unit 3, gre401

© Jeremy B Williams 2012

Sustainable Development and the Market

Sustainable Development and Competitive Advantage

Unit 3, Part 1:


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Outline1) What is the appropriate domain of the

market?2) Ecological consciousness and ‘market

maturity’3) The evolution of company environmental

performance4) A new corporate accountability


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1) WHAT IS THE APPROPRIATE DOMAIN FOR THE MARKET?

• SD is largely incompatible with neo-classical economics

• SD is NOT incompatible with capitalism


The power of the market

• The market mechanism – powerful, dynamic. Harnessed appropriately, can be the catalyst for change

• The challenge is to ‘incentivise’ economic agents so that economic activity proceeds along ecologically sustainable lines.

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A word or two from the forefather of modern capitalism

• ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ Adam Smith

Wealth of Nations, 1776


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Markets vs intervention• Each has drawbacks … tendency for moral,

distributional, sustainability issues to be overlooked vs allocative inefficiencies

• Belief systems vary between different societies and cultures – some rely more on markets, others place greater reliance on state institutions


No magic formula

• The art is to balance price-determined outcomes and price-influencing decisions

• Continuous adjustment should ensure the gradual evolution of an appropriate market domain.

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2) ECOLOGICAL CONSCIOUSNESS AND ‘MARKET MATURITY’

• The scale of market intervention will be a reflection of the political economy in the country concerned

• More intervention may be necessary in some countries compared to others, and some countries may have more than is necessary.


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The transition from industrial capitalism to natural capitalism

• The more ‘mature’ the market and its institutions, the more likely it is that businesses will be in the process of making the transition to natural capitalism from industrial capitalism


Intervention is less likely when …

• Businesses are engaging with the natural environment and not behaving in a reactionary manner

• They are proactively seeking competitive advantage by going beyond compliance with environmental regulations

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3) THE EVOLUTION OF COMPANY ENVIRONMENTAL PERFORMANCE

• Public pressure and stricter regulations have changed the way firms conduct business

• What started with compliance to environmental standards, has changed to environmental risk management and, more recently, to a focus on long term sustainable development strategy.

Source: International Institute for Sustainable Development http://www.bsdglobal.com/sd_journey.asp

http://www.bsdglobal.com/sd_journey.asp


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Regulatory compliance• Compliance can create unexpected

costs; e.g. costs associated with remediation, clean-ups and penalties for breaches of legislation

• To avoid liabilities, businesses put in place remediation and abatement measures

• This reactive approach often precludes the establishment of efficient cost control systems and growth strategies.

• Operating in ‘compliance’ mode, businesses look upon environmental protection as an unnecessary burden that reduces competitiveness.




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Environmental risk management• Liability for the cost of claims prompts

businesses to opt for a more proactive approach

• To improve their control of environmental performance, some companies conduct environmental health and safety (EHS) assessments, develop environmental policies, and implement environmental management systems (EMSs)

• Techniques such as pollution prevention or recycling are used to put policy objectives into practice, which can also serve to reduce operating costs.Source: International Institute for

Sustainable Development http://www.bsdglobal.com/sd_journey.asp



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Sustainable business strategies• At the firm level, SD means adopting

strategies that meet the needs of the business and its stakeholders today, while protecting, sustaining and enhancing the human and natural resources that will be needed tomorrow

• Initially, sustainable development strategies might be regarded as costly

• Results include new business processes with reduced external impacts, improved financial performance, and an enhanced reputation among stakeholders.


Supply side factors

Demand side factors



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4) A NEW CORPORATE ACCOUNTABILITY

• In practical terms, corporate accountability now amounts to more than maximising shareholder profit

• For proactive and successful companies, it is about maximising stakeholder value – a different goal with a broader set of beneficiaries (see Unit 4)

• Inevitably, this involves the recognition of a triple bottom line that focuses on people and the planet as well as profit.


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The triple bottom line• “Is it progress if a cannibal uses a

fork?” – Stanislaw Lec

John Elkington

Elkington (1997) asks this question in the context of 21st century capitalism as he ponders whether holding corporations accountable to a ‘triple bottom-line’ of economic prosperity, environmental quality, and social justice constitutes progress.


Sustainable Development and the Market


Unit 3, Part 2:


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Outline1) The business case against sustainable

development2) The business case for sustainable development3) Case study: Interface4) Summary and conclusions


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1) THE BUSINESS CASE AGAINST SUSTAINABLE DEVELOPMENT

• The evolution of company environmental performance indicates that a commitment to SD makes a lot of sense from the supply-side; i.e. it can reduce a firm’s costs of production

• Hawken, Lovins and Lovins (1999) provide numerous examples to support this

• Yet this is something not always appreciated by those in the business community who oppose SD.


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The sceptics• These academics argue

that the trend towards greater corporate Corporate Social Responsibility (CSR) is a mistake because it distorts market forces and increase firms’ costs

• They also challenge the view that the world is facing worsening social and environmental problems.

Professor David HendersonVisiting Professor, Westminster Business School, UK; former Head of Economics & Statistics Department, OECD

View Prof Henderson’s paper at: http://www.nzbr.org.nz/documents/publications/publications-2001/misguided_virtue.pdf

Professor Steve H. HankeSenior Fellow at the Cato Institute and Professor of Applied Economics at the Johns Hopkins University

http://www.companydirectors.com.au/conference/0cont/b/gl/henderson.html

http://www.jhu.edu/news_info/news/faculty/images/hanke.gif

http://www.nzbr.org.nz/documents/publications/publications-2001/misguided_virtue.pdf

http://www.nzbr.org.nz/documents/publications/publications-2001/misguided_virtue.pdf


Note well:

• Corporate Social Responsibility (CSR) is not synonymous with Sustainable Development

• Those who do not have a deep understanding of sustainability tend to use the terms interchangeably

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Spotting the difference

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Depletes non-renewable resources at rates that do not

exceed the rate of development of renewable substitutes

Exploits renewable resources at rates that do not exceed the ability of the ecosystem to regenerate these resources

Limits resource use to rates that allow waste to be absorbed by

the ecosystem

Business as usual

Social responsibility

Corporate sustainability Corporate social responsibility


‘Responsible’ business?

• BP and Shell issue CSR reports, but oil is to remain dominant source of energy through to 2050

• BAE has announced it has a new range of environment-friendly weapons, including ‘lead free’ bullets, rockets with reduced toxins and grenades that produce less smoke

• BAT issues a Sustainability Report, but still contributes to the premature death of millions of people

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Corporate sustainability

• Engaging in strategies and practices that aim to meet the needs of company stakeholders today, while seeking to protect, support, and enhance the human and natural resources that will be needed in the future

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Porter and Reinhardt (2007)• "Companies that persist in treating climate

change solely as a corporate social responsibility issue, rather than a business problem will risk the greatest consequences”

• Porter and Reinhardt believe that businesses need to look both ‘inside out’ (the company’s impact on climate) and ‘outside in’ (how climate regulatory change may affect the business environment in which the company competes).

Michael E. Porter and Forrest L. Reinhardt (2007), A Strategic Approach to Climate, October, Harvard Business Review.

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Michael Porter

Forrest Reinhardt


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• WBCSD's 2001 publication The Business Case for Sustainable Development suggests new governance strategies to accelerate the transition toward sustainable development in the form of 10 building blocks

2) THE BUSINESS CASE FOR SUSTAINABLE DEVELOPMENT

http://www.wbcsd.ch

http://www.wbcsd.org/Plugins/DocSearch/details.asp?strDocTypeIdList=2&DocType=2&StrCharValList=&DateStart=01.01.1753&DateEnd=31.12.9999&MenuId=ODU&ObjectId=275&URLBack=/templates/TemplateWBCSD2/layout.asp?strDocTypeIdList=2&DocType=2&StrC


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The WBCSD’s 10 building blocks1. The market

Encourages the efficiency and innovation necessary for sustainable human progress

2. The right frameFull-cost pricing, dismantling of perverse subsidies, effective use of tax system, reduction in ‘command-and-control’ mechanisms

3. Eco-efficiency‘The delivery of competitively priced goods and services that satisfy human needs and improve quality of life, while progressively reducing ecological impacts and resource intensity to a level at least in line with the earth’s estimated carrying capacity.’


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The WBCSD’s 10 building blocks4. CSR

‘the commitment of business to contribute to sustainable economic development [by] working with employees and their families, the local community and society at large to improve their quality of life.’

5. Learning to changeCorporate concern for the ‘triple bottom line’ requires radical change throughout a firm

6. From dialogue to partnershipsReduces misunderstanding, risk and liability, and increases public acceptance of corporate activity


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7. Consumer choiceInformed, responsible consumer choice helps achieve sustainability

8. InnovationAllows the global economy to depend more on the progress of technology than on the exploitation of natural capital

9. Reflecting the worth of the earthProper valuation of natural capital to maintain biodiversity

10. Making markets work for allPoverty is a major contributor to environmental degradation. LDCs must have equitable access to world markets

The WBCSD’s 10 building blocks


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The Johannesburg Summit

• At the World Summit on Sustainable Development (September 2002) the emphasis was on ‘walking the talk’

• How successful 10 years on?

http://news.bbc.co.uk/2/hi/in_depth/world/2002/earth_summit/

http://www.johannesburgsummit.org/

http://www.wbcsd.ch/summit/walking.htm


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3) CASE STUDY: INTERFACE• Interface is the world’s leading commercial carpet

and interior fabrics manufacturer• Sales in more than 100 countries and manufacturing

facilities at 23 sites on four continents• For the first 21 years of Interface's existence, no

thought was given to ecological implications of their production, except to obey laws and regulations

• Things changed after Ray Anderson read The Ecology of Commerce (Paul Hawken, 1993)

http://www.interfacesustainability.com/

http://www.interfacesustainability.com/


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A model of sustainability?

“Not one company on earth is truly sustainable.”

Ray Anderson, CEO, Interface, and author of Mid-Course Correction: Toward A Sustainable Enterprise

Interface’s Commitment

“Climbing Mount Sustainability”

http://www.interfacesustainability.com/commit.html



http://www.bigpicture.tv/videos/watch/e00da03b6




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4) SUMMARY AND CONCLUSIONS

• ‘Capitalism, as practiced, is a financially profitable, non-sustainable aberration in human development. What might be called ‘industrial capitalism’ does not fully conform to its own accounting principles. It liquidates its capital and calls it income. It neglects to assign any value to the largest stocks of capital it employs – the natural resources and living systems, as well as the social and cultural systems that are the basis of human capital.’

Hawken, Lovins and Lovins (1999), Natural Capitalism, p. 5.


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Case Study:

“The good, the bad, and the ugly”



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Think


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Sustainable development in practice

• Consider the sustainable development journey …

• Which companies are reactive, which are proactive?




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• Which companies have a good record?

• Which companies have a bad record?

• Which are plain ugly?


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Read


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• PowerPoint slides for Unit 3• Study Guide notes for Units 2 and 3,

especially:• Economic man, cleaner planet• The business case for sustainable de

velopment

http://www.econ.jhu.edu/people/ccarroll/Courses/365/Topics/3-JusticeAndEconomics/B-Externalities/ReadingsRequired/EconomicManCleanerEnvt.txt

http://www.wbcsd.org/web/publications/business-case.pdf

http://www.wbcsd.org/web/publications/business-case.pdf


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Discuss


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• A company that is well advanced on its sustainable development journey

• A company that hasn’t made much progress at all

• A company that hasn’t even started on the journey!

Consider, for example, …


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Deliver


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Prepare a 10 minute presentation providing an example (and critique) of each

Go ahead… make my

day!

unit 3, gre401

Education

market jeremy b williams

environmental policies

environmental health

environmental standards

market maturity3

scale of market intervention

sustainable lines

natural capitalism