The DEI backlash is serious. A series of well-publicized executive orders, statements from cabinet members, summons for law firms and other government actions have targeted initiatives for diversity, equity and inclusion.
Limited partners of all types also are pulling back from overtly DEI-branded initiatives. Political scrutiny is making some investors rethink their strategies and communications, if not their priorities and investments.
One thing is clear: the fundamental drivers of impact investing haven’t changed. The overlooked entrepreneurs, the communities that have endured historic underinvestment, the products and services focused on these communities that have great potential, but for needed capital – these needs persist, regardless of the policy decisions being made in Washington, DC, and elsewhere. The need for capital to address climate resilience, financial inclusion, and underserved markets is bigger than ever.
Enterprising fund managers who recognize these opportunities can still create impact and returns for investors.
The current climate is very different from 2020, immediately following George Floyd’s murder in Minneapolis. Then, major corporates and institutional investors took notice and made a series of public commitments to advance DEI causes. Today’s climate warrants a cautious and intentional approach.
How do you raise an impact fund that is fundable, defensible, and scalable in today’s environment?
The answer lies in strategy, structure, and storytelling. Here’s how we are advising some of our clients, and what you might consider in taking your strategies forward.
Evolving legal landscape
Even before the executive orders… even before last year’s Fearless Fund case… diversity-focused investing and corporate DEI initiatives have been subject to increasing scrutiny and litigation. High-profile cases, such as Students for Fair Admissions v. Harvard, which led to the Supreme Court’s 2023 rejection of race-based admissions policies, signaled a broader pushback against explicit diversity considerations.
That ruling and its underlying arguments have been used to attack recruiting practices at US colleges, military academies and major law firms, as well as to successfully challenge the Securities and Exchange Commission’s approval of Nasdaq’s board diversity rules.
Even private sector and corporate DEI programs have come under fire. Morgan Stanley, Novant Health and other companies have faced legal challenges from employees alleging either reverse discrimination or insufficient DEI efforts. The Pacific Legal Foundation recently sued UCSF Benioff Children’s Hospital over an internship program targeting minority students, arguing it violates constitutional protections. Lawsuits against Starbucks and the Ohio Department of Youth Services similarly allege discrimination against non-minority employees in hiring and promotions.
To be clear, many diversity, equity and inclusion-focused initiatives—especially those that are geared towards eliminating bias, developing a broad view of diversity and promoting equal opportunity—remain lawful. Diversity-focused investing remains a powerful economic strategy.
But the growing threat of litigation suggests that fund managers must carefully navigate legal risks and frame initiatives around business fundamentals, expansion of opportunity – and compliance with evolving regulations.
Steer clear of quotas
The legal position on racial quotas is increasingly restrictive, with courts striking down policies that explicitly allocate opportunities based on race. The Supreme Court’s affirmative action ruling reinforced the principle that race-conscious decision making in admissions—and by extension, other sectors as well—must meet the highest and most stringent standard of judicial review available, known as “strict scrutiny,” and cannot rely on quotas or numerical targets.
Similarly, corporate and philanthropic DEI programs that explicitly prioritize race-based eligibility are facing legal challenges, such as the lawsuit against the Fearless Fund, which questioned the legality of grant programs exclusively for Black female entrepreneurs, and has since been settled.
While affirmative action and race-conscious policies were once upheld under certain conditions, recent legal trends suggest that any investment strategy or hiring initiative structured around racial quotas is vulnerable to a successful challenge. Instead, fund managers should consider broader, race-neutral criteria—such as economic disadvantage, geographic underrepresentation, or sector-specific barriers—that can help achieve diversity without running afoul of anti-discrimination regulations and case law. Note: Even this framing has been challenged by plaintiffs who have argued that such “diverse backgrounds” language merely cloaks otherwise allegedly unlawful discrimination.
Take race out of decision-making
The evolving legal landscape is increasingly hostile to overtly race-based decision-making in commercial contracts, including investments, as courts apply heightened scrutiny to such practices.
Historically, race-conscious programs in contracting and business development were justified under affirmative action precedents. Recent rulings and legal challenges are narrowing the scope for explicitly race-based eligibility criteria. Cases like Nuziard v. Minority Business Development Agency and Ultima Services Corp. v. U.S. Department of Agriculture have challenged race-conscious contracting rules following the Supreme Court’s affirmative action ruling.
Venture funds and grant programs that explicitly allocate capital based on racial identity—such as Fearless Fund, a grant program for Black women business owners – are being challenged under federal anti-discrimination laws, including Section 1981 of the Civil Rights Act of 1866, which prohibits racial discrimination in private contracting. To ensure compliance while still advancing diversity in capital allocation, fund managers and impact investors are shifting toward legally resilient frameworks, such as targeting underserved communities or economically disadvantaged founders, rather than using explicitly race-based selection criteria.
Census tracts identified in the Opportunity Zone Act are just one example of an officially sanctioned designation of “distressed areas” in the United States. Regardless of whether the strategy seeks to take advantage of the OZ tax incentives, investments focused on designated Qualified Opportunity Zones may allow an investor to reach an underserved, economically disadvantaged community with less legal risk.
Thoughtful, intentional language
We have advised some managers to move away from ideological framing and to instead focus on value drivers, such as market inefficiencies, overlooked alpha, and financial resilience. In other instances, we’ve advised managers who are standing firm in how they communicate both their commitments and their strategy.
In today’s charged political climate, the language we use matters more than ever. But beyond the language itself, as impact investors, we also have the ability to speak about impact value creation – i.e. how positive impact drives economic value, and vice versa. This is true regardless of how one will approach the market.
To navigate the evolving legal and political landscape with a view towards mitigating risk, fund managers can emphasize financial opportunity rather than diversity as an end in itself. Instead of stating, “We invest in diverse founders,” a more legally and commercially resilient approach may be to highlight a focus on “high-performing businesses overlooked by traditional VC.” This aligns with LPs who are seeking exposure to emerging managers and to take advantage of market inefficiencies, rather than with explicitly race-based investment theses.
By positioning the lack of diversity in capital allocation as a structural inefficiency, fund managers may be able to make a compelling case that investing in underrepresented markets is a strategy for superior risk-adjusted returns.
Data plays a crucial role in reinforcing this argument, demonstrating how other investors have left value on the table by systematically underestimating businesses in these markets. Shifting the narrative toward addressing inefficiencies and unlocking hidden value allows investors to achieve positive impact outcomes while maintaining a focus on commercial viability and regulatory compliance. This may help some institutional LPs “get to yes” in a charged political environment where many have been directly targeted and are being closely scrutinized.
Build your fund for scrutiny
Regardless of the political landscape, and especially now, it’s important to ensure that you have a solid legal foundation that can survive shifting regulations, political winds and LP priorities.
Increased regulatory scrutiny demands rigorous legal preparedness. Your fund’s legal framework must help you withstand regulatory shifts, political pressure, and even “nuisance” litigation. Failure to observe seemingly mundane filing, disclosure, structuring or timing requirements can open an entire strategy to attack from a host of parties. Close collaboration with your legal and regulatory advisors can ensure your strategies are thoroughly vetted and compliant.
Funds are heavily regulated structures. Any experienced fund manager knows that being able to operate effectively during the fund’s deployment phase requires a complex analysis of regulatory rules, ensuring that exemptions are qualified for and timing requirements are met. Diligence – especially on LPs and their qualification to invest – is critical. In an environment of heightened regulatory scrutiny, it’s all the more important that legal structuring is tight, and that potential adversaries are not given an easy toehold to create distractions and obstacles.
Put simply: Don’t give opportunistic adversaries an opening to scrutinize or challenge your strategy based on otherwise avoidable legal or regulatory oversight. Make sure your documents (including your marketing materials) are airtight, and that you’re being well advised on the highly complex world of fund manager regulation.
This is especially the case for managers that employ a blended finance structure—as such structures are purposefully built to work across multiple regulatory, tax, jurisdictional and legal frameworks, all with their own complexities. It’s hard to beat having experienced, diligent advisors who understand the legal terrain as well as the relationship between your impact and financial strategies.
In sum, anticipate regulatory and legal risks, and work with your advisors to proactively build robust governance and compliance frameworks to insulate you and your strategy.
Managing and mitigating risk (real and perceived)
Many successful fund managers recognize that sophisticated capital—institutional or otherwise— flows to funds with well-constructed, “market-standard” legal, governance and compliance structures. We have seen many situations in which the key decision maker – a family principal, chief investment officer, or CEO – understands and decides to move forward with an impact investment into a fund, subject to their investment team’s signoff. This often includes outside diligence firms and law firms who will scrutinize the strategy, materials and documents. This is where solid documents and fundamentals can make a huge difference.
To get to first close, successful impact fund managers know they must operate with the same rigor as traditional private equity or venture firms, ensuring governance frameworks are robust, due diligence is seamless, and compliance standards align with institutional best practices. Institutional-grade impact investing demands impact reporting that is as rigorous as financial reporting. If impact drives returns, it is material—and the data must be reliable, measurable, and decision-useful.
Many impact fund managers build and deploy institutional-quality metrics aligned with internationally respected (or mandated) standards, such as the European Sustainable Finance Disclosure Regulation and the International Sustainability Standards Board, helping to ensure that LP reporting mirrors traditional financial statements.
Identify and utilize impact synergies
Utilizing blended finance strategies—such as catalytic capital, first-loss provisions, guarantees, innovative structures incorporating nonprofits—can further “de-risk” investments, making them more attractive to LPs.
By understanding the impact objectives of other potential stakeholders in the field, many of whom may share the same impact objectives as the fund’s strategy, managers can structure capital to align incentives (both impact and financial) and mitigate downside risk. In doing so, fund managers can enhance their ability to attract institutional commitments or simply enlarge the potential LP field. As I’ve said in other contexts, blended finance isn’t an asset class or a one-size solution; it’s a problem-solving approach.
We often see (and routinely employ) blended finance strategies in this arena because there are meaningful synergies between the impact objectives of impact fund managers, LPs and charitable organizations. This diversity of investors can help bridge a range of gaps and challenges.
The opportunity is bigger than ever
The backlash against DEI signals a shift, not a full stop, for impact investing focused on inclusion for diverse communities. Capital is still flowing—but fund managers need to speak the right language, build resilient structures, and execute flawlessly.
These are of course generalized themes that have flowed through our guidance of many different clients, across many different scenarios. These strategies will not be applicable to all LPs in all situations, but we have found them to be useful in a wide variety of circumstances. Take them for what they are, and recognize what they are not – that is, not legal advice. You should always check with your legal counsel and other advisors before taking action.
The world still needs impact capital. The best fund managers will find creative ways to overcome these new sets of challenges—and still move the needle.
Chintan Panchal is a founding partner at RPCK Rastegar Panchal LLP and head of the firm’s New York office, where he focuses on corporate and finance transactions.
