Investors are becoming increasingly concerned about the rollback of diversity, equity, and inclusion (DEI) initiatives, and are seeking to understand the potential impact on corporate ESG risks and its broader implications, according to the latest report published by Morningstar Sustainalytics.
In recent months, several high-profile US companies across a range of sectors, including Meta, McDonald’s, Walmart, Bank of America and BlackRock, have rolled back their DEI initiatives. Most companies cited an evolving legal and political landscape as the driver for scaling back their DEI initiatives; and more specifically, a January 2025 executive order from US President Donald Trump that directs attorneys general and relevant federal agencies to scrutinise DEI programs at private companies.
In contrast, several companies including Costco, Delta Air Lines, and Apple have publicly reaffirmed and defended their DEI policies and programs, with anti-DEI shareholder proposals overwhelmingly rejected.
Sustainalytics’ latest study – DEI Rollbacks: Impact on ESG Risk Ratings and Broader Implications for Investors – examines the potential impact that announced changes to DEI initiatives may have on corporates’ ESG Risk Rating, suggesting ways investors can evaluate the changes to discern whether they represent a material ESG risk, or merely a reframing of public disclosure on DEI.
Despite the potential impact of such DEI changes being “limited” due to its low level of financial materiality, investors should carefully consider the implications for their investments amid a potential wider rollback of broader ESG initiatives and values, such as carbon emissions and climate risk reporting, the report said.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, commented: “Diversity programs have become widespread within the business community, with more than 80% of the 20,000+ companies assessed by Sustainalytics having such initiatives in place. Consequently, recent DEI rollbacks have raised concerns among investors as many firms view diversity as beneficial for business.
“In the months ahead, investors will have the opportunity to closely examine the disclosure of DEI initiatives as companies have just started to update their corporate reporting. Investors may want to assess whether the perceived DEI rollback signals meaningful changes in corporate policy that could heighten ESG risks or just a reframing of public discourse on DEI.”
Key insights
Based on a review of media reports and corporate statements, Sustainalytics observed three types of changes: substantive changes to corporate initiatives or programs; reframing or repositioning existing policies; and discontinuation of DEI-adjacent initiatives.
Investors should not expect all reported rollbacks in DEI initiatives to have the same implications, the report noted. Some changes represent material shifts in corporate policy, potentially resulting in increased ESG risks, but others are just a reframing of public discourse on DEI.
Therefore, the report encourages investors to put DEI in context with respect to ESG risk. Given the relatively low weight of DEI in its ESG Risk Rating, Sustainalytics said it does not anticipate significant changes to overall ratings.
However, despite limited financial materiality, investors “may be concerned about broader implications”, including societal impacts and potential weakening of other ESG commitments.
A review of changes, specifically those related to material issues, may result in some companies seeing an increase in their human capital risk scores, particularly those in sectors where human capital is highly material, such as technology firms, the report’s authors warned. Consequently, this could lead to an increase in some companies’ overall ESG risk scores.
“While we anticipate the impact will be limited, even a small adjustment in a company’s ESG risk score could potentially move it into a different risk category,” the report concluded. “Perhaps more importantly, we could see more significant changes in ESG Risk Ratings if the current rollback of DEI initiatives in the US signals the start of a broader trend towards reducing efforts in other ESG areas, such as carbon emissions and climate risk reporting.”
In the context of recent SEC guidance on ESG engagement, and signals that it intends not to enforce its 2024 Climate Rule for risk disclosure, investors “will need to carefully consider the implications for their investments”.
