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Morningstar moves

Morningstar removes controversy tags on 19 companies doing business in Israel and West Bank

Seven of the 26 companies previously tagged with ESG controversy ratings that prompted BDS accusations retain such ratings

Rafael Henrique/SOPA Images/LightRocket via Getty Images

In this photo illustration, the Morningstar, Inc. logo is displayed on a smartphone screen.

Financial services firm Morningstar has removed controversy ratings the company had assigned to 19 companies doing business in Israel and the West Bank following a year of controversy and accusations that the firm had employed anti-Israel bias in its environmental, social and governance (ESG) ratings system.

Morningstar informed a coalition of Jewish and pro-Israel groups that had been advocating for changes to its ratings on Wednesday, according to an individual familiar with the situation. The changes — which are expected to improve the companies’ overall ESG scores —  come following pressure from pro-Israel groups and probes by state governments, which accused Morningstar of potentially furthering the Boycott, Divestment and Sanctions movement.

Seven companies — B Communications, Bezeq, Construcciones y Auxiliar de Ferrocarriles SA, Elbit Systems, Elco Ltd., Electra Ltd. and Shapir Engineering and Industry Ltd. — will retain ratings for alleged involvement in controversies, a Morningstar spokesperson Sarah Wirth said. Elbit’s controversy rating will be downgraded, according to the individual familiar with the situation.

“After months of negotiations and discussions with Morningstar about its assumptions, sources, and language, we appreciate that a significant number of companies unfairly rated for their work with Israel have had these black marks lifted,” Elana Broitman, the senior vice president for public affairs at the Jewish Federations of North America, told Jewish Insider. “Our work is not yet done, however, and we look forward to further progress and Morningstar’s selection of experts to advise on these matters.”

JFNA was part of a coalition of Jewish and pro-Israel groups pressing Morningstar to reform its assessments of companies doing business in Israel and the West Bank.

The changes come weeks after Florida’s chief financial officer announced a new probe into Morningstar, following an amendment to Florida’s anti-BDS law in May aimed specifically at Morningstar. A coalition of state attorneys general led by Montana also recently requested documents from Morningstar as part of their own inquiry into the issue, the source said. Montana’s attorney general did not respond to a request for comment.

“Following questions about whether some of Sustainalytics’ ESG research reflected biases, we engaged with organizations to understand the concerns and underwent a thorough, independent review of our research on the sensitive area of human rights. That process, while long, was a substantive and productive one that we’re grateful to have taken. We wrapped up all of the enhancements to our research on June 30, pending review by the independent, external experts,” Wirth said. “Among the changes we’ve made, we have enhanced our approach to using sources, clarified the human rights guidance that underpins aspects of our research, unified oversight of our methodologies, and improved the language we use.”

Morningstar said as of June 30 that it had implemented nearly all of the changes and reviews it had pledged to make to address alleged anti-Israel bias, on track with its target of the end of the second quarter of 2022.

Those changes included reviewing language and assumptions involved in assessments of companies, removing certain sources seen as biased against Israel, providing new guidance to analysts, sunsetting certain product offerings and implementing anti-bias and antisemitism training.

Wirth attributed the changes in controversy ratings to “enhancements to tighten our approach to sourcing,” which she said had led the company to remove a total of 704 controversy incidents, including 78 related to the Israeli-Palestinian conflict. 

Wirth said the sourcing changes included new processes for “identifying ineligible sources,” a new outside source evaluator, new “criteria for assessing source relevance and timeliness” and “methodology around sourcing to promote consistency.” 

She denied any connection between the ratings changes and the investigation and change in Florida law.

The only major changes the company said remain incomplete are hiring independent experts to advise the company and adding new staff focused on human rights and conflict zones, which the company claims are in progress.

Morningstar had previously told the coalition of pro-Israel groups that it could not implement some of the changes it had planned until it engaged outside experts and suggested that those groups had contributed to a slowing down of the selection process. The firm said in its public status update that several of the changes it had made were subject to the review of the experts once they are brought onboard later this year.

The individual familiar with the situation disputed Morningstar’s characterization of the changes it had made, arguing that the firm still failed to address the underlying issues in its ratings system. The individual also alleged that, contrary to its public announcements, the company has still not fully removed language referring to the West Bank and East Jerusalem as occupied territory.

“There is no question that the governors, attorneys general and treasurers around the country that have launched investigations have made it nearly impossible for Morningstar to continue its BDS business as usual,” Richard Goldberg, a senior adviser at the Foundation for Defense of Democracies and a cohost of Jewish Insider‘s podcast, said. “Florida’s new Morningstar law alongside continued AG document requests likely played an oversized role in this decision. Noting that a boycott of even one company is still a boycott, state officials should ask for all documents related to these remaining seven companies to understand why they remain blacklisted. But it’s also time to compare Morningstar’s updated ratings to its peers and understand how Moody’s, S&P and others treat the companies Morningstar has now removed from its blacklist.”

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