Recent announcements about DEI initiatives in the US may have no effect on the ESG risk assessment of companies.
However, some companies may see an increase in their human capital risk scores, particularly those in sectors where human capital is highly material, such as technology firms. This could lead to a few points’ increase in some companies’ overall ESG risk scores.
In a new note, Sustainalytics observes that investors may be concerned about the broader implications of the current rollback of DEI initiatives if the current trend towards reducing efforts in other ESG areas, such as carbon emissions and climate risk reporting,.
The US Securities and Exchange Commission (SEC) has indicated that it will not enforce its 2024 Climate Rule requiring disclosure related to material climate risks. Additionally, new guidance has made ESG engagement harder and potentially limiting investors’ ability to request ESG information and influence companies.
Many US companies, including Meta, McDonald’s, Walmart, Bank of America, and BlackRock, have rolled back their diversity, equity, and inclusion (DEI) initiatives, raising concerns among investors about the potential impact on corporate ESG risks and the broader implications.
Most companies have cited an evolving legal and political landscape as the reason for scaling back their DEI initiatives, with a January 2025 executive order from US President Donald Trump directing attorneys general and relevant federal agencies to scrutinize DEI programs at private companies.
Despite the increased threat of litigation, several companies, including Costco, Delta Air Lines, and Apple, have publicly reaffirmed and defended their DEI policies and programs.
Sustainalytics observed three changes in sustainability. These include significant adjustments to business plans, removal of diversity targets, reorientation of teams, programs, and policies, and softer language.
Sustainalytics’ ESG Risk Rating framework assesses workforce diversity by considering Defined Ethical Initiatives (DEI) initiatives.
These initiatives, including diversity programs, discrimination policies, gender pay equality programs, and gender pay disclosure, represent about 40% of a company’s human capital management assessment. The methodology uses publicly available sources to capture initiatives relevant to managing ESG risks and ensures a significant impact on overall ratings.
In conclusion, while the impact on ESG risk ratings should remain limited overall, it is important to consider the potential impact on stakeholders involved, such as employees, suppliers, and society.
