The U.S. Securities and Exchange Commission (SEC) recently released its first Diversity, Equity, Inclusion, and Accessibility Strategic Plan, signaling the potential for new regulations in the financial industry concerning DEI. While the plan primarily focuses on internal policies within the Commission, it includes two goals that aim to promote the inclusion of underrepresented groups using regulatory authority. DEI refers to the internal policies of organizations related to ethnicity, gender, and sexual preferences of employees. As the rise of DEI is linked to the global growth of environmental, social, and governance (ESG) investing, the SEC’s move towards DEI regulation aligns with the Biden Administration’s emphasis on promoting opportunities for historically marginalized communities. Although the exact method of implementation is unclear, the SEC’s intention to leverage its regulatory authority to promote DEI policies in the financial markets is evident.
This image is property of imageio.forbes.com.
Background on the SEC’s Diversity, Equity, Inclusion, and Accessibility Strategic Plan
Overview of the SEC’s strategic plan
The U.S. Securities and Exchange Commission (SEC) recently released its Diversity, Equity, Inclusion, and Accessibility (DEIA) Strategic Plan, which covers the fiscal years 2023 to 2026. This plan focuses on internal policies within the SEC but also includes goals related to utilizing the regulatory authority of the Commission to foster inclusion for underrepresented groups in the financial sector.
Goals of the plan
The SEC’s DEIA Strategic Plan outlines three primary goals: People, Culture, and Mission. Under the People goal, the plan aims to build the future of the SEC through its workforce. The Culture goal is centered around fostering inclusivity, connectedness, and a sense of belonging within the organization. Finally, the Mission goal focuses on leveraging DEIA to enhance the effectiveness of the SEC’s mission.
Focus on promoting inclusion in the financial sector
A major aspect of the SEC’s DEIA Strategic Plan is to promote inclusion in the financial sector as a whole. This involves not only addressing internal workforce diversity and equity within the SEC but also engaging with regulated entities in the financial services industry. The plan emphasizes educating and promoting the benefits of DEIA efforts while sharing best practices through initiatives like the Diversity Assessment Report process and external outreach and engagement.
Understanding DEI in the Financial Industry
Definition of DEI in the context of the financial industry
DEI, in the context of the financial industry, refers to the internal policies and practices implemented by companies and government entities to address and promote diversity, equity, and inclusion. This includes considerations of factors such as ethnicity, gender, and sexual preferences of employees within these organizations.
Importance of DEI in promoting fairness and efficiency
DEI plays a crucial role in promoting fairness and efficiency within the financial industry. By embracing diversity, companies can access a broader range of perspectives and experiences, leading to more informed decision-making processes. By fostering an inclusive and equitable environment, organizations can attract and retain top talent, resulting in improved productivity and innovation.
Impact of DEI on underrepresented groups in the industry
DEI efforts have a direct impact on underrepresented groups within the financial industry. By addressing barriers and creating opportunities for historically marginalized individuals, companies can help level the playing field and promote equal access to resources, career advancement, and leadership roles. DEI initiatives can also contribute to combating systemic biases and promoting a more inclusive and equitable industry.
The Rise of DEI and ESG
Correlation between DEI and the global rise of ESG
There is a strong correlation between the rise of DEI and the global emergence of environmental, social, and governance (ESG) considerations in the financial sector. ESG investing takes into account non-financial factors, including social issues like diversity and inclusion. As companies and investors increasingly prioritize ESG principles, DEI has gained significant attention as a crucial component of sustainable and responsible business practices.
Overview of ESG investing and its focus on non-financial factors
ESG investing evaluates companies based on their environmental, social, and governance performance alongside traditional financial factors. While environmental concerns have traditionally dominated the ESG landscape, social issues, including DEI, are now being recognized as important considerations. Investors are increasingly seeking companies that demonstrate commitment to diversity and inclusion, recognizing the long-term financial and societal benefits of such practices.
Controversies surrounding DEI policies within the social category of ESG
The inclusion of DEI policies within the social category of ESG has generated controversies, primarily in the United States. Some argue that including DEI within the social category results in the prioritization of a particular political ideology at the expense of a company’s core values. These controversies reflect a broader societal debate around the role of corporate social responsibility and the intersection of business and social issues.
DEI as a Priority for the Biden Administration
Executive order to create DEIA plans and Chief Diversity Officers
Recognizing the importance of DEI, the Biden Administration issued an executive order in June 2021 directing federal agencies to create DEIA plans and appoint Chief Diversity Officers. This initiative aims to advance opportunities for historically marginalized groups, including people of color, women, individuals with disabilities, LGBTQ+ individuals, and more. The executive order specifically focuses on enhancing diversity within the federal government’s internal workforce.
Focus on improving opportunities for historically marginalized groups
One of the key objectives of the Biden Administration’s DEIA initiative is to improve opportunities for historically marginalized groups in various aspects of society, including employment and professional advancement. By prioritizing diversity and inclusion, the administration aims to address systemic barriers and promote equitable access to opportunities for all individuals.
SEC’s DEIA plan as a result of the executive order
The SEC’s DEIA plan is a direct result of the executive order issued by the Biden Administration. By formulating this plan, the SEC aligns itself with the administration’s commitment to promoting diversity, equity, and inclusion. The plan demonstrates the SEC’s dedication to leveraging its regulatory authority to drive meaningful change and ensure fair access to capital markets for all individuals.
Goals of the SEC’s DEIA Plan
Primary goals of the SEC’s plan – People, Culture, Mission
The SEC’s DEIA plan encompasses three primary goals: People, Culture, and Mission. Under the People goal, the SEC aims to build its future through attracting and retaining a diverse and talented workforce. The Culture goal focuses on fostering an inclusive environment where all individuals feel connected and valued. Finally, under the Mission goal, the SEC intends to leverage DEIA principles to enhance the effectiveness of its mission in regulating the financial industry.
Priorities and actions relating to diversity, equity, inclusion, and accessibility
Each of the SEC’s primary goals is further divided into specific priorities and actions relating to diversity, equity, inclusion, and accessibility. These priorities and actions encompass various aspects of the SEC’s operations and focus on initiatives such as inclusive hiring practices, professional development opportunities, fostering a culture of belonging, and engaging with external stakeholders to promote DEIA efforts in the financial services industry.
Notable outward-facing actions under the Mission goal
Within the Mission goal, the SEC’s DEIA plan includes two notable outward-facing actions. The Equity action aims to develop processes that ensure the analysis of all regulatory matters considers underrecognized groups and potential unintended consequences of proposed regulatory actions. The Inclusion action focuses on educating and promoting the benefits of DEIA efforts to regulated entities in the financial services industry. This includes sharing best practices through initiatives like the Diversity Assessment Report process and external outreach and engagement.
SEC’s Intent to Utilize Regulatory Authority for DEI
SEC Chair’s statement on promoting fairness and inclusivity
SEC Chair Gary Gensler made a clear statement regarding the SEC’s intent to promote fairness and inclusivity. In the introductory letter of the SEC’s DEIA plan, Chair Gensler emphasized the importance of ensuring that access to the capital markets is inclusive and aligned with principles of fairness and efficiency. This statement indicates that the SEC intends to leverage its regulatory authority to push for the implementation of DEI policies within the financial markets.
Expectations of utilizing regulatory authority for DEI implementation
Given the SEC’s focus on promoting DEI through its strategic plan, it is expected that the Commission will utilize its regulatory authority to implement DEI-related policies and requirements. This could involve implementing rules and standards that require companies in the financial industry to adopt specific DEI measures and report on their progress. Such regulatory actions would reinforce the SEC’s commitment to fostering inclusive and equitable practices within the sector.
Uncertainty regarding the exact method of regulation
While the SEC has expressed its intent to utilize regulatory authority for DEI implementation, the exact method and form of regulation remain uncertain. The SEC has not provided explicit details on the specific regulations or requirements it plans to implement. As such, the financial industry awaits further guidance and clarification from the SEC regarding the nature and scope of forthcoming DEI-related regulations.
Anticipated Release of ESG Reporting Standards
End-of-year deadline for the release of ESG reporting standards
The SEC is anticipated to release ESG reporting standards for publicly traded entities by the end of 2023. These standards aim to provide consistent and comparable information regarding companies’ environmental, social, and governance performance. By establishing clear guidelines for ESG reporting, the SEC seeks to enhance transparency and facilitate informed decision-making among investors.
Focus on environmental policies in the new ESG rule
While the specifics of the forthcoming ESG reporting standards are not yet known, indications suggest a primary focus on environmental policies. Given the global priority of addressing climate change and achieving net-zero emissions, the SEC is likely to emphasize greenhouse gas emissions and other environmental factors in the new ESG rule. This aligns with the broader goal of promoting sustainable practices and combating climate change through corporate accountability.
Regulation of ESG investment funds to combat greenwashing
In addition to ESG reporting standards, the SEC has also announced a new rule regulating how ESG investment funds are marketed. This rule aims to address concerns surrounding greenwashing, wherein companies or funds may falsely claim to adhere to ESG principles. The regulation seeks to ensure that the marketing of ESG funds accurately represents the fund’s adherence to environmental and other non-financial considerations.
Potential Pathway to DEI Regulation: The Diversity Assessment Report
Overview of the voluntary Diversity Assessment Report
The Diversity Assessment Report was initially introduced as a voluntary assessment in 2018. It serves as a tool for companies to assess and report their efforts in promoting diversity within their organizations. The report focuses on various diversity metrics and provides transparency regarding an organization’s progress towards achieving diversity and inclusion goals.
Speculation on its potential as a mandatory part of the ESG report
There is speculation that the Diversity Assessment Report may become a mandatory component of the ESG report, linking DEI metrics directly to the reporting requirements for publicly traded entities. By making the report mandatory, the SEC would be able to enforce regulatory requirements relating to DEI metrics, embedding diversity and inclusion as an essential aspect of ESG reporting.
Enforcement of DEI metrics through mandatory reporting
If the Diversity Assessment Report becomes a mandatory part of the ESG report, it would enable the SEC to enforce DEI metrics through required reporting. Companies would need to provide detailed information on their diversity efforts, strategies, and outcomes, ultimately holding them accountable for progress in fostering inclusiveness. Mandatory reporting can serve as a powerful mechanism to drive change and ensure that companies prioritize diversity, equity, and inclusion.
Comparison to California’s Attempted Regulation
California’s board composition regulation and its constitutional challenges
In 2018, California attempted to regulate board composition by requiring companies to include at least one woman and one minority or LGBTQ director on their boards. However, this law faced constitutional challenges and was subsequently held to be unconstitutional by a federal court earlier this year. The outcome of California’s regulatory attempt highlights the importance of considering legal and constitutional constraints when implementing DEI-related regulations.
Lessons learned from California’s regulatory attempt
The experience of California’s board composition regulation provides important lessons for future DEI regulations. It underscores the need for regulations to be carefully crafted to withstand legal challenges and ensure alignment with constitutional principles. Future DEI regulations must balance the goals of promoting diversity and inclusion with considerations of legal validity and efficacy.
Potential implications for future DEI regulations
The outcome of California’s regulatory attempt may influence the future development of DEI regulations. Regulators, including the SEC, will likely take into account the legal challenges faced by California when formulating their own DEI-related rules. By learning from past experiences and addressing the constitutional complexities associated with DEI regulation, future regulations can be designed to effectively promote diversity, equity, and inclusion while standing up to legal scrutiny.
Indications of SEC’s Move Towards Regulation
Analysis of internal policy statements as clues
Examining internal policy statements can provide clues about the SEC’s potential move towards DEI regulation. While speculative, indications suggest that the SEC is increasingly leaning towards implementing regulatory measures to address DEI within the financial industry. Such measures may encompass requirements and standards that companies must adhere to, reinforcing the SEC’s commitment to promoting diversity, equity, and inclusion.
Speculation on the SEC’s direction towards DEI regulation
Based on the SEC’s DEIA plan and other public statements, speculation arises regarding the Commission’s direction towards DEI regulation. It is increasingly likely that the SEC will utilize its regulatory authority to introduce rules and requirements aimed at fostering diversity and inclusion within the financial sector. As the SEC continues to prioritize DEIA, the financial industry should prepare for potential regulatory changes and align its practices with future DEI regulations.
Possible impacts on the financial industry
The potential implementation of DEI regulations by the SEC would have significant impacts on the financial industry. Companies within the sector would need to adapt their policies and practices to meet regulatory requirements regarding diversity, equity, and inclusion. This could involve establishing robust DEI programs, improving reporting on DEI metrics, and ensuring compliance with specific obligations imposed by the SEC. The SEC’s emphasis on DEI reflects the growing recognition of its importance in creating a fair, inclusive, and efficient financial industry.
