Environmental, social and governance investor pressure sometimes causes firms to shift pollution to suppliers
Investors who evaluate companies using environmental, social and governance (ESG) criteria are increasingly expected to act as private regulators, using their influence as stakeholders to pressure firms to act more sustainably. New research published in Strategic Management Journal finds that companies under strong ESG investor pressure generate lower direct emissions. However, they sometimes…
Investors focusing on Environmental, Social and Governance (ESG) criteria are exerting pressure on companies to adopt more sustainable practices. According to new research in Strategic Management Journal, firms under heavy ESG scrutiny do generate lower direct emissions. However, these companies may shift pollution to their suppliers, without affecting their total carbon footprint.
The study, led by Shipeng Yan, Fan Zhang and Zhengyu Li from the University of Hong Kong, Bentley University and the University of Melbourne respectively, reveals that while ESG investor pressure leads to lower direct emissions, it often results in increased pollution outsourcing to suppliers, leaving overall supply-chain emissions unchanged.
The researchers used investor-level mergers and acquisitions as a quasi-experimental approach to estimate the impact of ESG ownership on pollution outsourcing. They analyzed a global sample of firms from 2006 to 2019, using greenhouse gas emissions data from Trucost. The findings suggest that ESG investors can help mitigate pollution outsourcing by promoting green technologies and enhancing supplier oversight, but they also acknowledge the limitations of their oversight, given the incomplete and sensitive nature of supplier-level data.
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