Impact of Vertical Integration on ESG Violations: The Role of Integrative Capabilities

Buying firms increasingly face reputational and financial costs from ESG violations occurring in their supply chains. Vertical integration is often assumed to represent a structural remedy, but its empirical effectiveness and boundary conditions are unclear. We analyze a panel of 3,061 U.S. publicly traded firms (2003--2020), combining LSEG ESG violations and capability data, a text-based measure of vertical integration from 10-Ks, FactSet supply-chain links, and Compustat controls. Using two-way fixed-effects models (with complementary 2SLS checks), we find that vertical integration is, on average, associated with fewer ESG violations: a one-unit increase in integration corresponds to an approximate 17\% reduction in violations. Crucially, this effect is substantially amplified by firm-level integrative capabilities. Firms one standard deviation above the mean on ESG evaluation capability see the integration effect roughly double, and firms high on ESG training capability see an even larger (ca. 2.7×) amplification. Firms lacking these capabilities show little or no benefit. For managers and policymakers, the results indicate that integration can reduce ESG risk exposure but works best when paired with credible evaluation and training infrastructures---otherwise it risks internalizing, not resolving, supply chain ESG risk.