FTM: Manipulation of ESG standards, a major risk for European pension funds

Investments considered ethical or socially responsible, promoted by many European pension funds, could indirectly support serious human rights abuses in Gaza and the West Bank, according to an investigation by the journalistic platform Follow the Money (FTM). According to the cited source, this situation occurs in the context in which two of the most influential consulting firms in the world - Morningstar Sustainalytics and MSCI - have stopped reporting on abuses committed in the occupied Palestinian territories, as a result of political pressure from pro-Israel lobby groups in the United States.

The investigation shows that, for example, the company Caterpillar, known for supplying bulldozers used by the Israeli army in the demolition of Palestinian homes, no longer appears in ESG (environment, social, governance) databases as having negative implications for human rights. In fact, according to the new assessments, Caterpillar received a perfect score on this chapter (10 out of 10), despite its repeated documentation of its role in actions that violate international law. The investigation shows that, until 2023, MSCI reports mentioned Caterpillar's involvement in home demolitions, crop destruction and the use of its equipment in military actions, but by August 2024, the MSCI report no longer contained any reference to Israel or Palestine, and the company received the maximum mark for respect for human rights. In the meantime, the conflict in Gaza has intensified, and international courts have invoked possible violations of the Genocide Convention. The cited source also claims that the change in methodologies of the two consulting companies particularly affects European mutual funds, which manage about 84% of the total global investments considered ethical, a market valued at about three trillion euros. In this context, retirees and investors concerned with financial ethics may find themselves in the paradoxical position of supporting, through their financial choices, the very type of behavior they are trying to avoid.

According to internal documents reviewed by Follow the Money and other European partner publications, MSCI has deliberately changed its reporting criteria, removing mentions of the Israeli-Palestinian conflict from its ratings. Morningstar Sustainalytics has publicly confirmed that it no longer uses data from the UN Human Rights Council and has replaced the term "occupied Palestinian territories" with more neutral terms such as "West Bank" or "East Jerusalem". It has also excluded the Israeli-Palestinian conflict from its ESG analysis.

Critics of this change argue that the deliberate disregard for realities on the ground undermines trust in the entire ESG system. Tara Van Ho, a lecturer in international law at the University of Essex, told the source that assessing human rights compliance is a matter of law, not opinion, and that rating agencies have sufficient objective sources to document situations in conflict zones.

The problem is not an abstract one. European pension funds such as PME in the Netherlands or KLP in Norway have begun to look for alternative sources of information, criticizing the fact that they can no longer comply with OECD standards on due diligence in conflict zones. KLP has already decided to exclude Caterpillar from its portfolio, and fund representatives have described the lack of transparency of consultants as a "breach of trust".

This development reflects a broader trend: Europe's dependence on American ESG data providers, which can be influenced by domestic US political dynamics. In a climate marked by hostility towards progressive movements (generically called "woke"), topics such as human rights or environmental protection become political targets. There is a risk that this pressure will spread to other areas of interest, such as the conflict in Ukraine or corruption.

In this context, experts warn that Europe must develop its own capacities to assess sustainability and respect for fundamental rights, because at stake is not only investment ethics, but also the credibility of the institutions that manage the savings of future retirees, as well as the democratic values on which the European Union is founded.

ESG, manipulation, standards, pension funds, investments