(An) essay on financial analysts’ assessment of suppliers’ ESG risk

Abstract

This paper investigates whether financial analysts integrate information about the ESG (Environmental, Social, and Governance) risks of a company's supply chain, and how they do so. With the increasing demands for ESG performance at the supply chain level, analysts must integrate ESG information across the entire supply chain for a more accurate evaluation of companies within complex supply chains. We consider the Tier 1 level supply chain and analyze whether analysts' stock recommendations for customer firms are related to the future negative ESG incidents faced by their suppliers. Our findings confirm that, post-2013 when the GHG Protocol Scope 3 Standard was in effect, analysts selectively focus on significant suppliers and incorporate information about their financially material ESG risks into stock recommendations. Furthermore, additional analysis reveals strong evidence that suppliers' market capitalization and transaction volume, as well as their bargaining power and competition level, are among the key factors for the analysts in selecting suppliers for analysis.