Diversity, equality and inclusion (DEI) in business is in for a rough ride over the next few years as the second Trump Administration rages against DEI programmes and companies around the world—from Nissan to Walmart—downsize their initiatives in the face of political blowback. 

Now, the US Fifth Circuit Court of Appeals based in New Orleans has dealt a blow to how companies manage their own regulations on DEI initiatives. Nasdaq—the tech-focused stock exchange—had implemented several ESG-focused rules on diversity and inclusion at board level. One rule required Nasdaq-listed companies to disclose data on the gender and racial makeup of their boards. The other rule, due to be phased in over several years, required companies to work towards minimum targets for diversity of board members. These targets only required a company to have at least one female director, and at least one director from an ethnic minority or who identified as LGBTQ.

Why did Nasdaq implement these DEI rules?

Far from being part of some ‘woke agenda,’ Nasdaq’s disclosure rules were founded in data-driven good governance. Research from the Boston Consulting Group shows DEI initiatives can boost profits, reduce employee turnover, and enhance motivation. Companies with above-average diversity on their management teams also report innovation revenue 19 percentage points higher than companies with below-average leadership diversity. Similarly, McKinsey reports that companies with diverse boards tend to outperform financially.

However the court sided with two conservative groups who argued that the rules constituted unlawful quotas, with Judge Andrew Oldham stating the SEC had intruded into areas beyond its jurisdiction by approving Nasdaq’s request. Nasdaq defended the rules, arguing they standardised disclosures and aligned with investor interests, citing studies linking board diversity to improved financial performance. However, the court’s decision reflects a broader political and legal backlash against “woke” corporate policies, such as ESG initiatives and affirmative action.

What happened to ESG?

The ruling also represents a backlash against the once vaunted ESG (environmental, social and governance) rules in business. A few years ago, ESG was a major focus for listed companies, with money managers promoting ESG funds that attracted billions in investments. BlackRock, the world’s largest asset manager, pledged to leverage its influence to push corporate boards toward climate-friendly policies.

In recent years, the ESG movement faced challenges partly because ESG funds struggled to outperform the broader market and demonstrate tangible environmental benefits. Investors withdrew approximately $13 billion—around 4% of assets—from publicly traded ESG funds last year, according to Morningstar, although some of BlackRock’s ESG funds continued to attract inflows.

In contrast, private renewable energy and broader energy-sector investment funds saw significant interest, with investors contributing about $75 billion during the same period. Over the past five years, these funds have raised nearly $500 billion, far surpassing the capital raised for traditional fossil-fuel investments, according to Preqin. Global energy transition investments also reached approximately $1.8 trillion in 2023, a 17% increase from the previous year, based on BloombergNEF data.

Both the numbers and a wider conservative backlash has since prompted BlackRock and other investors to scale back their ESG initiatives, while investor interest in ESG funds has waned. Simultaneously, legal challenges to policies addressing racial preferences have gained momentum, culminating in a landmark Supreme Court decision last year that invalidated affirmative action in university admissions. The college admissions cases were brought by Students for Fair Admissions, a group started by anti-DEI activist Edward Blum who also financed the successful challenge to Nasdaq’s rules.

Despite the ongoing pushback, most of the largest U.S. companies continue to champion DEI, with very few abandoning these efforts entirely. A recent analysis by the Heritage Foundation, a conservative think tank, revealed that 486 of the Fortune 500 companies still publicly affirm their dedication to DEI initiatives.

The court’s Nasdaq ruling, alongside the political headwinds DEI programmes are facing, has significant implications for corporate board diversity. Companies should be wary about making instant changes to their DEI programmes, or reflexively scrapping them altogether. Instead, it is important to think strategically about diversity policies, and focus on the return on investment which DEI brings to business. 

How global employers can manage the DEI pushback

It’s important for companies to remember they are not a public university. Compliance with the law is of course paramount, but business doesn’t have to follow a trend that has no legal implication. In fact, changing direction with every new administration or shift in the zeitgeist can be a reputationally damaging—and not to mention expensive—endeavour that’s likely to leave no one satisfied. 

Nevertheless, it is valuable for companies to think about their DEI initiatives, and how these are framed and communicated to the company and the world.

Review recruitment, hiring, and promotion practices

Assess your practices to ensure decisions are based on individual qualifications and legitimate business-related criteria. Race and other protected characteristics should not generally be used as deciding factors, and may be unlawful in some jurisdictions. Companies should be wary of quotas, and diversity targets should align with broader labour pool demographics. Programmes that pursue vague or immeasurable goals, such as “promoting robust idea exchange,” may face heightened challenges. 

Focus on inclusion and retention

Building an inclusive and equitable workplace culture remains critical. Building an inclusive and equitable workplace culture remains critical for attracting and retaining top talent. Employers should prioritise efforts to ensure employees feel valued, treated fairly, and have access to opportunities for growth and development. Retention strategies should include regular feedback mechanisms, competitive benefits, career development programmes, and recognition of employee contributions to foster a sense of belonging and commitment.

Evaluate the benefits of DEI and ESG initiatives
Analyse DEI and ESG policies, training, and initiatives not only to ensure compliance with legal requirements but also to evaluate their financial impact and long-term value. Evidence increasingly links well-executed DEI and ESG strategies to improved business outcomes, such as enhanced innovation, increased profitability, and stronger employee retention. 

Programmes such as mentorship schemes, affinity groups, and talent pipeline initiatives can boost organisational performance by fostering diverse perspectives and inclusive environments. However, these efforts must be designed carefully to avoid stereotyping, disadvantaging specific groups, or creating perceptions of unfairness that could lead to legal challenges. By focusing on initiatives that enhance both compliance and business value, employers can align their diversity and sustainability efforts with broader financial goals.

Wondering what 2025 has in store for DEI? Join our free webinar on Thursday 16 January 2025 at 10am EST / 3pm GMT.

Join us for this essential webinar to explore the latest trends, legal requirements, and best practices shaping DEI in 2025. Learn how to build an inclusive workplace that not only fosters belonging but also meets compliance standards and enhances organisational resilience.