Morningstar, the investor-research firm, claims to be “all in for investors,” and that because its founder “thought it was unfair that people didn’t have access to the same information as financial professionals,” the company was founded “to deliver investment research to everyone.”
Well, fair enough, perhaps. Morningstar doesn’t promise to present complete or unbiased investment research – just to provide that research to everyone. That lacuna is no doubt how the company thinks it can get away with expressly treating all non-leftist shareholder proposals as “anti-ESG,” and advising its clients to oppose such initiatives – thereby revealing that it places the political policy preferences of the company’s elite over the financial best interest of people who buy investment advice from the company. According to Morningstar, it’s “ESG” – and so, good – to demand increased equity-based discrimination on the bases of race and sex, and to demand that companies stop funding right-of-center organizations and causes; but it’s “anti-ESG” – and so, bad – to support protections against viewpoint discrimination or to demand that companies stop funding left-of-center organizations and causes. (Disclosure: the project I run files many of the proposals that Morningstar has identified as “anti-ESG” – which, given the firm’s biases, makes me think that we’re on the right track.)
These are pretty bald and pretty astonishing assertions, but at least they’re honest. It remains an open question whether this honesty is sufficient to satisfy Morningstar’s legal duty. When it counsels exclusively in favor of left-wing positions, does it provide such advice to all clients, or only to those seeking explicitly left-biased ESG advice? If the former, then that seems like a pretty material misrepresentation. When it downgrades companies, does it take partisan considerations into account? If so, does it fully reveal what it’s up to? Does it do so based on complete and unbiased research suggesting that company compliance with left-wing ESG, and only left-wing ESG, improves company performance? These seem like inquiries some customers or regulators might eventually wish to make.
As troubling as Morningstar’s partisan crankery is, recent revelations about its ugly anti-Israeli bias are far worse. It turns out that Morningstar is a covert carrier of the BDS (boycott, divest and sanction) virus – a virus that infects investments with a radical anti-Israel bias.
The vector of transmission for Morningstar, and through Morningstar to its clients, has been its acquisition and use of Sustainalytics, and its social rankings of various public corporations around the world. Sustainalytics’ work, like virtually all leftist “stakeholder activism” (Morningstar’s only acceptable kind of ESG, non-leftists apparently not being genuine stakeholders… for some reason) is biased from the jump by its exclusive reliance on deeply biased sources: in this case, deeply anti-Israeli organizations such as Who Profits, Human Rights Watch and Amnesty International.
Likewise, it establishes inherently biased metrics that, even when applied neutrally, create profoundly bigoted responses. Here, the joker metric, or one of them, raises the fact of doing business in or with regard to “occupied or disputed territories” to one of the major sins of international activity. Now, everyone knows – everyone knows – that this metric is included so as to permit “neutral” discrimination against Israel. There’s a lot of international evil in the world, but little of it has anything to do with occupied territories per se. The occupied and disputed territories in Israel are a problem, one that Israel has tried honestly to grapple with and to resolve for many years, only to be faced by hostility, intransigence and the instigation of aggression by adversaries many of which still do not recognize even so much as Israel’s basic right to exist. To include and elevate a category that is designed almost entirely to harm Israeli companies is simply and utterly anti-Israeli.
The anti-Israeli bias inherent in Morningstar’s rating metrics, and therefore in the ratings it sells to customers, was revealed by Richard Goldberg at the Foundation for the Defense of Democracies. Goldberg recently wrote a report fisking a White & Case study, paid for by Morningstar, that at the top line absolved Morningstar of wrongdoing, but within the report provided countless examples of the dire bias shot right through Sustainalytics’ and Morningstar’s efforts and results, including those already considered.
“On a full reading of the Report, rather than exonerating Morningstar, the White & Case investigation instead demonstrates conclusively that Sustainalytics’ processes and products — including its flagship ESG Risk Ratings product — are infected by systemic bias against Israel,” Goldberg concluded.
Morningstar is of course free to give clients any information it wants, and those clients are free to pay for it. Morningstar is not free to misrepresent itself to its clients, to pretend that wildly anti-Israel ratings are anything but; or that ratings that that are infused with nonpecuniary or biased metrics or research are based only on the objective, fully researched fiduciary prospects of a company. Clients that suspect that they have been materially misled in the past may want to make inquiries of varying levels of aggressiveness, as might institutional investors. And as Goldberg points out in his analysis, officials in states with anti-BDS laws should apply those laws to Morningstar.
Given what’s been revealed by this incident, investors of all sorts, as well as regulators, would be wise to look further into Morningstar and other partisan “ESG” peddlers. Morningstar brags that “[t]ransparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content,” but that doesn’t seem very true at all. It seems as though Morningstar paid quite a lot of money to whitewash some vast failings of transparency, and through the process illuminated the path to uncovering further failings of a similar sort.
They say in Washington that it’s not the deed; it’s the cover-up. Actually, it’s both.
