Methodology

The authors use the US public company disclosures from SEC filings to track DEI mentions and examine the actual practices of firms. The dataset spans from 2008 to 2021 and includes firm-level characteristics, ESG ownership proxies, CSR reports, and misconduct information. The Twitter API and Corporate Register database improve the richness of data sources.

Results

The authors find significant differences between a company’s external DEI discourse and its internal diversity practice. Firms that talk extensively about DEI are often “diversity washers” who obtain better Environmental, Social, and Governance (ESG) ratings and attract more attention from institutional investors with an ESG focus. Despite this, diversity washing firms are more prone to instances of workplace discrimination. The authors observe during the study that these firms are less likely to promote diversity through hiring.

Predictors of diversity washing

The paper highlights the importance of one critical factor – firm size – in forming the habit of diversity washing. The authors find that larger firms tend to utilise a high amount of DEI language and seem willing to commit DEI washing due to greater resources and exposure. They also show that voluntary corporate disclosures are heavily used to attract investment from ESG-oriented investors rather than addressing DEI practices.

ESG ratings

The report suggests that firms that engage in diversity washing gain higher overall ESG and social ratings due to rating providers’ dependence on voluntary company disclosures as primary input. These firms also experience higher ownership levels by norm-constrained institutions like ESG-oriented mutual funds, a trend that is widespread in the market.

Corporate social responsibility (CSR) reports

ESG rating providers depend on self-reported corporate disclosures like CSR reports. In this context, the report recognizes the CSR reports as a primary platform where firms can discuss a wide range of CSR-related aspects affecting their financial and operating performance, dispelling the notion that firms can merely deflect attention from their poor diversity practices by focusing on their ESG ratings.

Conclusion

The paper demonstrates that firms promote diversity and prioritise DEI discourse in spite of not implementing it internally. The study highlights that diversity washing leads to confusion of market participants about the genuine diversity of firms and calls for effective enforcement and regulations on corporate reporting on ESG activities. The paper urges firms that wish to demonstrate their commitment to ESG principles to align their internal practices. By contrast, the authors observe that the focus of market participants on firm disclosures instead of underlying diversity persists broadly, indicating a widespread misunderstanding among investors of the underlying diversity of firms.