Warnings that strict new sustainability rules will force developing countries out of EU firms’ supply chains has sparked calls for investment promotion agencies (IPAs) to step up their role in environmental, social and governance (ESG) compliance.

But while some larger IPAs have embraced the challenge, others feel ill-equipped to guide investors on complex regulatory compliance.

Speaking at the Aftercare Forum in Florence on May 30, Martin Kaspar, an FDI expert and head of business development at a German Mittelstand automotive company, stressed that stringent reporting regarding suppliers under the Corporate Sustainability Due Diligence Directive (CSDDD) and Carbon Border Adjustment Mechanism (CBAM) will reroute global trade and investment away from emerging markets. 

“[European] businesses are taking this very seriously and are looking at these in great detail,” he said at the event, organised by Cities & Collaboration and Invest in Tuscany. “You will have small and medium-sized enterprises [and] less developed countries dropping out of supply chains because they are considered too big a risk.”

CSDDD requires large EU firms to address ESG risks in their supply chains or risk being fined up to 5% of net turnover. Under CBAM, each EU import valued at €150 or more requires the reporting of 300 data points to determine if a carbon tax is applicable. Echoing comments from sustainability professionals, Mr Kasper said EU firms cutting ties with suppliers that can’t meet these requirements “is one of the inevitable outcomes of this tsunami of [ESG] regulation”.  

He urged IPAs from within the EU to help firms navigate their new ESG obligations, and for those outside the bloc to make businesses aware of the “genuine risk of dropping out of supply chains” and work with their governments to improve sustainability standards.  

Fellow speaker and former World Trade Organization official Victor do Prado also appealed to investment promotion professionals in the audience to “talk to your fellow IPAs” plus think tanks and non-governmental organisations. “Yes, the information is overwhelming … But don’t think everyone else understands it,” he said. 

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Pushing boundaries

IPAs increasingly push their jurisdiction’s sustainability agenda and competitiveness in attracting investment. But among investment professionals attending the Aftercare Forum, opinion was divided over the value they can add to ESG compliance.

Javier Martinez, Invest in Spain’s head of aftercare services, told fDi on the event’s sidelines that the IPA recruited the help of an ESG consultant and UN representatives to host a session in April that guided foreign multinationals operating in the country through their potential obligations under EU sustainability rules including CSDDD. “The goal of the session was to [tell] them the requirements … before they are adapted to Spanish law, so they can get prepared in advance,” Mr Martinez said. 

Representatives from other EU countries, however, were wary of involving themselves in such complex regulatory compliance. "It’s not something we’ve been doing. We work on ESG topics with our clients, but something this technical I think is better suited to sector associations," said Ivi Anna Buce, director of the investment project department at the Investment and Development Agency of Latvia.

Mariëlle Balk, Invest in Holland’s investment relations co-ordinator, said that for detailed information or specific needs on CBAM or ESG supply chain rules, it connects companies to the relevant government or non-governmental experts. “We IPAs are not experts on these topics, and companies coming to us have many other questions,” she added.

IPAs from non-European developing countries — those that risk dropping out of supply chains — said their efforts would have to be in close co-operation with chambers of commerce and local government. Wendy Mena, advisor at Invest Guatemala, said there is also the question of financial support. “What I’m wondering is whether [the EU] is going to set up funding and co-operation programmes to help our companies comply," she told fDi.

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