Crosswinds: CBAM, Trade Tensions, and Supply Chain Risks

ESG is not just about reporting and labels; it’s increasingly about navigating the geopolitical forces that shape supply chains and trade. In 2025, UK companies face a world where sustainability has become a geo-economic issue – carbon tariffs, trade negotiations, and political shifts all intertwine with ESG expectations. Legal advisors must therefore broaden their view of ESG risk management to include these macro factors:

Carbon Border Adjustments – Aligning with CBAM: 

One of the most talked-about developments is the EU’s Carbon Border Adjustment Mechanism (CBAM). The EU is phasing in CBAM as a levy on carbon-intensive imports (like steel, cement, fertilizer, aluminum, electricity, and more to be added over time) to prevent “carbon leakage” and protect its ambitious emissions reduction goals. Starting with a transitional reporting phase in 2023 and moving to actual financial charges by 2026, CBAM effectively means that exporters to the EU will pay a price if their products carry more carbon emissions than EU equivalents.

How does this affect the UK?

As a former EU member now outside the bloc, the UK initially wasn’t part of CBAM and risked seeing its industrial exporters (think British steelmakers or chemical producers) face these new taxes at the EU border. To maintain competitiveness and climate integrity, the UK government confirmed plans to introduce its own carbon border adjustment measure. As of late 2024, the UK announced it will launch a UK CBAM by 2027, aiming to align with the EU’s approach. The delay gives UK policymakers time to design the scheme and gives businesses time to prepare. However, companies cannot be complacent: whether it’s the EU’s CBAM in the short term or the UK’s version later, carbon accounting in the supply chain is becoming a fact of life for trade.

Legal counsel should be advising clients in affected sectors to start tracking and documenting the carbon intensity of their products and inputs now. This might involve working with technical consultants to calculate product carbon footprints, ensuring supply contracts allow for sharing emissions data, and even exploring lower-carbon sourcing or production methods to reduce future liabilities. From a trade law perspective, there’s also the complexity of how different regimes will interact – if a UK exporter pays the EU CBAM, would they get credit under the UK’s scheme or face double costs? These details are yet to be ironed out. Lawyers may need to engage with policymakers or industry groups to shape workable rules. In any event, ESG strategy now intersects with customs and trade strategy.

US-UK ESG Dynamics and Transatlantic Tensions: 

On the other side of the Atlantic, the ESG landscape is contrasting. The United States has seen a politicization of ESG, with some states actively pushing back against what they term “woke capitalism” – leading to a patchwork where certain investors face restrictions on considering ESG factors, even as the federal regulators move toward more disclosure.

The U.S. Securities and Exchange Commission (SEC) has been working on mandatory climate risk disclosure rules (which may come into effect by 2025/2026 for large companies), and there’s growing attention on greenwashing in financial products (mirroring trends in Europe). However, unlike the EU, the U.S. has not pursued an explicit carbon pricing or border tax; instead, it took a different route with the Inflation Reduction Act of 2022, pouring hundreds of billions into clean energy subsidies and incentives to drive decarbonization domestically.

These differences can lead to transatlantic trade frictions. From a UK perspective, negotiating trade deals or aligning standards with both the US and EU is a balancing act. A hypothetical example: if the UK presses ahead with stringent climate rules (like CBAM or supply chain due diligence), American exporters or politicians might view those as barriers to trade, potentially straining UK-US trade relations. Conversely, if the UK were to soften its stance to appease a trade deal with the US, it might then fall out of sync with EU standards and undermine its climate credentials.

So far, the UK government has signaled it wants to uphold high standards – for instance, it didn’t water down environmental rules in pursuit of a US trade deal (notably, a comprehensive US-UK trade agreement remains elusive as of 2025, partly due to differing priorities). For legal advisors, the key is to stay aware of international policy trends: a UK company operating in the US may need guidance on how to navigate anti-ESG sentiment in certain states (for example, avoiding contract language that could trigger state laws against “boycotting” oil companies), while also ensuring that globally it meets the highest ESG norms. The strategic counsel might advise such a client to “localize” their messaging – highlighting job creation and risk management in the US context, while emphasizing sustainability leadership in Europe – all without being inconsistent or inauthentic.

On a positive note, the broad direction in both the US and UK is still towards greater ESG integration, even if via different methods.

Collaboration on climate initiatives (like the Global Arrangement on Sustainable Steel and Aluminum being discussed among allies, or agreements on greener technology standards) could ease tensions and create common ground. In any case, UK lawyers should be prepared to interpret how foreign ESG-related laws impact their clients. This might mean understanding U.S. sanctions on products made with forced labor (which can affect UK importers of certain goods) or U.S. climate subsidy rules that could advantage or disadvantage UK companies.

In an interconnected world, geopolitics and ESG are two sides of the same coin – successful legal ESG strategies will account for both.

ESG in the Supply Chain – Managing Exposure: 

Geopolitical upheavals in recent years have underscored the importance of resilient and responsible supply chains. The war in Ukraine, for example, forced many companies to rethink energy sources and supply routes, while ongoing tensions with China have raised questions about dependency on certain materials (from rare earth metals to solar panels) that have ESG implications (labor conditions, environmental impact of mining, etc.). Moreover, there is a clear trend of regulators tackling supply chain issues as part of the ESG agenda. The UK’s Modern Slavery Act (in force since 2015) was an early example, requiring large companies to report on how they prevent forced labor in their supply chains. While groundbreaking at the time, its lack of strong enforcement mechanisms led to patchy compliance. Now, expectations are higher.

The EU’s forthcoming CSDDD will effectively mandate robust human rights and environmental due diligence for supply chains.

The UK, under a government keen to show leadership, may follow suit or be pressured to update its laws – for instance, by adding penalties to the Modern Slavery Act reporting requirements or expanding its scope. In addition, the Environment Act 2021 includes provisions about preventing the use of commodities associated with illegal deforestation in UK companies’ supply chains (applicable to commodities like beef, palm oil, soy, and others, once regulations are enacted). Business groups have actually welcomed such measures, calling for clear rules to ensure a level playing field and respond to consumer demand for ethical sourcing.

All this means that legal counsel should treat supply chain diligence as a core compliance issue, not a CSR nicety. Companies should be advised to map their supply chains in depth, identify ESG risks in each tier, and engage with suppliers to set expectations or contractual requirements on ESG standards.

Practical steps include inserting ESG clauses in supplier contracts (covering compliance with codes of conduct, audit rights, termination rights if violations occur), conducting periodic risk assessments (possibly using tools or third-party audits), and preparing contingency plans if a key supplier is found to be non-compliant or is cut off due to geopolitical events. Supply chain transparency is also increasingly crucial for reporting: stakeholders expect companies to know where their products come from and under what conditions. Initiatives like blockchain tracking for raw materials, or supplier disclosure platforms, might move from experimental to mainstream.

UK law firms can add value by helping clients design supply chain diligence programs that meet both UK expectations and international benchmarks (like the OECD Guidelines for Multinational Enterprises or the UN Guiding Principles on Business and Human Rights, which influence emerging laws). And once again, the carrot-and-stick both apply: yes, there’s risk of legal liability or scandal if issues are found, but there’s also competitive advantage in being able to prove to customers and investors that your supply chain is responsibly managed. In industries where end-consumers care (think food, fashion, electronics), this can be a brand differentiator.

Geopolitical factors are amplifying the stakes of ESG compliance.

Carbon tariffs, trade policy, and supply chain laws mean that ESG considerations penetrate every link of the value chain. Legal strategists must help clients see the full picture: it’s not just about pleasing the regulator in London, but also about satisfying expectations in Brussels, Washington, and beyond.

By adopting a proactive stance – preparing for carbon pricing, understanding differing international attitudes, and shoring up supply chain practices – UK companies can not only weather these crosswinds but harness them. After all, if sustainability is becoming part of the rules of global trade, those who integrate sustainability early will find doors open, not closed.

From Challenge to Opportunity

The state of ESG in the UK in 2025 is one of complexity and promise.

UK companies and their legal advisors are navigating a thicket of new rules – from anti-greenwashing mandates to detailed disclosure regimes – and feeling the pull of global standards alongside the push of domestic enforcement. Geopolitical factors add another layer, as sustainability becomes entwined with trade and diplomacy.

While this can seem daunting, the overarching narrative is positive: there is a clear momentum towards more sustainable and responsible business conduct, and those who adapt will thrive in a landscape that rewards transparency and accountability.

For delegates at the upcoming Legal ESG London conference and the broader legal community, the task at hand is to translate ESG pressures into practical strategies. By deepening our understanding of the laws and looking at the big picture, we can advise with confidence and creativity. Whether it’s guiding a client through the intricacies of UK and EU reporting requirements, or helping them design a supply chain resilience plan, we operate not just as lawyers, but as legal strategists – bridging law, business, and ethics.

In the end, navigating ESG in 2025 is about balancing risks and opportunities.

The firms that treat ESG compliance as an opportunity to innovate and lead will enhance their reputational capital and stakeholder trust. The lawyers who can frame these issues in business-savvy ways will become indispensable counselors to their clients and organizations.

The UK’s journey – amid geopolitical pressures, regulatory shifts, and greenwashing risks – is a microcosm of the global journey toward sustainable commerce.