The decisions by TIAA-CREF, the pension fund managers, to divest $73 million in Caterpillar stock from a socially-responsible investment fund and by MSCI, a Wall Street investment service firm, to delist Caterpillar from its index of “socially responsible” companies, have hit a giant political nerve. Palestinian solidarity groups are claiming the divestment as a victory– because Caterpillar has long been a target of divestment initiatives. Meantime, pro-Israel groups are spinning the decision their way, saying that Caterpillar got axed for reasons unrelated to the occupation.
Over the course of several interviews with people in a position to know, it became clear to us today that Caterpillar’s relationship to the Israeli occupation was an important consideration in these landmark decisions.
First, the Israel supporters. The Israel Action Network, a $6 million taskforce established by the Jewish Federations of North America to fight the BDS movement, jumped on the news early today, claiming that the TIAA-CREF decision had nothing to do with Israel, but was over labor issues.
From the press release “Here We Go Again…BDS Movement Tells Lies and Creates Pretend ‘Victories’”:
The Israel Action Network called the idea that TIAA-CREF had divested from Caterpillar because of that company’s sales to Israel simply a lie. Yesterday Boycott, Divestment, Sanctions (BDS) groups trumpeted TIAA-CREF’s move as a ‘victory’ for their movement. In actuality, TIAA-CREF’s fund, which follows the MSCI Socially Responsible Investment index, removed Caterpillar because of a Canadian labor dispute.
It is true that TIAA-CREF’s decision followed MSCI’s. The pension fund giant invests its Social Choice fund using a “screen” supplied by MSCI. MSCI dropped Caterpillar from its World ESG Index (pdf) in March during a routine review process in which it reportedly added 90 socially-responsible companies and stripped 100 that had fallen down. We have it from a reliable source that TIAA-CREF divested from Caterpillar once Caterpillar was delisted from the MSCI World ESG Index.
But why did MSCI drop Caterpillar?
One financial services consultant at TIAA-CREF explained, “One of the reasons is that they sell mechanized bulldozers to the Israeli or Palestinian army, I’m not sure which,” when we called today asking about the action. “That’s the reason Caterpillar was taken down.” Simple facts aside, this would seem to implicate the Israeli occupation in the firm’s decision.
Another source was more guarded, saying that MSCI made this decision about Caterpillar based on “environmental, social, and governance” performance, including issues of employee safety and toxic releases.
Calls to MSCI confirmed that both explanations were true.
An official with MSCI confirmed that Caterpillar was removed from the MSCI World ESG Index in March when the firm fell below the Environment, Social and Governance (ESG) rating threshold . A white paper of the Index Methodology (pdf), explains the process:
MSCI ESG research framework generates an analysis and rating of each company’s management of its environmental, social and governance performance. The rating criteria address a company’s ESG performance in the context of five categories, covering key corporate stakeholders.
- Environment – rate a company’s management of its environmental challenges, including its effort to reduce or offset the impacts of its products and operations.
- Community and Society – measure how well a company manages its impact on the communities where it operates, including its treatment of local population, its handling of human rights issues and its commitment to philanthropic activities.
- Employees and Supply Chain – assess a company’s record of managing employees, contractors and suppliers. Issues of particular interest include labor-management relations, anti-discrimination policies and practices, employee safety, and the labor rights of workers throughout the company’s supply chain.
- Customers – measure the quality and safety record of a company’s products, its marketing practices, and any involvement in regulatory or anti-competitive controversies.
- Governance and Ethics – address a company’s investor relations and management practices, including company sustainability reporting, board accountability and business ethics policies and practices.
MSCI ESG Research applies its proprietary ESG rating framework to each company by selecting the ESG rating criteria most relevant to each firm. To evaluate a company, analysts review more than 500 data points and score more than 100 indicators. MSCI ESG Research expresses a company’s ESG performance as a numerical score and on a letter-based rating scale. The ratings fall on a nine-point scale from ‘AAA’to ‘C’. . .
At the Annual Index Review, the composition of the MSCI Global ESG Indices is reassessed in order to target 50% free float-adjusted cumulative market capitalization of each sector of the Parent Index. For each sector, the constituents of the Parent Index are first ranked based on the company level ESG Score and then by decreasing free float adjusted market capitalization . . . Any existing index constituent whose rating falls to ‘CCC’ or lower is deleted from the MSCI Global ESG Indices.
Caterpillar was dropped during a quarterly review this spring when its rating fell below ‘CCC.’ An MSCI official confirmed that Caterpillar’s labor troubles in Canada was the final straw in pushing its rating below the acceptable threshold for the fund, and added that the firm’s relationship to the Israeli occupation was relevant as well, explaining it was “a consideration, but not the determining factor.”
To put it another way, Caterpillar’s role in the Israeli occupation had weakened the firm’s rating to the point that addition labor troubles put them beyond the pale.
It is worth noting that the Jewish Telegraphic Agency (which beat us to the punch on the MSCI decision) referenced the killing of Rachel Corrie in 2003 by a Caterpillar bulldozer operated by the Israeli army in Gaza.
the [MSCI] official acknowledged several factors played into [Caterpillar's] already relatively low rating, including the association of Caterpillar with Israeli army practices in the occupied territories. The death in 2003 of Rachel Corrie, an American pro-Palestinian activist, while she was protesting such a demolition in Gaza, helped spur the BDS movement forward.
If Rachel Corrie’s killing is widely discussed in the United States as a factor in investment decisions, then BDS supporters are surely right when they call this a watershed moment.