If your company is like many, your board of directors may be demanding that you put more effort into environmental, social, and governance issues, which have become known by the now-ubiquitous acronym "ESG." Those demands don't come from nowhere: consumers are demanding transparency and social responsibility. In particular, if your company does business internationally, regulators are focused on international social justice issues (such as the use of forced labor) more than ever.
For companies engaged in international trade, there are many dilemmas to confront in implementing your ESG agenda. Not least is how parts of that agenda may be in tension with your company's growth and revenue goals. For example, how to grow export revenue while doing your part to protect the environment. Or how far to go in auditing the import supply chain to comply with expanding prohibitions on products manufactured with forced labor. Yet there is very little guidance out there on managing those dilemmas.
In our view, one principal step is to go back to the company's core values. If you can identify your core values, you can better weigh competing interests. Moreover, connecting international trade policy with core institutional values may help the company better connect with employees, which can improve performance and compliance. It can also help steer the company clear of regulatory enforcement actions and protect the company's reputation.
Out with the old
In past, U.S. trade regulation focused more on foreign policy, national security, and economic security than on environment, social justice, or governance. For example, many U.S. sanctions programs are aimed at isolating foreign adversaries such as Iran and North Korea. Another example is antidumping and countervailing duties, which are imposed to protect U.S. manufacturing from unfair foreign competition. Similarly, U.S. export regulations are designed to protect U.S. technological and military superiority.
In reaction, most international companies have rightly designed their trade compliance policy to mitigate risk of regulatory violations. Manuals and trainings, supported by a company culture of compliance, drive employees to advance the business while complying with the applicable regulations, which helps advance U.S. national security and foreign policy.
In with the new
More recently, U.S. international trade regulations are targeting ESG goals. The biggest example is the recent surge in regulations confronting the use of forced labor in foreign supply chains. Recent examples abound. There has been a rapid increase in U.S. Customs and Border Protection (CBP) enforcement actions to prevent entry of imports made using forced labor. The Department of Labor has issued a list of foreign goods likely to be made with forced or indentured child labor. The United States-Mexico-Canada agreement (which replaced NAFTA last year) repackaged labor principles with access to a the Rapid Response Labor Panel to provide for better enforcement of worker protections abroad. Last year, the Department of Commerce issued a rulemaking proposing additional export controls on facial recognition technology and related surveillance tools used against Uighurs, Kazakhs, and other members of Muslim minority groups in the Xinjiang region China. The Department of Commerce also added over 40 Chinese entities to the Entity List for reasons of human rights abuses against Uighur Muslims in the Xinjiang regions.
As a result of these regulatory trends, environmental, social, and governance goals now have to be part of international trade compliance efforts. That is a daunting task, and it forces us to take a new look at compliance. But it also gives us a unique opportunity to reexamine our corporate values, and refresh our policies to align with company values.
Design trade policies to support company values
To extend ESG practices into your supply chain, here are some steps companies may wish to consider:
- Remind yourself of your company's core values. Many companies have started to spend time and effort digging deep to identify their values. If you've already conducted a values survey, or otherwise identified a set of shared beliefs and goals that define the company's true core values, this is a good time to understand that process. With a little hard work, you can use those findings as a basis for implementing ESG goals into your international trade compliance policy. If your company has not conducted a values project, it may be time to go deeper as an organization, and identify your company's core values.
- Determine the intersection with your international business. Identify the intersection between your company's corporate values and your international trade policies.
- Set internal targets. Set internal targets to prioritize and address all the goals in the intersection between values and trade policy. And don't forget to find a way to provide sufficient resources to meet those targets.
- Understand the risks in your supply chain. Consider conducting a formal review of your supply chain to identify not only listed entities to avoid, but also entities with strong ESG support and reputations. Consider working with suppliers with an ESG focus to put on industry education seminars or release publications.
- Address forced labor. Implement a subprogram focused on identifying forced labor. This could include a forced labor audit, revisions to the company's procurement policies, Supplier Code of Conduct, trainings, on-site inspections, self-assessment questionnaires, and rankings for suppliers. Monitor your suppliers with regular due diligence. Refresh your training for employees with key roles in identifying forced labor.
- Vet third parties. Decide who you want to work with by asking ESG questions. For an exporter, that could be whether customers track greenhouse gas emissions, or for an importer, that could be whether suppliers source from indigenous peoples.
- Formalize supply chain commitments. Consider formulating a Supplier Code of Conduct or Code of Ethical Purchasing. Consider additional contracts such as for sustainable sourcing, support of renewable energy, or other ESG goals captured in your company values.
In the end, this new perspective on compliance could enable companies to not only get out ahead of potential enforcement actions and reputational threat. It can also help you identify ways to conduct sustainable and profitable business as consumers, regulators, and employees are rewarding businesses for ESG performance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.