DEI Rollbacks: Impact on ESG Risk Ratings and Broader Implications for Investors

Key Insights:

• Not all reported rollbacks in diversity, equity, and inclusion (DEI) initiatives will have the same impact. While some changes may signal material shifts in corporate policy, potentially resulting in increased ESG risks, others are primarily a reframing of DEI discourse.

• Due to the relatively low weight of DEI in Sustainalytics’ ESG Risk Rating, we do not anticipate significant changes to overall ratings.

• Despite limited financial materiality, investors may be concerned about broader implications, including societal impacts and potential weakening of other ESG commitments, such as climate risk disclosure.

In recent months, many US companies, including Meta,¹ McDonald’s,² Walmart,³ Bank of America,⁴ and BlackRock,⁵ have rolled back their diversity, equity, and inclusion (DEI) initiatives. This is a notable shift from what has become widespread in the business community, as 82% of the approximately 20,000 companies globally that Morningstar Sustainalytics assesses have a diversity program (Figure 1). These changes have raised concerns among some investors who want to understand the potential impact on corporate ESG risks and these changes' broader implications. 

Most companies have cited an evolving legal and political landscape as the reason for scaling back their DEI initiatives; and more specifically, a January 2025 executive order⁶ from US President Donald Trump that directs attorneys general and relevant federal agencies to scrutinize DEI programs at private companies.⁷ As a result of the executive order, companies may face legal action if their programs are found to be discriminatory.

Despite the increased threat of litigation, several companies, including Costco,⁸ Delta Air Lines,⁹ and Apple,¹⁰ have publicly reaffirmed and defended their DEI policies and programs. Anti-DEI shareholder proposals have been overwhelmingly rejected.¹¹

_{Source: Morningstar Sustainalytics.
Note: Data as of February 2025, based on 20,371 companies globally.} 

Three Ways to Think About Changes to DEI Initiatives

As part of Sustainalytics' usual practice, analysts will review all relevant information once new corporate reporting is released, but in the meantime, based on a review of media reports and corporate statements, we have already broadly observed three types of changes. 

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. Meanwhile, 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. 

Reframing or Repositioning of Existing Policies, Programs, or Teams

These changes primarily represent a shift in messaging, often involving softer language, replacing terms such as “diversity” with vague alternatives such as “connectivity,” as in the case of BlackRock,¹² or even 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’s¹³ 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 or not.

Discontinuation of DEI-Adjacent Initiatives

This includes eliminating one-off sponsorships or philanthropic engagements that are not central to corporate diversity strategy. For instance, Walmart’s reduced investments in a racial equity center and its monitoring of third-party marketplace items to ensure that the company does 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. 

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 weight 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 primarily¹⁴ considered when assessing a company’s workforce diversity – which is part of an analysis of human capital risk management, alongside other topics, such as employee retention, career development, and workforce relations. Many employers are of the view that investing in diversity initiatives that foster an inclusive environment can help attract and retain talent and encourage idea-sharing and collaboration. We have also found initial evidence that industries with better gender representation have lower employee turnover.¹⁵

Our analysis of workforce diversity involves the assessment of four diversity-related indicators: diversity program, discrimination policy, gender pay equality program, and gender pay disclosure.¹⁶ Table 1 lists these four indicators and the underlying criteria that our analysts use to score companies on these indicators, as well as the average weight of these indicators in the human capital management assessment. Although each indicator’s weight varies by industry, in aggregate they represent about 40% of a company’s human capital management assessment on average. 

Table 1. List of Diversity-Related Management Indicators and Their Average Weight in Human Capital Management Assessment

_{Source: Morningstar Sustainalytics.
Note: Data as of February 2025.}

To assess company performance on each indicator, analysts leverage technologies to look for relevant information in 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 and the existence of initiatives such as mentorship programs and diversity training.

Our methodology is built to capture initiatives that are not only material to managing ESG risks, but also for which sufficient data is disclosed. This means that we tend to look for generally accepted best practices supported by international norms and standards,¹⁷ and we are less likely to capture aspirational or niche initiatives. 

Additionally, a company does not need to implement hard quotas or targets that link 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. 

The Importance of Diversity in Sustainalytics’ ESG Risk Rating Varies, but Remains Limited

As previously mentioned, workforce diversity is only one aspect considered in our assessment of a company’s human capital risk management, which in turn represents only a portion of Sustainalytics’ ESG Risk Rating. 

The weight of human capital in a company’s ESG Risk Rating depends on how material the workforce is to the company’s business. Industries that are more labor intensive or have a highly skilled workforce are typically more exposed to risks related to human capital issues. In practice, the weight of human capital ranges 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. 

Figure 2. Average Human Capital Risk Score as Percentage of Total Risk Score by Sector

_{Source: Morningstar Sustainalytics.
Note: Data as of February 2025.}

It is therefore important to put the recent announcements into perspective. Some of the changes will have no effect on our ESG risk assessment of companies because they relate to initiatives that were never previously considered. However, we will review other changes, specifically those related to material issues. As a result, 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 consequently lead to a few points’ increase in 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.¹⁸

Despite DEI’s Limited Financial Materiality, Investors May Be Concerned About Broader Implications 

Perhaps more importantly, we could see more significant changes in ESG Risk Ratings if the current rollback of DEI initiatives in the US signals the start of a broader trend towards reducing efforts in other ESG areas, such as carbon emissions and climate risk reporting. With regard to mandatory climate reporting, there is already indication that the US Securities and Exchange Commission (SEC) will not enforce its 2024 Climate Rule requiring disclosure related to material climate risks.¹⁹ Additionally, the SEC recently issued new guidance,²⁰ making ESG engagement harder and potentially limiting investors’ ability to request ESG information and influence companies. In this context, investors will need to carefully consider the implications for their investments. 

With regard to DEI, as companies begin to release financial and sustainability reporting substantiating the changes announced in recent months, investors should focus on understanding the nuances between the different types of changes to identify those that matter most to them. Although we have established that the impact on ESG Risk Ratings should remain limited overall, we should not negate the potential impact on the stakeholders involved, whether employees, suppliers, or society.

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References

1. In an internal memo, Meta announced plans to scrap its diverse hiring slate approach and diverse representation goals, refocus DEI training programs, and eliminate its DEI team to refocus staff on accessibility and engagement, among other changes. “Read: Meta's memo to employees rolling back DEI programs.” Axios. January 10, 2025. https://www.axios.com/2025/01/10/meta-dei-memo-employees-programs.
2. McDonald’s will retire representation goals and supplier diversity commitments, and rename its diversity team to the global inclusion team. McDonald’s. 2025. “Our Commitment to Inclusion at McDonald’s.” January 6, 2025. https://corporate.mcdonalds.com/corpmcd/our-stories/article/our-commitment-to-inclusion._html.html.
3. Walmart announced a broad list of changes, including reduced investments in a racial equity center and monitoring of third-party marketplace items to ensure that they do not market transgender products to minors. D’Innocenzio, A. 2024. “Walmart becomes latest — and biggest — company to roll back its DEI policies.” Associated Press. November 26, 2024. https://apnews.com/article/walmart-dei-inclusion-diversity-34b06922e60e5116fe198696201ce4d9.
4. In addition to dropping workforce representation goals, Bank of America removed most refences to diversity from its annual report. The number of mentions of the words “diversity” and “diverse” in the context of DEI dropped to 10 in its 2024 annual report from 73 in the previous year. Bank of America. 2024. Annual Report. https://d1io3yog0oux5.cloudfront.net/_67fc984844881423357d1c3cfe712fc0/bankofamerica/db/867/10162/annual_report./BAC+2024+Annual+Report.pdf
5. In addition to dropping workforce representation goals, BlackRock folded its DEI team into its talent management team. Brush, S. 2025. “BlackRock Ends Diversity Goals, Subsumes DEI Staff Into New Team.” Bloomberg. February 28, 2025. https://www.bloomberg.com/news/articles/2025-02-28/blackrock-ends-diversity-goals-subsumes-dei-staff-into-new-team?leadSource=uverify%20wall&embedded-checkout=true.
6. The White House. 2025. “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” January 21, 2025. https://www.whitehouse.gov/presidential-actions/2025/01/ending-illegal-discrimination-and-restoring-merit-based-opportunity/.
7. Ibid.
8. Costco argued that its DEI efforts help attract and retain a wide range of employees and improve merchandise and services in stores. Costco. 2011. Notice of Annual Meeting of Shareholders. https://materials.proxyvote.com/Approved/22160K/20241115/NPS_591967/INDEX.HTML?page=2.
9. Delta Air Lines said that DEI was about talent and therefore critical to the business.
10. Apple rejected a shareholder proposal requesting the firm to cease its DEI efforts. Apple. 2025. Notice of 2025 Annual Meeting of Shareholders. https://www.sec.gov/ix?doc=/Archives/edgar/data/320193/000130817925000008/aapl4359751-def14a.htm.
11. Stewart, L. 2025. “5 Charts on How Investors Are Addressing Race at Shareholder Meetings.” Morningstar. February 4, 2025. https://www.morningstar.com/sustainable-investing/5-charts-how-investors-are-addressing-race-shareholder-meetings.
12. BlackRock, Inc. Form 10-K 2024. New York, NY: BlackRock, Inc. 2024. https://s24.q4cdn.com/856567660/files/doc_downloads/2025/02/Q4-24-10-K-Final.pdf.
13. Although Bank of America’s 2024 annual report was nearly half as long as its 2023 annual report, mentions of veterans and neurodiverse groups increased in the most recent report, from 10 to 13 and 1 to 6 mentions, respectively. Mentions of women, minority, people of color, and LGBTQ+ all decreased or were eliminated entirely.
14. DEI initiatives are also assessed, though to a much lesser extent, in two other Material ESG Issues: Corporate Governance and Human Rights – Supply Chain.
15. Williams, E., & Flaherty, T. 2022. “Reporting on Gender Equity Is a Key Step to Improving Diversity, Upward Mobility for Women.” Morningstar. March 31, 2022. https://www.morningstar.com/sustainable-investing/reporting-gender-equity-is-key-step-improving-diversity-upward-mobility-women.
16. In our assessment methodology, a program comprises several related initiatives on a single topic. A policy is a formal commitment to achieve a stated goal or advance a certain topic.
17. Global Reporting Initiative. “GRI 405: Diversity and Equal Opportunity 2016.” https://www.globalreporting.org/publications/documents/english/gri-405-diversity-and-equal-opportunity-2016/.
18. In the ESG Risk Rating, numerical risk scores translate to risk categories as follows: 0-10 Negligible Risk; 10-20 Low Risk; 20-30 Medium Risk; 30-40 High Risk; 40+ Severe Risk.
19. United States Securities and Exchange Commission. 2025. Acting Chairman Statement on Climate-Related Disclosure Rules. February 11, 2025. https://www.sec.gov/newsroom/speeches-statements/uyeda-statement-climate-change-021025.
20. United States Securities and Exchange Commission. 2025. Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting. February 11, 2025. https://www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/exchange-act-sections-13d-13g-regulation-13d-g-beneficial-ownership-reporting.