Morningstar Misleads Investors on Its Anti-Israel Bias — Again

The investment research firm Morningstar, Inc. committed last October to making changes to its Sustainalytics environmental, social, and governance (ESG) subsidiary’s research in response to FDD’s ongoing analysis revealing anti-Israel bias in Morningstar’s ESG ratings. Despite Morningstar’s pledges, Jewish community organizations reported to Morningstar in December that “Sustainalytics is failing to do its part to implement the commitments that Morningstar made to eliminate the pervasive anti-Israel bias in Sustainalytics’ ESG ratings.” These ratings reportedly continue to target firms connected to Israel on the basis of assumptions and sources tied to the global anti-Israel boycott campaign.

Morningstar last week published new statistics and related analysis that purport to show the firm has made substantial progress “addressing anti-Israel bias concerns in our research.” A closer examination of the data shows that Morningstar’s claim to have addressed anti-Israel bias is misleading. A careful examination exposes the ongoing boycott, divestment, sanctions (BDS) activity in which Sustainalytics engages.

Morningstar Rates Israel a “Low-Risk Country” but Still Penalizes Firms Operating There

Morningstar’s first contention is that Sustainalytics rates Israel as a “low-risk country.” Out of 169 countries that Sustainalytics has evaluated, Israel ranks twenty-seventh. However, Sustainalytics ignores this rating when examining Israel-connected companies the BDS campaign maligns as human rights abusers. Specifically, as previous FDD research demonstrated, Sustainalytics assumes that business operations in East Jerusalem, the West Bank, and the Golan Heights come with inherent human rights risk because these territories’ status is disputed. Thus, Sustainalytics attaches controversy warnings to companies that provide basic services to Jews living in these areas — including all Israeli banks and telecommunications firms — without any evidence of those firms’ involvement in human rights abuses. This approach renders Israel’s overall low-risk status irrelevant.

Morningstar’s Misleading Cross-Country Comparisons

Morningstar contends “the average Israeli company’s ESG risk rating is in line with that of the United States…and far less risky than the average Chinese or Russian company.” Yet comparing the ratings of two countries’ firms cannot demonstrate fairness — the question is whether Israeli firms face obstacles that others do not. For example, FDD research has shown that Sustainalytics considers all Israeli banks to be involved in significant controversies because they serve Jewish customers in the disputed territories. Meanwhile, the firm does not assume Chinese banks are involved in controversies.

Similarly, Morningstar reports that only about 0.2 percent of all companies involved in controversies are “flagged for an Israeli-Palestinian conflict area related controversy.” Once again, this kind of comparison cannot demonstrate fairness because it does not address whether the method for rating Israeli companies was fair. It only tells us that Sustainalytics flagged many non-Israeli companies for controversy too. Moreover, the universe of publicly traded Israel-connected companies with operations in the disputed territories is relatively small. Thus, even the unfair treatment of Israeli banks and telecommunications companies only penalizes a few firms, including Bank Leumi, Bank Hapoalim, Israel Discount Bank, Mizrahi Tefahot Bank, First International Bank of Israel, Bezeq, Cellcom Israel, and Partner Communications. As Anti-Defamation League CEO Jonathan Greenblatt wrote last month, “Attacking the banks of a country is a form of economic warfare. It is next level – a drastic measure normally reserved for the most virulent actors on the world stage.”

Morningstar Takes a Narrow View of How Controversy Ratings May Affect a Firm

Morningstar claims that controversies related to the Israeli-Palestinian conflict “have a minimal impact on ESG Risk Ratings.” This is misleading in two ways. First, Morningstar previously asserted that “significant” (or level 3) controversies can inflate a company’s risk rating by two to three points, while “high” controversies (level 4) can inflate a rating by five to six points. Noting that Morningstar’s ESG risk rating is measured 0-10 (negligible), 10-20 (low), 20-30 (medium), 30-40 (high), and 40+ (severe), these extra controversy-derived points could push a company on the borderline between two risk categories into the higher of the two. Morningstar’s latest data presentation avoids using its traditionally advertised risk rating ranges in favor of an unexplained “Aggregate ESG Risk Score” with ranges from 600-700.

Second, and more importantly, 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. Thus, simply having a controversy label or being on a watchlist can cost a company business.

To defend itself, Morningstar reports that only four of 380 companies on its Global Standards Screening watchlist — an effective “do-not-invest” list of firms allegedly in breach of international standards — made the list because of issues arising from the Israeli-Palestinian conflict. Yet as noted in the previous section, such comparisons are misleading because they only tell us how many companies were affected, not whether the rating process was fair. The question is whether pro-BDS assumptions and sources resulted in a company being on the watchlist. Also, given Israel’s size, the number of affected companies is likely to be low regardless.

Morningstar should bear in mind that more than 30 American states have laws either prohibiting investment in or contracts with companies that inflict economic harm on companies based in Israel — making even one unfairly targeted Israeli company on a Morningstar watchlist a potential violation of state laws.

Morningstar Punishes Companies That Help Israel Protects Its Citizens from Terrorism

Motorola Solutions and Elbit Systems appear on Morningstar’s Global Standards Screening (GSS) watchlist because they provide counterterrorism technology and services to Israel. Their technology proved helpful in reducing the number of suicide bombers entering Israel in the 2000s and alerting West Bank Jewish communities to terrorist infiltrators. In 2011, terrorists infiltrated the community of Itamar, stabbing to death three children, including an infant, as well as killing their parents. Since the terrorist threat is especially acute in the West Bank, that is where Israel employs Motorola and Elbit products and services. To punish them is to make self-defense a crime. As documented in a June 2022 report on Morningstar’s ratings, “Sustainalytics employees acknowledged that some clients may use GSS as a so-called ‘do not invest’ list in order to comply” with investment policies requiring divestment from firms deemed in breach of international standards of business conduct.

Sustainalytics Products Knowingly Use Assumptions and Sources Flagged as Biased Against Israel

Finally, Morningstar contends that “none of Sustainalytics’ products or services have been designed to advance the boycott, divestment, sanctions (BDS) movement.” However, Sustainalytics maintains a close relationship with the BDS campaign itself, including a leading BDS advocacy group called Who Profits. The company continues to use Who Profits and two other notable pro-BDS sources, Human Rights Watch and DanWatch, to justify controversy ratings and watchlists targeting Israel-connected companies. This amounts to full-fledged collaboration with boycotters.

In its response to the December letter from Jewish community organizations, Morningstar reportedly claimed that changes to Sustainalytics’ ratings and sources “are contingent upon the selection of an outside expert to advise it.” But no expertise is needed to determine whether leading BDS advocacy organizations are biased against Israel — 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. 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.

Richard Goldberg is senior advisor at the Foundation for Defense of Democracies (FDD). He previously served as a White House National Security Council official, as deputy chief of staff and national security advisor for Senator Mark Kirk, as chief of staff for Illinois Governor Bruce Rauner, and as a Navy reserve intelligence officer. Follow him on Twitter @rich_goldberg. FDD is a nonpartisan research institute focusing on national security and foreign policy.