Arizona treasurer gives Morningstar 30 days to prove investment deals aren't anti-Israel

Arizona Treasurer Kimberly Yee is telling Morningstar Inc. investment services that it has 30 days to prove it is not violating Arizona law concerning its stance on Israel.

If Morningstar cannot prove it is actively boycotting the state of Israel, it will be placed on the Arizona Treasury’s prohibited investment list.

Arizona law states that a public entity or public fund cannot enter contracts or invest capital with companies or people engaged in boycotting.

The Arizona Treasurer’s Office said that Morningstar’s environmental, social, and corporate governance (ESG) focused subsidiary, Sustainalytics, uses “antisemitic and anti-Israel sources to negatively impact the scores of companies conducting business in Israel,” according to a press release from the State Treasurer’s office.

Yee's condemned Morningstar

"As treasurer, it is my duty to ensure that Arizona does not do business with companies that are attempting to undermine Israel’s economy and violate Arizona’s anti-BDS law,” she said in a statement from her office. “Morningstar’s ESG rating subsidiary, Sustainalytics, appears to violate Arizona law by negatively impacting ratings of companies doing business in Israel.”

In her letter to CEO Kunal Kapoor, Yee also said Morningstar must provide a “written averment,” saying that it will not engage in any further anti-Israel boycotts in the future, in addition to providing evidence its ESG ratings do not violate state law.

“As Arizona’s Chief Banking and Investment Officer, I stand with Israel, and I will not allow taxpayer dollars to become victim to the woke political gamesmanship of ESG ratings. ESG ratings are a political scorecard, not a financial scorecard,” Yee said in the press release. 

The company has previously denied connections to the boycott divestment sanctions (BDS) movement.

Morningstar issued a public letter on June 2, 2022, saying that it hired an outside company to investigate Sustainalytics’s potential connections to the BDS movement and denies that such a connection exists.

“White & Case has completed that investigation and documented its findings and recommendations in a 117-page report that we are publishing in its entirety. It identifies limited areas of bias that are outliers over the span of our work but, nevertheless, do not live up to Morningstar’s standards,” Morningstar wrote.

Morningstar said that White & Case determined that:

There was no evidence Sustainalytics products recommended or encouraged divestment from Israel.There was no evidence of pervasive or systemic bias against Israel across Sustainalytics products, including the Sustainalytics ESG Risk Rating.One Sustainalytics product, Human Rights Radar, exhibited bias in its outcomes by overrepresenting firms linked to the Israeli-Palestinian conflict. Human Rights Radar is a siloed product with the purpose of providing information on issuers involved in regions of the world where serious human rights violations allegedly occur. It also sometimes used inflammatory language and failed to provide sourcing attribution clearly and consistently.Though not widespread, the investigation found scattered instances of processes and procedures that can be improved to address and mitigate potential for implicit or confirmation bias.

Morningstar said it took a few actions in response to the report.

“Based on these findings, White & Case made various recommendations in the report, which we have decided to adopt in full,” the company wrote. “Morningstar has discontinued the Human Rights Radar, and additional steps we are taking include but are not limited to: (1) embracing greater transparency as to Sustainalytics’ research sources and ratings methodology, (2) monitoring our internal processes to ensure greater consistency and adherence to our methodology, (3) adopting a style guide to ensure all research products are free from biased terminology, and (4) discontinuing further bespoke research on behalf of clients.”