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CHAPTER 2
SUSTAINABLE BUSINESS
2.1 Sustainable Development
Sustainable development is a new force pushing society in a new direction, but this force is driven by many different issues and is interpreted and used by people in many different ways. Sustainable development must combine political, economic, social, technological, and scientific approaches to solving the environmental crisis. It must overcome many contradictions and accepted ways of doing things. Unfortunately, we cannot discuss all these aspects of sustainable development in this course. Our goal is to review the gathering strength of the environmental forces driving sustainable development, and its main currents of thoughts in order to understand its impact on business. In particular we are interested in those points of consensus that are providing powerful principles for a sustainable business to guide its operations.
The short definition of sustainable development, the one that is used most commonly is: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (WECD, 1987, 43). Sustainable Development thus attempts to achieve a compromise between what had been considered two contradictory goals:
o Sustainable refers to preserving the natural ecosystem and its resources. o Development refers to increasing economic growth and prosperity.
These two goals have been considered contradictory because it has been assumed that economic growth will damage the environment. Sustainable development is therefore, primarily, a vision of reducing the conflict between these two goals. The short definition of sustainable development has rarely satisfied anybody who used it. Often they have qualified it by with a particular perspective. The short definition was qualified by its originators in the following manner: “It (sustainable development) contains within it two key concepts: o the concepts of needs, in particular the essential needs off the world's poor, to which overriding priority should be given; and o the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs.” (WCED, 1987, 43)
These qualifications indicate that, the WCED believed that overcoming the contradiction between ecological preservation and economic growth would not be an easy task. Sustainable development is thus also an ethical-political statement in that it states that the needs of the poor should be given priority. It also states that we do not yet have the technological means or social institutions that will allow us to live within the environment's capacity and we should build these capacities.
History
Although a few authors had previously used the term sustainable development, it was the UN's World Commission on Environment and Development 1987 (WCED), that made Sustainable Development a popular term and powerful symbol. It has been adopted as a goal by almost all countries. The 'sustainable' portion of sustainable development originates in the environmental movement.
Before the WCED, scientific evidence and growing awareness of resource depletion and pollution brought about several international conferences. They laid the groundwork in creating an international consensus to preserve the environment and for that reason the UN established the WCED. The 'development' portion of sustainable development originates is a recognition that people must use the environment, and moreover they are interested in improving their standard of living. Development was integrated into what had been an emphasis on the environment primarily because most people irrespective of present level of development wanted to increase economic growth. Rich countries did not want to see their present level of prosperity or future levels of prosperity reduced. Poor countries wanted to be able to achieve the benefits of development. It was also widely recognized that environmental damage such as desertification, deforestation or urban air pollution result from poverty.
According to the WCED, to achieve global sustainability all countries, whether free-market, planned, developed or developing, should adopt strategies that:
o Revive growth, but change the quality of growth; o Meet essential needs for jobs, food, energy, water, and sanitation; o Ensure a sustainable level of population; o Conserve and enhance the resource base; o Reorient technology and manage risk; o Merge environmental and economics in decision making; o Enhance the flow of capital to developing countries; o Link trade, environment, and development by improving the terms of trade; o Increase the diffusion of environmentally sound technologies and their funding to developing countries.
After the WCED's report titled "Our Common Future" was published the UN initiated an international conference on the environment to be held in Rio de Janeiro in
- This conference, “the earth summit,” was better attended than any other international conference of nations and institutions of any type. The most important result of the conference was that all countries would commit themselves to developing a strategy for sustainable development for the 21st Century. These strategies are to be guided by a number of principles and suggested mechanisms, but leaving it to each country to develop its own appropriate plan. A second earth summit was held in Johannesburg, South Africa in 2002. It did not produce the large impact agreements that the first conference did, but was successful in getting agreement on the implementing actions to deal with, for example, water and energy supply to poorer regions.
Controversy and Acceptance
term preservation incentives. Public ownership and regulation of these resources is therefore considered necessary. A third way of regulation is by cooperative governance among people in the area (or users of the resource) to provide mutually agreed to governance over commonly used resources (common pool resources).
Despite these differences sustainable development has become a focus that draws people's attention to an urgent problem and compels them to address the confrontation between the environment and humankind's exploitation of it. The concept of sustainable development has become the most important guide to dealing with the environmental crisis. It has been accepted by the government here in Hong Kong who define it in the following manner: Sustainable development in Hong Kong balances social, economic and environmental needs, both for present and future generations, simultaneously achieving a vibrant economy, social progress and better environmental quality, locally, nationally and internationally, through the efforts of the community and the Government. (From SusDev 21, the government's policy report on sustainable development in Hong Kong)
Most Important Accepted Principles The concept of sustainable development promises to integrate environmental consideration into economic and social development in a much more comprehensive manner that before. It does so in spite of its different interpretations. Less open to interpretation are several principles that have become the accepted bases for achieving sustainability. They include the following:
o The public trust doctrine means that governments must act to prevent environmental damage whenever a threat exists, whether or not a specific law covers it. This doctrine normally implies the right of the public to require that governments act in these circumstances on its behalf.
o The precautionary principle holds that where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation (or expressed more liberally, when in doubt about the impact of development, it will be managed according to the worst case scenario of its impact on the environment). Politically, this principle is difficult to apply. In fact, it is ignored in most countries. Choosing the side of caution is not an attractive option when consider against immediate projected economic benefits which can be spelt out in conventional development terms.
o The principle of inter-generational equity is at the heart of the definition of sustainable development. It requires that the needs of the present be met without compromising the ability of future generations to meet their own needs. It depends on the combined and effective application of the other principles for sustainable development.
o The principle of intra-generational equity requires that people within the present generation have the right to benefit equally from the exploitation of resources and
that they have an equal right to a clean and healthy environment. This principle applies to the relationship between groups of people within a country and between countries. More and more, this principle is being applied in international negotiations. But within nations, it is particularly susceptible to cultural socio-economic forces.
o The subsidiarity principle seeks to reverse the inefficiencies and environmental damage done by centralized planning and decision-making. It requires that decisions should be made by the communities affected or on their behalf, by the authorities closest to them. As appropriate, decisions should rest either at the national rather than international level or at the local rather than the national level. This has been the basic principle governing the devolution of planning systems worldwide, and it is intended to encourage local ownership of resources and responsibility for environmental problems and their solutions. The growing pressure for devolution on government needs to be balanced by recognition that local areas are part of larger systems and cannot function in isolation. Often environmental problems may come from forces outside of local control such as "up-stream" pollution form a neighboring country or community. In such cases the other principles for sustainable development would override the subsidiarity principle.
o The polluter pays principle (PPP) suggests that the polluter should bear the cost of preventing and controlling pollution. The intent is to force polluters to internalize all the environmental costs of their activities so that these are fully reflected in the costs of the goods and services they provide. Problems would inevitably occur if an industry or plant goes out of business through the rigorous enforcement of this principle. A community might decide that, for example, the employment benefits of keeping a factory open outweigh the health and other environmental costs of pollution. Environmental agencies in developed countries have usually taken a flexible approach with the continuation of government subsidies in special cases, and negotiations of individual programs have been undertaken to allow certain polluters to meet new environmental standards gradually.
o The user pays principle (UPP) applies the PPP more broadly so that the cost of a resource to a user includes all the environmental costs associated with its extraction, transformation and use (including the costs of alternative or future uses foregone). The PPP and UPP can be expressed in similar ways through market systems and government regulation.
But what does sustainable development mean to business?
Growth: Business needs to shift from quantitative to qualitative growth, or in other words it must increase the value of products or services sold (the utility received by the purchaser) while reducing the amount of energy and materials used to produce it. Reduce the dependence on population (i.e. market) expansion.
The majority of businesses have reacted to the demand for better environmental protection haphazardly. They have done so primarily because public, scientific and governmental recognition of the severity of environmental impacts has also occurred in a case-by-case or ad-hoc manner. However, in most developed countries there has been an almost exponential increase in government regulations concerning the environment and lesser-developed countries are following their lead. Complying with these regulations has been the first priority of businesses because they could face severe financial and criminal penalties for not doing so. Some companies remain resistant to demands for change or react only when pressured to do so. Others have adopted a more forward-looking attitude, even if their rationale is simply to stay ahead of increasing regulation and thus maintain their ability to plan into the future. Also, a significant number of companies have made deeper changes to the ways they do business because they see the deeper issues underlying these regulations and understand that they need to build sustainability into their competitive strategies.
Although there is a general trend towards sustainability, companies in different industries, different sections of companies, and companies or their subsidiaries in different places have reacted different over time to environmental needs. Thus one should not read the following three descriptions of business responses to the environment as phases or steps, but as possibly overlapping approaches taken by businesses to greater and lesser degrees—some businesses changing only reluctantly, others in a positive but ad hoc manner, yet others systematically and strategically.
- Denial and Cover-up A lack of response or negative response by a business could have been caused by a number of factors. Costs: fixed assets; expenses for upgrading and training; too low of a margin of profitability; competitors (especially foreign) don't have similar costs. Priorities: profit main priority; other efforts such as TQM, reengineering, IT, downsizing, expansion, etc. more important. Liability and exposure: companies have felt that admitting to environmental problems would leave them open to legal action by government or the public. They have also worried that opening up their business to greater scrutiny could result in divulging business secrets. Ignorance: of their impact on environment; of how to reduce it; and of concerns of society and government.
- Environmental Management The first attempts to deal with environmental needs produced practices and technologies that would achieve compliance with government regulations and departments that would ensure that compliance. These first reactions often lead to the development of more comprehensive systems.
“End-of-pipe' technologies: various end of production process treatments developed to reduce pollution and comply with government regulations. “Low-hanging fruit' (easy environmental gains): collected by initiating recycling, maintenance, energy and resource efficiency programs that achieve significant environmental and cost benefits with little effort and costs. Environment, Health and Safety departments (EHS): established to institutionalize compliance with rapidly escalating government regulations and potential for legal liability claims from government, employees, communities and customers. Environmental Management Systems (EMS, TQEM, ISO 14000): developed to ensure environmental performance improved systematically and according to company objectives.
- Strategy The most promising advance in business response to environmental needs is to use the demands for a better environment to create a competitive advantage and thus to build environmental protection into its products, services, and supporting activities.
Pollution Prevention: reducing environmental impacts of existing products, processes and services at their source, removing toxic materials and reusing materials. It is primarily an internal activity. It was initially an attempt to save on capital costs by anticipating ever increasing government expectations for improved performance, but propelled by cost savings in energy and materials and the creation of marketable by-products. Product Stewardship: using Life-cycle Analysis (LCA) and Design for Environment (DfE) determine where and how a product or service most impacts the environment from cradle to grave, and then redesign it to minimize total energy and material use. Clean Technologies: substituting those products or services that can never be environmentally friendly with other products or services that greatly reduce burdens on the environment. Sustainability Vision: aligning corporate priorities and opportunities with social and environmental demands for sustainability and proactively developing markets, technologies, products and services to meet them.
Evidence of the adoption of sustainable development by business was the creation of the World Business Council for Sustainable Development. This organization is comprised of about 170 of the world’s largest corporations and it has devoted considerable resources to developing policies and tools such as corporate responsibility and eco-efficiency. Indeed, today it can safely be said that the majority of international corporations have adopted sustainability as part of their policies and most will publish a sustainability report every other year or two.
- Integrated Management To integrate these policies, programs and practices fully into each business as an essential element of management in all its functions.
- Process of Improvement To continue to improve policies, programs and environmental performance, taking into account technical developments, scientific understanding, consumer needs and community expectations, with legal regulations as starting point; and to apply the same environmental criteria internationally.
- Employee Education To educate, train and motivate employees to conduct their activities in an environmentally responsible manner.
- Prior Assessment To assess environmental impacts before starting a new activity or project and before decommissioning a facility or leaving a site.
- Products or services To develop and provide products or services causing no undue environmental impact and are safe in their intended use, that are efficient in their consumption of energy and natural resources, and that can be recycled, reused, or disposed of safely.
- Customer Advice To advise, and where relevant educate, customers, distributors, and the public in the safe use, transportation, storage and disposal of products provided; and to apply similar considerations to the provisions of services.
- Facilities and Operations To develop, design and operate facilities and conduct activities taking into consideration the efficient use of energy and materials, the sustainable use of renewable resources, the minimization of adverse environmental impact and waste generation, and the safe and responsible disposal of residual wastes.
- Research To conduct or support research on the environmental impacts of raw materials, products, processes, emissions, and wastes associated with the enterprise and on the means of minimizing such adverse impacts.
- Precautionary Approach To modify the manufacture, marketing, or use of products or services or the conduct of activities, consistent with scientific and technical understanding, to prevent serious or irreversible environmental degradation.
- Contractors and Suppliers To promote the adoption of these principles by contractors acting on behalf of the
enterprise, encouraging and, where appropriate, requiring improvements in their practices to make them consistent with those of the enterprise; and to encourage the wider adoption of these principles by suppliers.
- Emergency Preparedness To develop and maintain, where significant hazards exist, emergency preparedness plans in conjunction with the emergency services, relevant authorities and the local community, recognizing potential trans-boundary impacts.
- Transfer of Technology To contribute to the transfer of environmentally sound technology and management methods throughout the industrial and public sectors.
- Contributing to the Common Effect To contribute to the development of public policy and to business, governmental and intergovernmental programs and educational initiatives that will enhance environmental awareness and protection.
- Openness to Concerns To foster openness and dialogue with employees and the public, anticipating and responding to their concerns about potential hazards and impacts of operations, products, wastes or services, including those of trans-boundary or global significance.
- Compliance and Reporting To measure environmental performance; to conduct regular environmental audits and assessments of compliance with company requirements, legal requirements and these principles; and periodically to provide appropriate information to the Board of Directors, shareholders, employees, the authorities and the public.
2.3 Governance and Strategy
The dominant view of corporate governance is that it is run for the owners or stockholders of the company and the company should be focused on returning the highest profits possible to those owners. In addition to the interests of stockholders, however, other stakeholders now demand some say as in how a company is run. These additional voices in governance are justified by the fact that a company does not solely produce profit but has impacts on other people and their interests—irrespective of whether they are being paid by the company or not. Many issues are involved, from legal issues concerning compensation to victims of pollution, to insurers demanding higher premiums for bad environmental practices, to the potential for discovering new markets. The key issue is not whether a company pursues profit or not, but rather whether it listens to other people and takes their concerns for the environment into account. Indeed, by listening to these other voices of governance the company may be ensuring that it will continue to make a profit. A company needs to listen and talk to these people:
Values Created through a Sustainable Business Strategy
o Improved product quality o Increased staff commitment o Improved community relations o Positive pressure group relations o Improved media coverage and image o Green products o Cheaper finance o Lower insurance and legal costs o Reduced risk exposure o Assured present and future compliance o Reduced costs because of improved materials and energy efficiency o Improved materials o Reduced cleanup and decommissioning costs
Society needs business to respond to these opportunities because government regulations and the other forms of external governance have not yet taken us to where we need to go. The expansion of sustainable practices is most likely to come if they demonstrate can see competitive advantage in them and develop the strategies to capitalize on them.
Conclusion:
Social and political pressures are pushing business to incorporate the concept of sustainable development into their policies and strategies. Furthermore, many companies are now looking upon this requirement positively and using it to develop new strategies for competitive advantage. In the rest of the course we will look at many of the practices and strategies that have been developed to make businesses more sustainable. Our approach will be grounded in industrial ecology, because it offers the greatest potential for companies to not only reduce their environmental impact throughout the lifecycle of a product, but also offers the most efficient paths to cost reduction and profit generation.
Further Readings: Graedel T. and Allenby B. 2003. Industrial Ecology. Upper Saddle River: Prentice Hall. Chapter 1 Humanity and the Environment and Chapter 19 Managing Industrial Ecology in the Corporation.
The basis of Sustainable Development politics can be found: in chapter 1 of World Commission on Environment and Development, Our Common Future , Oxford University Press, Oxford, 1987, pp. 1-23.
These articles and books are some of the more influential in the field of sustainable business:
Porter, Michael and van der Linde, Claas. 1995. "Green and Competitive: Ending the Stalemate," Harvard Business Review, July-Aug. Hart, Stuart L. 1997 "Beyond Greening: Strategies for a Sustainable World" Harvard Business Review , Jan-Feb. pp. 66-76. Lovins, Armory B., L. Hunter Lovins, and Paul Hawken 1999 “A Road Map for Natural Capitalism,” Harvard Business Review, May-June. pp. 145-158. Elkington, John 1998. Cannibals with Forks. Gabriola Island BC: New Society Publishers. Read Chapter 3 "The Third Wave: Storming the Boardroom," for an overview of corporate reactions to environmental needs over the last 4 decades; read Chapter 4 "The Triple Bottom Line: sustainability's accountants for detailed explanation of the triple bottom line.
