The Ethical Investor: Five ways tariffs could mess up ESG, and one possible silver lining

Tariffs are hitting hard, with ESG goals tangled in messy supply chains and green projects pushed aside by higher costs.

5 ways tariffs could mess up ESG. Picture via Getty Images

• Tariffs are hitting hard but not all companies will suffer

• Supply chains are about to get messy for ESG goals

• Higher costs could mean green projects getting shelved

Last Saturday, the White House hit Canada and Mexico with 25% tariffs, and China with 10%.

Things got super hectic in the days following, with Canada and Mexico scrambling to make deals. After a round of frantic talks, both countries got a 30-day pause to work things out before the tariffs go full blast.

But China wasn’t so lucky, those tariffs kicked in for them on Tuesday, February 4. And as expected, China fired back, announcing retaliatory tariffs effective February 10.

However, President Trump’s move is under a legal microscope, so this could hit the courts soon. Nobody knows if these tariffs will last or if they’ll even happen at all.

The real worry here is if these tariffs stick, we could be heading straight into a full-blown trade war. And that’s going to hurt.

“If implemented for long enough, tariffs are likely to act as a stagflationary shock to the US economy...” said a note we received from Benoit Anne at MFS Investment Management.

“Current estimates point to a drag of about 1% to economic growth, together with an inflation boost of about 0.5%”

For Australia, a 10% global trade decline could see Australia’s GDP shrink by up to 1.2%, according to a recent OECD study.

Meanwhile for the markets, tariffs mean slower global growth and higher interest rates – a double whammy for stocks.

But it won’t be the same for every company. Some sectors will get hit harder than others.

For example, energy and auto industries will be feeling the heat.

And because Mexico and China are big players when it comes to the supply chains of electronics and mobile phones, those companies will face higher costs, which they’ll probably pass on to consumers.

On the other hand, some industries might feel it less, like financials and media.

Here's how tariffs could have impact on ESG

Yes, ESG (Environmental, Social, and Governance) initiatives are also about to get a wake-up call due to the tariffs.

And here’s how.

Supply chain issues

When tariffs rise, companies might pull up their socks and bring production back to the US or find new suppliers to avoid those higher costs.

But while this might lower the environmental impact of shipping things across the globe (at least for Americans), it’s not all good news.

"Setting up new supply chains often requires a significant initial investment in infrastructure and could lead to increased short-term emissions,” said analysts from Strategic Sustainability Consulting (SSC).

Meaning, companies might have to spend big and pollute a bit more while they get things rolling again.

And if tariffs hit countries with low-cost labor, they may need to find other suppliers fast.

But that could lead to "challenges in maintaining ethical labor standards." They might have to cut corners on worker rights and safety, just to keep up with the clock.

Read later: This is how Aussie markets could get caught in the crossfire of Trump’s tariff war

Green projects could get delayed

Tariffs are likely to send raw material prices through the roof.

"Businesses might feel pressured to redirect funds initially intended for sustainability projects to offset rising material expenses,” said SSC’s analysts.

And so, that green project you've been waiting on could just get put on hold.

And as productions costs rise, companies might pass those costs to consumers, and “price-sensitive consumers may deprioritise 'green' products if costs increase".

They will want cheap, not eco-friendly.

Renewable energy will go backwards

If tariffs are slapped on solar panels or wind turbines, companies might hit pause on their renewable energy plans.

Those "increased costs might slow corporate adoption of green energy solutions" or even push them back to dirtier energy sources.

No one wants to go backward, but with rising costs, that's the harsh reality.

For companies with big ESG goals, this could be a major setback.

Negative social impact

Tariffs can mess with profit margins, which means companies might shift their focus to just staying afloat financially.

"Companies may focus more on cost efficiency than on social impact initiatives such as community engagement, worker training programs, or DEI efforts."

It’s the corporate version of survival of the fittest.

If companies bring production back to the US from an emerging country, they might improve their labour practices.

But don’t be fooled, if saving money is the main goal, they might resort to temporary or gig workers instead of full-time jobs with benefits.

That’s not exactly winning any social justice points.

Declining global standards

Companies with a global presence will struggle to meet ESG standards if they’re shifting production to dodge tariffs.

If they start sourcing from regions with lax environmental or labour laws, expect some serious backlash.

"Companies may face scrutiny from international stakeholders and could experience reputational damage."

And with ESG reporting becoming mandatory, they’ll have to juggle those global expectations with the reality of rising costs.

But... tariffs could also spark innovation

Yes, the good news is, tariffs could spark innovation.

Companies might start investing in cleaner, more efficient ways to manufacture locally, which could actually align with sustainability goals.

"Tariffs could drive companies to invest in innovation to reduce reliance on foreign imports,” the analysts noted.

Also, companies will have to get creative with their supply chains, finding ways to stay resilient and sustainable.

At the end of the day, companies will need to balance the rising costs with their ESG commitments.

It’s going to be a bumpy ride, but "companies will need to recalibrate their ESG strategies to manage rising costs while attempting to meet stakeholder expectations for sustainable practices."

Originally published as The Ethical Investor: Five ways tariffs could mess up ESG, and one possible silver lining