Financial services firm Morningstar released a report delivering recommendations directed at eliminating anti-Israel bias from its Sustainalytics ESG company risk ratings.
The Jan. 31 report is being celebrated by organizations linked to Israel, as Israeli firms have received lower company ratings for operating in or doing business with Israel.
“You can perceive an underlying political bias, whether the people doing it are doing so intentionally or not,” Rachel Lerman, general counsel for the Brandeis Center, said in an interview with the Washington Examiner.
The report describes seven recommendations which, if implemented, should result in a more objective ESG company rating from Morningstar’s Sustainalytics. The following are some of the specific directives experts Michael Newton and former Ambassador Alex Wolff decided on in their report.
- Eliminating the “occupied territories/disputed regions” incident type to prevent geographic assumptions from biasing the ratings process.
- Examining facts on the ground in evaluating human rights violations rather than relying solely on uncorroborated media accounts.
- Ensuring international legal standards are applied in their full scope.
- Preventing third parties from manipulating ratings through generation of unfavorable media.
- Incorporating additional legal expertise, including considering appointing a designated expert under the company’s chief legal officer, to evaluate human rights law-related issues.
- Requiring analysts to clearly define what specific human rights a business is alleged to be violating.
If the recommendations are implemented, then unfavorable media coverage of a country will be separated from the ESG company ratings of firms who conduct business with said country. Additionally, eliminating the “occupied territories” incident type would provide a more neutral rating for companies operating within Israel, which pro-Palestinian groups allege to be “occupied.”
“We will work with our analysts and clients to implement each of the experts’ recommendations swiftly — before the end of this year,” a spokesperson for Morningstar told the Washington Examiner.
“The topic of human rights is complex, and while it represents a small part of Sustainalytics’ research and ratings, it is important to many sustainable investors when they evaluate risks in their portfolios,” she said. “Morningstar is committed to continuing rigorous, independent research in this space, and following concerns of anti-Israel bias, we engaged in a productive and transparent process to fortify objectivity, transparency, and consistency in our work.”
Lerman told the Washington Examiner that the specificity of the recommendations made by experts Newton and Wolff was no accident, and that the recommendations reflect real problems that “needed to be addressed.”
“This report reaffirms how easy it is for anti-Israel bias to become entrenched, and how important it is for our community to remain vigilant and engaged,” Eric Fingerhut, president and CEO of the Jewish Federations of North America, said in response to the report in a Feb. 7 public statement.
Newton, who serves as director of the International Legal Studies Program at Vanderbilt University, told the Washington Examiner that he believes “the followup study regarding implementation will be the key step.”
Morningstar created a live progress report so anyone can track how these recommendations are being implemented in real time, and the Chicago-based firm has already commissioned a follow-up report by both Newton and Wolff to further evaluate the progress on removing anti-Israel bias from its ESG company ratings.
“I was one of the people on the small group that worked with Morningstar. We met with Morningstar and Sustainalytics officials for quite some time, and we’re encouraged that Morningstar made these commitments and is keeping them,” Lerman said.
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A coalition of groups has worked with Morningstar over the last two years to ensure its Sustainalytics company ratings are fair and objective, and these efforts have previously resulted in a more fair company rating for over 100 Israel-linked firms that had negative ratings for operating with Israel a year before the Jan. 31 report was released.
Lerman said that if ESG is here to stay, then ideally it should “treat companies in Israel, and anywhere else some would call an ‘occupied territory,’ the same as you would treat companies anywhere in the world.”
