How business giants are getting lower interest rates to meet diversity quotas

Amid an increase in racially-conscious hiring programs across corporate America, many leading companies are now writing racial and gender quotas into their credit agreements with banks, tying the cost of borrowing from the diversity of the corporate workforce, a Free Washington Beacon analysis found.

Companies that have struck such deals include pharmaceutical giant Pfizer, consulting groups Ernst & Young and AECOM, insurers Prudential and Definity Financial, private equity firms BlackRock and The Carlyle Group, technology company Trimble and giant telefonica telecommunications.

Over the past two years, each of these companies has secured a loan agreement, known as a credit facility, that ties the interest rate charged by the banks to the company’s internal diversity goals, creating a financial incentive to achieve them. If the company achieves its goals, it will not have to pay as much interest on the loans it takes out; if it is insufficient, he is bound to pay more.

Under BlackRock’s $4.4 billion credit facility, for example, Wells Fargo will lower the company’s interest rate by 0.05% if it hits two benchmarks: a 30% increase in the share of black and Hispanic employees by 2024, and a 3% increase in the share of female executives each year – or increase the rate by the same amount if missing both.

The agreements, which typically involve multiple banks, are effectively credit cards for businesses: rather than providing a one-time loan, lenders extend a continuous line of credit that businesses can draw on at will, either to cover operating costs or as bad weather funds for emergencies. This means that changes to a facility’s interest rate, even modest ones like BlackRock’s 0.05% diversity adjustment, can have a sizable effect on a company’s bottom line.

The companies announced these agreements as proof of their progressive good faith. Trimble CEO Rob Painter, for example, said the company’s credit facility – which ties interest rates to the percentage of female employees – exemplifies Trimble’s “commitment” to “diversity of gender in the workplace”. In press releases announcing their own credit facilities, executives from BlackRock, Prudential and Definity say the deals demonstrate their commitment to “responsibility”.

But critics see something much more sinister: a form of blatant discrimination that will harm consumers, credit markets and the rule of law.

“If a bank were to penalize a company’s credit rating for having too many women or being too racially diverse, we would be appalled,” said a senior government regulator, who ran a credit facility. nine-figure credit as a lawyer in private practice. “It’s exactly the same, except the penalized target is white males.”

Credit agreements will divert consumer resources, critics say, to diversity initiatives, where the promise of discounted loans will encourage the use of illegal hiring quotas. They will also hurt businesses that don’t negotiate a diversity discount on their loans, as those businesses will face higher borrowing costs than their competitors, a dynamic that could steer entire industries toward race-friendly policies. .

“Let’s say Wells Fargo will lend to BlackRock at 1% if it meets diversity quotas and the market interest rate is 5%,” said Will Hild, executive director of Consumers’ Research. “All other companies that have to borrow at 5% are now at a disadvantage to BlackRock, so other companies will have to follow BlackRock’s lead or they will go bankrupt because BlackRock will be able to subsidize its products through Wells Fargo.”

BlackRock, Wells Fargo and Bank of America, which manages credit facilities for Trimble, Carlyle and Pfizer, did not respond to requests for comment.

The contracts represent a new twist on environmental, social and governance (ESG)-related lending that has proliferated in recent years. When banks lend to companies, they generally base interest rates on several factors, such as a company’s cost structure or debt ratio, which create credit risk. Since 2017, however, some banks have also factored in ESG considerations — a borrower’s carbon footprint, for example — in addition to the ability to repay a loan.

With diversity quotas in the mix, this gap between credit risk and access to credit has only grown. “There is no evidence that diversity makes a borrower more likely to repay their loan,” the government regulator said. “It’s like giving credit based on the astrological sign.”

When a bank lends irrationally to a customer, the regulator added, it “invariably makes its lending terms less fair to everyone else”.

The credit deals come as race-conscious programs explode in corporate America — and sometimes in the companies’ own faces. Pfizer, one of the companies that tied its lending costs to diversity, was sued in September over a prestigious scholarship that bars white and Asian applicants. Programs from Microsoft, IBM and Google use similar criteria, as do American Express and Amazon, both of which face civil rights lawsuits.

Race-friendly lending will encourage such policies, legal experts have said, and could expose companies to legal liability. Even if companies don’t adopt overt quotas, said Adam Mortara, a prominent civil rights advocate, the agreements could be used as evidence that the firing of a white or Asian employee was racially motivated, “due to incentives than this type of breed- the creation-based rebate.”

That said, it’s not clear whether the contracts are illegal per se. There is no federal civil rights law that directly prohibits discrimination in business lending, three attorneys said, unlike discrimination in consumer lending and employment, and attorneys were split on whether the agreements would hold up in court.

“You could argue that the deals themselves are allowed as long as the companies achieve their diversity goals without violating civil rights law,” said Hild, who also founded the public interest law firm Cause of Stock. “Of course, if there was a way to do it, they wouldn’t need these deals.”

Other lawyers said the contracts created such incitement to discrimination that courts could strike them down. If a company can’t increase its minority employment through race-blind means, said James Copland, director of legal policy at the Manhattan Institute, strict quotas will be the only way it can avoid losing money. under the loan agreement.

“This is an implied violation of Title VII,” the law that prohibits discrimination in employment, Copland told the Free tag. “It must be illegal.”

Credit facilities are the product of complex and confidential negotiations between a company and its lenders, making it difficult to know which party has offered which terms, although all terms must have the approval of banks and borrowers.

It might seem strange for companies to risk choosing between breaking the law or hurting their wallets, and even stranger for them to celebrate it. But if a company is ideologically committed to quotas, Hild said, credit agreements can make a kind of circular sense, both in economic and legal terms.

Economically, the company gets a discount for a policy it was already going to put in place. Legally, he gets a shield against shareholders who view diversity initiatives as a drag on corporate performance because, under the terms of the loan agreement, more diversity means less cost.

“The company can argue that its diversity policies make borrowing less expensive and thereby fulfill its legal obligation to shareholders,” said Dan Morenoff, executive director of the American Civil Rights Project, which has filed lawsuits against executives. business for their race. conscious programs.

The counter-argument, Morenoff added, is that these policies are highly vulnerable to civil rights complaints. If a court orders a company’s programs to be racially conscious, the company might not be able to meet the diversity goals specified in its credit agreement, in which case the cost of borrowing would increase.

The calculation is just as complex for banks. On the one hand, lenders will make less money if they lend to businesses at a reduced rate. On the other hand, Hild said, tying rebates to ESG goals, including diversity, can improve banks’ ESG scores and thus attract capital from ESG investors, some of whom, like BlackRock, are themselves beneficiaries. of ESG loans.

The private equity firm also owns 7.1% of Wells Fargo, the bank that manages its credit facility, and likely also owns shares of other participating lenders, Morenoff said. So when BlackRock obtains an ESG loan from these banks, it can indirectly increase the value of its own shares.

The result – if no one sues – is a win-win for both lender and borrower. The losers are innovators, retirees and consumers, who will bear the costs of a distorted market.

“The purpose of bank lending is to allocate capital to its best use so that we can have better products at a lower price,” Hild said. “If you subsidize diversity, you focus the market on other things.”

Leslie M. Gill