This groundbreaking strategy seeks to counteract the scenario in which businesses move their operations to regions with more lenient carbon pricing regulations.

Initially, the CBAM covers imports of specific products such as cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen. In particular, iron and steel are very energy- and carbon-intensive commodities, . They are among the first sectors covered by the CBAM, corresponding to about 4% of the EU鈥檚 total imports by value. The EU plans to assess and potentially expand the coverage of the CBAM by 2030, aiming to encompass more than half of the emissions in EU ETS sectors by the full phase-in of CBAM in 10 years.

As the CBAM is implemented, carbon emissions will emerge as a new and significant expense in global trade. The financial impact will be substantial, as the CBAM’s pricing structure will align directly with the allowance rates set by the EU ETS.

On a wider scale, the International Emissions Trading Association (IETA) showed that several nations are in the process of creating their own systems, while others are taking a stance against such measures. How quickly and to what degree these new systems come into force may also depend on the outcome of numerous national elections across the globe.

Guidance for companies and their suppliers

While CBAM’s financial impact isn’t expected to be fully felt until 2026, immediate preparation is crucial. Companies should take the following steps to mitigate potential legal and financial exposure in the future.

1. Determine the scope of impact and map your suppliers

Compliance and corporate functions should collaborate 鈥� along with other internal functions, such as tax, operations, finance, and procurement 鈥� to identify in-scope activities and then map out the company鈥檚 global supply chain. This effort should focus on EU activities and the in-bound flow of goods to identify their country of origin and volumes. (Some goods may be excluded because of their country or territories of origin.)

To assess and pinpoint affected suppliers, conduct a comprehensive mapping of your company鈥檚 supply chain to identify suppliers of CBAM goods, analyzing every stage from raw material sourcing to end-product distribution. Check your product records (along with your HS codes) against the regulation as a good starting point to identify those goods and suppliers within its scope.

Also, it鈥檚 important to understand what the default values are for your products. This will be important information to know when reviewing the potential cost impact, especially if you should need to use default values because the actual values are not known.

As this is an EU regulation, it is likely that foreign suppliers will not be familiar with CBAM and will need further training on how to capture, calculate, and report the required data to EU importers. Initiating communication with impacted suppliers sooner rather than later will be key as it will take time for them to put in place the required processes. Make sure to emphasize suppliers’ adherence to CBAM regulations and their ability to deliver goods with lower carbon intensity as an important part of their value to your company.

2. Amend terms and conditions in supplier contracts

Update the standard contracts for CBAM suppliers to include clauses that mandate the provision of accurate and timely embedded emissions data for CBAM goods. Require collaboration with them on data improvement efforts, clearly define supplier responsibilities for CBAM compliance, specify which party is responsible for carbon certificate costs, and outline the consequences for non-compliance. Additionally, consider adding clauses regarding confidentiality and data storage.

3. Institute processes for reporting

To optimize CBAM reporting, analyze the reporting infrastructure to identify specific areas of duplication and potential synergies that could be found in data collection, management, and analysis. Set up the process to collect and store data on the embedded emissions, including which parties in the supply chain hold this information, who will reach out to suppliers, and who will work with those suppliers that are new to tracking emissions.

As part of this step, set up the reporting process in the EU by determining which internal business function within your organization will be responsible for the compliance requirements of the CBAM and verifying under whose name the goods are imported into the EU to determine the declarant. Using global trade supply chain compliance solutions at this point, may be wise if it is feasible to do so.

4. Partner and codify collaboration cadence

Implementing CBAM will necessitate collaboration across various internal departments, including sustainability, procurement, tax, finance, trade compliance, supply chain operations, and legal. At an early stage, be sure to establish and communicate clear roles, responsibilities, and expectations, particularly regarding data requirements. Additionally, explore possibilities for partnerships with industry experts or specialized carbon-pricing organizations to better facilitate knowledge sharing, exchange best practices, and gain valuable insights.

5. Identify products with lower embedded emissions

Evaluate and analyze your supply chain to find additional sourcing options for products that may contain lower embedded carbon emissions, if necessary. Technology tools can help drive efficiency in this process as well.

6. Exporters to the EU should take steps as well

Exporters should be proactive in identifying any products covered under CBAM for which they will be responsible to report. Additionally, they should review the methodology for calculating emissions and ensure they have a method to collect the necessary data points. It would also be helpful to review the default values for impacted products to understand the possible cost impact to an EU client if you are unable to capture actual emissions data. Finally, make sure there is a process to collect, store, calculate, and share the required data.

Establishing CBAM marks a significant step by the EU towards reducing carbon emissions and promoting fair competition in the global market. Companies must take immediate action to prepare for the implementation of CBAM, including amending supplier contracts and identifying, evaluating, and educating impacted suppliers.

By taking these steps, companies can minimize the financial and legal risks associated with CBAM, while also capitalizing on opportunities to reduce their carbon footprint and promote their own commitment to sustainability.

You can find more information about here.

This gap allows a degree of flexibility on how companies present their performance around environmental, social & governance (ESG) issue, with the likelihood that they might omit certain information and present a more favorable image. This has sparked significant public debate and concerns with so-called greenwashing.

British-based consumer goods conglomerate Unilever that has been a vocal advocate for sustainable business practices particularly with their Sustainable Living Brands, which has been reported to in terms of growth. However the company is now into greenwashing, a situation that has raised questions about the accuracy of environmental claims made to consumers. Further, 53% of investors about the scarcity of essential ESG data that is crucial for assessing an organization鈥檚 sustainability level, according to a survey from BlackRock.

reported that 81% of Scope 3 emissions reside in the two most material Scope 3 categories 鈥� purchased goods and services; and use of sold products and capital goods 鈥� across a 4,000-company universe of downstream leased assets impacting greenhouse gas emissions the most.

Key challenges in the supply chain

The challenges within the corporate supply chain remain and are likely to worsen as jurisdictions around the world tighten their scrutiny. Some of these challenges include:

• • • Supply chain transparency 鈥� Collecting ESG data has posed significant challenges for companies operating globally, especially given their complex network of multiple tiers of suppliers and decentralized production processes. The absence of adequate oversight and visibility within the supply chain represents reputational risk for the reporting companies.
    • Supplier compliance and monitoring 鈥� Ensuring supplier compliance with ESG standards is contingent upon comprehensive knowledge of third-party entities involved in supply chain operations. However, the lack of visibility into supplier practices and the absence of monitoring mechanisms in global supply chains in which suppliers operate in diverse regulatory environments, has made ensuring adherence to ESG standards even more complex. More than ever, companies struggle to implement consistent oversight practices across different regions.
    • Quantifying environmental impact 鈥� Accurately measuring and reporting the environmental impact of supply chain activities is crucial for informed decision-making and sustainability initiatives. However, quantifying environmental metrics such as carbon emissions and resource usage across geographically dispersed operations presents significant challenges. The intricate nature of global supply chain activities, coupled with variations in production processes and regional regulations, complicates the standardization of environmental impact assessment methodologies.

AI likely to ease data challenges

While admittedly ESG management presents a complex challenge, it also creates an opportunity for companies to make strategic investments in cutting-edge technologies with artificial intelligence (AI) and generative AI to advance their enterprise value. AI-driven technology solutions can address many data challenges, including:

• • • Enabling global multilingual data analysis 鈥� AI algorithms can process information in multiple languages and provide translation, enabling organizations to analyze data from various sources around the world. These algorithms can be trained to detect adverse media news related to a company or its global supply chain partners, which could indicate unethical practices, including forced labor issues, sanctions violations, and other illicit practices.
    • Detecting data issues 鈥� AI and machine learning can analyze vast datasets that anticipate possible disruptions or can pinpoint areas of inefficiency. Companies employing diverse ESG standards can benefit from AI’s ability to detect anomalies, data gaps, and predict relevant metrics based on a custom set of inputs, such as various policies across regions. This method leads to a more accurate ESG reporting based on reliable information.
    • Automating alerts 鈥� Performing due diligence involves a labor-intensive process that relies on manual efforts and extensive human reviews. AI interaction enables easy customization of to monitor various changes related to ESG factors. For instance, instead of manually re-running reports yearly, a dashboard could flag changes in third-party data since the last check, making it easier for companies to stay updated on new potential risks and opportunities.

Recommended actions

While AI may address many data challenges, the fundamentals of selecting a tool through the evaluation processes of potential tools do not change. Indeed, a cross-functional team from IT, operations managers, sustainability leaders, and others may be necessary to partner in the selection of the tool with specific priority on several key factors, such as:

• • • Understanding ESG goals and data pain points 鈥� To effectively analyze how AI could address an organization鈥檚 data challenges, the first step is to address reporting needs to more thoroughly understand the company’s specific ESG goals and information gaps. This involves identifying relevant ESG areas that are most pertinent to the company鈥檚 operations and industry.
    • Defining requirements to address problem areas 鈥� To make sense of the vast range of technology options and to understand where to focus resources, companies must outline functional requirements and understand in detail how the technology address those requirements. And once the selection is complete, companies should perform a cost-benefit analysis of the chosen solutions to quantify the long-term return of investment.
    • Performing a trial run 鈥� Before full implementation, companies should conduct pilot tests to understand effectiveness and challenges, including how new solutions seamlessly integrate into existing systems and processes, to ensure minimal disruption. Companies should also provide necessary training to key stakeholders in the organization not only on the technical aspect but also on the broader context of ESG reporting.

Additionally, it is necessary for the company to iterate and improve based on the feedback it receives and the experiences it has. Indeed, companies should be prepared to adapt as ESG standards, investor expectations, and technological advancements evolve. It is also important to make sure that the tool has the ability to provide an audit trail of the data journey from raw data to that which is reported to government regulators.

By taking these actions, company leaders in this area will alleviate these headaches around supply chain compliance and ESG reporting, helping to improve efficiency and promote cross-functional collaboration while getting crucial data from unprocessed into a reportable format.

Increased investment in infrastructure needed

As extreme weather events appear to be worsening, there is little doubt that more intense weather patterns from wind, wildfires, droughts, and floods will continue to have adverse impacts on infrastructure assets and their own resilience. The level of additional investment needed to ensure the resilience of infrastructure is causing alarm.

The current rate of investment in resilience is not enough to deliver the necessary level of change. The fast pace in which temperatures are rising is causing more and more extreme weather patterns, despite the level of climate policy commitments made by governments through 2050 sitting at $75 trillion.

Three factors heavily influence the state of preparedness and resilience of infrastructure around the world. The first one is awareness of the risks to critical national infrastructure, which lags behind the focus on reducing carbon emissions. The second is the level of climate disruption we design our infrastructure and buildings to withstand. At the moment, governments are making infrastructure investment designed to meet standards for a 1.5-degree-Celsius increase in the Earth鈥檚 average temperature, but the standards are inconsistent and likely not enough for the 3-degree course we are on.

Getting together multilateral parties to address environmental challenges is not new. Indeed, the mass effort to help repair the hole in the ozone layer and to remove acid rain are two recent examples over the last 50 years. We have solved these problems in the past, and innovation has been key.

Finally, we need financial incentives to spur investment from the private sector and enable the best resilience improvements around the world to be consistently applied. A good example of this is the long-term flood defense funding of the UK鈥檚 Environment Agency. This offers funding for inland and coastal flood defense based on the number of homes and businesses that are protected. The more protection, the greater the funding available to projects such as the 拢640 million River Thames Scheme.

Three ways to encourage infrastructure investment

One of the biggest challenges in encouraging private and public sector investment in building infrastructure resilience is how to pay for it. Historically, three methods have been used. The first one is the user-based method, which is spread out across all the primary users and benefactors of the infrastructure project. For example, in an investment in electricity network resilience, users pay through network charges. Another example from the UK would be the Thames Tideway Tunnel, which is a 拢4.2 billion wastewater project to protect London.

The next option is to finance the project through tax-based incentive structures. The in the US, which applies a layering approach of tax incentives to increase the financial benefit to companies, is an example of this approach. The World Bank鈥檚 Global Infrastructure Facility and the UN鈥檚 Green Climate Fund also are examples of this.

The third way of paying for infrastructure investment is a value-capture scheme to unlock more value in land. This method involves making proactive investments in protections to address potential infrastructure vulnerabilities in order to increase the land value. By foreseeing areas of concern, the land emerges as a more secure place to build.

Of course, there are factors that are currently slowing progress on resilient infrastructure investment. First, the lack of broad awareness of the low resilience of infrastructure. It has only been in the last 18 to 24 months that headlines about extreme weather events on the vulnerability of infrastructure from around the world are breaking through. The last few weeks have seen Hurricane Idalia in Florida, wildfires in Hawaii, and a severe heat wave in Europe.

Secondly, the strain on government finances after years of public investment in responding to the global banking crisis, the global pandemic, energy security, war, and natural disasters. Many governments are now more indebted than at any time in the last 50 years and are facing a sharp increase in the cost of servicing that debt.

Solutions to challenges

Fortunately, there are solutions to overcoming these challenges. Collaboration among governments and public and private sector actors usually is the norm when it comes to a particular infrastructure enhancement project. Private and public partners come together to identify the risk, locate the investments, determine the best solutions that need to be made, and then invest proactively to improve the resilience of the project.

However, this process needs to be improved with suggested actions, including:

Enhance collaboration

Partnerships between governments and private organizations that own some individual parts of the infrastructure are a crucial element for success. Within a particular project, there are multiple owners of buildings, power networks, water networks, gas networks, and other infrastructure projects.

Expand efforts to grow awareness

The days of the public purse paying for most of the damage and resiliency are likely to come to an end because of the low level of financial health of many governments. As a result, governments need to increase efforts to champion the cause of resilience and to identify and build awareness of the overall macro-threats to the resilience of cities and communities they own.

Increase investments from private asset owners

Likewise, private owners of assets also should be prepared to invest in innovation in order to create more efficient infrastructure proactively, instead of only paying for repairs to the previous level of resilience post-disaster. Indeed, innovating to create transportation and power systems that don鈥檛 emit carbon is one key area of immediate need.

Further, developed economies must lead the way with innovation and funding, simply because emerging economies cannot follow the same carbon-emitting development path as other countries. Instead, these emerging economies must develop sustainably and build resilience as more extreme climatic events occur.

Looking to the past to inspire success for the future

Getting together multilateral parties to address environmental challenges is not new. Indeed, the mass effort to help repair the hole in the ozone layer and to remove acid rain are two recent examples over the last 50 years. We have solved these problems in the past, and innovation has been key.

According to a published by the International Federation of Consulting Engineers (FIDIC) in collaboration with Ernst & Young (EY), the world needs to deliver $139 trillion of sustainable infrastructure by 2050 to meet net zero 鈥� revealing a $64 trillion investment gap.

So, clearly, there is a way to go. And the path that lies ahead is difficult but not hopeless. Indeed, with optimism, innovation, investment, and collaboration, there will be better days ahead.

The article was written by听Chris C. Lewis,听EY Global Infrastructure Leader in the听Government & Public Sector division of EY UK