Chapter 9: Business and Environmental Sustainability

→Chapter Objectives
-explain how environmental challenges can create business opportunities
-describe a range of values that play a role in environmental decision making
-explain the difference between market-based and regulatory-based environmental policies
-describe business’s environmental responsibilities that flow from each approach
-identify the inadequacies of sole reliance on a market-based approach
-identify the inadequacies of regulatory-based environmental policies
-define and describe sustainable development and sustainable business
-highlight the business opportunities associated with a move towards sustainability
-describe the sustainable principles of eco-efficiency, biomimicry, and service
→Introduction
-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
-while environmental regulation can add costs to business operations and restrict business choice, they
can also provide opportunities for business
-we have entered the sustainability revolution—an age where creating environmentally and
economically sustainable products/services is creating unlimited business opportunities
-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
-throughout the history of industrial economies, business most often looked at environmental concerns
as unwanted burdens and barriers to economic growth
-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
-the major ethical question of this chapter is what responsibilities contemporary businesses have
regarding the natural environment
-the natural step funnel

•the Natural Step challenges business to “backcast” a path towards sustainability

-backcasting examines what the future will be when we emerge through the funnel
•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
-in simple terms, 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
-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
•the resources necessary to sustain life are on a downward slope
•the second line represents aggregate worldwide demand, accounting for both population growth
and the increasing demand of consumerist lifestyles
•barring an environmental catastrophe, many but not all industries will emerge through the
narrowing funnel into an era of sustainable living—innovative and entrepreneurial business will
find their way through
→Business Ethics and Environmental Values
-deciding what we should do is the ultimate goal of practical reason; our values are standards that
encourage us to act one way, not another
-given this objective, which values and decisions are supported by the natural environment?
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 •why should we act in ways that protect the natural environment from degradation?
•why should business be concerned with, and value, the natural world?
•human self-interest is the most obvious answer
-environmental concerns are relevant to business because human beings, both presently living humans
and future generations of humans depend on the natural environment in order to survive
-two aspects of contemporary environmental realities underscore the importance of self-interested
reasoning
•past human societies have often run up against the limits of the local environment’s ability to
sustain human life
-in these historical cases, environmental degradation has been localized to a particular
region and has seldom affected more than a generation
-in contrast, some contemporary environmental issues have the potential to adversely
affect the entire globe and change human life forever
•the science of ecology and its understanding of the interrelatedness of natural systems have
helped us understand the wide range of human dependence on ecosystems
-by the late nineteenth century, humans came to recognize the self-interested reasons for protecting the
natural environment
•the conservation movement—the first phase of modern environmentalism—advocated a
restrained and prudent approach to the natural world
-from this perspective, the natural world was still valued as a resource
-conservationists argued against the exploitation of natural resources as if they could
provide an inexhaustible supply of material
-the natural world, like capital, had the productive capacity to produce long-term income
but only if managed and used prudently
-besides self-interested reasons to protect human life and health, the natural environment is essential and
valuable for many other reasons
•the beauty and grandeur of the natural world provide great aesthetic, spiritual, and inspirational
value
•parts of the natural world can have symbolic value, historical value, and such diverse
psychological values as serenity and exhilaration
-these values can conflict with the use of the earth itself as a resource to physically, as opposed to
spiritually, sustain those who live on it
-a final set of values that we will consider involves the moral status of animals and other living beings
•variously referred to as the animal rights, animal liberation, or animal welfare movement, this
approach attributes a moral standing to animals
•according to many people, animals, and all other living things, deserve to be respected and
treated with dignity
•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
-distinctive ethical responsibilities concerning how we treat animals has significant implications for
many businesses
•some argue that many animals, presumably all animals with a central nervous system, have the
capacity to feel pain—reminiscent of the utilitarian tradition—asserts an ethical responsibility to
minimize pain
-acts that inflict unnecessary pain on animals are ethically wrong
•a second approach argues that at least some animals have the cognitive capacity to possess a
conscious life of their own—reminiscent of the Kantian ethical tradition—asserts that we have a
duty not to treat these animals as mere objects and means to our own ends
→Business’ Environmental Responsibility: The Market Approach
-historically, debate has focused on whether efficient markets or government regulation is the most
appropriate means for meeting the environmental responsibilities of business
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 -if the best approach to environmental concerns is to trust them to efficient markets—responsible
business managers simply ought to seek profits and allow the market to allocate resources efficiently
•by doing this, business fills its role within a market system, which in turn serves the greater
overall (utilitarian) good
-if government regulation is a more adequate approach, then business ought to develop a compliance
structure to ensure that it conforms to those regulatory requirements
-a market-based approach to resolving environmental challenges—reminiscent of the narrow, economic
view of CSR—contends that environmental problems are economic problems that deserve economic
solutions
-fundamentally, environmental problems involve the allocation and distribution of limited resources
-in his 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
•this optimal level is best attained by leaving it to a competitive market
•Baxter begins with a goal of “safe” air and water quality, and translates this goal to a matter of
balancing risks and benefits
-society could strive for pure air and water, but the costs (lost opportunities) that this
would entail would be too high
-a more reasonable approach is to aim for air and water quality that is safe enough to
breathe and drink without costing too much
-society, through the activities of individuals, will be willing to pay for pollution reduction as long as the
perceived benefits outweigh the costs
-the free market provides an answer for resource conservation
•from a strict market economic perspective—resources are “infinite”
-as the supply of any resource decreases, the price increases—providing a strong
incentive to supply more or provide a less costly substitute
-in economic terms, all resources are “fungible”—can be replaced by substitutes, and in
this sense resources are infinite
-a similar case can be made for the preservation of environmentally sensitive areas
•preservation for preservation’s sake would be wasteful since it would use resources inefficiently
-challenges to this narrow economic view of corporate social responsibility are familiar to both
economists and ethicists
•a variety of market failures, many of the best known of which involve environmental issues,
point to the inadequacy of market solutions
-since 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, future
generations), free market exchanges cannot guarantee optimal results
•a second type of market failure occurs when no markets exist to create a price for important
social goods
-endangered species, scenic vistas, and biodiversity are just some environmental goods
that typically are not traded on open markets
-public goods such as clean air and ocean fisheries also have no established market price
-with no established exchange value, the market approach cannot even pretend to achieve
its own goals of efficiently meeting consumer demand
-markets alone fail to guarantee that such important public goods are preserved and
protected
•a third way in which market failures can lead to serious environmental harm involves a
distinction between individual decisions and group consequences
-we can miss important ethical and policy questions if we leave policy decisions solely to
the outcome of individual decisions
-consider the calculations that an individual consumer might make regarding the purchase
of an SUV and the consequences of that decision on global warming
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 •the additional CO 2 that would be emitted by a single SUV is miniscule enough
that an individual would likely conclude that her decision will make no difference
•however, if every consumer made exactly the same decision, the consequences
would be significantly different
-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
-markets are incomplete (at best) in their approach to the overall social good
•in other words, what is good and rational for a collection of individuals is not necessarily what
is good and rational for a society
-internalizing external costs and assigning property rights to unowned goods such as wild species—two
responses to market failures by the defenders of a narrow economic view of CSR
-but there are good reasons for thinking that such ad hoc attempts to repair market failures are
environmentally inadequate
-one important reason is what has been called the first-generation problem
•markets can work to prevent harm only through information supplied by the existence of market
failures
•we learn about market failures and thereby prevent harms in the future only by sacrificing the
“first generation” as a means of gaining this information
-when public policy involves irreplaceable public goods such a reactionary strategy is ill advised
→Business’ Environmental Responsibility: The Regulatory Approach
-a broad consensus emerged in the United States in the 1970s that unregulated markets are an inadequate
approach to environmental challenges
-much of the most significant environmental legislation in the United States was enacted during the
1970s
•the Clean Air Act of 1970, Federal Water Pollution Act of 1972 (amended and renewed as the
Clean Water Act of 1977), and the Endangered Species Act of 1973 were part of the national
consensus for addressing environmental problems
-before this legislation was enacted, the primary legal avenue open for addressing environmental
concerns was tort law
•only individuals who could prove that they had been harmed by pollution could raise legal
challenges to air and water pollution—legal approach placed the burden on the person who was
harmed and, at best, offered compensation for the harm only after the fact
•except for the incentive provided by the threat of compensation, U.S. policy did little to prevent
the pollution in the first place
•because endangered species themselves had no legal standing, direct harm to plant and animal
life was of no legal concern and previous policies did little to prevent harm to plant and animal
life
-the laws enacted during the 1970s—shifted the burden from those threatened with harm to those who
would cause the harm
-government established regulatory standards to try to prevent the occurrence of pollution or species
extinction rather than to offer compensation after the fact
-business was free to pursue its own goals as long as it complied with the side constraints these
minimum standards established
-the consensus emerged that society had two opportunities to establish business’s environmental
responsibilities
•as consumers, individuals could demand environmentally friendly products in the marketplace
•as citizens, individuals could support environmental legislation
•as long as business responded to the market and obeyed the law, it met its environmental
responsibilities
-several problems suggest that the regulatory approach will prove inadequate over the long term
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 •first, it underestimates the influence that business can have in establishing the law
•second, this approach also underestimates the ability of business to influence consumer choice
-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
•further, if we rely on the law to protect the environment, environmental protection will extend
only as far as the law extends
-yet, most environmental issues, pollution problems especially, do not respect legal
jurisdictions
-similarly, national regulations will be ineffective for international environmental challenges
-finally—most troubling from an environmental standpoint—this regulatory model assumes that
economic growth is environmentally and ethically benign
•regulations establish side constraints on business’s pursuit of profits and, as long as they remain
within those constraints, accept as ethically legitimate whatever road to profitability management
chooses
→Business’ Environmental Responsibilities: The Sustainability Approach
-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
-the concept of sustainable development and sustainable business practice suggests a radically new
vision for integrating financial and environmental goals
-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”
-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
•the commission was charged with developing recommendations for paths towards economic and
social development that would not achieve short-term economic growth at the expense of long-
term environmental and economic sustainability
•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
-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
•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
•two aspects of the circular flow model are worth noting
-first, it does not differentiate natural resources from the other factors of production—
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
-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
•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
-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
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 -the circular flow model (9.2)

-a model of the economy as a subset of the biosphere (9.3)

-figure 9.3 differs from figure 9.2 in several important ways

•first, the sustainable model recognizes that the economy exists within a finite biosphere that
encompasses a band around the earth that is little more than a few miles wide
-from the first law of thermodynamics (the conservation of matter/energy)—matter nor
energy can truly be “created,” it can only be transferred from one form to another
•second, energy is lost at every stage of economic activity
-consistent with the second law of thermodynamics (entropy increased within a closed
system), the amount of usable energy decreases over time
-“waste energy” is continuously leaving the economic system and thus new low-entropy
energy must constantly flow into the system
•ultimately, the only source for low-entropy energy is the sun
-third, the sustainable model no longer treats natural resources as an undifferentiated and
unexplained factor of production emerging from households
•natural resources come from the biosphere and cannot be created ex nihilo
-finally, it recognizes that wastes are produced at each stage of economic activity and these
wastes are dumped back into the biosphere
-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
•these are what Daly calls the “biophysical limits to growth”
→The “Business Case” for a Sustainable Economy
-regulatory and compliance model—interprets environmental responsibilities as constraints upon
business, the sustainability model—more forward looking and may present business with greater
opportunities than burdens
•first, sustainability is a prudent long-term strategy
-as the Natural Step’s funnel image suggests, business will need to adopt sustainable
practices to ensure long-term survival
-firms that fail to adapt to the converging lines of decreasing availability of resources and
increasing demand risk their own survival
•second, the huge unmet market potential among the world’s developing economies can only be
met in sustainable ways
•third, significant cost savings can be achieved through sustainable practices
-savings on energy use and materials will reduce not only environmental wastes, but
spending wastes as well
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 -minimizing wastes makes sense on financial grounds as well as on environmental
grounds
•fourth, competitive advantages exist for sustainable businesses
-firms that are ahead of the sustainability curve will both have an advantage serving
environmentally conscious consumers and enjoy a competitive advantage attracting
workers who will take pride and satisfaction in working for progressive firms
•finally, sustainability is a good risk management strategy
-refusing to move towards sustainability offers many downsides that innovative firms
will avoid
•avoiding future government regulation is one obvious benefit
•avoiding legal liability for unsustainable products is another potential benefit
•consumer boycotts of unsustainable firms are also a risk to be avoided
→Principles for a Sustainable Business
-the precise implications of sustainability will differ for specific firms and industries, but three general
principles will guide the move towards sustainability
•firms and industries must become more efficient in using natural resources
-firms and industries must become more efficient in using natural resources—sometimes
called eco-efficiency, have long been a part of the environmental movement
•“doing more with less” has been an environmental guideline for decades
•some estimates suggest that with present technologies alone, business could
readily achieve at least a fourfold increase in efficiency and as much as a tenfold
increase
•they should model their entire production process on biological processes
-the second principle of business sustainability—firms should model their entire
production process on biological processes—can be easily understood by reference to
figure 9.2
•“closed-loop” production seeks to integrate what is presently waste back into
production
•in an ideal situation, the waste of one firm becomes the resource of another, and
such synergies can create eco-industrial parks
•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
-the ultimate goal of biomimicry is to eliminate waste altogether rather
than reduce it
•if we truly mimic biological processes, the end result of one
process (e.g., leaves and oxygen produced by photosynthesis) is
ultimately reused as the productive resources (e.g., soil and water)
of another process (plant growth) with only solar energy added
-the evolution of business strategy towards biomimicry can be understood along a
continuum
•the earliest phase has been described as “take-make-waste”—business takes
resources, makes products out of them, and discards whatever is left over
•a second phase envisions business taking responsibility for its products from
“cradle to grave”—sometimes referred to as “life-cycle” responsibility
-it holds that a business is responsible for the entire life of its products,
including the ultimate disposal even after the sale
-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
•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
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 back into the productive cycle—it would create incentives to redesign products so
that they could be recycled efficiently and easily
•they should emphasize the production of services rather than products
-a third sustainable business principle involves a shift in business model from products to
services
•traditional economic and managerial models interpret consumer demand as the
demand for products—washing machines, carpets, lights, consumer electronics,
air conditioners, cars, computers, and so forth
•a service-based economy interprets consumer demand as a demand for services
—for clothes cleaning, floor covering, illumination, entertainment, cool air,
transportation, word processing, and so forth

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