Buyer collaboration in managing supplier responsibility with ESG due diligence effort spillover and fairness concerns

Abstract

Propelled by climate change and social injustice, environmental, social, and governance (ESG) disclosure is popularizing and drives for building a more transparent and responsible supply chain. As many unsustainable and unethical activities are hidden in the upstream supply chain, it demands ESG reporting on suppliers. Against this background, buyers conduct due diligence (DD) to assess, manage, and report the ESG practices of the upstream suppliers. We consider two buyers with different responsible awareness competing for consumers in the end market (referred to as a strong buyer and a weak buyer). Competing buyers can share a common supplier and cooperate in implementing ESG DD to strengthen consumer trust, nevertheless, such cooperation gives the weak buyer an opportunity to free ride on the strong buyer’s ESG effort (i.e., ESG effort spillover). We find that only a significantly low spillover effect can induce a fair-neutral strong buyer to adopt buyer collaboration. Interestingly, with the consideration of fairness concerns, the competitor can be treated as a friend in collaboratively managing the ESG practices of the common supplier even facing a great threat of ESG DD effort spillover. Our results also reveal that fairness concerns have a non-monotone impact on the possibility of realizing a win–win outcome between the two buyers. Our findings shed light on how the optimal supplier ESG DD strategy in a competing market differs when incorporating fairness concerns.