Mandatory ESG Disclosure and Global Supply Chains

Does mandating ESG disclosure impact firms’ global supply chains? Using the staggered introduction of ESG disclosures in different countries, we find that mandatory ESG disclosure is associated with migration of suppliers to countries with relatively more opaque ESG-related corporate information environments. We find evidence consistent with cost-based and reputational motives. The effects are mitigated if the disclosure mandates include more targeted demands on supply chain due diligence processes. Moreover, such effects are less pronounced for firms located in countries with higher ESG-related social awareness, and for firms subject to stronger external governance mechanisms such as monitoring of analysts and institutional investors. Collectively, these findings suggest that mandating ESG disclosures can motivate firms to appear de jure compliant with the mandates, but de facto ignorant about their real ESG-related responsibilities of their suppliers. Our study informs regulators on the supply chain consequences stemming from the implementation of mandated sustainability reporting guidelines.