DEIs Irae! US companies are abandoning their diversity and climate pledges. What does that mean for UK pensions?

It will be no surprise to most readers that there has been a transformation in US boardroom culture in the past 15 years. It’s no longer rare for diversity and inclusion to be a standing agenda item, and a recent report from Fortune stated that more than half of S&P 500 companies now have a Chief Diversity Officer. A similar shift has taken place on climate change – it’s now mainstream for large companies to consider climate and other sustainability issues when developing their business strategy.

But recently, a number of American companies have quietly – or not so quietly – dropped elements of their outwardly progressive agendas:

• Facebook and Instagram owner Meta issued a memo to its employees informing them that they will “no longer have a team focused on DEI” (Diversity, Equity and Inclusion), they are “sunsetting supplier diversity efforts”, and that it has “previously ended representation goals for women and ethnic minorities” in its business.
• McDonalds informed franchise owners that it would end “aspirational representation goals”, citing a 2023 US supreme court ruling on affirmative action in university admissions.
• several banks and asset management firms have pulled out of voluntary climate initiatives the Net Zero Banking Alliance and Net Zero Asset Managers. Following one recent departure, NZAM announced it was suspending activities, pending the outcome of a review “to ensure NZAM remains fit for purpose in the new global context.”

These moves anticipated or happened in lockstep with President Donald Trump’s executive orders rolling back DEI and accessibility mandates across the US government.

Countervailing views are developing in America’s judiciary too: in a ruling handed down in Spence v. American Airlines Inc. this month, a federal judge in Texas held that the airline breached one of its statutory duties to prioritise investment returns for savers by allowing its asset managers to vote in favour of ESG (environmental, social and governance) resolutions at shareholders’ meetings.

This is markedly different to the position for trustees of UK pension schemes, where the current consensus is that it’s within a trustee’s fiduciary duty to consider financially relevant ESG when setting an investment strategy, and there are specific ESG legislative requirements covering, among other things, the statement of investment principles and climate reporting. Further, TPR requires trustees to consider DEI as part of their effective systems of governance under the General Code.

While the UK Government’s central mission is economic growth, climate remains on the UK agenda. For example, the Government has retained its manifesto promise not to issue further North Sea oil licences, and has been clear that expansion of Heathrow Airport must be “delivered in line with our legal, environmental and climate obligations.”

These differing perspectives seem unlikely to go away any time soon. So where does this leave UK pension schemes which have exposure to the US market?

Remember your training

Trustees and pension scheme managers, a good starting point is to go back to your halcyon days at pension boot camp, where you will have learned all about trustee fiduciary duties. For DB schemes in the UK, this means the overarching duty to provide the benefits that were promised to members, and using your investment power to achieve this, distinguishing between financial and non-financial factors when you do so. (See Stuart O’Brien’s excellent comments in Pensions Expert for a precis of the topic).

For DC schemes, the focus should still be on providing appropriate default investments that give value for members, but you should also ask what your members’ self-select funds are doing in this space – particularly those funds labelled with an ESG or sustainability focus.

Have a conversation with your fund managers on how they see these issues affecting your scheme’s portfolio – but remember that individual stock picking is outside of a Trustee’s investment remit.

It’s not easy being green

In the current environment, it can also be worth thinking about whether some of your members might become more actively engaged with you (positively or negatively) on DEI, climate and other issues in their investments. They may want to know how you (and your asset manager) are responding to changes in corporate approaches in the US and elsewhere, including through stewardship. Are you planning to make your views known at the next shareholder meeting? How does it fit with any stewardship policy you have in place? How would you explain your position to members?

Remember that this is a small part of a much wider investment picture, and that there are many issues in play that go to achieving good outcomes for members.

Remember also that economies and investment markets don’t always behave in the way we or our leaders might want or expect. Things might or might not be headed in different directions now, but there are still real-world climate and other sustainability risks and opportunities to consider, and your legal duties are still there.

Don’t shoot until you see the whites of their DEIs

US companies appear to be taking these steps partly in response to a perceived risk of being targeted for their ESG-related behaviour, whether by disgruntled employees or public officials – see for instance the teachers’ retirement plan in Texas, which in 2023 divested from 10 financial firms that the state’s comptroller had singled out for “boycotting” the oil and gas industry by adopting ESG policies.

In seeking to no longer stand out from the crowd, remember that corporate policy announcements can be very different from a change in practice. Meta’s announcement, for example, caveats that it will instead “focus on how to apply fair and consistent practices that mitigate bias for all”. The FT reports that BlackRock has told its clients that its departure from NZAM “does not change the way” it manages portfolios, and that its fund managers “continue to assess material climate-related risks.”

Time will tell whether the new political weather will lead to real lasting changes. Perhaps in the years to come, we could see more instances of “greenhushing”, where companies retain their ESG policies, but drop the term “ESG” and mention them less in public – although it carries its own set of risks, the new publicly acceptable compromise to balance climate risk with litigation risk in the US may be to “never say DEI”.

< Back to blog