Research Questions Addressed
Under what conditions does a firm’s commitment to publish its list of approved suppliers increase its expected profit as well as the environmental, social, and governance (ESG) efforts of its suppliers?
If a firm commits to publishing a “blacklist” of suppliers that fail ESG audits, what effect does this have on the firm’s profits and supplier’s ESG performance?
This study showed that under certain conditions, a firm’s commitment to publishing a list of approved suppliers motivates suppliers to work towards eliminating safety, environmental, or other responsibility violations. It also increases the buying firm’s expected profit.
Four conditions favor publishing an approved supplier list: The buying firm (1) has a low selling price or slim margin, (2) has a high cost of identifying and qualifying a candidate supplier, (3) faces a high likelihood that a supplier has responsibility violations that will be exposed, or (4) faces the potential for significant brand damage due to sourcing from a supplier with a responsibility violation.
The study also found that publishing a blacklist of suppliers that failed ESG audits increases supplier responsibility under some conditions but decreases it in others. One clear takeaway is that publishing both a blacklist and approved-supplier list is particularly effective with new, prospective suppliers that don’t know if an audit will find them to be in violation or not.