This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: 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 shift pollution to suppliers, which does not change their combined emissions. The study also found evidence that this outsourcing can be reduced when investors help firms adopt eco-friendly technologies and directly oversee supplier practices. Since the United Nations established the Principles for Responsible Investment initiative in 2006 to popularize the concept of ESG, total assets under management by PRI-signatory investors grew from a few hundred billion dollars to more than $100 trillion in 2021—illustrating the power these investors could wield to affect social and environmental change.
The research team of Shipeng Yan of the University of Hong Kong, Fan Zhang of Bentley University and Zhengyu Li of the University of Melbourne set out to determine whether ESG investment really improved firms' underlying environmental impact or whether pollution was simply moving elsewhere. "Earlier research often used ESG ratings as the main outcome, which made sense at the time, but we now understand much better both what ratings capture and what they can miss," Yan says. "That made us want to look beyond those metrics." As they began thinking about whether pollution moved across organizational boundaries, they focused on whether strong ESG investor ownership affected firms' decisions to move pollution-intensive activity to suppliers.
To estimate the impact on pollution outsourcing, the team used investor-level mergers and acquisitions as quasi-experimental variations in firm ESG ownership because such shifts support the predicted causal relationship between ESG ownership and pollution outsourcing. They analyzed a global sample of firms from 2006 to 2019 and used greenhouse gas emissions data from Trucost. Their analysis showed that a firm's ESG ownership is positively associated with pollution outsourcing to suppliers and that this outsourcing does not result in a decrease in overall carbon emissions.
"Investors are set up to understand the companies they own, not to audit every tier of a global supply chain," Yan says. "Even experienced ESG investors may have good information about a focal firm but only fragmented information about its suppliers. To know whether decoupling is happening, they would need supplier-level data on production, emissions and sourcing relationships—data that are often incomplete, voluntary or commercially sensitive.
That information gap is part of what makes this form of decoupling possible." The researchers found that ESG investors have unique advantages when attempting to mitigate pollution outsourcing. Such investors may make pollution outsourcing less attractive by allowing firms to access green technologies from other portfolio firms so they can build clean production capacity. ESG investors might also hold more shares of a firm's suppliers than other investors, extending their influence beyond the boundaries of the firm and helping address corporate decoupling caused by a lack of willingness.
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