ESG Shocks in Global Supply Chains

We show that U.S. firms cut imports by 11.1% and are 4.2% more likely to terminate a trade relationship when their international suppliers are hit by environmental and social (E&S) scandals. These trade cuts are larger for publicly-listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation, suggesting that E&S preferences in capital markets can have real effects in far-flung economies. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade. Our results highlight the role of customers’ exit in ensuring suppliers’ E&S compliance along global supply chains.