The Jewish News Syndicate (JNS) last week reported that Morningstar Sustainalytics – the environmental, social, governance (ESG) ratings arm of Morningstar, Inc. – had removed negative “controversy” ratings from 19 Israel-based companies. Sounds positive at first until you hear the “but.” Morningstar, sadly, also reaffirmed negative ratings for seven Israeli firms due to their operations in Jerusalem, Judea and Samaria, or their support for Israeli counterterrorism operations. Now it’s up to governors, attorneys general, and treasurers to rid this company of Israel boycotts once and for all.
According to Morningstar, B Communications, Bezeq, Construcciones y Auxiliar de Ferrocarriles, Elbit Systems, Elco, Electra, and Shapir Engineering and Industry remain flagged with ESG controversies in connection with the Israeli-Palestinian conflict. These controversy ratings often serve as the guidepost for ESG investor decision-making – avoiding investments in or even divesting from companies carrying such negative labels.
Bezeq and its largest shareholder, B Communications, are reportedly subject to human rights controversies for providing telecommunications infrastructure to Jews living in Judea and Samaria, also known as the West Bank – land that is also claimed by the Palestinians.
“Many international organizations have reported that the development of infrastructure and the provision of services that contribute to the maintenance and expansion of settlements might reduce the land available to Palestinians, negatively affecting their livelihoods and restricting their right to equality and non-discrimination and freedom of movement,” a Morningstar spokesperson told JNS. “Our rating reflects the fact that these allegations create risk for the company.”
Rather than remain neutral in what is arguably the most complicated geopolitical dispute in history, Morningstar’s ratings align with the boycott, divestment, sanctions (BDS) campaign that punishes companies for supporting any Jewish presence in these territories. Morningstar is using tools of economic warfare to pressure Israel to make unilateral concessions to the Palestinians outside the framework of a negotiated settlement.
Spain-based Construcciónes y Auxiliar de Ferrocarriles (CAF) is also subject to a human rights controversy rating because it builds and operates trams in Jerusalem, the capital of Israel. While Palestinians claim eastern Jerusalem as disputed territory, the United States recognizes Israel’s sovereignty over all of Jerusalem and moved the U.S. embassy there in 2018. Morningstar said CAF, like Bezeq and B Communications, was contributing to the maintenance and expansion of settlements – suggesting it is company policy to consider eastern Jerusalem, including the Western Wall, to be an Israeli settlement rather than Israel’s capital. Morningstar’s spokesperson also compared CAF helping Israel to expand light rail access for Israeli-Arabs in Jerusalem to involvement in “rail projects that support Myanmar’s junta as it uses trains to move its troops, arms and other supplies.”
Morningstar applies negative controversy ratings to three other Israeli companies for similar work. Shapir Engineering reportedly gets a controversy rating for operating and expanding the Jerusalem Light Rail system, which would connect it to Jewish communities in eastern Jerusalem. Electra and its major shareholder, Elco, are reportedly flagged for human rights risks for building tunnels in Jerusalem to help alleviate traffic – one of which would allow better road access for Jewish communities in Judea and Samaria.
In all these cases, Morningstar makes no allegation that these companies are involved in any violation of human rights. Instead, the alleged violation is merely providing non-controversial services or infrastructure in specific territory controlled by Israel – Jerusalem, Judea, and Samaria. This could trigger divestment and contracting bans in certain U.S. states, whose laws consider differential treatment of companies operating in Israeli-controlled territory to be a form of boycott.
The seventh Israeli company blacklisted by Morningstar’s ESG ratings is reportedly defense contractor Elbit Systems, which also remains on Morningstar’s Global Standards Screening (GSS) watchlist – a de facto “do-not-invest” list. Morningstar assigns Elbit a controversy rating due “to some minor reputational risks following allegations of delivering weapons that are used by the Israeli military and have caused civilian casualties.” Morningstar apparently ignores the fact that Israel, like the United States, is a democracy with a military that adheres to laws of war and goes to greater lengths than any country to minimize civilian casualties. Indeed, in other controversy reports, Morningstar lumps Israel in with Saudi Arabia, Egypt, Iraq, Lebanon, Oman, and Qatar as “countries which have been recognized as a high risk of violence against civilians.”
The United States military, of course, has faced similar allegations due to civilian casualties sustained during strikes on Al Qaeda and other terrorist targets around the globe. But there is no evidence either the United States or Israel targets civilians in counterterrorism operations. Punishing Elbit for unintended civilian casualties in such legitimate and defensive strikes is an assault on Israel’s inherent right to self-defense.
More than 35 U.S. states have adopted laws or executive orders intended to deter companies from engaging in boycott, divestment, sanctions (BDS) activities targeting the Jewish state. Some states prohibit contracting with companies that boycott Israel, while others mandate divestment of state funds, including pension fund investments, from such companies. Several states enforced these laws after Unilever subsidiary Ben & Jerry’s announced a boycott of its Israeli licensee.
Last month, JNS reported that the State of Florida opened a formal investigation into whether Morningstar may be violating its state’s updated anti-BDS statute, that specifically calls out ESG ratings. That follows an investigation opened by Arizona’s state treasurer last year. JNS also revealed new investigations launched by attorneys general in Montana and Kentucky.
State officials investigating Morningstar should request copies of all controversy reports or GSS watchlist reports related to the seven companies profiled in this analysis to determine whether Morningstar is violating state anti-BDS laws. In the case of Elbit, officials should also request controversy and watchlist reports for American defense contractors whose weapons systems may have resulted in unintentional civilian casualties during counterterrorism operations launched by the United States to compare Elbit’s treatment.
It’s certainly welcome news that Morningstar was able to remove controversy ratings for 19 Israel-based companies in the last few weeks without first hiring any independent “experts,” as the company had previously suggested might be necessary. That list included all of Israel’s banks and cell phone companies targeted for providing services to Jews living in disputed territories, which prompts an obvious question: Why is Morningstar applying a different standard to the seven Israeli companies still blacklisted?
For a firm whose brand depends on investors believing its financial research and ratings are objective and consistent, Morningstar’s ESG ratings related to Israel have proven to be anything but. To rescue its reputation, now is the time for the company to fully uproot the BDS infrastructure within its ESG subsidiary and remove the remaining seven companies from its blacklist. If C-suite leaders delay any further, state officials should hold them accountable.
Richard Goldberg, a senior adviser at the Foundation for Defense of Democracies, is a former National Security Council official, US Senate aide, governor’s chief of staff and Navy Reserve Intelligence Officer.