Environmentally Responsible Supply Chains

Abstract

Governments are beginning to mandate that firms disclose what they learn about their social and environmental impacts in their supply chains (e.g., regarding use of conflict minerals and generation of greenhouse gases). This chapter shows that such a mandate will deter firms from measuring (and thus improving) those impacts, for two reasons. First, as demonstrated by consumer choice experiments, voluntary disclosure of these impacts can boost a firm’s market share. Mandating disclosure, in contrast, reduces a firm’s expected gain in market share from learning about these impacts and disclosing this information. Second, investors’ valuation of a firm drops upon disclosure that impacts are high. Therefore, to the extent that managers are concerned about that valuation, a mandate for disclosure will discourage managers from seeking information about these impacts, lest they be forced to disclose that the impacts are high.