Global value chains governance, suppliers’ environmental, social and governance greenwash, adoptions and business performance

Abstract

Social screening activities from investors have led to the appearance of various social rating agencies, which focus on evaluations of firms’ social performance of three pillars of environmental, social and governance (ESG). Both positive functions of ESG rating data and concerns on reliability of diversified ESG rating data are confused by public and doubt raters’ independence issue. However, raters are complaining about the mass source of ESG data and the difficulty of interpreting firms’ intention behind the disclosure of the data. Focal firms have more complicated positions than others. On one side, firms face fundamental motivations of business to increase the profit, which might lead a model of cost saving method in adoptions of ESG practices and policies by declaring more than doing, called as greenwash. On the other side, globalization of business has led firms to include their upstream and downstream suppliers’ ESG adoptions in different countries, which is global value chains (GVCs) governance. The regulations in different countries did not remain the same, creating further difficulty in adopting ESG from firm’s side. This difference of regulation reflects the reality of different social issues in different societies. For example, developed economies have focused on health issues on diseases of obesity while few developing economies are lacking food due to poverty issue. It thus integrated with those conflicts stands by various positions of observers in this study by evaluations of the objectivity of ESG rating measurement and the investigation of relationships between different factors of global value chains governance, ESG greenwash, ESG adoptions and suppliers’ business performance.

First, this study evaluates the objectivity of four factors of ESG measurement input, ESG measures bias, measurement system, and measurement output. It finds that three original bodies and different observers have observers constructed differently in the structure of ESG and details ESG issues. The measures bias includes both own origin bias and bias created by the nature of ESG data. The measurement systems between different rating agencies are not transparent and misaligned. The empirical results of different treatments on missing data can lead various outputs of ESG measurement. This finding implies the challenges of the reliability of ESG rating results. However, the aim of this study is not to deny the contribution of ESG rating, which has given pressure for firms to improve ESG practices and improve society’s awareness on ESG issues. It thus recommends that different raters should make efforts on alignment of ESG measurement methods, move attentions to developing more ESG talents and try to ensure the reliability and quality of firms’ ESG data. It also suggests different regulators, including disclosure standard bodies and national or regional governments to align what is real ESG under the increase trend of globalization.

Second, after construction of ESG rating measurement in this study, the developed theoretical model finds relationships between varied factors. It finds the significant role of GVCs in restraining suppliers’ ESG greenwash activities. GVCs governance can also motivate suppliers to adopt more in the practices and policies of the environment. However, it does not find correlation of GVCs with total ESG adoptions and social and governance pillars adoptions. The empirical result indicates the suppliers’ ESG greenwash has no impact on ESG adoptions. Suppliers’ business performances are not correlated with factors of GVCs, ESG greenwash and ESG adoptions. This finding implies the key role of MNCs in sustainability development. It recommends different actors of raters, regulators, and investors to look carefully at adoptions activities from MNCs, because MNCs’ global trading remained their GVCs governance impact can improve the efficiency of enhancement of ESG. It also implies that ESG cost is not a short-term returnable investment. The police should motivate firms to look for long term and firms’ motivations should also remain on improving long-term value of shareholders.