From the return of Trump, to ensuing anxiety about tariffs and trade wars, numerous destructive conflicts around the world and devastating climate-related disasters, we are experiencing turbulent times globally. These geopolitical developments have significant ESG impacts. Geopolitical tensions disrupt supply chains and heighten market volatility, which complicate corporate sustainability efforts as companies navigate the complexities of operating in politically unstable regions, while continuing to prioritise ESG standards. These  tensions and challenges also contribute to a more uneven global ESG regulatory landscape, complicating compliance for multinational organisations as they struggle to navigate different legal frameworks.

This article is written by Annabelle van der Maarel ([email protected]).  Annabelle is part of RSM Netherlands Business Consulting Services, specifically focusing on Sustainability and Strategy.

Conflicts

We are witnessing significant global turmoil as a number of conflicts unfold worldwide. Besides the uncountable human rights violations and fatalities, such conflicts bring instability in the region and tremendous damage to the environment.

The Russia-Ukraine war has been ongoing since February 2022, and has resulted in disruptions to energy markets and energy security, (food) supply chains and geopolitical alliances. The war exposed Europe’s reliance on Russian gas, accelerating investments in alternative energy sources, including nuclear, wind and hydrogen. Conflicts like this have prompted a re-evaluation of ESG investment strategies. Notably, European ESG funds have more than doubled their holdings in defence-related stocks, prioritising national security.

Atrocities continue to be committed in the ongoing war in Gaza. An enormous humanitarian crisis is taking place in which masses are displaced, infrastructure is destructed and a staggering 46,600 people have reportedly been killed since October 2023 (although recent studies suggest that this number may even range between 55,000 and 80,000). The International Criminal Court has established that there have been breaches of international law amounting to war crimes and crimes against humanity, possibly also genocide. Businesses and investors are under pressure to respond ethically, as companies with operations or supply chains in the region, or with linkages to Israel, face the risk of reputational damage. The ensuing instability in the region affects global markets through rising oil prices, trade restrictions, supply chain disruptions and security concerns.

Recently, a Rwandan-backed M23 militia has launched an assault on Goma in the DRC, which has the potential to result in a wider regional conflict. In Sudan, a civil war has been raging since the spring of 2023, resulting in significant internal displacement and human rights violations. Moreover, the world is awaiting the outcome of the fall of Assad’s regime in Syria. All in all, global instability seems to be at an all-time high.

Trump

The re-election of US President Donald Trump has resulted in significant turmoil nationally and globally, with daily headlines addressing his controversial claims and policies. Trump signed 26 executive orders on his first day back in office, withdrawing from various international agreements and reversing long-standing national policies. Subsequently, his use of chaos and crisis have been referred to as the ‘shock and awe’ doctrine. Overall, Trump’s policies are not in line with ESG values, as indicated by his pro-fossil-fuel agenda and reversal of human rights protections, as well as the lack of transparency, regulatory oversight and ethical concerns his previous administration was frequently criticized for.

Departure from the Paris agreement

Similarly to his first term in 2017, President Trump began US withdrawal from the Paris Agreement on his first day back in office, making the US one of only four countries not party to the agreement (Libya, Yemen and Iran). This decision of the world’s largest economy and second largest emitter of greenhouse gases, has drawn criticism from environmental advocates and global leaders. The impact of the previous US withdrawal was significant, disrupting efforts to tackle climate change, damaging international climate diplomacy, halting contributions to climate finance and damaging US credibility internationally. According to the rules of the agreement, it will take a year for the withdrawal to become official. The withdrawal comes at a time in which global average temperatures have surpassed 1.5 degrees Celsius for the first time, indicating the grave need for immediate climate action. In contrast, Trump wants to expand fossil fuel development in the US, claiming “we will drill, baby, drill,” during his inaugural address. Moreover, it is feared that US withdrawal may create an excuse for other countries to decrease their climate commitments, and has the potential to slow down the energy transition. Similarly to the Paris Agreement, the US will leave the World Health Organization.

Protectionism

Promised US tariffs and looming trade wars will result in massive disruptions to supply chains between the US and its most important trading partners. Subsequently, those trading partners will likely respond with counter measures. Time will tell how resilient organisations in subject countries are to such supply chain disruptions. Tariffs will also apply to materials and products required for the transition towards renewable energy sources and projects, slowing the energy transition. Moreover, although Trump’s protectionism is aimed at bringing jobs back to the US, the policies in question also strained industries dependent on global supply chains, resulting in fewer jobs and wage stagnation. Overall, continuously shifting trade policies create uncertainty for businesses, allowing them to focus less on ESG considerations and making it more difficult to make long-term ESG commitments.

Colonial sentiment

Trump has expressed his wish to be in control of Greenland in order to boost US security in the Arctic against Russia and China. Trump’s interest in Greenland stems from its strategic location and resource potential, possessing vast reserves of rare earth minerals critical for technology, defence and clean energy. Greenland is an autonomous territory under the Kingdom of Denmark and Trump’s suggestion has caused diplomatic friction. The suggestion of ‘buying’ a territory brought about colonial sentiments and raised many concerns globally. In response, Greenland has announced that it plans to ban foreign political donations after Trump threats.

Similarly, Trump has made claims about taking over the Gaza strip and transforming it into the “Riviera of the Middle East”. His plan involves relocating the Palestinian population and redeveloping Gaza to stimulate economic growth. The proposal has sparked significant controversy and criticism, and many have responded to the plan as being a violation of international law.

As part of his pro-fossil-fuel agenda, Trump has also announced his intent to revive the Keystone CL and Dakota Access Pipelines, which has controversial social and environmental implications. These projects are meant to improve North American energy independence. However, critics have raised concerns about potential oil spills, threats to indigenous lands, as well as its overall conflict with sustainability goals and standards.

Retreat from ESG Commitments

Several major corporations have scaled back their ESG initiatives in response to geopolitical tensions and economic pressures,. For instance, BP initially set ambitious net-zero targets but later diluted these commitments, opting to invest more heavily in fossil fuel projects. In 2020, BP announced plans to reduce oil and gas production by 40% by 2030 as part of its net-zero strategy. However, following the financial impacts of the Ukraine war and rising oil prices, BP scaled back this target to a 25% reduction and has since shifted focus toward investments in fossil fuel-rich regions. Unilever has also revised several of its ESG commitments, reducing its target to cut virgin plastic usage from 50% by 2025 to 30% by 2026. Additionally, Unilever abandoned its pledge to spend €2 billion annually with diverse suppliers by 2025 and dropped its goal for 5% of its workforce to comprise individuals with disabilities by the same year. A number of prominent companies have reduced their Diversity, Equity, and Inclusion (DEI) programs in response to political and economic pressures, including Google, Target, Meta and Amazon. Overall, this shift reflects a broader trend where companies prioritise immediate financial stability over long-term sustainability goals.

Just transition

Countries with vast natural resources often leverage them as political tools, affecting supply chains. The global push for clean energy has increased the demand for critical minerals like lithium, cobalt, and rare earth elements, many of which are concentrated in geopolitically sensitive regions. Therefore, it is crucial that we strive for a ‘just transition’, meaning we must ensure that the energy transition takes place in a just manner that takes into account all interests at stake in the transition, and that benefits all. Hence, it involves the prioritisation of protection of workers and communities affected by changes in energy and resource policies. 

Forward Thinking

Geopolitics and sustainability are deeply connected. On the one hand, there is significant awareness of geopolitical risks in companies, but their preparedness to deal with such risks is often inadequate. On the other hand, research indicates that ESG-committed companies exhibit more resilience to geopolitical risks, emphasizing the need to enhance ESG efforts in order to minimise risk to your organisation. Geopolitical factors need to be integrated into sustainability strategies in order to build resilience and agility to respond to rapidly changing circumstances. Despite the many challenges posed by geopolitical tensions, they also act as a catalyst to accelerate action to achieve energy independence, investments in renewable energy, resilient supply chains and sustainable development.

Recommendations for companies to maintain their ESG values amid geopolitical tensions:

  1. Strengthen supply chain resilience by diversifying suppliers, investing in ethical sourcing and ensuring transparency to mitigate geopolitical risks.
  2. Stay on top of changing ESG regulations across different jurisdictions.
  3. Invest in energy and resource security by shifting to renewables and reducing dependence on instable regions.
  4. Foster a transparent organisation to build strong governance frameworks and convey your organisation’s sustainability values.
  5. Collaborate with value chain partners, governments, organisations and investors to uphold ESG commitments even in times of uncertainty.

RSM is a thought leader in the field of Sustainability consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.