The ripple effect of misconduct: ESG incidents and supply chain disruption risk

Supply chain disruption is a critical operational risk, yet how ESG misconduct affects supply chain stability remains underexplored. Using a BERT-based measure of supply chain disruption risk constructed from MD&A disclosures of Chinese listed firms, we find that ESG incidents significantly elevate supply chain disruption risk. This effect operates primarily through the customer channel, while supplier relationships remain largely unaffected. This asymmetry is consistent with customers facing lower switching costs and being more sensitive to supplier reputation. Quantile regressions reveal that the effect is more pronounced among firms already facing elevated supply chain risk. Cross-sectionally, the effect is stronger for smaller firms, non-state-owned enterprises, heavy-pollution industries, and periods of economic downturns. Community-oriented, diversity-related, and product-oriented CSR activities buffer ESG-induced supply chain risk, whereas environmental management and employee relations efforts do not, indicating that externally visible CSR carries insurance value. The effect persists approximately one to two years and ultimately impairs operating performance. Our findings identify ESG incidents as an important yet manageable driver of supply chain instability and highlight the strategic value of proactive ESG management and targeted CSR investment in sustaining supply chain resilience.