Introduction to Part II
‘Global companies have no future if the Earth has no future.’ This statement was made by Ryuzaburo Kabu, the honorary chairman of Canon (cited by Laszlo, 2003, p. 5), and reflects the dependence of the economy on the environment that we referred to in part I. This of course can be extended to other companies, even the smallest, and indeed also to other organisations and individuals. In case study 1.C2, we witnessed a similar regularity, ‘without fish there would be no fishermen’. Additionally, in case study 2.C1, we saw the opportunities that emerge from environmental protection when we consider the socio-economic system in the sufficiently long term.
The core idea of long-term thinking regarding economic activity, and thus sustainable development, was well expressed in 1923 by John Maynard Keynes in his famous assertion: ‘in the long run we are all dead’. Keynes meant that at the time of a storm, one cannot be consoled by the fact that the ocean will eventually become calm, because by that time all those at sea would be dead. Thus, Keynes urged us to take early actions that would protect us from the storm, change its course and effects, and eventually let us enjoy the welfare achieved.
Environmental protection and social interests are important for those in business seriously thinking about their long-term activity. They understand the indispensability of resources and energy taken from the environment, alongside the ecosystems’ ability to absorb and neutralise pollution resulting from economic activity (figure 1.1b). If businessmen reduce the accessibility of natural resources in the future, or if they reduce the regenerative capacity of the environment, the conditions for their future activity deteriorate. Although it may be possible to move their activity to a different sector, this means re-establishing their market position from scratch, which is costly and limits profits.
The fact that business depends on society was described well by Porter and Kramer (2007), stating that to be successful, companies need a healthy and well-educated society, with equal opportunities ensured for all. Safe products and working conditions not only attract consumers and employees, they also reduce the costs of economic activity. A well-educated society is able to create competent institutions, including a legal system that is crucial for innovation and efficiency. Finally, a healthy and wealthy society provides the demand for goods and services that are offered by businesses. Therefore profits that companies make through activity at the expense of society are illusory and in any case short-lived.
Taking into consideration the relationships above with regards to business, we associate sustainable development with corporate social responsibility (CSR). Both concepts demand perceiving business activity in a broad and long-term context. Although in this part of the book we mostly emphasise the economic arguments for adopting this approach (including cost reduction, pressure from public opinion, consumer demand, and new opportunities for business activity), are also justified according to ethics (Chappell, 1993; Chryssides and Kaler, 1993).
Ethics were traditionally perceived as one of the pillars of responsible business. Indeed, many managers declare that they take responsible decisions based on their own moral or religious beliefs, or from their previous social activity. In business, ethics comprise of beliefs, norms and values, and other forms of moral dictates which we know that should be followed. The most elementary of these include notions of honesty and transparency. It is on these that one builds trust, a foundation for the long-term functioning of a company. In recent years, many cases of unethical business behaviour have been revealed, such as ‘creative accounting’, misleading advertising campaigns, corruption, conflicts of interest, and hiding reprehensible behaviour of global corporations in less developed countries by activities via efforts in creating a positive image in developed countries. As a result, companies started to highlight the ethical dimension of their social responsibility through all their communication channels. Their activities aim at building trust among consumers, business partners and other stakeholders. Thus, businesses demonstrate that ethical activity pays, just as much as responsible behaviour in general.
Businessmen who understand the challenges above posed by sustainable development and are able to meet them to their benefit are the leaders in their field. We use their examples throughout this part of the book.
To illustrate the challenges and opportunities related to implementation of sustainable development in business, we use a causal loop diagram depicted in figure II.1 (we introduced this kind of diagram in section 2.3). Of course, figure II.1 represents a simplified picture and it might further be expanded to cover a larger number of interactions. However, for the time being let us concentrate on the most important of these.
Often consumers think lowly of business activities with regards to sustainable development. This is because consumers have growing expectations and have a growing social and environmental awareness in general. In effect, consumers object to reprehensible business practice, sometimes deciding to boycott the products and services of companies that perpetrate it. In response to consumer pressure, companies undertake activities aimed at sustainable development, eliminating some social and environmental problems, as a result of which consumer pressure abates (balancing loops B1a and B1b).
Business is under pressure not only from consumers but also from other stakeholders. These include: the local community, business partners, employees, trade unions, banks and other financial institutions (such as insurers and analysts assessing financial risks related to various investments), the media, non-governmental organisations (NGOs), public officers, social control institutions, and competitors. Therefore, companies need to identify these stakeholders, their expectations and enter into dialogue with them, an important element of their sustainability management system (chapter 4).1 In this context and throughout this book, we often refer to the social participation that warrants such activities (as in chapters 1, 9, 10 and 15, and in particular in the case study 1.C3). On the business side, this refers to letting various stakeholders have a say on the company’s activity and, in particular, relations with its direct surroundings. This participatory process can manifest itself as common committees and commissions created for the purposes of making different decisions in consultation with external stakeholders. In reality as we shall see in chapter 7, most activities that companies undertake in the area of sustainable development are influenced by different stakeholders and not result from the companies’ own initiative (Esty and Winston, 2009, p. 68).
Sometimes, in response to pressure exerted by consumers and other stakeholders, companies undertake only token activities (known as greenwash and bluewash), illustrated by the balancing loop B2. Instead of significantly changing their activities, companies increase their public relations efforts, and try to present themselves in better light. Although these activities can improve business image, they also involve a high level of risk. If they are unmasked, the business image can suffer severely. With wide access to information the world over via the media and independent bloggers seeking sensational news, and in the light of the increased social and environmental awareness of consumers, the likelihood increases of revealing that companies do not meet their own declarations, or that their declarations are not adequate. In tool 14.T1, we present some basic principles that are worth following when assessing business activities with regards to sustainable development. Furthermore, the different rankings of responsible or ‘sustainable’ companies require critical analysis. Sometimes, these ranking are based on data provided by companies interested in being listed themselves. In particular, one should be wary of rankings in which companies have to pay to be listed in a way that is primarily for a source of revenue for the institution that creates such a listing.
Figure II.1. Challenges and opportunities for companies undertaking activities in the area of sustainable development (Piotr Magnuszewski and Jakub Kronenberg)
However, increasingly often companies undertake activities in the area of sustainable development because they do see the potential benefits that they might bring and not only as a response to external pressure. One of the most obvious motives is cost reduction related to increases in resource and energy efficiency i.e. eco-efficiency (reinforcing loop R1) which can refer both to production (chapter 5) and construction of buildings (chapter 6). After all the economic benefits related to efficient use of resources were perceived since the inception of the Industrial Revolution, and in many areas even earlier (Desrochers, 2000). Thanks to these activities, companies reduce the costs of compliance via regulations, not only fulfilling legal requirements but exceeding them; anticipating future threats, preventing them; and meeting customer expectations (chapter 7).
Recognition of business activities in the area of sustainable development makes companies that undertake these activities a more attractive employer (reinforcing loop R2). Both present and potential employees associate themselves with corporate values that also enhance their own self esteem. Eventually, this leads to increased productivity, both directly through higher engagement, and indirectly through reduced turnover of employees and recruitment costs.
As we mentioned above, sustainable development requires a long-term approach. In the long term social and environmental problems may negatively affect companies by reducing demand for their products and services, and restricting access to the resources needed in production. Alternatively, social well-being and a clean environment improve business opportunities, illustrated by reinforcing loop R3.
However, to benefit, one first has to invest because companies have to bear the costs related to higher social and environmental standards. These costs can constitute a barrier, in particular from the perspective of a pressure on short-term gains, experienced by many companies from their owners, such as shareholders (balancing loop B3). Laszlo (2003, p. 7) has commented that the management boards of large companies can rarely afford to run the risks related to innovative sustainable development activities. In extreme cases, if they do give out short-term profits, they can be taken to court by their shareholders. Although this refers primarily to the American market, it shows that smaller companies managed by their owners, and principally those that are not publicly listed, may find it easier to contribute to sustainable development. IKEA for example is such a company, where the owner decided not to make it public, so short-term shareholder expectations would not undermine the long-term strategy of the company (case study 7.C1).
Pressure for short-term gains is further strengthened by market competition, and this includes competing with companies that do not fulfil the requirements of sustainable development. In particular, this applies to situations where social or environmental policies in a given market are not restrictive. So when undertaking sustainable development activities in this situation, companies put themselves at a short-term disadvantage in comparison to their competitors. This in turn can reduce their incentive to behave in a responsible way (balancing loop B4). Therefore, coherent and restrictive policies imposed on companies by governments have an important role to play in promoting sustainable development.
In this context, the policy makers’ approach of favouring companies that express their views louder (via stronger lobbying) over those who are innovative, constitutes yet another obstacle to sustainable development. At the end of October 2009, during the discussions on the European Union fund for combating climate change through increased energy efficiency in developing countries, the Polish government strongly negotiated a payment that was the smallest contribution. Although in general, this reflected the position of Polish companies, this also led to criticism of the Polish government’s undermining of the EU’s activities aimed at preventing global warming. In a statement issued on 30 October 2009, the Business Centre Club, an influential business organisation, asked the rhetorical question: ‘why should environmental threats in Poland always be treated as a series of national disasters, rather than as a challenge for the Polish economy?’.
Lack of government support for innovative companies in their sustainable development activities related was not only specific to Poland. In the United Kingdom, during a joint conference for business and government, on the 14th of September 2005, company representatives demanded stricter environmental regulations, while the government refused to do so. However, stricter rules would increase even the short-term competitiveness of companies that undertake sustainable development activities although as government officials explained, this could disadvantage other, less innovative companies (The Guardian, 20.09.2005).
In both of the above examples, the government’s approach was contrary to the arguments in building a long-term competitive advantage for the countries and companies that we highlight in this part of the book (Porter, 1991; Porter and van der Linde, 1995a,b). However, in other instances, governments are more supportive of sustainable development, including the offering of external funding for innovative companies (in chapter 8 we look at an example of an innovative strategy of replacing products with services). The aim of these funding programmes is precisely to increase the competitiveness of EU economy, keeping in mind that sustainable development is an overarching objective. In Poland the most important examples of such funds available companies include:
- EU structural funds, in particular the Regional Operational Programmes (priority 3) and the Innovative Economy Operational Programme (priority 4);
- the Eco-innovation programme, primarily directed at small- and medium enterprises, run by the European Commission’s Executive Agency for Competitiveness and Innovation;
- the LIFE programme which supports initiatives aimed at reducing the negative environmental impacts exerted by companies; and
- EU research programmes.
One of the crucial factors that can promote business activity in sustainable development is recognition by financial markets. This does already occur with indices used in various stock exchanges which reflect the performance of companies that fulfil their selected sustainability criteria (the best known examples are the Dow Jones Sustainability Index and FTSE4Good; and a similar index was created in 2009 by the Warsaw Stock Exchange). Implementing a sustainability management system in a company (as described in chapter 4) suggests that it puts all the relevant issues in order, providing a signal, for example to banks and other financial institutions, that this company poses less liability, compared to others that do not have such a system. In the context of climate change and the related atypical weather phenomena, the insurance industry places particular attention on activities related to preventing the global warming. Traditionally, this sector has been paying attention to also preventing social problems (such as road accidents), which can be explained by the drive to reduce the insurance payments for victims of social and environmental problems.
With this in mind the feedback loops presented in figure II.1 act with different intensity depending on many additional circumstances. However, understanding these basic interactions will help managers formulate more effective strategies for change management aimed towards sustainable development. Also, this can help external stakeholders (customers, NGOs, and decision makers) to better understand the situation which companies are in, and to create an institutional framework whereby business activity for sustainable development can be facilitated.
Before we move on to a detailed description of the selected issues in the following chapters, we need to have a look at the reasons for which activities that aim at sustainable development can also fail (table II.1). Sustainable development brings benefits to companies but only on the condition that they understand their implications and are able to take corrective action early enough to prevent problems. We refer to these in different chapters, which refer to the different loops presented in figure II.1. In addition to these factors, this book will also discuss the many other issues related to sustainable business management.
Table II.1. Reasons for which activities aiming at sustainable development can also fail (adapted from Esty and Winston, 2009)
|Problem||Solution||Section in the book||Loop in figure II.1|
|Surprise, ignorance, |
unforeseen consequences of actions, actions referring to problems
other than those that are caused by a given company
|Studying environmental and |
social impacts of a company
Studying environmental and
social impacts of companies cooperating with us in the supply
|Ignoring stakeholders and |
|Stakeholder dialogue; |
identification and consideration of their needs; public-private
|Lack of understanding of |
|Analysing benefits that the |
company brings to the society; studying functions that are
delivered by products and the possible alternative ways of
satisfying the same needs
|Lack of understanding of the |
specificity of customers, in particular when it is necessary to
change their behaviour
|Responding precisely to |
customer needs; selling functions that customers demand
|Attempts to solve problems |
that have already emerged
|Preventing problems before |
|Expecting a price premium |
related to sustainable behaviour; neglecting the economic part of
|Prices of environmentally and |
socially friendly solutions have to remain competitive, compared
to the prices of other solutions available in the market
|Lack of involvement of medium |
|Involving top management, |
medium management and all other employees in sustainable
|Entrusting environmental |
management to single managers, without referring it to the overall
activity of a company
|Sustainable development has |
to become a central part of a company’s strategy
Precise definition of
responsibility for various tasks
|Inertia – people’s |
resistance to change
|Motivating, awareness |
building and promoting involvement
|Premature promises and |
ostensible activities (greenwash, bluewash)
|Honest information on |
activities, continuous evaluation of activities
|Lack of information on |
activities undertaken by a company
|Reporting on activities |
undertaken by a company
1 An analogous sustainability management system can also be discussed in the context of local authorities (see chapter 9 and Borys, 2003, pp. 250–279).