Climate-linked Incentives and Supply Chain Management

This paper examines whether climate-linked performance in executive compensation leads firms to increase their greenhouse gas emissions along the supply chain. Using a sample of 912 unique U.S. firms from 2006 to 2020, I find that firms with better corporate governance, greater performance and lower firm growth opportunities are more likely to link executive compensation to climate performance. Such compensation practices are followed by increases in greenhouse gas emissions along the supply chain. This effect is more pronounced among firms with greater environmental pressure, higher bargaining power over suppliers, and lower institutional monitoring. Additionally, I show that firms with climate-linked incentives initiate fewer new contracts with suppliers from regions with higher environmental enforcement, stronger mandatory ESG reporting regulations and civil law countries. Overall, this paper unveils the potential impact on the supply chain of climate-linked performance in executive compensation