Morningstar has published the results of an investigation by law firm White & Case into claims of anti-Israel activities at its ESG data and ratings subsidiary Sustainalytics.
The publication of the report came two days after Responsible Investor revealed that the investigation had been undertaken in response to concerns raised by the Illinois Investment Policy Board (IIPB) and Jewish investor network JLens.
According to the 117-page report, JLens initially raised questions about Sustainalytics’ ESG ratings products in March 2016, focusing on those that assessed companies’ alignment with international human rights norms, in particular in relation to Israel.
Following Morningstar’s announcement in April 2020 of plans to acquire Sustainalytics, JLens pursued the issue with the ESG rating agency’s new owners.
In January 2021, JLens added Morningstar to its “do not invest” list due to the alleged support of Sustainalytics and GES International – acquired by Sustainalytics in 2019 – for the Palestinian-led Boycott, Divestment, Sanctions (BDS) movement against Israel.
During 2020 and 2021, the IIPB, the Office of the New York State Comptroller, the Jewish United Fund of Metropolitan Chicago, and an internal employee group at Morningstar each asked Morningstar to respond to the JLens allegations.
Illinois law currently prohibits public pension funds from investing in companies that boycott Israel, while the New York fund’s policy provides that companies determined to be engaging in BDS activities “may be subject to investment restrictions”.
In response to the concerns expressed by various stakeholders, Morningstar formed a working group led by independent directors to oversee an investigation. In October 2021, the working group engaged the outside law firm White & Case to conduct it.
White & Case interviewed more than 40 employees and external parties while reviewing around 140,000 Sustainalytics documents, client-facing reports and other materials.
The law firm 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”.
However, its Human Rights Radar was found to have a “latent, disproportionate focus on the Israeli/Palestinian conflict which results in biased outcomes”. The product, which provided information on companies operating in regions where Sustainalytics believed serious human rights violations were taking place, has been discontinued by Morningstar in response to recommendations by White & Case.
The report noted that Human Rights Radar had “never been integrated into Sustainalytics’ client-facing online platform, Global Access, does not impact any other Sustainalytics research, and does not feed into Sustainalytics’ flagship product (the ESG Risk Ratings)”.
In a letter, Joe Mansueto, executive chairman of Morningstar, and Kunal Kapoor, chief executive officer of Morningstar, said: “Neither Morningstar nor Sustainalytics supports the anti-Israel BDS campaign. However, in retrospect, our initial review was overly dismissive of the serious bias concerns raised by the organization JLens, the Illinois Investment Policy Board (IIPB), and other entities. We consider bias unacceptable in any form and concluded that the concerns warranted a thorough, independent review.”
Alongside the decision to axe the Human Rights Radar, Morningstar has said it will adopt White & Case’s other various recommendations in full.
These include: embracing greater transparency as to Sustainalytics’ research sources and ratings methodology; monitoring internal processes to ensure greater consistency and adherence to methodology, adopting a style guide to ensure all research products are free from biased terminology; and discontinuing further bespoke research on behalf of clients.
In response to Thursday’s news, JLens said in a statement: “Morningstar will remain on JLens’ Do Not Invest list until we are convinced that the company has successfully implemented the 43 recommendations in the report along with the 15 recent changes currently underway.”
It continued: “We hope improvements made at Morningstar will also influence other ESG research firms to eliminate the promotion of BDS in their products and services.”