1-2 9-2 business, the environment and sustainability mcgraw-hill/irwin business ethics:...

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Business, The Environment

and Sustainability

McGraw-Hill/IrwinBusiness Ethics: Decision-Making for Personal Integrity & Social Responsibility, Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter9

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Chapter Objectives After exploring this chapter, you will be able to:

1. Describe a range of values that play a role in environmental decision-making

2. Explain the difference between market and regulatory-based environmental policies

3. Describe business’ environmental responsibilities that would flow from each approach

4. Identify the inadequacies of sole reliance on a market-based approach5. Identify the inadequacies of regulatory-based environmental policies6. Define and describe sustainable development and sustainable business7. Highlight the business opportunities associated with a move towards

sustainability8. Describe the sustainable principles of eco-efficiency, biomimicry, and

service.

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Opening Decision Point: Should Toxic wastes be exported?

What facts do you need to know to form an opinion on the practice of exporting toxic wastes to foreign countries?

What values are implicit in the economic reasoning that leads to the decision to export such wastes?

Does it matter if the countries that accept such wastes are democratic?

How should the decision to locate toxic wastes sites be made? What are the consequences of making this decision on the basis of

costs? What principles are relevant to this decision? Can you think of undesirable land uses (trash dumps, incinerators,

smokestack industries) in your own region? Describe the neighborhoods in which they are located?

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Environmentalism: A Historical Perspective

There is a tendency to believe that environmental issues have been a concern only in recent times.

Environmentalism flourished in the latter half of the twentieth century, with such issues as air and water pollution, and the protection of endangered species becoming public policy concerns only in the 1970s.

Certainly few businesses gave the natural environment much thought at all prior to this time.

But environmental degradation has been a part of human history forever.

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Environmentalism: A Historical Perspective

Yet, the industrial revolution of the 18th and 19th centuries brought with it the ability to degrade the natural environment to a greater extent and at a faster rate than ever before.

By the start of the 21st century, the earth was experiencing the greatest period of species extinction since the end of the dinosaurs 65 million years ago.

Humans are also threatened by global climate change.

Simply put, 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 human life, and has already crossed those limits in the case of countless other forms of life.

Thus, the major ethical question of this chapter:

What responsibilities do contemporary businesses have regarding the natural environment?

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Sustainability as the New Paradigm?

There is some evidence that, at the start of the 21st century, a new model of business is emerging, perhaps first initiated in Europe and followed by North America and Asia.

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.

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Sustainability as the New Paradigm?

Environmental responsibilities are seen as a fundamental part of basic business practice.

Indeed, sustainable business ventures may find that environmental considerations offer creative and entrepreneurial businesses enormous opportunities.

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Business Ethics and Environmental Values (insert obj. 1)

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.

Therefore, what values are supported by the natural environment? Why should we act in ways that protect the natural environment from degradation? Why should business be concerned with, and value, the natural world?

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Human Self-Interest!

All human beings depend on the natural environment in order to survive. Humans need clean water to drink, healthy air to breathe, fertile

soil and oceans to produce food, an ozone layer to screen out solar radiation, and a biosphere that maintains the delicate balance of climate in which human life can exist.

Two aspects of contemporary environmental realities underscore the importance of self-interested reasoning.

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1. The Threat to Life

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.

Global climate change, species extinction, soil erosion and desertification, and nuclear wastes will threaten human life into the indefinite future.

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2. The Threat to Everything Else

The science of ecology and its understanding of the interrelatedness of natural systems have helped us to understand the wide range of human dependence on ecosystems. Where once we might have thought that buried wastes were gone

forever, we now understand how toxins can seep into groundwater and contaminate drinking water across great time and distances.

We now understand how pesticides accumulate throughout the food chain and pose greatest dangers not only to top predators such as bald eagles, but to human beings as well.

Where once we thought that ocean fisheries were inexhaustible and the atmosphere too big to be changed by humans, we now understand the precise balance necessary to maintain life-supporting systems.

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The Conservation Movement

By the late 19th century, humans came to recognize the self-interested reasons for protecting the natural environment.

The conservation movement, the first phase of modern environmentalism, advocated for a more restrained and prudent approach to the natural world.

From this perspective, the natural world was still valued as a resource, providing humans with both direct benefits (air, water, food), and indirect benefits (the goods and services produced by business).

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The Earth as Instrumental Value vs. Other Value

The natural environment is essential and valuable to use for many other reasons. Often, these other values conflict with the more direct instrumental value that comes from treating the natural world as a resource.

The beauty and grandeur of the natural world provides great aesthetic and inspirational value. Many people value the natural world as a manifestation of religious and spiritual value. Parts of the natural world are valued for their symbolic value, their historical value, and for such diverse psychological values as serenity and exhilaration.

These values can clearly conflict with the use of the earth itself as a resource to physically, as opposed to spiritually, sustain those who live on it.

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Environmental Value vs. the Animals

The moral status of animals has been the value that, arguably, has raised the greatest challenge to business.

Referred to as the animal rights, animal liberation, or animal welfare movement, this approach attributes a moral standing to animals.

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.

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Two Approaches to Animal Moral Standing: (1)

Many animals, presumably all that have a central nervous system, have the capacity to feel pain.

Reminiscent of the utilitarian tradition, this view asserts an ethical responsibility to minimize pain.

Inflicting unnecessary pain is taken to be an ethical wrong; therefore, acts that inflict unnecessary pain on animals is ethically wrong.

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Approaches to Animal Moral Standing: (2)

A second approach argues that at least some animals have the cognitive capacity to posses a conscious life of their own.

Reminiscent of the Kantian ethical tradition, this view asserts that we have a duty not to treat these animals as mere objects and means to our own ends.

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Business’ Environmental Responsibility: The Market Approach (insert obj. 2)

An overwhelming consensus does exist about the prudential reasons for protecting the natural environment-- humans have a right to be protected from harm.

What controversy remains has more to do with the best means for achieving this goal.

Historically, this debate has focused on whether efficient markets or government regulation is the most appropriate means for meeting the environmental responsibilities of business.

Each of these two approaches has significant implications for business.

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The Market vs. Regulation?

From one perspective, if the best approach to environmental concerns is to trust them to efficient markets, then the responsible business manager 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.

On the other hand, if government regulation is a more adequate approach, then business ought to develop a compliance structure in order to insure that it conforms to those regulatory requirements.

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The Market vs. Regulation?

Defenders of the market approach contend that environmental problems are economic problems that deserve economic solutions.

Fundamentally, environmental problems involve the allocation and distribution of limited resources.

Whether we are concerned with the allocation of scare non-renewable resources such as gas and oil, or the earth’s capacity to absorb industrial by-products such as CO2 or PCB, environmental challenges can be addressed through efficient markets.

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The Market Approach (insert obj. 3)

Some argue 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.

Denying that there is any “natural” or objective standard for clean air or water, we would begin 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.

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The Market Approach

A more reasonable approach is to aim for air and water quality that is safe enough to breathe and drink without costing too much.

This balance, the “optimal level of pollution” can be achieved through competitive markets.

Society, through the activities of individuals, will be willing to pay for pollution reduction as long as the perceived benefits outweigh the costs.

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The Market Approach

The free market also provides an answer for resource conservation. From a strict market economic perspective, resources are “infinite.”

There is an argument that resources should not be viewed as material objects but simply as any means to our ends.

History has shown that human ingenuity and incentive has always found substitutes for any shortages. As the supply of any resources decreases, the price increases thereby providing a strong incentive to supply more, or provide a less costly substitute.

All resources are “fungible” - They can be replaced by substitutes and in this sense resources are infinite. Resources that are not being used to satisfy consumer demand are being wasted.

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Inadequacy of the Market Approach: Externalities (insert obj. 4)

The market approach results in externalities, such as environmental pollution.

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.

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Inadequacy of the Market Approach: No Exchange Value

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.

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.

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Inadequacy of the Market Approach: Individual vs. Group Decisions

Important ethical and policy questions can be missed if we leave policy decisions solely to the outcome of individual decisions.

Because many important ethical questions may 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.

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The Market Approach – Defenses and Counters

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 has been called the first-generation

problem. Markets can work to prevent harm only through information supplied by the existence of markets failures.

That is, we learn about markets 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.

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The Regulatory Approach: History (insert obj. 5)

A broad consensus emerged within the United States in the 1970s that unregulated markets are an inadequate approach to 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.

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The Regulatory Approach: Historical Perspective

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.

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The Regulatory Approach: Historical Perspective

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 an 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 Regulatory Approach: Impact of the Laws

Each law 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 compensation after the fact.

These laws established minimum standards to ensure air and water quality and species preservation.

Business was free to pursue it own goals as long as it complied with the side constraints established by this minimum standards.

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The Regulatory Approach: Ethical Perspective

Philosopher Norman Bowie defended a modified version of this narrow view of corporate social responsibility.

Bowie argued that, apart from the duties to cause no avoidable harm to humans and to obey the law, business has no special environmental responsibility.

In so far as society desires environmental goods, e.g., lowering pollution by increasing the fuel efficiency of automobiles, it is free to express those desires through legislation or within the marketplace. Absent those demands, business has no special environmental responsibilities.

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Inadequacies of the Regulatory Approach (1) (insert obj. 5)

This approach underestimates the influence that business can have in establishing the law.

The Corporate Automotive Fuel Efficiency (CAFE) standards 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).

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Inadequacies of the Regulatory Approach (2)

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.

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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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.

While hope remains that international agreements might help control global environmental problems, the failure of the Kyoto agreement suggests that this might be overly optimistic.

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Perhaps most troubling from an environmental standpoint, this regulatory model assumes that economic growth is environmentally and ethically benign.

Regulations establish side-constraints on business’ pursuit of profits and, as long as they remain within those constraints, accept as ethically legitimate whatever road to profitability is chosen by management.

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 towards profitability can have very different environmental consequences.

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Business’ Environmental Responsibilities: The Sustainability Approach (insert obj. 6)

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, compared to the growth model that preceded it.

These three goals, economic, environmental, and ethical sustainability, are often referred to as the “Three Pillars of Sustainability.”

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Sustainability Approach: Historical Perspective

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, named for its Chair Gro Harlem Brundtland.

The Commission was charged to develop 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.

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The Nature of Sustainability: The Circular Flow Model

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” explains the nature of economic transactions in terms of a flow of resources from businesses to households and back again.

(Continued)

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Circular Flow Model

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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Business Opportunities in a Sustainable Economy (insert obj. 7)

While the regulatory and compliance model tends to interpret environmental responsibilities as constraints upon business, the sustainability model is more forward-looking and may present business with greater opportunities than burdens.

Indeed, it offers a vision of future business that many entrepreneurial and creative businesses are already pursuing.

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A Visual Example

The Natural Step uses an image of a funnel, with two converging lines, to help business understand these opportunities.

The resources necessary to sustain life are on a downward slope.

While there is disagreement about the angle of the slope, there is widespread consensus that available resources are in decline.

The second line represents aggregate worldwide demand, accounting for both population growth and the increasing demand of consumerist lifestyles.

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A Visual Example

Barring an environmental catastrophe, many but not all industries will emerge through the narrowing funnel into an era of sustainable living. Businesses unable to envision that sustainable future will hit the narrowing wall. Innovative and entrepreneurial business will find their way through.

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The Funnel Example

The Natural Step then challenges business to “backcast” a path towards sustainability.

We are all familiar with forecasting, in which we examine present data and predict the future. “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 in order for them to arrive at that future.

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Why be Sustainable?

For reasons of business self-interest alone, a strong case can be made for taking steps now to achieve a sustainable future.

At least five reasons establish a persuasive case for concluding that it is almost always in business’ self-interest to pursue a strategy of sustainability.

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Why be Sustainable? (1)

Sustainability is a prudent long-term strategy. Business will need to adopt sustainable practices in order

to insure long-term survival. Firms that fail to adapt to the converging lines of

decreasing availability of resources and increasing demand risk their own survival.

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There is a huge unmet market potential among the world’s developing economies that can only be met in sustainable ways.

Enormous business opportunities exist in serving the billions of people who need, and who are demanding, economic goods and services.

The base of the economic pyramid represents the largest and fastest-growing economic market in human history.

Yet, the sheer size of these markets alone makes it impossible to meet this demand with the environmentally damaging industrial practices of the 19th and 20th centuries.

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Significant cost savings can be achieved through sustainable practices.

Business stands to save significant costs in moves towards eco-efficiency.

Savings on energy use and materials will reduce not only environmental wastes, but spending wastes as well.

Minimizing wastes make sense on financial grounds as well as on environmental grounds.

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Competitive advantages exist for sustainable businesses. Firms that are ahead of the sustainability curve will have an

advantage serving environmentally-conscious consumers, as well as enjoying a competitive advantage attracting workers who will take pride and satisfaction in working for progressive firms.

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Sustainability is a good risk management strategy. There are many downsides in refusing to move towards

sustainability that will be avoided by innovative firms. Avoiding future government regulation is one obvious

benefit. Firms that take the initiative in moving towards sustainability

will also likely be the firms who set the standards of best-practices in the field. Thus, when regulation does come, these firms will likely play a role in determining what those regulations ought to be.

(continued)

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Why be Sustainable? (5) (continued)

Avoiding legal liability for unsustainable products is another potential benefit.

As social consciousness changes, the legal system may soon begin punishing those firms who are now negligent in failing to foresee harms caused by their unsustainable practices.

Consumer demand and consumer boycotts of unsustainable firms are also a risk to be avoided.

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Principles for a Sustainable Business (insert obj. 8)

Firms can evolve toward a sustainable business model by not allowing resources to enter into the economic cycle from the biosphere at rates faster than which they are replenished.

Ideally, waste should be eliminated or, at a minimum, not produced at a rate faster than which the biosphere can absorb them.

Finally, the energy to power the economic system should be renewable, ultimately relying on the sun, the only energy that is truly renewable.

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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.

1. Firms and industries must become more efficient in using natural resources;

2. They should model their entire production process on biological processes; and

3. They should emphasize the production of services rather than products.

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Principle 1: Eco-Efficiency Versions of the first principle, sometimes called eco-

efficiency, has long been a part of the environmental movement. “Doing more with less” has been an environmental guideline for decades.

Business firms can improve energy and materials efficiency in such things as lighting, building design, product design, and distribution channels.

Some estimates suggest that with present technologies alone, business could readily achieve a 4-fold increase in efficiency and as much as a 10-fold increase.

Consider that a 4-fold increase, called “Factor-Four” in the sustainability literature, would make it possible to achieve double the productivity from one-half the resource use.

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Principle 2: Biological Process Models

Imagine the waste that is leaving the economic cycle is being turned back into the cycle as productive resource.

“Closed-loop” production seeks to integrate what is presently waste back into production.

In an ideal situation, the waste of one firm become 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.

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Principle 3: Shift from Products to Services

Traditional economic and managerial models interpret consumer demand as the demand for products, e.g., 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, e.g., for clothes cleaning, floor-covering, illumination, entertainment, cool air, transportation, word processing, and so forth.

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Discussion of Opening Decision Point: Should Toxic wastes be exported?

In the early 1990s, an internal World Bank memo discussing the export of toxic wastes was leaked to the public.

The memo was written by then World Bank chief economist Lawrence Summers.

Summers later became Secretary of the Treasury under President Clinton and, after that, president of Harvard University.

Summers makes the economic case for exporting wastes in this memo. (See text or notes.)

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During the controversy that followed the release of this memo, defenders of the Summers and the World Bank alleged that this memo was intended as ironic and tongue-in-cheek.

Whether this was true of not, this memo does provide a clear description of some ethical and environmental implications of a fairly common pattern of economic thinking.

If we were to apply the principles of free market economic thinking to business decision making and corporate social responsibility, we would seek to put a price on everything, including “increased morbidity and mortality” (illness and death).

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This economic way of thinking then advises that we make decisions by applying a utilitarian calculus: act in whichever way will maximize overall happiness.

In the case of exporting toxic waste, “the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.”

On the other hand, deontological principles of justice would seem to imply that economic benefits and burdens be distributed fairly and that those who reap the benefits of industrial economies ought to be the same people who bear the burdens created by that economy.

Justice would require that that we not burden the least advantaged people in the world with the additional harms that industrial wastes create.

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Of course, the ideal would be to create industrial processes that do not produce toxic wastes in the first place.

“Take-back” regulations that are being developed by many European countries will produce incentives for business to ensure that the by-products of industrial processes are benign.

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Chapter Nine Vocabulary Terms After examining this Chapter, you should have a clear understanding of the following

Key Terms and you will find them defined in the Glossary:

Backcasting Biomimicry Corporate Automotive Fuel Efficiency (CAFE) Standards Cradle-to-Cradle Eco-Efficiency Service-based Economy Sustainable Development Sustainable Business Three Pillars of Sustainability