There is no doubt that, as I have previously noted on this site, the conversation about ESG has changed over time, particularly as ESG has faced a political backlash. These changes not only concern ESG itself but each of its three constituent pillars – and while ESG discussions frequently focus on the “E” pillar, and in particular on climate change, the changes in the ESG conversation also concern the “S” pillar as well. Of the recent changes surrounding the Social component of ESG, arguably none is more important that the U.S. Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard College, in which the Court ruled that race-based policies should not be used in university admissions. In a May 23, 2024, Law360 article entitled “The State of Play in DEI and ESG One Year After Harvard Ruling” (here), attorneys from the Crowell & Moring law firm review the ways that the Supreme Court’s decision in the Harvard case have changed the dialog surrounding Diversity, Equity and Inclusion (DEI) and ESG.

In the United States, at least, the “S” in ESG typically refers to DEI-related initiatives. DEI efforts received a substantial boost in response to social unrest following the May 2020 death of George Floyd. However, long before these events, conservative groups opposed the use of race-based considerations, and in particular, going all the way back to the seventies, challenged consideration of racial factors in college admissions. The U.S. Supreme Court, In a line of cases going back to 1978, had held that universities could consider an applicant’s race as a factor in admissions. However, the Harvard College case struck down the use of racial considerations in admissions decisions.

In the wake of the Court’s decision in the Harvard case, many observers tried to note that the Harvard College decision involved a collegiate educational context and did not on its own necessarily apply to other contexts, such as the private corporate world. However, other commentators contended that the Harvard College decision meant the end of the “diversity industry.”

According to the Law360 memo’s authors, in the year since the Court’s Harvard College decision, there has been a “dizzying tailspin of various legal actions,” particularly involving conservative states’ attorneys general, who have tried to use the Court’s decision to “attack corporate diversity, equity, and inclusion plans.”

For example, just days after the Supreme Court issued its opinion in the Harvard College case, a group of 13 Republican state attorneys general sent a letter to the CEOs of Fortune 100 companies, citing the Court’s decision and warning of “serious legal consequences” over race-based employment preferences and diversity policies. The letter also asserted that DEI plans are discriminatory and create illegal quotas. In addition, in late August 2023, a group of five Republican state attorneys general sent a separate public letter to the managing partners of AmLaw 100 law firms, arguing that the Harvard College decision requires the firms to refrain from discrimination based on race.

In a related development that underscores the extent of the struggle to interpret the implications of the Harvard College decision for ongoing corporate DEI efforts, just a week after the Republican AG letter to the corporate CEOs, a group of 21 Democratic state attorneys general sent their own letter to the Fortune 100 CEOs, in which the Democratic AGs argued that the Harvard College decision “does not directly address or govern the behavior or the initiatives of private sector businesses,” and contending further that DEI efforts remain legal.

Interestingly, while the AGs launched these various letters (and others that the Law360 article describes further), up until now at least, the state attorneys general “have not directly brought DEI-related lawsuits.” There could of course be ongoing state AG investigations that we don’t know about, as any investigations would remain confidential until a complaint is filed.

However, even though the state AGs have not yet launched DEI-related lawsuits, the flurry of activity and letter-writing campaigns mean, according to the memo’s authors, that “corporations are experiencing a chilling effect given risk concerns surrounding DEI and ESG initiatives.” These issues, the authors write, “remain politically fraught and top-of-mind for state enforcers.” The authors “expect to see DEI and ESG issues remain at the forefront, particularly as we head into the election season.” Moreover, they write, “we would not be surprised to learn of ongoing attorney general investigations, which may lead to complaints in the coming months.”

Discussion

As I have noted elsewhere, many companies, faced with the ESG backlash and seeking to avoid controversy, have toned down their ESG messaging, in a development that has been called “greenhushing.” The same considerations may be in effect when it comes to corporate responses to developments following the Court’s college admissions decision. Companies, the authors write, are “experiencing a chilling effect given risk concerns” and so may be less assertive in promoting DEI initiatives. At a minimum, the developments following the Court’s college admission decision have changed the dialog around DEI issues, as is true of ESG issues generally.

It seems likely that, as with ESG generally, it will be also be with DEI, in that the underlying issues and concerns will not go away, but rather that the vocabulary and tone of the conversation will change.

What may be of greater concern is the authors’ unanswered question – that is, whether we will see DEI-targeted investigations and even litigation as developments continue. Clearly, politicians who believe they can make political capital out of agitating on these issues will continue to do so. It remains to be seen in the months ahead whether the politicians – and private litigants as well– will target companies based on their DEI initiatives, as a continuing part of the ESG backlash.