To what extent can the business sector be encouraged to become more environmentally responsible to their customers and stakeholders?

Jeremy Lamont

Introduction

The business sector is generally targeted on environmental responsibility. This article assesses if firms can be encouraged in taking on more responsibility to their customers and stakeholders by analysing current and possible methods.

In economics the cost to the environment is categorized by social costs and externalities in the supply and demand model. The key of getting to the business sector is to not only take on more of the social costs away from consumers in the market but to also reduce them out of the market completely. The costs of economic activity have a negative externality or social cost and whilst much of it is currently borne by the environment and stakeholders, it could also be passed onto the business sector.

A Stakeholder is “a person, group or organization that has interest or concern in an organization. Stakeholders can affect or be affected by the organization's actions, objectives and policies” (businessdictionary.com, 2012) which together with consumers are usually unfortunate in bearing the negative environmental effects from business activities.

Supporters of environmentalism argue more can be done by firms to be more environmentally responsible. Climate change amongst a host of other environmental problems is largely blamed on the business sector. The article will critically assess the effects of what is being done to encourage firms’ environmental responsibility in the business sector.

Recommendations for encouraging firms to be more environmentally as well as an evaluation of current efforts will conclude the article. The article will also try to answer if the business sector will need to be coerced into or naturally move towards being more environmentally responsible and to what extent this will be successful.

Rising Pollution and degradation

Environmental problems are transnational and so are much of the world largest global corporations. What manufacturers sell in one country sometimes has a detrimental effect on the environment of stakeholders in the producer country. http://www.bized.co.uk, 1996-2012

The supply and demand model above illustrates how the market with producers represented by the Supply curve and consumers represented by the demand curve, fails to take social costs or negative externalities into account (shaded area). These costs will typically include the environment and even the health and well being of people affected by the economic activity. Pollution as result of activities such as excavation, processing, waste removal or even transport may affect the local population and their livelihoods who live off their local environment. Effects may include loss of farmlands, clean air, drinking water, disease and drought. These social costs are not included in the low prices that consumers may benefit from cheap good and products sold to them however effects such as climate change will affect them in the long term. It is therefore essential that the business spectator becomes more environmentally responsible towards their consumers and stakeholders.

Suggestions and initiatives

In his keynote lecture at the Harvard Business School, Joseph Aldy gave a convincing argument on a market based solution of encouraging firms in becoming more environmentally sustainable and responsible. By introducing the unique way of ‘harnessing the power’ (Aldy, 2012) of capital markets to encourage the business sector achieve this objective, Aldy was able to show how markets naturally encouraged a shift to cleaner gas rather than inefficient coal allowing consumers and businesses to shift towards cheaper electricity.
Source:www.instituteforenergyresearch.org, 2012

Aldy also highlighted how the business sector through pricing carbon can be encouraged to reduce carbon pollution; a policy already adopted in some US states such as California and as well as countries like Australia and many others in Europe. A unique initiative which is increasingly becoming more widely used was making companies include pollutions as potential liabilities on their balance sheets which would influence investors. This essentially prices pollution whilst also allowing investors to be made aware of potential lawsuits from stakeholder affected by pollution. The Harvard Business Review on Green Business Strategy also supports the idea of pricing the environment and argues “the reason companies (and governments are so prodigal with the ecosystem services is that that the value of those services doesn’t appear on the business balance sheet” ( A Lovins, LH Lovins and Hawken, 2007). They suggest a new idea of ‘natural capitalism’ by which the entire biosphere is actually priced with costs being passed to the business sector. This concept promotes investment into ‘natural capital’ which is the environment and incentivises the business sector into promoting environmental responsibility and sustainability.

Government legislation has been crucial in not only persuading but forcing companies into becoming environmentally responsible in their actions. The government is essentially also a powerful stakeholder in having the ability to effectively encourage and even force the business sector if needed to become more environmentally responsible. The BP oil spill in the Gulf of Mexico is an example where BP was forced to pay compensation to victims who suffered from the effects of the Deepwater Horizon Oil spill due to BP’s negligence.

The rise in Corporate Social responsibility signifies a shift of the business sector towards being more responsible towards towards social issues which firms use to communicate their commitment to the environment. Whilst analysing the strategy of firm involved in the highest polluting industries such paint production, Cambra Fierro, Hart and Polo Redondo state that firms will objectively have a “desire to make the market aware that the management system is respectful of the environment”(Cambra Fierro, Hart, Redondo, 2008). This does raise the question whether a firm’s policies regarding environmental responsibility are whether “their behaviour responds to an ethically correct profile or if it is merely the owner’s response to the need of complying with current legislations.” (Cambra Fierro, Hart, Redondo, 2008)

Pigou(1920), in the Economics of Welfare stated that that “tax revenue is one of the important economic instruments for the environmental protection” and can be very effective in encouraging firms to become environmentally responsible.” He continued to argue that it is “the government which is able to redistribute social interests,” (Pigou, 1920) which supports the economic model of placing social costs on supply and demand on the business sector. Subsidising new technologies and business models that promote environmental responsibility is an excellent way of encouraging firms to be greener helping manufacturers and consumers of new green technology. In his analysis of Tax incentives by the federal government, Larry Garrison examines tax incentives to states by the federal government which he is able to conclude by saying how “the federal government has encouraged energy efficiency and the transition to renewable energy resources through various tax incentives”( Garrison, 2009).

Using fiscal policy such as taxation will cause firms to experience a rise in costs associated to being irresponsible towards the environment and be encouraged to reduce this. Following their mathematical model of an effect of a green tax, Kuo Lee & Bin Lee (2011) empirically showed how “competition in the market has served as leverage to minimize total market pollution by magnifying the effect of green tax and squeezing out players that cause servers environmental pollution with lagging technology” Kuo Lee & Bin Lee (2011).Their analysis shows how taxes help competition within the business sector is able to encourage environmental responsibility.

Consumers can also encourage firms to become more environmentally responsible. Sam Walton a renowned businessman and founder of the retail giant Wal-Mart stated the consumer is essentially the boss and has the power to fire every in the organization by taking his money elsewhere making them very influential. Consumer boycotts and shopping patterns have been overwhelmingly successful in the past as customers pushed to try force a firm to shift its position towards being detrimental to the environment towards being more responsible. They essentially cut at the life blood of the business: the profit, and force a firm to act as demanded or force losing its profit or even existence. Being able to improve brand image through green initiatives has also shifted the business sector towards being naturally environmentally responsible. In their text focusing on changing consumer demands, Welford and Gouldson stated how when “faced with a number of alternatives, increasing numbers of consumer are now actively seeking out products which are less damaging to the environment” meaning “Firms who are able to provide environmentally friendly products will see their sales rise.”(Weldford and Gouldson, 1993). An example is the Body shops strong commitment to the environmental and ethical issues and the success of its franchises. using “an honourable code of behaviour” (thebodyshop.com,2012).

Business Fightback

One of the main problems with trying to encourage the business sector to be more environmentally responsible to its customers and stakeholders is firms will largely operate on a voluntary basis in outside of legislation. Most notable anti CSR school of thought is classical economics stating that “managements has one responsibility: to maximise profits of its owners or shareholders” (Buchholtz & Carroll, 2009) Milton Friedman stated “the social responsibility of business is to make profits”. This statement sums up much of the business sectors objectives with social responsibilities placed on the back agenda. Firms will try to always minimise costs by minimising environmental commitments as doing so is seen as costly. Some firms have comparative advantage over their rivals in the market which may sometimes be due certain means of production they use; more often than not they are detrimental to the environment and local population.

The business sector has enormous political influence and is able to make use of its financial resources to sway legislation in its favour making passing environmentally friendly legislation in favour of stakeholders or customers more difficult to pass.

Another problem is adding taxes can also reduce the competitiveness of firms in the business sector and may not also consider their behaviour as efficiently. Droge and Shroder state, “While percentage targets appear to be increasingly popular with policymakers, they pose new questions in environmental economics, since the full complexity of industry dynamics, e.g. entry and exit behavior of firms, needs to be considered in an analysis “(Droge and Shroder, 2 005).

One of the problems some businesses may not entirely adhere to environmentally friendly ways is their objectives to first meet economic objectives. “No one wants to hear about limits unless they have what they want” hence “sustainable growth makes sense on a theoretical level, but needs to be operationalized in concrete solutions where resource usage is involved.”(Buchholz, Marcus & Post, 1992)

Driscoll and Starik in their focus on Stakeholders deduced, “proximity is additionally necessary as a salience dimension because some stakeholders in a firm’s network, or value chain, are closer than others to areas that are susceptible to extreme climatic events produced in part by climate change” (Driscoll and Starik). This highlights how some stakeholders can also be isolated, vulnerable or politically muted with an inability to put pressure on a businesses to become environmentally responsible towards them.
I

Conclusion and recommendation

The market itself has the ability to encourage the business sector to become more environmentally responsible. Market based solutions are beneficial as they are efficient allowing the business sector to function and provide goods and services to consumers at market set rates. The market however is prone to market failure and its only at this point that government should step in in using fiscal policy through public spending and taxation to encourage business to be more environmentally responsible to their customers and stakeholders.

Consumer culture may continue to push the business sector further down the path of being environmentally responsible. With the rise in climate change dominating environmental debate, public opinion and policy is in favour of both consumers and stakeholders; it is critical they use this power to further sway further environmental regulation in their favour at a faster rate. The business sector will move once either legally or financially pushed, though some firms take on the initiative to be more environmentally responsible.

Activists groups are also very crucial in mobilizing individuals who are good and raising interest in environmental issues. Their methods have been successful as highlighted in previous instances in protecting vulnerable stakeholders, and initiating steps that introduce change towards environmental responsibility.

Hope for the future?

Ray Anderson CEO of Interface Inc in a keynote speech in 2009 highlighting his carpet firms success in being more environmentally sustainable was able to show how exemplary his firm was on its initiative ‘Mission zero’ which aims to make the company completely carbon pollutant free by 2020 as well as reducing waste and water usage, using renewable materials. To date over 85 million square yards of carbon neutral carpet had been sold with reduction sales up two thirds and net pollution down 82% through efficiency (Anderson, 2009). Interface Inc took this step naturally upon realising the financial benefits of being more environmentally responsible which perhaps may be a model of the future of the business sector.

References:

Anderson, R. (2009). Ray Anderson: The business logic of sustainability. Available: http://www.ted.com/talks/ray_anderson_on_the_business_logic_of_sustainability.html. Last accessed 21/11/2012.

Aldy, J. (2012). Tapping the Power of Markets to Protect the Environment | Harvard Thinks Green 2012 . Available: http://www.youtube.com/watch?v=7YpaGTER2YY&feature=plcp. Last accessed 21/11/2012.

Businessdictionary.com. (2012). Definition Stakeholder Available: http://www.businessdictionary.com/definition/stakeholder.html. Last accessed 21/11/2012.

BizEd. (2001). The Theory of Externalities [ Biz/ed Virtual Developing Country ]. Available: http://www.bized.co.uk/virtual/dc/copper/theory/th19.htm. Last accessed 21/11/2012.

Institute for Energy Research. (2012). The U.S. War on Coal; But Global Consumption Increases. Available: http://www.instituteforenergyresearch.org/2012/06/19/the-u-s-war-on-coal-but-global-consumption-increases/. Last accessed 21/11/2012

The Body Shop. (2012). Our Values. Available: http://www.thebodyshop.com/content/services/aboutus_values.aspx. Last accessed 21/11/2012.

Journals:

Driscoll, C., & Starik, M. (2004). The primordial stakeholder:
Advancing the conceptual consideration of stakeholder status for the natural environment.
Journal of Business Ethics, 49, 55–73.

Cambra-Fierro,J , Hart, S Polo-Redondo,Y. (2008). Environmental Respect: Ethics or Simply. Journal of Business Ethics. 82 (1), 645-646.

Droge, S Shroder, P. (2005). How to Turn an Industry Green: Taxes versus. Journal of Regulatory Economics. 27 (2), 197.

Kuo-Lee, C Bin-Lee, Y. (2011). Effects of Green Taxes on Firms Operating Costs: An Explanatory Model. International Journal of Management. 28 (1), p 1-12.

Texts:

Buchholz, R, Marcus, R A, Post, J A. (1992). Managing Environmental Issues. New Jersey: Prentice-Hall, Inc. 168.

Buchholtz, A. Carroll, A B. (2009). Business And Society. 7th ed. United States: South Western, Cengage Learning. 49.

Lovins, A Lovins, LH Hawken, P (2007). Harvard Business Review on Green Business Strategy. Boston: Harvard Business School Press. 67-69.

Welford, R, Gouldson, A. (1993). Environmental Management & Business Strategy. London: Pitman Publishing. 148-149.
Pigou, A. C. (1920). The Economics of Welfare, 4th edn. 1932. London:
Macnillam