Regulation & Public Policy

The Hidden Risks of ESG Complacency

The most dangerous time for a company isn’t when regulations tighten—it’s when they ease. As ESG oversight softens, many organizations assume their risk profile has too. In reality, weaker rules create wider blind spots, leaving companies more vulnerable to the kind of failures that damage trust, disrupt supply chains, and erase market value overnight.

By Dean Alms | Published 1 month ago | About a 5 minute read

Image: Steve Buissinne

When Environmental, Social, and Governance (ESG) regulations ease, it can be tempting for companies to relax. Less oversight may lower compliance costs and reporting demands, but it doesn’t erase risk – it magnifies it.

And that’s the central challenge of today’s regulatory environment: even as governments scale back oversight, companies are still expected to uphold high standards.

In an age of instant transparency, environmental damage or labor abuses can surface on social media within hours. A single viral story can spark consumer backlash, trigger lawsuits, or erode investor confidence. And in many cases, the fallout doesn’t stop with reputation. It can cascade into disrupted supply chains and fractured operations. These costs often dwarf any fine a regulator might have imposed. The weak points are rarely internal. They are found across sprawling supplier networks where visibility is weakest and risks are easiest to miss.

The Real-World Cost of Overlooking Third Parties

The most damaging ESG failures often begin with suppliers.

The 2013 Rana Plaza garment factory collapse in Bangladesh exposed deadly labor conditions and drew global outrage against major fashion brands. In 2023, fast-fashion brands also faced scrutiny due to concern around unsustainable practices. More recently in the tech sector, companies like Tesla face accusations of ‘greenwashing’ and alleged forced labor in its cobalt supply chain.

In each case, it’s the brands, not the suppliers, that absorb the reputational and financial cost. Deregulation widens the visibility gap, making it easier for risks to go unnoticed until it’s too late. For companies, this makes supplier oversight a core discipline of resilience. It’s the role of third-party risk management (TPRM): creating visibility, accountability, and controls that protect brand reputation when regulations fall short.

Companies that monitor suppliers with the same rigor as their own operations, and act decisively when risks surface, are far less likely to face surprises. Yet shifting trade rules and cost pressures are multiplying supplier blind spots faster than many companies can keep up, making effective oversight harder just as it becomes more critical.

Why Deregulation Creates More Blind Spots

Tariffs and changing trade dynamics are pushing companies to restructure supply chains quickly. New suppliers are brought on in alternative regions, often under pressure to cut costs. These urgent shifts make due diligence a challenge, often placing critical operations in areas with fragile infrastructure, weak labor protections, or high exposure to climate disruption. Without ESG monitoring, companies may save on tariffs in the short term but import long-term risks that can destabilize operations.

At the same time, regulatory inconsistency across markets heightens the challenge. While ESG rules in the U.S. are being rolled back, companies with global operations must still manage evolving frameworks like CSRD, CSDDD, and other emerging forced labor laws. Weakening standards in one region while trying to comply in another creates operational inconsistencies that frustrate suppliers, confuse employees, and signal to stakeholders that responsibility is conditional. That is a vulnerability no global company can afford.

Applying global standards rather than settling for local minimums is what separates leaders from laggards. But companies must do more than just align with the latest letter of the law as regulations continue to shift. They must establish internal guardrails that won’t move with every political cycle.

From Compliance to Confidence: Five Leadership Priorities

Here’s how business leaders can build supply chains that can stand up to any ESG regulations and bend without breaking when disruptions inevitably emerge:

Create ESG policies rooted in values, not politics: Stop relying on regulators to set the bar. Define standards you are willing to stand behind and enforce, regardless of political cycles. For instance, refusing to work with suppliers linked to deforestation, unsafe waste management, or exploitative labor conditions – choices that protect long-term brand trust and operational continuity, even if they create short-term costs.
Embed ESG into governance structures for accountability: In the past, compliance teams were seen as the safeguard. In a deregulated era, responsibility must sit squarely with executives and boards, who are expected to make and defend the policies they adopt. Elevate ESG to a governance mandate, with oversight from the board and accountability at the executive level, so responsibility is enforced from the top down.
Strengthen due diligence for responsible sourcing and operations: Strong due diligence starts with visibility into both business operations and ESG practices. That means conducting a full review of a third party before contracts are signed – from ownership, operations, and financial stability to labor practices, environmental impact, and continuity planning. Codified standards, written into contracts and reinforced through procurement policies, make expectations clear and binding so suppliers know responsibility is not optional.
Diversify supply chains to reduce fragility: Concentration risk – relying on one supplier or one region for critical functions – leaves companies exposed when unforeseen disruptions like tariffs occur. Building alternative supplier networks spreads risk across geographies and partners, enabling supply chains to better adapt when conditions change and reduce the chance for a single failure to destabilize operations.
Commit to continuous monitoring, not one-time checks: Monitoring can’t stop at onboarding. Companies need ongoing audits, real-time risk alerts, and regular supplier assessments to surface labor, environmental, and operational risks before they escalate.

Together, these practices reduce disruption, strengthen brand credibility, and reassure skeptical investors and consumers about ESG commitments. Just as importantly, they keep supply chains safe, ethical, and resilient, providing insulation against the volatility of political headwinds. When rules change again, as they inevitably will, companies with steady frameworks aren’t scrambling to react. They’re already aligned.

Deregulation is not a shield. It is a test. Only companies that hold firm to their values, enforce standards across third parties, and invest in responsible practices will emerge stronger, more trusted, and less vulnerable to the next disruption.

And for leaders unsure where to start, the best advice is simple: stop treating ESG as a buzzword. Drop the label and commit to responsible policies you can defend with confidence – the kind you would uphold regardless of regulation.

There’s a line, sometimes attributed to Mark Twain, sometimes to Ted Lasso: “It’s never the wrong time to do the right thing.” For companies navigating today’s landscape, that’s more than just advice, it’s the only strategy that lasts.