Anti-Israel boycotts masquerade as social justice

Nineteen US states sent Morningstar, the financial services giant, a clear message last month: its attempts to sweep its anti-Israel bias under the rug are not fooling anyone.

On August 17, Missouri Attorney General Eric Schmitt announced that 18 states had joined Missouri in investigating the Chicago-based corporation’s apparent support for Boycott, Divestment, Sanctions (BDS) against Israel. Schmitt promised to investigate whether Morningstar’s Environmental, Social and Governance (ESG) tools amounted to “consumer fraud or unfair trade practices.”

ESG investment is a huge industry, accounting for $17 trillion in assets in the US alone. While ESG is designed to incorporate ethical considerations into investment, the industry’s subjective standards have allowed anti-Israel activists to impose their agenda on unwitting investors. Former US State Department special envoy for monitoring and combating antisemitism Elan Carr has called it “BDS dressed up as social-justice investing.”

Matters only got worse on August 25, when top financial authorities from 17 states called on Morningstar to reverse course on Israel. This followed Arizona State Treasurer Kimberly Yee’s warning to Morningstar’s CEO that he had 30 days to prove his company was not violating Arizona’s anti-BDS law. Otherwise, Arizona would add the company to the state’s prohibited investments list. Morningstar uses “anti-Israel and antisemitic sources to negatively impact companies doing business in Israel and Israeli-controlled territories,” Yee wrote.

Arizona’s threat may only be the tip of the iceberg: ESG firms must contend with anti-BDS statutes on the books in more than 30 states. These laws have created real consequences, including prohibitions on investing state funds, for companies engaging in discriminatory boycotts of Israel.

Morningstar and the BDS

Morningstar’s BDS headache began in 2017 when it acquired a 40% stake in ESG firm Sustainalytics, an acquisition it completed in 2020. Sustainalytics already had a long track record of promoting boycotts of Israel, especially through its “Occupied Territories Involvement Report,” which pushed investors to stay away from territories controlled by Israel. When companies and churches boycotted Israel, Sustainalytics’ research support was often leading the way.

By January 2021, the Sustainalytics acquisition had landed Morningstar on the investment monitoring group JLens’ “Do Not Invest” list. According to JLens, Morningstar “pressure[d] BDS-targeted global companies with business ties to Israel to divest Israeli operations or cease sales to Israeli entities.” Morningstar tried to brush off and even suppress JLens’ efforts to raise Morningstar shareholders’ awareness of this anti-Israel liability.

But in July 2021, the Illinois Investment Policy Board, a state body that enforces anti-BDS investment laws, launched an official investigation. Not wanting to get blacklisted, Morningstar eventually hired outside law firm White & Case to review the allegations. The firm detailed its findings in a 117-page report published in May 2022.

Though Morningstar portrayed the report as proof that it was not engaged in BDS, White & Case highlighted numerous areas of concern. Particularly problematic was Sustainalytics’ reliance on deeply flawed, anti-Israel sources. For example, the report noted that Sustainalytics enjoys a special relationship with Who Profits, a pro-BDS research organization founded in response to Palestinian calls to boycott Israel.

And according to Sustainalytics’ “Occupied Territories” document, merely operating in disputed territories can contribute to human rights abuses. This stands in stark contrast to international law and the United Nations’ non-binding principles on corporate social responsibility, which allow for investing in disputed territories. Seventy percent of companies Sustainalytics flagged for involvement in conflict zones were related to Israel.

What’s more, Sustainalytics’ ESG screening punished Israel for defending its citizens against terrorism. The firm placed companies on a watchlist for helping build and maintain Israel’s West Bank security barrier, providing Israel with surveillance equipment or supplying Israel with arms.

This past June, upon the report’s recommendations, Morningstar made minor fixes to its ESG tools to counter accusations of anti-Israel bias. The firm discontinued its Human Rights Radar product because it “exhibited bias in its outcomes by overrepresenting firms linked to the Israeli-Palestinian conflict.” The company also committed to other token steps aimed at combating bias, such as increasing transparency in its source usage and ratings methodology and eliminating biased terminology.

Then Morningstar kicked up its feet. It touted the Illinois Investment Policy Board’s decision at its June meeting not to place the company on the state’s “prohibited investment list” as proof Morningstar had eliminated the problem. However, according to a meeting attendee, the board’s decision was contingent upon the investment firm’s implementation of far-reaching reforms recommended by White & Case and others. The board will meet again in September.

Even now, Morningstar refuses to take responsibility for how its “responsible investment” methods have targeted Israel. The investment firm had hoped that minor reforms would prevent unwanted scrutiny, but 19 states have now made clear they see through this window dressing.

Morningstar’s continued promotion of boycotts against Israel confirms that all states with anti-BDS laws should help divest Morningstar of its anti-Israel bias.