Where Tariffs and Sustainability Collide Together--and Ride Together

The intersection of tariff policies and sustainability requirements and goals creates friction points for businesses, but also catalysts for positive change. If business leaders stay alert and keep a growth mindset, they may realize the truth of economist Paul Romer's famous observation that "a crisis is a terrible thing to waste."

The Friction Points: How Tariffs Undermine Sustainability Goals

Tariffs can directly impede progress on environmental goals, particularly the transition to circular solutions and clean energy, by increasing the cost of inputs, critical technologies and disrupting carefully constructed sustainable supply chains. They may also push companies to select regions of the world where labor rights protections are weakest but are tariff-preferred.

Tariff Pricing Pressures Delay Sustainability Goals: Coca-Cola has stated recently that tariffs on aluminum are likely to negatively impact their ability to realize goals to reduce reliance on single use plastic. The company is already under fire for walking back sustainability goals and this recent announcement is likely to raise concerns among some investors.

Increased Costs for Green Technology: Tariffs levied on components essential for renewable energy and electric mobility act as a direct tax on decarbonization efforts, slowing deployment and making climate goals harder to reach.

Solar Energy: The US solar industry has been heavily impacted by tariffs, primarily Section 201 and Section 301 duties, targeting imported solar cells and modules, many originating from China or manufactured by Chinese firms in Southeast Asia. Analysis by the Solar Energy Industries Association (SEIA) indicated that earlier tariffs resulted in over 62,000 lost US jobs, $19 billion in foregone private investment, and the cancellation of 10.5 gigawatts (GW) of solar projects—enough to power 1.8 million homes and equivalent to the emissions of 7 coal plants. Recent adjustments under Section 301 have further increased tariffs on cells and modules from 25% to 50%, potentially exacerbating these negative impacts. While domestic manufacturing is a goal, tariffs can make solar uncompetitive, particularly in nascent markets.

Electric Vehicles (EVs) and Batteries: The transition to EVs is critical for transport decarbonization, but tariffs pose a significant hurdle. Section 232 tariffs on steel and aluminum increase the cost of vehicle bodies and components. More critically, Section 301 tariffs target lithium-ion batteries and battery components imported from China, which dominates global production (over 75% of cells) and supplies nearly 70% of US lithium battery imports. With batteries accounting for 30-40% of an EV's cost, tariffs projected to reach a combined effective rate of up to 82% by 2026 could add thousands of dollars to the price of EVs, slowing consumer adoption.

Energy Storage Systems (ESS): Grid-scale battery storage is vital for integrating intermittent renewables like solar and wind. The same tariffs impacting EV batteries also drive up the cost of ESS projects, potentially hindering grid modernization and the achievement of national storage deployment targets (e.g., a potential 30 GW by 2030 goal). Some forecasts predict a potential 27% decline in annual US BESS installations by 2027 due to tariff impacts.

Disruption of Sustainable Supply Chains: Many companies have invested heavily in optimizing their global supply chains not just for cost, but also for environmental performance (e.g., sourcing low-carbon materials) and social responsibility (e.g., ensuring ethical labor practices). Tariffs disrupt these optimized networks by forcing shifts. To avoid duties, companies may switch from certified sustainable suppliers in tariff-affected regions to domestic or alternative international suppliers whose environmental or social performance is inferior or less transparent.

For example, a firm might abandon a long-term relationship with a Southeast Asian supplier known for strong environmental controls in favor of a local option with a higher carbon footprint simply due to tariff costs. Real-world examples illustrate this tension: Apple's supply chain diversification efforts reportedly led to a temporary increase in its Scope 3 emissions due to new logistics and facility needs. Similarly, tariff pressures could push companies like Tesla towards sourcing battery materials from regions with greater environmental or labor risks.

Possible Overall Reduced Focus on ESG Amidst Turmoil: During periods of intense economic pressure and operational disruption caused by tariffs, companies may deprioritize long-term sustainability investments. The immediate need to secure materials, manage costs, and maintain market access can overshadow ESG commitments. This is particularly concerning for social aspects like labor standards; rapid supply chain shifts can lead to instability for suppliers, potentially resulting in worker exploitation, unpaid wages, or unsafe conditions if due diligence falters. Uncertainty about future orders can also deter suppliers from making capital investments in decarbonization technologies.

Potential Catalysts: Tariffs Can Spur Positive Change

Despite the challenges, tariff policies could catalyze certain positive sustainability outcomes, particularly if businesses respond strategically.

Localization and Regionalization: By making distant imports more expensive, tariffs create a strong incentive for companies to shorten their supply chains through reshoring (bringing production back to the US) or nearshoring (moving it to nearby countries like Mexico or Canada, often leveraging agreements like USMCA). This shift offers potential sustainability benefits, primarily through reduced transportation distances and associated emissions. It can also facilitate easier monitoring of environmental and labor compliance.

However, the net environmental impact is not guaranteed. Domestic or regional production facilities might rely on a more carbon-intensive energy grid or employ less energy-efficient technologies compared to specialized global suppliers. Therefore, a simplistic equation of "local equals green" is misleading; a thorough assessment of the specific production context is essential to understand the true sustainability implications of localization driven by tariffs.

Circular Economy Acceleration: Tariffs on primary raw materials, such as steel, aluminum, and critical minerals used in batteries, increase the relative cost-competitiveness of substitutes like secondary (recycled) materials and the circular business models that accompany them. This economic shift can accelerate investment in recycling infrastructure, product designs facilitating reuse and repair, and waste-to-value technologies.

For instance, the automotive industry has shown increased interest in using recycled aluminum and steel partly in response to tariff-related cost pressures. Embracing circularity not only aligns with ESG goals by reducing resource depletion and emissions but also enhances resilience by lessening dependence on volatile global commodity markets and tariff-prone imports.

Charting the Course

In this environment of intersecting trade volatility and sustainability pressures, US business leaders must adopt proactive and integrated strategies. Reactive, siloed approaches are insufficient; resilience and competitive advantage demand a holistic view.

Fortifying Supply Chains for Resilience and Sustainability

The first line of defense is building supply chains that can withstand shocks while aligning with ESG commitments.

Diversification and Regionalization: Over-reliance on single sources, particularly from regions facing high tariffs or geopolitical instability like China, is a major vulnerability. Implementing "China Plus One" strategies or developing regional supply hubs in North America (leveraging USMCA) or Southeast Asia can mitigate risk. Companies like Apple have already moved significant production out of China partly in response to trade tensions.

Enhanced Visibility and Traceability: Ignorance is not bliss. Businesses need deep visibility into their multi-tier supply chains. Investing in digital tools—such as AI-powered analytics, blockchain for traceability, and integrated ERP systems—provides real-time data on supplier locations, performance, potential disruptions, and ESG metrics. This allows for rapid risk identification (e.g., a supplier's exposure to new tariffs or ESG violations) and informed decision-making. HP Inc.'s use of blockchain to audit new suppliers in Southeast Asia is a case in point. A mid-sized electronics firm used AI/ERP to identify alternative suppliers and avoid millions in tariff costs.

Scenario Modeling and Impact Assessment: Proactively model the potential impacts of various tariff scenarios (e.g., new reciprocal tariffs, expanded Section 301 duties) across different products, regions, and suppliers. Use data analytics to quantify potential cost increases and evaluate mitigation options, such as alternative sourcing or product redesign.

Strategic Nearshoring/Reshoring: Carefully evaluate the business case for moving production closer to end markets. While this can reduce tariff exposure and transport emissions, it requires rigorous analysis of factors beyond tariffs, including labor costs, infrastructure availability, automation potential, and, critically, the sustainability footprint (energy mix, environmental regulations) of the potential new location. A drone company's move to Arizona, despite higher initial costs, proved viable due to tariff savings.

Adaptive Inventory Management: Pure Just-in-Time (JIT) inventory models become risky in a volatile trade environment. Businesses should consider incorporating Just-in-Case (JIC) principles for critical components vulnerable to tariffs, building strategic inventory buffers. However, this must be balanced against the increased carrying costs, potential obsolescence, and waste implications.

Fostering Collaboration

Addressing these intertwined challenges effectively requires breaking down internal and external silos.

Cross-Functional Integration: Success hinges on collaboration between departments that traditionally operate separately. Trade compliance, tax, supply chain management, procurement, finance, legal, operations, and sustainability teams must work together closely. Establishing cross-functional steering committees can enable rapid assessment and response to tariff changes or emerging ESG risks.

Strategic Supplier Partnerships: Move beyond transactional relationships. Collaborate closely with key suppliers to enhance transparency, jointly manage risks (tariff and ESG), share data, and potentially co-invest in sustainability initiatives. Building trust and stable, long-term relationships is crucial for navigating uncertainty and encouraging supplier investment in decarbonization.

Industry Engagement: Participate in industry associations and collaborative initiatives focused on sustainability standards, supply chain resilience, and responsible trade practices. Sharing best practices and aligning on common approaches can benefit the entire sector.

Constructive Policy Engagement: Engage with policymakers to advocate for predictable, transparent, and ideally, sustainability-aligned trade policies. This could involve pushing for exemptions for clean technologies, supporting trade agreements with strong environmental and labor clauses, or providing input on the implementation of complex regulations like CBAM and CSRD.

The complexity of the current environment necessitates a fundamental shift in strategic thinking. Decisions about sourcing, investment, product design, and market entry can no longer be made by considering tariffs in isolation from sustainability implications, or vice versa. A tariff-driven decision to shift sourcing might inadvertently increase Scope 3 emissions or violate ethical sourcing policies, creating new risks. Conversely, a sustainability initiative might become economically unviable due to unforeseen tariff impacts.

Sustainability Builds Organizational Muscle

The process of embedding ESG deeply within operations, strategy, and supply chains builds significant organizational muscle. Companies that have invested in robust systems for tracking value chain impacts—measuring Scope 3 emissions, monitoring supplier labor practices, assessing resource consumption—develop a granular understanding of their operational footprint. When faced with external shocks like tariffs, this pre-existing data infrastructure and analytical capability become invaluable.

These companies can more rapidly assess the environmental and social implications of shifting suppliers or redesigning products, identify efficiency opportunities that help offset tariff-related cost increases (such as through circularity), and navigate related regulatory requirements like the EU's Carbon Border Adjustment Mechanism (CBAM). In essence, a higher level of ESG maturity translates directly into enhanced operational resilience and strategic agility in the face of trade policy volatility.

Conclusion: Building Resilience and Value in a Turbulent World

US businesses operate today at the confluence of two powerful currents: a volatile and often unpredictable tariff environment driven by shifting geopolitical aims, and an accelerating global demand for corporate sustainability and ESG performance. The collision of these forces creates significant risks, including escalating costs for essential inputs (especially green technologies), disruption to optimized supply chains, complex compliance burdens from new regulations, and the potential for sustainability goals to be sidelined amidst operational turmoil.

However, this challenging landscape also presents opportunities. The pressure from tariffs can catalyze beneficial shifts towards greater supply chain resilience through diversification and regionalization. It can accelerate the adoption of cost-saving and emission-reducing circular economy models.

Navigating this complexity successfully requires a fundamental departure from reactive, siloed management. Business leaders must champion a proactive, integrated approach where trade policy considerations and sustainability principles are embedded into the core business strategy. This means investing in supply chain visibility and diversification, leveraging ESG performance for risk mitigation and competitive differentiation, mastering the evolving regulatory requirements through robust data systems, and fostering deep cross-functional and external collaboration.

The path forward demands agility, foresight, and a commitment to viewing sustainability not as an isolated constraint, but as an essential component of building a resilient, future-proofed organization. In an era where trade, geopolitics, and climate action are inextricably linked, the ability to strategically manage this nexus will increasingly define business success and long-term value creation.

Tariffs and trade battles, COVID-19, and financial crises (like in 2008) have shown sustainability-focused leaders and companies to outperform their peers according to the latest research from MSCI. I have said for years that sustainability is not about the environment but a better way of doing things. A former colleague, a renowned supply chain scholar, used to say that sustainability is simply understanding your business. The fundamentals of good management from Peter Drucker to Jim Collins expound the importance of facing the brutal facts and measuring what we manage. Sustainability increases transparency, connectivity with stakeholders and greater insight into business risks and opportunities. It is just a better way to run a business because it gives decision-makers more information to base their decisions upon.