The Hidden Boycott, Divestment, and Sanctions Campaign
What happens when the firms handling environmental, social, and governance ratings are themselves biased?
The anti-Israel Boycott, Divestment and Sanctions (BDS) movement—which grew out of the U.N.’s 2001 conference against racism in Durban, South Africa—campaigns openly on college campuses and in progressive spaces. There are even members of Congress who voice the movement’s interests within the Capitol. But what if a significant contribution to its cause has actually been buried in social justice-related corporate ratings?
Investors’ questions started six years ago. It was in April 2020, though, that JLens, “an investor network” that “represents Jewish communal concerns in the values-based investing field” wrote to the CEO of Chicago-based investment research firm Morningstar. JLens expressed concern about anti-Israel bias in Morningstar’s environmental, social, and governance (ESG) subsidiary, Sustainalytics, after analyzing “five investment firms, coming to the conclusion that Sustainalytics holds the most bias against the Jewish state.”
In 2020 and 2021, the Office of the New York State Comptroller, the Jewish United Fund of Metropolitan Chicago, the Illinois Investment Policy Board, and some Morningstar employees encouraged Morningstar to address JLens’ concerns. Morningstar called JLens’ charges “grossly inaccurate and without merit” in March 2021. Still, the Illinois Investment Board Committee on Israel Boycott Restrictions, which oversees state pension investments, decided Morningstar should “submit information and/or appear before the IBR committee or Board” that same month.
Morningstar conducted an internal investigation before hiring the law firm White & Case to consider more carefully whether Sustainalytics was, in fact, biased. In June, Morningstar released White & Case’s 117-page report on the matter. Morningstar’s leadership characterized the findings as showing “limited areas of bias that are outliers over the span of our work.”
That positive synopsis may rely on the report’s introduction, which presents three key takeaways: First, “Sustainalytics products do not recommend or encourage divestment.” Second, there is “neither pervasive nor systemic bias against Israel in Sustainalytics products or services,” even if the Human Rights Radar product displays “a latent, disproportionate focus on the Israeli/Palestinian conflict.” Third, “there are scattered instances of processes and procedures which can be improved.”
Richard Goldberg, senior adviser at the Foundation for Defense of Democracies, believes White & Case’s report is important, because it “is the most exhaustive publication of methodology and sources of any ESG firm in the world,” offering rare insight into “how the sausage is made for rating companies.” But, “the report’s conclusions don’t match the evidence,” he said.
The White & Case report reveals some eyebrow-raising findings. For example, Sustainalytics allowed publications’ paywalls to become a barrier to research. It eventually subscribed to the Financial Times, but not, it seems, to other lost news sources (p. 38). Global Standards Screening (GSS) researchers have relied heavily not only on Amnesty International, Human Rights Watch, and Who Profits—all anti-Israel NGOs—for information, but also unfriendly-to-Israel sources like the New York Times, the Washington Post, the European Union, and the United Nations. Sustainalytics used the BDS movement’s own website as a source until 2019, and its Controversies Research team only “sought removal” of Venezuelan and Iranian government-affiliated sources in 2021.
When questions of international law arise, GSS analysts don’t typically query “external legal experts.” Rather, they “make their own assessments based on decisions by international bodies like the International Court of Justice and the United Nations,” both of which have demonstrated hostility to Israel.
GSS analysts were provided with “guidance on issuers [publicly traded companies] operating in specific geographic regions.” Three regions are cited: “Xinjiang, Myanmar, and the Israeli/Palestinian conflict areas.” Revealingly, Sustainalytics thought it logical to group the Middle East’s only democracy with a country holding its Uyghur minority in concentration camps and a nation notorious for “unlawful or arbitrary killings, including extrajudicial killings; [and] forced disappearances,” among other serious human rights abuses.
Americans should also know that Sustainalytics considers Israel’s borders to be its pre-1967 boundaries. Like the United Nations, it refers to the “West Bank, East Jerusalem, the Gaza Strip, and the Golan Heights” as the “‘Occupied Palestinian Territories,’” even though the Oslo Accords attempted to establish a plan for the West Bank, East Jerusalem includes the Western Wall, Israel left Gaza in 2005, and the United States recognized the Golan Heights as part of Israel in 2019.
With ratings in its Human Rights Radar (HRR)—which offers information to companies operating in regions with alleged human rights abuses—Sustainalytics has treated businesses operating in the aforementioned areas harshly: “29% of entities — forty-two total — are rated primarily for involvement in the ‘Disputed Territory of Palestine’ over 10% more than the next runner-up (‘Disputed territory of Western Sahara,’ at 17%).” By contrast, companies in Tibet “represented only 3% of HRR ratings” and those in Saudi Arabia “only 7% of HRR ratings.” This is what prompted White & Case to conclude that HRR had “a latent, disproportionate focus on the Israeli/Palestinian conflict which results in biased outcomes disfavoring companies doing business in Israel.”
That said, White & Case raises some questions about its own team’s views when it twice notes that Sustainalytics allows the use of the Jerusalem Post, which it calls “pro-Israel,” as a counterpoint to Sustainalytics’ list of anti-Israel sources. Goldberg correctly notes that in that spirit, White & Case could describe the Washington Post as pro-American, but it doesn’t.
White & Case further observes that Sustainalytics is helping similar numbers of companies improve their human-rights-related ESG ratings in “the Israeli/Palestinian conflict areas” as those “in China, Myanmar, Russia, Saudi Arabia, and Western Sahara.” Apparently, including a democracy in this peer group didn’t raise any questions for the investigators at White & Case.
Notably, White & Case cautions that when it comes to interacting with certain entities, some of Sustainalytics’ business practices “may also run afoul of the intent of certain anti-BDS legislation in the United States.” In other words, JLens’ initial concerns were well-grounded.
Morningstar has a vested interest in painting White & Case’s investigation positively and hoping everybody moves on. Sustainalytics is one of the two biggest ESG firms and an important part of Morningstar’s business; White & Case reports that ESG investing is projected to be a $17 trillion business “in the United States alone” by year’s end. And blacklisting remains a risk for Morningstar, as Goldberg notes “12 states require divestment from pensions, if they find a company has engaged in boycotting Israel.”
For now, Illinois’ oversight board will monitor Morningstar’s progress with reform. In an email to its network, JLens seemed pleased that Morningstar would be “implement[ing] the 43 recommendations listed in their report.” However, JLens added:
Morningstar will remain on JLens’ Do Not Invest list until we are convinced that the company has successfully implementated [sic] the 43 recommendations in the report along with the 15 recent changes currently underway.
For over a decade, BDS activists have manipulated the ESG (environment, social, governance) responsible investing field to promote an anti-Israel, antisemitic, and hate fueled one-sided political campaign intended to harm Israel's economy and question its legitimacy.
So, what are the lessons for everybody else?
First, be aware of what Goldberg calls “the hidden BDS campaign.” Much of BDS is open and explicit, but its influence in the ESG realm has not been.
Second, Marc Stern, chief legal officer at the American Jewish Committee, observes that sources matter: “Take slanted information and take it at face value, you’ll come out with slanted evaluations.” Investors should ask what sources an ESG rating provider is using. As is now clear, hidden assumptions built into corporate ratings may not be so neutral.
Third, Stern notes, “Social justice is not self-defining. If you ask people to have more social justice considerations in running companies, they should lay out clearly what that means and how they’ll deal with situations of conflicting views of social justice.” This particularly matters now, as “the SEC [U.S. Securities and Exchange Commission] has rules out to encourage more ESG disclosure.”
Fourth, Goldberg recommends that anyone concerned about these developments “ask your state treasurer and attorney general to raise these issues. Ask your member of Congress to raise the issue with the SEC, and make sure your state legislators and governors are enforcing the state’s anti-BDS laws where they exist.”
Fifth, with ESG’s rising popularity, Stern believes that when organizations like Human Rights Watch issue full-length reports on Israel, dissenters should “rebut them point by point; have something to go to pension funds with.”
Finally, Goldberg advises states with relevant anti-BDS laws and pension funds beyond Illinois to investigate whether they have unwittingly divested from Israel. Relatedly, Goldberg suggests state treasurers “ask [firms] upfront, ask them who their sources are, because they’re asking for a lot of your money.”
ESG offers investors an opportunity to feel like they’re doing good in the world, but there can clearly be a gap between theory and practice. Let the investor beware.
Melissa Langsam Braunstein, a former U.S. State Department speechwriter, is now an independent writer and communications strategist in the Washington, D.C., area.