business and environmental sustainability and environmental sustainability. 9-2 ... of sole reliance...

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 9

BUSINESS AND

ENVIRONMENTAL

SUSTAINABILITY

9-2

ETHICS IS TOUGHER THAN YOU THINK . . .

“A thing is right when it tends to preserve the integrity, stability and beauty of the biotic community. It is wrong when it does otherwise.”

- Aldo Leopold

“Growth for the sake of growth is the ideology of the cancer cell.”- Edward Abbey

“Waste equals food.”- William McDonough

“Environmental regulation is a signal of design failure.”- William McDonough

9-3

CHAPTER OBJECTIVES

o After exploring this chapter, you will be able to:

1. Explain how environmental challenges can create business

opportunities.

2. Describe a range of values that play a role in environmental decision

making.

3. Explain the difference between market-based and regulatory-based

environmental policies.

4. Describe business’s environmental responsibilities that flow from

each approach.

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CHAPTER OBJECTIVES

5. Identify the inadequacies of sole reliance on a market-based

approach.

6. Identify the inadequacies of regulatory-based environmental policies.

7. Define and describe sustainable development and sustainable business.

8. Highlight the business opportunities associated with a move towards sustainability.

9. Describe the sustainable principles of eco-efficiency, biomimicry, and service.

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OPENING DECISION POINT: WHEN IS

BUILDING DESIGN AND CONSTRUCTION AN

ETHICAL ISSUE?

o Is the decision to meet LEED building standards a business decision

or an ethical decision?

o Should every new building project be required to meet LEED

standards, or is this best left to individual businesses?

o Who are the stakeholders in this decision?

9-6

OPENING DECISION POINT: WHEN IS

BUILDING DESIGN AND CONSTRUCTION AN

ETHICAL ISSUE?

o Are you aware of any controversies with regard to the LEED

standard or certification process?

o Environmental architect William McDonough (see his essay

included at the end of this chapter) once claimed that government

regulation is evidence of a design problem and a failure to properly

design a product or building. Can you imagine any regulations that

might be avoided by designing a building to LEED certification?

9-7

INTRODUCTION

o There is a tendency to believe that environmental challenges always

create a burden on business and that environmental and business

interests are always in conflict.

o While environmental regulation can add costs to business operations

and restrict business choice, they can also provide opportunities for

business.

o We have entered the sustainability revolution—an age where

creating environmentally and economically sustainable

products/services is creating unlimited business opportunities.

o The way we have done business over the last two centuries has

brought us up against the biophysical limits of the earth’s capacity

to support all human life.

9-8

INTRODUCTION

o Throughout the history of industrial economies, business most often

looked at environmental concerns as unwanted burdens and barriers

to economic growth.

o The sustainable business and sustainable economic development

seek to create new ways of doing business in which business success

is measured in terms of economic, ethical, and environmental

sustainability, often called the Triple Bottom Line approach.

o The major ethical question of this chapter is what responsibilities

contemporary businesses have regarding the natural environment.

9-9

FIGURE 9.1 - THE NATURAL STEP FUNNEL

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INTRODUCTION

o The environmental research and consulting group The Natural Step

uses an image of a funnel, with two converging lines, to help

business understand the opportunities available in the age of

sustainability.

o The resources necessary to sustain life are on a downward slope.

o The second line represents aggregate worldwide demand, accounting

for both population growth and the increasing demand of consumerist

lifestyles.

o Barring an environmental catastrophe, many but not all industries will

emerge through the narrowing funnel into an era of sustainable living—

innovative and entrepreneurial business will find their way through.

9-11

INTRODUCTION

o The Natural Step challenges business to “backcast” a path

towards sustainability.

o Backcasting examines what the future will be when we emerge

through the funnel.

o Knowing what the future must be, creative businesses then look backwards

to the present and determine what must be done to arrive at that future.

o In simple terms, sustainable business must use resources and produce

wastes at rates that do not jeopardize human well-being by exceeding

the earth’s capacity to renew the resources and absorb the wastes.

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BUSINESS ETHICS AND ENVIRONMENTAL

VALUES

o Deciding what we should do is the ultimate goal of practical reason;

our values are standards that encourage us to act one way, not

another.

o Given this objective, which values and decisions are supported by

the natural environment? Why should we act in ways that protect the

natural environment from degradation? Why should business be

concerned with, and value, the natural world?—Human self-interest

is the most obvious answer.

o Environmental concerns are relevant to business because human

beings, both presently living humans and future generations of

humans depend on the natural environment in order to survive.

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VALUES

o Two aspects of contemporary environmental realities underscore the

importance of self-interested reasoning.

o Past human societies have often run up against the limits of the local

environment’s ability to sustain human life.

o In these historical cases, environmental degradation has been

localized to a particular region and has seldom affected more than a

generation.

o In contrast, some contemporary environmental issues have the

potential to adversely affect the entire globe and change human life

forever.

o The science of ecology and its understanding of the interrelatedness of

natural systems have helped us understand the wide range of human

dependence on ecosystems.

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VALUES

o By the late nineteenth century, humans came to recognize the self-

interested reasons for protecting the natural environment.

o The conservation movement—the first phase of modern

environmentalism—advocated a restrained and prudent approach to the

natural world.

o From this perspective, the natural world was still valued as a resource.

o Conservationists argued against the exploitation of natural resources as if

they could provide an inexhaustible supply of material.

o The natural world, like capital, had the productive capacity to produce

long-term income but only if managed and used prudently.

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VALUES

o Besides self-interested reasons to protect human life and health, the

natural environment is essential and valuable for many other

reasons.

o The beauty and grandeur of the natural world provide great aesthetic,

spiritual, and inspirational value.

o Parts of the natural world can have symbolic value, historical value,

and such diverse psychological values as serenity and exhilaration.

o These values can conflict with the use of the earth itself as a

resource to physically, as opposed to spiritually, sustain those who

live on it.

9-16

DECISION POINT: COMMERCIALIZE A

HISTORIC CIVIL WAR SITE?

o What facts would be helpful to know before making a decision?

o What values are in conflict in this case? Take a look at Disney’s

environmental policy. How might its policy guide its decisions or

present conflicts in the current dilemma?

o http://thewaltdisneycompany.com/citizenship/policies/environmental

-policy

o Who are the stakeholders in this case?

o What would be the consequences if all public land uses were

decided by the market?

o What are the rights and duties involved in this case?

http://thewaltdisneycompany.com/citizenship/policies/environmental-policy

9-17


VALUES

o A final set of values that we will consider involves the moral status

of animals and other living beings.

o Variously referred to as the animal rights, animal liberation, or animal

welfare movement, this approach attributes a moral standing to

animals.

o According to many people, animals, and all other living things, deserve

to be respected and treated with dignity.

o Such a status would create a wide variety of distinctive ethical

responsibilities concerning how we treat animals and would have

significant implications for many businesses.

9-18


VALUES

o Distinctive ethical responsibilities concerning how we treat animals

has significant implications for many businesses.

o Some argue that many animals, presumably all animals with a central

nervous system, have the capacity to feel pain—reminiscent of the

utilitarian tradition—asserts an ethical responsibility to minimize pain.

o Acts that inflict unnecessary pain on animals are ethically wrong.

o A second approach argues that at least some animals have the cognitive

capacity to possess a conscious life of their own—reminiscent of the

Kantian ethical tradition—asserts that we have a duty not to treat these

animals as mere objects and means to our own ends.

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BUSINESS’S ENVIRONMENTAL

RESPONSIBILITY: THE MARKET APPROACH

o Historically, debate has focused on whether efficient markets or

government regulation is the most appropriate means for meeting

the environmental responsibilities of business.

o If the best approach to environmental concerns is to trust them to

efficient markets—responsible business managers simply ought to

seek profits and allow the market to allocate resources efficiently.

o By doing this, business fills its role within a market system, which in

turn serves the greater overall (utilitarian) good.

o If government regulation is a more adequate approach, then business

ought to develop a compliance structure to ensure that it conforms to

those regulatory requirements.

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o A market-based approach to resolving environmental challenges—

reminiscent of the narrow, economic view of CSR—contends that

environmental problems are economic problems that deserve

economic solutions.

o Fundamentally, environmental problems involve the allocation and

distribution of limited resources.

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o In his book, People or Penguins: The Case for Optimal Pollution,

William Baxter argued that there is an optimal level of pollution that

would best serve society’s interests. This optimal level is best

attained by leaving it to a competitive market.

o Baxter begins with a goal of “safe” air and water quality, and translates

this goal to a matter of balancing risks and benefits.

o Society could strive for pure air and water, but the costs (lost

opportunities) that this would entail would be too high.

o A more reasonable approach is to aim for air and water quality that is safe

enough to breathe and drink without costing too much.

o Society, through the activities of individuals, will be willing to pay

for pollution reduction as long as the perceived benefits outweigh

the costs.

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o The free market provides an answer for resource conservation.

o From a strict market economic perspective—resources are “infinite.”

o As the supply of any resource decreases, the price increases—providing a

strong incentive to supply more or provide a less costly substitute.

o In economic terms, all resources are “fungible”—can be replaced by

substitutes, and in this sense resources are infinite.

o A similar case can be made for the preservation of environmentally

sensitive areas.

o Preservation for preservation’s sake would be wasteful since it would

use resources inefficiently.

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o Challenges to this narrow economic view of corporate social

responsibility are familiar to both economists and ethicists.

o A variety of market failures, many of the best known of which involve

environmental issues, point to the inadequacy of market solutions. E.g.

Existence of externalities.

o Since the “costs” of such things as air pollution, groundwater

contamination and depletion, soil erosion, and nuclear waste disposal are

typically borne by parties “external” to the economic exchange (e.g.,

people downwind, neighbors, future generations), free market exchanges

cannot guarantee optimal results.

9-24



o A second type of market failure occurs when no markets exist to create

a price for important social goods.

o Endangered species, scenic vistas, and biodiversity are just some

environmental goods that typically are not traded on open markets.

o Public goods such as clean air and ocean fisheries also have no established

market price.

o With no established exchange value, the market approach cannot even

pretend to achieve its own goals of efficiently meeting consumer demand.

o Markets alone fail to guarantee that such important public goods are

preserved and protected.

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o A third way in which market failures can lead to serious environmental

harm involves a distinction between individual decisions and group

consequences.

o We can miss important ethical and policy questions if we leave policy

decisions solely to the outcome of individual decisions.

o Consider the calculations that an individual consumer might make

regarding the purchase of an SUV and the consequences of that decision

on global warming—The additional CO 2 that would be emitted by a single

SUV is miniscule enough that an individual would likely conclude that her

decision will make no difference. However, if every consumer made

exactly the same decision, the consequences would be significantly

different.

9-26



o A number of alternative policies (e.g., restricting SUV sales, increasing

taxes on gasoline, treating SUVs as cars instead of light trucks in

calculating Corporate Automotive Fuel Efficiency [CAFE]

Standards) that could address pollution and pollution-related disease

would never be considered if we relied only on market solutions.

o Markets are incomplete (at best) in their approach to the overall social

good. In other words, what is good and rational for a collection of

individuals is not necessarily what is good and rational for a society.

9-27



o Internalizing external costs and assigning property rights to

unowned goods such as wild species—two responses to market

failures by the defenders of a narrow economic view of CSR.

o But there are good reasons for thinking that such ad hoc attempts to

repair market failures are environmentally inadequate.

o One important reason is what has been called the first-generation

problem.

o Markets can work to prevent harm only through information supplied

by the existence of market failures. We learn about market failures and

thereby prevent harms in the future only by sacrificing the “first

generation” as a means of gaining this information.

o When public policy involves irreplaceable public goods such a

reactionary strategy is ill advised.

9-28


RESPONSIBILITY: THE REGULATORY

APPROACH

o A broad consensus emerged in the United States in the 1970s that

unregulated markets are an inadequate approach to environmental

challenges.

o Much of the most significant environmental legislation in the United

States was enacted during the 1970s.

o The Clean Air Act of 1970, Federal Water Pollution Act of 1972

(amended and renewed as the Clean Water Act of 1977), and the

Endangered Species Act of 1973 were part of the national consensus

for addressing environmental problems.

o Before this legislation was enacted, the primary legal avenue open

for addressing environmental concerns was tort law.

9-29



APPROACH

o Before this legislation was enacted, the primary legal avenue open

for addressing environmental concerns was tort law.

o Only individuals who could prove that they had been harmed by

pollution could raise legal challenges to air and water pollution—legal

approach placed the burden on the person who was harmed and, at best,

offered compensation for the harm only after the fact.

o Except for the incentive provided by the threat of compensation, U.S.

policy did little to prevent the pollution in the first place.

o Because endangered species themselves had no legal standing, direct

harm to plant and animal life was of no legal concern and previous

policies did little to prevent harm to plant and animal life.

9-30



APPROACH

o The laws enacted during the 1970s—shifted the burden from those

threatened with harm to those who would cause the harm.

o Government established regulatory standards to try to prevent the

occurrence of pollution or species extinction rather than to offer

compensation after the fact.

o Business was free to pursue its own goals as long as it complied

with the side constraints these minimum standards established.

9-31



APPROACH

o The consensus emerged that society had two opportunities to

establish business’s environmental responsibilities.

o As consumers, individuals could demand environmentally friendly

products in the marketplace.

o As citizens, individuals could support environmental legislation.

o As long as business responded to the market and obeyed the law, it met

its environmental responsibilities.

9-32



APPROACH

o Several problems suggest that the regulatory approach will prove

inadequate over the long term.

o First, it underestimates the influence that business can have in

establishing the law.

o Second, this approach also underestimates the ability of business to

influence consumer choice.

o To conclude that business fulfills its environmental responsibility when it

responds to the environmental demands of consumers is to underestimate

the role that business can play in shaping public opinion.

o Further, if we rely on the law to protect the environment, environmental

protection will extend only as far as the law extends. Yet, most

environmental issues, pollution problems especially, do not respect

legal jurisdictions.

9-33



APPROACH

o Similarly, national regulations will be ineffective for international

environmental challenges.

o Finally—most troubling from an environmental standpoint—this

regulatory model assumes that economic growth is environmentally

and ethically benign.

o Regulations establish side constraints on business’s pursuit of profits and,

as long as they remain within those constraints, accept as ethically

legitimate whatever road to profitability management chooses.

9-34


RESPONSIBILITIES: THE SUSTAINABILITY

APPROACH

o Beginning in the 1980s, a new model for environmentally

responsible business began to take shape—one that combines

financial opportunities with environmental and ethical

responsibilities.

o The concept of sustainable development and sustainable business

practice suggests a radically new vision for integrating financial

and environmental goals.

o These three goals, economic, environmental, and ethical

sustainability, are often referred to as the three pillars of

sustainability.

o Assessing business activity along these three lines is often referred

to as the “triple bottom line.”

9-35



APPROACH

o The concept of sustainable development can be traced to a 1987

report from the United Nations’ World Commission on

Environment and Development (WCED), more commonly known as

the Brundtland Commission

o The commission was charged with developing recommendations for

paths towards economic and social development that would not achieve

short-term economic growth at the expense of long-term environmental

and economic sustainability.

o The Brundtland Commission offered what has become the standard

definition of sustainable development. “Sustainable development is

development that meets the needs of the present without compromising

the ability of future generations to meet their own needs.”

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APPROACH

o Economist Herman Daly has been among the leading thinkers who

have advocated an innovative approach to economic theory based on

the concept of sustainable development.

o What is sometimes called the “circular flow model” explains the nature

of economic transactions in terms of a flow of resources from

businesses to households and back again.

o Two aspects of the circular flow model are worth noting.

o First, it does not differentiate natural resources from the other factors of

production—does not explain the origin of resources. They are simply

owned by households from which they, like labor, capital, and

entrepreneurial skill, can be sold to business.

o A second observation is that this model treats economic growth as both the

solution to all social ills and also as boundless—the possibility that the

economy cannot grow indefinitely is simply not part of this model.

9-37

FIGURE 9.2 - THE CIRCULAR FLOW MODEL

9-38



APPROACH

o The three points summarized in the Reality Check, “Why

Sustainability?” suggest why the circular flow model will be

inadequate.

o Daly argues that neoclassical economics, with its emphasis on

economic growth as the goal of economic policy, will inevitably fail

to meet these challenges unless it recognizes that the economy is but

a subsystem within earth’s biosphere.

o We need to develop an economic system that uses resources only at a

rate that can be sustained over the long term and that recycles or reuses

both the by-products of the production process and the products

themselves.

9-39

FIGURE 9.3 - A MODEL OF THE ECONOMY (OR

ECONOMIC SYSTEM) AS A SUBSET OF THE

BIOSPHERE (OR ECOSYSTEM)

9-40



APPROACH

o Figure 9.3 differs from Figure 9.2 in several important ways.

o First, the sustainable model recognizes that the economy exists within a

finite biosphere that encompasses a band around the earth that is little

more than a few miles wide.

o From the first law of thermodynamics (the conservation of

matter/energy)—matter nor energy can truly be “created,” it can only be

transferred from one form to another.

o Second, energy is lost at every stage of economic activity.

o Consistent with the second law of thermodynamics (entropy increased

within a closed system), the amount of usable energy decreases over time.

o “Waste energy” is continuously leaving the economic system and thus new

low-entropy energy must constantly flow into the system. Ultimately, the

only source for low-entropy energy is the sun.

9-41



APPROACH

o Third, the sustainable model no longer treats natural resources as an

undifferentiated and unexplained factor of production emerging from

households.

o Natural resources come from the biosphere and cannot be created ex

nihilo.

o Finally, it recognizes that wastes are produced at each stage of

economic activity and these wastes are dumped back into the biosphere.

o Over the long term, resources and energy cannot be used, nor waste

produced, at rates at which the biosphere cannot replace or absorb

them without jeopardizing its ability to sustain (human) life. These

are what Daly calls the “biophysical limits to growth.”

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THE “BUSINESS CASE” FOR A

SUSTAINABLE ECONOMY

o Regulatory and compliance model—interprets environmental

responsibilities as constraints upon business, the sustainability

model—more forward looking and may present business with

greater opportunities than burdens.

o First, sustainability is a prudent long-term strategy.

o As the Natural Step’s funnel image suggests, business will need to

adopt sustainable practices to ensure long-term survival. Firms that fail

to adapt to the converging lines of decreasing availability of resources

and increasing demand risk their own survival.

o Second, the huge unmet market potential among the world’s

developing economies can only be met in sustainable ways.

9-43


SUSTAINABLE ECONOMY

o Third, significant cost savings can be achieved through sustainable

practices.

o Savings on energy use and materials will reduce not only

environmental wastes, but spending wastes as well. Minimizing wastes

makes sense on financial grounds as well as on environmental grounds.

o Fourth, competitive advantages exist for sustainable businesses.

o Firms that are ahead of the sustainability curve will both have an

advantage serving environmentally conscious consumers and enjoy a

competitive advantage attracting workers who will take pride and

satisfaction in working for progressive firms.

9-44


SUSTAINABLE ECONOMY

o Finally, sustainability is a good risk management strategy.

o Refusing to move towards sustainability offers many downsides that

innovative firms will avoid.

o Avoiding future government regulation is one obvious benefit.

o Avoiding legal liability for unsustainable products is another potential

benefit.

o Consumer boycotts of unsustainable firms are also a risk to be avoided.

9-45

PRINCIPLES FOR A SUSTAINABLE

BUSINESS

o The precise implications of sustainability will differ for specific

firms and industries, but three general principles will guide the

move towards sustainability.

o Firms and industries must become more efficient in using natural

resources.

o They should model their entire production process on biological

processes.

o They should emphasize the production of services rather than products.

9-46


BUSINESS

o Firms and industries must become more efficient in using natural

resources—sometimes called eco-efficiency, have long been a part

of the environmental movement.

o “Doing more with less” has been an environmental guideline for

decades.

o Some estimates suggest that with present technologies alone, business

could readily achieve at least a fourfold increase in efficiency and as

much as a tenfold increase.

9-47


BUSINESS

o The second principle of business sustainability—firms should model

their entire production process on biological processes—can be

easily understood by reference to Figure 9.2.

o “Closed-loop” production seeks to integrate what is presently waste

back into production. In an ideal situation, the waste of one firm

becomes the resource of another, and such synergies can create eco-

industrial parks.

o Just as biological processes such as photosynthesis cycle the “waste” of

one activity into the resource of another, this principle is often referred

to as biomimicry.

9-48


BUSINESS

o The ultimate goal of biomimicry is to eliminate waste altogether

rather than reduce it.

o If we truly mimic biological processes, the end result of one process

(e.g., leaves and oxygen produced by photosynthesis) is ultimately

reused as the productive resources (e.g., soil and water) of another

process (plant growth) with only solar energy added.

9-49


BUSINESS

o The evolution of business strategy towards biomimicry can be

understood along a continuum.

o The earliest phase has been described as “take-make-waste”—business

takes resources, makes products out of them, and discards whatever is

left over.

o A second phase envisions business taking responsibility for its products

from “cradle to grave”—sometimes referred to as “life-cycle”responsibility.

o It holds that a business is responsible for the entire life of its products,

including the ultimate disposal even after the sale.

o A cradle-to-grave model would hold a business liable for groundwater

contamination caused by its products even years after they had been buried

in a landfill.

9-50


BUSINESS

o Cradle-to-cradle responsibility extends this idea even further and holds

that a business should be responsible for incorporating the end results of its

products back into the productive cycle—it would create incentives to

redesign products so that they could be recycled efficiently and easily.

o A third sustainable business principle involves a shift in business model

from products to services.

o Traditional economic and managerial models interpret consumer demand

as the demand for products—washing machines, carpets, lights, consumer

electronics, air conditioners, cars, computers, and so forth.

o A service-based economy interprets consumer demand as a demand for

services—for clothes cleaning, floor covering, illumination, entertainment,

cool air, transportation, word processing, and so forth.

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CHAPTER NINE VOCABULARY TERMS

o After examining this Chapter, you should have a clear understanding of the following Key Terms and you will find them defined in the Glossary:o Backcasting

o Biomimicry

o Corporate Automotive Fuel Efficiency (CAFE) Standards

o Cradle-to-cradle responsibility

o Eco-efficiency

o LEED certification

o Service-based economy

o Sustainable business practice

o Sustainable development

o Three pillars of sustainability

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