MSCI ESG Ratings May Violate State Anti-BDS Laws

Florida Attorney General Ashley Moody and 17 other state attorneys general sent a letter on March 28 to financial analytics firm MSCI Inc. following a report the firm may be imposing punitive environmental, social, governance (ESG) ratings on Israel-connected companies “for conducting business in Judea and Samaria and eastern Jerusalem.” The letter reflects the determination of many state attorneys general that ESG ratings firms engage in both deceptive business practices and Boycott, Divestment, Sanctions (BDS) activities when they impose negative ratings on Israel-connected companies based on BDS sources and assumptions.

ESG ratings purport to give investors a better picture of a company’s environmental impact and governance practices, including involvement in human rights controversies. Since the BDS campaign cloaks its assault on Israel in “human rights” terms, ESG ratings can quickly be hijacked for BDS objectives, ultimately inflicting economic damage on firms simply for operating in certain disputed territories, not because of actual misconduct.

The Jewish News Syndicate (JNS) reported last month that MSCI imposed a “severe” ESG “controversy” rating on Israeli defense contractor Elbit Systems due to the company’s “participation in the construction of security and surveillance barriers designed to protect Israelis from terrorists.” JNS reported that MSCI’s ESG rating for Elbit cited known pro-BDS sources, including Pax Christi and Jewish Voice for Peace.

The JNS report suggests MSCI’s ESG ratings may be weaponized against Israel-connected companies in the same manner as ratings previously developed by Morningstar Sustainalytics, another financial information provider. In June and November of 2022, the Foundation for Defense of Democracies (FDD) documented the way in which Morningstar used anti-Israel sources and assumptions — for example, that merely operating in Jewish areas of Judea, Samaria, or eastern Jerusalem amounted inherently to a human rights controversy — to negatively alter the ESG ratings of Israel-connected companies.

FDD’s research prompted a multi-state attorney general investigation, state treasurer probes, and legislative action in Florida to ensure the state’s anti-BDS law covered discriminatory ESG ratings. As of April 5, 2024, Morningstar had removed all remaining BDS-related controversies from its ESG ratings of Israel-connected companies following sustained pressure from the State of Florida.

While MSCI’s full ESG ratings are not publicly available, its website provides an “ESG Ratings & Climate Search Tool” that shows partial information, including the existence of human rights controversy determinations, for companies in the MSCI “All Country World Index.” At least 10 of the Israel-connected companies previously targeted by Morningstar are listed by MSCI as having human rights-related controversies.

Access to the complete ESG rating documents for the following companies would be needed to confirm whether those controversies stem from anti-Israel assumptions and sources:

• Bank Hapoalim
• Bank Leumi le-Israel
• Caterpillar Inc.
• CEMEX S.A.B de C.V.
• Elbit Systems Ltd.
• Heidelberg Materials
• Israel Discount Bank
• United Mizrahi Tefahot Bank Ltd.
• Motorola Solutions, Inc.
• PayPal Holdings, Inc.

One red flag in the public-facing ratings — something that also stuck out in Morningstar’s prior ratings — is that while MSCI lists alleged human rights controversies for four Israeli banks, no such controversies appear in the public profiles of Chinese banks, such as the Agricultural Bank of China, which has been linked to China’s genocide in Xinjiang.

MSCI should follow Morningstar’s lead by providing full transparency to investors and stakeholders about how it produces ESG ratings of companies with operations in Israel; restricting the use of politicized, pro-BDS sources of information as the basis for ESG controversy investigations and ratings; ensuring no companies with operations in Israel are being unfairly targeted with negative ESG ratings tied to their mere presence in territories controlled by Israel or their involvement in helping Israel defend itself from terrorism; and carefully reviewing, adopting, and implementing the recommendations made by Morningstar’s Independent Experts Initial Report from January 31, 2024.

Richard Goldberg is a senior advisor at FDD, directs FDD’s International Organizations program, and contributes to FDD’s Center on Economic and Financial Power. He previously served on the White House National Security Council as deputy chief of staff to former U.S. Senator Mark Kirk and as chief of staff to former Illinois Governor Bruce Rauner. Follow him on X @rich_goldberg. Follow FDD on X @FDD. FDD is a nonpartisan research institute focusing on national security and foreign policy.