Do suppliers value clients’ ESG profiles? Evidence from Chinese firms

Abstract

We investigate whether suppliers value their clients' ESG profiles in China, the largest emerging market featuring low ESG awareness and severe agency problems. We find a robust and negative impact of Chinese firms' ESG scores on their access to trade credit. The 2SLS regression results based on the instrumental variable indicate that the impact is casual. Additionally, the impact is more pronounced for firms with higher agency costs, greater information asymmetry, worse financial performance, and larger ex-ante default risk. These results suggest that suppliers in China view clients' ESG engagement as costly investments caused by agency problems. Finally, we highlight the economic importance of ESG's negative impact on trade credit by showing that trade credit access helps Chinese firms decrease debt costs, increase trade credit provision to downstream firms, and promote R&D inputs.