It helps to have a long-term viewpoint on occasion. Sustainability professionals should be long term by definition, but we can be just as guilty of being blown by the fickle winds of fate as the next person.
Nowhere is this more obvious than in the ongoing debate over Diversity, Equity and Inclusion (DEI).
Also read: AGM ballots: An unlikely DEI battleground
The trigger, as for many ructions in the fabric of geopolitical consensus, is the re-election of Donald Trump. More precisely, the assent to the Presidency of Trump 2.0, totally unconcerned with doing anything in line with established norms and paying scant regard to checks and balances.
In 2016, Trump sought to play into the legitimacy of the party he had come to represent by appointing serious people. But there are no Rex Tillerson’s in this administration – and don’t we know it, by the flood of executive orders and the ignition of a global trade war.
While we are yet to see the full effect of these declarations, and court cases aplenty are in the offing, we can see the impact on the corporate world in one very high-profile area – that of the shift in stance on DEI.
Quick off the ground
This all began with executive orders which, among other things, terminated diversity, equity and inclusion offices, positions and programmes in the federal government; terminated DEI-related grants and contracts; and told those providing contracted services for the state to contractually certify that they “do not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws”.
These orders also directly challenged public corporations on their own DEI programmes, should they wish to remain viable for state-level contracts.
The response was quick from many – especially those with a vested interest in keeping the administration onside. The media was awash with talk of rollbacks, walkbacks, retrenchment and retreat. No sooner had the companies made their stance clear than the proxy voting agencies followed suit – with one withdrawing all elements of diversity from its default voting policies, and another making the policy more clearly ‘opt-in’. Anti-ESG shareholder resolutions calling out ‘wasteful’ and ‘immoral’ DEI programmes were set to have a field day. Surely the post-George Floyd/MeToo consensus was in tatters?
The truth is more nuanced and more hopeful. The first point of correction to make here is that the moves do not reflect public opinion or even the legal structure in the US, where anti-discrimination laws and the right to equality of opportunity are enshrined in law and constitution.
The second point is that for every company that backed down, another stood up to be counted. For every Target there was Costco. And there is emerging evidence that the backtrackers in the retail space are being hurt by falling footfall and online activity as brand boycotts begin.
The third is that the anti-DEI shareholder proposals that have come to the ballot have been soundly defeated, while pro-DEI efforts have retained support at similar levels.
The business case for diversity
So is that all there is to say? Is it all just a politically-driven culture war we should ignore? Well, not quite. There is another strand of much more rigorous, good-faith questioning of the motivations for corporate DEI which bears our attention.
Several studies have been used and re-used to make the business case for diversity in particular. These studies are often presented as proof that increasing specific aspects of demographic diversity is good for the bottom line, in some chain of causation. But, although we might not like the answers, it’s important to pay attention to an honest critique of these studies, characterised as they often are by confirmation bias.
Simply put, better diversity of thought is what we want at the board level, not necessarily demographic diversity. High demographic diversity might bring that diversity of thought, but it’s not a given. There are many very good reasons to pursue gender diversity equality, for example, but it’s far from clear that doing so results automatically – as some have suggested – in outperformance.
Thankfully, a reckoning is coming here. In November 2024, Professor Alex Edmans was invited to lead a groundbreaking study into how cognitive diversity impacts team performance in the investment industry.
According to its website: “The Diversity Project has commissioned this work following criticism of existing studies claiming a linkage between demographic diversity and financial performance. Given questions raised over both the robustness of the methodologies and the replicability of these studies’ results, the Diversity Project decided to re-examine the ‘business case’ for diversity, focusing on diversity of thought. Specifically, there is very limited, if any, academic work exploring the linkage between cognitive diversity and investment performance.”
Diversity, equity and inclusion are laudable goals, but we need to be cautious about making a clear link to improved demographic diversity and better financial performance. To do so goes right to the foundations of this work, and makes them stronger. And we need to be sure of our footing if we are to resist the waves of anti-DEI coming from the US.
But, at the end of the day, any ESG-related initiative that is based on sound reasoning and material impact will survive, because investing like non-financial factors can affect the valuations of investable assets is just plain, common sense.
