No. 246: How Do Firms Trade Off Financial and Environmental Factors in B2B Contracting?

Firms increasingly incorporate non-financial information when selecting supply chain partners, yet little is known about how they trade it off against financial performance. Using a discrete choice experiment with 3,172 German firm representatives, we show that firms value partners’ strong financial performance almost five times more than strong environmental performance. However, consistent with unraveling disclosure theory, firms prefer environmental disclosure to non-disclosure, even when the disclosed performance is weak. The trade-off between financial and environmental performance varies with the characteristics of the selecting firm. Among firms intentionally committed to a sustainability strategy and among downstream firms, strong environmental performance of potential business partners partly offsets weak financial performance. Firms preparing for sustainability reporting exhibit stronger environmental preferences only when both the regulatory environment becomes more stringent and stakeholder pressure is present. This pattern suggests that reporting regulation is associated with persistent sustainability improvements only alongside market forces.