February 18, 2023 / VOLUME NO. 249

Diversity Washers Beware

Some publicly traded companies may talk a big game about diversity among their senior ranks, but their public statements don’t always reflect the reality on the ground. 

Companies that use a lot of lofty statements about diversity, equity and inclusion may be obscuring underwhelming action on those items, or lackluster financial performance, according to a recent academic working paper. Those so-called diversity washers tended to also earn higher scores from environmental, social and governance (ESG) ratings firms — attracting dollars from ESG-focused investors as a result.  

“We expect diversity washers are more likely to provide policies without targets, because they may want the appearance of good corporate citizenship without exerting the effort to achieve quantifiable targets,” the report’s authors write. 

"Diversity washing" is a play on the more commonly used term "greenwashing," which refers to the practice of a company spending time and money marketing itself to appear more environmentally friendly than it is. 

David Larcker, a professor at Stanford University Graduate School of Business, says his team wanted to essentially find out whether companies were “walking the talk” on diversity. To do this, the group used a database that included more than 5,000 public U.S. companies. It used information from Revelio Labs to analyze companies’ actual diversity using LinkedIn profiles and resumes, and cross referenced that with companies’ language relating to diversity efforts, as well as discrimination-related violations. 

None of this is intended to malign diversity and inclusion initiatives undertaken by banks, but rather to emphasize the importance of making those efforts deliberately and truthfully. 

“Maybe it’s time for the boards of directors of banks or senior executives to do a gut check and actually review what we’re seeing and what we’re doing,” Larcker says. “Is there a close match or not?” 

Larcker also points out that the U.S. Securities and Exchange Commission has recently started to crack down on what it calls misleading statements about ESG. In May 2022, for example, the agency accused BNY Mellon Investment Adviser of making ESG-related misstatements about the companies in which it invested. (The firm paid a $1.5 million penalty and agreed to take remedial measures but did not admit to any wrongdoing.)  

“You want to be pretty careful about what you’re claiming,” Larcker says. “There are reputational issues and potential legal issues that could arise.”  

• Laura Alix, director of research for Bank Director

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