What is sustainability?

Session 1

• Introduction to the course• What assumptions do we live with?• Public goods, private goods and externalities• Market failure and government failure• Sustainable development, corporate

sustainability

Course objectives

• develop an understanding of the emerging national/global sustainable development trends and their relevance to business management

• develop stakeholder sensitivity to be able to drive management decisions to create shared value for inter and intra generational equity

• develop a familiarity with the various tools and frameworks that enable integration of sustainable development concerns into business decision making

Evaluation

• Class participation (and presentation) 10%• Concept based examination 30%• Term paper – (group) 20%• End Term (Case, Descriptive questions) 40%11. Groups- first roll no. belongs to group 1 and so onGroup 1 presents case analysis during session 3Group 11 discussed ideas about term paper in session 3Submission of term paper on August 5

Why this course needs to be studied?

• Or why not?

Course contents- sessions 1-6

• What is sustainability• Problems in achieving sustainability• Business case for sustainability: • Business environment: Drivers of

sustainability• Stakeholders perspectives on sustainability• Multi-stakeholder partnerships

Session details – sessions 7-13• Tools for managing sustainability• Markets for sustainable products• Sustainability metrics• Sustainability reporting• Implementing a sustainability management

system• Corporate social responsibility• Towards a sustainable future: how firms can

contribute to a sustainable habitat

Focus of this session

• How to reconcile between issues of growth, environment (sustainability)and market/exchange

Key incidents: Union Carbide, 1984• Over 500,000 people were exposed to methyl isocyanate (MIC) gas and other

chemicals. The toxic substance made its way into and around the shanty towns located near the plant.

• The official immediate death toll was 2,259. The government of Madhya Pradesh confirmed a total of 3,787 deaths related to the gas release. A government affidavit in 2006 stated that the leak caused 558,125 injuries, including 38,478 temporary partial injuries and approximately 3,900 severely and permanently disabling injuries Others estimate that 8,000 died within two weeks, and another 8,000 or more have since died from gas-related diseases.

• The cause of the disaster remains under debate. The Indian government and local activists argue that slack management and deferred maintenance created a situation where routine pipe maintenance caused a backflow of water into a MIC tank triggering the disaster. Union Carbide Corporation (UCC) contends water entered the tank through an act of sabotage.

Key incidents: Exxon Valdez oil spill• March 1989, supertanker Exxon Valdez ran aground on

Bligh Reef in Prince William Sound, Alaska, spilling 11 million gallons of crude oil into the sea.

• If in addition to the out-of-pocket losses suffered by fishermen, resort owners, tour guides, recreationists and others directly and indirectly harmed by the accident, Exxon would be forced to pay also for lost nonuse or existence values, the compensation would be raised substantially. This possibility focused the attention of Exxon and many other companies on existence values and the contingent valuation method.

From Paul Hawken- the ecology of commerce, 1998

• If all the firms adopt practices of ‘leading’ companies, the world would still be heading for a disaster.

• Need to ensure that each act is inherently sustainable and restorative

• Need to focus on principles such as reduction of consumption of natural resources, provide stable employment, ensure self-actuated progress to sustainability (as opposed to regulated), rely on current income, exceed sustainability by restoring past degradation of habitat.

• How do we measure performance- growth/utility

• How do we define the purpose of the firm• What is sustainability, how has the concept of

sustainability evolved• Problems of commercial view of markets in a

country like India

GDP based economic focus• Case of two economies• Focus only on monetised activities• Fiction of the nation state- positive view of

demographic dividend?- are we too many?• Confusing between stock and flow

– Very high resource consumption in some parts of the world- US? Bangladesh? Amazon Basin? India?

• De-linking sustainability from consumption, and waste- hence conceptualization of alternative economics based on sustainability

Congestion on roads, air pollution

• Estimated 1 billion cars in 2010• Projected 3 billion cars in 2035• Currently more cars in US than drivers• Car sales in India 700,000 per year, in 2010

about 2 million an year.• Search for innovative solutions for parking

etc.-(People adapting to technology, rather than the other way around)-limited thinking?

Are we locked into certain ways of thinking? Assumptions?Moving beyond thinking out of the box about the box

• Rational thinking, ceteris paribus, – Graham T Allison– Frameworks in strategy– Thinking silos- eg. US vs Japanese– Invisible hand, counter- lighthouse example

• Assumptions about the firm as a perpetual entity• Why do we feel happy when the stock markets

rise? Role of media in perpetuating ways of thinking

Resulting implications from the “fiction of a firm”

• Explicit shift to a profit motive- the organized and concerted actions of a group of individuals, over a long period of time, institutionalization of the legitimacy of the for-profit-firm

Treadmill of production (Schnaiberg,1997)

• Capitalist induced production• Investor driven focus on profits and growth• Competition for markets, resources, reducing

margins• Political bargaining for better economics• Either exit or continue to struggle• Lower prices stimulate more demand, but tech

advances continue to maintain efficiencies• Continue to ignore the environment• Invisible elbow (Jacobs,) instead of invisible hand

What are the assumptions and implications of the current economic

system• Market based on exchange• Products based on individual incentives

– Assumption that costing is right and hence prices would provide the right incentives for the invisible hand

• At the firm level also, assumption that markets would take care of the costs

• Markets would weed out the less desirable firms and products

Problems based on the current economic system/markets

• Our consumption on public goods- beyond entitlement

• Tragedy of the commons• Problem with valuing resources which do not

allow costing• Problems of market failure

Characteristics of goods

• Rivalrous• Excludability• Public goods: non rivalrous, non excludable

(additional consumers may be added at zero marginal cost)

• Private goods: rivalrous, excludable• Impure public goods- mix of both

Classification of goods

Excludable Non-excludable

RivalrousPrivate goods

food, clothing, cars, parking spaces

Common goods(Common-pool resources)

fish stocks, timber, coal

Non-rivalrous

Club goodscinemas, private parks, satellite

television

Public goodsfree-to-air television, air, national defense

Demand and supply of public goods (Buchanan, 1967)

• If each person’s contribution is independent public goods are underprovided

• If the public good is recognized as important individuals may be willing to trade their other private goods to allocate responsibility for producing the public goods

Provision of public goods- the free rider problem

• Everyone’s child is no one’s

Common-pool resource (CPR), also called a common property resource

• A type of good consisting of a natural or human-made resource system (e.g. an irrigation system or fishing grounds), whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use. Unlike pure public goods, common pool resources face problems of congestion or overuse, because they are subtractable.

• A common-pool resource typically consists of a core resource (e.g. water or fish), which defines the stock variable, while providing a limited quantity of extractable fringe units, which defines the flow variable.

Externalities

• The cost or benefit that affects a party who did not choose to incur that cost or benefit (Buchanan and Stubblebine, 1962)

Types of externalities• Negative production externalities- eg.

pollution, “tragedy of commons”• Negative consumption externalities: eg.

shared costs of smoking• Positive production externalities- e.g

demonstration effect by MNCs to local firms• Positive consumption externalities- positive

network externalities

Solution to problems of negative externalities

• Pigovian taxes or subsidies intended to redress economic injustices or imbalances. (Pigou, 1932)

• Regulation to limit activity that might cause negative externalities- (problem of knowledge gaps)

• Government provision of services with positive externalities (Who pays for that? Funds diverted from?)

• Lawsuits to compensate affected parties for negative externalities (how to determine value?, who is responsible?)

• Mediation or negotiation between those affected by externalities and those causing them (knowledge gaps, transaction cost)

• Pigouvian logic of tax: If the marginal private benefit is more than the managerial social benefit, the government can increase welfare by taxing, and if the private marginal benefit is less than the marginal social benefit, it is socially beneficial to offer a subsidy. This takes care of the logic of positive and negative externalities.

Coase’s critique of Pigouvan taxes (Coase, 1960)

• ‘Coase Theorem’ - efficiency is independent of the initial endowment of liability

• an efficient level of harm would be reached without the requirement of direct government action if parties could costlessly bargain (and property rights were well defined, and people act rationally),.

• that the Pigouvian prescription to externalities was entirely misguided as this perspective failed to take into account the reciprocal nature of harm

Market failure• A situation in which the allocation of goods and

services is not efficient. That is, there exists another conceivable outcome where an individual may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal).

• Market failures are often associated with time-inconsistent preferences, information asymmetries, non-competitive markets- deadweight (Stiglitz, 1998), principal–agent problems, externalities, or public goods(Stiglitz, 1989)

Tragedy of commons (Hardin, 1968)

• Individuals acting independently and rationally according to their self-interest behave contrary to the best interests of the whole group by depleting some common resource. - related to free rider problem

• "Commons" in this sense has come to mean such resources as atmosphere, oceans, rivers, fish stocks, the office refrigerator, energy or any other shared resource which is not formally regulated; not common land in its agricultural sense.

Issues in emerging economies like India

• Economy not fully monetised– Social and community work

• Patron client relationships and interlocked factor markets

Along with market failure, government failure also occurs

• Failure in appropriate regulation- eg. Regulation and control of mines

• Failure in providing laws that balance out between groups that are differently affected

• Hence need for others- individuals, institutions, organizations to be proactive

Definition of sustainable development

• “Development that meets the needs of the present without compromising the ability of future generations to meet their needs (WCED, 1987:43)– Implications of this definition?

Critiques• The definition considered too anthropocentric- as it

places the economic and social needs of the human society over the natural environment (Vucetich and Nelson, 2010)

• The aspect of economic value of the ecosystem as specified in (WCED 1987, page 147) is an attempt to trivialize the environment

• What about human resources? (Farver, 2013)

• Managing tradeoffs between current and future, and between stakeholders

Value of the natural environment

• Ecological and other perspectives are critical of the tendency to put an economic value to bio-diversity (Giddings et al, 2002) or that the value derived has any sanctity (Diamond and Hausman, 1994)

• Use values and non use values• Non use values of natural environment may imply

recreational value as well as non-recreational value (Giddings et al, 2002)

• Recreational value can be considered as part of the benefits that can be excluded.

Valuing the natural environment• The non use value is usually derived from the

contingent valuation method which mainly look at the hypothetical price that people are willing to pay for public good eg. improvement in environmental conditions measured through a survey, or even measured for instance in Hotelling’s travel cost method or the existence value that people would be assigning to the continued existence of natural phenomenon (Krutilla, 1967). There could be some value even beyond this.

• Use of revealed preferences, hedonic pricing (eg. hedonic wage analysis for risky jobs that reduce life spans)

Definition of corporate sustainability (WCED, 1987)

• Focus on three basic resource areas that are impacted by any company (Farver, 2013)

– Environmental– Social– Economic

Overlapping themes of the sustainability paradigm

Corporate sustainability- operationalizing definition (Farver, 2013)

• Balancing environmental stewardship, social wellbeing and economic prosperity while driving towards a goal of long term success for the health of the company and its stakeholders.– Sustainable corporation- transparent in

management of these responsibilities and is held accountable to its stakeholders for its results

‘Positive’ approach

• Negative effects can be removed, problems can be resolved in ways such that profitability of all concerned improves

Hart 1995: Natural Resource View of the firm

• Focus on three interconnected strategic elements of – Pollution prevention (minimise emissions,

effluents and waste)– Product stewardship (minimise life cycle cost of

products) and – Sustainable development (minimise environmental

burden of firm growth and development)• Concept of ecological capital (Coleman, 1988)

• Western world- system built out of exploitation= Huberman, Lewis, Marx, Gandhi, Veblen

• Earlier focus on exploitation of nature– Eg. British introduction of Anthropology as one of

the earlier subjects in Indian universities.• The conservation movement- in the 1800s-

forerunners of the modern environmentalism- Emerson, Thoreau

Building Sustainability or resilience?

• Resilience- seen as the capability of a system to be resistant or responsive to change (UNISDR, 2002)