Geopolitical Risks and ESG: Navigating sanctions, compliance, and sustainability in conflicted environments

Operating in conflict zones is a high-stakes challenge, where every decision can ripple through fragile ecosystems and vulnerable communities. For companies navigating these turbulent landscapes, strong ESG standards aren’t just guidelines — they’re a lifeline for sustainable growth, ethical accountability, and long-term success.  

In this article, experts Marion Kerestedjian and Ramzi Al Khatib delve into the complex relationship between ESG standards and geopolitical risks, with a focus on how companies navigate the unique challenges of operating in conflict zones, emphasizing the urgent need for thorough due diligence and transparency in these contexts. Specifically, they explore how legal frameworks such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) can shape accountability and promote ethical business practices in volatile regions.  

The article also highlights persistent challenges in enforcement and the complexities of identifying and mitigating human-rights impacts across supply chains. Together, these insights underscore the need for businesses to navigate these evolving trends and align with ESG expectations in an uncertain global landscape. 

1. Linking ESG standards and geopolitical risk

Investing in areas of conflict or geopolitical instability presents multifaceted challenges that extend far beyond traditional operational risks. Investors in these regions face obstacles that encompass political, financial, physical, and logistical risks. 

On one hand, political and physical risks indirectly contribute to fiscal and financial uncertainties. For example, such environments pose direct threats to employees, facilities, and infrastructure. Companies operating in conflict zones must invest heavily in safeguarding their premises and often require costly insurance coverage to mitigate these risks. 

In addition, risks extend into supply chains. These vulnerabilities can result in unforeseen disruptions to production and business momentum, leading to revenue losses, delays, and decreased productivity. Political unrest or even minor instabilities in these regions can further jeopardize operations. Such events, often unpredictable, are accompanied by drastic political changes. Rapidly changing laws, the nationalization of private assets, or the imposition of sanctions can severely impact business operations and investments, often without warning.  

Ultimately, the spectrum of political, financial, and physical risks necessitates rigorous risk management and contingency planning.

Financial and economic impact 

On the other hand, beyond operational disruptions, areas considered “hot zones” burden investments with numerous negative externalities. Businesses in these regions are particularly vulnerable to disruptive events that can lead to significant financial losses and make the recovery of lost assets and revenues more challenging. 

Furthermore, companies operating in conflict zones frequently face scrutiny from stakeholders, civil society, and advocacy groups. This can result in negative publicity stemming from allegations of unethical practices or non-compliance with ESG standards. Such criticism may lead to targeted boycotts, reduced investor trust, and diminished stock performance. Besides, companies operating in geopolitically risky areas often encounter stricter borrowing requirements, with elevated borrowing costs. Lenders, wary of heightened risks, typically demand a premium to compensate for their exposure. 

Moreover, these businesses must contend with economic sanctions or trade embargoes, which can restrict access to essential markets and resources, limiting opportunities for growth. Additionally, operating in unstable regions often correlates with currency devaluation and hyperinflation, further eroding purchasing power and complicating the repatriation of profits. 

While broader risks of operating in conflict zones highlight the necessity for robust risk management strategies, a deeper examination of specific ESG-related challenges — such as combating corruption, addressing corporate misconduct, and upholding due diligence — reveals the critical role of ethical governance and compliance in ensuring sustainable operations and investments in such volatile environments.

2. Specific ESG risks in conflict zones: Navigating sanctions, anti-corruption, and corporate misconduct challenges

Given the multitude of potential negative externalities — both financial and non-financial — that companies face when operating in conflict-affected areas, it’s crucial to examine where ESG principles intersect and conflict with their operations and corporate governance in such environments. Shifting focus from an ESG investment perspective — which prioritizes evaluating investments based on corporate policies and responsible business practices — it becomes evident that there’s a limited availability of legal mechanisms to effectively mitigate these risks. 

Particularly, companies aren’t directly bound by international instruments such as the Geneva Conventions, which establish basic rights for civilians in and around war zones. Moreover, only State Parties are subject to sanctions imposed by international organizations, such as the International Court of Justice, leaving corporations largely outside their reach.

Accountability under national laws 

However, companies can be held accountable for corporate misconduct under national laws. Corruption and bribery, which are often closely associated with war and regional conflicts, are among the most serious offenses. The Organisation for Economic Co-operation and Development (OECD) defines corruption as “the abuse of a public or private office for personal gain,” a concept that encompasses scenarios such as the corruption of private companies by a belligerent government, and vice versa. 

Notably, half of the countries in the bottom quartile of Transparency International’s latest Corruption Perceptions Index are currently in conflict. War economies, in particular, create fertile ground for both governments and private actors to exploit, enabling them to seize control of critical supply chains essential during conflicts, such as weapons and manufacturing materials. 

In response to such misconduct, some countries have adopted preventive measures. For example, in France, Law No. 2016-1691 of December 9, 2016, known as Sapin II, focuses on transparency, combating corruption, and modernizing economic practices. In short, it mandates companies to conduct risk mapping, supported by regularly updated documentation, to identify, analyze, and prioritize the risks of exposure to external attempts at corruption.  

Yet, despite these efforts, effectively preventing, detecting, investigating, and addressing corruption and bribery — along with managing broader ESG risks in conflict-affected regions — remains a significant challenge. Legal systems continue to struggle with enforcing stringent regulations, leaving a regulatory gap that allows humanitarian crises to persist and weakens accountability. 

To close this loophole, recent reporting tools have been developed with the goal of strengthening corporate accountability. Notable examples include the CSRD and its associated EU Delegated Regulation, which lays down the European Sustainability Reporting Standards (ESRS), particularly ESRS G1 on Business Conduct. For instance, under ESRS G1, companies engaged in sustainability reporting must disclose their anti-corruption policies as part of their annual management reports. 

3. Due diligence and sustainability reporting: Compliance challenges in conflict areas

Historically, ESG reports have often served as a veneer, allowing businesses to claim ethical practices while human rights violations went unpunished.  

The entry into force of the CSRD and its ongoing transposition process, with more Member States coming on board, significantly hinders greenwashing practices and pushes for improved transparency from large corporations. On that aspect, the CSRD has introduced stringent assurance requirements aimed at enhancing the credibility of ESG disclosures, ensuring that companies’ sustainability reports are transparent, reliable, and aligned with evolving EU standards.  

This shift is likely to shed light on, or at least deter, severe business misconduct as well as human rights violations across companies’ value chains and equally within the communities impacted by their operations. Companies will be mandated to produce accurate sustainability reports, ensuring that only reliable information is included, with strict penalties for non-compliance. Companies that underperform in sustainability are unlikely to face significant consequences as long as their inaction is transparently communicated to stakeholders and the public. Hence, reputational risks serve as the primary driver of accountability. 

Furthermore, the core issue lies in the fact that the lack of transparency affects not only customers, investors, and the public, but also business partners throughout the entire supply chain. Indeed, many companies unknowingly engage with entities that violate standards, while their actions remain hidden from view. Therefore, how can we effectively ensure businesses carry out thorough due diligence and map out risks across their entire chain of activities?

How to address due diligence challenges in conflict zones — The CSDDD solution 

Although we currently lack robust tools specifically designed to address these challenges, we can still optimize the use of recently adopted instruments. On July 25th of this year, the Corporate Sustainability Due Diligence Directive (CSDDD) came into effect impacting the world’s largest companies and extending its reach across their entire chain of activities. 

Notably, the scope of the CSDDD is broader than the CSRD in two key areas: geographic reach and the range of impacted activities. Indeed, although the CSDDD is an EU Directive, it also applies to non-EU companies, provided they generate a net turnover of more than EUR 450 million within the EU (it’s possible many multinational corporations will be impacted). 

Additionally, compared to other due diligence frameworks like the UK’s Modern Slavery Act 2015 or the recently adopted EU Regulation on Deforestation-free Products (EUDR), the scope of the CSDDD is far broader. It’s not confined to specific matters and can target any in-scope company where negative human rights or environmental impacts are identified throughout its chain of activity. 

“Chain of activity” encompasses a much wider range of operations than the “value chain,” which is primarily the focus of corporate reporting obligations. More precisely, chain of activities refers to “any activity related to the production and supply of goods or provision of services by a company, activities of direct and indirect business partners that design, extract, manufacture, transport, store and supply raw materials and eliminate products through the recycling or composting of products or parts of products, or that provide services to the company that are necessary to carry out the company’s activities”.  

Reflecting that, companies can no longer turn a blind eye — once they meet the threshold of 1,000 employees and a global turnover exceeding EUR 450 million in the previous financial year, they’ll have to comply with due diligence obligations, which involves identifying, preventing, mitigating, ending or remediating actual or potential adverse impacts stemming from their own operations, those of their subsidiaries, and, when relevant, those of their business partners within their chains of activities. 

Specifically, companies will have to carefully evaluate the impacts of their products on their upstream and downstream supply chain, including those related to their distribution. This involves carrying out an in-depth analysis of the areas where their products are being distributed and identifying locations where adverse human rights impacts are most likely to arise and where they may be the most severe.  

Needless to say, businesses would need to prevent, mitigate, and eliminate such impacts, which may involve a requirement to suspend or terminate business relationships with companies that are severely non-compliant. Consequently, companies involved in activities that lead to critical human rights breaches, in clear violation of international humanitarian laws, will be compelled to terminate their direct participation in such operations — especially regarding the supply of harmful products.

How companies can foster sustainability in conflict areas

In conclusion, investing in conflict zones and geopolitically unstable regions presents significant challenges that extend beyond traditional operational risks. Companies must navigate a complex landscape of political, financial, physical, and logistical uncertainties, all of which require comprehensive risk management strategies.  

As the intersection of ESG standards and geopolitical risks becomes increasingly evident, it’s clear that robust due diligence and transparency are essential for mitigating potential negative externalities. Legal frameworks like the CSRD and the CSDDD are pivotal in pushing for accountability and curbing unethical business practices, but challenges remain in enforcing compliance and ensuring thorough risk assessments across entire supply chains.  

As corporations are held to higher standards of sustainability and ethical conduct, the pressure to align business operations with human rights and environmental considerations will only intensify. Ultimately, companies operating in these high-risk areas must adopt a proactive, transparent approach to their ESG responsibilities, as failing to do so will lead not only to reputational damage but also to potential legal and financial consequences.