ENVIRONMENTAL AND ETHICAL ISSUESThis chapter will explain:

• how business activity can affect the

environment and the

concept of externalities

• what sustainable

development means and

how businesses can contribute to

this

• how increasing concern for the

environment and pressure groups are influencing business decisions

• how legal controls can be

used to influence business decisions

to protect the environment• how ethical

issues might affect business decisions.

Consider these two statements by different factory managers:

• Manager A: ‘I know that my factory pollutes the air and the river with waste products but it is very expensive to use cleaner methods. We make a profit from making cheap products and these are what consumers want.’

• Manager B: ‘We recently spent $10 million on new low energy boilers that produce 90 per cent less pollution than the old ones. We now recycle 75 per cent of our waste — consumers prefer firms that are aware of their social responsibility.’

Business activity and the environment

Business activity aims to satisfy customers’ demand for goods and services — but it often has an impact on the environment. The ‘environment’ means our natural world.

Here are some examples of how business activity impacts on the environment:

• Aircraft jet engine emissions damage the atmosphere.

• Pollution from factory chimneys reduces air quality. • Waste disposal can pollute rivers and seas. • Transport of goods by ship and trucks burns fossil

fuels such as oil which create carbon emissions and may be linked to ‘global warming’ and climate change.

Air pollution damages the environment

Dirty rivers are expensive to clean up

Road transport creates noise andair pollution and adds to global warming

Definitions to learnSocial responsibility is when a business decision benefits stakeholders other than shareholders, for example, a decision to protect the environment by reducing pollution by using the latest and ‘greenest’ production equipment.Environment is our natural world including, for example, pure air, clean water and undeveloped countryside.Private costs of an activity are the costs paid for by business.Private benefits of an activity are the gains to a business.

Let’s look at both sides of the

argument:

External costs are costs paid for by

the rest of society, other

than the business, as a

result of business activity.

External benefits are the gains to

the rest of society, other

than the business,

resulting from business activity.

Social costs = external costs + private costs.

Social benefits = external benefits

+ private benefits.

Definitions to learn

Sustainable developmentLook at the following information about the world’s demand for energy and carbon dioxide emissions:

*million barrels per day of oil equivalent

World energy demand

Global population and carbon dioxide emissions since 1900

These graphs show some of the problems that world economic and population growth is resulting in. Many economists and environmentalists argue that this rapid rate of energy use and pollution cannot continue if the world is to enjoy the same living standards as we have today. Using up scarce resources at a very fast rate will mean that there may be many fewer resources in the future. Creating so much pollution may lead to health and climate problems that put at risk the wellbeing of millions of people.Sustainable development means trying to achieve economic growth but without damaging the environment and society for future generations.

Sustainable development: what can business do?1 Use renewable energy — by fitting solar panels or buying energy that uses renewable sources such as wind or tidal power.2 Recycle waste — by re-using water and other products that would otherwise be wasted or disposed of, total use of resources is reduced.3 Use fewer resources — lean production is about managing production so efficiently that the minimum quantity of resources is used.4 Develop new ‘environmentally friendly’ products and production methods — for example, replacing drink cans and bottles with biodegradable packaging that will not damage the environment.By using these sustainable production methods businesses respond positively to environmental pressures and opportunities.

Definitions to learn

Sustainable development is development

which does not put at risk the living standards of

future generations.

Sustainable production methods are those that

do minimum damage to the environment

RESPONDING TO ENVIRONMENTAL PRESSURES AND OPPORTUNITIES

How can society make business give the environment a

higher priority? There are three main ways.

Pressure groupsBad publicity is bad news! If a firm is reported as destroying an important natural site or dumping waste in the sea, then many consumers will stop buying its products.An increasing proportion of consumers are becoming concerned about their environment. Firms obviously want to sell goods profitably. If sales of a product fall because consumers think it is harmful to nature, then the business may have to quickly change its products or its production methods.Pressure groups are becoming increasingly powerful. They can take some very effective actions against businesses that are not socially responsible. Pressure groups such as Greenpeace and Earth First! have tried to block up firms’ waste pipes or organise consumer boycotts.

Pressure group activity is likely to change business actions when:

• they have popular public support and receive much media coverageconsumer boycotts result in much reduced sales for the firm• the group is well organised and financed.

Pressure group activity is unlikely to result in a change in business actions when:

• what the firm is doing is unpopular but not illegal, such as testing drugs on animals• the cost to the business of changing its methods is more than the possible cost of poor image and lost sales• the firm sells to other businesses rather than to consumers — public pressure will be less effective.

Definitions to learnA pressure group is made up of people who want to change business (or government) decisions and they take action such as organising consumer boycotts.A consumer boycott is when consumers decide not to buy products from businesses that do not act in a socially responsible way.Laws passed by governmentGovernments can make business activities illegal, For example:• locating in environmentally sensitive areas such as national parks• dumping waste products into rivers or the sea — though it is sometimes difficult to prove which firm is responsible for this• making products that cannot easily be recycled.

I t i s o f ten d iffi cu l t fo r governments to fi nd out wh ich fi rms a re respons ib le fo r dumping chemica l waste

Financial penalties, including pollution permitsPollution permits are licences to pollute up to a certain level. Governments can sell a permit to a factory that produces pollution. If it produces more pollution than the permit allows, it must either buy more permits from ‘clean’ firms or pay heavy fines. Either way, the costs of the business increase. Firms producing much less pollution can sell their permits to ‘dirty’ firms. This encourages firms to produce goods in less polluting ways. Other financial penalties could be additional taxes on goods or factories that create pollution.These three types of controls help to explain why many businesses now respond to environmental pressures. Being ‘environmentally friendly’ can create a positive public opinion of a business and lead to opportunities for sustainable growth.