Is greenwashing old news? The latest component of ESG to be subject to a good scrubbing is diversity: specifically, “diversity washing.” What’s that? According to this paper authored by academics from several institutions, including Chicago Booth and the Rock Center for Corporate Governance at Stanford, there are a number of companies that actively promote their commitments to diversity, equity and inclusion in their public communications but, in actuality, their hiring practices, well, don’t quite measure up. The authors label companies with significant discrepancies—companies that “discuss diversity more than their actual employee gender and racial diversity warrants—as ‘diversity washers.’” What’s more, the authors found, companies that engaged in diversity washing received better ratings from ESG rating firms and were often financed by ESG-focused funds, even though these companies were “more likely to incur discrimination violations and pay larger fines for these actions.” The authors cautioned companies that getting a handle on the level of misrepresentation in this area is important because “a failure to adequately address deficiencies in DEI has real effects on firms, including costly ESG audits initiated by activist shareholders, increased scrutiny from regulators, and bad publicity that can negatively affect customer loyalty.” Not to mention the “social and economic loss” for ESG investors.
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