The impact of supply chain complexity on ESG controversy exposure

Abstract

The increasing external demands from customers, investors, to competitors have influenced companies to adopt sustainable practices not only in their own operations but throughout their supply chains. To successfully mitigate sustainability-related risks in the supply network, it is necessary to understand the drivers of ESG risk exposure. This thesis investigates how upstream supply chain complexity, measured through the dimensions of horizontal, vertical, and spatial complexity, relates to the ESG Controversies score of international companies.

Using ESG data from the Refinitiv database for 197 companies over a five-year period (2019-2023), a quantitative research method with panel data regression analysis was conducted to assess the relationship between upstream complexity dimensions and ESG controversies scores.

The empirical findings suggest that ESG-related controversies are not only influenced by the focal companies’ practices but also by the structure of the upstream supply network. Among the three complexity dimensions, horizontal supply chain complexity showed a statistically significant impact on the ESG Controversies score, while vertical and spatial complexity did not provide any additional explanatory power. The results indicate that firms with a wider supplier base may face more sustainability-related challenges due to limited visibility, control, and the difficulty of managing and enforcing sustainability standards.

The findings of this thesis contribute to existing supply chain complexity literature by connecting structural supply chain complexity to sustainability and reputational risks and offer a foundation for future research on mechanisms and risk mitigation strategies.