6.

2 – Environmental and
Ethical Issues
Business’ Impact on the Environment
Social responsibility is when a business decision benefits stakeholders other than
shareholders i.e. workers, community, suppliers, banks etc.
This is very important when coming to environmental issues. Businesses can pollute
the air by releasing smoke and poisonous gases, pollute water bodies around it by
releasing waste and chemicals into them, and damage the natural beauty of a place
and so on.
WHY BUSINESSES WANT TO BE WHY BUSINESSES DO NOT WANT
ENVIRONMENT- FRIENDLY TO BE ENVIRONMENT-FRIENDLY

It is expensive to reduce and recycle

Sense of social responsibility that comes waste for the business. It means that
from the fact that their activities are expensive machinery and skilled labour
contributing to global warming and will be required by the business –
pollution reducing profits.

Firms will have to increase prices to

Using up scarce non-renewable resources compensate for the expensive
(such as rainforest wood and coal) will environment-friendly methods used in
raise their prices in the future, so production- higher prices mean lower
businesses won’t use them now demand.

Consumers are becoming socially-aware High prices can make firms less
and are willing to buy only environment competitive in the market and they could
friendly products. lose sales

Governments, environmental
organisations, even the community could
take action against the business if they do Businesses claim that it is the
serious damage to the environment government’s duty to clean up pollution
  
Externalities
A business’ decisions and actions can have significant effects on its stakeholders.
These effects are termed ‘externalities’. Externalities can be categorized into six
groups given below and we’ll take examples from a scenario where a business
builds a new production factory.

Private Costs: costs paid for by the business for an activity.

Examples: costs of building the factory, hiring extra employees, purchasing new
machinery, running a production unit etc.
Private Benefits: gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs: costs paid for by the rest of the society (other than the business) as a
result of the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near
residents, loss of land (it could have been a farm land before) etc.
External Benefits: gains enjoyed by the rest of the society as a result of a business
activity.
Example: new jobs created for residents, government will get more tax from the
business, other firms may move into the area to support the firm-helping develop the
region, new roads might be built that can be enjoyed by residents etc.
Social Costs = Private Costs + External Costs
Social Benefits = Private Benefits + External Benefits
Governments use the cost-benefit-analysis (CBA) to decide whether to proceed with a
scheme or not and businesses have also adopted it. In CBA, the government weighs
up all the social costs and benefits that will arise if the scheme is put into effect and
give them all monetary values (this is not easy- what is the value of losing natural
beauty?). They will only allow the scheme to proceed if the social benefits exceed
the social costs, if the costs exceed the benefits, it is not allowed to proceed.
 
Sustainable Development
Sustainable development is development that does not put at risk the living standards
of future generations. It means trying to achieve economic growth in a way that does
not harm future generations. Few examples of a sustainable development are:
 using renewable energy- so that resources are conserved for the future
 recycle waste
 use fewer resources
 develop new environment-friendly products and processes- reduce health and climatic
problems for future generations
 
Environmental Pressures
Pressure groups are organisations/groups of people who change business (and
government) decisions. If a business is seen to behave in a socially irresponsible way,
they can conduct consumer boycotts (encourage consumers to stop buying their
products) and take other actions. They are often very powerful because they have
public support and media coverage and are well-financed and equipped by the
public. If a pressure group is powerful it can result in a bad reputation for the
business that can affect it in future endeavours, so the business will give in to the
pressure groups’ demands. Example: Greenpeace
The government can also pass laws that can restrict business decisions such as not
permitting factories to locate in places of natural beauty.
There can also be penalties set in place that will penalize firms that excessively
pollute. Pollution permits are licenses to pollute up to a certain limit. These are very
expensive to acquire, so firms will try to avoid buying the pollution permit and will
have to reduce pollution levels to do so. Firms that pollute less can sell their pollution
permits to more polluting firms to earn money. Taxes can also be levied on polluting
goods and services.

 
Ethical Decisions
Ethical decisions are based on a moral code. It means ‘doing the right thing’.
Businesses could be faced with decisions regarding, for example, employment of
children, taking or offering bribes, associate with people/organisations with a bad
reputation etc. In these cases, even if they are legal, they need to take a decision
that they feel is right.
Taking ethical/’right’ decisions can make the business’ products popular among
customers, encourage the government to favour them in any future
disputes/demands and avoid pressure group threats. However, these can end up
being expensive as the business will lose out on using cheaper unethical
opportunities.