Gensler testifies during the House Financial Services Committee hearing entitled “Oversight of the Securities and Exchange Commission” on Wednesday, September 27, 2023, in the Rayburn Building. (Tom Williams/CQ-Roll Call, Inc via Getty Images)CQ Roll Call, Inc via Getty Images
The U.S. Securities and Exchange Commission released its first strategic plan for diversity, equity, inclusion and accessibility in September. The short plan, covering fiscal years 2023 to 2026, focuses primarily on internal policies but includes two goals that promote the use of the Commission’s regulatory powers to promote the inclusion of underrepresented groups. This could mean new regulations regarding diversity, equity and inclusion in the financial sector.
DEI generally refers to a company or government agency’s internal policies regarding employee ethnicity, gender, and sexual preferences. On the left, it’s about reducing discrimination and promoting underrepresented voices within the company and giving them the opportunity to thrive. To the right, it is about pushing a political ideology that is incompatible with its core values and discriminates against populations that are not considered underrepresented.
The rise of DEI is directly related to the global rise of environmental, social and governance. ESG is a form of investment that takes non-financial factors into account in the decision-making process. ESG focuses primarily on environmental policy and the Paris Agreement’s goal of achieving net-zero emissions by 2050. However, the social category has sparked the most controversy, particularly in the United States, as some fund managers and companies have included DEI policies in this category.
DEI has been a focus of the Biden administration, including an executive order issued in June 2021 directing federal agencies to create DEIA plans and appoint chief diversity officers. It focuses exclusively on the composition of the federal government’s internal workforce.
The EO stated: “The initiative will improve opportunities for communities that have historically faced workplace discrimination and professional barriers, including: people of color; Women; first-generation professionals and immigrants; people with disabilities; LGBTQ+ people; Americans living in rural areas; older Americans who face age discrimination when looking for work; parents and caregivers facing barriers to employment; people of faith who require religious accommodations at work; people who were previously incarcerated; and veterans and military spouses.”
The SEC’s DEIA plan is a direct result of this order. The overall plan is divided into three key objectives: People: Shaping our future through our people; Culture: Promote a culture of inclusivity, connection and belonging; Mission: Leverage DEIA for mission effectiveness. Each goal is divided into priorities and actions related to the individual elements of diversity, equity, inclusion and accessibility.
While most priorities and actions relate to addressing recruitment and personnel matters within the agency, there are two notable actions that are outward-facing as part of the mission objective.
Equity: “Develop processes to ensure that analysis of all regulatory matters includes consideration of unrecognized groups and analysis of potential unintended consequences of proposed regulatory actions.”
Involvement: “Educate and promote the benefits and importance of DEIA efforts with regulated entities in the financial services industry and share best practices through the Diversity Assessment Report process and external outreach and engagement.”
If there is any doubt about the intent, SEC Chairman Gary Gensler explains in the introductory letter: “To promote fairness and efficiency, it is important that access to our more than $100 trillion capital markets is inclusive.”
This suggests that the SEC intends to use its regulatory powers to push financial markets to implement DEI policies. The exact method is not yet known.
The SEC is expected to publish ESG reporting standards for public companies by the end of 2023. However, all signs point to the new ESG rule focusing primarily on greenhouse gas emissions and other environmental policies. The SEC has announced a new rule for ESG investment funds that regulates their marketing but also focuses on environmental issues, particularly greenwashing.
The most likely path is a new regulation that makes the Diversity Assessment Report, which was created as a voluntary assessment in 2018, a mandatory part of the ESG report. Once reporting becomes mandatory, they can attempt to enforce regulatory requirements in DEI metrics. California tried a similar regulation in 2018, requiring boards to include at least one woman and at least one minority or LGBTQ director. That law was declared unconstitutional by a federal court earlier this year.
The path to new regulations is often found in the tea leaves of internal policy statements. Although this is purely speculative, it appears that the SEC is moving toward a regulatory regime related to DEI.
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I am an attorney and founder of McGowan Law Firm in Jacksonville, Florida, where I practice business law, administrative law and legal development. My particular focus is on governance, start-ups and corporate policy. I have several academic publications on ESG, including with the University of Chicago Business Law Review and a chapter on ESG regulation and development in the UK in the book Impact Investing and Social Enterprises. I have spoken on ESG and other legal topics at legal conferences in the US and internationally. I am a fellow at the European Law Institute (ELI) in Vienna, Austria. I am also the author/editor of Florida’s Constitution: 1812 – Present and am currently writing “Roberts Rules of Order For Lawyers,” a book on the functions, roles and procedures of board attorneys.
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