The U.S. Securities and Exchange Commission (SEC) unveiled its inaugural Strategic Plan for Diversity, Equity, Inclusion, and Accessibility in September, outlining its objectives for the fiscal years 2023 to 2026. This concise plan primarily concentrates on internal policies but contains two key objectives aimed at leveraging the regulatory authority of the SEC to enhance the representation of underrepresented groups. This development could indicate the potential for new regulations in the financial sector with regards to diversity, equity, and inclusion.
Diversity, Equity, and Inclusion (DEI) are typically concerned with the internal policies of an organization or government body concerning the ethnicity, gender, and sexual orientation of their employees. To one side of the spectrum, it focuses on reducing discrimination and promoting the advancement of underrepresented voices within the organization. To the other side, it is perceived as aligning with a particular political ideology that contradicts the core values of the organization and is discriminatory toward groups not considered underrepresented.
The rise of DEI is closely linked to the global ascent of Environmental, Social, and Governance (ESG) principles. ESG investing involves considering non-financial factors in decision-making, with an emphasis on environmental policies and the goal of achieving net-zero emissions by 2050, as outlined in the Paris Accords. However, the social aspect of ESG has sparked controversy, particularly in the United States, where some fund managers and businesses have incorporated DEI policies within the social category.
DEI has been a focal point of the Biden Administration, exemplified by an executive order issued in June 2021, directing federal agencies to formulate Diversity, Equity, Inclusion, and Accessibility (DEIA) plans and establish Chief Diversity Officers. This initiative centers exclusively on diversifying the federal government’s workforce.
The executive order stipulates that the initiative aims to promote opportunities for historically marginalized groups, including people of color, women, first-generation professionals, immigrants, individuals with disabilities, LGBTQIA+ individuals, residents of rural areas, older Americans facing age discrimination, parents and caregivers encountering employment barriers, individuals of faith requiring religious accommodations, formerly incarcerated individuals, and veterans and military spouses.
The SEC’s DEIA plan is a direct response to this order. The comprehensive plan is divided into three main objectives: People – Cultivate our future through our workforce; Culture – Foster an inclusive, interconnected, and belonging culture; Mission – Harness DEIA to enhance mission effectiveness. Each objective is further broken down into priorities and actions addressing various facets of diversity, equity, inclusion, and accessibility.
While the majority of priorities and actions pertain to hiring and personnel-related matters within the agency, two significant actions under the Mission objective have outward-facing implications:
Equity: “Develop processes to ensure that the analysis of all regulatory matters includes consideration of underrepresented groups and an examination of potential unintended consequences of proposed regulatory actions.”
Inclusion: “Educate and advocate for the benefits and significance of DEIA efforts with regulated entities in the financial services industry, along with sharing best practices through the Diversity Assessment Report process and external outreach and engagement.”
In his introductory letter, SEC Chair Gary Gensler underscores the importance of inclusive access to the over $100 trillion capital markets in promoting fairness and efficiency.
This suggests that the SEC aims to use its regulatory authority to steer financial markets towards the adoption of DEI policies, though the exact method remains to be seen.
The SEC is expected to introduce ESG reporting standards for publicly traded entities by the end of 2023. Nevertheless, it appears these new ESG rules will primarily focus on greenhouse gas emissions and other environmental issues. The SEC has also introduced a rule governing the marketing of ESG investment funds, with an emphasis on environmental concerns, particularly the prevention of greenwashing.
The most likely course of action involves making the Diversity Assessment Report, initially a voluntary assessment introduced in 2018, a mandatory component of ESG reporting. Once reporting becomes obligatory, the SEC can potentially enforce regulatory requirements related to DEI metrics. It’s worth noting that California previously attempted a similar regulation in 2018, mandating that corporate boards include at least one woman and one minority or LGBTQIA+ director, but this law was ruled unconstitutional by a federal court earlier this year.
The path towards new regulations often becomes evident through the nuances of internal policy statements, and while speculative, it seems the SEC is progressing towards a regulatory framework centered on DEI.
