At Morningstar, Inc. in Chicago, August 20, 2019. Source: Facebook.
by Mike Wagenheim
(JNS) — A coalition of U.S. Jewish and pro-Israel groups is treading carefully while pursuing unfulfilled commitments from investment firm Morningstar, Inc. in the way it assigns risk ratings to companies doing business in Jewish communities beyond the Green Line.
Last Oct. 31, the Chicago-based Morningstar reached an agreement with the coalition to change the way its Sustainalytics subsidiary assesses such companies when calculating risk factors that inform its Environmental, Sustainability and Governance scores, which it distributes to socially-minded investors.
While the coalition met the understanding with cautious optimism, a recent letter addressed to Morningstar, coupled with independent analyses of updates to the firm’s ratings, which JNS has reviewed, and answers that the firm provided to JNS, show a disconnect between the coalition’s expectations and Morningstar’s preferred process going forward.
The Jewish investor network JLens was the first to pursue changes at Morningstar. Its founder and CEO, Julie Hammerman, told JNS it is pleased with Morningstar’s commitment fulfillment so far.
“Morningstar, while it took a long time and will continue to be a long process, is now engaging in a good faith effort to make improvements and understand and address the concerns that JLens and others have raised to them,” Hammerman said. “The company’s leadership has committed to removing anti-Israel bias.”
JLens has removed Morningstar from its Do Not Invest list, she added.
Another key coalition source told JNS on the condition of anonymity — to avoid disrupting ongoing discussions — that it is pleased Morningstar is engaging, but there is growing frustration and a feeling that the firm is stalling in its selection of an independent expert, or experts, to review its processes.
Morningstar, in a response to the coalition, accused the Jewish groups of delaying the selections by proposing additional, preferred candidates to ensure those selected are not inherently biased against Israel. It also said the groups are delaying antisemitism training for Sustainalytics analysts so the coalition can have more time to propose its own training program.
Richard Goldberg, a senior adviser at the Foundation for Defense of Democracies who has written extensively on Sustainalytics practices, told JNS that Morningstar is continuing to mislead Jewish groups and the public.
Morningstar released a public progress report on the issue last week. “A closer examination of the data shows that Morningstar’s claim to have addressed anti-Israel bias is misleading,” Goldberg wrote in response. “A careful examination exposes the ongoing boycott, divestment, sanctions (BDS) activity in which Sustainalytics engages.”
Morningstar told JNS that the process, moving forward, depends upon hiring an expert to provide an external review of the research assumptions.
“We shared our proposed candidates with the Jewish Federations-coalition group on Dec. 12, 2022, and await feedback, so we can move forward,” it said.
The disagreement centers on a commitment Morningstar made that it would “provide additional documented guidance to ensure that its analysts understand that business activity, including but not limited to sectors such as telecommunications, banking, real estate and construction, within the regions linked to the Israeli-Palestinian conflict or related to Israel’s defense against terrorism, do not give rise to a presumption that there is a human rights concern.”
In a letter to the coalition on Jan. 17, Morningstar stated that as part of recent reassessments, Sustainalytics analysts “reevaluated the link between the companies’ activities and potential human rights violations in the context of the IPCA [Israeli-Palestinian conflict area].
“This review also included the below changes to sources, divestment activities, removal of references to the boycott, divestment and sanctions campaign, and changing ‘OPT’ to ‘OT.’”
Those acronyms refer to “occupied Palestinian territory” and “occupied territory.”
There is no clarity within Oct. 31 agreement text on whether hiring an independent expert must come first, and a source within the Jewish/pro-Israel coalition told JNS that point of order is one of the main sources of friction.
Morningstar told JNS that “if we had an automatic presumption [about human rights violations], we would simply identify all companies operating in the region.”
The company also told JNS that the reassessment focused on three reasons for the removal of ICPA controversies: The controversy must establish a link between the company’s activities and human rights violations in the Israeli-Palestinian conflict; the controversy cannot stem from references to the Boycott, Divestment and Sanctions campaign; and the reassessment included a routine review of incidents based on continuing pertinence and timeliness.
“We removed the U.N. Human Rights Council as a source. We also removed most references to divestment actions,” Morningstar wrote.
But analyses of several relevant companies’ updated Sustainalyitcs profiles, which JNS viewed and corroborated with a second knowledgeable source, and answers that Morningstar provided JNS, show that many of the presumptions remain even in instances in which Morningstar admits there is no activity of a company with obvious human rights violations.
A recent analysis of Sustainalytics’s updated ratings for Cellcom Israel shows Morningstar judged that Cellcom may be downgraded with “evidence its products or services are customized in such a way to contribute or facilitate direct human rights violations in the region.”
Judea and Samaria
Morningstar told JNS that Cellcom’s delivery of telecom services to the “settlements,” the Jewish communities in Judea and Samaria, is linkable to “adverse human rights effects on the Palestinian population, such as the freedom of movement, the rights to equality and nondiscrimination,” since it could “enable the maintenance and expansion of settlements.
“Our research flags this risk, which creates a more challenging operating environment for the company,” it said.
At the time, Morningstar provided no claim that Cellcom was doing anything that violated human rights directly, only the potential that it might.
In response to JNS questions about how to reconcile that inference with Morningstar’s commitment to eliminate assumptions, Sarah Wirth, a company spokeswoman, stated: “It was part of the agreement with the Jewish Federations-coalition group to revisit these research assumptions with an independent, external expert, and then provide documented guidance for analysts to follow.”
Later, however, Morningstar inferred that it judged Cellcom was indeed committing human rights violations, rising to a Level 3 (significant) controversy.
Morningstar claimed that disparity is due to “evidence” that Cellcom is placing a large number of antennas in the West Bank, which it intends to provide cellular services to soldiers and settlers.
“Additionally, there is evidence that Cellcom is supporting the expansion of the Israeli settlements of Beitar Illit and Efrat in the West Bank as a telecom infrastructure provider,” Morningstar told JNS. “These activities enable the maintenance and expansion of settlements and are therefore linked to adverse impacts on the Palestinian population” such as those concerning “freedom of movement, the rights to equality and non-discrimination.”
JNS asked Morningstar to cite one example of a telecommunications, banking, real estate or construction company operating in Jewish communities that Morningstar labels “occupied territory” that would not receive a controversy score on human rights.
Morningstar listed one Israel-based construction and one real estate company, but admitted “the data doesn’t show whether or not these firms operate in disputed territories.” JNS could find no evidence that either company operates beyond the Green Line.
Motorola, meanwhile, currently appears on a Sustainalytics Global Standards Screening watchlist. While Motorola’s Sustainalytics-assigned ESG risk rating is low, a controversy listed in Sustainalytics’s risk analysis revolves around “Motorola’s supply of equipment that can be used for surveillance and population control, a common controversy and human rights concern for telecom/tech companies around the world, and the fact that there is a related lawsuit,” per Morningstar.
The reference to surveillance and population control appears to pertain largely to security systems, which detect human movement near the security barrier built as a response to the numerous Palestinian suicide bombings of the Second Intifada, and that surveil perimeters around Jewish communities beyond the Green Line to prevent terrorist attacks.
Elbit Systems appears on the GSS watchlist for similar reasons. Morningstar has previously acknowledged that “some clients may use GSS as a so-called ‘do not invest’ list in order to comply” with investment policies that demand divestment from companies deemed to breach international standards of business conduct.
Morningstar also committed to removing sources that an independent, third-party, expert review finds to be biased and unreliable from Sustainalytics risk assessment.
Analyses show that while Sustainalytics has removed sources linked to United Nations Human Rights Council from its risk assessment sources, the blatantly pro-BDS Who Profits remains a prominent source even as Morningstar agreed to suspend its use pending expert review.
Morningstar told JNS it removed a category 1 (low) controversy from the assessment of Banco Bilbao Vizcaya Argentaria.
“We raised the bar on the required evidence to make the specific link between the financing activities of these companies and activities that cause, contribute to or could be linked to human rights violations,” it stated. “In this case, the controversy centered around allegations made by NGOs that BBVA is financing the occupation by supporting companies active in the Israeli-Palestinian conflict area by providing loans and underwriting activities.”
Morningstar told JNS the allegations were “no longer sufficient to establish a direct link with human rights abuses.”
But why would the Spanish bank receive a controversy assessment based on allegations rather than substantiated facts?
Morningstar told JNS it also removed a category 2 (moderate) controversy from the assessment of Airbnb. “We removed the controversy because the link to core activities that support the maintenance, existence and expansion of settlements to human rights violations was not strong enough,” it said.
The firm said the previous Airbnb controversy “reflected reputational risk based on reporting from civil society organizations.”
That statement seems to suggest that Sustainalytics bases some of its controversy ratings solely on organizations’ published perspectives. A core part of public BDS campaigns is to attempt to damage the reputations of companies that do business beyond the Green Line to get them to withdraw from the area.
The light rail
According to an analysis that JNS viewed, Bank Hapoalim’s risk profile was recently updated to include a Reuters report on the bank’s financing of a light rail project connecting “settlements” beyond the Green Line, i.e. neighborhoods in eastern Jerusalem. The only other sources listed were Who Profits, Human Rights Watch and DanWatch, which disproportionately criticize Israel, critics say.
“Three leading BDS groups are the crux of the justification for a significant controversy on another Israeli bank,” said a source with knowledge of the issues. Morningstar said it removed references to the BDS campaign itself from its listed controversies.
Morningstar told JNS that Sustainalytics’s controversies research is not the same as its flagship ESG risk rating for companies, and that a company’s risk rating depends on many factors beyond listed controversies.
“Controversies Research identifies companies involved in incidents and events that may pose a risk to a company due to the potential impact on stakeholders or the environment,” Morningstar said. “Only those controversies that could pose financial risk are integrated into the ESG Risk Rating.”
The company added that during its recent reassessment, it removed 79 of 109 controversies related to the Israeli-Palestinian conflict area.
“Sustainalytics customers are not solely concerned with overall risk ratings. The company also sells products that enable ESG investors to screen their holdings based on controversy level and watchlist status,” Goldberg told JNS. “Simply having a controversy label or being on a watchlist can cost a company business.”
Morningstar stated that Israel’s country risk rating is “low.”
“The majority of Israel-based companies (66%) are rated Medium Risk or lower, which is no riskier from an ESG standpoint than the average company in other countries,” it said.
Goldberg said the comparison is misleading.
“The question is whether Israeli firms face obstacles that others do not,” he said, citing FDD research showing that Sustainalytics considers every Israeli bank to be involved in significant controversies because they serve Jewish customers in disputed territories.
“Meanwhile, the firm does not assume Chinese banks are involved in controversies,” Goldberg said.
The company noted nearly 75% of Israeli companies have not been involved in any controversies, and of more than 16,000 it assessed for controversies, only 30 companies were flagged for a controversy related to the Israeli-Palestinian conflict area. The majority of those controversies fall below the “high” or “severe” controversy level.
“This kind of comparison cannot demonstrate fairness because it does not address whether the method for rating Israeli companies was fair,” Goldberg said. “It only tells us that Sustainalytics flagged many non-Israeli companies for controversy too.”
Furthermore, there are very few publicly traded Israel-connected companies with operations in the disputed territories, Goldberg added.
Morningstar told JNS this is a “work in progress.”
“We are working toward a goal of completing all the changes by the end of June this year,” it said, including engaging an external expert to review practices and processes.
Goldberg insists Morningstar does not require an outside expert to understand it should not include leading BDS advocacy organizations as sources.
“That is self-evident. Nor should an ‘expert’ be needed to remove companies like Motorola Solutions and Elbit Systems from watchlists for helping to protect civilians,” Goldberg said. “Simply doing business in disputed territories is not a violation of human rights. All Morningstar needs to do is tell Sustainalytics to stop applying double standards to Israel.”