Tackling climate change was a cornerstone of President Biden’s election campaign, and he has been quick to act on his promises. Within days of taking office, Biden signed an executive order to rejoin the Paris Climate Agreement and directed federal agencies to review and reverse more than 100 Trump administration actions on the environment. On Earth Day 2021, world leaders convened at a virtual climate summit, where Biden outlined his ambitious goal for reducing carbon emissions by 2030.
Any business operating in the United States will need to be prepared to respond to, and comply with, a wave of new environmental regulations. And shoring up your own supply chain is not enough; as regulatory scrutiny increases, businesses will be held responsible for their own actions and those of their entire supply network. Compliance teams need to do their due diligence before it’s too late.
The growing compliance burden
Biden and his senior aides have been busy finalizing a new climate change strategy that will help the United States meet a revised target for emissions reductions. As part of that strategy, we are likely to see tighter pollution standards, changes in federal procurement, and taxes and tariffs to penalize carbon emissions — all of which will create a heavier workload for compliance teams.
We can also expect to see more reporting requirements for publicly traded companies, which will be pushed to disclose climate risks and greenhouse gas emissions in their operations and supply chains.
This renewed focus on climate actions means that the cost of non-compliance will increase. And it is not only the regulators who will hold businesses to higher account; investors, customers and employees all expect companies to operate in a more sustainable way. Any supply chain organization that falls foul of environmental standards also faces severe reputational damage.
But it’s also important to remember that sustainability means much more than simply cutting carbon emissions; it is a combination of social, economic and environmental factors. For this reason, climate risks cannot be managed in isolation. Poor environmental practices are inextricably linked with broader issues, including modern-day slavery, bribery and corruption — all of which have become key priorities for the Biden administration. An effective compliance review will therefore involve looking at specific environmental risks and more broadly at a company’s current business practices and track record.
Building a more sustainable supply network
To get ahead, companies with complex, cross-border supply chains must develop a clear understanding of their carbon footprint. This requires mapping out the entire supply chain to identify climate-related risks and where improvements can be made.
Expanding sustainability programs to include vendors and suppliers is a crucial step every business must take to achieve full visibility over its materials, processes and logistics. Compliance teams need to ensure they have the fullest possible picture on third and fourth parties. Too often, businesses focus on their immediate partners, not their broader network of suppliers. This leaves them unwittingly exposed to regulatory and reputational risk.
The best third-party risk management programs will introduce new checks to understand their suppliers’ sustainability credentials. This could include adding code of conduct questionnaires into the onboarding process, alongside gathering information relating to the broader network of companies their third parties rely upon.
However, when it comes to assessing environmental risks in the supply chain, compliance teams cannot rely on self-disclosed information alone. It’s vital that companies screen potential partners and suppliers using high-quality risk data — drawn from trusted, publicly available sources, such as news articles and official reports — to validate the third party’s own responses and catch any red flags.
Companies should also remember that risks are never static. A seemingly low-risk vendor or supplier could suddenly be caught up in a scandal for violating sustainability standards. Continuous monitoring through adverse media screening, for example, means that changes or red flags affecting the risk profile of all third-party engagements are flagged immediately, enabling businesses to address issues in real time.
A climate-first foreign policy
Biden’s environmental policy will also shape his approach to foreign policy, including trade regulation and the U.S. sanctions regime. Biden is making it very clear that he is prepared to push countries to meet more ambitious climate targets, including “naming and shaming” those that are falling behind on their climate commitments. Tariffs and trade restrictions could be introduced to ensure goods imported from overseas bear the full cost of climate pollution.
We also cannot rule out sanctions and export controls to target carbon-intensive companies and projects. Biden has already taken similar action on human rights issues. Supply chain compliance teams therefore need to be ready to respond to any new regulation that may influence their international operations, including who they buy from and sell to.
The path to net-zero
Climate has long threatened to be the weak link in global supply chains, with more extreme weather events increasing the risk of disruption. But it now presents a whole new set of risks and regulatory obligations. Organizations will need to answer the regulators, their stakeholders and society at large — and the expectations are only increasing. The message is clear: Now is the time to start assessing, managing, and reducing climate-related risk and keep ahead of the new wave of environmental regulation.