'DEI' is under attack. What does that mean for investors?

The increasingly politicized words "diversity, equity and inclusion" are growing more important to investors and testing how their portfolios align to their principles and overall strategy.

President Donald Trump's executive orders ending a swath of federal government programs they defined as DEI came as the latest but heftiest example of conservative pushback against what critics of it — and concepts such as ESG investing or forms of "woke capitalism" — view as a liberal effort to impose social policies that endanger shareholder value and merit-based success. For financial advisors and their clients, the political debate reflects differing interpretations of the fiduciary duty to put customers' best interest first in all investment advice.

"I believe that those companies have a fiduciary, legal and moral obligation to shareholders, and I believe that those policies were getting in the way of shareholder value," said David Bahnsen, the founder, managing partner and chief investment officer of Newport Beach, California-based advisory firm The Bahnsen Group. He's one of nearly five dozen advisors, investment professionals and conservative officials and activists who signed a November letter to every Fortune 1000 company urging them to drop DEI after Trump's election. "I don't have any interest in picking these fights just for the culture war of it," he added. "I care about these companies."

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Many have questioned the sincerity of companies that made a variety of pledges about racial equality in the wake of the murder of George Floyd in 2020, and others have long pointed out the failures of DEI when it comes to devoting the resources necessary to remove systematic barriers. Practitioners of impact investing often shun labels like DEI or ESG that they see as mere window-dressing or so-called greenwashing. And, regardless of the political environment or their particular investing screens, impact investors are not going to shut down, either.

"I wouldn't consider the work that I'm doing as DEI work," said Keith Beverly, managing partner and chief investment officer of Washington, D.C.-based Re-Envision Wealth. Beverly's firm uses anonymous surveys of "women of color at S&P 500 companies" as part of its criteria assigning a "racial equity score" to stocks as part of its "fiduciary duty to our clients to make sure that we're positioning them for opportunities," he said, citing studies that link gender and ethnic diversity in executive ranks to companies' results. "For us, it's more of a performance-related conversation," Beverly said. "It would be different if the data showed the opposite."

Rejecting 'equity' and competing in the global economy

But the opponents of DEI are trying to cast doubt on that research, and they're doing so through a megaphone amplified on social media and daily messaging from the White House that links DEI to federal spending or even the tragic deaths of 67 people in the D.C. plane crash last month. 

Companies like Walmart, Boeing, Toyota, Nissan, Lowe's, John Deere, Caterpillar and Harley-Davidson have pulled back their DEI programs under pressure from an activist named Robby Starbuck who told the Wall Street Journal last month that his team deploys research to "build a real portrait of how an ideology may have shaped or taken over a company." Other companies such as Costco are defending their DEI efforts. With financial firms at the center of the scrutiny, Starbuck is now gearing up for a fight with JPMorgan Chase. He and other DEI critics focus frequently on the word "equity" as a root problem with the programs.

"The horror of it is that it sounds so similar to 'equality,' that people get tricked into believing that they should accept equity," Starbuck told the Journal. "But equity in fact is something that seeks to strip excellence and really everything that makes you special and individual away from you."

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Those opponents of DEI attacking companies' efforts to alter their practices may be missing the larger perspective that comes from collecting people of many different backgrounds and views together, according to Rosalyn Brown, founder of consulting firm SowInclusive. In a global economy, companies will find it difficult to operate "in a bubble," she said.

"There isn't a company out there that keeps their product aligned with just one demographic," she said. "You can't be successful unless you understand that there are people who aren't like you, who don't have your shared lived experiences and that's OK."

The upcoming shareholder proxy season will shed light on "how much of the announcements that we're seeing from companies are tangible and have teeth and how much is positioning so they won't be targets," Beverly said. Firms must take factors like regulatory risk and litigation expenses into account.  

"It'll take some time to see how that plays out," he said. "You have to be mindful of the political environment, especially if it means real costs to your firm."

What's in the crosshairs and what's at stake

Companies that are rolling back DEI are simply examples of how "corporate America is reading the tea leaves," according to Bahnsen. DEI opponents seek to eliminate practices such as quotas and programs like the World Federation of Advertisers' now-shuttered Global Alliance for Responsible Media, but they're not trying to end professional development efforts such as programs supporting women in the industry or organizations for minority professionals, he said.

"All we're asking for is an even playing field, out of the spirit of liberalism and open-mindedness," Bahnsen said. He "would be offended if anyone believed" that DEI opponents are effectively arguing, "'You guys discriminated against us, we want the right to discriminate against you,'" he added. "I'm looking for nondiscrimination across the board."

Bahnsen and other signers of the November letter to large corporations came together in a coalition led by a legal advocacy group "committed to protecting religious freedom, free speech, parental rights, and the sanctity of life" called the Alliance Defending Freedom. The group included representatives from the conservative Heritage Foundation, the organizer of the "Project 2025" blueprint for Trump's second term.

"You stand at an important crossroads. Either you can heed the voice of the American people —  your shareholders, customers, and employees — or you can bow to fringe activists who demand that you double down on a failing ideology," the alliance's letter said. "You can capitalize on this moment by publicly distancing yourself from divisive DEI initiatives and programs, like many of the companies listed above. You should also take proactive steps to show that you are protecting fundamental freedoms for your workforce, customers and fellow citizens. A culture of free speech and religious freedom is essential for any business to thrive."

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If firms in wealth management or the related financial fields embrace the anti-DEI movement too much, though, they risk turning away prospective advisors that the industry needs to address its succession challenge and driving consumers toward "nontraditional money coaches" that are predominating online, according to Brown.

"DEI does not take anything away from anyone," she said. "There's so much more value in understanding everyone, as opposed to just counting people who are in the office."