business ethics

Hartman: Business Ethics: Decision−Making for Personal Integrity and Social Responsibility

9. Business, the Environment, and Sustainability

Text © The McGraw−Hill Companies, 2008

Chapter 9

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Business, the Environment,and Sustainability 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




370 Chapter 23 Capital Asset PricingOpening Decision Point Should Toxic Wastes Be Exported?

Tons of toxic wastes are created every day in the production and disposal of countless goods and services. Business and government must decide what to do with such leftovers as the radioactive wastes created in nuclear power plants, the fly ash from industrial and municipal incinerators, chemical residues from industrial processes and consumer goods, and heavy metals in computers and other consumer electronics. Consumers are challenged to find ways to dispose of toxic chemicals in household cleaners, lawn and garden pesticides, home appliances, and consumer electronics.

Ordinary waste disposal is a serious enough public policy challenge for every level of government. Newer landfills soon reach their capacity; many older and closed landfills contaminate groundwater; and incinerators spew noxious pollutants. But the challenge is compounded when the wastes entering into the disposal system are themselves highly toxic and dangerous.

Historically, industry has disposed of wastes into the easiest and least desirable sites. For decades, industry simply dumped waste into the air and water or buried it underground. Landfills, trash dumps, incinerators, and other socially undesirable activities were located either in out-of-the-way and unattractive locations, or in the most convenient location to ease disposal. Such decisions seemed to make economic sense; if land values would be degraded because of proximity to a toxic waste dump, it makes most sense to choose a location that already has the lowest valued property.

One result of this dumping is that domestic waste disposal often creates a cycle of decreasing land values that seem clearly to harm the poorest and most disenfranchised citizens. Areas with the lowest land values, and therefore areas targeted as the location for socially undesirable activities, tend to be the areas in which a society’s poorest citizens live. As those areas accept more of the undesirable wastes and industries, they became even less attractive locations in which to live, thereby making them poorer and poorer, as those who are able to move away leave behind those who are less able to do so. This practice raises fundamental questions of social justice when society’s least advantaged citizens pay the highest costs for the social benefits of industrial society.

In recent decades, this same economic logic has created a market for toxic wastes among the world’s poorest countries. The incentive to send toxic wastes offshore increases as waste disposal has become more expensive domestically. The world’s less developed countries need the income and, because they are less developed, often do not have the industrial pollution problems that plague developed countries.

Should waste disposal be treated simply as an economic issue, to be resolved through private market exchanges, or should government regulations place greater responsibility on producers for the entire life cycle of products?

What facts do you need to know to form an opinion on the practice of export-ing toxic wastes to foreign countries? What values are implicit in the economic reasoning that leads to the decision to export such wastes? Does it matter if the countries that accept such wastes are democratic?

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Chapter 9 Business, the Environment, and Sustainability 371

Chapter Objectives

After reading this chapter, you will be able to:

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

2. Explain the difference between market-based and regulatory-based environ-mental policies.

3. Describe business’s environmental responsibilities that flow from each approach.

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

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

6. Define and describe sustainable development and sustainable business.

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

8. Describe the sustainable principles of ecoefficiency, biomimicry, and service.

Introduction

There is a tendency to believe that environmental issues have been a concern only in recent times. Environmentalism flourished in the latter half of the twentieth century: Issues such as air and water pollution and the protection of endangered species became public policy concerns only in the 1970s. Certainly few busi-nesses gave the natural environment much thought at all prior to this time. But environmental degradation has been a part of human history forever. In the recent best-selling book Collapse, geographer Jared Diamond documents numerous cul-tures that suffered and collapsed as a result of environmental degradation.

The Industrial Revolution of the 18 th and 19 th centuries, however, brought with it the ability to degrade the natural environment to a greater extent and at a faster rate than ever before. By the start of the 21st century, the earth was experi-encing the greatest period of species extinction since the end of the dinosaurs 65 million years ago. Humans are also threatened by global climate change. Each of these monumental environmental events is largely due to human activity, and spe-cifically to our present arrangements of modern industrial society. Simply put, 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 human life, and it has already crossed those limits in the case of countless other forms of life. Thus, the

How should the decision to locate toxic wastes sites be made? What are the consequences of making this decision on the basis of costs? What principles are relevant to this decision? Can you think of undesirable land uses (trash dumps, incinerators, smokestack industries) in your own region? Describe the neighborhoods in which they are located.

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372 Chapter 9 Business, the Environment, and Sustainability

major ethical question of this chapter is what responsibilities contemporary busi-nesses have regarding the natural environment. For a business leader’s perspective on this question, see the Reality Check above.

It is fair to say that, throughout the history of industrial economies, business most often looked at environmental concerns as unwanted burdens and barriers to economic growth. Nonetheless, there is some evidence that, at the start of the 21 stcentury, a new model of business is emerging, perhaps first initiated in Europe and followed by North America and Asia. Sustainable business and sustainable eco-nomic development seek to create new ways of doing business in which business success is measured in terms of economic, ethical, and environmental sustain-ability, often called the Triple Bottom Line approach. The sustainability paradigm sees environmental responsibilities as a fundamental part of basic business prac-tice. Indeed, sustainable business ventures may find that environmental consider-ations offer creative and entrepreneurial businesses enormous opportunities.

This chapter will introduce a range of ethical issues that will accompany this tran-sition to an environmentally sustainable future. Environmental issues are no longer at the periphery of business decisions, as burdens to be managed if not avoided alto-gether. Environmental sustainability must accompany financial sustainability for business to survive in the 21st century. For reasons of both deontological principles and for the overall social good, sustainable business is the wave of the future.

Business Ethics and Environmental Values

The opening chapters of this text introduced ethics in terms of practical reasoning. Deciding what we should do is the ultimate goal of practical reason and our values are those standards that encourage us to act one way rather than another. Given this objective, what values does the natural environment support? Why should we act in ways that protect the natural environment from degradation? Why should business be concerned with, and value, the natural world?

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In a 1997 speech that attracted worldwide attention, John Browne, chief executive of BP, announced:

[T]he time to consider the policy dimensions of climate change is not when the link between greenhouse gases and climate change is conclusively proven . . . but when the possibility cannot be discounted and is taken seriously by the society of which we are part. We in BP have reached that point . . . there is now an effective consensus among the world’s leading scientists and serious and well informed people outside the

scientifi c community that there is a discernible human infl uence on the climate, and a link between the concentration of carbon dioxide and the increase in temperature. . . . Those are wide margins of error, and there remain large elements of uncertainty—about cause and effect . . . and even more importantly about the consequences. But it would be unwise and potentially dangerous to ignore the mounting concern.

Source: John Browne, group chief executive, British Petroleum (BP America) in a speech at Stanford University, May 19, 1997.

Reality Check Do Business Leaders Think There Is an Environmental Crisis?





Human self-interest is the most obvious answer to these questions. All human beings depend on the natural environment in order to survive. Humans need clean water to drink, healthy air to breathe, fertile soil and oceans to produce food, an ozone layer to screen out solar radiation, and a biosphere that maintains the deli-cate balance of climate in which human life can exist. Two aspects of contemporary environmental realities underscore the importance of self-interested reasoning.

As documented in Collapse, past human societies have often run up against the limits of the local environment’s ability to sustain human life. In these historical cases, environmental degradation has been localized to a particular region and has seldom affected more than a generation. In contrast, some contemporary environ-mental issues have the potential to adversely affect the entire globe and change human life forever. Global climate change, species extinction, soil erosion and deserti-fication, and nuclear wastes will threaten human life into the indefinite future.

Second, 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. Where once we might have thought that buried wastes were gone forever, we now understand how toxins can seep into groundwater and contami-nate drinking water across great time and distances. We now understand how pes-ticides accumulate throughout the food chain and pose greatest dangers not only to top predators such as bald eagles, but to human beings as well. (Consider the basic issue of the environment’s impact on breast milk, discussed in the preceding Reality Check.) Where once we thought that ocean fisheries were inexhaustible and the atmosphere too big to be changed by humans, we now understand that a precise environmental balance is necessary to maintain life-supporting systems.

Pollutants in the biosphere will tend to accumulate in the fatty tissue of species at the top of the food chain. In mammals, fatty tissue is broken down as a source of energy during lactation. As a result, breast milk is a particularly signifi cant resource for studying toxins that the body has absorbed. The following is a list of synthetic toxins that one study found in human breast milk.

Chlordane (a compound used in pesticides)

DDT (a pesticide that has been banned in the United States for decades)

Dieldrin, Aldrin, and Endrin (insecticides)

Hexachlorobenzene (a pesticide and an indus-trial chemical)

Hexachlorocyclohexane (insecticide)

Heptachlor (insecticide)

Mirex (insecticide)

Nitro musks (used as a fragrance in household products such as detergents and soaps)

Toxaphene (agricultural insecticide)

Dioxins and furans ( any of a number of poly-chlorinated compounds produced as by-prod-ucts from industry and combustion)

PBDEs (used as fl ame retardants in clothes and other fabrics)

PCBs (no longer manufactured, but persist-ent toxins that were used for a wide variety of industrial purposes)

Solvents (any of a number of chemical com-pounds used to dissolve or stabilize other com-plex chemical compounds)

Lead, mercury, cadmium, and other metals (can be especially toxic to the developing brain)

Reality Check Breast Milk Toxins





By the late 19th century, humans came to recognize the self-interested reasons for protecting the natural environment. The conservation movement, the first phase of modern environmentalism, advocated a more restrained and prudent approach to the natural world. From this perspective, the natural world was still valued as a resource, providing humans with both direct benefits (air, water, food), and indirect benefits (the goods and services produced by busi-ness). Conservationists argued against the exploitation of natural resources as if they could provide an inexhaustible supply of material. They made the case that business had good reasons for conserving natural resources, reasons that paral-leled the rationale to conserve financial resources. 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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Is the market, what people are most willing to pay, the best means to determine land and resource use? Consider the case of a proposed development in Virginia.

The city of Manassas is today a suburb of Washington, DC, in northern Virginia. During the U.S. Civil War, it was the site of two historic battles, the first and second Battle of Bull Run. Thousands of soldiers were killed during these battles and many more thousands injured. Today, Manassas Battlefield National Park and several Civil War cemeteries are located at the site.

In the late 1980s developers announced plans to build a large shopping mall on the land that had once served as Robert E. Lee’s headquarters during the battle. Significant public opposition led to a public purchase of the land and its incorporation into the national park. A few years later, Disney Company announced plans to develop a large theme park called Disney’s America on land adjacent to the National Park. Disney’s America would have included a theme park that would be a tribute to the Civil War, as well as residential subdivisions and commercial developments including hotels and restaurants. Eventually, the national park would have been surrounded by commercial development.

The plan met with vociferous opposition from a coalition of environmentalists, preservationists, historians, and Civil War authorities. Although it was convinced that the project would have been a tremendous commercial success, Disney eventually abandoned its plans to develop this site. Should the company have abandoned these plans?

What facts would be helpful to know before making a decision? What values are in conflict in this case? Take a look at Disney’s “environmentality” mission statement at http://corporate.disney.go.com/environmentality/mission_history.html . How might its mission guide its decisions or present conflicts in the current dilemma? Who are the stakeholders in this case? What would be the consequences if all public land uses were decided by the market?What are the rights and duties involved in this case?

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Decision Point Commercialize a Historic Civil War Site?




Besides these reasons to protect human life and health, the natural environment is essential and valuable for many other reasons. Often, these other values conflictwith the more direct instrumental value that comes from treating the natural world as a resource. The beauty and grandeur of the natural world provide great aesthetic and inspirational value. Many people view the natural world as a manifestation of religious and spiritual values. Parts of the natural world can have symbolic value, historical value, and such diverse psychological values as serenity and exhilara-tion. These values can clearly conflict with the use of the earth itself as a resource to physically, as opposed to spiritually, sustain those who live on it. Consider that balance as you review the preceding Decision Point.

The moral status of animals has been the environmental value that, arguably, has raised the greatest challenge to business. Variously referred to as the animal rights, animal liberation, or animal welfare movement, this approach attributes a moral standing to animals. Such a status would create a wide variety of distinctive ethical responsibilities concerning how we treat animals and would have signifi -cant implications for many businesses. Two versions of this perspective are worth mentioning.

The first approach emphasizes the fact that many animals, presumably all ani-mals with a central nervous system, have the capacity to feel pain. Reminiscent of the utilitarian tradition described in Chapter 3, this view asserts an ethical responsibility to minimize pain. Inflicting unnecessary pain is taken to be an ethi-cal wrong; therefore, acts that inflict unnecessary pain on animals are ethically

Some animal farming practices, especially within large-scale industrial factory farms, have been criti-cized as cruel and heartless. Calves are prevented from exercising and intentionally malnourished so that consumers can enjoy tender and pink veal. Chickens are tightly packed in cages with their beaks cut off to prevent them from pecking each other. Cattle are raised in giant feed lots where they spend their time walking in their own manure.

Opponents have organized boycotts against such fast-food chains as McDonald’s and KFC (formerly called Kentucky Fried Chicken) to protest how animals in their supply chain are treated. In response to this criticism, McDonald’s has become an industry leader in creating policies to ensure the humane treatment of animals. As part of this effort, McDonald’s has adopted a set of guiding principles, including the following:

McDonald’s commitment to animal welfare is global and guided by the following principles.

These principles apply to all the countries in which McDonald’s does business.

Safety . First and foremost, McDonald’s will provide its customers with safe food products. Food safety is McDonald’s number one priority.

Quality . McDonald’s believes treating animals with care and respect is an integral part of an overall quality assurance program that makes good business sense.

Animal Treatment . McDonald’s supports that animals should be free from cruelty, abuse and neglect while embracing the proper treatment of animals and addressing animal welfare issues.

Source: McDonald’s Corporation, “2006 Worldwide Corporate Responsibility Report; Products: Responsible Purchasing Guiding Principles,” http://www.mcdonalds.com/corp/values/purchasing/animalwelfare/guiding_principles.html.

Reality Check Treatment of Animals in Agriculture






wrong. Raising and slaughtering animals for food, particularly in the way indus-trial farming enterprises raise poultry, hogs, and cattle, would be an obvious case in which business would violate this ethical responsibility, as one side argues in the preceding Reality Check.

A second approach argues that at least some animals have the cognitive capac-ity to possess a conscious life of their own. Reminiscent of the Kantian ethi-cal tradition described in Chapter 3, this view asserts that we have a duty not to treat these animals as mere objects and means to our own ends. Again, businesses that use animals for food, entertainment, or pets would violate the ethical rights of these animals. Let’s explore the humane treatment of animals in more detail through the Decision Point above.

Business’s Environmental Responsibility: The Market Approach

While significant debate surrounds some environmental values, an overwhelm ing consensus exists about the prudential reasons for protecting the natural environ-ment—humans have a right to be protected from harm. What controversy remains has more to do with the best means for achieving this goal. Historically, this debate has focused on whether efficient markets or government regulation is the most appropriate means for meeting the environmental responsibilities of busi-ness. Each of these two approaches has significant implications for business.

From one perspective, if the best approach to environmental concerns is to trust them to efficient markets, then the responsible business manager simply ought to seek profits and allow the market to allocate resources efficiently. By doing this, business fills its role within a market system, which in turn serves the

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To distinguish these two approaches to the ethical treatment of animals, consider a case in which veal calves are spared the pain of their confinement by being raised in more humane circumstances. Even if they feel no pain, is it still cruel to slaughter a young calf in order to eat its flesh? Similarly, as explained above, McDonald’s has gone to great lengths to ensure that the animals their suppliers slaughter are treated in ways that are “free from cruelty, abuse and neglect.” Is it possible to treat animals humanely while they are being raised and led to slaughter for the purpose of being used as food?

What facts would be relevant to your decision? What are the ethical issues involved in this situation? Who are the stakeholders for the issues of the ethical treatment of animals? What alternatives are available for businesses like McDonald’s that rely on animals?What are the consequences of various alternatives? What ethical principles are involved?

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Decision Point Does Animal Cruelty Depend on Pain?




greater overall (utilitarian) good. On the other hand, 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.

Defenders of the market approach contend that environmental problems are economic problems that deserve economic solutions. Fundamentally, environmen-tal problems involve the allocation and distribution of limited resources. Whether we are concerned with the allocation of scarce nonrenewable resources such as gas and oil, or with the earth’s capacity to absorb industrial by-products such as CO

2 or PCBs, efficient markets can address environmental challenges.

Consider the implications of this model for pollution and resource conserva-tion. In his well-known book, People or Penguins: The Case for Optimal Pollu-tion, William Baxter argued that there is an optimal level of pollution that would best serve society’s interests. 1 This optimal level is best attained, according to Baxter, by leaving it to a competitive market. (The reasoning here is identical to the reasoning we described in Chapter 6 in connection with a market-based approach for protecting employee health and safety.)

Denying that there is any “natural” or objective standard for clean air or water (as this view would deny there is an objective state of perfect health), Baxter begins with a goal of “safe” air and water quality, and translates this goal to a mat-ter of balancing risks and benefits. Society could strive for pure air and water, but the costs (lost opportunities) that this would entail would be too high. A more rea-sonable approach is to aim for air and water quality that is safe enough to breathe and drink without costing too much. This balance, the “optimal level of pollution” can be achieved through competitive markets. Society, through the activities of individuals, will be willing to pay for pollution reduction as long as the perceived benefits outweigh the costs.

The free market also provides an answer for resource conservation. From a strict market economic perspective, resources are “infinite.” Julian Simon, for example, has argued that resources should not be viewed as material objects but simply as any means to our ends. 2 History has shown that human ingenuity and incentive have always found substitutes for any shortages. As the supply of any resources decreases, the price increases, thereby providing a strong incentive to supply more or provide a less costly substitute. In economic terms, all resources are “fungi-ble.” They can be replaced by substitutes, and in this sense resources are infinite.Resources that are not being used to satisfy consumer demand are being wasted.

A similar case can be made for the preservation of environmentally sensitive areas. Preservation for preservation’s sake would be wasteful since it would use resources inefficiently. Thus, to return to the Manassas Battlefield development plan described previously, preserving open space surrounding the area rather than developing the land as a theme park should be done only if people are willing to pay more for open space than for a park. Since the Disney plan would have been financially very profitable, leaving it undeveloped would be wasting these valu-able resources.

Challenges to this narrow view of corporate social responsibility are familiar. A variety of market failures, many of the best known of which involve environ-mental issues, point to the inadequacy of market solutions. One example is the

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existence of externalities, the textbook example of which is environmental pol-lution. Since the “costs” of such things as air pollution, groundwater contamina-tion 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.

A second type of market failure occurs when no markets exist to create a price for important social goods. Endangered species, scenic vistas, rare plants and animals, and biodiversity are just some environmental goods that typically are not traded on open markets (or, when they are, they are often traded in ways that seriously threaten their viability as when rhinoceros horns, tiger claws, elephant tusks, and mahogany trees are sold on the black market). Public goods such as clean air and ocean fisheries also have no established market price. With no established exchange value, the market approach cannot even pretend to achieve its own goals of efficiently meeting consumer demand. Markets alone fail to guarantee that such important public goods are preserved and protected. The case study discussed in the next Decision Point explores whether market incentives always lead to the decisions that we might prefer in these particular conflicts.

A third way in which market failures can lead to serious environmental harm involves a distinction between individual decisions and group consequences. We can miss important ethical and policy questions if we leave policy decisions solely to the outcome of individual decisions. 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.

This example demonstrates that the overall social result of individual calcula-tions might be significant increases in pollution and such pollution-related dis-eases as asthma and allergies. 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] Stan-dards) that could address pollution and pollution-related disease would never be considered if we relied only on market solutions. Because these are important ethical questions, and because they remain unasked from within market transac-tions, we must conclude that 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.

Such market failures raise serious concerns for the ability of economic markets to achieve a sound environmental policy. Defenders of a narrow view of corporate social responsibility have responses to these challenges of course. Internalizing external costs and assigning property rights to unowned goods such as wild spe-cies are two responses to market failures. But there are good reasons for thinking that such ad hoc attempts to repair market failures are environmentally inadequate. One important reason is what has been called the first-generation problem. Mar-kets can work to prevent harm only through information supplied by the existence of market failures. Only when fish populations in the North Atlantic collapsed,





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Decision Point Pacifi c Lumber

The Pacific Lumber Corporation, based in Humboldt County in northern California, a major timber and wood products corporation, was a publicly traded company run by the same family for most of its history.

Pacific Lumber managed natural resources in a manner that protected the long-term sustainability of its tree harvest. Its forests, some of which contained old-growth redwood trees, were harvested at a rate of 2 to 3 percent a year, about equal to the annual growth rate of the trees. The company was known for treating its employees very responsibly. It paid employees relatively well, provided financial support during periods of economic decline, guaranteed jobs for family members of employees, established scholarships for the children of employees, and implemented a generous pension plan. By all accounts, the company was a good corporate citizen contributing in many ways to the life of the community.

Pacific Lumber appeared to be well managed financially as well. The company was debt free and profitable, and it provided a steady rate of return to its investors. But this management philosophy changed dramatically when the company became a takeover target in 1986.

Through the late 1980s and early 1990s, outside buyers took over many corporations. The takeover mania that characterized these years was financedlargely through so-called junk bonds. These bonds are higher-risk loans that financial investors make on the promise of a high rate of return. Takeover specialists, generally with expertise in finance and law but seldom in the particular industry being purchased, identify a corporation that appears to be undervalued. That is, its assets appear to be worth more than the “book value” of its stock. Armed with cash from the high-interest junk bonds, takeover specialists are able to purchase a controlling interest in the corporation at a price above the present trading price of its stock. They then either manage the corporation more efficiently than the present management or sell off the undervalued assets. Because the high-interest loans provide a strong incentive to produce immediate income, the most common strategy is to sell off the company’s assets. Such “leveraged buyouts” create the potential of immense profits in a very short period of time.

Pacific Lumber was a target for such a leveraged buyout. Because it was debt free and because it was not optimally using many of its resources (the 97 to 98 percent of its trees that were not harvested each year, for example), the financialvalue of Pacific Lumber seemed much higher than its stock value. From a financialpoint of view, these unused resources seemed to be wasted. Armed with $800 million in high-interest junk bonds managed by Drexel Burnham Lambert, corporate raider Charles Hurwitz succeeded in a leveraged buyout of Pacific Lumber.

Predictably, the new owners immediately established plans to increase the rate of its timber harvest, including previously preserved old-growth redwood trees, to raise cash to pay off its debt. Pacific Lumber was split into three separate companies and much of the debt was transferred to these new companies and refinanced with lower interest loans secured with the forest lands as collateral. The company pension plan was terminated and its funds used to repay debt and purchase retirement annuities from an insurance company that Hurwitz owned. Due to the increased logging, employment in the Humboldt County area increased slightly after the takeover.

Pacific Lumber provides an interesting case study of two competing managerial philosophies. The managerial philosophy that guided Pacific Lumber prior to

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the takeover directed management to balance a diverse group of interests. This management team kept Pacific Lumber operating as a profitable and stable business. Customers had a steady source of timber products at a price they were willing to pay. Employees had stable and well-paying jobs with generous benefits. Investors received a return on their investment favorable enough to keep their money in the firm. The firm provided the community with a stable economic base and an acceptable balance of environmental protection and economic activity. Any additional benefits that could be given to one group would come as a cost to another. Investors could have received a higher rate of return, but only at the cost of lowering employee wages or benefits, increased environmental destruction, or higher prices. Employees could have received higher wages, but at a cost of lower stock value, higher prices, and so on. On this model, managerial expertise involves finding and maintaining a stable balance between these competing interests.

After the takeover, the managerial philosophy was to maximize profit. From this perspective, the company’s resources should be organized in a way that most efficiently produces profit. Unused resources, for example the 98 percent of the forests not harvested, were wasted resources. Capital sitting in a pension plan was a wasted resource. Wages and benefits above what was needed to maintain a stable supply of labor were wasted. Wasted resources indicate that people are losing opportunities and not getting all they want. In particular, as owners of the firm, stockholders deserve to have priority over the interests of employees, customers, and the community.

Both of these managerial philosophies are deeply rooted in contemporary managerial practice. Each can appeal to long ethical traditions for support as well.

Evaluate the management philosophy of the original managers of Pacific Lum-ber from the point of view of stockholders, employees, the local community, environmentalists, the company’s financial institutions, and customers. Were the 97 to 98 percent of company resources that were not harvested each year being wasted? Was this rate of use fair to stockholders? Who should decide such questions? Was the buyout a reasonable thing to do from a financial perspective? From an ethical perspective? Were there any other options? Should business management always seek the highest rate of return on invest-ment? What reasons might there be for seeking something less? Would your views change if instead of a lumber company harvesting old-growth forests, this case involved a mining company mining coal or other minerals?

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for example, did we learn that free and open competition among the world’s fish-ing industry for unowned public goods failed to prevent the decimation of cod, swordfish, Atlantic salmon, and lobster populations. That is, we learn about mar-ket failures and thereby prevent harms in the future only by sacrificing the “firstgeneration” as a means of gaining this information. When public policy involves irreplaceable public goods such as endangered species, rare wilderness areas, and public health and safety, such a reactionary strategy is ill advised. (See the follow-ing Reality Check for a call for public policy in connection with energy.)

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Business’s Environmental Responsibility: The Regulatory Approach

A broad consensus emerged in the United States in the 1970s that unregulated markets are an inadequate approach to environmental challenges. Instead, gov-ernmental regulations were seen as the better way to respond to environmental problems. Much of the most significant environmental legislation in the United States was enacted during the 1970s. The Clean Air Act of 1970 (amended and renewed in 1977), 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 this national consensus for addressing environmental problems. Each law was originally enacted by a Democratic Congress and signed into law by a Republican president.

These laws share a common approach to environmental issues. Before this legislation was enacted, the primary legal avenue open for addressing environ-mental concerns was tort law. Only individuals who could prove that they had been harmed by pollution could raise legal challenges to air and water pollution.

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A recent call from the chairman and CEO of Chevron-Texaco for changes in U.S. energy policy emphasizes the need for partnership between government and business to address the energy market. In a speech delivered in February 2005, David J. O’Reilly claimed that we are now in the midst of what he called a “new energy equation” requiring a broad-based energy policy.

The most visible element of this new equation is that relative to demand, oil is no longer in plentiful supply. The time when we could count on cheap oil and even cheaper natural gas is clearly ending. Why is this happening now? . . . Demand from Asia is one fundamental reason for this new age of more volatile and higher prices. The Chinese economy alone is a roaring engine whose thirst for oil grew by more than 15 percent last year and will double its need for imported oil between 2003 and 2010—just seven years. This new Asian demand is reshaping the marketplace. And we’re seeing the center of gravity of global petroleum markets shift to Asia and, in particular, to China and India. . . . But demand isn’t the only factor at play. Simply put,

the era of easy access to energy is over. In part, this is because we are experiencing the convergence of geological diffi culty with geopolitical instability. Although political turmoil and social unrest are less likely to affect long-term supplies, the psychological effect of those factors can clearly have an impact on world oil markets, which are already running at razor-thin margins of capacity. Many of the world’s big production fi elds are maturing just as demand is increasing. The U.S. Geological Survey estimates the world will have consumed one-half of its existing conventional oil base by 2030. Increasingly, future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.

Source: David J. O’Reilly, chairman and CEO, Chevron-Texaco Corporation, “U.S. Energy Policy: A Declaration of Interdependence,” keynote address to the 24th annual CERA Week Conference, Houston, Texas, February 15, 2005. Available on the Chevron-Texaco Web site: http://www.chevrontexaco.com/news/speeches/2005/2005-02-15_oreilly.asp .

Reality Check Supply and Demand for Energy





That legal approach placed the burden on the person who was harmed and, at best, offered compensation for the harm only after the fact. Except for the incen-tive provided by the threat of compensation, U.S. policy did little to prevent the pollution in the first place. Absent any proof of negligence, public policy was content to let the market decide environmental policy. Because endangered spe-cies 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.

The laws enacted during the 1970s established standards that effectively shifted the burden from those threatened with harm to those who would cause the harm. Government established regulatory standards to try to prevent the occurrence of pollution or species extinction rather than to offer compensation after the fact. We can think of these laws as establishing minimum standards to ensure air and water quality and species preservation. Business was free to pursue its own goals as long as it complied with the side constraints these minimum standards established.

The consensus that emerged was that society had two opportunities to estab-lish business’s environmental responsibilities. As consumers, individuals could demand environmentally friendly products in the marketplace. As citizens, indi-viduals could support environmental legislation. As long as business responded to the market and obeyed the law, it met its environmental responsibilities. If consumers demand environmentally suspect products, such as large gas-guzzling SUVs, and those products are allowed by law, then we cannot expect business to forgo the financial opportunities of marketing such products.

Philosopher Norman Bowie (in an essay reprinted at the end of this chapter) defended a modified version of this narrow view of corporate social responsibility. Bowie argued that, apart from the duties to cause no avoidable harm to humans and to obey the law, business has no special environmental responsibility. Busi-ness may voluntarily choose to do environmental good, but it has no obligation to do so. Business should be free to pursue profits by responding to the demands of the economic marketplace without any particular regard to environmental responsibilities. In so far as society desires environmental goods (for example, lowering pollution by increasing the fuel efficiency of automobiles), it is free to express those desires through legislation or within the marketplace. Absent those demands, business has no special environmental responsibilities.

Several problems suggest that this approach will prove inadequate over the long term. First, it underestimates the influence that business can have in establishing the law. The Corporate Automotive Fuel Efficiency (CAFE) standards mentioned previously provide a good example of how this can occur. A reasonable account of this law suggests that the public very clearly expressed a political goal of improv-ing air quality by improving automobile fuel efficiency goals (and thereby reduc-ing automobile emissions). However, the automobile industry was able to use its lobbying influence to exempt light trucks and SUVs from these standards. It should be no surprise that light trucks and SUVs at the time represented the larg-est selling, and most profitable, segment of the auto industry.

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Second, this approach also underestimates the ability of business to influenceconsumer choice. To conclude that business fulfills its environmental responsibil-ity when it responds to the environmental demands of consumers is to underes-timate the role that business can play in shaping public opinion. Advertising is a $200 billion a year industry in the United States alone. It is surely misleading to claim that business passively responds to consumer desires and that consumers are unaffected by the messages that business conveys. Assuming that business is not going to stop advertising its products or lobbying government, this model of corporate environmental responsibility is likely to prove inadequate for protecting the natural environment.

Further, if we rely on the law to protect the environment, environmental protec-tion will extend only as far as the law extends. Yet, most environmental issues, pol-lution problems especially, do not respect legal jurisdictions. New York State might pass strict regulations on smokestack emissions, but if the power plants are located downwind in Ohio or even further west in the Dakotas or Wyoming, New York State will continue to suffer the effects of acid rain. Similarly, national regulations will be ineffective for international environmental challenges. While hope remains that international agreements might help control global environmental problems, the failure of the Kyoto agreement suggests that this might be overly optimistic.

Finally, and perhaps most troubling from an environmental standpoint, this regulatory model assumes that economic growth is environmentally and ethically benign. 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. What can be lost in these discussions is the very important fact that there are many different ways to pursue profits within the side constraints of law. Different roads towards profitability can have very different environmental consequences.

Business’s Environmental Responsibilities: The Sustainability Approach

Beginning in the 1980s, a new model for environmentally responsible business began to take shape, one that combines financial opportunities with environmen-tal and ethical responsibilities. The concept of sustainable development andsustainable business practice suggests a radically new vision for integrating financial and environmental goals, compared to the growth model that preceded it (as explored in the Reality Check that follows). These three goals, economic, envi-ronmental, and ethical sustainability, are often referred to as the three pillars of sustainability .

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, named for its chair, Gro Harlem Brundtland. The commission was charged with developing

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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. 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.”

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. Daly makes a convincing case for an understanding of economic development that transcends the more common standard of economic growth . Unless we make significant changes in our understanding of economic activity, unless quite literally we change the way we do business, we will fail to meet some very basic ethical and environmental obligations. According to Daly, we need a major paradigm shift in how we understand economic activity.

We can begin with the standard understanding of economic activity and eco-nomic growth found in almost every economics textbook. What is sometimes called the “circular flow model” ( Figure 9.1 ) explains the nature of economic transactions in terms of a flow of resources from businesses to households and back again. Business produces goods and services in response to the market demands of households, then ships the goods and services to households in exchange for payments back to business. These payments are in turn sent back to households in the form of wages, salaries, rents, profits, and interests. Households receive the

Three factors are most often cited to explain and justify the need for a model of economic development that stresses sustainability rather than growth.

First, billions of human beings live in severe poverty and daily face real challenges associated with the lack of food, water, health care, and shelter. Addressing these challenges will require signifi cant economic activity.

Second, world population continues to grow at a disturbing rate, with projections of an increase from 6 billion people in 1998 to 7 billion shortly after 2010 and 8 billion before 2030. Most of this population growth will occur within the world’s poorest regions, thereby only intensifying the fi rst challenge. Even more economic activity will be needed to address the needs of this growing population.

Third, all of this economic activity must rely on the productive capacity of the earth’s biosphere. Unfortunately, there is ample evidence that the type

and amount of economic activity practiced by the world’s economies have already approached if not overshot the earth’s ability to support human life.

Given these realities, citizens within developed economies have three available paths. We can believe that developing economies in places such as China, India, and Indonesia cannot, will not, or should not strive for the type of economic prosperity enjoyed in developed economies. Second, we could believe, optimistically, that present models of business and economic growth can be extended across the globe to an expanding population without degrading the natural environment beyond its limits. Third, we can search for new models of economic and business activity that provide for the needs of the world’s population without further degrading the biosphere. Sustainable development and the connected model of sustainable business choose this third path.

Reality Check Why Sustainability?





payments in exchange for the labor, land, capital, and entrepreneurial skills busi-ness uses to produce goods and services.

Two aspects of this circular flow model are worth noting. First, it does not dif-ferentiate natural resources from the other factors of production. This model 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. As economist Julian Simon has argued, “As economists or consumers, we are interested in the particular services that resources yield, not in the resources them-selves.” Those services can be provided in many ways and by substituting differ-ent factors of production. In Simon’s terms, resources can therefore be treated as “infinite.”

A second observation is that this model treats economic growth as both the solution to all social ills and also as boundless. To keep up with population growth, the economy must grow. To provide for a higher standard of living, the economy must grow. To alleviate poverty, hunger, and disease, the economy must grow. The possibility that the economy cannot grow indefinitely is simply not part of this model.

The three points summarized in the previous Reality Check suggest why this growth-based model will be inadequate. According to some estimates, the world’s economy would need to grow by a factor of five- to tenfold over the next 50 years in order to bring the standard of living of present populations in the developing world into line with the standard of living in the industrialized world. Yet, within those 50 years, the world’s population will increase by more than 3 billion people, most of whom will be born in the world’s poorest economies. Of course, the only source for all this economic activity is productive capacity of the earth itself.

FIGURE 9.1 The Circular Flow Model

Consumer goods and services

Wages, rents, interests, profits

Resources: labor, land,capital, entrepreneurial skills

Payments

BUSINESS HOUSEHOLDS




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. Economic activity takes place within this biosphere and cannot expand beyond its capacity to sustain life. All the factors that go into production—natural resources, capital, entrepreneurial skill, and labor—ultimately originate in the productive capacity of the earth. In light of this, the entire classical model will prove unstable if resources move through this system at a rate that outpaces the productive capac-ity of the earth or of the earth’s capacity to absorb the wastes and by-products of this production. Thus, 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. A model of such a system, based on the work of Daly, is presented in Figure 9.2 .

Figure 9.2 differs from Figure 9.1 in several important ways. First, the sus-tainable 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. From the first law of thermodynamics (the conservation of matter/energy), we rec-ognize that neither matter nor energy can truly be “created,” it can only be trans-ferred from one form to another. Second, energy is lost at every stage of economic activity. Consistent with the second law of thermodynamics (entropy increased within a closed system), the amount of usable energy decreases over time. “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. Third, this model no longer treats natural resources as

FIGURE 9.2 A Model of the Economy (or Economic System) as a Subset of the Biosphere (or Ecosystem)

Energy,natural resources

Wastes(pollution, trash)

SOLAR ENERGY

BIOSPHERE

Consumer goods andservices

Wages, rents, interests,profits

Resources: labor,capital, entrepreneurial skills

Payments

Heat energy

Wastes(pollution, trash)

Energy,natural resources

Heat energy

HOUSEHOLDSBUSINESS






an undifferentiated and unexplained factor of production emerging from house-holds. Natural resources come from the biosphere and cannot be created ex nihilo. Finally, it recognizes that wastes are produced at each stage of economic activity and these wastes are dumped back into the biosphere.

The conclusion that should be drawn from this new model is relatively simple. 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. 3 The biosphere can produce resources indefinitely, and it can absorb wastes indefinitely, but only at a certain rate and with a certain type of economic activity. This is the goal of sustainable development. Finding this rate and type of economic activity, and thereby creating a sustainable business practice, is the ultimate environmental responsibility of business.

Business Opportunities in a Sustainable Economy

While the regulatory and compliance model tends to interpret environmental responsibilities as constraints upon business, the sustainability model is more for-ward looking and may present business with greater opportunities than burdens. Indeed, it offers a vision of future business that many entrepreneurial and creative businesses are already pursuing.

The environmental research and consulting group The Natural Step uses an image of a funnel, with two converging lines, to help business understand these opportunities. The resources necessary to sustain life are on a downward slope. While there is disagreement about the angle of the slope (are we at the start, with only a mild slope, or further along, with a sharper downward slope?), there is widespread consensus that available resources are in decline. The second line rep-resents aggregate worldwide demand, accounting for both population growth and the increasing demand of consumerist lifestyles. Barring an environmental catas-trophe, many but not all industries will emerge through the narrowing funnel into an era of sustainable living. Businesses unable to envision that sustainable future will hit the narrowing wall. Innovative and entrepreneurial business will find their way through. The Natural Step’s funnel is illustrated in Figure 9.3 .

The Natural Step then challenges business to “backcast” a path towards sus-tainability. We are all familiar with forecasting, in which we examine present data and predict the future. “Backcasting” examines what the future will be when we emerge through the funnel. 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.

Why ought a business pursue a strategy of sustainability? For reasons of busi-ness self-interest alone, a strong case can be made for taking steps now to achieve a sustainable future. At least five reasons establish a persuasive case for conclud-ing that it is almost always in business’s self-interest to pursue a strategy of sus-tainability. (For some clarity on the circumstances under which it is not, take a look at the Reality Check on page 389.)

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First, sustainability is a prudent long-term strategy . As the Natural Step’s fun-nel 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. One can look to the ocean fishing industry as an example.

Second, the huge unmet market potential among the world’s developing economies can only be met in sustainable ways . Enormous business opportuni-ties exist in serving the billions of people who need, and are demanding, economic goods and services. The base of the economic pyramid represents the largest and fastest-growing economic market in human history. Yet, the sheer size of these markets alone makes it impossible to meet this demand with the environmen-tally damaging industrial practices of the 19th and 20th centuries. For example, if China were to consume oil at the same rate as the United States, it alone would consume more than the entire world’s daily production and would more than triple the emission of atmospheric carbon dioxide. It is obvious that new sustainable technologies and products will be required to meet the Chinese demand.

Third, significant cost savings can be achieved through sustainable prac-tices. Business stands to save significant costs in moves towards ecoefficiency. 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.

Fourth, competitive advantages exist for sustainable businesses . Firms that are ahead of the sustainability curve will both have an advantage serving envi-ronmentally conscious consumers and enjoy a competitive advantage attracting workers who will take pride and satisfaction in working for progressive firms.

Finally, sustainability is a good risk management strategy . Refusing to move towards sustainability offers many downsides that innovative firms will avoid. Avoiding future government regulation is one obvious benefit. Firms that take the initiative in moving towards sustainability will also likely be the firms that set the standards of best practices in the field. Thus, when regulation does come, these firms will likely play a role in determining what those regulations ought to be. Avoiding legal liability for unsustainable products is another potential benefit. As

FIGURE 9.3The Natural Step Funnel

Copyright © The Natural Step International, www.thenaturalstep.com. Reprinted with permission.

Throughinnovation,

creativity, andthe unlimited

potentialfor change

we can openthe walls ofthe funnel.

Lifesupporting

resources aredecreasing...

... Demandfor resourcesis increasing.

RESOURCES

DEMAND





social consciousness changes, the legal system may soon begin punishing firms that are now negligent in failing to foresee harms caused by their unsustainable practices. Consumer boycotts of unsustainable firms are also a risk to be avoided.

We can summarize these previous sections by reflecting on the ethical decision-making model used throughout this text. The facts suggest that the earth’s biosphere is under stress and that much of this comes from the type of global economic growth that has characterized industrial and consumerist societies. The ethical issues that develop from these facts include fairness in allocating scare resources, justice in meeting the real needs of billions of present and future human beings, and the values and rights associated with environmental conservation and preservation. The stakeholders for these decisions include, quite literally, all life on earth. Relaying on our own moral imagination, we can envision a future in which economic activity can meet the real needs of present generations without jeopardizing the ability of future generations to meet their own needs. Sustainability seems to be just this vision. The next section describes directions in which business might develop towards this sustainable model.

Principles for a Sustainable Business

Figure 9.2 provides a general model for understanding how firms can evolve towards a sustainable business model. In the simplest terms, resources should not enter into the economic cycle from the biosphere at rates faster than they are replenished. Ideally, waste should be eliminated or, at a minimum, not produced at a rate faster than the biosphere can absorb it. Finally, the energy to power the economic system should be renewable, ultimately relying on the sun, the only energy that is truly renewable.

The precise implications of sustainability will differ for specific firms and industries, but three general principles will guide the move towards sustainability. Firms and industries must become more efficient in using natural resources; they should model their entire production process on biological processes; and they should emphasize the production of services rather than products.

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“Sustainability” has become a somewhat trendy term and can seem to mean all things to all people. When we hear talk about “sustainability,” we should always be prepared to ask “ What is being sustai-ned?” “ For whom is it being sustained?” “ How is it being sustained?” and “What should be sustained?”

The language of sustainability can be especi-ally attractive to those of us living comfortably in developed economies if it is interpreted to mean

maintaining the status quo over the long term. But, not every industry, nor every fi rm, nor every business practice, nor every consumer product is sustainable. Industrial fi shing practices in the North Atlantic have already proven unsustainable, as has or soon will be many agricultural practices such as burning rain forests to increase cropland, tapping underground aquifers for irrigation, and burning fossil fuels to power personal transportation.

Reality Check Is Everything Sustainable?





Versions of the first principle, sometimes called ecoefficiency, has long been a part of the environmental movement. “Doing more with less” has been an envi-ronmental guideline for decades. On an individual scale, it is environmentally better to ride a bike than to ride in a bus, to ride in a fuel-cell or hybrid-powered bus than in a diesel bus, to ride in a bus than to drive a personal automobile, and to drive a hybrid car than an SUV. Likewise, business firms can improve energy and materials efficiency in such things as lighting, building design, product design, and distribution channels. Some estimates suggest that with present technologies alone, business could readily achieve at least a fourfold increase in efficiency and perhaps as much as a tenfold increase. Consider that a fourfold increase, called “Factor-Four” in the sustainability literature, would make it possible to achieve double the productivity from one-half the resource use. 4

The second principle of business sustainability can be easily understood by ref-erence to Figure 9.2 . Imagine that the waste leaving the economic cycle is being turned back into the cycle as a productive resource. “Closed-loop” production seeks to integrate what is presently waste back into production. In an ideal situ-ation, the waste of one firm becomes the resource of another, and such synergies can create ecoindustrial parks. Just as biological processes such as photosynthe-sis cycle the “waste” of one activity into the resource of another, this principle is often referred to as biomimicry. The following Reality Check provides an example of biomimicry.

The ultimate goal of biomimicry is to eliminate waste altogether rather than reducing it. 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.

The evolution of business strategy towards biomimicry can be understood along a continuum. The earliest phase has been described as “take-make-waste.” Business takes resources, makes products out of them, and discards whatever is left over. A second phase envisions business taking responsibility for its products from “cradle to grave.” Sometimes referred to as “life-cycle” responsibility, this approach has already found its way into both industrial and regulatory thinking. Cradle-to-grave, or life-cycle, responsibility holds that a business is responsible for the entire life of its products, including the ultimate disposal even after the sale. Thus, for example, 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.

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. This responsibility, in turn, would create incentives to redesign products so that they could be recycled efficiently and easily.

The environmental design company McDonough and Braungart, founded by architect William McDonough and chemist Michael Braungart, has been a leader in helping businesses reconceptualize and redesign business practice to achieve sustain-ability. Their book, Cradle to Cradle, traces the life cycle of several products, provid-ing case studies of economic and environmental benefits attainable when business





takes responsibility for the entire life cycle of products. Among their projects is the redesign of Ford Motor Company’s Rouge River manufacturing plant.

Beyond ecoefficiency and biomimicry, a third sustainable business principle involves a shift in business model from products to services. 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. 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.

The book Natural Capitalism provides examples of businesses that have made such a shift in each of these industries. 5 This change produces incentives for prod-uct redesigns that create more durable and more easily recyclable products.

One well-known innovator in this area is Interface Corporation and its CEO, Ray Anderson. Interface has made a transition from selling carpeting to leasing floor-covering services. On the traditional model, carpet is sold to consumers who, once they become dissatisfied with the color or style or once the carpeting becomes worn, dispose of the carpet in landfills. There is little incentive here to produce long-lasting or easily recyclable carpeting. Once Interface shifted to leas-ing floor-covering services, it created incentives to produce long-lasting, easily replaceable and recyclable carpets. Interface thereby accepts responsibility for the entire life cycle of the product it markets. Because the company retains ownership and is responsible for maintenance, Interface now produces carpeting that can be easily replaced in sections rather than in its entirety, that is more durable, and that can eventually be remanufactured. Redesigning carpets and shifting to a service lease has also improved production efficiencies and reduced material and energy costs significantly. Consumers benefit by getting what they truly desire at lower costs and fewer burdens.

Large-scale production of agricultural fertilizer has relied on natural gas as its feedstock. The gas is processed into its chemical components to produce high-nitrogen fertilizers. As the price of natural gas has increased signifi cantly in recent years, the cost of producing fertilizers in this way has created a severe fi nancial burden on farmer and fertilizer companies alike. One company, Royster-Clark, was driven to sell its fertilizer plant in Illinois.

As it turns out, parts of Illinois sit atop large reserves of coal, but it is a type of high-sulfur coal that, because of environmental regulations, is inappropriate for burning in electric power plants. Rentech, a small energy company with an innovative technology for converting coal and other

hydrocarbons into liquids, bought the Royster-Clark plant. Rentech’s process converts the coal into ultraclean fuels, nitrogen, and electric power. The plant now produces fertilizer at lower costs than it could have with natural gas, and as its by-products it produces sulfur-free diesel fuel, other industrial chemicals, and power. Reduced-sulfur diesel fuel, newly required by federal regulations, can play a major role in increasing fuel effi ciency with fewer of the pollution problems of traditional diesel.

While the process also produces carbon dioxide, it does so in such a way that the gas can be sepa-rately collected rather than discharged into the atmosphere. Long-term plans would be to sequester the carbon dioxide deep underground.

Reality Check Corn from Coal?




392 Chapter 9 Business, the Environment, and SustainabilityOpening Decision Point Revisited ShouldToxic Wastes Be Exported?

Should toxic wastes be exported? In the early 1990s, an internal World Bank memo discussing the export of toxic wastes was leaked to the public. The memo was written by then–World Bank chief economist Lawrence Summers. Summers later became secretary of the Treasury under President Clinton and, after that, president of Harvard University. Summers makes the economic case for exporting wastes in this memo.

DATE: December 12, 1991

TO: Distribution

FR: Lawrence H. Summers

Subject: GEP

‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:

1) The measurements of the costs of health impairing pollution depends on the forgone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.

The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.

During the controversy that followed the release of this memo, defenders of Summers and the World Bank alleged that this memo was intended as ironic and tongue-in-cheek. Whether this was true or not, the memo does provide a clear description of some ethical and environmental implications of a fairly common

392(continued)





As a research project, choose a product with which you are familiar (one with local con-nections is best), and trace its entire life cycle. From where does this product originate? What resources go into its design and manufacture? How is it transported, sold, used, and disposed of? Along each step in the life cycle of this product, analyze the economic, environmental, and ethical costs and benefits. Consider if a service could be exchanged for this product. Some examples might include your local drinking water, food items such as beef or chicken, any product sold at a local farmer’s market, or building materi-als used in local projects.

Conduct a Web search for ecological footprint analysis. You should be able to find a self-administered test to evaluate your own ecological footprint. If everyone on earth lived as you do, how many earths would be required to support this lifestyle?

Research corporate sustainability reports. How many corporations can you find that issue annual reports on their progress towards sustainability? Can you research a com-pany that does not and explore why not (perhaps through its critics), or whether it has plans to change?

A movement within the European Union requires that business take back its products at the end of their useful life. Can you learn the details of such laws? Discuss whether or not you believe such a law could be passed in the United States. Should the United States have similar laws?

Apply the concept of sustainability to a variety of businesses and industries. What would sustainable agriculture require? What are sustainable energy sources? What would sustainable transportation be? What would be required to turn your hometown into a sustainable community?

1.

2.

3.

4.

5.

pattern of economic thinking. If we were to apply the principles of free market economic thinking to business decision making and corporate social responsibility, we would seek to put a price on everything, including “increased morbidity and mortality” (illness and death). This economic way of thinking then advises that we make decisions by applying a utilitarian calculus: act in whichever way will maximize overall happiness. In the case of exporting toxic waste, “the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.”

On the other hand, deontological principles of justice would seem to imply that economic benefits and burdens be distributed fairly and that those who reap the benefits of industrial economies ought to be the same people who bear the burdens created by that economy. Justice would require that that we not burden the least advantaged people in the world with the additional harms that industrial wastes create.

Of course, the ideal would be to create industrial processes that do not produce toxic wastes in the first place. “Take-back” regulations that many European countries are developing will produce incentives for business to ensure that the by-products of industrial processes are benign.

Questions,Projects, and Exercises

393

(concluded)





1. William Baxter , People or Penguins: The Case for Optimal Pollution (New York: Columbia University Press , 1974) .

2. Julian Simon , The Ultimate Resource (Princeton, NJ: Princeton University Press , 1983) .

3. Herman Daly , Beyond Growth (Boston: Beacon Press, 1996) , pp. 33–35

4. For the Factor Four claim, see Ernst von Weizacker , Amory B. Lovins , L. Hunter Lovins , and Kogan Page, “Factor Four: Doubling Wealth—Halving Resource Use: A Report to the Club of Rome” (1998), and for Factor 10, see Friedrich Schmidt-Bleek, Factor 10 Institute, http://www.factor10-institute.org/ .

5. Paul Hawken , Amory Lovins , and Hunter Lovins , Natural Capitalism (Boston: LittleBrown , 1999 ).

EndnotesEndnotes

Investigate what is involved in an environmental audit. Has such an audit been con-ducted at your own college or university? In what ways has your own school adopted sustainable practices? In what ways would your school need to change to become more sustainable?

Do you believe that business has any direct ethical duties to living beings other than humans? Do animals, plants, or ecosystems have rights? What criteria have you used in answering such questions? What is your own standard for determining what objects count, from a moral point of view?

Investigate LEED (Leadership in Energy and Environmental Design) building designs. If possible, arrange a visit to a local building designed according to LEED principles. Should all new buildings be required by law to adopt LEED design standards and con-form to the LEED rating system?

6.

7.

8.

Key Terms

backcasting, p. 387biomimicry, p. 390 Corporate Automotive Fuel Efficiency (CAFE) Standards, p. 378

cradle-to-cradleresponsibility, p. 390 ecoefficiency, p. 390 service-based economy,p. 391

sustainable development,p. 383 sustainable business practice, p. 383 three pillars of sustainability, p. 383

After reading this Chapter, you should have a clear understanding of the following Key Terms. The page numbers refer to the point at which they were discussed in the chapter. For a more complete definition, please see the Glossary.

Readings Reading 9-1: “Morality, Money, and Motor Cars,” by Norman Bowie, p. 395

Reading 9-2: “The Next Industrial Revolution,” by William McDonough and Michael Braungart, p. 401

Reading 9-3: “Taking Sustainability Seriously: An Argument for Managerial Responsibility,” by Tara. Radin, p. 410





Environmentalists frequently argue that business has special obligations to protect the envi-ronment. Although I agree with the environmentalists on this point, I do not agree with them as to where the obligations lie. Business does not have an obligation to protect the environment over and above what is required by law; however, it does have a moral obliga-tion to avoid intervening in the political arena in order to defeat or weaken environmental legislation. In developing this thesis, several points are in order.

First, many businesses have violated important moral obligations, and the violation has had a severe negative impact on the environment. For example, toxic waste haulers have illegally dumped hazardous material, and the environment has been harmed as a result. One might argue that those toxic waste haulers who have illegally dumped have violated a special obligation to the environment. Isn’t it more accurate to say that these toxic waste haulers have violated their obligation to obey the law and that in this case the law that has been broken is one pertaining to the environment? Businesses have an obligation to obey the law—environmental laws and all others. Since there are many well-publicized cases of business having broken environmental laws, it is easy to think that business has violated some special obligations to the environment. In fact, what business has done is to disobey the law. Environmentalists do not need a special obligation to the environment to protect the environment against illegal business activity; they need only insist that business obey the laws.

Business has broken other obligations beside the obligation to obey the law and has harmed the environment as a result. Consider the grounding of the Exxon oil tanker Valdezin Alaska. That grounding was allegedly caused by the fact that an inadequately trained crewman was piloting the tanker while the captain was below deck and had been drinking. What needs to be determined is whether Exxon’s policies and procedures were sufficiently lax so that it could be said Exxon was morally at fault. It might be that Exxon is legally responsible for the accident under the doctrine of respondent superior, but Exxon is not thereby morally responsible. Suppose, however, that Exxon’s policies were so lax that the company could be characterized as morally negligent. In such a case, the company would violate its moral obligation to use due care and avoid negligence. Although its negligence was disastrous to the environment, Exxon would have violated no special obligation to the environment. It would have been morally negligent.

A similar analysis could be given to the environmentalists’ charges that Exxon’s cleanup procedures were inadequate. If the charge is true, either Exxon was morally at fault or not. If the procedures had not been implemented properly by Exxon employees, then Exxon is legally culpable, but not morally culpable. On the other hand, if Exxon lied to government officials by saying that its policies were in accord with regulations and/or were ready for emergencies of this type, then Exxon violated its moral obligation to tell the truth. Exxon’s immoral conduct would have harmed the environment, but it violated no special obligation to the environment. More important, none is needed.

Reading 9-1

Morality, Money, and Motor CarsNorman Bowie





Environmentalists, like government officials, employees, and stockholders, expect that business firms and officials have moral obligations to obey the law, avoid negligent behav-ior, and tell the truth. In sum, although many business decisions have harmed the envi-ronment, these decisions violated no environmental moral obligations. If a corporation is negligent in providing for worker safety, we do not say the corporation violated a special obligation to employees; we say that it violated its obligation to avoid negligent behavior.

The crucial issues concerning business obligations to the environment focus on the excess use of natural resources (the dwindling supply of oil and gas, for instance) and the externalities of production (pollution, for instance). The critics of business want to claim that business has some special obligation to mitigate or solve these problems. I believe this claim is sadly mistaken. If business does have a special obligation to help solve the environ-mental crisis, that obligation results from the special knowledge that business fi rms have. If they have greater expertise than other constituent groups in society, then it can be argued that, other things being equal, business’s responsibilities to mitigate the environmental cri-sis are somewhat greater. Absent this condition, business’s responsibility is no greater than and may be less than that of other social groups. What leads me to think that the critics of business are mistaken?

William Frankena distinguished obligations in an ascending order of the difficulty in carrying them out: avoiding harm, preventing harm, and doing good. The most stringent requirement, to avoid harm, insists no one has a right to render harm on another unless there is a compelling, overriding moral reason to do so. Some writers have referred to this obligation as the moral minimum. A corporation’s behavior is consistent with the moral minimum if it causes no avoidable harm to others.

Preventing harm is a less stringent obligation, but sometimes the obligation to prevent harm may be nearly as strict as the obligation to avoid harm. Suppose you are the only person passing a two-foot-deep [wading] pool where a young child is drowning. There is no one else in the vicinity. Don’t you have a strong moral obligation to prevent the child’s death? Our obligation to prevent harm is not unlimited, however. Under what conditions must we be good Samaritans? Some have argued that four conditions must exist before one is obligated to prevent harm: capability, need, proximity, and last resort. These conditions are all met with the case of the drowning child. There is obviously a need that you can meet since you are both in the vicinity and have the resources to prevent the drowning with little effort; you are also the last resort.

The least strict moral obligation is to do good—to make contributions to society or to help solve problems (inadequate primary schooling in the inner cities, for example). Although corporations may have some minimum obligation in this regard based on an argument from corporate citizenship, the obligations of the corporation to do good can-not be expanded without limit. An injunction to assist in solving societal problems makes impossible demands on a corporation because at the practical level, it ignores the impact that such activities have on profit.

It might seem that even if this descending order of strictness of obligations were accepted, obligations toward the environment would fall into the moral minimum category. After all, the depletion of natural resources and pollution surely harm the environment. If so, wouldn’t the obligations business has to the environment be among the strictest obliga-tions a business can have?

Suppose, however, that a businessperson argues that the phrase “avoid harm” usually applies to human beings. Polluting a lake is not like injuring a human with a faulty product. Those who coined the phrase moral minimum for use in the business context defined harm





as “particularly including activities which violate or frustrate the enforcement of rules of domestic or institutional law intended to protect individuals against prevention of health, safety or basic freedom.” Even if we do not insist that the violations be violations of a rule of law, polluting a lake would not count as a harm under this definition. The environmen-talists would respond that it would. Polluting the lake may be injuring people who might swim in or eat fish from it. Certainly it would be depriving people of the freedom to enjoy the lake. Although the environmentalist is correct, especially if we grant the legitimacy of a human right to a clean environment, the success of this reply is not enough to establish the general argument.

Consider the harm that results from the production of automobiles. We know statisti-cally that about 50,000 persons per year will die and that nearly 250,000 others will be seriously injured in automobile accidents in the United States alone. Such death and injury, which is harmful, is avoidable. If that is the case, doesn’t the avoid-harm criterion require that the production of automobiles for profit cease? Not really. What such arguments point out is that some refinement of the moral minimum standard needs to take place. Take the automobile example. The automobile is itself a good producing instrument. Because of the advantages of automobiles, society accepts the possible risks that go into using them. Society also accepts many other types of avoidable harm. We take certain risks—ride in planes, build bridges, and mine coal—to pursue advantageous goals. It seems that the high benefits of some activities justify the resulting harms. As long as the risks are known, it is not wrong that some avoidable harm be permitted so that other social and individual goals can be achieved. The avoidable-harm criterion needs some sharpening.

Using the automobile as a paradigm, let us consider the necessary refinements for the avoid-harm criterion. It is a fundamental principle of ethics that “ought” implies “can.” That expression means that you can be held morally responsible only for events within your power. In the ought-implies-can principle, the overwhelming majority of highway deaths and injuries is not the responsibility of the automaker. Only those deaths and injuries attrib-utable to unsafe automobile design can be attributed to the automaker. The ought-implies-can principle can also be used to absolve the auto companies of responsibility for death and injury from safety defects that the automakers could not reasonably know existed. The company could not be expected to do anything about them.

Does this mean that a company has an obligation to build a car as safe as it knows how? No. The standards for safety must leave the product’s cost within the price range of the consumer (“ought implies can” again). Comments about engineering and equipment capability are obvious enough. But for a business, capability is also a function of profitability. A company that builds a maximally safe car at a cost that puts it at a competitive disadvantage and hence threatens its survival is building a safe car that lies beyond the capability of the company.

Critics of the automobile industry will express horror at these remarks, for by making capability a function of profitability, society will continue to have avoidable deaths and injuries; however, the situation is not as dire as the critics imagine. Certainly capability should not be sacrificed completely so that profits can be maximized. The decision to build products that are cheaper in cost but are not maximally safe is a social decision that has widespread support. The arguments occur over the line between safety and cost. What we have is a classical trade-off situation. What is desired is some appropriate mix between engineering safety and consumer demand. To say there must be some mix between engi-neering safety and consumer demand is not to justify all the decisions made by the auto-mobile companies. Ford Motor Company made a morally incorrect choice in placing Pinto





gas tanks where it did. Consumers were uninformed, the record of the Pinto in rear-end col-lisions was worse than that of competitors, and Ford fought government regulations.

Let us apply the analysis of the automobile industry to the issue before us. That analysis shows that an automobile company does not violate its obligation to avoid harm and hence is not in violation of the moral minimum if the trade-off between potential harm and the utility of the products rests on social consensus and competitive realities.

As long as business obeys the environmental laws and honors other standard moral obligations, most harm done to the environment by business has been accepted by society. Through their decisions in the marketplace, we can see that most consumers are unwilling to pay extra for products that are more environmentally friendly than less friendly competi-tive products. Nor is there much evidence that consumers are willing to conserve resources, recycle, or tax themselves for environmental causes.

Consider the following instances reported in The Wall Street Journal. The restaurant chain Wendy’s tried to replace foam plates and cups with paper, but customers in the test markets balked. Procter & Gamble offered Downey fabric softener in concentrated form that requires less packaging than ready-to-use products; however the concentrated version is less convenient because it has to be mixed with water. Sales have been poor. Procter & Gamble manufactures Vizir and Lenor brands of detergents in concentrate form, which the customer mixes at home in reusable bottles. Europeans will take the trouble; Americans will not.

Kodak tried to eliminate its yellow film boxes but met customer resistance. McDonald’s has been testing mini-incinerators that convert trash into energy but often meets opposi-tion from community groups that fear the incinerators will pollute the air. A McDonald’s spokesperson points out that the emissions are mostly carbon dioxide and water vapor and are “less offensive than a barbecue.” Exxon spent approximately $9,200,000 to “save” 230 otters ($40,000 for each otter). Otters in captivity cost $800. Fishermen in Alaska are permitted to shoot otters as pests. Given these facts, doesn’t business have every right to assume that public tolerance for environmental damage is quite high, and hence current legal activities by corporations that harm the environment do not violate the avoid-harm criterion?

Recently environmentalists have pointed out the environmental damage caused by the widespread use of disposable diapers. Are Americans ready to give them up and go back to cloth diapers and the diaper pail? Most observers think not. Procter & Gamble is not vio-lating the avoid-harm criterion by manufacturing Pampers. Moreover, if the public wants cloth diapers, business certainly will produce them. If environmentalists want business to produce products that are friendlier to the environment, they must convince Americans to purchase them. Business will respond to the market. It is the consuming public that has the obligation to make the trade-off between cost and environmental integrity.

Data and arguments of the sort described should give environmental critics of busi-ness pause. Nonetheless, these critics are not without counter-responses. For example, they might respond that public attitudes are changing. Indeed, they point out, during the Reagan deregulation era, the one area where the public supported government regulations was in the area of environmental law. In addition, Fortune predicts environmental integrity as the primary demand of society on business in the 1990s. More important, they might argue that environmentally friendly products are at a disadvantage in the marketplace because they have public good characteristics. After all, the best situation for the individual is one where most other people use environmentally friendly products but he or she does not, hence reaping the benefit of lower cost and convenience. Since everyone reasons this way, the real demand for environmentally friendly products cannot be registered in the market.





Everyone is understating the value of his or her preference for environmentally friendly products. Hence, companies cannot conclude from market behavior that the environmen-tally unfriendly products are preferred.

Suppose the environmental critics are right that the public goods characteristic of envi-ronmentally friendly products creates a market failure. Does that mean the companies are obligated to stop producing these environmentally unfriendly products? I think not, and I propose that we use the four conditions attached to the prevent-harm obligation to show why not. There is a need, and certainly corporations that cause environmental problems are in proximity. However, environmentally clean firms, if there are any, are not in proximity at all, and most business firms are not in proximity with respect to most environmental problems. In other words, the environmental critic must limit his or her argument to the environmental damage a business actually causes. The environmentalist might argue that Procter & Gam-ble ought to do something about Pampers; I do not see how an environmentalist can use the avoid-harm criterion to argue that Procter & Gamble should do something about acid rain. But even narrowing the obligation to damage actually caused will not be sufficient to establish an obligation to pull a product from the market because it damages the environment or even to go beyond what is legally required to protect the environment. Even for damage actually done, both the high cost of protecting the environment and the competitive pressures of business make further action to protect the environment beyond the capability of business. This conclusion would be more serious if business were the last resort, but it is not.

Traditionally it is the function of the government to correct for market failure. If the market cannot register the true desires of consumers, let them register their preferences in the political arena. Even fairly conservative economic thinkers allow government a legiti-mate role in correcting market failure. Perhaps the responsibility for energy conservation and pollution control belongs with the government.

Although I think consumers bear a far greater responsibility for preserving and pro-tecting the environment than they have actually exercised, let us assume that the basic responsibility rests with the government. Does that let business off the hook? No. Most of business’s unethical conduct regarding the environment occurs in the political arena.

Far too many corporations try to have their cake and eat it too. They argue that it is the job of government to correct for market failure and then use their influence and money to defeat or water down regulations designed to conserve and protect the environment. They argue that consumers should decide how much conservation and protection the environment should have, and then they try to interfere with the exercise of that choice in the political arena. Such behavior is inconsistent and ethically inappropriate. Business has an obligation to avoid intervention in the political process for the purpose of defeating and weakening environmental regulations. Moreover, this is a special obligation to the environment since business does not have a general obligation to avoid pursuing its own parochial interests in the political arena. Business need do nothing wrong when it seeks to influence tariffs, labor policy, or monetary policy. Business does do something wrong when it interferes with the passage of environmental legislation. Why?

First, such a noninterventionist policy is dictated by the logic of the business’s argument to avoid a special obligation to protect the environment. Put more formally:

Business argues that it escapes special obligations to the environment because it is will-ing to respond to consumer preferences in this matter.

Because of externalities and public goods considerations, consumers cannot express their preferences in the market.

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The only other viable forum for consumers to express their preferences is in the politi-cal arena.

Business intervention interferes with the expression of these preferences.

Since point 4 is inconsistent with point 1, business should not intervene in the political process.

The importance of this obligation in business is even more important when we see that environmental legislation has special disadvantages in the political arena. Public choice reminds us that the primary interest of politicians is being reelected. Government policy will be skewed in favor of policies that provide benefits to an influential minority as long as the greater costs are widely dispersed. Politicians will also favor projects where benefitsare immediate and where costs can be postponed to the future. Such strategies increase the likelihood that a politician will be reelected.

What is frightening about the environmental crisis is that both the conservation of scarce resources and pollution abatement require policies that go contrary to a politician’s self-interest. The costs of cleaning up the environment are immediate and huge, yet the benefitsare relatively long range (many of them exceedingly long range). Moreover, a situation where the benefits are widely dispersed and the costs are large presents a twofold problem. The costs are large enough so that all voters will likely notice them and in certain cases are catastrophic for individuals (e.g., for those who lose their jobs in a plant shutdown).

Given these facts and the political realities they entail, business opposition to envi-ronmental legislation makes a very bad situation much worse. Even if consumers could be persuaded to take environmental issues more seriously, the externalities, opportuni-ties to free ride, and public goods characteristics of the environment make it difficult for even enlightened consumers to express their true preference for the environment in the market. The fact that most environmental legislation trades immediate costs for future benefits makes it difficult for politicians concerned about reelection to support it. Hence it is also difficult for enlightened consumers to have their preferences for a better environ-ment honored in the political arena. Since lack of business intervention seems necessary, and might even be sufficient, for adequate environmental legislation, it seems business has an obligation not to intervene. Nonintervention would prevent the harm of not having the true preferences of consumers for a clean environment revealed. Given business’s com-mitment to satisfying preference, opposition to having these preferences expressed seems inconsistent as well.

The extent of this obligation to avoid intervening in the political process needs consider-able discussion by ethicists and other interested parties. Businesspeople will surely object that if they are not permitted to play a role, Congress and state legislators will make deci-sions that will put them at a severe competitive disadvantage. For example, if the United States develops stricter environmental controls than other countries do, foreign imports will have a competitive advantage over domestic products. Shouldn’t business be permitted to point that out? Moreover, any legislation that places costs on one industry rather than another confers advantages on other industries. The cost to the electric utilities from regula-tions designed to reduce the pollution that causes acid rain will give advantages to natural gas and perhaps even solar energy. Shouldn’t the electric utility industry be permitted to point that out?

These questions pose difficult questions, and my answer to them should be considered highly tentative. I believe the answer to the first question is “yes” and the answer to the second is “ no .” Business does have a right to insist that the regulations apply to all those in

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the industry. Anything else would seem to violate norms of fairness. Such issues of fairness do not arise in the second case. Since natural gas and solar energy do not contribute to acid rain and since the costs of acid rain cannot be fully captured in the market, government intervention through regulation is simply correcting a market failure. With respect to acid rain, the electric utilities do have an advantage they do not deserve. Hence they have no right to try to protect it.

Reading 9-2

The Next Industrial RevolutionWilliam McDonough and Michael Braungart

In the spring of 1912 one of the largest moving objects ever created by human beings left Southampton and began gliding toward New York. It was the epitome of its industrial age—a potent representation of technology, prosperity, luxury, and progress. It weighed 66,000 tons. Its steel hull stretched the length of four city blocks. Each of its steam engines was the size of a townhouse. And it was headed for a disastrous encounter with the natural world.

This vessel, of course, was the Titanic—a brute of a ship, seemingly impervious to the details of nature. In the minds of the captain, the crew, and many of the passengers, nothing could sink it. One might say that the infrastructure created by the Industrial Revolution of the nineteenth century resembles such a steamship. It is powered by fossil fuels, nuclear reactors, and chemicals. It is pouring waste into the water and smoke into the sky. It is attempting to work by its own rules, contrary to those of the natural world. And although it may seem invincible, its fundamental design flaws presage disaster. Yet many people still believe that with a few minor alterations, this infrastructure can take us safely and prosper-ously into the future.

During the Industrial Revolution resources seemed inexhaustible and nature was viewed as something to be tamed and civilized. Recently, however, some leading industrialists have begun to realize that traditional ways of doing things may not be sustainable over the long term. “What we thought was boundless has limits,” Robert Shapiro, the chairman and chief executive officer of Monsanto, said in a 1997 interview, “and we’re beginning to hit them.”

The 1992 Earth Summit in Rio de Janeiro, led by the Canadian businessman Maurice Strong, recognized those limits. Approximately 30,000 people from around the world, including more than a hundred world leaders and representatives of 167 countries, gathered in Rio de Janeiro to respond to troubling symptoms of environmental decline. Although there was sharp disappointment afterward that no binding agreement had been reached at the summit, many industrial participants touted a particular strategy: eco-efficiency. The machines of industry would be refitted with cleaner, faster, quieter engines. Prosperity would remain unobstructed, and economic and organizational structures would remain intact. The hope was that eco-efficiency would transform human industry from a system that takes, makes, and wastes into one that integrates economic, environmental, and ethical

Source: Copyright © Norman Bowie. Used by permission of the author.





concerns. Eco-efficiency is now considered by industries across the globe to be the strategy of choice for change.

What is eco-efficiency? Primarily, the term means “doing more with less”—a pre-cept that has its roots in early industrialization. Henry Ford was adamant about lean and clean operating policies; he saved his company money by recycling and reusing materials, reduced the use of natural resources, minimized packaging, and set new standards with his timesaving assembly line. Ford wrote in 1926, “You must get the most out of the power, out of the material, and out of the time”—a credo that could hang today on the wall of any eco-efficient factory. The linkage of efficiency with sustaining the environment was perhaps most famously articulated in Our Common Future, a report published in 1987 by the United Nations’ World Commission on Environment and Development. Our Common Future warned that if pollution control were not intensified, property and ecosystems would be threatened, and existence would become unpleasant and even harmful to human health in some cities. “Industries and industrial operations should be encouraged that are more efficient in terms of resource use, that generate less pollution and waste, that are based on the use of renewable rather than nonrenewable resources, and that minimize irrevers-ible adverse impacts on human health and the environment,” the commission stated in its agenda for change.

The term “eco-efficiency” was promoted five years later, by the Business Council (now the World Business Council) for Sustainable Development, a group of 48 industrial spon-sors including Dow, Du Pont, Con Agra, and Chevron, who brought a business perspective to the Earth Summit. The council presented its call for change in practical terms, focusing on what businesses had to gain from a new ecological awareness rather than on what the environment had to lose if industry continued in current patterns. In Changing Course, a report released just before the summit, the group’s founder, Stephan Schmidheiny, stressed the importance of eco-efficiency for all companies that aimed to be competitive, sustain-able, and successful over the long term. In 1996 Schmidheiny said, “I predict that within a decade it is going to be next to impossible for a business to be competitive without also being ‘eco-efficient’—adding more value to a good or service while using fewer resources and releasing less pollution.”

As Schmidheiny predicted, eco-efficiency has been working its way into industry with extraordinary success. The corporations committing themselves to it continue to increase in number, and include such big names as Monsanto, 3M, and Johnson & Johnson. Its famous three Rs—reduce, reuse, recycle—are steadily gaining popularity in the home as well as the workplace. The trend stems in part from eco-efficiency’s economic benefits,which can be considerable: 3M, for example, has saved more than $750 million through pollution-prevention projects, and other companies, too, claim to be realizing big savings. Naturally, reducing resource consumption, energy use, emissions, and wastes has implica-tions for the environment as well. When one hears that Du Pont has cut its emissions of airborne cancer-causing chemicals by almost 75 percent since 1987, one can’t help feel-ing more secure. This is another benefit of eco-efficiency: it diminishes guilt and fear. By subscribing to eco-efficiency, people and industries can be less “bad” and less fearful about the future. Or can they?

Eco-efficiency is an outwardly admirable and certainly well-intended concept, but, unfortunately, it is not a strategy for success over the long term, because it does not reach deep enough. It works within the same system that caused the problem in the first place, slowing it down with moral proscriptions and punitive demands. It presents little more than an illusion of change. Relying on eco-efficiency to save the environment will in fact





achieve the opposite—it will let industry finish off everything quietly, persistently, and completely.

We are forwarding a reshaping of human industry—what we and the author Paul Hawken call the Next Industrial Revolution. Leaders of this movement include many people in diverse fields, among them commerce, politics, the humanities, science, engineering, and education. Especially notable are the businessman Ray Anderson; the philanthropist Teresa Heinz; the Chattanooga city councilman Dave Crockett; the physicist Amory Lovins; the environmental-studies professor David W. Orr; the environmentalists Sarah Severn, Dianne Dillon Ridgley, and Susan Lyons; the environmental product developer Heidi Holt; the ecological designer John Todd; and the writer Nancy Jack Todd. We are focused here on a new way of designing industrial production. As an architect and industrial designer and a chemist who have worked with both commercial and ecological systems, we see conflictbetween industry and the environment as a design problem—a very big design problem.

Any of the basic intentions behind the Industrial Revolution were good ones, which most of us would probably like to see carried out today: to bring more goods and services to larger numbers of people, to raise standards of living, and to give people more choice and opportunity, among others. But there were crucial omissions. Perpetuating the diversity and vitality of forests, rivers, oceans, air, soil, and animals was not part of the agenda.

If someone were to present the Industrial Revolution as a retroactive design assignment, it might sound like this: Design a system of production that

Puts billions of pounds of toxic material into the air, water, and soil every year.

Measures prosperity by activity, not legacy.

Requires thousands of complex regulations to keep people and natural systems from being poisoned too quickly.

Produces materials so dangerous that they will require constant vigilance from future generations.

Results in gigantic amounts of waste.

Puts valuable materials in holes all over the planet, where they can never be retrieved.

Erodes the diversity of biological species and cultural practices.

Eco-efficiency instead

Releases fewer pounds of toxic material into the air, water, and soil every year.

Measures prosperity by less activity.

Meets or exceeds the stipulations of thousands of complex regulations that aim to keep people and natural systems from being poisoned too quickly.

Produces fewer dangerous materials that will require constant vigilance from future generations.

Results in smaller amounts of waste.

Puts fewer valuable materials in holes all over the planet, where they can never be retrieved.

Standardizes and homogenizes biological species and cultural practices.

Plainly put, eco-efficiency aspires to make the old, destructive system less so. But its goals, however admirable, are fatally limited.

Reduction, reuse, and recycling slow down the rates of contamination and depletion but do not stop these processes. Much recycling, for instance, is what we call “downcycling,”

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because it reduces the quality of a material over time. When plastic other than that found in such products as soda and water bottles is recycled, it is often mixed with different plas-tics to produce a hybrid of lower quality, which is then molded into something amorphous and cheap, such as park benches or speed bumps. The original high-quality material is not retrieved, and it eventually ends up in landfills or incinerators.

The well-intended, creative use of recycled materials for new products can be mis-guided. For example, people may feel that they are making an ecologically sound choice by buying and wearing clothing made of fibers from recycled plastic bottles. But the fibersfrom plastic bottles were not specifically designed to be next to human skin. Blindly adopt-ing superficial “environmental” approaches without fully understanding their effects can be no better than doing nothing.

Recycling is more expensive for communities than it needs to be, partly because tradi-tional recycling tries to force materials into more lifetimes than they were designed for—a complicated and messy conversion, and one that itself expends energy and resources. Very few objects of modern consumption were designed with recycling in mind. If the process is truly to save money and materials, products must be designed from the very beginning to be recycled or even “upcycled”—a term we use to describe the return to industrial systems of materials with improved, rather than degraded, quality.

The reduction of potentially harmful emissions and wastes is another goal of eco-efficiency. But current studies are beginning to raise concern that even tiny amounts of dangerous emissions can have disastrous effects on biological systems over time. This is a particular concern in the case of endocrine disrupters—industrial chemicals in a variety of modern plastics and consumer goods which appear to mimic hormones and connect with receptors in human beings and other organisms. Theo Colborn, Dianne Dumanoski, and John Peterson Myers, the authors of Our Stolen Future (1996), a groundbreaking study on certain synthetic chemicals and the environment, assert that “astoundingly small quantities of these hormonally active compounds can wreak all manner of biological havoc, particu-larly in those exposed in the womb.”

On another front, new research on particulates—microscopic particles released during incineration and combustion processes, such as those in power plants and automobiles—shows that they can lodge in and damage the lungs, especially in children and the elderly. A 1995 Harvard study found that as many as 100,000 people die annually as a result of these tiny particles. Although regulations for smaller particles are in place, implementation does not have to begin until 2005. Real change would be not regulating the release of particles but attempting to eliminate dangerous emissions altogether—by design.

Applying Nature’s Cycles to Industry

“Produce more with less,” “Minimize waste,” “Reduce,” and similar dictates advance the notion of a world of limits—one whose carrying capacity is strained by burgeoning populations and exploding production and consumption. Eco-efficiency tells us to restrict industry and curtail growth—to try to limit the creativity and productiveness of human-kind. But the idea that the natural world is inevitably destroyed by human industry, or that excessive demand for goods and services causes environmental ills, is a simplification.Nature—highly industrious, astonishingly productive and creative, even “wasteful”—is not efficient but effective.

Consider the cherry tree. It makes thousands of blossoms just so that another tree might germinate, take root, and grow. Who would notice piles of cherry blossoms littering the




ground in the spring and think, “How inefficient and wasteful”? The tree’s abundance is useful and safe. After falling to the ground, the blossoms return to the soil and become nutrients for the surrounding environment. Every last particle contributes in some way to the health of a thriving ecosystem. “Waste equals food”—the first principle of the Next Industrial Revolution.

The cherry tree is just one example of nature’s industry, which operates according to cycles of nutrients and metabolisms. This cyclical system is powered by the sun and con-stantly adapts to local circumstances. Waste that stays waste does not exist.

Human industry, on the other hand, is severely limited. It follows a one-way, linear, cradle-to-grave manufacturing line in which things are created and eventually discarded, usually in an incinerator or a landfill. Unlike the waste from nature’s work, the waste from human industry is not “food” at all. In fact, it is often poison. Thus the two conflicting sys-tems: a pile of cherry blossoms and a heap of toxic junk in a landfill.

But there is an alternative—one that will allow both business and nature to be fecund and productive. This alternative is what we call “eco-effectiveness.” Our concept of eco-effectiveness leads to human industry that is regenerative rather than depletive. It involves the design of things that celebrate interdependence with other living systems. From an industrial-design perspective, it means products that work within cradle-to-cradle life cycles rather than cradle-to-grave ones.

Waste Equals Food

Ancient nomadic cultures tended to leave organic wastes behind, restoring nutrients to the soil and the surrounding environment. Modern, settled societies simply want to get rid of waste as quickly as possible. The potential nutrients in organic waste are lost when they are disposed of in landfills, where they cannot be used to rebuild soil; depositing synthetic materials and chemicals in natural systems strains the environment. The ability of complex, interdependent natural ecosystems to absorb such foreign material is limited if not nonexistent. Nature cannot do anything with the stuff by design : many manufac-tured products are intended not to break down under natural conditions. If people are to prosper within the natural world, all the products and materials manufactured by indus-try must after each useful life provide nourishment for something new. Since many of the things people make are not natural, they are not safe “food” for biological systems. Products composed of materials that do not biodegrade should be designed as techni-cal nutrients that continually circulate within closed-loop industrial cycles—the technical metabolism.

In order for these two metabolisms to remain healthy, great care must be taken to avoid cross-contamination. Things that go into the biological metabolism should not contain mutagens, carcinogens, heavy metals, endocrine disrupters, persistent toxic substances, or bio-accumulative substances. Things that go into the technical metabolism should be kept well apart from the biological metabolism.

If the things people make are to be safely channeled into one or the other of these metabolisms, then products can be considered to contain two kinds of materials: biological nutrients and technical nutrients.

Biological nutrients will be designed to return to the organic cycle—to be literally consumed by microorganisms and other creatures in the soil. Most packaging (which makes up about 50 percent by volume of the solid-waste stream) should be composed of biological nutrients—materials that can be tossed onto the ground or the compost heap to






biodegrade. There is no need for shampoo bottles, toothpaste tubes, yogurt cartons, juice containers, and other packaging to last decades (or even centuries) longer than what came inside them.

Technical nutrients will be designed to go back into the technical cycle. Right now anyone can dump an old television into a trash can. But the average television is made of hundreds of chemicals, some of which are toxic. Others are valuable nutrients for industry, which are wasted when the television ends up in a landfill. The reuse of technical nutrients in closed-loop industrial cycles is distinct from traditional recycling, because it allows materials to retain their quality: high-quality plastic computer cases would continually cir-culate as high-quality computer cases, instead of being downcycled to make soundproof barriers or flowerpots.

Customers would buy the service of such products, and when they had finished with the products, or simply wanted to upgrade to a newer version, the manufacturer would take back the old ones, break them down, and use their complex materials in new products.

First Fruits: A Biological Nutrient

A few years ago we helped to conceive and create a compostable upholstery fabric—a biological nutrient. We were initially asked by Design Tex to create an aesthetically unique fabric that was also ecologically intelligent—although the client did not quite know at that point what this would mean. The challenge helped to clarify, both for us and for the company we were working with, the difference between superficial responses such as recycling and reduction and the more significant changes required by the Next Industrial Revolution.

For example, when the company first sought to meet our desire for an environmentally safe fabric, it presented what it thought was a wholesome option: cotton, which is natural, combined with PET (polyethylene terephthalate) fibers from recycled beverage bottles. Since the proposed hybrid could be described with two important eco-buzzwords, “natu-ral” and “recycled,” it appeared to be environmentally ideal. The materials were readily available, market-tested, durable, and cheap. But when the project team looked carefully at what the manifestations of such a hybrid might be in the long run, we discovered some disturbing facts. When a person sits in an office chair and shifts around, the fabric beneath him or her abrades; tiny particles of it are inhaled or swallowed by the user and other people nearby. PET was not designed to be inhaled. Furthermore, PET would prevent the proposed hybrid from going back into the soil safely, and the cotton would prevent it from re-entering an industrial cycle. The hybrid would still add junk to landfills, and it might also be dangerous.

The team decided to design a fabric so safe that one could literally eat it. The European textile mill chosen to produce the fabric was quite “clean” environmentally, and yet it had an interesting problem: although the mill’s director had been diligent about reducing levels of dangerous emissions, government regulators had recently defined the trimmings of his fabric as hazardous waste. We sought a different end for our trimmings: mulch for the local garden club. When removed from the frame after the chair’s useful life and tossed onto the ground to mingle with sun, water, and hungry microorganisms, both the fabric and its trim-mings would decompose naturally.

The team decided on a mixture of safe, pesticide-free plant and animal fibers for the fab-ric (ramie and wool) and began working on perhaps the most difficult aspect: the finishes,dyes, and other processing chemicals. If the fabric was to go back into the soil safely, it had





to be free of mutagens, carcinogens, heavy metals, endocrine disrupters, persistent toxic substances, and bio-accumulative substances. Sixty chemical companies were approached about joining the project, and all declined, uncomfortable with the idea of exposing their chemistry to the kind of scrutiny necessary. Finally one European company, Ciba-Geigy, agreed to join.

With that company’s help the project team considered more than 8,000 chemicals used in the textile industry and eliminated 7,962. The fabric—in fact, an entire line of fabrics—was created using only 38 chemicals.

The director of the mill told a surprising story after the fabrics were in production. When regulators came by to test the effluent, they thought their instruments were broken. After testing the influent as well, they realized that the equipment was fine—the water com-ing out of the factory was as clean as the water going in. The manufacturing process itself was filtering the water. The new design not only bypassed the traditional three-R responses to environmental problems but also eliminated the need for regulation.

In our Next Industrial Revolution, regulations can be seen as signals of design failure. They burden industry by involving government in commerce and by interfering with the marketplace. Manufacturers in countries that are less hindered by regulations, and whose factories emit more toxic substances, have an economic advantage: they can produce and sell things for less. If a factory is not emitting dangerous substances and needs no regula-tion, and can thus compete directly with unregulated factories in other countries, that is good news environmentally, ethically, and economically.

A Technical Nutrient

Someone who has finished with a traditional carpet must pay to have it removed. The energy, effort, and materials that went into it are lost to the manufacturer; the carpet becomes little more than a heap of potentially hazardous petrochemicals that must be toted to a landfill.Meanwhile, raw materials must continually be extracted to make new carpets.

The typical carpet consists of nylon embedded in fiberglass and PVC. After its useful life a manufacturer can only downcycle it—shave off some of the nylon for further use and melt the leftovers. The world’s largest commercial carpet company, Interface, is adopt-ing our technical-nutrient concept with a carpet designed for complete recycling. When a customer wants to replace it, the manufacturer simply takes back the technical nutrient —depending on the product, either part or all of the carpet—and returns a carpet in the cus-tomer’s desired color, style, and texture. The carpet company continues to own the material but leases it and maintains it, providing customers with the service of the carpet. Eventually the carpet will wear out like any other, and the manufacturer will reuse its materials at their original level of quality or a higher one.

The advantages of such a system, widely applied to many industrial products, are two-fold: no useless and potentially dangerous waste is generated, as it might still be in eco-efficient systems, and billions of dollars’ worth of valuable materials are saved and retained by the manufacturer.

Selling Intelligence, Not Poison

Currently, chemical companies warn farmers to be careful with pesticides, and yet the companies benefit when more pesticides are sold. In other words, the companies are





unintentionally invested in wastefulness and even in the mishandling of their products, which can result in contamination of the soil, water, and air. Imagine what would happen if a chemical company sold intelligence instead of pesticides—that is, if farmers or agro-businesses paid pesticide manufacturers to protect their crops against loss from pests instead of buying dangerous regulated chemicals to use at their own discretion. It would in effect be buying crop insurance. Farmers would be saying, “I’ll pay you to deal with boll weevils, and you do it as intelligently as you can.” At the same price per acre, everyone would still profit. The pesticide purveyor would be invested in not using pesticide, to avoid wasting materials. Furthermore, since the manufacturer would bear responsibility for the hazardous materials, it would have incentives to come up with less-dangerous ways to get rid of pests. Farmers are not interested in handling dangerous chemicals; they want to grow crops. Chemical companies do not want to contaminate soil, water, and air; they want to make money.

Consider the unintended design legacy of the average shoe. With each step of your shoe the sole releases tiny particles of potentially harmful substances that may contaminate and reduce the vitality of the soil. With the next rain these particles will wash into the plants and soil along the road, adding another burden to the environment.

Shoes could be redesigned so that the sole was a biological nutrient. When it broke down under a pounding foot and interacted with nature, it would nourish the biological metabolism instead of poisoning it. Other parts of the shoe might be designed as technical nutrients, to be returned to industrial cycles. Most shoes—in fact, most products of the cur-rent industrial system—are fairly primitive in their relationship to the natural world. With the scientific and technical tools currently available, this need not be the case.

Respect Diversity and Use the Sun

The leading goal of design in this century has been to achieve universally applicable solu-tions. In the field of architecture the International Style is a good example. As a result of the widespread adoption of the International Style, architecture has become uniform in many settings. That is, an office building can look and work the same anywhere. Materials such as steel, cement, and glass can be transported all over the world, eliminating depend-ence on a region’s particular energy and material flows. With more energy forced into the heating and cooling system, the same building can operate similarly in vastly different settings.

The second principle of the Next Industrial Revolution is “Respect diversity.” Designs will respect the regional, cultural, and material uniqueness of a place. Wastes and emis-sions will regenerate rather than deplete, and design will be flexible, to allow for changes in the needs of people and communities. For example, office buildings will be convertible into apartments, instead of ending up as rubble in a construction landfill when the market changes.

The third principle of the Next Industrial Revolution is “Use solar energy.” Human systems now rely on fossil fuels and petrochemicals, and on incineration processes that often have destructive side effects. Today even the most advanced building or factory in the world is still a kind of steamship, polluting, contaminating, and depleting the surrounding environment, and relying on scarce amounts of natural light and fresh air. People are essentially working in the dark, and they are often breathing unhealthful air. Imagine, instead, a building as a kind of tree. It would purify air, accrue solar income, produce more energy than it consumes, create shade and habitat, enrich soil, and change with the seasons.





Oberlin College is currently working on a building that is a good start: it is designed to make more energy than it needs to operate and to purify its own wastewater.

Equity, Economy, Ecology

The Next Industrial Revolution incorporates positive intentions across a wide spectrum of human concerns. People within the sustainability movement have found that three catego-ries are helpful in articulating these concerns: equity, economy, and ecology.

Equity refers to social justice. Does a design depreciate or enrich people and commu-nities? Shoe companies have been blamed for exposing workers in factories overseas to chemicals in amounts that exceed safe limits. Eco-efficiency would reduce those amounts to meet certain efficiency would reduce those amounts to meet certain standards; eco-effectiveness would not use a potentially dangerous chemical in the first place. What an advance for humankind it would be if no factory worker anywhere worked in dangerous or inhumane conditions.

Economy refers to market viability. Does a product reflect the needs of producers and consumers for affordable products? Safe, intelligent designs should be affordable by and accessible to a wide range of customers, and profitable to the company that makes them, because commerce is the engine of change.

Ecology, of course, refers to environmental intelligence. Is a material a biological nutri-ent or a technical nutrient? Does it meet nature’s design criteria: Waste equals food, Respect diversity, and Use solar energy?

The Next Industrial Revolution can be framed as the following assignment: Design an industrial system for the next century that

Introduces no hazardous materials into the air, water, or soil.

Measures prosperity by how much natural capital we can accrue in productive ways.

Measures productivity by how many people are gainfully and meaningfully employed.

Measures progress by how many buildings have no smokestacks or dangerous efflu-ents.

Does not require regulations whose purpose is to stop us from killing ourselves too quickly.

Produces nothing that will require future generations to maintain vigilance.

Celebrates the abundance of biological and cultural diversity and solar income.

Albert Einstein wrote, “The world will not evolve past its current state of crisis by using the same thinking that created the situation.” Many people believe that new indus-trial revolutions are already taking place, with the rise of cybertechnology, biotechnology, and nanotechnology. It is true that these are powerful tools for change. But they are only tools—hyperefficient engines for the steamship of the first Industrial Revolution. Similarly, eco-efficiency is a valuable and laudable tool, and a prelude to what should come next. But it, too, fails to move us beyond the first revolution. It is time for designs that are creative, abundant, prosperous, and intelligent from the start. The model for the Next Industrial Revolution may well have been right in front of us the whole time: a tree.

Source: Published in the Atlantic Monthly, October 1998. Reproduced with permission of the authors. See http://www.mcdonough.com .

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I. Sustainability and Stakeholders

Concern for the natural environment has become a pivotal issue for businesses today. Com-panies have found that legal approaches only go so far in helping managers deal with the complexity of the environment and they have come to rely more heavily on managerial discretion in dealing with it and the laws governing it. Managers, in turn, increasingly need to be able to interpret and apply laws appropriately. Moreover, they need to develop discre-tion because there is no formula—no single, universal rule—that will enable them to deal effectively with their problems. Managers must navigate uncharted territory by weighing competing interests to determine the best way to address complex business issues involving the natural world. All this means is that there is less need for regulation and more need for managers to have a clear understanding of ethics and a sense of responsibility for the influ-ence of their businesses on the natural environment. It seems then that responsible organiza-tion decision making in response to concerns relating to the natural environment is critical.

During the last 20 years, a number of arguments have emerged in support of the respon-sibility of business for the natural environment. Throughout this period, appeals have been made to both moral and economic considerations. One of the chief concerns has involved the legitimacy and standing of the natural environment as a stakeholder and the ways the environment relates to business and its various constituents. While the status of the envi-ronment as a stakeholder has not been fully resolved, a view of the firm emphasizing the interconnected relationship is helpful in addressing some of the more pressing concerns surrounding the interaction between human beings and the biosphere.

Addressing environmental concerns from a stakeholder perspective demands address-ing the so-called “separation thesis,” or notion that business and ethics are distinct func-tions. The term derives from an article by R. Edward Freeman published a decade after his seminal book, Stakeholder Management . In the article he asserted that one of the problems in business thinking is the view that functional areas can be isolated (made separate) from one another. In business, for example, marketing is thought to be separate from finance,which is separate from operations, and so on. The result is a mindset that views these enti-ties as discrete and decisions made in each domain as isolated from each another.

While, in many instances, an approach that compartmentalizes the functional areas of business seems to enhance the efficiency of the organization, it nevertheless misses the big picture. More troubling, it can leave out altogether certain functional areas that do not make obvious contributions to the bottom line. One of these is ethics. In terms of business and ethics, the separation thesis would have business and ethics as distinct and non-overlapping, with business concerned with the financial bottom line without consideration of ethics, and ethics concerned with the individual’s adherence to moral norms devoid of the contingencies of business.

The separation thesis in regard to business and ethics is mistaken chiefly because the firm’s bottom line is influenced by a multitude of interrelated decisions and effects, most

Reading 9-3

Taking Sustainability Seriously: An Argument for Managerial Responsibility

Tara J. Radin





of which are embedded with ethical concerns. The same holds true for issues involving the natural environment, where, again, the effects of decisions are multiple, interrelated, and embedded with ethical concerns.

This is particularly relevant as it pertains to the natural environment and concerns for sustainability. As businesses rely on the natural environment, deplete its resources, and interact with the biosphere, it becomes increasingly difficult to separate business concerns from concerns relating to the natural environment. Many of the effects might not be felt on the firm’s short-term bottom line, but they nevertheless represent a very real challenge to the firm’s long-term stability and success.

A. Three Fundamental Questions If the separation thesis is false and business and the natural environment are as tightly conjoined as business and ethics, then at least three questions about how firms can and/or should address the environment in their business decision-making arise. Consider the fol-lowing questions:

Question 1: Is it permissible for firms to contribute resources to environmental efforts?

This question addresses the permissibility of firms considering the environment in their strategic planning, in particular in regard to the environment’s influence on short-term prof-itability. It also introduces topics such as the legitimacy of redirecting funds that would otherwise be channeled toward stockholders or other direct business purposes, as well as the permissibility of investing in research for alternative energy sources, engaging in costly waste reduction procedures, manufacturing lower margin environmentally friendly prod-ucts, and so forth.

While a stockholder approach to this question might simply focus on the bottom line, a relational stakeholder approach devoid of the separation thesis would charge that fi rmsare morally responsible for the environment as a legitimate stakeholder. It would claim, moreover, that a firm has reciprocal relationships with a wide range of stakeholders who care about the environment and that these concerns warrant the firm’s attention to environ-mental issues.

Question 2: Is it consistent with existing laws for firms to contribute resources to environmental efforts?

This question asks whether or not it is legal for firms to contribute resources to environ-mental efforts. In doing so, it draws attention to laws related to corporate governance that allow for and require significant managerial discretion.

Since companies hire managers in lieu of robots to access the complex set of values and talents they possess, it is beneficial for the firm’s bottom line for decision-makers to be empowered to respond to their inherent moral and strategic intuitions. Firms have found that attention to such concerns is not inconsistent with profit-generation. To the contrary, as numerous examples illustrate, firms increase their profitability and place themselves at a competitive advantage when they take such considerations into account. As George W. Merck stated in 1950: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered that, the larger they have been.” The same holds true for their concern for the natural environment: it makes good business sense to support laws that encourage managerial discretion and creativity in regard to environmental responsibility.

Question 3: Could it be considered mandatory for firms to contribute resources to environmental efforts?

This question explores the difference between permissibility and obligation. It asks whether or not firms are obliged to support or enhance the environment and whether or not firms need to support other stakeholders who are concerned about the environment.





Again, firms are morally and legally responsible to stakeholders based, at least in part, on reliance considerations. Because society relies upon the natural environment and because some natural resources are finite, it is incumbent upon society to carefully steward natural resources. Since firms as an aggregate use substantial amounts of natural resources and because they often have the power, control, and finances to protect natural resources, they are obliged to use their wherewithal to protect natural resources for the benefit of the socie-ties in which the firms are embedded.

B. Three Guiding Principles The answers to questions such as those above indicate that environmental responsibility on the part of firms is desirable. These answers do not, however, specify how it should mani-fest itself or to what degree.

Principle 1: Firms are obliged to attend to the natural environment. The first principle is straightforward: Firms are obligated to pay attention to the envi-

ronment. How they do this is their choice. At a minimum, they must comply with existing rules, regulations, and industry requirements. The reasons for this mandate are twofold.

First, the pragmatic view: It is important for firms to attend to stakeholder concern to maintain satisfied stakeholders with whom they are engaged in relationships. Second, they have moral duties based on a principle of “do no harm.” Since firms are aware of their potential for causing harm and because they typically have the resources to mitigate that harm, they are required to do so.

Principle 2: The nature of a firm’s obligation is generally discretionary.According to this principle, the nature and extent of a firm’s obligations beyond com-

pliance is largely discretionary. The manner in which a firm responds to environmental concerns is therefore voluntary. Environmentally responsible efforts on the part of fi rmstend to be categorized along a spectrum, as displayed in Figure A , which is both normative and descriptive. At a minimum, firms are morally obliged to “do no harm” and remain in compliance with the law. While not specifically definite, this position encompasses the sort of exploitation that leads to tragedies such as Love Canal. It does not mean that firms are not permitted to partake in the earth’s resources, but that they should do so moderately and consistent with existing laws.

In the indeterminate middle is the notion that some firms choose to be proactive in decid-ing to prevent harm while others are merely reactive. The proactive approach considers

Do no harm

Firm’sapproach

Prevent harm Do goodFIGURE AShades of Green





investments in research, waste management, development of environmentally responsible products, and so forth. A number of companies have engaged in this approach, adopting systemic product and/or process redesigns to make positive contributions to society and the environment. While some companies engage in such undertakings because they consider it their moral obligation, others do so for self-interested reasons, finding that doing so gives them a competitive advantage.

Principle 3: There are circumstances that create mandatory obligations for firm behav-ior toward the environment beyond mere compliance.

The third principle suggests that there are situations where a firm’s obligation could be considered mandatory. Such situations are not the norm, but occur where a particular firm is specially suited for the role.

In general, it is unusual for positive obligations to be assigned—particularly to firms.Firms represent a voluntary contribution to the economy, that is, investors and owners are motivated to participate generally because of the opportunity to profit from certain enter-prises. It is therefore generally considered inappropriate to impose correlative burdens that might detract from investment in such enterprises and thereby interfere with the economy.

At the same time, someone must be made responsible when there is harm or potential harm. Economists such as Ronald Coase and Guido Calebresi have argued in favor of efficiency. Coase has argued that firms exist only because of their inherent efficiency. It would seem, then, that coordinated and/or collective corporate initiatives will and should arise when they are recognized as more efficient than costly alternatives. Further, Calebresi has argued that an effective and efficient way of dealing with harm is to impose the burden on the individual or entity who or which is in best position to discover the problem and most cheaply avoid harm. In fact, while it can be argued that we are all aware of the harm, corporations are in the best position to avoid the harm since they are the ones on the front line engaging in the most destructive behavior. It would thus seem logical and appropriate to impose on corporations a mandatory obligation beyond mere compliance when they are specifically in the best position to avoid the harm.

This leads to a set of criteria that can frame those situations in which there can be construed a mandatory obligation for environmental responsibility. First, there must be a specific need for change as manifest in actual or foreseeable harm. Second, there must be proximity through a direct or indirect link. The firm must be a participant in the problem or a direct beneficiary. Third is capability. The firm must have the ability to change prod-ucts or processes without it becoming overly cumbersome to the firm. Fourth and finally, there exists some sort of comparative advantage. The firm must be particularly situated to address the harm. When these four criteria are met, it can be said that a firm has a specificobligation to engage in environmentally responsible behavior to address harm with regard to the natural environment.

C. Sustainability and Fiduciary Duties Corporations are often resistant to the imposition of mandatory duties, particularly those that could be construed as conflicting with their other obligations—particularly their fidu-ciary duty to shareholders. For this reason, it is important to emphasize the connection between sustainability and fiduciary duty. Although it is possible to construe fiduciary duties narrowly in terms of profit-maximization, the reality is that there are many factors that can affect a firm’s bottom line—in the long if not short term. Further, sharehold-ers can be held accountable for corporate violations or neglect. On this basis, Professor Cynthia A. Williams and Professor John M. Conley have argued that managers are respon-sible to consider human rights. In the context of the natural environment, added to this





is the recognition that shareholders can be held legally liable for negligence. Since the 1990s, there has been criminal enforcement of American environmental statutes.

The inescapable reality is that corporate responsibilities to the natural environment can no longer be viewed as anything but mandatory—the environment is a business concern. If for no other reasons, corporations have to be mindful of sustainability concerns in light of their reliance on the natural environment. As Bruce Ledewitz warns, “The state of the world is not good, or, since the world will be here long after we are gone, I should say the state of the world upon which people depend is not good. Long predicted and feared envi-ronmental problems are now cascading upon us. Not a day goes by, it seems, without news of catastrophic global warming or collapsed fisheries or depleted resources or diminished topsoil or lack of fresh water or diminished biological diversity—and on and on.”

While the manner in which a corporation responds to these responsibilities remains vol-untary, the presence of a duty must be viewed as mandatory. It can be argued that there is a moral duty to the environment. Beyond that, failure to address environmental concerns can result in financial distress for the firm, including bankruptcy. If it is the fiduciary responsi-bility of managers to protect the interests (and profits) of shareholders, the only way they can do that is to consider how it affects and is affected by the natural environment because stakeholders affect and are affected by the natural environment. Not only can the corpo-ration’s approach to sustainability influence short- and long-term profits, the corporation faces expensive tort litigation and shareholders face criminal sanctions if the corporation does not behave responsibly.

D. Stakeholders, Sustainability, and Citizenship In addressing environmental responsibility, the term most commonly used today is sus-tainability . Sustainability refers to the integrated, systemic, lasting effect of attention to the natural environment and encompasses everything from the local neighborhood to the planet and the well-being of all living things. The emphasis lies on investments in the future rather than on one-time actions. Sustainability is a process; environmental responsibility is about beginning or participating in this process of addressing environmental concerns. Sustainability is inherently connected to stakeholder thinking (particularly the relationship view) in that both build upon existing relationships, interconnectedness, and synergies.

The key here lies in the notion of “systems thinking,” which has recently taken hold in contemporary business scholarship. Systems thinking provides both the rationale for why corporations should be paying attention to sustainability and how they should go about doing so. Each corporation is itself embedded in a web of relationship and at the same time part of a “networked economy.”

Stakeholder thinking and sustainability are also connected to the concept of “citizen-ship.” Citizenship emphasizes the responsibilities of individuals in social (community-based) and political systems. An individual derives both rights and responsibilities from his or her affiliation with particular communities or social systems. The protection of the nonhuman, natural environment, as a resource shared by a social system or social systems, becomes a shared responsibility.

Individual citizenship has given way to corporate citizenship. Borrowing from common understandings of individual citizenship, the notion of corporate citizenship suggests that business organizations have rights and responsibilities comparable to those of individuals. This means that corporate citizens are expected to contribute to the communities in which they operate and to be considerate of their interaction with other community members. By implication, this means that, since community members share the environment, corporate citizens should be respectful of them in their use of natural resources and reliance on the





environment—if not because of their own feelings toward the environment, then as a result of their community’s interdependent and respect for the environment. Progressive interpre-tations of the law are increasingly reflecting consideration of stakeholder interests.

II. Stakeholders, the Environment, and Good Business Decision Making

The contribution of stakeholder thinking to developing an approach to environmental responsibility is to show how obligations can be assigned to firms. Specifically, fi rmshave legal duties to some stakeholders in some specified circumstances. They have moral responsibilities to stakeholders in general. Whereas it is left to the discretion of fi rms to determine how they will handle these responsibilities, there is evidence that attention to stakeholders can contribute to profitability.

Specific examples illustrate how environmental responsibility can turn into a competi-tive advantage. Unpacking fundamental assumptions about business, humanity, and the environment reveals how shifting mental models can open up tremendous new opportuni-ties for business.

A. The Bottom of the Pyramid C.K. Prahalad argues that the often assumed target of business has been misplaced. He points out that most businesses focus on providing goods and services to the middle and upper class, whereas the poorest socioeconomic group holds the key to tremendous oppor-tunity. In economic terms, the pyramid, as illustrated in Figure B , refers to the distribution of wealth in society. According to Prahalad, the poor represents a virtually untapped resource:

If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up. Four billion poor can be the engine of the next round of global trade and prosperity…. What is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable.

First, there are many more members of this class at the bottom of the pyramid than of the class of wealthy people at the top. Second, particularly from a global perspective, many

Upper class

Middle class

Poor

FIGURE BEconomic Pyramid





of the poorest people have fundamental needs that can be addressed without huge capital investments. Third, elevating the standards of the socioeconomic disadvantaged can help to transform societal drains into societal contributions.

Muhammad Yunus has demonstrated the tremendous power of this proposition. In the 1970s, Yunus found the Grameen Bank, a microfinance organization that started in Bangladesh. The purpose of this enterprise is to elevate the status of the impoverished by making small loans without requiring collateral. The underlying premise is that the poor have skills that are underutilized because of their lack of capital.

By infusing capital into poor communities, the Grameen Bank has both elevated local conditions and profited significantly. The bank’s assets are experiencing tremendous growth—in the three years between 2002 and 2005 the bank’s assets nearly doubled from $391 million to $678 million. The bank boasts 5.58 million borrowers, 1,735 branches, and a 21.22 percent return on equity.

B. Cradle-to-Cradle William McDonough offers an alternative perspective on how organizations can approach sustainability with an eye toward profits. He advocates what he calls a “cradle-to-cradle” approach. This translates into comprehensive redesign of products and/or processes. The result is far-reaching. In contrast with the traditional “cradle-to-grave” perspective whereby resources are used once and then discarded, the cradle-to-cradle approach advocates the use of perpetually recyclable or compostable materials. According to McDonough, “Pollu-tion is a symbol of design failure.”

Small and large companies alike have adopted McDonough’s approach to sustainable business. One of his most famous projects in which he was involved was a site restora-tion of Ford Motor Co.’s historic River Rouge Complex in Michigan. Kodak’s single-use camera is another example of cradle-to-cradle product design. Kodak controls the entire lifecycle of the cameras and, even through recovery, keeps most of the materials traveling in a continuous loop.

Cradle-to-cradle design reflects a reconceptualization of what an externality is. Tradi-tional manufacturing has emphasized cost reduction by externalizing nonessential proc-esses. Waste, for example, has traditionally been externalized as pollution. McDonough espouses the exact opposite: he argues that companies should take ownership of their proc-esses and invest in ways to internalize processes so as to minimize waste. Whereas compa-nies fear short-term costs, McDonough argues that long-term profits will follow in addition to positive contributions toward sustainability.

C. Restorative Commerce An arguably even more dramatic approach lies in aiming for “restorative” commerce. According to Ray Anderson, founder and former CEO of Interface, Inc., a global leader in the design, production, and sale of carpeting, “[B]eing restorative means to put back more than we take, and to do good to the Earth, not just no harm.” This is his long-term goal for Interface.

Interface has not always been so “green.” Although Interface today is recognized as a leader in sustainable business, it was only about a decade ago that Anderson spearheaded an effort to harness technology and transform processes. The catalyst for this initiative was Paul Hawken’s The Ecology of Commerce . Hawken’s words stunned him into recognizing his company’s destructive role toward the environment and he set about reducing his company’s petroleum dependence. For Anderson, this sort of approach is not just the morally right thing to do; it is also good for business.





In 2005, Interface introduced a production process that enables the company to recycle old carpeting. Interface considers it a “dream come true…. We can now mine the landfillinstead of siphoning off more oil. But it’s also good business. Now, we’re not just willing to take back old carpet, we’re eager to take it because Cool Blue [the production equipment responsible for the recycling process] can turn it into profit.”

This is Anderson’s legacy for Interface: his company has turned a product into a serv-ice. Instead of selling carpet tiles, Interface now leases them; as they wear down, they are replaced and the old tiles are remanufactured, as part of an endless loop. Waste has been reduced and this has dramatically decreased the company’s reliance on raw materials.

The experience at Interface has been tremendously positive. In the five years between 2000 and 2005, Interface tripled its use of recycled or biobased raw materials and grew its use of renewable energy from 6.4 percent to 21.7 percent. At the same time, it cut its waste (sent to a landfill) by 50 percent. Net sales are growing and the company is looking healthier and healthier.

The experience at Interface underscores the tremendous value—psychically, environ-mentally, and financially—of the greening of business.

D. Bottom Line All of these examples reflect the value of sustainable business to the financial bottom line of organizations, communities, and the globe. The bottom line for us is that our businesses do not need laws in order to provide for sustainability; they need good business sense. While laws might have failed businesses, the inherent problem is not the law—it is the reli-ance of businesses upon laws and the expectation that legislation can and should determine what responsible decision making entails.

Moving forward, it is possible to continue to strive to improve the legal framework, but there will virtually always be an inevitable “lag effect.” An alternative is thus to endeavor to influence the norms of acceptable and expected business behavior. Fiduciary duties, pre-scribed by law, are interpreted according to existing norms. In affecting these norms, then, the fiduciaries of corporations become responsible for living up to and abiding by current societal standards and expectations.

Environmental responsibility is about justice not charity. As a corporate citizen that can and does affect the lives of others, the firm has an obligation to act as a citizen by acting responsibly vis-à-vis the environment. Further, good business decision making (that can translate into profits) demands attention to stakeholder concerns about issues such as the environment.

It is important to keep in mind that, while corporations are legal fiction, the individuals who populate them are very real. While the corporation might not “care” about the environ-ment, its stakeholders are dependent upon its survival. Sustainability is not just the way of the future; it is what will provide a future.

Source: Copyright © Tara Radin. Reprinted by permission of the author.

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