more rigorous procedures for assessing the underlying facts contained in media reports, regardless of the purported reliability of the media entity.”

Coinciding with that, Sustainalyitcs, per the expert recommendations, will be required to “clearly define what specific human rights a business is alleged to be violating.”

‘Cautiously optimistic’

Critics previously noted that Sustainalytics issued negative ratings to business operations on the sole basis of their operating in “occupied” territories rather than violation of international law.

Rachel Lerman, general counsel at the Louis D. Brandeis Center for Human Rights Under Law, has been involved with the coalition seeking changes at Morningstar. “You can treat a disease by treating the symptoms or by treating the body, and I think they’ve elected to treat the body,” she told JNS.

Rather than focusing on one business or another, the recommendations are structural and could be applied at other ESG rating agencies, according to Lerman. “What they recommend would make the product a lot better,” she said.

Lerman is “cautiously optimistic” that Morningstar will adopt the recommendations. The experts who compiled the report are due to issue a follow-up report on the implementation of their guidance.

“All of us had a tendency to be very skeptical, including myself. So, I feel like this report was a real shot in the arm,” Lerman said. “If they don’t do anything with this, then of course, it’ll be for naught. But if they do, and if we can convince other companies to do the same, I think there’s hope.”

Rich Goldberg, senior advisor at the Foundation for Defense of Democracies and a harsh critic of Morningstar’s practices, told JNS that the true test is whether the handful of companies remaining on Morningstar’s controversies list doing business in Judea and Samaria are removed.

“The bottom line question is whether the recommendations translate to actions,” he said. “If the remaining BDS controversies come off Israeli companies after this, we can finally say that Morningstar is BDS-free.”

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