Sustainalytics: Amplifying BDS through “Business and Human Rights” Rhetoric
Based in the Netherlands, Sustainalytics bills itself as a “leading independent ESG (environmental, social and corporate governance) and corporate governance, research, ratings, and analytics firm.” Through its ratings and reports on companies, the firm promotes discriminatory BDS (boycott, divestment, sanctions) campaigns against Israeli companies and businesses operating in Israel and the West Bank.
Sustainalytics provides ESG data to several prominent financial data platforms, including Yahoo! Finance and Bloomberg.
Partners seeking to divest from Israeli-linked companies
Before being acquired by Morningstar in 2020, Sustainalytics was owned by PGGM, a Dutch asset manager that divested from five Israeli banks in 2014, alleging that they financed construction of settlements in the West Bank and that this was “considered illegal under international law.”1
Similarly, PFA Pension – Denmark’s largest investment fund and a Sustainalytics client2 – divested from the German firm HeidelbergCement in 2015, alleging involvement in “illegal activities in relation to the occupation of the West Bank.” PFA Pension also blacklisted the Israeli company Elbit Systems, accusing it of a “breach of fundamental human rights.” PKA, another Danish pension fund that has relied on Sustainalytics data, had, as of December 2020, blacklisted at least five Israeli firms and several other companies with operations in Israel.
In 2019, Sustainalytics acquired GES International, a provider of “engagement, screening and fiduciary voting services to institutional investors.” GES provided risk assessment services to investors considering investing in companies based in Israel and relied on BDS-related source material in its analysis. For example, its analysis of DXC Technologies and Hewlett Packard in a report prepared for the Glasgow City Council in 2018 is based almost entirely on a report from Who Profits – a well-known pro-BDS group that provides target companies for BDS activists. GES was also part of a reference group for a 2011 report on corporate social responsibility in high conflict areas prepared by the Swedish group Diakonia, which echoed false UN claims that international firms engaged in business activity in Israeli settlements automatically violate international law.
Sustainalytics BDS ratings after Morningstar acquisition
According to a May 2020 Jerusalem Post article, an audit of five investment firms found that Sustainalytics had the most anti-Israel bias of the five, consistently tagging Israeli companies with more negative controversy ratings (e.g. identifying supposedly damaging information surrounding the company). According to the same article, Sustainalytics profits from the sale of an Occupied Territories Involvement Report, which assigns similar controversy scores to companies based in the West Bank, Golan Heights, and Gaza. According to JLens, a Jewish investor network, Sustainalytics has been known to increase a company’s controversy score when it is targeted by BDS activists, thus granting unaccountable political activists influence over a company’s score.
The Jerusalem Post’s article also maintains that the firm frequently cites BDS source material in its “analyst commentary,” without presenting counterpoints.
While Sustainalytics’ analyses are largely available only to paying customers, some insight can be gained from quarterly reports prepared for customers, which provide data and updates on the engagement status of the companies it rates. From these reports, it is clear that when discussing companies operating in Israel and the West Bank, the company simply repeats claims from pro-BDS sources without any evidence of independent verification or analysis. For example:
- In a 2020 quarterly report prepared for Erste Asset Management, Sustainalytics directly references Who Profits, as noted, a political advocacy group that promotes BDS efforts, in its analysis of Caterpillar. Citing Who Profits, Sustainalytics writes that the construction company has been “heavily criticized for its sales to Israel” and that its equipment has been used in “demolition works in the Occupied Palestinian Territories,” without examples or sources. The report ignores the fact that Caterpillar equipment is sold to Israel via the US Department of Defense’s Foreign Military Financing program and is part of US military aid to Israel.
- In the same report, echoing an ongoing BDS campaign, Sustainalytics accuses five Israeli banks – Hapoalim, Leumi, First International, Discount, and Mizrahi Tefachot – of “financing of illegal settlements in occupied territories” and urges them to “cease providing financial support to activities that are linked to violations of the Fourth Geneva Convention.” The report provides no information as to what the alleged “financing of illegal settlements” entails. In recent years, Human Rights Watch has targeted these banks, using language similar to that used by Sustainalytics and also based on allegations by biased, pro-BDS groups such as Who Profits and DanWatch.
- In a 2019 quarterly report, Sustainalytics claims that the automobile company Volvo was “involved in the delivery of construction equipment that has been used by the Israeli military in the demolition of houses and the construction of checkpoints in the occupied territories,” again almost directly echoing Who Profits allegations about the same company. Notably, Sustainalytics does not elaborate in its report on the manner in which Volvo was “involved” in said activities, nor does it provide sources or examples for this claim, or any analysis as to how such actions would constitute violations of human rights.
- Sustainalytics also calls on foreign firms with bases of operation in Israel such as CEMEX and HeidelbergCement to “demonstrate that [their] operations on Occupied Palestinian Territory are in compliance with international humanitarian law.” Yet, international humanitarian law (IHL) is only binding upon States. Private companies are not bound by, nor are obligated to comply with IHL. Systainalytics ignores this key legal principle as well as multiple court cases in the US, Canada, France, the UK, and elsewhere, reiterating that companies do not have duties under IHL. HeidelbergCement has been accused by the BDS movement of complicity in the “pillage of Palestinian natural resources,” while CEMEX in 2017 was the target of a highly publicized BDS campaign branded #StopCemex, which asserted that “by having factories in illegal Israeli settlements built on stole Palestinian land…Cemex is profiting from and enabling Israel’s regime of occupation, land theft, and apartheid.”
Notably, in the quarterly reports, Sustainalytics mentions IHL and the Fourth Geneva Convention only in the context of Israeli and Israel-based firms, despite its inclusion in the same report of several other companies operating in armed conflict zones and occupied territory, such as Sudan, Myanmar, and Western Sahara. In addition, Sustainalytics omits key information, notably, that house demolitions and checkpoints are not illegal per se under international law. With regards to alleged “financing of illegal settlements”, the reports do not reference relevant Israeli domestic anti-discrimination and banking laws which Israeli banks are required to follow.
In January 2021, JLens placed Morningstar, Sustainalytics’ parent company, on its “do not invest” list due to Sustainalytics’ continued support for BDS campaigns and discrimination against Israeli firms, citing Sustainalytics’ practice of “elevating the controversy rating of BDS-targeted companies, which in turn raises those companies’ overall ESG risk ratings.”
“Disengagement” from Israeli and Israel-based companies
Sustainalytics maintains a regularly updated “disengagement list” which is comprised of firms for whom other engagement options are deemed “ineffective” after a period of “low performance.” While the consequences for a company’s inclusion on the “disengagement list” are not explicitly specified by Sustainalytics, a senior Sustainalytics executive stated in a 2019 interview that a disengage status is “an indication that the company may not be suitable for investors’ portfolios.”
In its Erste Asset Management report for the first quarter of 2020, Sustainalytic’s “disengage list” consisted of four firms in Israel and the Palestinian territories, more than half of the designees for the Africa and Middle East region. Several of these have been subject to extensively publicized BDS campaigns:
- Elbit Systems – In 2018, the international bank HSBC divested from Elbit as a result of an aggressive BDS campaign pressuring banks to divest of companies “profiting from the Israeli occupation.”
- Israel Aerospace Industries – In 2012, Israel Aerospace Industries, along with Elbit, was forced to pull out of a major international aerospace industry convention in France following a campaign led by a local BDS group.
- Jerusalem Economy Ltd – Who Profits maintains a file on Jerusalem Economy due to its holdings in the “occupied Syrian Golan” and the “occupied West Bank.”
- Motorola Solutions – Motorola has been targeted by the BDS movement for providing surveillance equipment to Israeli settlements. In 2019, under BDS pressure, the US Episcopal Church divested completely from Motorola.
Human Rights Radar
Alongside its ratings, Sustainalytics also maintains a global “Human Rights Radar,” which seeks to “identify and understand companies’ involvement in countries and territories where there is a high risk of human rights violations” and to “provide information on companies that are active in countries where the greatest human rights violations are taking place.” This is done, according to Sustainalytics, by “systematic and comprehensive data collection methods, including collecting and processing thousands of news sources on a daily basis.” Notably, data collected for the Human Rights Radar is based solely on client demand, featuring only three disputed territories: “Palestine”, Western Sahara, and Tibet. Areas such as Northern Cyprus, Nagorno-Karabakh, and Crimea are excluded.
As noted above, the vast majority of Sustainalytics’ analysis is available only to paying customers. According to the company, ESG risk ratings are calculated on a basis of “risk exposure” and “risk management,” though it is unclear how either of those two metrics are calculated. The methodology used for the Human Rights Radar is equally opaque – while certain criteria are disclosed, such as the nature, impact and extent of involvement of a company in alleged human rights violations, the method used to quantify these criteria is nontransparent and unclearly defined.
According to the company, Sustainalytics’ methodology for risk assessment is based primarily on media coverage. Such a bias towards media sources, absent analysis of the underlying legal and business issues, is an unbalanced formula that provides undue influence for political activists.
Due to this imbalance, the large volume of BDS campaigns and BDS-related material appearing in media are given undue influence in Sustainalytics’ analysis. Such an approach leads to ratings unduly influenced by interested third parties, particularly in sensitive, opaque metrics such as the “controversy rating.”
Use of BDS materials in ESG assessments
While it is reasonable to inform potential investors interested in a company’s reputation that it is targeted by pro-BDS activists, such groups should not be quoted as the basis of analysis of a company’s performance, legal status, or behavior. Any reference to materials produced by BDS activists, the Sustainalytics must disclose that they originate with partisan BDS campaigners. Sustainalytics must base risk assessments on verifiable facts and legal expertise without making use of politicized source material, such as BDS campaigns. It should not provide equal weight when devising rankings to BDS materials as it would to credible news and analysis.
The adoption of such material without due diligence leads to inaccurate and myopic research, the politicization of risk assessment and to the discrimination of Israeli companies based on a false narrative of human rights violations.
- In 2019, PGGM reversed its decision, removing the Israeli banks from its blacklist.
- According to its 2019 annual report, “We screen all of our listed investments in order to identify potentially problematic issues among the companies in our investment portfolio. The screening is done in co-operation with Sustainalytics.”; See 2019 Annual Report, p.24-25, https://english.pfa.dk/-/media/pfa-v2/english/documents/about-pfa/financial-information/annual-reports/pfa-holding-annual-report-2019.pdf?la=en&hash=56D11654C9C2EEE783E7C147B23387FF355E49C9