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How tariffs affect corporate ESG initiatives
ESG initiatives, like all areas of business, are affected by President Trump's tariffs. Here's what CIOs need to know to keep the supply chain moving and ESG programs supported.
Corporate environmental, social and governance, or ESG, policies have become essential for organizations seeking to embrace ethical principles and curry public favor.
ESG policies serve as a framework to address the long-term effects of business activities on the environment, society and internal governance practices. As worldwide awareness of issues such as climate change, social responsibility and labor rights continues to grow, investors, customers, companies and entities find themselves under increasing pressure to adopt such policies.
On the social and governance fronts, ESG policies emphasize equitable treatment of employees, respect for labor and human rights, engagement with groups and communities and positive corporate ethics. The environmental component of ESG focuses on a company's use of natural resources and its responsibility to reduce its ecological footprint.
By embedding ESG considerations into their corporate DNA, organizations can contribute positively to society, position themselves for long-term growth and generate goodwill among the public.
Still, ESG is not a government-driven initiative, said Adam Freedgood, principal client director and co-founder at Third Partners, a full-service ESG and sustainability strategy company.
"The Federal Government was never a driving force in this … it has always been a business-led movement," he said. "There's very little federal regulation in the U.S. that compels companies to do anything."
Introduction to tariffs for businesses
Tariffs are a tax levied by national governments on imported goods when they arrive in the nation and before they reach consumers. They serve several purposes, including protecting domestic industries. By making imported goods more expensive, tariffs encourage consumers to buy from local producers.
However, tariffs also carry economic trade-offs, like retaliation. If Nation A slaps tariffs on Nation B's products, Nation B can retaliate against Nation A by slapping similar tariffs on its products. Even if both sides eventually back down, this can temporarily disrupt the supply chain and affect consumer prices.
In the case of the Trump Administration's use of tariffs, President Donald Trump has used them as an incentive to bring manufacturing back to the U.S. that has fled to nations with lower manufacturing costs -- primarily, those in Asia.
"It's creating a real opportunity for reshoring in the U.S.," said John Boyd, principal with the Boyd Company, which advises major corporations where to locate their facilities throughout North America. "It's also creating opportunities for near-shoring. Latin American nations have a lower tariff rate than China and India."
Tariffs as an ESG obstacle
While tariffs could create new opportunities within the U.S., they have affected every facet of corporate operations and might also harm ESG programs.
"They're a huge distraction for C-suite teams. They're absolutely having an impact on a company's bandwidth, on free cash flow, depending on where you are in the value chain," he said.
The extent of damage to organizations in general and to ESG programs remains unclear, especially as companies have been hitting the brakes on ESG programs since 2018, according to Jay Ruckelshaus, president and co-founder of Gravity Climate, a carbon and energy management platform.
"Especially with more economic uncertainty and push back on some of the ESG for ESG's sake, there's been a real hunger and, frankly, demand for value creation from these departments. Like, how do these sustainability initiatives actually amount to cost savings, revenue growth, product differentiation, product innovation and easier access to capital?" Ruckelshaus said.
Corporate responses to tariff changes
Trump's tariffs have introduced incredible volatility into global supply chains and forced intense changes within them. Now, companies are responsible for both their direct supply chains and those who supply their supply chain partners. Organizations can manage this risk through a practice called supply chain mapping, which involves understanding their suppliers and the entire supply chain. This can also help with traceability, Boyd said.
"There's a real hunger for finding efficiencies where we can, especially … those that have a positive ROI. The sustainability teams [are then] being brought into the discussion when it comes to dealing with tariffs," Ruckelshaus said.
The tariffs have introduced the financial imperative, in addition to any pre-existing policy, regulatory and sustainability imperatives, for companies to conduct supply chain due diligence, including mapping traceability, according to Freedgood.
"Now you have to manage not only environmental and social risk, but logistics risk, cost risk," he said. "It's absolutely created more of an imperative around supply chain mapping. There were already strong imperatives for companies with global, multi-tiered supply chains to map their supply chains and to know their suppliers."
For example, Freedgood said he helped companies that sourced leather from South America map their supply chains, understand where they might contribute to deforestation, identify risk exposure, and make changes to inform strategic supply chain decisions.
Strategic role of CIOs and tech leaders
CIOs and CTOs can take on various roles to address tariff-related and general supply chain issues related to ESG. When an organization operates in large supply chains, with thousands of suppliers, CIOs and CTOs invariably become involved in the technology to help their sourcing teams and regulatory teams manage impossible amounts of data, Boyd said.
Some technology they might adopt includes supply chain mapping technology, whether that's SaaS or ERP integration. ERPs aren't suited to manage non-transactional data or data from suppliers with which the organization doesn't have a direct transactional relationship. So, CIOs and CTOs require a more agile approach to manage multi-tiered supply chain data.
"There are a number of traceability and supply chain mapping platforms out there. It's invariably CEOs and CIOs and CTOs who are evaluating these solutions, if they find their teams have impossible levels of data and they no longer have the tools they need to make decisions on the fly," Boyd said.
Additionally, teams shouldn't underestimate the viability of AI in all of this, Freedgood said. There's a lot of hype around AI, but in this case, there's something real behind it.
"We're using AI to make inferences and to vacuum up essentially big data on how supply chains work, and by making inferences about how raw materials flow from supplier to supplier, globally, we can end up with predictive risk analytics, and that's absolutely important to the profession," he said.
Andy Patrizio is a technology journalist with almost 30 years' experience covering Silicon Valley who has worked for a variety of publications on staff or as a freelancer, including Network World, InfoWorld, Business Insider, Ars Technica and InformationWeek. He is currently based in southern California.
