By Terry Lee – MS Candidate in Sustainability
As a senior manager in sustainability strategy at one of largest chemical companies in Korea (LG Chem) and a second-year Master’s student in Sustainability, I am deeply immersed in the evolving world of trade, especially in an era of uncertainty. Lately, I have been reflecting on how Environmental, Social, and Governance (ESG) standards, once regarded as corporate buzzwords, they are now emerging as powerful forces reshaping global trade dynamics. Especially, in transformative industries like electric vehicles (EVs) and artificial intelligence (AI), ESG is rapidly transitioning from voluntary guidelines into enforced trade barriers; this change is influencing policies, partnerships, and economic strategies.
Trade Conflicts through ESG Lens
What I find fascinating is how ESG, initially designed to encourage corporate responsibility, has morphed into a strategic tool wielded by governments. One of the most notable trends is how ESG standards are evolving into trade barriers. Governments are enforcing stricter ESG regulations to protect domestic industries and limit competitors’ influence.
One of the key areas where ESG is playing a pivotal role in the global trade conflicts is the intense competition between the US and China. The US emphasizes transparency and sustainability in governance, leveraging ESG to curb China’s access to critical technologies and resources. In contrast, China prioritizes securing its supply chains to solidify its manufacturing dominance. These diverging strategies are redefining trade landscapes, with ESG standards becoming a battleground for influence and control.
ESG in the EV and AI Business
For industries like EVs and AI, dependent on scarce resources and advanced technologies, ESG is shaping who can trade, what is traded, and on whose terms. This shift underscores how deeply ESG is intertwined with economic and national security concerns.
For example, the EV sector is particularly emblematic of ESG’s impact in this respect. Rising demand for EVs highlights critical challenges like ethical sourcing of cobalt, nickel, and lithium, materials central to battery production but often linked to human rights and environmental violations. China’s dominance in processing these materials (Figure 1) raises concerns about labor practices and sustainability. In response, the US and EU are working with trusted allies like South Korea and Japan, both integral to the battery production supply chain, to establish transparent and ESG-compliant supply networks.
Figure1. China dominates the global battery supply chain. Source from International Energy Agency report on Global supply chains of EV batteries (2022)
Policies like the Inflation Reduction Act (IRA) are pivotal here, incentivizing the sourcing of materials from responsible suppliers. Likewise, the EU’s Carbon Border Adjustment Mechanism (CBAM) imposes tariffs on imports from nations with weaker environmental standards. These policies use ESG as a strategic tool to influence supply chains, reducing reliance on Chinese materials and promoting sustainability.
Similarly, the AI industry, like the EV sector, faces ESG challenges amidst the competition between two nations. For instance, “AI development relies heavily on semiconductors, whose production demands immense resources and energy” said Chris Miller, Professor at the Fletcher School and the author of Chip War. The geopolitical complexity of the semiconductor supply chain mirrors the US-China rivalry in AI, with both nations vying for technological leadership.
Looking Ahead: The Future of ESG
As ESG continues to impact the global trade, I expect to see some important changes. One of the things I would like to emphasize is that standardization of ESG practices could level the playing field, but countries and companies must navigate challenges like stricter requirements and geopolitical pressures. Countries with a robust ESG framework, therefore, will have significant opportunities to lead in this space.
However, with Donald Trump’s return to power in 2025, environmental (E) regulations are likely to be eased or repealed to prioritize economic growth. On the flip side, governance (G) is expected to be strengthened to safeguard domestic industries, with an emphasis on data security, increased transparency, and improved traceability within the supply chains of the EV and AI.
Reflecting on all these aspects, it is clear to me that ESG is no longer optional for corporations and nations aiming to maintain a competitive edge in the global market. It is a critical factor in shaping global economic strategies, and adapting to this evolving landscape is essential for ensuring both economic security and sustainability.
1) Link to full version of a white paper by Terry Lee
2) Link to an article (contribution) featured in a Korean online ESG-focused media