Regulators and Companies Lining Up Against DEI, ESG Programs

It wasn’t long ago that “DEI” and “ESG” were standard acronyms in the corporate lexicon. Major institutional investors prodded companies to commit to sustainability initiatives. Brand names amplified messages to the public about their dedication to diversity of all sorts.

Today, that positioning has all but vanished in what seems like an instant. Companies are jettisoning diversity, equity and inclusion programs and environmental, social and governance initiatives as quickly as they once embraced them. Evidence of the shift is showing up in corporate proxy statements across industries, as DEI and ESG are disappearing as considerations for executive compensation plans and the composition of boards of directors.

Consumer goods manufacturer Procter & Gamble disclosed in an August filing with the Securities and Exchange Commission that it had removed an ESG metric from its compensation structure. According to the company, the ESG consideration “served its purpose by solidifying the integration of environmental, social, and governance priorities” into Procter & Gamble’s mission. Mastercard made a similar disclosure in April, stating that removing an ESG factor from its compensation plans “reflects the significant progress that has been made since 2021 in the areas of greenhouse gas emissions, financial inclusion and gender pay parity.” Salesforce dropped ESG from its compensation metrics a year earlier than that, disclosing it was limiting its definition of company performance to “pre-established financial performance metrics and targets.”

Recent decisions by Goldman Sachs offer insight into the consensus in the investing community about corporate America’s retrenchment. Last year, the banking powerhouse dropped its mandate that companies must have diverse boards of directors for Goldman to take them public. News then broke this month that Goldman was eliminating its own requirements to consider factors such as race, gender and sexual orientation when evaluating candidates to add to its board.

For corporate activists hoping to turn the tide back in favor of sustainability and similar issues, the regulatory environment appears equally unaccommodating. The SEC recently issued guidance indicating it opposes publishing so-called exempt solicitations from shareholders who don’t own at least $5 million worth of a company’s stock. That effectively bars smaller activist investors from using one of their favored strategies for promoting their agendas for corporations.

Additionally, the SEC’s Division of Corporation Finance announced in November that it intended to stop issuing substantive responses to most requests from companies for informal guidance when deciding whether to exclude shareholder proposals from proxy ballots. Instead, the agency has taken the position that companies should determine on their own if they have a “reasonable basis” for nixing the proposals. The guidance appears most likely to affect DEI- and ESG-related proposals and counterproposals.

In other words, activist investors will find it harder to put their proposals up for proxy votes thanks to new SEC policies. Moreover, they face new limits on how they can lobby for those proposals when they do end up on proxy statements.

Given the rollbacks on existing programs, it does seem as though the deck has been stacked against DEI/ESG advocates. In response, some activists are taking their cases to court. PepsiCo, for instance, has been sued for excluding an animal-welfare proposal from its proxy ballot. Meanwhile, New York City pension funds have sued AT&T over the exclusion of a workforce diversity reporting proposal. (It’s worth noting that in a letter to SEC Chair Paul Atkins, the Council of Institutional Investors warned that companies excluding shareholder proposals under the agency’s new framework could face vote-no campaigns and litigation.)

Opponents of DEI and ESG programs have seemingly gained the upper hand in boardrooms for the time being. They may find those fights harder to win in courtrooms, though.

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