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Eighteen State Attorneys General Join Missouri Probe into Morningstar Inc.'s Use of ESG Ratings
Practical Law Legal Update w-036-7060 (Approx. 5 pages)
Eighteen State Attorneys General Join Missouri Probe into Morningstar Inc.'s Use of ESG Ratings
by Practical Law Commercial Transactions
| Published on 24 Aug 2022 • Missouri, USA (National/Federal) |
A group of 18 state attorneys general joined Missouri's investigation into Morningstar, Inc. and its subsidiary, Sustainalytics, alleging unfair trade practices related to the use of environmental, social, and governance (ESG) ratings in financial products and the boycott, divestment, sanctions (BDS) movement targeting Israel.
On August 17, 2022, a group of 18 state attorneys general joined Missouri's ongoing investigation into Morningstar, Inc. and its subsidiary, Sustainalytics for alleged violations of consumer protection and anti-boycott laws related to environmental, social, and governance (ESG) ratings used in financial research products. Missouri's investigation stems from public reports that Morningstar subsidiary Sustainalytics's ESG risk ratings product, Human Rights Radar (HRR), contained what the letter described as "anti-Israel bias." In early June 2022, Morningstar stopped selling the product following an independent review that found HRR focused "disproportionately on the Israel/Palestinian conflict" relative to other high-risk regions.
Missouri's investigation began on July 26, 2022, when Attorney General Eric Schmitt sent investigative demands to Morningstar and Sustainalytics. When announcing the investigation, Missouri invited other attorneys general to join to widen the pool of resources available and share information.
The investigation alleges:
- Consumer fraud and unfair trade practice violations.
- Violation of state laws concerning boycott, divestment, sanctions (BDS). Under Missouri law, public entities shall not enter into certain public contracts with companies with ten employees or more that engage in boycotts against:
- goods or services from Israel;
- companies doing business in or with Israel or authorized, licensed, or organized under the laws of Israel; or
- persons or entities doing business in Israel;
Other states have similar anti-BDS laws, which have been the subject of controversy. On January 21, 2022, a federal court granted an injunction against enforcement of a similar Texas law on First Amendment grounds, but did not grant a statewide injunction (A & R Eng'g & Testing, Inc. v. City of Houston, (S.D. Tex. Jan. 28, 2022)).
Practical Implications
The investigation into Morningstar is only one of many challenges that some states are making against the use of ESG as an evaluation criteria by major financial institutions. Other examples include:
- A letter from a group of state attorneys general sent to BlackRock CEO Laurence Fink stating that the company's stated objectives violate the Sherman Antitrust Act and "multiple state laws." (Letter from Attorneys General to Laurence Fink, August 4, 2022.)
- A 2021 North Dakota law that prohibits the state Investment Board from making a "social investment" unless the board can demonstrate it would provide an equivalent or superior rate of return compared to an equivalent investment (N.D.C.C. § 21-10-08.1).
Counsel for companies with ESG frameworks or that use or sell ESG financial products should pay attention to this emerging movement targeting ESG at the state level.
For more information on ESG issues, see Practice Note, Environmental, Social, and Governance (ESG): Overview.
For toolkits containing Practical Law's ESG resources, see: