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Chapter 9: Business and Environmental Sustainability Chapter Objectives After reading this chapter, you will be able to: 1. Explain how environmental challenges can create business opportunities. 2. Describe a range of values that play a role in environmental decision making. 3. Explain the difference between market-based and regulatory-based environmental policies. 4. Describe business’s environmental responsibilities that flow from each approach. 5. Identify the inadequacies of sole reliance on a market-based approach. 6. Identify the inadequacies of regulatory-based environmental policies. 7. Define and describe sustainable development and sustainable business. 8. Highlight the business opportunities associated with a move towards sustainability. 9. Describe the sustainable principles of eco-efficiency, biomimicry, and service. Opening Decision Point When is Building Design and Construction an Ethical Issue? With only some exceptions, every business operates in and out of a physical location. For even small businesses, constructing a building can represent a multi-million dollar investment, often the largest single investment a company makes. For large multinational corporations, building construction can cost billions of dollars. But based on what grounds, based on what criteria, should a business design and construct its buildings? One increasingly prominent set of standards are supported by the LEED certification program developed by the United States Green Building Council (USGBC). USGBC is an independent organization of builders, designers, and architects whose mission is “to transform the way buildings and communities are designed, built and operated, enabling an environmentally and socially responsible, healthy, and prosperous environment that improves the quality of life.” The USGBC has developed a system of certifying building design and construction called LEED certification (Leadership in Energy and Environmental Design) in 1998. LEED certification is now the industry-leading “Green Building” process by which environmentally sustainable standards are applied to building construction and renovation. LEED provides both the standards and the independent third-party verification to certify the environmental quality of a building. All buildings must meet certain zoning and safety regulations, of course. For the most part, these building codes are established by local governments and typically focus on fire safety, electrical and plumbing standards, and also include zoning standards for size and building use that is compatible with neighboring sites. LEED standards instead focus on energy usage and efficiency, sustainable and recycled resource use in construction, waste and trash minimization in use, landscaping that restores or protects local habitat, health and safety for building users, indoor air quality, wastewater treatment, and compatibility with alternative forms of transportation. According to the USGBC, buildings in the United States account for 72% of U.S. electricity consumption, 39% of energy use, 38% of all carbon dioxide (CO2) emissions, and 30% of waste output (136 million tons annually). LEED standards aim to reduce significantly all of these expenditures. Supporters of LEED certification claim that Green buildings produce major economic, environmental, and social benefits, otherwise known as the “triple bottom line” of sustainable development. Economically, they reduce operating costs, add to the value of the building, and enhance productivity and satisfaction of employees and customers. Environmentally, Green buildings improve air and water quality, reduce wastes, conserve natural resources, increase energy efficiency, and protect habitat. Socially, Green buildings improve the local environment, create healthy workplaces, minimize reliance on the local transportation and utility infrastructure, and can contribute to the overall quality of life. The biggest challenge to the LEED standards involves their costs. Typical estimates suggest that meeting LEED certification standards can add 5% to the total project cost, an estimate that can mean hundreds of thousands of dollars to a construction project. For some businesses, this added expenditure to construction costs can be worth it for the longer-term savings in energy efficiency but, for others, the addition can seem too costly. Other challenges focus less on the LEED standards themselves and more on a movement towards incorporating these standards into existing and mandatory governmental building codes. Critics argue that LEED standards should be left as voluntary guidelines that should be left to individual businesses to follow. Others argue that the social and environmental benefits outweigh the costs and that the standards should be mandatory. Some suggest a parallel with building regulations created by the Americans with Disabilities Act (ADA) which require all buildings to be handicapped-accessible. ADA requirements do add costs to any building project, but society has judged these costs acceptable given the social value of equal opportunity. They are simply part of the costs of doing business. So, too, evidently we have determined that the social and environmental benefits of LEED certification should override the initial compliance costs of building to meet these standards. As an out-of-class assignment, students could be asked to research other environmental building standards such as Net Zero, the Living Building Challenge, STARS, Sustainable Sites Initiative, Green Globes, and compare and contrast these with LEED standards. Students should consider the following questions when assessing this scenario: • Is the decision to meet LEED building standards a business decision or an ethical decision? • Should every new building project be required to meet LEED standards, or is this best left to individual businesses? • Who are the stakeholders in this decision? • Are you familiar with any LEED buildings in your own surrounding community? Are you aware of any controversies that were involved in the project? • Environmental architect William McDonough and chemist Michael Braungart (see his essay, “The Next Industrial Revolution”) claim that government regulation is evidence of a design problem and a failure to properly design a product or building. Can you imagine any regulations that might be avoided by designing a building to LEED certification? I. Introduction a. There is a tendency to believe that environmental challenges always create a burden on business and that environmental and business interests are always in conflict. i. While it certainly can be the case that environmental regulation can add costs to business operations and restrict business choice, they can also provide opportunities for business. 1. Where one automobile manufacturer sees government mandated fuel efficiency standards as a burden on its ability to sell large SUVs, another company sees it as an opportunity to market fuel-efficient hybrids. ii. Many observers believe we have entered the sustainability revolution, an age in which the race to create environmentally and economically sustainable products and services is creating unlimited business opportunities. iii. As happened in the industrial revolution, there will be winners and losers in this sustainability revolution and, according to supporters, the economic winners will be the firms and industries that do the most environmental good. b. Environmentalism & Environmental Degradation: As described by geographer Jarad Diamond in his in the best-selling book, Collapse, human history provides many examples of societies that have run up against the environmental limits of their lifestyles. i. The Industrial Revolution of the 18th and 19th centuries brought with it the ability to degrade the natural environment to a greater extent and at a faster rate than ever before. 1. The industrial model of growth and productive efficiency and seemingly unlimited energy supply continued along almost unchecked by environmental regulation until the latter half of the twentieth century. 2. By the start of the 21st century, the earth was experiencing he greatest period of species extinction since the end of the dinosaurs 65 million years ago. 3. Humans are also threatened by global climate change. 4. Each of these monumental environmental events is largely due to human activity, and specifically to our present arrangements of modern industrial society. ii. The way we have done business over the last two centuries has brought us up against the biophysical limits of the earth’s capacity to support all human life. It has already crossed those limits in the case of countless other forms of now-extinct life. iii. Thus, the major ethical question of this chapter is what responsibilities contemporary businesses have regarding the natural environment. *Reference: “Reality Check – What Do Business Leaders Think?” *Teacheing Note: A helpful exercise to explore what businesses think about the current state of the environment would be to have students research the insurance industry’s response to climate change. iv. Triple Bottom Line Approach: The sustainable business and sustainable economic development seek to create new ways of doing business in which business success is measured in terms of economic, ethical and environmental sustainability, often called the Triple Bottom Line approach. 1. The sustainability paradigm sees environmental responsibilities as a fundamental part of basic business practice. 2. Sustainable business ventures may find that environmental considerations offer creative and entrepreneurial businesses enormous opportunities. 3. See Reading 9-2, “Getting to the Bottom of Triple Bottom Line,” for a critical perspective on the triple bottom line. *Chapter Objective 1 Addressed Below* v. Opportunities available in the age of sustainability: The environmental research and consulting group The Natural Step uses an image of a funnel, with two converging lines, to help business understand the opportunities available in the age of sustainability. 1. The funnel shows that the resources necessary to sustain life are on a downward slope. 2. While there is disagreement about the angle of the slope, there is widespread agreement that available resources are in decline. 3. The second line represents aggregate worldwide demand, accounting for both population growth and the increasing demand of consumerist lifestyles. 4. Barring an environmental catastrophe, many but not all industries will emerge through the narrowing funnel into an era of sustainable living. 5. Businesses unable to envision that sustainable future will hit the narrowing wall. Innovative and entrepreneurial business will find their way through. *Reference Figure 9.1 – The Natural Step’s Funnel* vi. The Natural Step challenges business to “backcast” a path towards sustainability. 1. “Backcasting” examines what the future will be when we emerge through the funnel. 2. 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. vii. Sustainable business must use resources and produce wastes at rates that do not jeopardize human well-being by exceeding the earth’s capacity to renew the resources and absorb the wastes. viii. Businesses that do so will succeed in moving through the funnel and emerge as successful in the age of sustainability. ix. Environmental issues are no longer at the periphery of business decisions, as burdens to be managed, if not avoided altogether; nor are they regulatory constraints in managerial decision making. 1. Environmental sustainability must accompany financial sustainability for business to survive in the twenty-first century. 2. For reasons of rights and duties, as well as for the overall social good, sustainable business is the wave of the future. II. Business Ethics and Environmental Values *Chapter Objective 2 Addressed Below* a. Protection of the Natural Environment: Which values and decisions are supported by a concern with the natural environment? Why should we act in ways that protect the natural environment from degradation? Why should business be concerned with, and value, the natural world? i. The most obvious answer to these questions is human self-interest. 1. Environmental concerns are relevant to business because human beings, both presently living and future generations of humans, depend on the natural environment in order to survive. 2. Human 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 delicate balance of climate in which human life can exist. 3. Two aspects of contemporary environmental realities underscore the importance of self-interested reasoning. ii. As documented in Collapse, past human societies have often run up against the limits of the local environment’s ability to sustain human life. 1. Historically, environmental degradation has been localized to a particular region and has seldom affected more than a generation. 2. In contrast, some contemporary environmental issues have the potential to adversely affect the entire globe and change human life forever. 3. Global climate change, species extinction, soil erosion and desertification, and nuclear wastes will threaten human life into the indefinite future. iii. Second, the science of ecology and its understanding of the interrelatedness of natural systems have helped us to understand the wide range of human dependence on ecosystems. 1. Where we once might have thought that buried wastes were gone forever, we now understand how toxins can seep into groundwater and contaminate drinking water across great time and distances. 2. We now understand how pesticides accumulate throughout the food chain and pose greatest dangers not only to top predators such as bald eagles, but to human beings as well. 3. Where we once thought the atmosphere too big to be changed by humans, we now understand the precise balance necessary to maintain life-supporting systems. *Reference: “Reality Check - Breast Milk Toxins”* *Teaching Note: Students can be directed to these media sources for coverage of this issue: “Toxins in Breast Milk: Studies Explore Impact Of Chemicals on Our Bodies,” by Thaddeus Herrick , Wall Street Journal Jan. 20, 2004; “Toxic Breast Milk?” Florence Williams, NY Times Magazine Jan 9, 2005; http://news.bbc.co.uk/1/hi/health/391514.stm b. The Conservation Movement: The conservation movement, the first phase of modern environmentalism, advocated for a more restrained and prudent approach to the natural world. i. 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 business). ii. Conservationists argued against the exploitation of natural resources as if they could provide an inexhaustible supply of material and made the case that business had good reasons for conserving natural resources. iii. The natural world, like capital, had the productive capacity to produce long-term income, but only if it is managed and used prudently. c. Value of the Natural Environment: Besides these reasons to protect human life and health, the natural environment is essential and valuable to use for many other reasons. i. The beauty and grandeur of the natural world provides great aesthetic and inspirational value; Many people value the natural world as a manifestation of religious and spiritual value; Parts of the natural world are valued for their symbolic value, their historical value, and for such diverse psychological values as serenity and exhilaration. ii. 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. iii. Aesthetic and inspirational values often play out in public debates about economic development. The 1970’s song “Big Yellow Taxi” captured this sentiment with the well-known lyric, “they paved paradise and put up a parking lot.” iv. Many critics fault business for destroying natural beauty and replacing it with strip malls, neon signs, fast-food restaurants and parking lots. Consider these debates as you review the Decision Point, “Commercialize an Historic Civil War Site?” Decision Point Commercialize an Historic Civil War Site? ** Teaching note: This case can be useful in helping students understand the variety of values that can be involved in environmental issues. The symbolic and historical value of a memorial to a deadly Civil War battle conflicts with the potential financial gain that Disney stood to make from developing this site. Asking students what would be lost by developing this site for commercial purposes will force them to articulate values that are often unspoken. This Decision Point deals with a proposed land development project in Virginia, on the site of a historic battlefield. The question posed is whether the market, defined as that which people are most willing to pay, is the best means by which to determine land and resource use? The city of Manassas, in northern Virginia, is a suburb of Washington, D.C. today, but during the U.S. Civil war, it was the site of two historic battles, the first and second Battle of Bull Run. Today, Manassas Battlefield National Park and several Civil War cemeteries are located at the site. In the late 1980’s the public purchased this land and incorporated it into the national park in order to prevent developers from building a mall in its place. 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, which 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. The plan met with vociferous opposition from a coalition of environmentalists, preservationists, historians, and Civil War authorities. Although they were convinced that the project would have been a tremendous commercial success, Disney eventually abandoned its plans to develop this site. Should they have abandoned these plans? Students should consider the following questions when assessing this scenario: • 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 “Environmental Goals,” located at: http://thewaltdisneycompany.com/citizenship/environmental-goals. How might these goals guide its decisions or present conflicts in this 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? d. Status of Animals: The moral status of animals has been the environmental value that, arguably, has raised the greatest challenge to business. i. Variously referred to as the animal rights, animal liberation, or animal welfare movement, this approach attributes a moral standing to animals. ii. Such a status would create a wide variety of distinctive ethical responsibilities concerning how we treat animals and would have significant implications for many businesses. Two versions of this perspective are worth mentioning. iii. The first approach: emphasizes the fact that many animals, presumably all that have a central nervous system, have the capacity to feel pain. 1. Reminiscent of the utilitarian tradition, his view asserts an ethical responsibility to minimize pain. 2. Inflicting unnecessary pain is taken to be an ethical wrong, therefore, acts that inflict unnecessary pain on animals is ethically wrong. 3. Raising and slaughtering animals for food, particularly in the way it is done with poultry, hog, and cattle in industrial farming enterprises, would be an obvious case in which business would violate this ethical responsibility. This is argued in the following Reality Check – Treatment of Animals in Agriculture. *Reference: “Reality Check - Treatment of Animals in Agriculture”* iv. The second approach: argues that at least some animals have the cognitive capacity to posses a conscious life of their own. 1. Reminiscent of the Kantian ethical tradition, his view asserts that we have a duty not to treat animals as mere objects and means to our own ends. 2. Businesses that use animals for food, entertainment, or pets would violate the ethical rights of these animals. III. Business’ Environmental Responsibility: The Market Approach ** Teaching Note: This issue can be connected back to the discussion of markets and ethics from Chapter 3. a. Protecting the Environment: While debate continues to surround some environmental values, an overwhelming consensus exists about the self-interested and prudential reasons for protecting the natural environment: humans have a right to be protected from undue harm. i. What is 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 business. *Chapter Objective 3 Addressed Below* ii. Each of these two approaches has significant implications for business. 1. 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. a. By doing this, business fills its role within a market system which, in turn, serves the greater overall (utilitarian) good. 2. On the other hand, if government regulation is a more adequate approach, then business ought to develop a compliance structure in order to insure that it conforms to those regulatory requirements. iii. A market-based approach to resolving environmental challenges is reminiscent of the narrow, economic view of CSR described in chapter 5. 1. Defenders of the market approach contend that environmental problems are economic problems that deserve economic solutions. 2. Fundamentally, environmental problems involve the allocation and distribution of limited resources. 3. Whether we are concerned with the allocation of scare non-renewable resources such as gas and oil, or the earth’s capacity to absorb industrial by-products such as CO2 or PCB, environmental challenges can be addressed through efficient markets. *Chapter Objective 4 Addressed Below* b. Implications of Pollution and Resource Conservation: i. In his well-known book, People or Penguins: The Case for Optimal Pollution, William Baxter argued that there is an optimal level of pollution that would best serve society’s interests. 1. This optimal level is best attained, according to Baxter, by leaving it to a competitive market. 2. Denying that there is any “natural” or objective standard for clean air or water, Baxter begins with a goal of “safe” air and water quality, and translates this goal to a matter of balancing risks and benefits. 3. Society could strive for pure air and water, but the costs that this would entail would be too high. 4. A more reasonable approach is to aim for air and water quality that is safe enough to breathe and drink without costing too much. ii. 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. *Teaching Note: Challenge students to develop a parallel argument for issues of workplace safety and consumer products safety. Is there an “optimal level” of workplace safety and products safety? iii. The free market also provides an answer for resource conservation. From a strict market economic perspective, resources are “infinite.” 1. History has shown that human ingenuity and incentive has always found substitutes for any shortages. 2. As the supply of any resources decreases, the price increases, thereby providing a strong incentive to supply more, or provide a less costly substitute. iv. In economic terms, all resources are “fungible,” meaning, 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. v. A similar case can be made for the preservation of environmentally sensitive areas. 1. Preservation for preservation’s sake would be wasteful since it would use resources in inefficiently. 2. Example: In the Manassas Battlefield development scenario described in a previous Decision Point, 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 valuable resources. *Chapter Objective 5 Addressed Below* c. Challenges to this narrow economic view of corporate social responsibility are familiar to both economists and ethicists. i. A variety of market failures, many of the best-known of which involve environmental issues, point to the inadequacy of market solutions. ii. One example of market failure is the existence of externalities, the textbook example of which is environmental pollution. 1. Because the “costs” of such things as air pollution, groundwater contamination and depletion, soil erosion, and nuclear waste disposal are typically borne by parties “external” to the economic exchange (e.g., people downwind, neighbors, and future generations), free market exchanges cannot guarantee optimal results. iii. A second type of market failure occurs when no markets exist to create a price for important social goods. 1. Endangered species, scenic vistas, rare plants and animals, and biodiversity are just some environmental goods that typically are not traded on open markets. 2. Public goods such as clean air and ocean fisheries also have no established market price. 3. With no established exchange value, the market approach cannot even pretend to achieve its own goals of efficiently meeting consumer demand. 4. Markets alone fail to guarantee that such important public goods are preserved and protected. *Teaching Note: Again, you can challenge students to apply these objections to any of the market-based polices mentioned above: workplace health and safety and consumer products safety. iv. A third way in which market failures can lead to serious environmental harm involves a distinction between individual decisions and group consequences. 1. Consequences of Individual Decisions: Important ethical and policy questions can be missed if we leave policy decisions solely to the outcome of individual decisions. 2. Consider the calculations that an individual consumer might make regarding the purchase of an SUV and the consequences of that decision on global warming. a. The additional CO2 that would be emitted by a single SUV is miniscule enough that an individual would likely conclude that her decision will make no difference. b. However, if every consumer made exactly the same decision, the consequences would be significantly different. v. The overall social result of individual calculations might be significant increases in pollution and such pollution-related diseases as asthma and allergies. 1. A number of alternative policies (e.g., restricting SUV sales, increasing taxes on gasoline, treating SUVs as cars instead of light trucks in calculating Corporate Automotive Fuel Efficiency (CAFE) Standards) that could address pollution and pollution-related disease would never be considered if we relied only on market solutions. vi. These are important ethical questions which remain unasked from within market transactions, so we must conclude that markets are incomplete (at best) in their approach to the overall social good. 1. In other words, what is good and rational for a collection of individuals is not necessarily what is good and rational for a society. d. Environmental Policy: Such market failures raise serious concerns for the ability of economic markets to achieve a sound environmental policy. i. Defenders of a narrow economic view of corporate social responsibility and have responses to these challenges. 1. Internalizing external costs and assigning property rights to un-owned goods, such as wild species, are two responses to market failures. ii. There are good reasons for thinking that such ad hoc attempts to repair market failures are environmentally inadequate. 1. One important reason is what has been called the first-generation problem. 2. Markets can work to prevent harm only through information supplied by the existence of markets failures. a. For example: Only when fish populations in the North Atlantic collapsed did we learn that free and open competition among the world’s fishing industry for un-owned public goods failed to prevent the decimation of cod, swordfish, Atlantic salmon, and lobster populations. 3. We learn about markets failures and thereby prevent harms in the future only by sacrificing the “first-generation” as a means for gaining this information. 4. 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. *Reference: “Reality Check – The Significance of Fossil Fuels”* IV. Business’ Environmental Responsibility: The Regulatory Approach *Chapter Objective 3 Addressed Below* a. Governmental Regulations: A broad consensus emerged within the United States in the 1970s that unregulated markets are an inadequate approach to environmental challenges. Instead, governmental regulations were seen as the better way to respond to environmental problems. i. Much of the most significant environmental legislation in the United States was enacted during the 1970s: 1. The Clean Air Act of 1970 (amended and renewed in 1977) 2. Federal Water Pollution Act of 1972 (amended and renewed as the Clean Water Act of 1977) 3. Endangered Species Act of 1973 4. Each law was originally enacted by a Democratic Congress and signed into law by a Republican president. ii. These laws share a common approach to environmental issues. iii. Before this legislation was enacted, the primary legal avenue open for addressing environmental concerns was tort law. 1. Only individuals who could prove that they had been harmed by pollution could raise legal challenges to air and water pollution. 2. That legal approach placed the burden on the person who was harmed and, at best, offered compensation for the harm only after the fact. iv. Except for the incentive provided by the threat of compensation, U.S. policy did little to prevent the pollution in the first place. 1. Absent any proof of negligence, public policy was content to let the market decide environmental policy. 2. Because endangered species themselves had no legal standing, direct harm to plant an animal life was of no legal concern and previous policies did little to prevent harm to plant and animal life. v. Laws enacted during the 1970s established standards that effectively shifted the burden from those threatened with harm to those who would cause the harm. 1. Government established regulatory standards try to prevent the occurrence of pollution or species extinction rather than compensation after the fact. 2. We can think of these laws as establishing minimum standards to ensure air and water quality and species preservation. 3. Business was free to pursue it own goals as long as it complied with the side constraints established by these minimum standards. vi. As consumers, individuals could demand environmentally friendly products in the marketplace. As citizens, individuals could support environmental legislation. vii. As long as business responded to the market and obeyed the law, their environmental responsibilities were being met. 1. If environmentally-suspect products, such as large gas-guzzling SUVs, were demanded by consumers and allowed by law, then one cannot expect business to forego the financial opportunities of marketing such products. *Chapter Objective 6 Addressed Below* b. Does Business Have No Responsibility? Several problems suggest that this approach will prove inadequate over the long term. i. This approach underestimates the influence that business can have in establishing the law. ii. The CAFE Standards mentioned previously provide a good example of how this can occur. 1. A reasonable account of this law suggests that the public very clearly expressed a political goal of improving air quality by improving automobile fuel efficiency goals, and thereby reducing automobile emissions. 2. The automobile industry was able to use its lobbying influence to exempt light trucks and SUVs from these standards. Of course light trucks and SUVs at the time represented the largest selling, and most profitable, segment of the auto industry. iii. Second, this approach also underestimates the ability of business to influence consumer choice. iv. To conclude that business fulfills its environmental responsibility when it responds to the environmental demands of consumers is to underestimate the role that business can play in shaping public opinion. 1. Advertising is a $200 billion a year industry in the United States alone. 2. It is surely misleading to claim that business passively responds to consumer desires and that consumers are unaffected by the messages that business conveys. 3. 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. v. If we rely on the law to protect the environment, environmental protection will extend only as far as the law extends. vi. Most environmental issues, pollution problems especially, do not respect legal jurisdictions. 1. 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. 2. Similarly, national regulations will be ineffective for international environmental challenges. 3. 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. vii. Finally, and perhaps most troubling from an environmental standpoint, this regulatory model assumes that economic growth is environmentally and ethically benign. viii. Regulations establish side-constraints on business’ pursuit of profits and accept as ethically legitimate whatever road to profitability is chosen by management. 1. 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. 2. Different roads towards profitability can have very different environmental consequences, as discussed in the Reality Check, “Cap and Trade – A Mixed Approach.” *Reference: Reality Check – “Cap and Trade – A Mixed Approach?”* V. Business’ Environmental Responsibilities: The Sustainability Approach *Chapter Objective 7 Addressed Below* a. New Business Model: Beginning in the 1980s, a new model for environmentally responsible business began to take shape, one that combines financial opportunities with environmental and ethical responsibilities. i. The concept of sustainable development and sustainable 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, “Why Sustainability?”). *Reference: “Reality Check - Why Sustainability?”* ii. These three goals, economic, environmental, and ethical sustainability, are often referred to as the three pillars of sustainability. Assessing business activity along these three lines is often referred to as the “triple bottom line.” (For a critical perspective on the Triple Bottom Line, see Reading 9-2, “Getting to the Bottom of ‘Triple Bottom Line’”). b. Sustainable Development: 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. i. 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." c. Innovative Approach to Economic Theory: 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. i. Daly makes a convincing case for an understanding of economic development that transcends the more common standard of economic growth. 1. Unless we change the way we do business, we will fail to meet some very basic ethical and environmental obligations. 2. According to Daly, we need a major paradigm shift in how we understand economic activity. ii. We can begin with the standard understanding of economic activity and economic growth. What is sometimes called the “circular flow model” explains the nature of economic transactions in terms of a flow of resources from businesses to households and back again: 1. Business produces goods and services in response to the market demands of households. 2. These goods and services are shipped to households in exchange for payments back to business. 3. Payments are in turn sent back to households in the form of wages, salaries, rents, profits, and interests. 4. These payments are received by households in exchange for the labor, land, capital and entrepreneurial skills used by business to produce goods and services. *Reference: Figure 9.2 – The Circular Flow Model* d. Circular Flow Model: Two aspects of this circular-flow model are worth noting. i. First, it does not differentiate natural resources from the other factors of production. 1. 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. 2. Economist Julian Simon has argued, “As economists or consumers, we are interested in the particular services that resources yield, not in the resources themselves.” 3. Those services can be provided in many ways and by substituting different factors of production. 4. In Simon’s terms, resources can therefore be treated as “infinite.” ii. A second observation is that this model treats economic growth as both the solution to all social ills and also as boundless. The possibility that the economy cannot grow indefinitely is simply not part of this model. 1. To keep up with population growth, the economy must grow. 2. To provide for a higher standard of living, the economy must grow. 3. To alleviate poverty, hunger, and disease, the economy must grow. iii. The three points summarized in the Reality Check, “Why Sustainability?” suggest why this growth-based model will be inadequate. 1. According to some estimates, the world’s economy would need to grow by a factor of five-to-tenfold over the next fifty 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. 2. Yet, within those fifty years, the world’s population will increase by more than 3 billion people, most of which will be born in the world’s poorest economies. 3. The only source for all this economic activity is the productive capacity of the earth itself. e. Economic Growth: 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. i. Economic activity takes place within this biosphere and cannot expand beyond its capacity to sustain life. ii. All the factors that go into production--natural resources, capital, entrepreneurial skill, and labor--ultimately originate in the productive capacity of the earth. iii. In light of this, the entire classical model will prove unstable if resources move through this system at a rate that outpaces the productive capacity of the earth or of the earth’s capacity to absorb the wastes and by-products of this production. 1. 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. *Reference: Figure 9.2 – A Model of the Economy (or Economic System) as a Subset of the Biosphere (or Ecosystem)* f. A Sustainable Economic Model: Figure 9.3 differs from Figure 9.2 in several important ways. i. First, there is a recognition that the economy exists within a finite biosphere that encompasses little more than a few miles-wide band surrounding the earth’s surface. 1. From the first law of thermodynamics, we recognize that neither matter nor energy can truly be “created,” it can only be transferred from one form to another. ii. Second, energy is lost at every stage of economic activity. Consistent with the second law of thermodynamics, the amount of usable energy decreases over time. 1. “Waste energy” is continuously leaving the economic system and thus new, low entropy energy, must constantly flow into the system. 2. Ultimately, the only source for low-entropy energy is the sun. iii. Third, natural resources are no longer treated as an undifferentiated and unexplained factor of production emerging from households. 1. Natural resources come from the biosphere and cannot be created ex nihilo. iv. Finally, it recognizes that wastes are produced at each stage of economic activity and these wastes are dumped back into the biosphere. v. The conclusion that should be drawn from this new model is relatively simple: 1. 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. 2. These are what Daly calls the “biophysical limits to growth.” 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. vi. Finding the correct rate and type of economic activity and creating a sustainable business practice is the ultimate environmental responsibility of business. VI. The “Business Case” for a Sustainable Economy *Chapter Objective 8 Discussed Below* a. While the regulatory and compliance model tends to interpret environmental responsibilities as constraints upon business, the sustainability model is a more forward-looking and may present business with greater opportunities than burdens. i. The model offers a vision of future business that many entrepreneurial and creative businesses are already pursuing. ii. Many observers argue that a strong economic and financial case can be made for the move towards a sustainable future (but also see the Reality Check, “Is Everything Sustainable?” for further discussion of this issue). *Reference: “Reality Check – Is Everything Sustainable?” b. First, sustainability is a prudent long-term strategy. i. As the Natural Step’s funnel image suggests, business will need to adopt sustainable practices in order to insure long-term survival. ii. Firms that fail to adapt to the converging lines of decreasing availability of resources and increasing demand risk their own survival. c. Second, there is a huge unmet market potential among the world’s developing economies that can only be met in sustainable ways. i. Enormous business opportunities exist in serving the billions of people who need, and are demanding, economic goods and services. ii. The base of the economic pyramid represents the largest and fastest-growing economic market in human history. (Review Reading 8-4, “Fortune at the Bottom of the Pyramid”) iii. The sheer size of these markets alone makes it impossible to meet this demand with the environmentally damaging industrial practices of the 19th and 20th centuries. 1. 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. 2. Obviously, new sustainable technologies and products will be required to meet the Chinese demand. d. Third, significant cost savings can be achieved through sustainable practices. Business stands to save significant costs in moves towards eco-efficiency. i. Savings on energy use and materials will reduce not only environmental wastes, but spending wastes as well. ii. Minimizing wastes make sense on financial grounds as well as on environmental grounds. e. Fourth, competitive advantages exist for sustainable businesses. i. Firms that are ahead of the sustainability curve will have an advantage serving environmentally-conscious consumers, as well as enjoying a competitive advantage attracting workers who will take pride and satisfaction in working for progressive firms. f. Finally, sustainability is a good risk management strategy. i. Refusing to move toward sustainability offers many downsides that innovative firms will avoid. 1. Avoiding future government regulation is one obvious benefit. Firms that take the initiative in moving towards sustainability will also likely be the firms who set the standards of best-practices in the field. When regulation does come, these firms will likely play a role in determining what those regulations ought to be. 2. Avoiding legal liability for unsustainable products is another potential benefit. As social consciousness changes, the legal system may soon begin punishing those firms who are now negligent in failing to foresee harms caused by their unsustainable practices. 3. Consumer demand and consumer boycotts of unsustainable firms are also a risk to be avoided. g. 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 characterizes industrial and consumerist societies. i. The ethical issues that develop from these facts include: 1. Fairness in allocating scare resources. 2. Justice in meeting the real needs of billions of present and future human beings. 3. The values and rights associated with environmental conservation and preservation. ii. The stakeholders for these decisions include, quite literally, all life on earth. iii. Relying 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. iv. Sustainability seems to be the vision that is needed. VII. Principles for a Sustainable Business *Chapter Objective 9 Addressed Below* a. Sustainable Business Model: Figure 9.3 provides a general model for understanding how firms can evolve toward a sustainable business model. i. In the simplest terms, resources should not enter into the economic cycle from the biosphere at rates faster than which they are replenished. ii. Ideally, waste should be eliminated or, at a minimum, not produced at a rate faster than which the biosphere can absorb them. iii. The energy to power the economic system should be renewable, ultimately relying on the sun, the only energy that is truly renewable. b. Implications of Sustainability: The precise implications of sustainability will differ for specific firms and industries. Three general principles will guide the move towards sustainability: i. Firms and industries must become more efficient in using natural resources. ii. Firms should model their entire production process on biological processes. iii. Firms should emphasize the production of services rather than products. c. Eco-efficiency: Has long been a part of the environmental movement. “Doing more with less” has been an environmental guideline for decades. i. Just as individuals can make improvements in their energy efficiency (e.g., riding a bike instead of riding in a bus or car), business firms can improve energy and materials efficiency in such things as lighting, building design, product design, and distribution channels. 1. The LEED building standards described in this chapter’s opening Decision Point incorporate many such eco-efficiency ideas. ii. Some estimates suggest that with present technologies alone, business could readily achieve a fourfold increase in efficiency, and even as much as a tenfold increase. iii. 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. 1. When applied to the additional costs for buildings associated with LEED standards, for example, such a return on investment means that companies can quickly recoup this environmental investment. d. A second principle of business sustainability is known as “Closed-loop Production.” Imagine the waste that is leaving the economic cycle is being turned back into the cycle as productive resource. i. “Closed-loop” production seeks to integrate what is presently waste back into production. ii. In an ideal situation, the waste of one firm will become the resource of another and such synergies can create eco-industrial parks. iii. Just as biological processes such as photosynthesis cycle the “waste” of one activity into the resource of another, this principle is often referred to as biomimicry. e. Eliminate Waste: The ultimate goal of biomimicry is to eliminate waste altogether rather than reducing it. i. If we truly mimic biological processes, the end result of one process, (e.g., leaves and oxygen produced by photosynthesis) are ultimately reused as the productive resources (e.g., soil and water) of another process (plant growth) with only solar energy added. ii. The evolution of business strategy towards biomimicry can be understood along a continuum. 1. The earliest phase has been described as “take-make-waste.” Business takes resources, makes products out of them, and discards whatever is left over. 2. A second phase envisions business taking responsibility for its products from the “cradle to grave.” Sometimes referred to as “life-cycle” responsibility, this approach has already found its way into both industrial and regulatory thinking. 3. 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. 4. 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. iii. 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. 1. This responsibility, in turn, would create incentives to redesign products so that they could, efficiently and easily, be recycled. iv. The environmental design company McDonough and Braungart, founded by architect William McDonough and chemist Michael Braungart, has been a leader is helping businesses reconceptualize and redesign business practice to achieve sustainability. 1. Their book, Cradle to Cradle, traces the life cycle of several products, providing case studies of economic and environmental benefits attainable when business takes responsibility for the entire life cycle of products. 2. See McDonough and Braungrat’s Reading 9-1, “The Next Industrial Revolution,” for greater details about their design principles. f. Beyond Eco-efficiency and Biomimicry: A third sustainable business principle involves a shift in business model from products to services. i. Traditional economic and managerial models interpret consumer demand as the demand for products, e.g., washing machines, carpets, lights, consumer electronics, air conditioners, cars, computers, and so forth. ii. A service-based economy interprets consumer demand as a demand for services, e.g., for clothes cleaning, floor-covering, illumination, entertainment, cool air, transportation, word processing, and so forth. 1. The book Natural Capitalism provides examples of businesses that have made such a shift in each of these industries. 2. This change produces incentives for product redesigns that create more durable and more easily recyclable parts. iii. Example: Interface Corporation, led by CEO, Ray Anderson, has made a business transition. The company has transitioned from selling carpeting to leasing floor-covering services. 1. On the traditional model, there is little incentive here to produce long-lasting or easily recyclable carpeting. Once Interface shifted to leasing floor-covering services, incentives were created to produce long-lasting, easily replaceable and recyclable carpets. 2. Interface accepts responsibility for the entire life-cycle of the product. 3. Redesigning their carpets and shifting to a service lease has also improved production efficiencies and reduced material and energy costs significantly. 4. Consumers benefit by getting what they truly desire at lower costs and fewer burdens. *Teaching Note: Have students research other companies that focus on cradle-to-cradle responsibility and discuss whether or not students believe these companies will be successful in the long-run. Opening Decision Point Revisited Building Design and Values From the earliest years of the industrial revolution, building design has contributed much to economic growth and economic efficiency. They have also contributed much to environmental degradation and pollution. From giant textile mills in Europe and New England to Henry Ford’s assembly line manufacturing plants, to office buildings with row after row of cubbyholes and desks, building design has paralleled managerial philosophy. Reflect on how this has changed through the years. Consider how building designs and construction reflect the social values of the times during which they were built. Students are presented with the following questions: • Can you identify the oldest commercial buildings in your city or town? • What are the oldest local manufacturing facilities that are still operating? • Can you trace a timeline for types of commercial buildings in your community? • What values guiding their design? • Can you identify the biggest problems with the oldest buildings? • Are there any benefits to them? • Can you identify any reasons why the oldest buildings continue to function when many building of the same age have long since been torn down? • What do the buildings say about workers, management, business? • What do they say about the values that guided their design and construction? Subsequently, students are asked to do the same exercise for the buildings on their own campus and compare the oldest to the most recent. Then they are asked to answer the following questions: • What are some differences? • Were they designed with different values and different understandings of students, teachers, and the educational mission? • Does your own campus have any buildings that are LEED certified? • How do they differ from earlier buildings? • Does your own campus have any buildings in the planning stages? • Will they be built to LEED certification? • Can you learn why or why not? Instructor Manual for Business Ethics: Decision Making for Personal Integrity and Social Responsibility Laura P. Hartman, Joseph R. Desjardins, Chris MacDonald 9780078029455, 9781259060588, 9781259417856
