Based on deterrence theory and supply chain risk contagion, this study empirically examines the impact of customer environmental administrative penalties on corporate ESG performance using a sample of A-share listed companies in Shanghai and Shenzhen from 2009 to 2022. The findings reveal that customer environmental administrative penalties have a supply chain contagion effect and can significantly enhance a company’s ESG performance. Mechanism analysis shows that customer environmental administrative penalties have improved their ESG performance through three aspects: forcing companies to undergo green transformation and upgrading, improving social responsibility and efficiency, and optimizing supervision and governance. Heterogeneity analysis shows that in the context of high public environmental attention, fierce industry competition, and close supply chain relationships, customer environmental administrative penalties have a more significant promoting effect on corporate ESG performance. Further research has found that fulfilling corporate ESG responsibilities under customer environmental administrative penalties is a substantive behavior rather than a strategic tool.