The spillover effect of customers' ESG to suppliers

Using a sample of Chinese listed firms, this study investigates how customers' ESG performance has influence on suppliers' ESG. We document a positive spillover effect of customers' ESG to that of suppliers. Regarding the components of ESG, we show evidence that customers concern more about the environment and social performance of their suppliers instead of the corporate governance. In addition, the positive spillover effect of customers' ESG (E) is strengthened by the implementation of the double carbon policy. We also find a more pronounced spillover effect of customers' ESG when the suppliers have at least one foreign customer, face greater competition and locate in more marketized regions. Spillover effect is also documented in the ESG disclosure: when customers disclose ESG reports, suppliers tend to follow the trend in the subsequent year. Finally, both customers and suppliers benefit from the collaborative ESG efforts along the supply chain by achieving a better performance evidenced by reduction of discretionary expenses, increase of sales growth and improvement of Tobin's Q.