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Li, Minjia

University of British Columbia

As environmental issues gain greater prominence among stakeholders, companies are increasingly adopting sustainability practices. One such practice is linking executive pay to Environmental, Social, and Governance (ESG) performance. Such compensation contracts allow firms to credibly convey to various stakeholders that management attention will be drawn to ESG practices. Prior literature on the consequences of ESG metrics in executive compensation is limited as they predominantly focus on the corporate outcomes within the focal firms. This dissertation investigates the consequences beyond the boundary of focal firms by examining whether the use of “E” or climate-linked executive pay affects firms’ supply chain management. This dissertation documents a positive and significant association between a firm’s use of climate-linked metrics in executive pay and its outsourced emissions to the supply chain. Using a sample of S&P 1500 U.S. firms, I find that firms with better internal corporate governance, better financial performance, and lower growth opportunities are more likely to use climate-linked pay. Such pay schemes are followed by an increase in upstream suppliers’ emissions and a decrease in firms’ direct emissions. This effect is more pronounced among firms with greater climate pressure, greater bargaining power over suppliers, and lower external monitoring. To explore potential mechanisms, I show that firms with climate-linked pay facilitate emissions outsourcing by initiating fewer and terminating more contracts with suppliers from the regions with higher emission costs. I also leverage the mandatory ESG reporting regulations in suppliers’ countries as exogenous shocks and find that U.S. firms with climate-linked pay initiate fewer contracts with suppliers from such supplier countries post their regulations. Specifically, the effects of climate-linked pay on GHG emissions outsourcing are concentrated in firms with lower supplier switching costs. Overall, my findings highlight the potential impact of climate-linked metrics in executive compensation on the supply chain.

Text

2024-07-15

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/88640

Business Administration - Accounting

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/