Morningstar’s new report seeks to eradicate anti-Israel bias in ESG ratings
Financial Services Firm Morningstar Takes Steps to Eliminate Anti-Israel Bias from ESG Ratings
Financial services firm Morningstar has released a report containing recommendations aimed at removing anti-Israel bias from its Sustainalytics ESG company risk ratings. The report, celebrated by Israeli organizations, addresses the issue of Israeli firms receiving lower ratings due to their operations in or business with Israel. Rachel Lerman, general counsel for the Brandeis Center, highlighted the presence of underlying political bias in the ratings process. The report outlines seven recommendations, including eliminating geographic assumptions and incorporating additional legal expertise to evaluate human rights law-related issues.
Key Recommendations for a More Objective Rating
- Eliminate the “occupied territories/disputed regions” incident type to prevent bias.
- Evaluate human rights violations based on facts on the ground, not uncorroborated media accounts.
- Apply international legal standards comprehensively.
- Prevent third parties from manipulating ratings through unfavorable media.
- Include more legal expertise to assess human rights law-related issues.
- Require analysts to clearly define alleged human rights violations by businesses.
If implemented, these recommendations would separate unfavorable media coverage of a country from the ESG ratings of firms conducting business with that country. It would also provide a more neutral rating for companies operating within Israel, which has been accused of being ”occupied” by pro-Palestinian groups.
Morningstar has committed to swiftly implementing these recommendations in collaboration with its analysts and clients. The company recognizes the importance of addressing concerns of anti-Israel bias and aims to fortify objectivity, transparency, and consistency in its work.
Eric Fingerhut, president and CEO of the Jewish Federations of North America, emphasized the need for vigilance and engagement in combating anti-Israel bias. Michael Newton, director of the International Legal Studies Program at Vanderbilt University, believes that the key step lies in the follow-up study on implementation.
Morningstar has created a live progress report to track the implementation of these recommendations in real time. The firm has also commissioned a follow-up report by Newton and former Ambassador Alex Wolff to evaluate the progress made in removing anti-Israel bias from its ESG ratings.
A coalition of groups has been working with Morningstar for the past two years to ensure fair and objective Sustainalytics company ratings. These efforts have already resulted in fairer ratings for over 100 Israel-linked firms. Rachel Lerman emphasizes the importance of treating companies in Israel and other “occupied territories” equally, regardless of location.
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How does engaging in continuous dialogue with Israeli stakeholders help ensure accurate assessments of compliance with international human rights law?
Ensure accurate assessment of compliance with international human rights law.
The report acknowledges that anti-Israel bias has been a concern among Israeli companies and their supporters for some time. The Sustainalytics ESG company risk ratings are used by investors and asset managers to assess the sustainability and impact of companies on environmental, social, and governance issues. However, the ratings have drawn criticism for their alleged bias against Israeli firms. Israeli organizations have commended Morningstar for taking a step towards rectifying this bias. The report’s recommendations aim to promote fairness and objectivity in the ratings process, ensuring that companies are evaluated based on their actual practices and adherence to international standards rather than subjective political opinions. Rachel Lerman, general counsel for the Brandeis Center, has voiced concerns about the ratings’ underlying political bias. She highlighted the need for an accurate and unbiased assessment of human rights law-related issues, incorporating real-time information and avoiding reliance on uncorroborated media reports. The report’s recommendation to evaluate human rights violations based on facts on the ground is a significant step towards addressing this concern. In addition to evaluating human rights issues more objectively, the report suggests eliminating geographic assumptions. This recommendation recognizes that assumptions about territorial disputes may contribute to biased ratings and emphasizes the need to base assessments on verifiable facts. By doing so, Morningstar aims to prevent the stigmatization of Israeli companies solely based on their operations in or business with Israel. The report also emphasizes the importance of international legal standards in evaluating companies’ adherence to human rights laws. To ensure comprehensive and accurate assessment, the inclusion of additional legal expertise is recommended. By incorporating diverse legal perspectives and expertise, Morningstar aims to strengthen the ratings process and minimize the potential for bias. Another recommendation focuses on preventing third parties from manipulating ratings through unfavorable media. This measure aims to protect the independence and integrity of the ratings process. Morningstar recognizes that external influences, such as biased or unreliable media reports, can distort the evaluation of a company’s sustainability and impact. By safeguarding against such manipulation, the company aims to maintain the credibility and trustworthiness of its ratings. Furthermore, the report calls for the avoidance of double standards and disproportionate scrutiny on Israeli companies. It stresses the need for fairness and consistency in the ratings process, irrespective of a company’s origin or the political contexts in which it operates. By applying the same standards to all companies, Morningstar aims to eliminate any perceived bias from its ratings and promote equality among firms. Lastly, the report emphasizes the importance of engaging in continuous dialogue with Israeli stakeholders. Morningstar recognizes the value of understanding the local context and addressing concerns directly. By actively listening to Israeli companies, investors, and other stakeholders, Morningstar aims to ensure its ratings truly reflect the companies’ practices and overcome any potential biases. The recommendations outlined in the report demonstrate Morningstar’s commitment to eliminating anti-Israel bias from its Sustainalytics ESG company risk ratings. The company’s efforts have been applauded by Israeli organizations and supporters who acknowledge the need for fairness and objectivity in the ratings process. By implementing these recommendations, Morningstar aims to restore confidence in its ratings and provide investors with unbiased and accurate assessments of companies’ sustainability and impact.
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