Morningstar announces substantive changes to how it rates Israeli companies

Chicago, IL/USA - May 31, 2020 Downtown Chicago MorningStar building during the day with no people. logo

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

by Mike Wagenheim

(JNS) — Following an extended period of wrangling, the investment firm Morningstar reached an agreement on Oct. 31 with pro-Israel organizations to alter its methodology in rating the risk it assigns to companies doing business in and with Israel.

Morningstar and its subsidiary Sustainalytics have been accused by critics of utilizing anti-Israel sources and weighing them disproportionately in assigning Environmental, Social and Governance (ESG) risk ratings to companies as guidance for socially-minded investors. The ratings, which assigned a higher risk simply for doing business in or with Israel or in Israel-controlled territories, amount to a de facto boycott of Israel, allege several American Jewish groups and state officials.

“After months of intensive discussions, we are pleased that Morningstar has made new commitments related to the assumptions and sources involved in its ESG ratings. We are hopeful these commitments will lead to important changes in Morningstar’s Sustainalytics company data and ratings in order to eliminate any singling out of or discrimination against Israel,” Jewish Federations of North America President and CEO Eric Fingerhut said in a statement.

At the JFNA General Assembly in Morningstar’s home base of Chicago on Oct. 31, it was announced that Morningstar committed to barring the use of biased and unreliable sources from its reporting, such as the U.N. Human Rights Council and WhoProfits. It will use geographic names (e.g. West Bank, East Jerusalem) in relevant regions, rather than terms such as “Occupied Palestinian Territory” or “occupied territory”; provide guidance to analysts that will ensure businesses operating in Israeli-Palestinian conflict areas or contributing to Israel’s defense against terrorism are not treated as de facto violators of human rights; remove references to the BDS campaign; provide ongoing anti-bias and anti-Semitism training to relevant staff; bring in independent experts to ensure ESG ratings do not single out and discriminate against Israel or hold it to a different standard than other countries; and review and update existing data and analysis to align with the commitments described above.

The groups engaged in long-running discussions with Morningstar included JFNA, the Anti-Defamation League, the American Jewish Committee, JLens, the Foundation for Defense of Democracies and the Louis D. Brandeis Center for Human Rights Under Law, in coordination with the Conference of Presidents of Major American Jewish Organizations, Hadassah the Women’s Zionist Organization, Jewish Funders Network, Combat Antisemitism Movement, Jewish United Fund of Metropolitan Chicago and UJA-Federation of New York.

Fingerhut cited JLens for initially raising the issue of Morningstar’s methodologies in 2020, followed by early work on the issue by the Jewish United Fund of Metropolitan Chicago and the Foundation for Defense of Democracies. He also thanked Morningstar Executive Chairman Joe Mansueto and CEO Kunal Kapoor for their “engagement and goodwill.”

William C. Daroff, CEO of the Conference of Presidents of Major American Jewish Organizations, commented, “We are thankful for the many hours Morningstar devoted to understanding the Jewish community’s concerns about Sustainalytics’ historic bias against Israel and our concerns about its ESG operation. We are hopeful that today’s announcement will result in more accurate financial data, as well as ending the use of BDS activists as sources.”

“But we are also mindful that many Israel-connected companies have been negatively impacted by the assumptions and sources that have underpinned Sustainalytics’ ratings, watchlists and engagements to date, and are hopeful these ratings and statuses will be modified to reflect today’s announcement,” he added.

A source close to the process said that Morningstar moved closer over the weekend toward the working group’s demands on issues such as the assumptions and sources it uses in developing the risk ratings that drew the ire of pro-Israel groups and the attention of officials from 20 states who are investigating whether Morningstar’s practices violate laws against boycotting Israel.

According to the source, Morningstar resisted substantive changes in its discussions with the working group, only moving off its position over the last few days. The source indicated there was some dissension within the working group itself over how far Morningstar would need to go in order to satisfy the group’s demands.

“Morningstar strongly reinforces the fact that we repudiate the Boycott, Divest and Sanctions campaign. We are grateful to JLens for first raising these issues, and that the Jewish Federations of North America, the ADL, the American Jewish Committee, JLens, the Foundation for Defense of Democracies and the Louis D. Brandeis Center for Human Rights Under Law engaged with us in a thoughtful and productive manner in the spirit of sharing perspectives that can help our research be better for investors,” said Mansueto in a statement. “I thank the coalition for bringing their deep expertise on Israel and anti-Semitism and our Sustainalytics team for providing extensive background and analysis to have these important, meaningful discussions and help find common ground.”

Morningstar has long insisted it does not practice BDS and has pointed to an independent report it commissioned that claimed there was no inherent anti-Israel bias in its ratings process. The company promised to implement some 40 recommendations springing from the report to ensure any bias was eliminated, but opponents say the changes, if implemented, would have done little to root out the core bias at work.

“This is an important step toward ensuring investors do not receive research tainted by politics and sources that have historically been hostile towards Israel. We will continue to work with our partners in the Jewish community to ensure Morningstar is transparent when it implements reforms and lives up to its commitments,” said Ted Deutch, CEO of the American Jewish Committee. “We believe the framework announced today is strong and could serve as a model for other financial firms to ensure that anti-Israel bias does not infect their methodologies. We call on other firms to embrace openness and transparency to reassure the public that their financial advice is not politicized.”

Still, some long-time observers of Morningstar’s practices are playing a wait-and-see role, eager to discover whether the changes implemented on paper will lead to substantive relief for companies doing business in and with Israel.

“The key test of whether Morningstar is violating state anti-BDS laws is whether the company is inflicting harm on Israel-connected firms in the form of controversy ratings, watchlists and so-called engagements,” Richard Goldberg, senior advisor at the Foundation for Defense of Democracies and author of the first state anti-BDS law in Illinois, told JNS. “If these steps lead to controversies being dropped, companies coming off watchlists and engagements being closed, this is a great success and model for every ESG-involved firm. If not, it’s still BDS.”