American financial services firm Morningstar, Inc., with operations in 29 countries, provides investment research and investment management services. On Wednesday, a coalition of Jewish organizations that worked for more than two years to remove anti-Israel bias from the ratings in Morningstar’s Sustainalytics ESG (Environmental, Social, and Governance), welcomed Morningstar’s Independent Experts Initial Report: Recommendations, which was released on January 31.
The report’s background section explains:
“In October 20221, Morningstar committed to taking a series of specific actions designed to address concerns of anti-Israel bias in Sustainalytics’ ESG research. Among these commitments, Morningstar undertook to seek advice regarding its assumptions, sources, and internal use of language from independent, recognized experts in international law, including international human rights law.
“The experts were expected to be well-versed in the policy, security, history, religious, and legal context of the Israel-Palestinian dispute. These commitments flowed from Morningstar’s sustained engagement with representatives of the Jewish Federations of North America, the ADL, the American Jewish Committee, JLens, the Foundation for Defense of Democracies, and the Louis D. Brandeis Center for Human Rights Under Law. They followed the findings of the law firm White & Case, LLP in its independent investigative counsel report dated May 11, 2022.
“Morningstar engaged us as Independent Experts to review Sustainalytics’ models, methods, and assumptions in order to provide actionable recommendations to address concerns of anti-Israel bias in Sustainalytics’ research and products. This initial report by Professor Michael Newton and Ambassador (Ret.) Alejandro Wolff constitutes the first of two products commissioned by Morningstar in partial fulfillment of its commitments of October 2022.
“We were granted access to the Global Access database, which proved to be an invaluable source of autonomous inquiry. Combined with our research and analysis, that access permitted us to examine the full range of corporate practices, products, policies, assumptions, and conclusions relevant to our inquiry.
“To supplement our research, we conducted wide-ranging interviews with Sustainalytics staff and reviewed various privileged materials. We also reviewed a variety of public sources to supplement our efforts, and we sought and received perspectives from informed third parties. All of this work informed the Recommendations that follow regarding the assumptions, sources, and language that Sustainalytics uses for its rating.”
The Jewish groups expressed their gratitude that “The experts chosen by Morningstar, Prof. Michael Newton and Ambassador (ret.) Alex Wolff made seven recommendations to eliminate anti-Israel bias in company ratings and ensure that Sustainalytics’ ESG product is among the most objective and accurate available.”
The groups added: “We commend Morningstar for its stated commitment to implementing these recommendations by the end of 2024. Morningstar has already commissioned a follow-up report by the same experts to evaluate its progress.”
In October 2017, the Wall Street Journal published a front-page feature story headlined, “The Morningstar Mirage – Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t,” criticizing Morningstar’s influence and questioning the predictive power of the firm’s rating system.
In response, Morningstar provided a quantitative analysis showing that higher-rated funds outperform lower-rated funds, but cautioned against using the ratings as a definitive marker of future performance.
Regarding the steps the Morningstar report recommended, the Jewish group noted that if implemented to their full extent, the expert recommendations will ensure that Morningstar has a superior ESG product.
Below is a screenshot of Newton and Wolff’s recommendations. The report is available here.
