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A new BDS battlefront emerges in investing world, with spotlight on Morningstar

Multibillion-dollar Chicago-based investment research firm accused of steering investors away from Israel, and is now being investigated by Illinois Investment Policy Board

In this Thursday, June 24, 2010, file photo, attendees of a Morningstar investment conference walk beneath banners at the McCormick Center in Chicago.  (AP Photo/M. Spencer Green, File)
In this Thursday, June 24, 2010, file photo, attendees of a Morningstar investment conference walk beneath banners at the McCormick Center in Chicago. (AP Photo/M. Spencer Green, File)

JTA – After brushing aside allegations of anti-Israel bias for nearly a year, a multibillion-dollar investment research firm has done an about-face, hiring an outside law firm to investigate the company’s practices.

The change of tack at Chicago-based Morningstar came in early December, about two weeks before the Illinois Investment Policy Board was set to place the company on its blacklist, which would have barred state-run pension systems from investing in Morningstar.

According to complaints first raised by Jlens, which advocates for Israel in the investing world, Morningstar’s subsidiary Sustainalytics steers investors away from Israel by improperly inflating the country’s risk and controversy ratings — which, for Jlens and its allies, amounts to an antisemitic boycott of Israel.

“By its purchase of Sustainalytics in 2020, Morningstar has joined the anti-Israel and antisemitic boycott, divest, sanction movement, and is profiting from and promoting products and services that discriminate against and promote divestiture from Israel,” Jlens CEO Julie Hammerman told the Jewish Telegraphic Agency by email.

The dispute between Morningstar and pro-Israel activists is the latest front in the battle against the Israel boycott. Investors who want to put their money into socially responsible companies look to companies like Morningstar to screen for environmental, social and governance behavior, or ESG.

Because Israel is the frequent target of United Nations condemnation and has been criticized by several human rights groups, most recently Amnesty International, Israel supporters worry that companies such as Morningstar, unwittingly or under pressure from the boycott Israel movement, will add Israeli companies and companies to business in Israel to lists of bad corporate actors, causing capital to flee the country.

The only job of the seven-member Illinois Investment Policy Board is to ensure that state-run pension systems comply with an Illinois law against investing in certain companies doing business in Iran and Sudan, and prohibiting investments in companies that boycott Israel.

“We would be wholly justified in adding Morningstar to the state’s list of prohibited investments today,” said Andrew Lappin, chair of the board’s Committee on Israel Boycott Restrictions, at its last quarterly meeting on Dec. 22, according to his written comments, obtained through an Illinois public records request. “Morningstar is, however, asking us to kick the can down the road once again.”

Lappin called Morningstar’s announcement of a third-party investigation by the law firm White & Case “a striking departure from its public statements over the past year.” He said he agreed to delay the decision on Morningstar until the board’s meeting in March when the investigation’s findings are expected to be available.

Lappin is one of three members of the investment policy board who have ties to pro-Israel organizations. All were appointed by Illinois governors. A fourth member was also a gubernatorial appointee, and the three remaining seats are filled by representatives of Illinois’ public pension systems.

Morningstar would be the first US-based company to be placed on the list of companies that boycott Israel, joining 40 other firms from around the world.

The most recent company to make the list is the British conglomerate Unilever, the parent company of Vermont ice cream brand Ben & Jerry’s, which announced last year that it would no longer allow its ice cream to be sold in the West Bank. Ben & Jerry’s said it was “inconsistent with our values” for the ice cream to be sold in Palestinian territory that was occupied by Israel.

Pro-Israel demonstrators protest in New York City against Ben & Jerry’s, over its settlement boycott on August 12, 2021. (Luke Tress/Flash90)

The announcement from Ben & Jerry’s was one of the most prominent rebukes of Israeli policy by a major company. And even though it was targeted at sales beyond Israel’s Green Line and not Israel proper, the movement to boycott, divest from and sanction Israel, known as BDS, embraced the move as a victory. It also drew widespread consequences for the company as Illinois and other states quickly triggered their newly written anti-BDS laws to punish Unilever.

Increasingly, investors seeking to “do well by doing good” are weighing their investments according to environment, social and governance, or ESG, factors.

“With the tremendous growth in ESG investment, this is the BDS tsunami we have to be focused on,” Jay Tcath, executive vice president at the Jewish United Fund/Jewish Federation of Metropolitan Chicago, told the Jewish Telegraphic Agency. “Ben and Jerry’s leaves a bad taste in one’s mouth. But the Israeli economy and the Israeli palate really isn’t threatened by Ben and Jerry’s.”

Tcath is part of a new task force of Jewish organizations paying close attention to Wall Street’s tilt toward what’s also called socially responsible investing. Convened by the Jewish Federations of North America, the task force includes Hammerman of Jlens, representatives from Jewish communal organizations in states with anti-BDS laws, and staff from the Foundation for the Defense of Democracies, a right-leaning think tank.

The task force is examining to what extent companies engaged in the ESG movement are targeting Israeli companies and companies doing business in Israel.

“Jewish Federations along with other Jewish organizations have been concerned about some ESG companies appearing to unfairly single out Israel when scoring investment risks,” Elana Broitman, JFNA’s senior vice president of public affairs, told JTA by email. “This could well violate various anti-BDS state laws.”

In Illinois, Tcath has been advising Lappin and other committee members. Emails obtained through an Illinois public records request show that Tcath and Lappin collaborated to devise a list of demands Lappin presented to Morningstar at the December meeting.

A senior official of the Chicago Jewish federation, Tcath said he has devoted considerable time to his work on Morningstar amid his regular federation responsibilities. “But this issue merits almost any expenditure of time, and not just by me,” he said.

Another member of the task force is Richard Goldberg, who works for the Foundation for the Defense of Democracies as a senior advisor. He authored Illinois’ anti-BDS bill while serving as chief of staff to then Illinois Gov. Bruce Rauner, a Republican who lost his seat in 2018 to Democrat J. B. Pritzker.

During his first year in office, Rauner appointed four members to the board. They included Mitchell Goldberg, the brother of Richard Goldberg; Lappin, a longtime acquaintance of Richard Goldberg who serves on the board of several Israel advocacy groups, and Alicia Oberman, then executive director of the Jack Miller Family Foundation, a nonprofit dedicated to defending Israel.

In 2018, the Rauner appointees set their sights on Airbnb after the company said it would stop listing vacation stays that are located in the West Bank. Later, however, Lappin began worrying that the push against Airbnb would fail, according to an email he sent to Tcath that turned up in an Illinois public records request.

Lappin wrote on Dec. 12, 2018, that two things combined to make him fret: Airbnb presented a “robust” defense to the board, and Illinois residents voted Rauner out of office. A new governor could choose to replace the board members with his own people.

A protester against Airbnb’s listing of West Bank settlement rentals during an interview with Ashton Kutcher at Airbnb Open in Los Angeles. November 19, 2016 (Screen capture: YouTube)

In its defense, Airbnb said it opposes the Israel boycott and that it had been coming under continued attacks from BDS activists. The company noted that it did a lot of business in Israel and sees very little revenue from the few West Bank listings that appear.

Lappin wrote that he and his fellow Rauner appointees, Goldberg and Oberman, could see through this defense.

But he worried that new board members appointed by the incoming governor would not be “as fiercely committed to the principle and the nuance, within the context of the committee’s mission, of protecting Israeli sovereignty, and as regards to Judea & Samaria, appreciative of the dire strategic ramifications that would result from failing to do,” according to the email, which refers to the West Bank using its official Israeli name.

Lappin never had a chance to find out. After Pritzker took office he proceeded to strip various commissions and boards of Rauner appointees, but he didn’t touch the Illinois Investment Policy Board. Later on, when Goldberg resigned from the board to become a judge, Pritzker, a Democrat, appointed a Republican, Sidney Mathias. A former member of the Illinois House of Representatives, Mathias also once served on the board of Jewish United Fund/Jewish Federation of Metropolitan Chicago.

In the end, the Illinois board never had to make a decision about blacklisting Airbnb because the company backtracked in April 2019 and pledged in a letter to the board that it would not engage in a boycott of Israel.

The campaign targeting Morningstar traces back to April 2020, when the Chicago company announced it was acquiring full ownership of Amsterdam-based Sustainalytics. The Dutch company is one of the main global firms offering ratings of companies based on their social responsibility, and Morningstar wanted a bigger presence in the fast-growing ESG market. A Bloomberg Finance analysis from last year projected that financial assets classified as ESG investments will reach $53 trillion by 2025.

The announcement of the planned deal alarmed the pro-Israel group JLens, which shared its longstanding concerns about Sustainalytics’ alleged bias against Israel with Morningstar. The company ignored Jlens and closed the deal. A few months later, Jlens secured a meeting with Morningstar staff and began a dialogue that ended in January 2021 with Jlens placing Morningstar on its “Do Not Invest” list and publicly accusing the company of supporting BDS.

Protesters walk after a rally that was held in solidarity with Palestinians, Wednesday, May 12, 2021, in Chicago, where Morningstar is based.(AP Photo/Joshua Housing)

According to Jlens, Morningstar was guilty of doing so in numerous ways.

Jlens said the company pressures other companies targeted by BDS to cave and divest from Israel, and elevates the controversy ratings of certain companies, which causes investors interested in socially responsible finance to avoid doing business tied to Israel. It said the company disproportionately focused on Israel in its investments screens for human rights abuses.

Also in January 2021, Jlens reached out to the executive chairman of Morningstar’s board of directors and raised the issue at the company’s annual shareholder meeting. The organization introduced a shareholder proposal that would require the company to produce a report on the risks of its ”economic activism.”

Morningstar’s board shot down the shareholder proposal. In March 2021, however, the company announced it had carried out an internal review of the claims against it, and the review “found no systematic bias and concluded that the claims are false.”

It was soon after that Morningstar landed in the crosshairs of the Illinois Investment Policy Board.

Tcath, whose office at the Jewish federation is a short walk away from Morningstar’s headquarters in downtown Chicago, also got increasingly involved. He had been thinking about the jeopardy to Israel from the rise of ESG investing for years, and wrote an article about it in 2017, titled “The Next BDS Battlefield.”

One of the challenges in tracking what is happening in the ESG market is the limited access to data. The ratings produced by companies like Morningstar are proprietary, and clients who purchase reports from the companies often sign nondisclosure agreements.

Jay Tcath (Courtesy)

“We only know the little bit that we know because we’ve come across documents in a haphazard, happenstance way,” Tcath told JTA.

One such document that Jlens chanced upon turned out to be important. Produced by Sustainalytics in 2020 for the Austrian asset management firm Erste, the report examined about 100 companies through the prisms of the environment, human rights, business ethics and labor rights.

Tcath and Jlens presented the report as a damning piece of evidence when they met with Morningstar’s executive chairman Joe Mansueto in October. Tcath argued that Israeli companies were overrepresented in the report, noting that while Israel was one of 71 countries in a region encompassing Africa and the Middle East, it accounted for 50% of the companies on Sustainalytics’ radar.

“There was no even attempted defense of that finding in my discussion with Morningstar officials,” Tcath said.

He added that he didn’t think the company had been intentionally hostile to Israel, but that it had been led astray because it relied on information provided by the UN and its agencies, which have repeatedly — and unfairly, according to Tcath and other Israel advocates — condemned Israel’s treatment of Palestinians.

Morningstar declined to comment while the investigation by the law firm it hired was ongoing, but a spokesperson said that the company “takes seriously all questions and concerns around our research.”

The December meeting of the Illinois Investment Policy Board, at which the board tabled the vote on Morningstar, drew a crowd. The normally sleepy quarterly gathering saw a lineup of speakers requesting to participate during the public comment period.

The main topic of attention was Ben & Jerry’s, which was about to become blacklisted by the board. Representatives from a coalition of pro-Palestinian groups criticized Israel’s human rights record with some arguing that the Illinois law against boycotters of Israel is being used to take away the ice cream maker’s right to free speech.

“Ben & Jerry’s, as a privately owned company run by two Jewish men, is well within their right to stop selling their ice cream in illegal, violent Israeli settlements stealing land from Palestinians in the West Bank,” said Liz Bajjalieh, from the advocacy groups Peace Action and Just Foreign Policy.

(Ben Cohen and Jerry Greenfield are the Jewish founders of the ice cream company but they sold it to Unilever in 2000 and have not run it since.)

“This law is just another example of Palestinian exceptionalism, where Palestinians are told that when they demand justice, they’re going too far,” Bajjalieh added.

A unanimous board ruled that the Unilever subsidiary had violated Illinois law and was therefore ineligible for investments by state-run pension systems. More than 30 states have passed anti-BDS laws and nearly 10 have taken action against Unilever following the announcement by Ben & Jerry’s.

Up next, at the board’s March 22 meeting, is the matter of Morningstar.

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