Summary:
As sustainable development gains global consensus, ESG rating agencies have emerged as critical information intermediaries connecting firms with capital markets, with their assessments profoundly shaping corporate reputational capital and financing costs. Meanwhile, deepening supply chain integration increasingly exposes focal firms to ESG-driven reputational contagion from upstream and downstream partners. While existing research has extensively examined direct supply chain ESG risk management strategies, including supplier screening, on-site audits, and compliance standards, scholarly understanding remains limited regarding whether firms strategically adjust supply chain information disclosure as a lower-cost and more covert alternative. This gap motivates our central inquiry: under intensifying ESG scrutiny pressure, do firms strategically reduce supply chain disclosure transparency to sever risk transmission channels? Two competing theoretical hypotheses frame our analysis. The risk avoidance hypothesis predicts that ESG rating coverage will prompt firms to reduce supply chain disclosure transparency: by restricting the supply chain information available to ESG information stakeholders, firms take advantage of investors' limited attention to weaken the perceived linkage between supply chain ESG incidents and focal firm performance, thereby reducing external reputational pressure. The signaling hypothesis predicts the opposite: firms proactively enhance disclosure to satisfy ESG information demands and signal superior governance capabilities to the market. Which hypothesis prevails remains an empirical question. We exploit a quasi-natural experiment arising from the staggered coverage of Chinese A-share listed companies by seven major ESG rating agencies, including both domestic and international institutions, between 2007 and 2023. Leveraging the voluntary nature of supply chain disclosure in China, we employ a difference-in-differences framework to identify the effect of ESG scrutiny pressure on supply chain disclosure transparency and examine its real economic consequences. Our findings consistently support the risk avoidance hypothesis. ESG rating coverage significantly reduces supply chain disclosure transparency, with the effect intensifying as the number of covering agencies increases. Cross-sectional analyses reveal that strategic disclosure is more pronounced when supply chain members exhibit weaker ESG performance, that is, when reputational contagion risk is most acute, and when firms face elevated media attention, which amplifies the potential reputational damage from supply chain ESG incidents. These patterns collectively confirm that firms deliberately reduce transparency to sever the risk transmission chain between supply chain ESG events and their own market standing. Analysis of real effects reveals an asymmetry in economic consequences. On one hand, reduced supply chain transparency lowers firms' capital engagement in supply chain relationship maintenance, generating near-term cost savings. On the other hand, the information asymmetry created by strategic disclosure may persistently accumulate unresolved uncertainty in capital markets, potentially elevating firms' future stock price crash risk. This study contributes to the literature in three respects. First, we identify strategic information disclosure as a supply chain ESG risk management approach, extending the existing research framework beyond direct intervention measures to the domain of information management. Second, we document an unintended consequence of soft ESG regulation: while ESG rating coverage is intended to promote sustainability, the scrutiny pressure it generates may paradoxically suppress voluntary information transparency. Third, by introducing an ESG risk transmission avoidance motive, we extend supply chain disclosure motivation theory as a complement to traditional explanations grounded in proprietary costs and related considerations. These findings carry concrete policy implications. Regulators should further improve the regulatory framework governing supply chain information disclosure. ESG rating agencies should incorporate supply chain transparency as an independent evaluative dimension, monitor disclosure trends dynamically, and cross-validate assessments through diverse channels including regulatory enforcement records. Investors should look beyond ESG rating scores to the continuity and completeness of supply chain disclosure, incorporating anomalous transparency changes into investment decision frameworks as potential early warning signals of latent risk.
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