How a Giant of Responsible Investing Agreed to an Israel Exception

On October 31st, the major investment research firm Morningstar, Inc. announced significant changes to the information-gathering practices of its subsidiary Sustainalytics, which gives companies social and environmental responsibility ratings. To arrive at these ratings, Sustainalytics takes account of businesses’ human rights records; accordingly, the firm has historically penalized companies that facilitate Israeli settlement construction or military aggression in the occupied Palestinian territories. Now, however, Sustainalytics was adjusting its approach to Israel/Palestine. It would cease to apply the term “occupied territories” to the West Bank, Gaza, and East Jerusalem, and would stop using data from prominent sources like the United Nations Human Rights Council. Morningstar promised to provide “documented guidance” to its employees stating that a company’s operations in occupied Palestinian territory should not automatically raise red flags—despite the international legal consensus, reflected in the United Nations Guiding Principles on Business and Human Rights, that companies working in conflict areas like the territories merit additional scrutiny.

To experts in what is known as socially responsible investing (SRI), these changes were troubling. The term encompasses a fast-growing set of financial practices and a ballooning industry of research firms like Sustainalytics that rate companies on environmental, social, and governance (ESG) factors in order to determine whether they are a safe bet for investors. “This makes me doubt [Morningstar’s] competence across the entire range of social issues,” said Tara Van Ho, a senior lecturer in business and human rights at Essex Law School. “If I were an institutional investor, this kind of political manipulation of the assessment tools and frameworks would be deeply concerning to me.”

Morningstar itself had spent years resisting making the changes. It adopted them only after a lengthy pressure campaign initiated by the Jewish investing group JLens, which launched in 2012 and has worked to prevent socially responsible investors from putting pressure on companies that do business in Israel/Palestine. In 2020, JLens turned its attention to Morningstar, arguing that the firm’s reporting on Israeli human rights abuses amounted to support for the Boycott, Divestment, and Sanctions (BDS) movement against Israel, and was a form of antisemitism. Morningstar denied the accusations, insisting that it was treating Israel the same as other countries. But JLens was able to mobilize a network of government officials and Jewish organizations to apply pressure on the financial firm, buttressed by a new wave of anti-BDS laws that prevent states from investing their pension funds in companies said to be boycotting Israel. In Chicago, where Morningstar is based, the local Jewish federation—known as the Jewish United Fund (JUF)—lobbied close contacts on the Illinois Investment Policy Board to place Morningstar on the state’s “do not invest” list. Jewish federations in states like New Jersey and Florida pushed their officials to do the same. The campaign continued even after Morningstar hired an independent law firm to investigate its research practices for antisemitic bias and adopted the resulting recommendations.

Morningstar’s capitulation marked a major success for the previously little-known JLens. Less than two weeks after the firm changed its policies, on November 10th, the Anti-Defamation League (ADL) announced that it would absorb JLens. The small advocacy shop will remain under the leadership of its founding CEO, Julie Hammerman, but will benefit from the ADL’s greater prestige and resources, enhancing its stature and lobbying capacity. The ADL’s decision is the latest indication that Israel-advocacy organizations are turning their attention to the finance industry, and in particular to ESG investing. “ESG is the latest frontier in the fight against antisemitism, with radical Boycott, Divestment, and Sanctions (BDS) activists trying to push their agenda,” ADL CEO Jonathan Greenblatt said in a press release about the acquisition of JLens. “It’s time for the Jewish community to take a seat at the table to use our power as institutional investors to ensure corporations are aligned with our values, and don’t fall for antisemitic pressures.”

Yet Alison Taylor, a professor at the NYU Stern School of Business with expertise in corporate responsibility and sustainability, said that Morningstar’s new Israel/Palestine commitments may be undermining the firm’s own insistence on the rigor of the ESG framework. “How robust is the [ratings] methodology if all you need to do is get together with a bunch of other organizations and make a fuss for them to say, ‘Okay, we’ll change it’?” she said. “It undermines the credibility of the whole exercise.” Meanwhile, human rights advocates warn that the policy changes are a blow to efforts to seek corporate accountability: “Businesses play a very important role in contributing to human rights abuses around the world,” said Omar Shakir, Israel and Palestine director at Human Rights Watch. “The challenge with holding companies accountable is always information: How can you know about a company’s activities in some other corner of the globe? How can people make informed decisions? The anti-Morningstar campaign helps to cover up human rights abuses and prevent decision-makers from having the information they need.”

In 2014, the Presbyterian Church (USA), the US’s largest Presbyterian denomination and an early adopter of SRI investing, voted to divest from three companies that, it argued, profited from maintaining the occupation of Palestine. In 2016, the United Methodist Church took a similar action, voting to blacklist five Israeli banks from its pension fund investments. In response to these divestments and a wave of shareholder activism against companies operating in the occupied territories, a 2018 report by the Reut Group, an Israeli think tank that develops strategy for Israel advocates, identified SRI as an area where the BDS movement was gaining ground.

JLens rose to prominence amid Israel advocates’ growing concerns about this trend. Its founder Hammerman—a Harvard MBA and onetime JPMorgan investment banker—told The Forward in 2016 that she believed BDS activists had gotten comfortable pushing for divestment from Israel in SRI spaces “because there was no presence of the Jewish community.” JLens, she suggested, would enter such rooms as Jewish representatives and lobby against BDS. This strategy has appealed to Jewish institutions, as has JLens’s “Jewish Advocacy Strategy”—a portfolio of “kosher” investment opportunities that it says “ensures alignment with Jewish values and avoids the biases in [ESG] research.” In 2015, JLens received its first major investment of $5 million from the Jewish Community Foundation of Los Angeles. In 2017, the executive vice president of the Chicago Jewish Federation (JUF), Jay Tcath, wrote in the Times of Israel that SRI was “the next BDS battlefield” and announced that JUF had invested over $1 million in JLens’s “Advocacy Strategy.” Today, more than 30 North American Jewish institutions have invested a total of over $200 million through the organization, per its 2021 annual report.

According to its mission statement, JLens engages in shareholder advocacy on behalf of its investors on a number of policy priorities including “religious coexistence,” environmental protection, and workers’ rights. In the last few years, the group has cosponsored shareholder resolutions at TJ Maxx’s parent company asking for a report on gender and racial pay equity among employees, and at Eli Lilly calling on the company to address public concern about high drug prices. But its most visible work is its anti-BDS effort. JLens counters activist and shareholder campaigns that push companies to divest from activities in Israel and the occupied territories, encouraging businesses to increase their Israeli investments instead. “For years when [Hammerman and I] were both in San Francisco, it felt like she was shadowing me—I would meet with a company with concerns about their operations in the occupied Palestinian territories and she would meet with them the next day to present the other case,” said Dov Baum, director of the economic activism project at the American Friends Service Committee, a Quaker social justice organization.

In 2017, Hammerman raised the alarm about criticism of Israel within the influential Interfaith Center for Corporate Responsibility (ICCR), a mostly Christian coalition of faith-based investors. After several ICCR members hosted a session at the organization’s conference on the human rights ramifications of operating in West Bank settlements, JLens accused the event, and by extension the group, of being anti-Israel. ICCR denied the claims. Rachel Kahn-Troster, then director of programs at the progressive Jewish group T’ruah and now executive vice president of ICCR, told Responsible Investor at the time that she had never experienced ICCR as antisemitic or anti-Israel, and that the JLens accusations were “really unfair.”

In the ensuing years, JLens continued its anti-BDS advocacy: In 2019, after a campaign temporarily convinced Airbnb to stop listing rentals in West Bank settlements, Palestine solidarity activists filed shareholder resolutions with Booking.com and Tripadvisor encouraging them to take similar actions; JLens reached out to the companies to offer an alternate pro-Israel narrative. (While neither company ceased listing properties within settlements, Booking.com added travel warnings to listings in the West Bank last year.) That same year, when the SRI coalition Investor Alliance for Human Rights formed, JLens joined as a founding member. In exchange for its membership, according to its year-end report, it “obtained assurances that the coalition would avoid the field’s significant bias against Israel.”

In 2020, JLens set its sights on Morningstar, one of the largest, most well-respected independent research firms in both traditional and socially responsible investing. Morningstar had recently acquired Sustainalytics, a research firm that specializes in assessing ESG risk. The “s” in ESG—“social”—typically refers to a company’s human rights record, and Sustainalytics offers several products that assess the financial risks of operating in international conflict areas, which clients can use to inform their investment decisions. Some of these Sustainalytics products have flagged companies that operate in Israel and the occupied territories for their complicity in human rights violations, or noted that certain companies face “reputational risks” because their activities in Israel/Palestine have generated public backlash. For example, Sustainalytics attached high “controversy” ratings to Elbit Systems, an Israel-based defense electronics company that provides equipment for the separation wall between Israel and occupied Palestine, and Caterpillar, which has faced negative media coverage for allegedly providing the bulldozers used to demolish Palestinian homes in the West Bank. (The Israeli occupation of Palestine is generally considered to be illegal under international law, in part because occupation is only permitted if temporary, and Israel’s occupation has continued since 1967.)

Overall, however, criticizing companies’ operations in Israel has never been a major part of Sustainalytics’s work. In fact, an outside investigation conducted in 2022 by the international law firm White & Case—one of the few sources of available information on Sustainalytics’s proprietary assessments—found that, on average, Sustainalytics’s flagship ESG rating product calculate a lower risk for companies operating in Israel/Palestine than for companies in general. According to an internal review that Morningstar undertook in 2021, out of 21,000 “controversies” cataloged by the firm in its research, only 103 concerned companies’ operations in Israel. Of the 354 companies that were designated as “watchlist” or “noncompliant” for their violations of “global standards,” just three were cited for activities in Israel. While Sustainalytics researchers sometimes consulted Who Profits, a research center (co-founded by AFSC’s Baum) that exposes businesses complicit in the occupation, according to White & Case, they didn’t necessarily accept its conclusions, sometimes granting a clean bill of health to companies Who Profits had censured.

To JLens, however, any attempt to assess businesses’ involvement in Israeli human rights abuses amounted to support for the BDS movement. Hammerman’s organization claimed that Morningstar was advising companies to divest from Israel and elevating the controversy ratings of companies targeted by the BDS campaign. After reaching out to Morningstar with its concerns, JLens arranged a meeting with Sustainalytics employees in November 2020, but found the dialogue “unproductive,” according to an account on the JLens website. In January 2021, JLens added Morningstar to its portfolio’s “do not invest” list. Palestinian rights advocates who followed the unfolding campaign contend that JLens’s goal was to keep Israeli human rights violations out of the public eye. “They are in [investing] spaces to silence speech on Palestinian human rights, block companies from providing information about Palestinian human rights to investors, and prevent investors from taking a socially responsible approach,” said Baum.

Hammerman also leveraged the fact that her own family trust owned 15 shares in Morningstar, submitting a shareholder resolution in February 2021 that called on the company’s board to account for its “economic activism against Israel.” Morningstar resisted, claiming in a since-deleted statement on its website that JLens had not responded to repeated requests for “the specifics in our research that drove their conclusions” that Morningstar supported BDS, and adding that internal review found “no systematic bias and concluded that the claims are false.” In response, Hammerman doubled down. At a virtual shareholder meeting that May, she presented her proposal by video, solemnly facing the camera and calling on Morningstar to show “moral leadership.” According to the meeting transcript, Morningstar Executive Chairman Joe Mansueto replied by repeating that an internal review had found no evidence of “any bias” against Israel. The JLens shareholder proposal was voted down.

But JLens had other tools in its arsenal—specifically, the support of major Jewish institutions and their allies in state governments. In January 2021, Tcath, the executive vice president of the JUF, received an email from JLens with the news that the group had added Morningstar to its “do not invest” list. According to emails released under Illinois public records laws, Tcath (who declined to be interviewed for this story) forwarded the note to Mitchell Goldberg, then the chair of the Illinois Investment Policy Board (IIPB). The IIPB had created a Committee on Israel Boycott Restrictions after Illinois passed its 2015 anti-BDS law, one of 13 statutes nationwide that require states to divest from companies considered to be boycotting Israel. (In total, 34 states have anti-BDS laws on the books, including 28 regulations that deny state contracts to entities boycotting Israel.) “Anyway [sic] this is a violation of Illinois BDS law?” Tcath asked, signing the email with his first name. (Goldberg and Tcath were already frequent correspondents, with Tcath sending Goldberg tips about which companies the committee should look into.) Goldberg forwarded Tcath’s email to the committee’s lawyer, suggesting that the IIPB should investigate Morningstar.

Tcath’s federation was far from alone in lobbying state officials to divest from Morningstar. In February 2021, 11 Jewish federations from across Florida jointly wrote to Governor Ron DeSantis asking him to consider prohibiting state investments in Morningstar and reevaluating a contract with the company, which Florida had hired to provide research on whether it should divest from companies doing business in Iran and Sudan. Josh Sayles, an employee of the Greater Miami Jewish Federation, sent the letter to a list of 19 other Jewish professionals, including representatives of Jewish federations and similar organizations in New Jersey, Texas, Illinois, Colorado, Indiana, New York, and North Carolina, as well as Stephanie Hausner, the COO of the Conference of Presidents of Major American Jewish Organizations. “Forwarding in case it is helpful,” he wrote. That December, the heads of five Jewish federations in New Jersey wrote a letter to the state’s Department of Treasury, asking it to review its state investments in Morningstar.

By December 2021, the pressure on Morningstar had paid off. The company announced that it was hiring White & Case to conduct an independent investigation into the antisemitism allegations. It was clear almost immediately that this would not be sufficient to placate Morningstar’s critics. Shortly after the announcement, Andrew Lappin, a real estate developer and former JUF fundraiser who chaired the IIPB Committee on Israel Boycott Restrictions, said that although the board was prepared to give Morningstar 90 days to complete its investigation, the move to hire an outside firm would be viewed with “skepticism.” Lappin wrote in a public statement that Morningstar would be placed on Illinois’s “do not invest” list if it did not meet a number of stipulations by March 2022, including “the complete and transparent accounting of the manner by which the Morningstar/Sustainalytics methodology creates a double standard whereby firms connected to Israel, have . . . received negative Morningstar scores, while firms connected to flagrant human rights abuses in other countries . . . have been left proportionally and substantially unscathed.” This statement, which came from the state’s investment policy board, had in fact been edited by the JUF’s Tcath; Lappin had also sent a draft to Hammerman and to Richard Goldberg, a senior adviser at the conservative think tank Foundation for Defense of Democracies (FDD) who authored Illinois’s anti-BDS legislation when he served as chief of staff to then-governer Bruce Rauner. (Goldberg is also the brother of former IIPB chair Mitchell Goldberg. Lappin is a trustee of FDD.)

When White & Case completed its 117-page report in May 2022, it largely rejected Israel-advocacy groups’ claims that Sustainalytics was engaging in BDS activism. The firm did find that one of Morningtar’s products, called Human Rights Radar, had a “latent, disproportionate focus” on companies operating in Israel, in part because it began as a custom project for a single client that controlled the scope of the research. White & Case suggested that the firm re-evaluate or abandon Human Rights Radar and eliminate “bespoke” research reports performed at the request of clients. The law firm also suggested that Sustainalytics cite specific sources in its reports to explain why it used the term “occupied” to describe the Palestinian territories, warning against “presenting the modifier as an independent or qualitative judgment.” But White & Case concluded that Sustainalytics’s more widely used products treated companies operating in Israel similarly to—or even less harshly than—those in other conflict areas. The report also confirmed that, contrary to JLens’s accusation that Sustainalytics supported BDS, it was a “known and understood policy among its employees that Sustainalytics does not recommend divestment” from any companies.

Asked how JLens squared its claims that Morningstar supported BDS and penalized firms connected to Israel with the White & Case report’s findings to the contrary, Hammerman declined to provide specifics. “JLens is an experienced ESG practitioner and we have reviewed Morningstar’s ESG research and services extensively and engaged in many conversations with company executives,” she wrote in a statement to Jewish Currents. “The White and Case report is only one data point in a nearly three-year engagement with the company. We are fully confident in our analysis and conclusions which have been validated by many others both inside and outside of the company.” Human rights advocates continue to question JLens’s interpretation, however. “This was not about facts,” Shakir of Human Rights Watch said. “This wasn’t about concerns over the accuracy of information. This was an effort to use bullying to undermine legitimate human rights advocacy.”

Morningstar agreed to the White & Case recommendations and set up a public tracker on its website to show its progress in implementing the changes. But its opponents weren’t satisfied: JLens claimed on its website that the report had used “legal acrobatics” to absolve Morningstar of responsibility, arguing that the substance of the report—such as its criticisms of Human Rights Radar—showed that Morningstar had demonstrated “extensive” support for the BDS movement, even if White & Case’s conclusions said otherwise. On June 17th 2022, Richard Goldberg of the FDD wrote a memo claiming that the report showed that Israel was “disproportionately punished in Sustainalytics ratings compared to companies doing business in any other country.” In fact, though the pages he cited mentioned White & Case’s criticisms of the Human Rights Radar product, they also showed that Morningstar’s more widely used products tended to assign better ratings to companies in Israel than to those in other countries. (Goldberg did not respond to requests for comment on how he reached his conclusions.) In a joint letter to Morningstar on July 15th, 90 Jewish Federations from around the country, as well as JLens and national Jewish organizations like the ADL and the American Jewish Committee, argued that even after the adoption of the White & Case recommendations, Morningstar’s products were still overly reliant on “sources with known biases against Israel,” including the United Nations Human Rights Council, Who Profits, and Amnesty International, the latter of which had put out a landmark report in February accusing Israel of practicing apartheid.

Once again, the Jewish groups’ campaign against Morningstar was backed by state government action and the threat that the company could run afoul of anti-BDS laws. In August, attorneys general of 17 states wrote to Morningstar to express their concerns that the firm was furthering BDS. The letter complained that Sustainalytics “inexplicably” considered business activity in East Jerusalem, the West Bank, the Gaza Strip, and the Golan Heights to “advance human rights abuses.” It noted that Sustainalytics had placed companies on its watchlist for “large infrastructure projects” in the occupied territories (likely a reference to settlement construction), which the attorneys general took to mean that Sustainalytics supported “the removal of Jewish people from certain parts of Israel.” Lara Friedman, president of the Foundation for Middle East Peace, said that the attorneys general had taken a position tantamount to ignoring international law on settlement construction in the West Bank: “The position that’s being offered here is that the West Bank is legitimately Israeli territory, and that opposing settlements is antisemitic,” she said.

While previous JLens and federations campaigns had accused Morningstar of singling out Israel, the letter from the attorneys general instead criticized the firm for rating activity in Israel much as it did operations in countries like China, Myanmar, and Russia, arguing that this equal treatment was itself a problem. “Susainalytics’ failure to draw a distinction between Israeli democracy and repressive regimes shocks our collective conscience,” they wrote. That month, when the attorney general of Missouri announced an investigation into Morningstar, 18 other states said they would join in the effort.

On August 25th, a few days after the attorneys general published their letter, 15 state treasurers and three other state finance officials—all of them Republicans, and 15 of them representing states with anti-BDS laws—wrote to Morningstar arguing that “Sustainalytics relies on anti-Israel sources and automatically punishes” companies involved in Israel, and threatening to reconsider their states’ investments in the firm. One of the signatories was the Arizona state treasurer, who had notified Morningstar earlier that month that it would be placed on her state’s “do not invest” list if it did not provide proof within 30 days that it had not violated Arizona’s anti-BDS law.

In the face of this onslaught, Morningstar capitulated. On October 31st, the firm announced the additional sweeping changes to its approach to Israel/Palestine—eliminating its use of the term “occupied territory,” ceasing to use the United Nations Human Rights Council and Who Profits as sources, and offering guidance to Sustainalytics analysts that they should not presume operations in the occupied Palestinian territories to be human rights violations. In the press release, Morningstar noted that the new policies were intended to respond to concerns raised by various Jewish and Israel-advocacy groups, including JLens, the ADL, the American Jewish Committee, the FDD, JUF, and more. JLens said it was “pleased” by the changes and removed Morningstar from its “do not invest” list. (Jewish Currents sent the ADL a list of detailed questions about JLens, asking the organization to respond to criticisms from human rights activists, and to clarify whether the ADL is against the use of the term “occupied territories.” An ADL spokesperson did not respond to the questions but sent back a statement similar to the group’s press release on its acquisition of JLens, adding, “All countries should be treated fairly when it comes to human rights concerns or any other issue. ADL and JLens aim to ensure that Israel is assessed on an equal and fair footing in ESG ratings and to eliminate any singling out of or discrimination against Israel.”)

Van Ho, the human rights and business law expert, said that, rather than place Israel on “equal footing,” the new standards will cause Israel/Palestine to be treated differently than other areas with enduring situations of conflict and occupation, like Russia and Ukraine or Saudi Arabia and Yemen. “By determining that what is objectively a conflict-affected area will no longer be treated as such, Morningstar is relegating Palestinians to second-class citizens compared to Ukrainians,” Van Ho said. Given Morningstar’s prominence, its new policies could have a powerful effect, she argued. Aware that their activity is less likely to be scrutinized, businesses on the ground in Israel/Palestine may alter their practices. “We’re going to see economic activity within an already fraught situation be undertaken without as much consideration for human rights,” she said.

Shakir said the consequences of abandoning terms like “occupied” to refer to Palestine could spread to Morningstar’s work beyond the region, and may risk “allowing this bullying effort to water down the terms of international law.” “That Israel occupies the Palestinian territories is a matter of consensus in the international legal community. It has even long been the position of military advisors in the Israeli government itself,” he said. “The minute you create a special rule for one context, that begs the question of whether those standards will be applied elsewhere. Are they similarly not going to use terms like this when it comes to Russia’s occupation in Ukrainian territory?” A former Sustainalytics employee now working in socially responsible asset management, who asked to speak anonymously to avoid career repercussions, said that it was disappointing to see Morningstar abandon the UN Human Rights Council as a source: “The UN’s work helped legitimize human rights violations as a serious ESG issue among mainstream investors,” they said. “It’s a bummer that [the Morningstar decisions] create a bigger rift between a key ESG research provider and the good work that the UN is doing.”

When asked to respond to such criticisms, a Morningstar spokesperson did not address specific questions but said the company believes that “these measures and the ones we’re taking as a result of the independent investigation published in June, will make our research better.” But Morningstar’s troubles may not be over. On January 24th, the FDD’s Goldberg argued in the New York Post that Morningstar was still engaging in “boycotting business as usual in Chicago,” because Sustainalytics hadn’t removed its flags from certain companies that operate in settlements. “If you drop your principles because bullies are bullying you, they just bully you more,” said Friedman. “That’s what Morningstar has gotten out of this.”

Jewish groups’ fight against ESG assessments of Israel comes at a moment when the larger field of socially responsible investing is under attack from conservatives. “The ESG movement is the latest tool that woke corporations are using to push a radical and left-leaning social agenda into every corner of American life,” Texas Attorney General Ken Paxton said in a statement on Morningstar. The campaign against Morningstar is notable in part because the company has been a prominent defender of ESG. Its website publishes the columns of sustainable investing researcher Jon Hale, who has written about the conservative actors behind the anti-SRI movement and championed ESG as “good business.”