The Emerging Impact of Racial Equity Audits

November 1, 2022

Activist groups and shareholders alike have made extensive efforts to close the gap in company ESG compliance. Using Racial Equity Audits, a company is given a comprehensive report on their standing regarding how they uphold said regulations. The goal is to create a dent in systemic racism by holding companies to a higher standard than what is currently upheld. Companies like Starbucks have recently stood as a testament to how stricter policies can increase an enterprise’s financial return while encouraging more equitable practices.

Context

As the focus on ESG (Environmental, Social, and Governance) has been growing exponentially, shareholders, along with leaders of activist groups, have been pushing for companies to perform an REA (Racial Equity Audit), also commonly known as “Civil Rights Audit.” An REA is meant to combat systemic racism by analyzing a company’s policies and procedures and identifying bias. Proponents of this movement view these examinations as necessary to gain perspective on how companies uphold ESG policies. These audits are typically conducted by an external law firm or another third party. Covington and Burling has been a large contributor to the execution of these audits, with notable companies such as Starbucks being one of their constituents. As the success of these audits grows, the expectation is that they will play a significant role in the private sector and the government. REAs benefit companies and the community as they encourage diversity and proper representation, along with increasing financial return for the companies that undergo these reviews. [1]

Why REAs are Necessary, in Addition to HRAs and DEIs

REAs have been labeled redundant by the opposition due to the existence of Human Rights Assessments and Diversity, Equity, and Inclusion reports. Respectively, these assess and address the impact of corporations on the community’s civil rights and evaluate inclusion in the workplace. However, both HRAs and DEIs are completed internally by companies and are subjected to many rounds of editing by the companies’ personnel, leaving them open to questions regarding their objectivity. REAs conduct a fully comprehensive view of the company’s compliance with ESG policies and give shareholders a better understanding of the institution to which their investment contributes.

Companies that have completed REAs

Facebook

In 2018, Facebook willingly enlisted civil rights lawyers Laura W. Murphy and Megan Cacace to evaluate their company in their own version of a Civil Rights Audit. Murphy is a well-known civil rights leader and actively uses her knowledge to combat discriminatory policies used by corporations[2]. Cacace actively holds the position of Director of Anti-Discrimination & Equity Programs for Airbnb[3]. The audit featured three reports and extensive interviews with hundreds of civil rights organizations and congressmen[4]. After a full holistic review of the company, they exposed that Facebook had many instances of malpractice. The platform was censured for prioritizing free expression without any regard to implementing non-discrimination policies. A specific instance that auditors emphasized was the publishing of three posts written by former president Donald J. Trump that contained hateful and abhorrent speech; Facebook took no action to remove the posts, consequently perpetuating the violent messages from Mr. Trump. Along with this, Facebook chose to ignore white nationalist and other extremist content and advertisement on their site, setting a shameful precedent for other companies by substantiating the notion that dodging ESG policies is acceptable. The issue boiled down to the platform prioritizing profit over the reduction of propaganda on its site. Facebook CEO, Mark Zuckerberg, addressed these issues, but Facebook continued to be exposed for its shortcomings.

Like the fall of the first domino, following the 2021 audit, Facebook was under investigation when a whistleblower³, Frances Haugen, leaked upwards of ten thousand internal documents, specifically ones which revealed issues regarding Facebook’s algorithms and advertising techniques. The original audit heightened awareness of the problem, thus contributing to the following 2021 investigation, where the company reevaluated its policies. Without the audit, there is no guarantee that the company would take steps to address its issues as it is doing now. Haugen exemplified the newfound confidence employees have in coming forward; this courage opened a new culture of consciousness that does not tolerate inequitable, discriminatory practices in institutions. It should not be easy for big corporations to turn a blind eye for the sake of their financial gain.

Starbucks

Covington and Burling, a District of Columbia law firm commissioned by Starbucks, conducted an official Civil Right Audit on their enterprise in 2019. The request followed an incident in 2018 at a Starbucks in Philadelphia, Pennsylvania. In a video garnering over 8 million views, two black men were denied access to the restroom for not having purchased anything. Discourse ensued, and they were asked to leave. When they refused, an employee responded by calling the police. The two individuals were arrested on the grounds of suspicious trespassing. Starbucks CEO at the time, Kevin Johnson, apologized for the incident and proceeded not to press charges. The wrongful arrest incited mass criticism, including activists from Twitter using the hashtag “BoycottStarbucks” to hold Starbucks accountable for their actions. Johnson promised to investigate his own company, saying that they stand against “discrimination or racial profiling.”[5] Starbucks closed over 8,000 stores to conduct sessions to educate their employees about implicit bias and discrimination. Covington’s review of the company after the arrest in Philadelphia helped the company understand where it can improve regarding inclusion and equity. In 2021, an update was made to the assessment, which led to Starbucks rectifying a host of issues, including a pledge to open 100 stores in low-income areas.

Even after undergoing many corporate changes, Starbucks continues to promise improvements in the future, accepting the criticism with open arms. The audits proved to be necessary by helping a large influential organization recognize its faults and improve its policies, promoting the message that hate is not tolerable.[6][7]As a result of their newly curated plan, Starbucks expects a ten to twelve percent growth between the 2023 [8] and 2025 fiscal years. Furthermore, the company predicts a seven percent annual development in its global store portfolio. [9]

Opposition to the Movement

Naysayers to the movement have made their stance loud and clear to the public. A current representative for Georgia, Marjorie Taylor Greene, has issued a public statement on Twitter regarding the new ESG initiative. She has made radical claims, such as comparing ESG to corporate communism. She goes on to say that “corporations should not be vehicles for political activism,” ending the tweet by enlisting the entirety of the Republican party (referred to as “we”) to end corporate communism. It seems the concept of how audits and ESG policies work is beyond comprehension for some. Republicans have publicly denounced the heads of national banks[10] for allowing a liberal ESG agenda to corrupt America. It is evident that increasing polarization between political parties has started to play an expressive role in the ESG initiative. Republicans view audits as an enterprise that Democrats will weaponize against them. The entire point of an audit is to target racially inequitable practices that have gone under the radar for years; social justice should not be reduced to being “too expensive” or pegged as a ploy in political games.

Companies that Push Back

After the proposal to implement anti-racism audits, shareholders for major companies such as Bank of America and Citigroup have refused to accept the audits. Companies have released proxy statements detailing that they should vote against the proposal for Racial Equity Audits. Another corporation to reject anti-discrimination audits are shareholders for Walt Disney Co. Actively fighting against ESG policies and audits is simply a way to say that you are hiding something. When companies push back, it raises questions about their reluctance to complete these civil rights audits. One is to assume that ESG policies are not being properly fulfilled and the establishments are failing to address the issues that are to be revealed in Racial Equity Audits. Anti-racism and anti-discriminatory movements should not be considered “liberal concerns.” These are basic human rights issues that should not be left ignored.

New policies and government regulations

In May 2022, the Securities and Exchange Commission considered new regulations requiring companies to comply with ESG mandates. Emphasizing the importance of upholding ESG mandates is integral for slowly weeding out systemic racism and other social justice issues that have been fueled by big corporations.[11]The two-part proposal consisted of amendments and reporting forms that would encourage transparency between companies and their investors, allowing shareholders to make proper investment decisions.[12] These modifications require further clarity of ESG affairs to investors and clients alike.

The first part of the proposal would amend rules and forms currently perpetuated in the Investment Advisors Act of 1940 and the Investment Company Act of 1940[13]. The purpose of said modifications is to ensure investment advisors and registered investment companies disclose all details of their ESG-related investment practices.[14] The second part of the proposal targets a specific directive in the Investment Company Act titled ’Rule 35d-1,’ loosely referred to as ’Names Rule.’[15] The rule prohibits any use of a company name that may mislead investors into contributing their funds to a cause they may otherwise not support. The issue revolving around this rule is that it has not been touched in over 20 years since it was first introduced. Proponents for ameliorating the ‘Names Rule’ claim it does not keep up with the modern developments of the industry. The SEC stresses that competition may contribute to asset managers strategically picking a name that gives a falsified impression that attracts funds. An example would be a name that targets a section of ESG.[16] Overall, both proposals would require funds to disclose more detailed and specific information regarding fund prospectuses and advisor brochures in their final report.[17]

With the integration of these rules and the rise of REAs, there is hope that society is moving towards a culture of change. As exemplified by the previously mentioned Facebook whistleblower, the space for speaking up and voicing concerns regarding company complaisance with ESG mandates has grown exponentially in the past decade. REAs create consequences for companies unable to uphold basic inclusion policies, and they have opened a space for a conversation about racial inequities and company transparency that is long overdue.

Edited by Tabea Schneider, Esha Amin, and Clara Durski.

[1] https://corpgov.law.harvard.edu/2021/10/30/racial-equity-audits-a-new-esg-initiative

[2] https://lwmurphy.com/about.html

[3] https://news.airbnb.com/megan-cacace-joins-airbnb-as-director-of-anti-discrimination-policy-amp-equity/

[4] https://www.nytimes.com/2020/07/08/technology/facebook-civil-rights-audit.html

[5] https://www.nytimes.com/2018/04/15/us/starbucks-philadelphia-black-men-arrest.html

[6] https://stories.starbucks.com/press/2019/starbucks-overview-of-the-covington-assessment-on-civil-rights-equity-diversity-and-inclusion/

[7] https://stories.starbucks.com/uploads/2021/03/Starbucks-2021-Civil-Rights-Assessment.pdf

[8] https://stories.starbucks.com/press/2022/starbucks-enters-new-era-of-growth-driven-by-an-unparalleled-reinvention-plan/

[9] https://stories.starbucks.com/press/2022/starbucks-enters-new-era-of-growth-driven-by-an-unparalleled-reinvention-plan/

[10] https://www.reuters.com/world/us/senior-republican-chastises-banks-social-agenda-that-harms-america-2022-09-22/

[11] https://www.whitecase.com/insight-alert/sec-proposes-amendments-rules-regulate-esg-disclosures-investment-advisers-investment#:~:text=On%20May%2025%2C%202022%2C%20the,naming%20of%20funds%20with%20an