Sustainability Beyond Borders

Having a good sustainability record is not enough to satisfy today’s investors and stakeholders, who are increasingly holding companies accountable not just for their environmental impact and labor practices but also for their suppliers’.

Companies are aware of the problem, and many would like to improve the environmental and working conditions of companies along their supply chains. Still, initiatives can be costly, and their impact on stakeholders is far from certain. Prioritizing programs is complex, and businesses often handle more tasks than they can successfully manage.

How can companies know where their supply chain sustainability dollars will be most effective? How can they maximize the value of their programs? No one has been able to answer these questions. While past studies have shown a correlation between a company’s stock price and its suppliers’ environmental and workplace-related practices, they have failed to establish causality.

That made the subject an intriguing research topic for Craig Carter, John G. and Barbara A. Bebbling Professor of Supply Chain Management. He and colleagues Zachary Rogers of Colorado State University and Sina Golara of Georgia State University decided to investigate the effects of both positive and negative supplier news events on the stock prices of companies that used their services. They examined 3,986 supplier-related environmental and “socially sustainable” (labor-related) news events from 1994 to 2013.

Their study, “Moving Beyond the Four Walls: The Evolving Impact of Supplier Sustainability on Firm Value,” was published in the Journal of Purchasing and Supply Management.

One of the first things the researchers learned was that positive supplier events, such as winning an award for an anti-pollution program or being rated as a top workplace, had almost no effect on a company’s stock price but negative ones, such as an incident of industrial contamination or a workplace accident, did.

Carter says the difference is likely due to psychological distancing. Negative events have a stronger psychological and emotional pull than positive ones. A polluted river—especially if it’s nearby—is easier to picture and more gripping than amorphous workplace kudos or the potential future effects of a new environmental program. This negativity bias also aligns with earlier economic research showing that investors fear losses more than they desire potential gains.

Further data analysis revealed that supplier events of any sort had less effect on a company’s stock price than the company’s environmental and social performance across the 20-year study period.

But there’s an important caveat: The results were not evenly distributed. Upon examining the data more closely, the researchers saw that the picture changed considerably in the final third of the study period, in the years 2008 to 2013.

“During the last period, if something bad happened for a supplier—especially for some types of events—it had the same impact as if it had occurred within the company’s four walls,” Carter says.

That impact hit the company’s stock price, and it happened again and again in the final years of the study.

“Earlier, stakeholder pressure was on the firm alone. But over the years, the significance of supplier events increased.”

The change wasn’t due to increased regulations; those didn’t come until later. Instead, Carter believes growing transparency about supplier activity and the rapid spread of negative news across social media fueled stakeholder outrage and depressed stock prices. Though the study period ended more than a decade ago, those same conditions are in place today.

“Firms need to recognize that stakeholders are pretty powerful, and if firms wait for regulation to make supply chain improvements, it will probably be too late,” Carter says.

The study’s conclusion is that supplier problems involving working conditions, wages, workplace safety, or human rights have a far greater effect on company stock price than environmental problems, such as a chemical spill. Again, psychological distancing likely accounts for the difference.

“If someone is sent to the hospital after a workplace accident, the effects are immediate. You can picture them more easily than the effects a chemical spill may have years later.”

Serious workplace problems have such a strong impact on stakeholder sentiment that geographical distance no longer matters. Problems that occur half a world away might as well be next door—or, more to the point, inside the headquarters of the business where the supplier works.

“The key takeaway is that what happens in the supply chain is just as impactful as what happens inside a company’s four walls,” Carter says. “You can’t ignore it. You need to exercise the same diligence and care that you would at your facilities.”