By Lars Karlsson, Global Head of Trade and Customs Consulting Maersk
“We already have the tools for a smart application of new ESG regulations. These tools drive down the cost of compliance to business and provide regulators with the information they need”
The new framework of environmental, social, and governance regulations (ESG) that have emerged in response to the myriad of challenges facing the global community will have a fundamental impact on global trade flows. These regulations are important for our collective future. At the same time, we need to ensure that trade facilitation gains made in recent decades by dismantling the web of red tape are not threatened by a new tangle of green tape. By simply replacing red tape with green tape, we risk losing the gains resulting from faster and more predictable trade flows that have lifted hundreds of millions of people out of poverty.
We already have the tools for a smart application of new ESG regulations. These tools drive down the cost of compliance to business and provide regulators with the information they need. Driven by supply chain visibility resulting from digitalization, it is now possible to create trust-based digital trade corridors. Goods travelling along these corridors will have a fast-track ‘passport for goods’, lowering the cost of compliance and leading to more resilient and predictable supply chains.
ESG regulations impact all parts of the supply chain
During the last three years alone, international institutions estimates that 3000 new trade barriers have been introduced for global trade. This is red tape not needed when a complex world already is getting more complicated by the day.
Right across the world, there are new regulations that have the potential to create green tape. Perhaps the highest profile is the EU’s Carbon Border Adjustment Mechanism which is already being implemented for imports into the EU. This mechanism, also known as CBAM, requires importers to report on and pay for emissions involved in the production of their imports through the purchase of CBAM certificates.
In addition to CBAM, there are a number of other sustainability regulations that impact on global supply and value chains. These include the US Uyghur Forced Labor Prevention Act, the German Supply Chain Due Diligence Act (and the EU similar regulation), and new EU Deforestation Regulations. A rage of other jurisdictions, including Australia, the UK, Canada and United States are already considering CBAM-style regulations.
Trust based systems and intelligent Digital Trade Corridors that support ESG compliance
Large strides have already been taken in developing tools for trust based trade solutions that support smart implementation of ESG regulations. This includes efforts by both governments and businesses to increase the use of digital trade data. The updating and reengineering of Authorized Economic Operator and holistic Trusted Trader programs, especially more cost-efficient digital versions of these concepts with more advanced benefits for traders – and the increasing use of Mutual Recognition Agreements – is providing the platform for through which digitalization can create intelligent Digital Trade Corridors (iDTCs) that support and supervise trust based trade.
Some of the most visible developments in digitalization and the potential for greater supply chain visibility are driven by the private sector. At my company, Maersk, Smart Containers and similar IOT solutions are being used to supervise cargo and goods movements and supply real time data. This provides end-to-end supply chain visibility which we are using to provide digital compliance solutions for CBAM, the EU Deforestation Regulation, and the US Uyghur Forced Labor Prevention Act. And at Maersk we have invested in our Maersk ECO delivery solution to replace fossil fuels with green fuels with the target of having net zero greenhouse gas emissions by 2040.
From governments we have seen an increasing number of digitalization initiatives and efforts to leverage data for greater supply chain insights. One example is the UK where the Electronic Trade Documents Act, which is the first of a number of global actions to allow the recognition of digital documentation and a digital only environment for trade. With countries such as Singapore following suit, these actions will continue to drive increased use of, for example, electronic bills of lading (eBL).
The increased use and availability of supply chain visibility data and trusted value chains powered by AI is feeding into an expanding network of international agreements supporting AEOs and Trusted Traders that already have a proven track record of compliance. Leveraging the trusted status of their supply chains, these businesses will be able to utilize developing iDTCs and provide data from every stage of their supply chain to demonstrate full ESG and regulatory compliance. Good travelling along iDTCs will have a fast-track ‘passport’ that results in greater supply chain predictability and resilience and lower compliance costs. The 2023 UK Ecosystem of Trust pilots has shown the reality of how these solutions can already be implemented.
After all, the smart application of new ESG regulations will give us what we all want – a better and more sustainable world.
Lars Karlsson is Global Head of Trade and Customs Consulting and he is one of the most well-known and experienced customs leaders in the world with an extensive background over four decade in customs, borders and international trade policy. He was prior to his current executive position, CEO and MD of KGH Global Consulting and is a former Director of World Customs Organization and former Director General of Swedish Customs. He is Doctor of Education (HC) with a PhD in Trade Compliance and holds a Master International Customs Law. As acknowledged author, speaker, influencer and board member of international think-tanks and research networks, he has been advising both UK Government and European Commission on Brexit.