ESG data providers set to ‘face increased scrutiny on Israel’ following Morningstar report

Jewish groups put industry on notice, investors stress the need for objective analysis and data.

Morningstar’s decision to discontinue a human rights information service offered by its subsidiary Sustainalytics following an investigation into claims of anti-Israel bias could have implications for the broader ESG data industry, according to market participants.

The investigation was undertaken by law firm White & Case in response to concerns raised by the Illinois Investment Policy Board (IIPB), the Office of the New York State Comptroller, the Jewish United Fund of Metropolitan Chicago and an internal employee group at Morningstar.

The various entities asked Morningstar to respond to allegations by Jewish investor network JLens that Sustainalytics products supported the Palestinian-led Boycott, Divestment, Sanctions (BDS) movement against Israel. Morningstar acquired Sustainalytics in 2020.

White & Case found that Sustainalytics’ Human Rights Radar, which provided information on companies operating in regions where serious human rights violations were taking place, displayed a “latent, disproportionate focus on the Israeli/Palestinian conflict which results in biased outcomes”.  

Tara Lee, White & Case lead author, told Responsible Investor that the report could have an impact on the broader ESG ratings industry “by raising the standard as to transparency of methodology and by highlighting the importance of embracing transparency as to research sources and ratings methodology, of maintaining consistency and adhering to methodology, and of ensuring objectivity by implementing robust structural and procedural controls”.

Another finding of the report related to a lack of scholarship or direction “to guide ESG ratings providers in navigating US anti-BDS regulations”. Lee noted that this will likely change over the coming years as a result of an increasing focus on these topics.

“That focus will lead to more helpful academic commentary,” she said. “Likewise, as regulatory agencies worldwide focus on these issues, I would expect to see an increased demand for internal and independent investigations of this nature.”

At JLens, CEO and founder Julie Hammerman, suggested that the network – which comprises more than 9,000 individual and institutional investors – could look to target other ESG data providers and rating agencies. She told RI: “We have found that other ESG research firms are also promoting and profiting from the BDS campaign. We hope that Morningstar taking a leading role to root out biased support for the antisemitic BDS campaign from their products will influence the laggards in the ESG field to do the same.”

Responding to the White & Case report, JLens said in a statement that Morningstar would remain on its Do Not Invest list – to which it was added in January 2021 – “until we are convinced that the company has successfully implemented the 43 recommendations in the report, along with the 15 recent changes currently underway”.

Jay Tcath, executive vice president at the Jewish United Fund, agreed that the report should be “required reading for any ESG business, investor, or would-be investor… given the lack of transparency, regulation, or logic throughout the ESG human rights sector”.

“There is no reason to believe that any other ESG human rights rater has developed smarter, better, fairer inputs or algorithms [than Morningstar] regarding doing business in Israel,” he told RI. “The industry’s reliance on biased, disproportionate media coverage, NGO advocacy, and politicised UN data must be revealed and reformed. ESG is too important an investing option to be undermined by rogue players manipulating it simply to advance their politicised anti-Israel agenda.”

Jewish United Fund, which was one of the investors to raise concerns with Morningstar about JLens’s allegations, is a non-profit that provides philanthropic support to Chicago’s community.

The Office of New York State Comptroller – which asked Morningstar to respond to the allegations in 2020 and 2021 – told RI they did not have any comment on the report, but that they had engaged Morningstar as part of their anti-BDS policy and determined that the company was not engaging in BDS activity.

At the time of publication, the Office had not answered RI’s query about when they made the determination.

White & Case found “no evidence” that Sustainalytics products recommended or encouraged divestment from Israel, or that would suggest a “pervasive or systemic bias against Israel across Sustainalytics products, including the Sustainalytics ESG Risk Rating”.

Investor concerns

Meanwhile some investors raised concerns about the report and Morningstar’s response.

Kiran Aziz, head of responsible investment at KLP, told RI: “It is obvious that any civil society campaigns need critical assessments but the case that analytical companies are facing pressure from lobby groups then it is concerning as a lot of investors rely on their assessments. Many global investors have committed to respect international law and data from analytical companies is very often an important resource of information.”

The Norwegian pension giant divested from 19 companies in July 2021, including due to their association with human rights’ violations in the Occupied Palestinian Territories.

Aziz added: “While our divestment decision required extensive research, the report from the United Nations High Commissioner for Human Rights with a list of companies with operations linked to the Israeli settlements in the occupied Palestinian territory was an important resource, not once did we get the impression that there is any kind of bias against Israel by investors per se.”

Richard Stazinski, co-founder and executive director at Heartland Initiative, said it was important to note that, as world leaders grapple with an ongoing Russian war of aggression and occupation of Ukraine and its global economic shockwaves, there are dozens of other conflict-affected and high-risk areas experiencing varying levels of violence and political instability with potentially dire consequences for individuals, groups and communities.

“Evidence shows that it’s in these areas where salient human rights risks increasingly translate into material risks – legal, operational, and financial – for companies and their investors,” he told RI. “Now is a time when institutional investors require more, not less, data on human rights across all affected areas.”