What Do DEI Rollbacks Mean for Investors?

In recent months, many US companies, including Meta Platforms META, McDonald’s MCD, Walmart WMT, Bank of America BAC, and BlackRock BLK, have rolled back their diversity, equity, and inclusion initiatives for fear of potential legal action following a January 2025 executive order from US President Donald Trump that directs attorneys general and relevant federal agencies to scrutinize DEI programs at private companies—which, if found to be discriminatory, may lead to legal action.

The DEI rollbacks have raised concerns among some investors, as many employers believe that diversity is good for business. Such employers argue that a diverse workforce fosters an inclusive environment that encourages idea-sharing and collaboration while also helping to attract and retain talent. Diversity programs have become widespread within the business community, with more than 80% of the 20,000-plus companies that Morningstar Sustainalytics assesses having a diversity program.

Some investors are particularly concerned about the potential impact of these DEI rollbacks on corporate environmental, social, and governance risks. ESG risk, if not managed properly. can have a material financial impact on a company. However, not all scaled-back DEI initiatives will have the same impact, as some changes are less substantive and material than others. Overall, we found that the recent changes will have a limited impact on ESG risk, but investors should focus on understanding the nuances between the different types of changes to identify those that matter most to them.

Companies Change DEI Programs

Based on a review of media reports and corporate statements, we have already observed three types of changes:

1) Substantive changes to corporate initiatives, policies, or programs: These changes may involve the removal of diversity targets, as Meta, McDonald’s, and Bank of America have done. For example, in an internal memo, Meta announced plans to scrap its diverse hiring slate approach and diverse representation goals and refocus DEI training programs. McDonald’s retired supplier diversity commitments, and Bank of America removed all mentions of its global diversity and inclusion council, which the CEO previously chaired. Substantive changes are the most likely to be considered in an assessment of a company’s workforce, though their impact on corporate ESG ratings may be more nuanced.

2) Reframing or repositioning of existing policies, programs, or teams: These changes primarily represent a shift in messaging, often involving softer language, replacing terms like “diversity” with vague alternatives such as “connectivity,” as in the case of BlackRock, or removing the term “DEI” altogether. BlackRock’s combination of its Talent Management and DEI teams to form a new Talent and Culture team and Bank of America’s shift toward emphasizing veterans and neurodiverse groups over traditional diversity categories are examples of this type of change. In some instances, the impact of new language on diversity initiatives can be difficult to decipher and should be analyzed closely to determine whether they represent substantive changes.

3) Discontinuation of “DEI-adjacent” initiatives: This includes eliminating one-off sponsorships or philanthropic engagements that are not central to corporate diversity strategy. For example, Walmart’s reduced investments in a racial equity center and its monitoring of third-party marketplace items to ensure that they do not market transgender products to minors fall into this category. This type of change is less material to a company’s workforce and therefore unlikely to have a significant impact on any assessment.

How Do DEI Rollbacks Affect Risk?

Morningstar Sustainalytics analyzes ESG risk and provides ESG risk ratings for thousands of companies. To understand the impact of recent developments on our ESG Risk Rating, it helps to consider two aspects: 1) whether the changes relate to DEI initiatives that are included in our assessment framework; and 2) if they are included, whether the weights of these initiatives in the overall rating are significant enough to impact it.

How DEI Fits Into Sustainalytics’ ESG Risk Rating

In Sustainalytics’ ESG Risk Rating framework, DEI initiatives are primarily considered when assessing a company’s workforce diversity. This assessment is part of an analysis of human capital risk management. (Other factors that go into human capital analysis include such as employee retention, career development, and workforce relations.) Many employers believe that investing in diversity initiatives that foster an inclusive environment can help attract and retain talent and encourage idea-sharing and collaboration.

Sustainalytics’ analysis of workforce diversity looks at four indicators: diversity program, discrimination policy, gender pay equality program, and gender pay disclosure. In aggregate, these represent about 40% of a company’s human capital management assessment on average. Analysts look for information from publicly available sources, such as annual reports, sustainability reports, and codes of conduct. For example, to assess the strength of diversity programs, we look for evidence of managerial or board-level responsibility for diversity initiatives.

The methodology aims to capture initiatives that are not only material to managing ESG risks but also for which sufficient data is disclosed. Analysts look for generally accepted best practices supported by international norms and standards rather than aspirational or niche initiatives.

Additionally, a company does not need to implement targets linking hiring decisions to diversity characteristics in order to get full credit on the four indicators listed above. Such practices are among those now targeted by the recent executive order.

Diversity Plays a Limited Role in ESG Risk

Workforce diversity is only one aspect of Sustainalytics’ assessment of a company’s human capital risk management, which in turn is only part of Sustainalytics’ ESG Risk Rating.

The weight of human capital in a company’s ESG Risk Rating varies. In practice, it can range from as low as 5% on average for capital-intensive industries, such as utilities and energy, to as high as 20% for knowledge-intensive industries, such as information technology.

Let’s put the recent announcements into perspective. Some changes will not affect our ESG risk assessment of companies because they relate to initiatives that were never previously considered. However, some companies may see an increase in their human capital risk, particularly those in sectors where human capital is highly material, such as technology firms. This could increase 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.

As companies begin to release financial and sustainability reporting documenting such changes, investors should focus on understanding the nuances between the different types of changes to identify those that matter most to them.

A version of this piece was originally published on Sustainalytics.com.