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Tuesday, August 16, 2022
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BDS festers in a new investment sphere.

Editor's note: This essay, being published exclusively by The Jewish Link, is adapted from a section of Conspiracy U: A Case Study (Wicked Son, October, 2021), by Scott Shay. The book argues that conspiracy theories are masquerading as scholarship at major universities and that this phenomena has enabled BDS to spread its impact from campus to the real investment world through socially conscious investment funds.  The essay explains how investors who have no desire to boycott Israel may be doing so because of hidden screens that disproportionately penalize companies doing business with or in Israel.

During my father’s childhood in Sveksna, Lithuania in the 1930s, there were constant boycotts of Jewish shops. Small smears of black tar were placed on the corner of the signs of Jewish stores. The tar smears were discrete but for those looking, it was a way to notice which shops were Jewish to avoid them. The Jews were blamed simultaneously for being communists and too close to the Russians, being fascists and too close to the Poles (the longtime enemies of the Lithuanians) and wanting to assimilate and refusing to do so. When it came to public rhetoric, there were always polite justifications for these boycotts and in some cases, willful, false denials. As late as 1938, the president of Lithuania stated that there was no “antisemitism as in other states” and that Lithuania was a place of “universal human values.” But the small black smear of tar spoke otherwise.

Today, few would have expected that a new form of economic boycott of Jews would be taking place. But this is in fact happening under the guise of the boycott, divestment and sanctions (BDS) movement. It is important to be clear that BDS is not a movement that protests the occupation or the stalled peace process. As Omar Barghouti, BDS’s founder stated: “Accepting Israel as a ‘Jewish state’ on our land is impossible.” In other words, BDS is an anti-Zionist movement that supports the dismantling of Israel and the creation of an Arab Palestine through boycott, divestment, and sanctions against all of Israel. BDS written materials are purposely vague on just what is supposed to happen to Jews who currently live in Israel in a liberated Palestine, though political parties that support BDS like Hamas are more open about killing and/or expelling the Jews.

Since BDS is directed against the one Jewish state on the planet and is currently the only large-scale boycott movement in a world where there are hundreds of ethnic conflicts, it is hard not to see the movement as prejudiced against Jews. Thus, while BDS proponents claim there is no antisemitism involved and that it’s all based on universal human values, the facts show the contrary. As in interwar Lithuania, conspiracy theories about Jews are widespread, while public rhetoric is careful. In the case of at least one major investment research firm I will describe below, BDS has been able to sometimes hijack an otherwise very welcome investment term.

Environmental, social and governance (ESG) trounces return on investment ROI) in business discussions and throughout Google searches these days. Investments with an ESG prism are projected to top $53 trillion worldwide by 2025, according to Bloomberg. It is indeed long past the time to neglect the effects of business decisions on climate change and on other societal concerns. Yet in the momentum to adopt algorithmic ESG scores into investing screens, it is vital to not let idiosyncratic political agendas infiltrate, and potentially discredit, the laudable goals of ESG investing, which I wholeheartedly support.

The story of Sustainalytics, and its parent, Morningstar, is a cautionary tale about this potential abuse of ESG scoring and the mainstreaming of the BDS movement against Israel.

Morningstar is one of the most significant investment research firms and credit rating agencies in the world. It was early to recognize the importance of ESG, and strategically acquired Sustainalytics to deepen its vigorous entrance and advocacy in the ESG arena. Morningstar’s ESG scores have significant influence on which companies receive investment monies and which mutual funds are recommended.

Investment firms and companies cheered Morningstar’s scores because they face a dilemma since they want to embrace ESG, but often don’t know how to apply it to the thousands of potential investment opportunities they evaluate. Hence they rely on Morningstar and Sustainalytics products to do just that.

To cite one presentation from a top investment bank: “Ignore the noise… it is important to focus your efforts on the key providers most commonly used by investors—MSCI and Sustainalytics. Understand which factors might get you screened out … monitor controversy scores … business involvement screens [are vital to] understand which controversial business involvement will get you flagged.” Being “flagged” effectively means being eliminated from investment consideration.

While Morningstar’s business is to provide ESG scores and to encourage transparency, ironically, it is secretive about just how its own report narratives and scores are devised. The only public source of information about Morningstar’s confidential reports are the writings of outside advisors. Regarding the former, since most Morningstar/Sustainalytics research reports and analysis are proprietary and are provided to clients only on a confidential basis, the public is not permitted to evaluate them. I have spoken with senior managers of investment firms, who remarked that they have little choice but to simply trust the Morningstar family of products. In fact, I learned some managers don’t even have a clue as to how the scores are computed.

A review of outside advisors to Morningstar will indicate that when it comes to Israel, they either believe in BDS, or minimally, are BDS-friendly. While the BDS movement differs from the anti-occupation movement, BDS welcomes people and companies who advocate a more limited boycotting of Israeli companies with respect to the disputed territories, as the BDS movement recognizes that any form of boycotting Israel is useful to the broader BDS aim of eliminating Israel.

This is why I was alarmed to learn that Morningstar articles spotlighted some of their advisors’ beliefs in limiting investments related to Israel. One Morningstar-published article reported on an advisor’s list of about 100 companies that should be eliminated from investment consideration, with 59 being companies doing business with Israel, against not just the settlements, but Israel – no other country was singled out in this way.1 I could find no countervailing voices among Morningstar articles or publicly disclosed advisors.

Morningstar reports also provide tacit support for BDS. I was stunned to see that Morningstar uses sources that advocate for BDS as primary inputs. An example of one Sustainalytics recent ESG review notes referring to a student BDS resolution, “University… students named several companies, including [the company being examined] in an approved referendum in which they demanded the university not to invest in corporations complicit in human-rights abuses in the Palestinian territories…” There was no evidence of the company’s products being used illegally.

Indeed, Sustainalytics uses both sources that are officially anti-occupation, though hostile to Israel in practice, and those officially seeking the elimination of Israel. The former includes organizations such as DanWatch and Who Profits, which advance the boycott of and divestment from Israeli and international companies involved with the West Bank. The latter publications currently include the Electronic Intifada, Mondoweiss and on occasion, the Iran Daily, which promote BDS for all of Israel, advocate the destruction of Israel and advance conspiracy theories that Israel is out to harm all people of color and/or all Muslims. Who Profits similarly endorses blatant conspiracy theories about Israel. Israeli publications were not cited unless the publication was reporting on some sort of anti-Zionist news.

Controversy scores involving Israel quickly ascend. It does not take too much involvement with Israel to cause a Sustainalytics controversy score of 3 (a 4 rating is very high while a 5 rating is rare). These scores are critical because they are directly input into algorithms and models that determine the composition of investment portfolios. This means that a person in Peoria who has no intention or desire to boycott Israel will still have her portfolio underweighted to Israel.

This is the quiet boycott of Israel that Morningstar tucks into what are the otherwise noble goals of ESG. JLens, an investor network that emphasizes impact and socially responsible investing along with corporate social responsibility via a Jewish lens, was among the first to notice the anti-Israel bent of Morningstar and its murkiness in its ratings relating to Israel.

Morningstar denies an anti-Israel or anti-Jewish bias. When I brought this issue to the attention of some investment professionals who specifically asked their Morningstar representatives about why only one territory with investment significance was singled out by Morningstar, they spoke with seemingly scripted phraseology that the focus stemmed solely from “client requests.” Amazingly, Morningstar claimed that clients demanded research on only three disputed territories: Israel, Western Sahara and Tibet. (There are about 100 disputed territories in the world and only Israel, of the three chosen, is substantially impacted by ESG-conscious investors.) In contrast, when Morningstar representatives are asked about creating a portfolio that is Israel-positive, their answers are evasive.

Morningstar denies it is pro-BDS as a matter of corporate policy, but its tools are certainly BDS-friendly and enabling. Morningstar has published a paper vindicating itself, relying on internal data only available to itself and ignoring most of the facts noted above. This is particularly ironic since Morningstar ESG ratings exist on the premise that outsiders need access to publicly released data to fairly evaluate company claims.

In Sveksna, the goal was not just economic. Rather, the boycotts were part of a set of conspiracy theories that claimed that Jews were part of an evil cabal somehow causing harm to Lithuania and the world. The evil that the Jews were supposed to be causing were manifold, contradictory and without any evidence. But that didn’t matter. When the Nazis marched into Sveksna, every last Jew was turned in by the locals. The boycott had helped them internalize that the Jews must be evil and part of a worldwide cabal, even if a particular shop owner seemed like a nice person.

The sources that Morningstar cites in its internal reports derive from propagators of conspiracy theories about Jews and Zionists. Morningstar should not participate in this modern-day smear.

1 Morningstar Advisor Insight, “Investing for Social Justice From the Bottom: Advisor Rachel Robasciotti Listens to Groups on the Ground to Make an Impact,” August 24, 2020,  https://www.morningstar.com/articles/998577/investing-for-social-justice-from-the-bottom-up, accessed April 20, 2021.


Scott Shay is chairman and co-founder of Signature Bank. He is also the chairman of the investment committee of the Elah Fund, an Israel-based social impact fund. His most recent book, “Conspiracy U: A Case Study” (Wicked Son, October 2021), is focused on Northwestern University.

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