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10.1 Introduction: Business the Environment and Sustainability

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10.1 Introduction: Business the Environment and Sustainability

10.1 Introduction: Business, the Environment, and Sustainability

 

For many years, environmental concerns were considered to be peripheral to business operations. At best, they were understood as external constraints that limited what business could do and how it could operate. Natural resources were generally thought of as unlimited, restricted only by the cost of extraction and processing. The capacity of the earth to absorb wastes, whether in the form of trash to be disposed or effluents sent into the air or water, seldom entered into business calculations. Beginning in the 1970s, government regulations began to establish limits on air and water pollution, but as long as business remained within the limits established by law, it was free to operate with little thought to the natural environment.

 

Over the past two decades, this mind-set has changed radically. The idea of sustainability has become the primary model for understanding business’s environmental responsibilities. The concept of sustainable business can be traced to a UN report authored by then-prime minister Gro Brundtland of Norway in which sustainability was defined as the ability “to meet the needs of the present without compromising the ability of future generations to meet their own needs.” The fundamental idea was that no economic activity could be sustained if we ignored the environmental context in which that activity occurs. The Brundtland Commission pointed to numerous examples where economic growth was already pushing up against the biophysical limits established by the natural world.2

 

In the 1990s, the concept of sustainability was far from the corporate mainstream. Sustainable business was seen, at best, as a fad with few practitioners and none among leading firms. By 2018, it is difficult to find a major corporation that is not involved in sustainability efforts and that does not issue an annual corporate sustainability report. It would not be an exaggeration to describe what is occurring as a sustainability revolution in contemporary business.

 

For example, Patagonia, the outdoor gear, equipment, and clothing company, has been one of the true leaders in this sustainability movement. Because sustainability is very much a part of their business mission and strategic vision, Patagonia is also an 216excellent example of the strategic model of corporate social responsibility described in chapter 3. For them, profitability and sustainability merge rather than conflict.

 

Begun as a company selling climbing gear and clothing, Patagonia soon grew to include a wide range of outdoor sports and activities, including hiking, skiing, surfing, paddling, and running. The people who started the company, the customers it serves, and the market in which it operates all helped shape Patagonia into one of the world’s most sustainable businesses. Sports such as climbing, hiking, paddling, and surfing are all, in the words of Patagonia’s mission statement, “silent sports” that bring participants into close connection with nature. Their mission statement continues: “For us at Patagonia, a love of wild and beautiful places demands participation in the fight to save them, and to help reverse the steep decline in the overall environmental health of our planet.”3

 

Patagonia’s commitment to sustainable business practices starts with the materials used in creating their products. Recycled synthetics, and pesticide-free organic cotton is used in their clothing lines. They donate a minimum of 1 percent of their profits to environmental causes. Patagonia’s “common thread initiative” is described as a “partnership between Patagonia and our customers to reduce consumption and give our planet’s vital resources a rest.” This pledge seeks to reduce resource use, repair products to extend their life, reuse products by reselling or giving them to others, and recycle what cannot be repaired or reused—reimagining a world in which humans live in harmony with nature.

 

One of the most pioneering aspects of Patagonia’s commitment to sustainability is their “footprint chronicles,” a wide-ranging CSR project that aims for full transparency in their supply chain operations. This commitment includes an online disclosure of all the mills and production factories used to create Patagonia’s products. This interactive website allows anyone who visits the Patagonia website to view a global map that identifies all mills and manufacturing plants. By clicking on the site, anyone can view a photograph of the location and learn what products are made there, how many people are employed, the languages spoken, the percentage of male and female workers, as well as updated information from recent social audits of the facility.

 

From an ethical perspective, the question is whether a firm like Patagonia should be viewed as going above and beyond ethical duties and what is required, or should they be viewed as a model for what is ethically required of all businesses. Is the transition toward environmental sustainability an ethical duty, or is it good thing that can be left up to the decisions of individual firms? Should sustainability goals such as becoming carbon neutral be mandated for business in the ways that increasing fuel efficiency is mandated for the automobile industry?

 

10.2 CORPORATE SOCIAL RESPONSIBILITY AND THE ENVIRONMENT

 

A helpful way to begin our analysis of business’s environmental responsibilities is to return to the models of corporate social responsibility described in chapter 3. Consider how the economic model of corporate social responsibility would account for business’s environmental responsibilities. In the economic model, business’s 217only responsibility is to maximize profit within the law. By doing this, business fills its role within a market system that, in turn, serves the greater overall (utilitarian) good of optimally satisfying consumer preferences (i.e., more people will get more of what they want) and respecting the property rights of business owners.

 

Challenges to this narrow view of corporate social responsibility are familiar by this point. A variety of market failures, many of the best known of which involve environmental issues, point to the inadequacy of market solutions. One example is the existence of externalities, the textbook example of which is environmental pollution such as greenhouse gas emissions. Because the “costs” of such things as greenhouse gas emissions, 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, rare plants and animals, and biodiversity are just some environmental goods that typically are not traded on open markets (when they are, it often is in ways that seriously threaten their viability, as when rhinoceros horns, tiger claws, elephant tusks, and mahogany trees are sold on the black market). Public goods such as a stable climate, 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 adequately 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. Important ethical and policy questions can be missed if we leave policy decisions solely to the outcome of individual decisions. Chapter 3 presented the case of individual choice and SUV purchasing as a classic example of such a market failure. (A similar challenge was raised against market solutions to such health concerns as exposure to workplace chemicals.) The example demonstrated that the overall social result of individual calculations might be significant increases in pollution and such pollution-related diseases as asthma and allergies. 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 automobile fuel efficiency [CAFE] standards) that could address pollution and pollution-related disease would never be considered if we relied only on market solutions. Because these are important ethical questions, and because they remain unasked from within market transactions, we must conclude that 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. We saw examples of this situation in the opening discussion case. Such market failures raise serious concerns for the ability of economic markets to achieve a sound environmental policy. Defenders of the narrow view of corporate social responsibility and their economic theory have responses to these challenges, of course. Internalizing external costs and assigning property rights to unowned goods such as wild species are two responses to market failures. But there are good reasons for thinking that such ad hoc attempts to repair market failures are environmentally inadequate. One important reason is what was earlier called the first-generation problem. Markets can work to prevent harm only through information supplied by the existence of market failures. Only when fish populations in the North Atlantic collapsed, for example, did we learn that free and open competition among the world’s fishing industry for unowned public goods failed to prevent the decimation of cod, swordfish, Atlantic salmon, and lobster populations. That is, we learn about market failures and thereby prevent harms in the future only by sacrificing the first generation as a means for gaining this information. 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.

 

Considerations such as these should lead us to conclude that business has wider environmental responsibilities than those required under a narrow free market approach. A common alternative argues that some goods are so important that they should be exempt from the preference-optimizing trade-offs that occur within markets. We’ve seen this approach before, for example, in our discussions of employee rights and consumer safety. This alternative would support limits, typically in the form of government regulation, on business’s economic goals. We turn now to a consideration of this regulatory approach to business’s environmental responsibilities.

 

10.3 BUSINESS’S RESPONSIBILITY AS ENVIRONMENTAL REGULATION

 

A broad consensus emerged in the United States in the 1970s that unregulated markets are inadequate to deal with environmental challenges. Instead, governmental regulations were seen as the better way to respond to environmental problems. Much of the most significant environmental legislation in the United States was enacted during the 1970s. The Clean Air Act of 1970 (amended and renewed in 1977), 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 this national consensus for addressing environmental problems. Each law was originally enacted by a Democratic Congress and signed into law by a Republican president.

 

These laws share a common approach to environmental issues. 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. That 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. Absent any proof of negligence, public policy was content to let the market decide environmental policy. 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.

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The laws enacted during the 1970s established standards that effectively 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. We can think of these laws as establishing minimum standards to ensure air and water quality and species preservation. Business was free to pursue its own goals as long as it complied with the side constraints these minimum standards established. The consensus that emerged was that society had two opportunities to establish business’ 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. If consumers demand environmentally suspect products, such as large gas-guzzling SUVs, and those products are allowed by law, then we cannot expect business to forgo the financial opportunities of marketing such products.

 

This approach is an improvement over the narrow view in that it acknowledges the legitimacy of exempting some environmental goals from market trade-offs. As citizens, we are free to create laws that regulate and restrict what we, as consumers, desire. Our beliefs and values, expressed through law as well as through consumer choices, establish an ethical context in which we can then pursue our economic ends. Thus, this approach would argue that citizens should rely on democratic processes to establish environmental goals. Citizens are also free to use their power as consumers to demand that business provide environmentally sound goods and services. But absent law or consumer demand, business has no particular environmental responsibility.

 

Several problems suggest that this approach will prove inadequate over the long term. First, it underestimates the influence that business can have in establishing the law. The CAFE standards mentioned previously provide a good example of how this can occur. 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). However, the automobile industry was able to use its lobbying influence to exempt light trucks and SUVs from these standards. It should be no surprise that light trucks and SUVs at the time represented the largest-selling, and most profitable, segment of the auto industry.

 

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. Advertising is a $200 billion a year industry in the United States alone. We considered how effective marketing can be in shaping consumer demand in chapter 9. It is surely misleading to claim that business passively responds to consumer desires and that consumers are unaffected by the messages that business conveys. 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.

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Third, 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. New York State might pass strict regulations on smokestack emissions, but if the power plants are located upwind in Ohio or even further west in the Dakotas or Wyoming, New York State will continue to suffer the effects of pollution. Similarly, national regulations will be ineffective for international environmental challenges. While hope remains that international agreements might help control global environmental problems, the failure of international global climate change agreements, such as the Paris Climate Agreement, suggests that this might be overly optimistic.

 

Finally, and perhaps most troubling from an environmental standpoint, this regulatory model assumes that economic growth is environmentally and ethically benign. Regulations establish side constraints on businesses’ pursuit of profits and, as long as they remain within those constraints, accept as ethically legitimate whatever road to profitability management chooses. 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. Different roads toward profitability can have very different environmental consequences. More recent approaches to business’s environmental responsibilities aim to better link economic and environmental goals.

 

10.4 BUSINESS ETHICS AND SUSTAINABLE ECONOMICS

 

A more comprehensive challenge to the ability of markets to set reasonable environmental policy has been raised in the work of economist Herman Daly and other economists working on sustainable development and ecological economics. Daly makes a convincing case for an understanding of economic development that transcends the more common standard of economic growth.4 There are, Daly argues, biological, physical, and ethical limits to growth, many of which the present world economy is already approaching, if not overshooting. Unless we make significant changes in our understanding of economic activity, unless quite literally we change the way we do business, we will fail to meet some very basic ethical and environmental obligations. According to Daly, we need a major paradigm shift in how we understand economic activity.

 

We can begin with the standard understanding of economic activity and economic growth found in almost every economics textbook. What is sometimes called the circular flow model (Figure 10-1) explains the nature of economic transactions in terms of a flow of resources from businesses to households. Business produces goods and services in response to the market demands of households. These goods and services are shipped to households in exchange for payments back to business. These payments are in turn sent back to households in the form of wages, salaries, rents, profits, and interests. These payments are received by households in exchange for the labor, land, capital, and entrepreneurial skills used by business to produce goods and services.

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