Businesses Must Integrate ESG Strategies to Meet New Challenges

In an era marked by geopolitical tensions and conflicts, businesses worldwide are increasingly compelled to adopt measures that safeguard their supply chains and consider their own business conduct. These measures are essential to ensure resilience and operational continuity.

However, this focus on securing supply chains while ensuring the viability of the business raises a question: Are human rights, social, and environmental standards still essential for globally operating businesses, or is the emphasis on green and digital transformation waning?

The answer lies in the evolving landscape of environmental, social, and governance priorities. Businesses mustn’t lose track of such concerns, even as they navigate complex geopolitical landscapes. Instead, they should take a holistic approach to ESG, integrating these principles into their core ESG strategies.

EU Green Deal

The EU Green Deal has been instrumental in shaping the ESG landscape, driving legislative initiatives that can be broadly categorized into four areas: reporting, decarbonization, due diligence, and product-specific ESG initiatives.

These initiatives aim to create a sustainable and resilient economy by setting stringent standards for businesses operating within and beyond the EU.

The product-specific regulations lay down stringent sustainability criteria. These include minimum shares of recycled secondary raw materials in new products, lifecycle carbon footprint assessments, maximum thresholds for substances of concern, and minimum safeguards on human rights and social standards. Additionally, criteria on reuse, recycling, and repurposing help promote a circular economy.

Meeting these sustainability criteria isn’t merely a regulatory obligation but is a strategic imperative for businesses. Failure to comply with ESG requirements can result in restricted trade, limiting market access and growth opportunities.

Enhancing Transparency

In today’s globalized economy, the movement of goods across borders is a complex and often opaque process. Many companies struggle with transparency in their goods transactions , primarily due to the outsourcing of import and export operations to external service providers. This lack of transparency can pose significant challenges, especially when it comes to aligning with ESG requirements.

The identification of affected goods flow is paramount for successfully implementing new ESG product requirements. Without a clear understanding of the movement and classification of goods, companies risk falling short of these emerging standards.

The accurate classification of products using the Harmonized System (HS) codes is a critical component of this process. These codes are universally recognized and form the basis for defining the scope of ESG files. They determine which products are subject to specific regulatory requirements, making their accurate classification essential for compliance.

Proper customs tariff classification enables companies to ascertain the correct ESG criteria applicable to their products. This is vital for ensuring compliance with import and export regulations and for meeting market placement standards. Misclassification can lead to noncompliance, resulting in fines, delays, and reputational damage.

By enhancing transparency in their goods transactions and mastering the intricacies of customs tariff classification, companies can better navigate the ESG landscape. This proactive approach safeguards against regulatory pitfalls and aligns with growing consumer and stakeholder demand for responsible business practices.

Adapting Organizational Structures

In the quest for sustainable business practices, companies often face challenges in implementing new governance processes that are agile and efficient. The evolving complexity of ESG regulations demands a rethinking of organizational structures, moving toward a more integrated approach.

A matrix organization is becoming essential for companies aiming to successfully implement ESG requirements.

No single department can shoulder the responsibility of compliance alone. Just as ESG regulations have grown in complexity, so too must the organizational structures within companies adapt to meet these demands.

Implementing ESG initiatives requires a collaborative effort across all departments within a company. Each department must contribute and understand its specific role and responsibilities. This collective effort ensures that all areas of the business are aligned with ESG objectives, fostering a culture of sustainability throughout the organization.

Typically, the sustainability department takes the lead in ESG matters. This department is tasked with analyzing new ESG requirements, evaluating their impact on the business, and defining specific tasks for various departments within a matrix organization. As the central governance function, the sustainability department provides oversight and ensures that all departments are working cohesively toward shared ESG goals.

Successful implementation of ESG requirements hinges on the cooperation of all departments within a company. Embracing a matrix organizational structure and fostering cross-departmental collaboration allows businesses to comply with complex ESG regulations and enhance overall governance and sustainability efforts.

Holistic Approach

Geopolitical conflicts shouldn’t detract from the importance of ESG priorities. Businesses must adopt a holistic approach to ESG, integrating these principles into their core strategies to drive sustainable growth and resilience.

The EU Green Deal provides a robust framework for ESG integration, with its comprehensive regulations and directives setting a new benchmark for businesses. By embracing these initiatives, companies can enhance their long-term competitiveness, mitigate risks, and contribute positively to society and the environment.

By prioritizing transparency, accountability, and sustainability, companies can navigate geopolitical challenges while upholding their commitment to ethical practices and sustainable development. In doing so, they not only will safeguard their supply chains and their own business conduct but also will help secure a competitive and sustainable future.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephan Freismuth is KPMG director, trade and customs global.

Write for Us: Author Guidelines