June 2, 2022

To our Morningstar community,

Morningstar owes its success to the trust investors place in the data, research, and analytics we provide. We engender that trust by placing our principles—independence, transparency, and long-term thinking—front and center in what we do. We spend every day thinking not just about how we can spur Morningstar’s growth and create value for stakeholders, but about how we can reinforce our commitment to the principles that have led us on our successful mission.

Soon after we acquired ESG ratings and research firm Sustainalytics, we began receiving questions about whether some of Sustainalytics’ research practices reflected bias against companies operating in Israel, including charges that Morningstar and Sustainalytics supported the Boycott, Divestment, Sanctions (BDS) movement. To address those questions, we conducted an internal investigation and published our findings in March 2021.

We stated then—and reaffirm today—that neither Morningstar nor Sustainalytics supports the anti-Israel BDS campaign. However, in retrospect, our initial review was overly dismissive of the serious bias concerns raised by the organization JLens, the Illinois Investment Policy Board (IIPB), and other entities. We consider bias unacceptable in any form and concluded that the concerns warranted a thorough, independent review.

For that reason, we formed a working group led by independent directors Steve Kaplan and Gail Landis of our Board of Directors to oversee an investigation. In October 2021, the working group, which also included Managing Director Don Phillips and Chief Ratings Officer Jeffrey Ptak, engaged the outside law firm White & Case LLP to conduct that investigation. White & Case interviewed more than 40 employees and external parties while reviewing around 140,000 Sustainalytics documents, client-facing reports, and other materials.

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.

In summary, White & Case found:

• 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.

Based on these findings, White & Case made various recommendations in the report, which we have decided to adopt in full. 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.

Along with Sustainalytics President Bob Mann, we have shared these findings and recommendations with community organizations and colleagues who expressed interest in this topic. We have greatly appreciated their candid feedback and thoughtful perspective, and given what we have learned, we want to thank JLens, the Illinois Investment Policy Board, and other interested parties for focusing our attention on these issues. We hope this dialogue, coupled with the actions we have taken to investigate this matter and adjust our policies, procedures, and products, underscores our commitment to conducting research in a way that upholds our principles.

We acquired Sustainalytics because we thought the firm shared our values and commitment to delivering objective and insightful investment research and analysis to investors. Our experience since that time has only further reinforced our original conviction. Bob and his team work tirelessly to conduct rigorous, incisive analysis while innovating to keep up with the market’s rapidly evolving demands. It is far from an easy task, as Sustainalytics is often called on to assess controversial or ethically ambiguous matters. But time and again we’ve been impressed by the seriousness and good faith with which our Sustainalytics colleagues meet these challenges. It makes us proud to work alongside them.

Despite our best efforts, if investors have reason to question whether our research and ratings uphold the principles of independence, transparency, and long-term thinking we aspire to, then we can’t fulfill our mission. That’s why we’re taking the actions we’re taking. By taking these steps, we believe we can build on Sustainalytics’ abundant strengths and ensure its work resonates even more with the investors we serve.

As always, we value contrarian views and welcome your feedback anytime you see an opportunity to do better for investors.

Sincerely,