Florida investigating Morningstar for anti-Israel bias in investment ratings

A truck in downtown Chicago bears DontTrustMorningStar.com signage, a Consumers’ Research campaign. Credit: Courtesy.

(JNS) — JNS got a scoop last month that Florida was investigating investment giant Morningstar. On July 17, Florida Gov. Ron DeSantis, currently the second-ranked Republican presidential candidate, said in a video excerpting a speech he gave to the 2023 Christians United for Israel summit taking place this week in Washington: “We’re not letting them target Israel and get away with it.”

DeSantis announced that Florida would officially investigate Morningstar, an investment firm, for violating the new law opposing the boycott, divestment and sanctions movement.

The law Morningstar may have broken went into effect in May. It forbids companies doing business with the state of Florida from “taking adverse action, including changes to published commercial financial ratings, risk ratings and controversy ratings based on non-pecuniary factors, to inflict economic harm on Israel or persons or entities doing business in Israel or in Israeli controlled territories.”

Morningstar is suspected of being in violation of the law because it has been accused of using investment ratings that discriminate against Israel. The parent company has experienced a crashing fall from grace, now under investigation in 20 states.

The Florida agency responsible for investing state and local government assets confirmed to JNS that it is opening an investigation into potential boycott Israel (BDS) practices by the investment firm Morningstar and its subsidiary Sustainalytics.

Kent Perez, deputy executive director of the State Board of Administration of Florida, told JNS that board consultants and legal personnel held a lengthy June 19 meeting to review and analyze the state’s new anti-BDS provisions. Those went into effect on May 24 when Florida Gov. Ron DeSantis signed the amended anti-BDS bill into law.

Legislators crafted the law to target the environmental, social and corporate governance (ESG) industry, which critics say broadly injects left-wing political concerns into investing. An array of U.S. Jewish and pro-Israel groups have accused Morningstar and Sustainalytics of using investment ratings systems that inherently discriminate against and single out Israel. The parent firm is under investigation in some 20 states for its practices.

“We’ve asked the State Board of Administration to engage Morningstar to assess why the company appears to be blacklisting companies associated with Israel,” Jimmy Patronis, Florida’s chief financial officer, told JNS on June 7.

“The company already has a troubling history. If they’re discriminating against Israel, Florida law is clear, and we have no choice but to explore divestment actions against the firm,” Patronis said.

Perez doesn’t think there is a clear case of BDS violations by Morningstar “on the face of the new verbiage” in the amended law, he told JNS. But that question is at the center of the investigation.

The process will likely begin with a letter from the state to Morningstar leadership, inviting the latter to engage with the State Board of Administration. Florida did the same with the British company Unilever, when the latter’s subsidiary, Ben & Jerry’s, announced that it was ceasing operations in Israeli-controlled territory beyond the 1949 armistice lines due to political considerations.

The Sunshine State announced in October 2021 that it would stop buying shares in the global conglomerate, in line with its anti-BDS law at the time, after Unilever failed to take action. Florida had invested $139 million in Unilever at that point.

Morningstar has consistently denied that it engages in BDS practices and has sought to change some of its ratings policies and procedures in the wake of pressure from an American Jewish and pro-Israel coalition of organizations and various state authorities.

Morningstar pledged to stop presuming that every business with activity in Judea and Samaria and eastern Jerusalem has human-rights concerns.

But if Morningstar is indeed living up to that pledge, as of mid-April there appears to be no tangible positive effect on the controversy scores of any of the 28 companies operating in territories that Israel controls, which Sustainalytics flagged.

Richard Goldberg, a senior adviser at the Foundation for Defense of Democracies, told JNS that the lack of positive impact is evidence that Morningstar and Sustainalytics are employing a form of BDS, wherein a company can only repair a controversy rating by halting any type of business in Judea and Samaria and eastern Jerusalem.

“First, we had a U.N. blacklist of Israel-based companies, and now we have a Morningstar blacklist of Israel-based companies,” said Goldberg. “Why is Morningstar engaged in economic warfare against every Israeli bank and cell-phone company? This isn’t ESG. It’s BDS.” (ESG refers to the “environmental, social and corporate governance” movement, which is supposed to help guide the decisions of socially conscious investors.)

Last October, Morningstar reached an agreement with a broad group of U.S. Jewish and pro-Israel groups to address concerns of anti-Israel bias in its ESG research. That research contributes to ratings Morningstar assigns to companies, which socially conscious investors then use.

Critics allege that Sustainalyics relies heavily on blatant and reflexively anti-Israel sources in its ratings research and has attempted to minimize the systemic nature of its anti-Israel culture. Morningstar, which has consistently denied promoting a BDS or anti-Israel agenda, offers an online tracker ostensibly to show progress towards fulfilling its arrangement with the aforementioned coalition.

Beyond removing Motorola from its watchlist in April, Morningstar has also erased controversy ratings associated with Motorola, which it previously tagged with a “category three” listing. That denotes “a significant impact on the environment and society, posing significant business risks to the company,” per Morningstar.

Morningstar stated that it placed Motorola in that risk category due to its “supply of equipment that can be used for surveillance and population control, a common controversy and human-rights concern for telecom/tech companies around the world, and the fact that there is a related lawsuit.”

The reference to surveillance and population control appeared to pertain largely to security systems, which detect human movement near the security barrier that Israel built in response to numerous Palestinian suicide bombings during the Second Intifada from 2000-05. The systems also surveil perimeters around Jewish communities beyond the Green Line to prevent terrorist attacks.

“We could no longer confirm that Motorola has ongoing contracts with the Israeli military for the delivery of surveillance services used in the West Bank barrier and checkpoints,” Sarah Wirth, a Morningstar spokeswoman, told JNS.

The United Nations Human Rights Council included Motorola on its highly controversial 2020 blacklist of businesses conducting activity in what the United Nations deems “occupied Palestinian territory,” for the “supply of surveillance and identification equipment for settlements, the wall and checkpoints directly linked with settlements.”

Morningstar previously stated that Sustainalytics analysts, as part of the recent agreed-upon reassessments, “reevaluated the link between the companies’ activities and potential human-rights violations” in the context of the Israeli-Palestinian conflict area.

This was part of a pledge Sustainalytics made to the U.S. Jewish and pro-Israel groups that it would provide additional documented guidance to ensure that its analysts understand that business activity “within the regions linked to the Israeli-Palestinian conflict or related to Israel’s defense against terrorism, do not give rise to a presumption that there is a human-rights concern.”

‘A result of internal processes’

In response to questions from JNS, Morningstar said that Altice Europe NV, a French multinational telecommunications and mass media giant which previously held a “category two” (moderate) controversy rating, now has no rating attached to it, only as a result of its early-2021 corporate acquisition by Next Private.

The U.N. Human Rights Council included Altice on its blacklist due to its purported “provision of services and utilities supporting the maintenance and existence of settlements, including transport.”

Per policy, Altice received the controversy rating of its new parent company, Next Private, said Morningstar. Although Next Private acquired Altice in January 2021, it took Morningstar until two months ago — more than two years later — to change Altice’s rating because it needed to research Next Private and to accommodate investors still holding Altice fixed income securities, according to Wirth.

Meanwhile, B Communications was downgraded from “category one” (low) to “category two” in December, during the recent review process. Morningstar told JNS that the downgrade is a result of B Communications becoming the largest shareholder in Israeli telecommunications giant Bezeq, altering its corporate profile. Bezeq is tagged with a “category three” rating by Morningstar.

B Communications has been the controlling shareholder in Bezeq for several years, but Morningstar explained that it only downgraded the company in December 2002 due to changes in the way it analyzes “the relationship between parents and subsidiaries and enhancements that bring consistency for low-scoring controversies (category one and two).”

Wirth told JNS that all of the changes in its controversy scores were “a result of internal processes” that “are not unique to these companies.”

Additionally, Elbit is flagged on Sustainalytics’ GSS watchlist. Morningstar has previously acknowledged that “some clients may use GSS as a so-called ‘do not invest’ list in order to comply” with investment policies that demand divestment from companies deemed to breach international standards of business conduct.

Elbit, like Motorola, facilitates security systems for the security barrier in Judea and Samaria. It has also been criticized for its supply of unmanned aerial vehicles (UAVs) allegedly used for surveillance and in attacks in which civilians were killed during Israeli military operations against terrorist groups in Gaza in 2009 and 2014, even though Sustainalytics cites no evidence of any systematic targeting of civilians using those UAVs.

“It’s welcomed news that Motorola Solutions was removed from the watchlist after being called out publicly, but what about the others?” posed Goldberg. “Why is Elbit Systems still on a watchlist just for helping Israel save civilian lives from terrorist attacks?”

Wirth stressed that Morningstar’s activities in conjunction with the American Jewish/pro-Israel coalition is “a work in progress” and that Morningstar asserts it is, indeed, making progress towards fulfilling its pledges, offering a monthly update on its tracker.

That includes the impending hiring of an independent expert who is “well-versed in the policy, security, history and religious and legal context of the Israeli-Palestinian dispute,” from whom the company will “seek advice regarding its assumptions, sources and use of language.”

The process of selecting the expert has caused friction between the company and the coalition with Morningstar accusing the coalition of holding up the process, and the coalition expressing concerns about Morningstar’s initial preferences.

*Some 26 companies doing business in Israel-controlled territories remain flagged by Morningstar and Sustainalytics. They include Africa-Israel Investments Ltd. (Category 3); Ashtrom Group Ltd. (2); B Communications Ltd. (2); Bank Hapoalim BM (3); Bank Leumi Le-Israel Ltd. (3); Bezeq The Israeli Telecommunication Corp. Ltd. (3); Caterpillar, Inc. (4); Cellcom Israel Ltd. (3); CEMEX SAB de CV (3); CNH Industrial NV (2); Construcciones y Auxiliar de Ferrocarriles SA (2); Delek Group Ltd. (3); Elbit Systems Ltd. (4); Elco Ltd. (2); Electra Ltd. (2); Energix-Renewable Energies Ltd. (2); Enlight Renewable Energy Ltd. (2); F.I.B.I. HOLDINGS LTD (2); HeidelbergCement AG (3); Israel Discount Bank Ltd. (3); Mizrahi Tefahot Bank Ltd. (3); Partner Communications Co. Ltd. (3); PayPal Holdings, Inc. (2); Shapir Engineering & Industry Ltd. (2); The First International Bank of Israel Ltd. (3); and Volvo AB (2).