A prominent financial services firm under fire for encouraging divestment from companies that help Israel combat suicide bombers may also be promoting divestment from firms that supply the Israeli military and police with weaponry, according to an independent investigation conducted by a Washington, D.C., think tank.
Morningstar Inc., a financial research firm that advises investors, is facing accusations that its recently acquired research firm, Sustainalytics, downgrades companies that help Israel combat terrorism and bolsters the anti-Semitic Boycott, Divestment, and Sanctions movement (BDS), which wages economic warfare on the Jewish state. A third-party analysis published by the Foundation for Defense of Democracies (FDD) alleges that Sustainalytics employs biased methods to investigate and downgrade firms doing business with Israel and its security sector.
Company ratings produced by Morningstar and similar research firms act as a primary guide for investors and can greatly impact how a company is valued, and the FDD report analyzed evidence presented in a 134-page review of the company’s methods conducted by the law firm White & Case that cleared Morningstar of any wrongdoing.
But evidence presented in the White & Case report indicates that Sustainalytics may place a company on its investment "watchlist" for the "supply of arms" to Israel or other nations involved in conflicts, according to Richard Goldberg, who authored the FDD report. In downgrading a company that supplies the Israel Defense Forces, for instance, Sustainalytics could be relying on metrics that negatively impact Israel more than others—aiding the BDS movement in its attempts to drive divestment from the Jewish state, according to Goldberg.
"Blacklisting companies that help Israel maintain the security barrier and blacklisting companies that supply the IDF critical arms to support counter-terrorism—these are hallmarks of the BDS campaign," Goldberg told the Washington Free Beacon. "I wouldn’t be surprised to learn that Sustainalytics is using the BDS campaign itself to establish these categories. The [ratings] product is teeming with anti-Semitism and the company’s continued employment of these watchlists likely constitutes a breach of state anti-BDS laws."
Sustainalytics sells investors a product called the Global Standards Screening, which rates companies based on their association "with violations of international norms and standards," according to the White & Case report.
The firm lists "surveillance [or] security for the checkpoints or walls" as another category that could impact a company’s rating and place it on the investor watchlist. Those who provide "equipment [or] services for the demolition of housing and property" could also wind up on the watchlist.
"Sustainalytics employees acknowledged" that their clients might use these ratings as a de facto "‘do not invest' list," according to the White & Case report.
Goldberg says these ratings systems may unfairly target those who partner with the Jewish state. He concluded that Sustainalytics’s "ratings and reports [are] driven by a quantifiable bias against Israel" and effectively promote BDS, as the Free Beacon reported in June.
BDS activists have long targeted firms that provide arms to the Israel Defense Forces and Israel Police, alleging such arms are used to "occupy" Palestinian land in violation of international norms. Pro-BDS legislative initiatives have sought to condition military assistance to Israel on weapons not being used by the IDF in the West Bank or Gaza Strip. BDS campaigns have also targeted Israeli defense companies based on similar allegations, such as a recent pressure campaign on Elbit Systems, a firm that supplies equipment to Israel so it can combat terrorism.
A Morningstar spokesman did not respond to a Free Beacon request for comment on how Sustainalytics concluded that "supply of arms" should be a category for its watchlist and how it might apply to Israel.
Morningstar said last month "there was no evidence Sustainalytics products recommended or encouraged divestment from Israel." The company did acknowledge, however, that its initial "review was overly dismissive of the serious bias concerns." The company says it is implementing a series of reforms to crackdown on any instances of bias.
Arsen Ostrovsky, an expert on international law and CEO of the International Legal Forum, a pro-Israel organization that tracks the BDS issue, said Morningstar should more clearly explain the ways its watchlist could impact investment in Israel.
"It would appear that, notwithstanding Morningstar’s assertions that it is taking action to root out charges of anti-Israel bias, they seem to have a real credibility deficit, with this latest controversy providing a glimpse of just how pervasive and all-encompassing the BDS activity and anti-Israel bias is within the organization," he said. "In applying a different, adverse ratings criteria to firms supplying the Jewish state with arms in order to defend its citizens against terror, Morningstar is effectively seeking to constrain Israel's self-defensive capability by pressuring companies with financial repercussions from providing weapons."
Update 2:45 p.m.: Following publication of this article, Morningstar spokeswoman Sarah Wirth told the Free Beacon Morningstar disputed the characterization of White and Case's report.
"Your broad reference to ‘firms that supply the Israeli military and police with weaponry’ ignores that the watchlist focuses on specific, narrowly selected activities when combined with other factors, such as inadequate due diligence processes for human rights risk management," Wirth said.
Morningstar is committed to a "rigorous, quantitative, bias-free research process" in all of Sustainalytics' products, she said.