Nonlinear effects of ESG practices on innovation efficiency and eco efficiency in the automotive supply chain

As environmental, social, and governance (ESG) considerations gain prominence across global supply chains, understanding how specific ESG subcomponents influence firm performance has become increasingly critical. This study examines the nonlinear relationships between ESG dimensions and firm efficiencies within Honda’s automotive supply chain, encompassing suppliers, partners, supplier-partners, and customers. A two-stage data envelopment analysis (DEA) model is first applied to measure innovation efficiency and eco-efficiency. It is followed by a two-step system generalized method of moments (GMM) estimator to address endogeneity and explore the dynamic effects of ESG practices on firm efficiency. The results reveal heterogeneous and nonlinear ESG–efficiency linkages, including U-shaped and inverse U-shaped patterns across ESG indicators. Environmental innovation and emission-reduction efforts demonstrate diminishing marginal returns for innovation efficiency, whereas workforce and shareholder-related practices show threshold effects for innovation and eco-efficiency. These findings underscore the importance of strategic, not incremental or excessive, ESG investments because the efficiency impact varies across ESG pillars and among different supply chain actors. This study provides actionable insights for Honda and other manufacturers seeking to optimize ESG engagement by integrating DEA and dynamic GMM approaches within a holistic supply chain perspective. The results highlight the need to balance ESG commitments to avoid inefficiencies arising from underinvestment or overinvestment, thereby enhancing sustainability outcomes and operational performance across intricate supply chain networks.