Measuring ESG Risk in Supply Networks
This addresses the problem of greenwashing in ESG ratings for investors and companies, offering a method to assess supply network risks, but it is incremental as it builds on existing centrality metrics.
The paper tackles the problem of ESG ratings being vulnerable to greenwashing by studying how trade with poorly rated companies affects a target company's rating, introducing a measurement framework that generalizes PageRank and Alpha Centrality to update ratings, identify influential neighbors, and assess vulnerability in supply networks, with evaluation on synthetic and real-world networks including international trade.
Environmental, Social and Governance (ESG) rating is a way for investors to prioritise investments in companies with good corporate behaviour. However, ESG ratings are vulnerable to greenwashing in a number of ways. In this paper we study the effect that trade with badly rated companies has on a target company's own rating. To do this we introduce a measurement framework, generalising PageRank and Alpha Centrality, which allows tuning of aggregation and path counting approaches to resist greenwashing and reflect the rater's opinions and preferences for harm accumulation. These metrics allow updating of the target's ESG rating, identification of influential neighbours and assessment of vulnerability of the target to bad behaviour in their supply network. We study these metrics on synthetic ESG interaction networks as well as a real inter-company network and the international trade network.