**The Importance of DEI: Why Companies Should Prioritize Diversity, Equity, and Inclusion**
**Political Pressure on DEI Initiatives**
In recent times, corporate America has been navigating a tightrope when it comes to diversity, equity, and inclusion (DEI) efforts. The pressure from various political entities has created challenges for companies in their DEI initiatives. Republican attorneys general from 13 states issued a cease-and-desist letter to Fortune 100 companies, urging them to follow so-called race-neutral principles in their employment and contracting practices. In response, seven Democratic state attorneys general pledged legal defense to companies facing challenges to their DEI initiatives.
**Concerns Stemming from a Recent Supreme Court Ruling**
The back-and-forth dialogue between political entities regarding DEI practices follows a recent Supreme Court decision that essentially banned race-conscious college admissions. While this ruling does not directly impact Title VII of the 1964 Civil Rights Act, which governs employment discrimination and DEI initiatives, corporate leaders are concerned about its implications for companies seeking to recruit from diverse educational institutions. They are also worried about a potential backlash against DEI practices in the corporate world.
**The Shareholder Perspective on DEI**
Companies that reconsider their DEI efforts due to fear of political pressure might be overlooking an important stakeholder group – their shareholders. According to JUST Capital’s analysis, there is a strong investor case for corporate diversity, equity, and inclusion. The company’s DEI Leaders index concept, which includes companies scoring in the top 20% of JUST’s Rankings on DEI Issues, has outperformed both the Russell 1000 Cap Weighted benchmark and the Russell 1000 Equal Weighted benchmark since its inception.
**The Relationship Between Workforce Diversity and Performance**
Investors have long advocated for strong stakeholder management, which includes planning for the long term while focusing on attracting and retaining a diverse labor force. The Human Capital Management Coalition, a group of 36 investors with over $9 trillion in assets, recognizes the correlation between workforce diversity and performance. They consider workforce diversity data as one of the foundational disclosures that allow them to evaluate human capital management skills and identify risks and opportunities. Shareholder proposals and institutional investor-led campaigns have also played a role in increasing the disclosure of workforce diversity data among Russell 1000 companies.
Other researchers have also found positive correlations between companies’ diversity and their stock performance. A study conducted by The Wall Street Journal discovered that the 20 most diverse companies experienced an average annual stock return of 10% over a five-year period, compared to a 4.2% return for the 20 least diverse companies.
**The Risk of Overcorrecting and Abandoning DEI Efforts**
In fact, companies may be taking on more risk by overcorrecting or shirking away from their DEI initiatives. Major investors have emphasized the importance of diversity to corporations, stating that it is material to companies’ ability to grow and helps investors identify opportunities. UBS, a global investment bank, released a report highlighting the materiality of diversity to both individual corporations and overall markets.
**Recognition of Diversity’s Importance**
A significant number of companies recognized the importance of diversity even before the recent Supreme Court decision. Almost 80 companies filed an amicus brief in support of collegiate affirmative action programs, noting that corporate DEI programs depend on college and university admissions processes that promote diverse educational environments. These companies acknowledged that embracing diversity led to greater alignment with the public, increased profits, and business success.
**The Future of DEI and Shareholder Influence**
As companies face new challenges related to advancing DEI, the importance of these policies and practices to shareholders becomes clearer. Shareholders will closely monitor how companies navigate this moment and assess the potential impact on long-term growth.
Ashley Marchand Orme is the director of equity initiatives and Tolu Lawrence is the managing director and head of corporate impact at JUST Capital, an independent nonprofit organization dedicated to measuring and improving corporate stakeholder performance.
*Note: The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.*
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