Companies aren’t living up to their diversity claims

Here’s an excerpt from this article by Yale Professor Edward Watts:

The research is based in part on data about diversity from Revelio Labs, which compiles workplace analytics using public sources, including LinkedIn. After creating a dictionary of DEI-related words, Watts and his coauthors then compared that data to information about diversity that companies voluntarily disclose in three different types of financial documents filed with the U.S. Securities and Exchange Commission: annual reports (10-Ks), current reports (8-Ks), and proxy statements. Ultimately, the sample included information from nearly all U.S. public companies between 2008 and 2021. The research team focused on the “disconnect” between DEI language and actual diversity—what they call the “diversity-washing level.”

One of the results that was most compelling, Watts says, was that statements about diversity seem to be almost completely untethered from actual diversity. “The disclosure regime is very weakly correlated with actual actions,” he says. “They are almost two separate things, which is concerning.”

Diversity washing is associated with many other negative behaviors. The researchers found that diversity washers were more likely to have been penalized by the Equal Employment Opportunity Commission; to provide vague, difficult to measure, or forward-looking ESG policies; to highlight them via other communication platforms, including on X and in corporate sustainability reports; and to hire fewer diverse candidates in the future (despite those forward-looking policies).

Meanwhile, diversity washers were more highly rated by two of the leading ESG rating providers—with scores that were 12% and between 1.5% and 1.9% higher than companies that do not engage in diversity washing. Those ratings, in turn, influence institutional investors who make decisions based on supposed ESG commitments. According to the paper, diversity washing firms have 10.4% more ownership by funds committed to sustainable and responsible investment.