When Demand Soars, ESG Requirements Don't Disappear

A common assumption in Israeli boardrooms is that when a product is in high demand and customers can’t get it elsewhere, they will waive “nice to have” requirements such as sustainability and ESG. In practice, this assumption is wrong, or at least not always right. Even in a sellers’ market, buyers keep considerable power, and their willingness to bend on ESG is limited. Two sectors facing surging demand and limited supply show this clearly: the defense industry and the AI value chain.

In the defense industry, which is seeing unprecedented demand amid global geopolitical developments, customers impose broad ESG requirements. These customers include both companies and national procurement authorities. The requirements cover human rights in the supply chain, material traceability, Scope 3 emissions and reduction targets, external ratings and data assurance. They are built into supplier selection and contracts, and they turn into concrete work plans. High demand does not exempt manufacturers from these requirements; at most, it buys them time to close the gap.

In the AI value chain, demand for compute is soaring while capacity, chips and power remain limited. Yet leading customers still assess data centers on renewable energy, energy and water efficiency, emissions, reporting and certified management systems. New Israeli data centers face some of the most demanding ESG requirements in the market. Once a supplier is chosen, these become binding contractual commitments to improve and report throughout the contract, because the suppliers’ performance directly affects customers’ own climate targets. The same applies to chip makers and to equipment and infrastructure suppliers.

The two cases share no customers, regulation or risk profile, yet they reach the same conclusion: ESG requirements do not depend on the strength of demand. They are driven by the customer’s risk management, its commitments to investors, regulation and its social license to operate. ESG is not a passing trend or a value statement. It is an infrastructure of data and risk management that moves along the value chain through contracts. Companies that understand this early will see ESG as what it has become: the ability to prove, with data, that you are a company others can do business with.

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