Progress Report on Changes to Sustainalytics ESG Ratings and Research for Israeli Companies

Updated as of December 4, 2024.

Update: Morningstar Sustainalytics announced an update to eligibility standards, making research on human rights issues connected to disputes concerning contiguous territories, which includes relevant issues pertaining to Israeli-Palestinian conflict area (IPCA), ineligible for analyst coverage. This means we won’t cover those areas because human rights issues, when related to contiguous territorial disputes, are less likely to be objective, reliable, or consistent, and subject to complex geopolitical factors, divergent views and conflicting partisan media reports. The update impacts human rights research within the Controversy Ratings and Global Standards Screening (GSS) methodologies, as well as all research products using data on relevant incidents, issues, events, or controversies.

Following this methodology update, recommendations #2-4 of the Independent Experts Initial Report are no longer applicable. The experts provided actionable recommendations to address concerns of anti-Israel bias in Sustainalytics’ research. The experts noted the complexity of the IPCA, the disparate legal and policy frameworks that apply, and that even relying on credible sources does not in itself sufficiently ensure that only credible information is applied to such research. At the end of 2024, the experts will issue a final report on Morningstar’s implementation of their recommendations.

* Notes actions that will receive a post-implementation review by the third-party experts

Embrace Transparency

Clearly state underlying assumptions and review language in Sustainalytics reports.

COMPLETE

Conducted a comprehensive language review of specific terms referenced in Global Standards Screening research.

Source: White and Case Report, Page 95

Why it’s important: Sustainalytics will review language and add statements to its research reports so that the reader can better understand the basis for our assessments and how they link to research assumptions related to business and human rights and the Israeli-Palestinian conflict. In addition, analysts will use consistent language related to the conflict, the territories, the settlements, and the wall for accuracy and consistency and to separate fact from opinion.

What is a research “assumption”? Research assumptions are a set of beliefs about a concept that the researcher brings to a study, and that are generally accepted to be true or at least plausible, by peers. In this case, research assumptions are related to analyzing business activity in regions linked to the Israeli-Palestinian conflict area.

Promote accuracy and protect transparency and objectivity of Sustainalytics sources.

COMPLETE

Updated Sustainalytics' Restricted Sources Protocol to enhance our approach to identifying potentially ineligible sources. Ineligible sources are placed on our restricted list and not used for Sustainalytics research.
Created sourcing methodology document that will describe how news media and nongovernmental organization sources are used within Sustainalytics’ research, how news is evaluated, and the various controls in place to ensure objectivity and consistency of research.
Implemented enhanced criteria for assessing source relevance and timeliness across the Human Rights Controversy category. (This resulted in removing 704 incidents, including 78 incidents related to the Israeli-Palestinian conflict area. A total of 72 event ratings have been upgraded.)

Source: White and Case Report, Page 97

Why it’s important: Aligning with one of Morningstar’s core values, transparency, we’re making our research process more transparent when it comes to what research sources are used and how they contribute to our research.

Hone approach to media and other sources for research into companies’ involvement in controversies.

Remove sources that following a review with independent third-party experts are determined to be biased and unreliable; limit mention of divestment activities if they do not create significant risk to a company and cannot be corroborated by additional approved sources; and remove references to the Boycott, Divest, and Sanctions campaign. Sustainalytics will immediately terminate the use of several sources, including the United Nations Human Rights Council, among others. As part of the sources review process, Sustainalytics will immediately suspend the use of WhoProfits.

COMPLETE

Identified and removed from controversy narratives and incident chains all references to the Boycott, Divestment, and Sanctions campaign, the UN’s list of companies linked to Israeli settlements, and the UN Human Rights Council, as well as most references to divestment actions. (Sustainalytics removed 120 references from controversy incident chains and controversy narratives. In some instances, Sustainalytics upgraded the controversy rating of companies to reflect the removal of these references.)
Suspended the use of WhoProfits.

Source: Press Release, Additional Commitment #3

Why it’s important: Sustainalytics utilizes a third-party database (LexisNexis) of more than 70,000 sources. We utilize these sources to identify possible incidents and controversies. Typically, controversies must be corroborated by other sources. Occasionally, we need to remove unreliable sources. This commitment honors that process by removing several sources that we now deem to be unreliable for our research purposes. The addition of an external expert to review our approach to sources will further strengthen our research processes.

How does Sustainalytics use sources? We use media, civil society, and nongovernmnetal organization reports to identify companies’ involvement in controversies.

What are controversies and controversy narratives? A controversy is an event or a collection of events related to an ESG topic. A controversy narrative is how the controversy is communicated within the context of the associated ESG topic.

Mandate that Controversy Ratings be based on defined human rights violations, including enhancement of internal Sustainalytics processes.

Expected Completion Date: Q4 2024

NO LONGER APPLICABLE*

Source: Independent Experts Initial Report, Recommendation #4, page 28

Please refer to the top of the page for the latest update on Recommendations #2-4 of the Independent Experts Initial Report.

Why does this matter? Sustainalytics has historically assessed demonstrated and potential human rights violations in its Controversies Research. The experts recommended that Sustainalytics modify its approach to clarify the link between a firm’s business activities and documented human rights impacts, rooted in relevant laws. In adopting this approach, the experts recommend that Sustainalytics analysts link all Controversy Ratings to demonstrable human rights violations attributable to company business activities and identify the specific human right affected. This will crystallize the criteria for flagging companies with controversies and improve our analysts’ ability to explain these risks to readers.

Adopt appropriate guidance related to the “Society—Human Rights” event indicator.

Expected Completion Date: Q4 2024

NO LONGER APPLICABLE*

Source: Independent Experts Initial Report, Recommendation #2, page 15

Please refer to the top of the page for the latest update on Recommendations #2-4 of the Independent Experts Initial Report.

Why does this matter? The experts recommended adopting guidance that focuses human rights assessments on prevailing views of international law pertinent to occupation or armed conflict, such as states’ obligations to establish mechanisms to facilitate human rights such as basic utilities, communications infrastructure, and law enforcement on behalf of civilians.

Maintain Consistency

Consolidate methodology for all Sustainalytics products under a unified, metrics-driven methodology department.

COMPLETE

Identified research products to be onboarded to methodology team.
Reviewed and assessed current methodology for each product.
All products have been onboarded by Sustainalytics' Methodology team.

Source: White and Case Report, Page 99

Why it’s important: Bringing all of Sustainalytics’ products under one methodology team will maintain transparent, objective, and analytics-based processes for all its products.

Develop a style guide and research guidance on issues related to the Israeli-Palestinian conflict areas.

COMPLETE

Updated Sustainalytics Style Guide and language guidance documents to ensure proper and consistent use of terms related to the Israeli-Palestinian conflict.

Source: White and Case Report, Page 100

Why it’s important: Putting structured guidance in place around language and voice will help enforce consistency across the board on these issues.

Eliminate the Human Rights Radar product.

COMPLETE

Decommissioned the HRR product.
Ceased all new sales of the product.
Completed all outstanding HRR research commitments to clients.

Source: White and Case Report, Page 102

Why it’s important: According to the White and Case report, the Human Rights Radar product 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 companies involved in regions of the world where serious human rights violations allegedly occur.

Eliminate bespoke research.

COMPLETE

Decommissioned bespoke research.
Ceased all new sales of the product.
Delivered all outstanding bespoke research for clients.

Source: White and Case Report, Page 106

Why it’s important: Bespoke research by its nature falls below the standards of transparency, consistency, and objectivity that we intend to uphold.

Use geographic names (e.g., West Bank, East Jerusalem) in relevant regions, rather than terms such as “Occupied Palestinian Territory” or “occupied territory.”

COMPLETE

Made interim change to remove “Palestinian” from “Occupied Palestinian Territory” in all relevant controversy narratives and incident chains.
All Sustainalytics research has transitioned to using geographic names in relevant regions instead of "Occupied Territories" or "Occupied Palestinian Territories" in order to provide more specificity in our research.

Source: Press Release, Additional Commitment #2

Why it’s important: We’re transitioning to geographic names to be more precise in clarifying the various statuses and circumstances of the different territories.

Provide ongoing anti-bias and antisemitism training to research staff, including analysts, to continually work toward a goal of not having anti-Israel bias in sources and terminology.

COMPLETE

Requested proposals for training from three training providers.
Engaged training experts and set a training curriculum.
Confirmed training provider and set curriculum.
Implemented training for approximately 100 Sustainalytics research staff.

Source: Press Release, Additional Commitment #4

Why it’s important: In the context of our research and in the workplace, we believe antisemitism training will build our team’s knowledge of the dangers and history of antisemitism.

Bolster in-house expertise with staff members focused on human rights and conflict zones.

COMPLETE

Confirmed logistical plans for team.
Hired team members.

Source: Press Release, Additional Commitment #4

Why it’s important: A team focused on conflict areas will further ensure Sustainalytics has a framework for incorporating conflicts into its research and the knowledge and capabilities to make nuanced research evaluations.

Repeal the “Occupied Territories/Disputed Regions” Controversies Research incident type along with accompanying guidance.

COMPLETE*

Dissolved the “Occupied Territories/Disputed Regions” incident type.

Removed controversies under that tag, which were associated with 38 issuers from several countries (representing 0.02% of all incidents).

Source: Independent Experts Initial Report, Recommendation #1, page 7

Why does this matter? Sustainalytics has historically applied the “Occupied Territories/Disputed Regions” tag to human rights-related incidents in disputed regions around the world. The experts observed that this is the only incident type with a geographic focus. This change will support consistency in how human rights-related incidents across geographies.

Ensure Objectivity

Establish appropriate screening mechanisms between engagement services and ratings decisions.

COMPLETE

Developed a guide for interactions between Engagement Services and Ratings teams (Global Standards Engagement and Global Standards Screening teams).
Access to information between engagement and research teams has been fully restricted across all relevant research platforms.

Source: White and Case Report, Page 107

Why it’s important: In order to implement effective measures to prevent conflicts of interest we want to enhance protocols so that engagement managers are not in a position to influence research determinations.

Retain an ombudsperson responsible for responding to external inquiries from non-client, non-issuer third parties.

COMPLETE

Filled the ombudsperson role.
Developed the complaints handling protocol.
Developed standard operating procedures for the ombudsperson.

Source: White and Case Report, Page 116

Why it’s important: An independent ombudsperson and complaints handling protocol will facilitate handling concerns in an unbiased and timely manner.

Provide additional documented guidance to ensure that analysts understand that business activity, within the regions linked to the Israeli-Palestinian conflict, does not give rise to a presumption that there is a human rights concern.

COMPLETE

Reassessed all companies that had been associated with involvement in a controversy related to the Israeli-Palestinian conflict area (IPCA). As part of those reassessments, the analysts re-evaluated the link between the companies’ activities and potential human rights violations in the context of the IPCA. (After conducting this review, combined with the changes resulting from removal of certain sources, analysts removed 79 of 109 IPCA-related incidents from controversies. Consequently, more than half of the IPCA controversies were removed altogether. This process included the removal of older controversies and affected primarily Category 1 and Category 2 with minimal impact on ratings outcomes.)
Researched assumptions and guidance have been enhanced to ensure consistent research outcomes as they relate to the Israeli-Palestinian conflict area.

Source: Press Release, Additional Commitments #1

Why it’s important: The Israeli-Palestinian conflict is complex and multi-faceted. Morningstar and Sustainalytics do not seek to take a political viewpoint in the conflict. Our goal is to produce research and data that helps investors understand financial risk related to their investments. Additional documented guidance will provide additional support on which analysts base their work.

What is an "incident"? An incident is a record of an activity by a company that may have unintended and/or undesired negative impacts on the environment, society or other stakeholders. An incident is tied to one company, one location and one date. The corporate “activity” creating a negative impact can be a single incident (e.g. a mine collapse) or an ongoing activity (the use of child labor in factories).

Seek advice regarding assumptions, sources, and use of language from independent, recognized experts in international law, including international human rights law, who are well-versed in the policy, security, history, and religious and legal context of the Israeli-Palestinian dispute.

COMPLETE

Michael A. Newton, the Director of International Legal Studies Program at Vanderbilt University and Alejandro Daniel Wolff, a retired American diplomat who served as U.S. Ambassador and Deputy Permanent Representative to the United Nation reviewed our assumptions, sources and language used in relevant rating practices and engaged with our analytical teams over several months.
They delivered a comprehensive report containing seven recommendations, which Morningstar made available to the public in February 2024.
The experts will deliver a final report after reviewing Morningstar’s implementation of those recommendations.

Source: Press Release, Additional Commitment #5

Why it’s important: Given the complex history of the Israeli-Palestinian conflict, additional review of our processes by independent, third-party experts provided outside perspective to make our research stronger and prohibit reference to countries not directly implicated in a particular event or incident in narrative descriptions or rating justifications.

Michael A. Newton

(Biography)

Alejandro Daniel Wolff

(Biography)

Refine procedures for assessing the materiality and impact of incident reporting to minimize the risk of bias.

Expected Completion Date: Q4 2024

NO LONGER APPLICABLE*

Source: Independent Experts Initial Report, Recommendation #3, page 23

Please refer to the top of the page for the latest update on Recommendations #2-4 of the Independent Experts Initial Report.

Why does this matter? By its nature, Controversies Research identifies companies involved in incidents that may pose a business or reputation risk. This often requires consideration of risks created by attention from credible media and third parties. The experts recommended that Sustainalytics refine its approach to clarify the link between a firm’s business activities and documented human rights impacts that may be reported by media or third parties, rooted in relevant laws. They also recommended that Sustainalytics enhance its procedures for assessing the underlying facts contained in media reports.

Incorporate additional legal expertise in Sustainalytics operations and appoint a designated legal expert to advise analysts and the Oversight Committees of relevant human rights law, legal aspects of corporate human rights compliance, and jurisprudence.

COMPLETE*

Source: Independent Experts Initial Report, Recommendation #5, page 33

Why does this matter? The human rights and legal landscape are complex and constantly changing. Prevailing legal and regulatory positions frequently change, there are disparate treaty regimes, and the debates among governments are always evolving. The experts recommended Morningstar incorporate additional legal expertise in this regard into Sustainalytics’ operations under the authority of the Chief Legal Officer.

Prohibit reference to countries not directly implicated in a particular event or incident in narrative descriptions or rating justifications.

COMPLETE*

Updated guidance document for analysts accordingly.

Source: Independent Experts Initial Report, Recommendation #6, page 34

Why does this matter? Sustainalytics analysts provide written reports that articulate their rating rationale and provide context to the reader. The experts recommended that analysts avoid reference to countries not directly implicated in events or incidents.

Enhance guidance and quality oversight to ensure consistency and accuracy of ratings assumptions and language within and across Sustainalytics product lines.

COMPLETE*

Resolved contradictions between the numerical scores and narrative descriptors in our Controversies Research reports.

Source: Independent Experts Initial Report, Recommendation #7, page 35

Why does this matter? The experts recommended guidance and oversight to promote alignment between the language analysts use to describe risks and the way the methodology describes the risk associated with the various Controversy Rating levels, such as low (Category 1), moderate (Category 2), significant (Category 3), high (Category 4), and severe (Category 5).

Embrace Transparency

Clearly state underlying assumptions and review language in Sustainalytics reports.

Promote accuracy and protect transparency and objectivity of Sustainalytics sources.

Hone approach to media and other sources for research into companies’ involvement in controversies.

Mandate that Controversy Ratings be based on defined human rights violations, including enhancement of internal Sustainalytics processes.

Adopt appropriate guidance related to the “Society—Human Rights” event indicator.

Maintain Consistency

Consolidate methodology for all Sustainalytics products under a unified, metrics-driven methodology department.

Develop a style guide and research guidance on issues related to the Israeli-Palestinian conflict areas.

Eliminate the Human Rights Radar product.

Eliminate bespoke research.

Use geographic names (e.g., West Bank, East Jerusalem) in relevant regions, rather than terms such as “Occupied Palestinian Territory” or “occupied territory.”

Provide ongoing anti-bias and antisemitism training to research staff, including analysts, to continually work toward a goal of not having anti-Israel bias in sources and terminology.

Bolster in-house expertise with staff members focused on human rights and conflict zones.

Repeal the “Occupied Territories/Disputed Regions” Controversies Research incident type along with accompanying guidance.

Ensure Objectivity

Establish appropriate screening mechanisms between engagement services and ratings decisions.

Retain an ombudsperson responsible for responding to external inquiries from non-client, non-issuer third parties.

Provide additional documented guidance to ensure that analysts understand that business activity, within the regions linked to the Israeli-Palestinian conflict, does not give rise to a presumption that there is a human rights concern.

Seek advice regarding assumptions, sources, and use of language from independent, recognized experts in international law, including international human rights law, who are well-versed in the policy, security, history, and religious and legal context of the Israeli-Palestinian dispute.

Refine procedures for assessing the materiality and impact of incident reporting to minimize the risk of bias.

Incorporate additional legal expertise in Sustainalytics operations and appoint a designated legal expert to advise analysts and the Oversight Committees of relevant human rights law, legal aspects of corporate human rights compliance, and jurisprudence.

Prohibit reference to countries not directly implicated in a particular event or incident in narrative descriptions or rating justifications.

Enhance guidance and quality oversight to ensure consistency and accuracy of ratings assumptions and language within and across Sustainalytics product lines.

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