A Procurement Advantage in Disruptive Times: New Perspectives on ESG Strategy and Firm Performance

Abstract

This study investigates whether elevated environmental, social, and governance (ESG) practices in the global supply chain confer firm resilience during disruptions and, if so, the underlying mechanisms. Drawing on the COVID-19 pandemic as a natural experiment, we define a firm's resilience as its relatively superior financial performance during the pandemic. To isolate the causal effect of ESG practices on a firm's resilience, we employ an instrumental variable estimation approach, exploiting exogenous variation in ESG practices driven by the political orientations of the firms' home countries. The results reveal that increased ESG practices strengthen a firm's resilience during disruptions: a 1% increase in ESG practice scores leads to a 0.215% increase in firms' return on assets. We analyze the mechanisms driving this resilience effect and show that improved ESG practices are associated with reduced purchasing costs and higher profitability amid disruptions. Through a series of mechanism tests exploiting heterogeneity of stakeholder resources, we provide robust evidence that ESG enhances operational congruency with suppliers, which becomes critical in securing a procurement advantage during severe external constraints. Contrary to popular belief, there is little evidence that the ESG improves price premiums during the disruption. Therefore, strengthening operational alignment with suppliers is more critical than fostering customer loyalty with ESG labels, highlighting the primacy of ESG-enabled upstream stakeholder collaborations. Managerially, this research quantifies the economic rationale for ESG practices, offering managers empirical evidence on the imperative to prioritize specific stakeholder alignments as opposed to broad, vague ESG practices that may harm firm performance.

Keywords: ESG strategy, firm resilience, responsible operations, supply chain risk

JEL Classification: C36,F53,L20,M14,Q56