upplier engagement is my term for shareholder engagement with the goal to address suppliers either directly or indirectly. I provide an overview of current scientific research regarding supplier engagement. I also explain my respective recommendations to the companies I am invested in. Supplier engagement can be very powerful.
Supplier engagement is my term for shareholder engagement with the goal to address suppliers either directly or indirectly. I provide an overview of current scientific research regarding supplier engagement. I also explain my respective recommendations to the companies I am invested in. Supplier engagement can be very powerful.
The other two stakeholder groups which I address with my “leveraged shareholder engagement” are customers and employees (compare HR-ESG shareholder engagement: Opinion-Post #210 – Responsible Investment Research Blog (prof-soehnholz.com) ).
Supplier emissions can be very high Supplier relations have become much talked about in recent years. Climate change is one of the reasons. Greenhouse gas (GHG) emissions are one of the prime shareholder concerns if they are interested in environmental topics. To compare more or less vertically integrated companies with their competitors, evaluating GHG emissions of suppliers is important. Often, GHG emissions of suppliers (part of so-called scope 3) are much higher than the (scope 1 and 2) emissions of the analyzed company itself.
Relevant research (1): Managing climate change risks in global supply chains: a review and research agenda by Abhijeet Ghadge, Hendrik Wurtmann and Stefan Seuring as of June 13th , 2022: “The research … captures a comprehensive picture of climate change and associated phenomenon in terms of sources, consequences, control drivers, and mitigation mechanisms. … The study contributes to practice by providing visibility into the industry sectors most likely to be impacted; their complex association with other supply chain networks. The drivers, barriers, and strategies for climate change mitigation are particularly helpful to practitioners for better managing human-induced risks …” (p. 59).
Supply chain becomes more important for ESG-analyses COVID and geopolitical changes such as the Russian attack on the Ukraine also showed that the management of supply chains is crucial for many companies. Even before, many supplier related incidents such as the Foxconn/Apple discussions had significant effects on company ESG perceptions and potentially also on ESG-ratings. Also, supply chains are becoming more in many countries.
Relevant research (2): ESG Shocks in Global Supply Chains by Emilio Bisetti, Guoman She, and Alminas Zaldokas as of Sept. 6th , 2023: “We show that U.S. firms cut imports by 29.9% and are 4.3% more likely to terminate a trade relationship when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation …. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade” (abstract).
On the positive side, many suppliers have great knowhow and can help their clients to become better in ESG-terms.
Relevant research (3): Stakeholder Engagement by Brett McDonnell as of Nov. 1st , 2022t : “Suppliers, like employees, also provide inputs to the production process of companies. Retaining the loyalty of suppliers may be important for companies, depending in part on how firm-specific inputs are. Where inputs are fungible, they can be bought on the market for the prevailing market price, but where they are firm-specific, the buying firm will have more trouble replacing a supplier that decides to withdraw. Suppliers have information about the quality of what they supply, and about conditions which may affect future availability and prices” (p. 8).
Supplier engagement: How investors can indirectly engage Investors in publicly listed companies do probably not want to directly with the often many important suppliers of their portfolios companies. But they can indirectly leverage the knowhow and energy of suppliers. Here is what Brett McDonnell suggests:
Relevant research (4) : Stakeholder Governance as Governance by Stakeholders by Brett McDonnell as of August 31st , 2023: “… American stakeholder engagement is limited to soliciting (and on occasion responding to) the opinions of employees, customers, suppliers, and others. True stakeholder governance would involve these groups in actively making corporate decisions. I have suggested various ways we could do this. The focus should be on employees, who could be empowered via board representation, works councils, and unions. Other stakeholders could be less fully empowered through councils, advisory at first but potentially given power to nominate or even elect directors” (p. 19).
In my opinion, too, advisory councils of suppliers could be helpful to improve listed companies. I prefer other forms of ESG engagement with suppliers, though. First, companies could regularly survey most of their direct and even some important indirect suppliers in a regular way regarding ESG topics. With regular surveys companies can find out how happy their suppliers are with the companies ESG activities and ESG-improvement ideas by suppliers can be collected.
Example (1) : Surveys from Stakeholders Make Good Business Sense by Terrie Nolinske from the National Business Research Institute (no date) mentions The Body Shop and Michelin who use supplier surveys.
Example (2): AA1000 Stakeholder Engagement Standard
I specifically suggest to regularly ask suppliers the following questions: 1) “How satisfied are you with the environmental, social and corporate governance activities of company XYZ?” and 2) “Which environmental, social and corporate governance improvements do you suggest to company XYZ?”.
Systematic supplier engagement using ESG evaluations In my view, even more important to improve the full supply chain ESG-profile is that companies regularly, broadly and independently evaluate the ESG-quality of their suppliers. Independent ESG-ratings can be very useful for that purpose, since they systematically cover many environmental, social and governance aspects.
I try to invest in the 30 most sustainable publicly listed companies globally (see Active or impact investing? – (prof-soehnholz.com) ), but even most of these companies do not have such a supplier ESG evaluation process. Here are the best examples of my portfolios companies:
Supplier ESG evaluation (1) : Watts Water Sustainability Report 2022 p. 63: “In 2022, we met our goal of reviewing suppliers representing approximately 30% of our global annual spend using the Dun & Bradstreet (D&B) ESG Rating Service. The service is a web-based ratings platform that assesses the ESG operations of suppliers across 70 key topics, including through peer benchmarking and using leading sustainability frameworks …. Through our expanded use of this tool, we gained increased insight into our suppliers’ sustainability practices, including that suppliers making up one-sixth of the global spend we assessed already have advanced ESG systems in place”.
Supplier ESG evaluation (2): CAFs 2022 Sustainability Report : “ … the evaluation effort focuses on 349 target suppliers out of a total of approximately 6,000 suppliers. The evaluations are carried out by Ecovadis …. Ecovadis adapts the evaluation questionnaire to each supplier based on the locations in which it operates, its sector and its size to evaluate 21 aspects of sustainability alligned with the most demanding international norms, regulations and standards …. Suppliers‘ responses are evaluated by specialised analysts … This analysis results in a general rating with a maximum score of 100 points …. If the result of an evaluation does not meet the requirements established by CAF (a general score of 45 out of 100 in sustainability management), the supplier is required to implement an action plan to improve the weaknesses identified. If the supplier does not raise its assessment to acceptable levels or does not show a commitment to improve, it is audited by experts in the field” (p. 83).
“By the end of 2022, the activities … have assessed … 78% of the prioritised suppliers (118 business groups) …. The assessed suppliers have an average overall rating of 58.6 out of 100 … which is 13 percentage points higher than the average of all suppliers assessed by Ecovadis worldwide (45/100). In addition, 71% of CAF suppliers reassessed in the last year improved their general rating … As a result of these assessments it has also been identified that 2% of the Group’s total purchases are made from suppliers with average or lower sustainability management and an improvement plan has been agreed with all of them”(p. 84).
The picture of my blogpost summarises the results of the 2022 supplier assessment campaign of one of my portfolio companies: Construcciones y Auxiliar de Ferrocarriles (CAF Sustainability Report 2022, p. 85):
But even Watts Water and CAF currently only cover a relatively small share of their suppliers with these evaluations.
Supplier ESG evaluation (3) : And here is another good example, the Alstom Annual Report 2023/24 e.g. on page 355:
„Suppliers identified throughout the risk mapping can be eligible to an EcoVadis evaluation. This online assessment covers 21 sustainability criteria under four pillars: environment, labor & human rights, ethics and sustainable procurement. … Not compliant suppliers (global score <45) are reassessed by EcoVadis, once the corrective
Supplier ESG evaluation (4) : Mips AB from Sweden states on page 29 of the 2024 Sustainability Report : „The target for 2025 is to achieve an average of at least 88 points from the sustainability audits of Mips’ manufacturing suppliers. Mips’ long-term goal in this area is to achieve an average of at least 90 points by 2030. The maximum amount of points is 100. The average takes into account the size of the volumes Mips’ orders from each supplier. Thus, target fulfilment is affected by the extent to which Mips considers sustainability when choosing suppliers. This is expected to create an even greater incentive for the suppliers to further improve their sustainability performance“.
Better fewer suppliers? Such a sustainability-oriented supplier evaluation approach could result in fewer and therefore more important suppliers.
Relevant research (5) : A Supply Chain Sourcing Model at the Interface of Operations and Sustainability by Gang Li and Yu A. Xia as of Aug. 25th, 2023: “This research investigates … how to integrate sustainability with sourcing planning decisions and how to address the challenges associated with the integration, such as the balance between operational factors and sustainability factors and the quantitative evaluation of sustainability performance. … Our model suggests that while increasing the number of suppliers may cause additional sustainability risk in supply chain management, decreasing the supply base will decrease the production capacity and increase the risk of delivery delay. Therefore, a firm should carefully set up its global sourcing network with only a limited number of selected suppliers. This finding is particularly true when the focus of sourcing planning gradually moves away from decisions based solely on cost to those seeking excellence in both supply chain sustainability and cost performance“ (p. 32).
Supplier engagement: Powerful supplier ESG disclosures I think that is very important to make the supplier engagement activities transparent. Only transparent activities can be controlled by stakeholders. It is very useful for stakeholders, too, to know the identities of the major suppliers.
Relevant research (6): Green Image in Supply Chains: Selective Disclosure of Corporate Suppliers by Yilin Shi, Jing Wu, and Yu Zhang as of Sept. 9th , 2022 (#2015): “We uncover robust empirical evidence showing that listed firms selectively disclose environmentally friendly suppliers while selectively not disclosing suppliers with poor environmental performance, i.e., they conduct supply chain greenwashing. This is a prevalent behavior in the sample of more than 40 major countries or regions around the world that we study. … we find that customer firms that face more competitive pressure, care more about brand image and reputation, and have larger shares of institutional holdings are more likely to conduct such selective disclosure. … we find that information transparency reduces such behavior. Finally, we study the outcomes of selectively disclosing green suppliers and find that customers benefit from the practice in terms of sales, profitability, and market valuation“ (p. 22/24).
A supplier engagement proposal and first engagement experiences Based on my engagement policy (Shareholder engagement: 21 science based theses and an action plan – (prof-soehnholz.com) ), I try to make it as simple as possible for my portfolio companies to implement my suggestions. Comprehensive and regular supplier ESG surveys would be a rather simple and low-cost approach and I certainly encourage them.
Given the importance of the supply chain for ESG-topics and the risks of greenwashing, I especially recommend a more demanding supplier ESG-rating approach to all my portfolio companies. Specifically, I tell them: “Favoring suppliers with better overall/comprehensive ESG scores is probably the way to go. Reporting aggregated information such as percentage of suppliers with XYZ ESG-scores can be one first step regarding transparency”. I also inform them about current relevant research and the two examples mentioned above.
No supplier engagement results yet I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far (compare 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf ).
I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my attempts for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little company overlap. The asset managers and the shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such a small entity as mine.
Nevertheless, I will continue to ask my portfolio companies for such stakeholder engagements and the publication of their results. I am confident, that at least a few companies will adopt such surveys and evaluations and thus position themselves even more as ESG-leaders. Research such as “A Test of Stakeholder Governance ” by Stavros Gadinis and Amelia Miazad as of Aug. 25th , 2021 is one of the reasons for optimism on my part. And, maybe, with publications such as this blog post, I can encourage other companies, investors etc. to support such broad stakeholder engagement activities as well.
Additional research (published after the post was first put online):
Bringing ESG Accountability to Global Supply Chains as of Oct. 30th, 2023 by Ingrid Cornander, Michael Jonas, and Daniel Weise from The Boston Consulting Group:
„Key takeaways: By adhering to a simple six-step process, business can systematically identify and mitigate ESG risks in global supply chains.
Teaming up with suppliers will not only help companies meet new legislation in Europe and North America, but will also embed ESG into the heart of their operating models.
Companies must create transparency around their complex supply chains, identify ESG risks, assign risk scores, and, when needed, deploy measures suited to tackle them.
Internally, some leaders have set up an ESG center of excellence as a central organizational node. It helps companies create consistent company-wide policies, share best practices, and constantly monitor ESG issues.
Externally, companies have realized the need to collaborate with rivals as well as governments to increase the awareness of ESG issues in business ecosystems“.
A Procurement Advantage in Disruptive Times: New Perspectives on ESG Strategy and Firm Performance by Wenting Li and Yimin Wang as of May 8th , 2024:
„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“ (Abstract).
Eco—Friendliness: Signals, Proprietary Insights into Behavior, and Buyer-Supplier Relationship Persistence in the U.S. Import Market by Agnieszka Nowinska and Chris Dirzka as of April 8th, 2025:
„The tensions between environmental sustainability and performance have been flagged as an important avenue for future research in international business. We use signaling theory and buyer-supplier (freight forwarders and carriers) relationships in the U.S. import market and study the stand-alone and contingent value of eco-friendly signals and behavior and the persistence of the relationship. We find that dyads with higher carbon footprints are less likely be persist. Strong and costly signals by suppliers providing service in stringently regulated locations influence the dyadic persistence positively and further enhance the effects of the experienced eco-friendly service by suppliers. Accordingly, our findings indicate sustainability, and performance can go hand in hand and that buyers value a non-symbolic and congruent commitment to a cause while doing business with suppliers. The findings further emphasize the importance of a long-term, green thinking, whether signal- or experience-based and the fragility of businesses that disregard environmental responsibilities“ (Abstract).
The Evolution of Artificial Intelligence in Supply Chain Due Diligence: A Systematic Literature Review and Framework Development by Marcel Welsen and Łukasz Sułkowski as of April 24th , 2025: “… The findings demonstrate that AI not only improve the ESG compliance verification and monitoring capabilities, but it also revealed key challenges, such as data quality issues, algorithmic bias, cross-border regulatory difficulties, and cultural adaptation requirements. Critical research gaps that were identified are: limited integration between technological and ethical dimensions, insufficient attention to cultural factors, absence of comprehensive ethical frameworks, lack of empirical studies, and inadequate regulatory alignment examination. The theoretical contributions provided by this research is the development of a framework and practical implication advices for stakeholders“ (Abstract).
Climate Disclosures and Decarbonization along the Supply Chain by Pietro Bonetti, Yang (Ellen) En, Igor Kadach, and Gaizka Ormazabal as of Dec. 26th , 2024: „… Our … exploit the unique features of the CDP, the world-leading platform of corporate climate risk disclosures. We find a strong positive association between customer and supplier disclosures to the CDP. … We also observe that supplier CDP disclosures likely induced by customers’ demand are associated with subsequent lower carbon emissions. Moreover, customers are more (less) likely to terminate relationships with the most (least) polluting suppliers and with those not meeting their disclosure demands” (Abstract).
Greening the Supply Chain: Financial Tools to Catalyze Decarbonization by Small Businesses by Kyle J. Blasinsky as of Feb. 10th , 2025: “… small- and medium-sized enterprises (“SMEs”) … aggregate emissions … account for half of all emissions in the United States annually. … many SMEs express interest in decarbonization, but they often cite insufficient capital and expertise as central barriers to these efforts. … this Article proposes integrating energy savings performance contracts (“ESPCs”) into large firms’ supply chains … ESPCs allow firms to invest in energy efficiency upgrades with an experienced energy services company that oversees the project and accesses financing by guaranteeing savings from those upgrades. …” (Abstract).
ESG Alignment and Supply Chain Dynamics: Evidence from U.S. Customer-Supplier Relationships by Stefan Hirth and Sai Palepu as of Jan. 15th , 2025: “We study the role of Environmental, Social, and Governance (ESG) alignment in shaping customer-supplier relationships within U.S. supply chains. … we find that major customers significantly influence supplier ESG performance, with a 6.9% increase linked to one unit increase in the major customer ESG scores. Positive ESG divergence, where a supplier outperforms its major customer, increases the likelihood of relationship termination by 18.1% …. Replacement suppliers generally exhibit higher ESG ratings than their predecessors …” (Abstract).
