Led by Missouri, nineteen states are investigating whether Morningstar, Inc., investment management firm’s Environmental, Social, and Governance (ESG) evaluations violate consumer-protection law and unfair trade practices.
ESG is an investment strategy that tries to reward companies who publicly adhere to politically-correct values of environmentalism, woke social justice issues like diversity, equity, and inclusion (DEI), and racial diversity in its leadership; and to pressure companies that don’t adhere to them into doing so.
Morningstar has been accused of anti-Israel bias. The investment management company attributed this to complaints following its April 2020 acquisition of the ESG ratings and research firm Sustainalytics. The Dutch company is one of the main firms rating companies based on their social responsibility, and Morningstar wanted a bigger presence in the fast-growing ESG market.
After initially blowing off the criticism, Morningstar began a review two weeks before the Illinois Investment Policy Board was set to blacklist the company, which would have barred state-run pension systems from investing in Morningstar.
Morningstar eventually offered a grudging, partial acknowledgment of bias at Sustainalytics. According to Morningstar’s June 2, 2022, public letter:
[I]n retrospect, our initial review was overly dismissive of the serious bias concerns raised by the organization JLens, the Illinois Investment Policy Board (IIPB), and other entities…Based on these findings, White & Case made various recommendations in the report, which we have decided to adopt in full. Morningstar has discontinued the Human Rights Radar, and additional steps we are taking include but are not limited to: (1) embracing greater transparency as to Sustainalytics’ research sources and ratings methodology, (2) monitoring our internal processes to ensure greater consistency and adherence to our methodology, (3) adopting a style guide to ensure all research products are free from biased terminology, and (4) discontinuing further bespoke research on behalf of clients.
Nevertheless, Morningstar insisted there was “no evidence of pervasive or systemic bias against Israel across Sustainalytics products, including the Sustainalytics ESG Risk Rating.”
Not everyone is taking Morningstar’s word for it.
In mid-June, Richard Goldberg at Foundation for Defense of Democracies published a report explaining “just how pervasive and systemic that bias remains,” as his introductory summary put it.
Mansueto and Kapoor have touted these findings, including in a June 2 public statement, as evidence supporting Morningstar’s prior assertions that “[n]either Morningstar nor Sustainalytics supports the anti-Israel BDS campaign.”Yet, notwithstanding the conclusions set forth at the beginning of the Report, the evidence collected and presented in the Report tells a different story. On a full reading of the Report, rather than exonerating Morningstar, the White & Case investigation instead demonstrates conclusively that Sustainalytics’ processes and products — including its flagship ESG Risk Ratings product — are infected by systemic bias against Israel. Specifically, the Report conclusively demonstrates that:
- Sustainalytics relies heavily, if not quite exclusively, on deeply flawed, anti-Israel sources, including anti-Israel non-governmental organizations (NGOs) such as Who Profits, Human Rights Watch, and Amnesty International.
- Companies that are in any way involved in the Israeli economy are automatically identified as complicit in human rights abuses in all Sustainalytics’ core products and are thus disproportionately punished in Sustainalytics ratings compared to companies doing business in any other country.
In response to the Report, Morningstar announced that it would implement minor remedial measures to enhance the transparency and reliability of its ESG products. While a modest start, these measures are not sufficient to address the underlying and pervasive anti-Israel biases revealed in the Report. In addition to the minor remedial steps Morningstar announced it would take to address concerns of bias within Sustainalytics, Morningstar must:
- Prohibit reliance on biased and radical anti-Israel sources;
- Remove Israel from the list of conflict zones that automatically trigger a response by Sustainalytics’ Incidents team; and
- Address, across all its core products, the root causes of Sustainalytics’ problematic downgrading, based on alleged but unfounded complicity in human rights violations, of companies that do business in Israel.
In mid-July, a group of Jewish organizations sent Morningstar a letter asking the organization to take additional steps to root out its anti-Israel bias.
Most importantly, last month Missouri’s Attorney General Eric Schmitt launched an investigation into Morningstar, which other states have now joined. Schmitt explained:
Following public reports into Morningstar’s alleged anti-Israel bias and concerns raised to my Office, we launched an investigation into Morningstar Inc. and Sustainalytics over potential consumer fraud issues. 18 attorneys general have now joined our investigation. These ESG investing firms are playing politics with pensions and real people’s livelihoods.
Missouri passed an anti-BDS law in July 2020, but it only prevents the government from contracting with BDS supporters. As noted in Schmitt’s statement quoted above, the current investigation officially targets potential consumer fraud or unfair trade practices. The AG is looking into whether Morningstar and Sustainalytics were secretly boycotting or enabling a boycott against Israel, and whether that violated laws regulating business practices.
Schmitt sent civil investigative demands to Morningstar and Sustainalytics. The demands include 43 interrogatories (a fancy legal name for questions) and/or document requests – most are both. Among them are (*snooze alert* – they’re written in Legalese):
The eighteen AGs who have joined Missouri’s include fifteen Republicans, whose states have been identified, and three others that are unidentified. The fifteen are Arkansas, Georgia, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah, and Virginia.
All but Montana and Nebraska have anti-BDS laws. Montana got as far as passing a bill in the state House back in February 2017, but the effort got no further. A Nebraska lawmaker introduced an anti-BDS bill into the legislature in January 2022, but it was indefinitely postponed in April.
Since the other three states haven’t been identified, it is unknown whether they have taken action to combat the anti-Israel boycott movement. Several Democratic-run states have also passed anti-BDS laws.
On the other hand, the states may be motivated by a more generalized concern over efforts to impose woke policies on businesses. Pushback efforts against this have been much in the news lately. For instance, Gov. DeSantis of Florida (which is not one of the states included in the above list) has made some well-publicized efforts in that direction.
There is a great deal of overlap between the nineteen AGs investigating Morningstar and the nineteen states whose Attorneys General (led by Arizona’s AG) have written to the Securities and Exchange Commission asking it to investigate whether Blackrock was properly prioritizing its fiduciary responsibilities to its investors, given its ESG objectives as well as its ties to China. Those nineteen states are: Alabama, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Ohio, South Carolina, Texas, West Virginia, and Utah.
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