Supply Chain Disruptions: the Propagation and Economic Costs of ESG Shocks

This paper examines how negative environmental or social (E&S) news about suppliers affects downstream firms’ supply chain configurations and real economic outcomes. Using a novel dataset combining supply-chain links and ESG incident data, we find that ESG negative news shocks significantly increase the likelihood of supplier termination, particularly when inputs are generic and easily replaced. However, when inputs are highly specific, firms often retain ESG-implicated suppliers, even under reputational pressure. We also document an asymmetric response: firms are more likely to drop domestic suppliers than foreign ones following ESG incidents, highlighting the role of switching costs and input specificity. Using a difference-in-differences and instrumental variables strategy, we show that ESG-induced terminations raise operating costs for customers by 4.4%, reduce markups by 6.7%, and lower productivity by 3.6%. These effects are concentrated in cases involving foreign or specialized inputs, underscoring the operational vulnerabilities ESG risks pose across global supply networks.