How business giants get lower interest rates to meet diversity quotas

Amid an upward trend in racially aware hiring programs across America, many prominent companies are now writing racial and gender quotas into their loan agreements with banks, tying the cost of borrowing to the diversity of the company’s workforce, a Washington Free Beacon analysis found.

Companies that have reached such agreements 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 telecoms giant Telefónica.

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 banks to the company’s internal diversity goals, providing a financial incentive to meet them. If the company achieves its goals, it will have to pay less interest on the loans it borrows; if it falls short, it has to pay more.

For example, under the terms of BlackRock’s $4.4 billion credit facility, Wells Fargo will cut the company’s interest rate by 0.05 percent if it hits two benchmarks — a 30 percent increase in the proportion of black and Hispanic employees up to 2024 and a 3 percent increase in the proportion of women executives per year – or increase the quota by the same amount if neither is missing.

The arrangements, usually involving multiple banks, are effectively business credit cards: instead of providing a one-time loan, lenders extend an ongoing line of credit that businesses can draw on at their leisure, either to cover operating expenses or as a contingency fund in case of emergencies . That means changes in a facility’s interest rate — even small ones like BlackRock’s 0.05 percent diversity adjustment — can have a noticeable impact on a company’s bottom line.

Companies have promoted these agreements as evidence of their progressive credibility. Trimble CEO Rob Painter, for example, said the company’s lending facility – which ties interest rates to the percentage of female employees – exemplifies Trimble’s “commitment” to “gender diversity in the workplace.” In press releases announcing their own lending facilities, executives at BlackRock, Prudential and Definity say the arrangements demonstrate their commitment to “accountability.”

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

“If a bank penalized a company’s creditworthiness because there were too many women or because there was too much racial disparity, we would be appalled,” said a senior government official who managed a nine-figure loan facility as an attorney in private practice. “It’s exactly the same, except the target being penalized is white males.”

Critics say the loan deals will divert resources away from consumers and toward diversity initiatives, where the promise of concessional credit will encourage the use of illegal hiring quotas. They will also hurt companies that don’t negotiate a diversity rebate on their loans because those companies face higher borrowing costs than their competitors — a dynamic that could steer entire industries toward racially-conscious policies.

“Let’s say Wells Fargo will loan BlackRock at 1 percent if it meets diversity quotas and the market rate is 5 percent,” said Will Hild, managing director of Consumers’ Research. “Any other company that has 5% debt is now at a disadvantage compared to BlackRock. So other companies have to follow BlackRock’s lead or they’ll go out of business because BlackRock can subsidize its products through Wells Fargo.”

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

The contracts represent a new variant of the ESG-related lending (Environmental, Social, Governance) that has become widespread in recent years. When banks lend to companies, interest rates are typically based on several factors that affect credit risk, such as: B. the cost structure or the debt ratio of a company. Since 2017, however, some banks have included ESG considerations – such as a borrower’s carbon footprint – in addition to ability to repay.

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

When a bank irrationally lends to a customer, the regulator added, “they invariably make their lending terms less fair to everyone else.”

The credit deals come as race-conscious programs explode across America — and sometimes on the corporate faces themselves. Pfizer, one of the companies that has linked its borrowing costs to diversity, was sued in September over a prestigious grant that excludes white and Asian applicants. Programs from Microsoft, IBM and Google use similar criteria, as do American Express and Amazon, both of which are now facing civil rights lawsuits.

Racially aware lending will encourage such policies, legal experts said, and could expose companies to legal liability. Even if companies don’t implement open quotas, Adam Mortara, a well-known civil rights activist, said the agreements could be used as evidence that firing a white or Asian employee was racially motivated, “because of the incentives that this kind of racial-based discounting.” creates.”

However, it is not clear whether the contracts are illegal in and of themselves. There is no federal civil rights law that directly prohibits discrimination in business credit, three attorneys said, unlike discrimination in consumer credit and employment, and attorneys were divided over whether the agreements would stand in court.

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

Other lawyers said the contracts created such a strong incentive to discriminate that courts could strike them down. Unless a company can increase its minority employment through racially blind means, said James Copland, director of legal policy at the Manhattan Institute, hard quotas will be the only way to avoid losing money under the terms of the loan agreement.

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

Credit facilities are the result of complex, confidential negotiations between a company and its lenders, making it difficult to determine which party proposed which terms, although all terms must be approved by banks and borrowers.

It may seem strange that companies would risk choosing to break the law or hurt their wallets, and even stranger that they should celebrate doing so. However, if a company commits itself ideologically to quotas, the credit transactions could result in a kind of circular reasoning, both economically and legally, says Hild.

Economically, the company gets a rebate for a policy that it was already planning to implement. It is legally protected from shareholders who see diversity initiatives as a burden on business success – because according to the loan agreement, more diversity means lower costs.

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

The counterargument, Morenoff added, is that these policies are highly prone to civil rights complaints. If a court bans a company from racially sensitive programs, it may not be able to meet the diversity goals set out in its loan agreement, which would increase borrowing costs.

The calculus for banks is similarly complex. On the one hand, lenders make less money by lending to companies at a reduced interest rate. On the other hand, Hild said, linking the rebates to ESG objectives, including diversity, can improve banks’ ESG scores and thus attract capital from ESG investors – some of whom, like BlackRock, are themselves recipients of ESG loans.

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

The result – if no one complains – is a win-win situation for lenders and borrowers. The losers are innovators, retirees and the consumers who will bear the cost of a distorted market.

“The purpose of bank lending is to get the most out of capital so we can have better products at a lower price,” Hild said. “Anyone who subsidizes diversity focuses the market on other things.”


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