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Facing Illinois blacklist, Morningstar commits to resolving anti-Israel biases

The Illinois Investment Policy Board voted not to blacklist Morningstar in return for a commitment from the financial services company to address its anti-Israel biases

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In this photo illustration a person holding a smartphone displaying the Morningstar logo on a screen.

Morningstar, Inc., the Chicago-based financial services firm that came under fire earlier this month for providing analytical tools that were found to have a bias against Israel, committed to addressing concerns that the company harbors anti-Israel attitudes at an Illinois investing board meeting last week, according to two individuals present.

In last Tuesday’s meeting, the Committee on Israel Boycott Restrictions subdivision of the Illinois Investment Policy Board (IIPB) voted not to place Morningstar on the state’s “prohibited investment list,” subject to the firm’s implementing of recommendations put forth in a report published by the Foundation for Defense of Democracies (FDD) and a separate independent report commissioned by Morningstar and conducted by New York City-based law firm White & Case LLP.

The unanimous vote cleared Morningstar from penalty under an Illinois law requiring the state pension fund to divest from firms that support the Boycott Divestment Sanctions (BDS) movement targeting Israel. 

The concerns raised in the two reports focus on Sustainalytics, a Morningstar subsidiary firm that rates companies based on Environmental and Social Governance (ESG) criteria, metrics that have recently become popular among investors who desire to understand companies’ social impact.

Critics assert that Sustainalytics unfairly targets Israeli companies in its ratings and that it supports the BDS movement.

The White & Case recommendations focus on transparency, internal consistency and addressing conflicts of interest. The FDD proposals go further, calling for ending Morningstar’s reliance on reporting from “anti-Israel sources” in addition to a request that Morningstar “address [the] unfair policy of punishing businesses just for operating in Israel.” 

Morningstar did not acknowledge that the board vote was conditional on responding to the FDD-recommended reforms, and told Jewish Insider, “ultimately, the IIPB voted not to place Morningstar on the Prohibited Investment List.”

A meeting attendee who asked for anonymity to discuss the conversation disputed Morningstar’s characterization of the meeting, which did not address the proposals put forward by FDD, and did not mention the board’s insistence that Morningstar address FDD’s critiques to avoid further legal action.

The attendee told JI, “Morningstar is playing fast and loose with the truth to avoid a shareholder backlash.”

“That’s disturbing to hear their analysis,” echoed Andy Lappin, who chairs the Committee on Israel Boycott Restrictions, after JI read Morningstar’s characterization of the meeting.

Both Lappin and the other meeting attendee told JI that the committee took a vote to clear Morningstar of all wrongdoing and end its monitoring of the company. That vote, both individuals said, did not muster enough support to pass.

The committee then received a commitment from Morningstar CEO Kunal Kapoor to address its concerns and subsequently voted “seven to zero on a motion to not putting them on the list, subject to their response to the FDD memo and their implementation of the 40 recommendations in the report,” according to Lappin.

(Jewish Insider filed a Freedom of Information (FOIA) request to access minutes from the meeting last week, and was informed that minutes would be unavailable until October.)

Lappin called the White & Case report a “double-edged sword” because it sought to exonerate Morningstar of wrongdoing in its topline findings, while also admitting some of Sustainalytic’s anti-Israel biases in a section that discussed the firm’s methodology.

“I think they went into the meeting with an expectation that they had in view of the meticulous dissection [of the White & Case report] and the findings of that dissection, that [they] should be in the clear,” said Lappin, who disputed the report’s findings based on the “facts on the ground.”

The meeting occurred after a yearslong campaign by JLens, an organization that brings a Jewish perspective to values-based investing, aiming to correct Sustainalytics’ perceived biases and alleged support for the BDS movement.

For years, Morningstar denied allegations that Sustainalytics unfairly targeted Israel, but agreed to an external investigation in December after an earlier internal probe cleared the firm of wrongdoing.

The external White & Case study absolved Morningstar of bias charges in its topline findings, but confirmed JLens’ suspicions that firms were penalized in ESG ratings for being Israeli.

According to the 117-page report, Sustainalytics employees relied on reporting from organizations including Human Rights Watch, Amnesty International and Who Profits, a self-described “independent research center dedicated to exposing the commercial involvement of Israeli and international corporations in the ongoing Israeli occupation of Palestinian and Syrian lands.”

The report also revealed that until 2019, the firm relied on Electronic Intifada and BDSMovement.net to rate companies’ practices and that until 2021 the company used reporting from Venezuelan and Iranian state media.

Further, the report found that Sustainalytics indiscriminately gave poor ratings to Israeli infrastructure companies.

The White & Case report also described a “guidance document on ‘Occupied Territories’” that asserts “in occupied territories where human rights are being systematically violated, any business activity in that region is connected to the violations in some direct or indirect way.”

Morningstar responded to the White & Case report by eliminating Sustainalytics’ Human Rights Radar division, but has not addressed the other concerns raised in the White & Case report or the FDD document.

Last week’s vote does not end Morningstar’s troubles before the Illinois board, which is scheduled to meet again in September.

“They’re still under the microscope and the investigation from our perspective is on a lower flame, but still ongoing,” said Lappin.