Diversity Washing in Social Aspect
In the three aspects of environment, social and governance, stakeholders are motivated to take certain false actions or statements to meet relevant standards. In the field of the environment, the existence of greenwashing has been paid attention by regulators and investors. In the social field, the existence of diversity washing has been gradually confirmed by scholars.
Diversity washing refers to the situation that the company’s external publicity is inconsistent with the actual performance in terms of diversity, equity, and inclusion (hereinafter referred to as DEI). Such publicity can improve the company’s ESG rating and thus obtain more funds from investors.
Difference between Diversity Washing and Greenwashing
Obviously, diversity washing and greenwashing belong to different ESG categories, but the degree of attention to diversity washing is significantly lower than that to greenwashing. It is more difficult to define the diversity washing for investors and regulators. This phenomenon has the following reasons:
In the three aspects of ESG, the environmental aspect is most vulnerable to attention. For example, the current carbon neutral and carbon peak plans of countries are directly related to the global warming of 1.5 degrees Celsius under the Paris Agreement. At the same time, the regulatory policy has very detailed requirements on greenhouse gas emissions (Scope 123), pollution treatment and other aspects, so it has also given higher attention to the problem of greenwashing under “E” aspect;
Besides, the company’s ESG disclosure at the social level is not so strict, which makes the companies that perform poorly at the social level may choose less disclosure, while the companies that choose diversity washing do not face excessive standard restrictions at the disclosure level, and the positive impact of diversity washing on them is greater than the negative impact. Most people believe that only companies that are good enough in DEI will choose to actively disclose these information;
Practical Evidence of Diversity Washing
In a recently published working paper, researchers from the University of Chicago, Stanford University and other universities conducted empirical analysis on the DEI statements and actual situation of listed companies, confirming the existence of diversity washing, and this phenomenon has won the trust of ESG rating agencies and the favor of investors.
Specifically, in terms of rating, the companies that choose diversity washing are 13% higher than normal companies, and the more serious the diversity washing, the higher the ESG rating is. For investors’ investment, companies with diversity washing can obtain 9.4% excess fund allocation, and more serious diversity washing leads to higher proportion of fund allocation.
Suggestions for Solving Diversity Washing
Under the condition that the greenwashing behavior has been restrained to some extent, the solution to diversity washing will also become an important topic in the future ESG development. From the analysis of the existence of diversity washing and their impact on stakeholders, the following measures can be taken:
For disclosure at DEI and social level, regulatory authorities need to formulate consistent and detailed standard disclosure rules. At present, ESG disclosures from the social level are still voluntary, and most of them are descriptive, which cannot be clearly quantified. This situation provides living space for diversity washing, so improving the disclosure rules can reduce the occurrence of such phenomenon.
For ESG rating and investors’ asset allocation, rating agencies and asset management companies should take an objective view of DEI disclosure at the social level. In the absence of a consistent disclosure system at present, rating and asset allocation need to carefully examine whether there are diversity washings in the company’s actual actions. Another way to avoid misleading it is to reduce ESG weight at the social level.