ESG investing and pollution outsourcing
Strong ESG investor pressure lowers a firm's direct emissions but may shift pollution to suppliers, leaving combined emissions unchanged.
Summary
Using global firm data from 2006 to 2019, the authors find that firms with strong ESG investor ownership reduce their own direct emissions but tend to outsource pollution to suppliers, so total emissions across the supply chain do not fall. The mechanism is an information gap: data on supplier-level production, emissions and sourcing are often incomplete, voluntary or commercially sensitive, which lets a firm look cleaner than it is. The outsourcing is weaker when investors help firms adopt green technologies and when they oversee supplier practices directly, for example by holding shares in suppliers and engaging with them.
Editor's opinion
Investor pressure to cut emissions can move the problem instead of solving it: the firm gets cleaner on paper while its suppliers get dirtier. Companies and investors that want real reductions need to look at the whole supply chain, and investors can close the gap by giving suppliers access to green technology and by engaging beyond the boundary of the firm.
Key concepts
ESG investing · pollution outsourcing · supply chain emissions · investor pressure