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This essay discusses contemporary federal, financial intermediary, and company efforts to navigate racial inequality, placing those efforts in the context of ESG—environmental, social, and governance—initiatives. While ESG tools and metrics have tended to focus on a firm’s external and internal impacts on the environment, human rights, and labor standards, in recent years, firms have targeted ESG efforts at racial equity primarily through internal diversity, equity, and inclusion (DEI) initiatives and customer-facing corporate philanthropy. This essay proposes an ESG racial equity goal, discusses how federal regulations of corporate DEI programs and policies fail to meet this goal, and highlights how racial equity standards being set by other power brokers, namely stock exchanges, indices, and institutional investors. I then discuss an emerging and important ESG tool: the racial equity audit. “Race audits” were first proposed in 2011 in the context of municipalities seeking to map the specific impacts of racial disadvantage within a jurisdiction. The focus of the audit is to track laws, policies, and procedures that contribute to racial disparities within the municipality or, in the context of ESG, within a company. Racial equity audits were the topic of numerous shareholder proposals during the 2021 proxy season. While no racial equity audit shareholder proposals were successful in 2021, they—and the entire ESG movement—continue to be bolstered by institutional investors eager to tackle systemic racism and reluctant corporate managers facing embarrassing and newsworthy racially-charged incidents in their offices and storefronts. This essay concludes with my own recommendation to improve ESG efforts to combat racial inequality: the U.S. Securities Exchange Commission (SEC) should step into the role of regulator of ESG accounting and auditing firms to oversee and regulate the quality, ethics, integrity, and independence of ESG audits, including racial equity audits.

Publication Citation

University of Pennsylvania Journal of Business Law, Vol. 24, No. 2, 2022, Symposium: Festschrift Honoring the Hon. Leo E. Strine, Jr.