Climate-linked Pay and Supply Chain Management

Abstract

This study tests the hypothesis that firms with climate-related metrics in their executive pay promote emissions outsourcing to their supply chain. I find that firms with climate-linked pay reduce the direct emissions by shifting them to the suppliers, resulting in no significant change in total emissions. This emissions spillover effect is more pronounced when firms have greater bargaining power over their suppliers and lower supplier switching costs. Specifically, firms with climate-linked pay initiate fewer and terminate more contracts with those “hard-to-shift-emissions” suppliers. Alternative explanations, such as greater efforts in green innovation and divestiture of assets, do not appear to explain my findings. 

Keywords: ESG metrics, climate-linked pay, executive compensation, supply chain management, switching costs

JEL Classification: G30, M12, M14, M41