The Joint Role of Vertical Integration and ESG Oversight Capability in Shaping ESG Violations

Firms increasingly bear reputational and financial costs when ESG violations surface in their operations and supply chains. Two governance levers are often proposed—separately—as remedies: vertical integration, which brings more activities under common ownership, and ESG oversight capability, the capacity to assess ESG risks, enforce standards, and embed corrective practices across operations and suppliers. We ask whether either reduces violations on its own, and how the two interact.

Drawing on a panel of 2,733 U.S. publicly traded firms from 2003 to 2022 and instrumental-variable estimation, we find that neither lever works alone. Instead, vertical integration and ESG oversight act as complements: only firms with high levels of both experience fewer ESG violations. Integration without oversight tends to absorb problems rather than resolve them, while oversight without integration has limited reach across the firm’s activities. Managers should therefore treat the two as joint investments—particularly when violation risk is concentrated in supply chain operations.