How Financial Giant Morningstar Blacklists Companies That Help Israel Stop Terrorism

Think tank report finds systemic anti-Israel bias in corporate ratings

Israel's security barrier May 4, 2008 (Getty images)
June 30, 2022

A prominent financial services firm promotes divestment from companies that help the Israeli government combat Palestinian suicide bombers, according to an independent investigation conducted by a Washington, D.C. think tank.

Morningstar Inc., a financial research firm that advises investors, is accused in a new report from the Foundation for Defense of Democracies (FDD) of downgrading companies that help Israel combat terrorism, including those that work on the country’s security barrier built to stop Palestinian suicide bombers from attacking cities. Ratings produced by Morningstar and similar research firms act as a primary guide for investors and can greatly impact how a company is valued.

The author of the FDD report told the Washington Free Beacon that Morningstar’s practices comprise a key pillar of the Boycott, Divestment, and Sanctions (BDS) movement—which wages economic warfare on Israel—and could force states with anti-BDS laws to cut ties with Morningstar. FDD concluded that Morningstar’s ratings are "driven by a quantifiable bias against Israel" and that the company "risks running afoul of numerous state statutes" meant to curb support for the BDS movement. 

The focus on Morningstar stems from its 2020 acquisition of Sustainalytics, a research firm that rates companies based on their social values. Following Morningstar’s acquisition of Sustainalytics, watchdog groups including NGO Monitor and JLens accused Morningstar of allowing its research arm to promote the BDS movement through ratings that negatively impact companies working with Israel. These claims prompted the Illinois Investment Policy Board to initiate an investigation into the company’s practices. They are also fueling calls for at least 34 other states with similar anti-BDS laws to cut ties with Morningstar.

Faced with concerns from its own shareholders, Morningstar insisted in March 2021 that it was not unfairly targeting companies that work with Israel. But the Illinois investigation into its actions prompted the company to hire an outside law firm, White & Case, to conduct an investigation into Sustainalytics’s business practices. That report was published earlier this month and touted by Morningstar as proof it does not discriminate against the Jewish state.

"This investigation concludes that Morningstar’s Sustainalytics products do not recommend or encourage divestment," the report reads."

While White & Case unearthed an enormous amount of information about how Sustainalytics builds ratings that could negatively impact Israel, it ultimately concluded there was no evidence of systemic bias against the Jewish state within the company.

Outside analysts disagree. Sustainalytics routinely employs biased methods to investigate and downgrade firms doing business with Israel and its security sector, according to a follow-up analysis published by the Foundation for Defense of Democracies. Evidence included in the White & Case report indicates these "ratings and reports [are] driven by a quantifiable bias against Israel" and effectively promote BDS, according to FDD’s research.

The White & Case investigation "demonstrates conclusively that Sustainalytics’s processes and products … are infected by systemic bias against Israel," FDD senior adviser Richard Goldberg, a former Trump administration official, wrote in the June 17 policy brief.

"Sustainalytics may engage directly with companies to try to dissuade them from doing business in and with Israel," according to FDD's analysis. "To the extent that Sustainalytics encourages companies to cease doing business in Israel to improve their [social values] ratings—which is precisely what would happen, according to the methodology set forth in the Report—these interactions may amount to boycotts of Israel under numerous state anti-boycott laws."

Sustainalytics also sells investors a product called the Global Standards Screening, which essentially rates companies based on their association "with violations of international norms and standards"—an esoteric metric that critics say is intentionally skewed against Israel.

"Sustainalytics employees acknowledged" that their clients use these ratings as a de facto "'do not invest list," according to the White & Case report. Experts tout this as evidence that Sustainalytics knowingly downgrades certain companies in order to drive divestment from Israel.

Among activities that would put a company on the blacklist: surveillance or security supporting the security barrier Israel built during the Second Intifada to stop suicide bombers from infiltrating Israeli cities and killing civilians.

FDD’s Goldberg maintains that the metrics used by Morningstar are intentionally written to impact any company that works with Israel’s security sector.

"Morningstar is staking out a corporate policy to drive divestment from companies that help Israel stop suicide bombers from blowing up children in restaurants," Goldberg, who helped draft the Illinois anti-BDS law, told the Free Beacon. "Morningstar is complicit in classic BDS campaign tactics. There’s little doubt state anti-BDS laws apply to Morningstar."

A Morningstar spokeswoman in comments to the Free Beacon acknowledged that the White & Case report "identifies limited areas of bias that are outliers over the span of our work."

The company said these limited findings of bias "do not live up to Morningstar’s standards" and that the company will alter its methodologies to reduce instances of anti-Israel bias.

The spokeswoman also noted that the Illinois Investment Policy Board did not sanction the company after a June 21 meeting about whether Morningstar’s policies violate the state’s anti-BDS laws. During that meeting, a motion put forward to clear Morningstar of wrongdoing failed. But after discussing the need to continue monitoring to see if further changes are made, the Illinois board voted not to blacklist Morningstar.

Arsen Ostrovsky, international law expert and CEO of The International Legal Forum, an organization that combats BDS, said Morningstar "has essentially been engaging in BDS practices and economic warfare" via its ratings system. "By actively seeking to discourage investments in companies that work on Israel’s security barrier, they are effectively giving tacit support to Palestinian terrorism, by falsely claiming it is contrary to international law and undermining Israel’s inalienable right to self-defense."

Jay Tcath, executive vice president at the Jewish United Fund of Metropolitan Chicago, which works to combat BDS and was involved in pressing Morningstar to implement reforms, said his organization will continue to raise concerns about any investment rating criteria that unfairly target Israel.

A rating guide "that would 'flag' and harm the rating of a company like Illinois-based Motorola because it provides camera surveillance technology to what is mistakenly and provocatively referred to Israel’s 'wall' is an example of the type of on-going concerns—over terminology, sources, etc.—that we will continue to raise," Tcath told the Free Beacon.

Morningstar also has offered to meet with Goldberg to discuss his findings and said it is committed to keeping the Illinois investment board apprised of any reforms it makes.

Published under: BDS , Israel