Sustainability in Business: principles for profit

8 March 2011

This paper outlines the problems of unsustainable development and the scale of the challenge, and then turns to the role of business in meeting that challenge.

Despite increasing average incomes and life-spans currently development is failing us in three critical ways:

1. It is reliant on excessive use of environmental resources - thus breaching global environmental limits and causing impacts such as climate change (this is 'cheating on our children' because they will inherit a world less able to support human life)
2. The benefits are inequitably distributed. Inequality is growing, both globally and within most developed countries (this is 'cheating on our neighbours' because most of us in developed countries are relative beneficiaries).
3. This development and excessive resource use is not increasing quality of life for those that receive its material benefits (this is 'cheating on ourselves' because we all play along with the game of consuming more).

To achieve sustainability we therefore need to reduce the total burden we place upon the environment to a sustainable level by cutting back on the amount of environmental resources, distribute access to those environmental resources fairly, and use them to increase quality of life.

Friends of the Earth uses the idea of 'Environmental Space' to set measurable targets for use of environmental resources such as energy, land, water and wood. First we establish what level of resource use is sustainable - for example, how much fossil fuel we can burn within the acceptable constraints of climate change. For most non-renewable resources we find that globally we need to cut our consumption at least in half. Then we estimate what a fair share of that global resource use is for any country - calculated according to its share of a stable world population in 2050. For most developed countries, this is generally around one-fifth of our current share because we are part of the 20% of the world's people that consumes 80% of the world's resources. 

Combining these two produces environmental space targets - for reducing resource inputs used to support consumption - for the UK, of up to 88% reductions in total resource use. Put another way, if in 2050 everyone consumed in the way the British do now, we would need eight planets to sustain the human race - and the British are by no means the most profligate consumers on Earth. These targets seem challenging. But they can be reached. The main reason is that quality of life is not directly dependent upon material consumption. Nor do our economies rely only on material resources to be productive and profitable.

We have the technology to make incredible efficiency gains - to cut energy use in average homes by 95%, to recycle 80% or more of our waste, to increase vehicle fuel efficiency by 10 times, to produce the food we need with a tiny fraction of the chemicals and fossil energy used now, and generally to cut waste and pollution from industry in ways that will save millions of pounds and create jobs. We also have the intelligence and research capacity to deliver even more.

We also have 'technologies' that allow us to enjoy a greater quality of life by consuming less - so called sufficiency strategies. For example, cities designed for walking and cycling, demand-management techniques for energy and water that meet our needs but do less damage to the environment, and libraries and other leasing and sharing techniques to cut resource use.

We even have the money to deliver many of these changes. Currently in Britain we waste several billion pounds a year subsidising things we don't want - like factory farming, fossil fuel exploration and nuclear power. We give perverse tax incentives to companies and individuals to drive more, locate on out-of-town greenfield sites and throw things away rather than recycling. We spend billions more on dealing with the symptoms of environmental and social problems - such as poor health from cold and damp homes - rather than the causes. Our savings and investments are largely managed simply to maximise financial returns rather than with environmental and ethical objectives in mind. Redirecting all this wasted money could help fund what we need. 

But to deliver such changes requires a dramatic fundamental shift in how private companies operate at all levels. Despite contributing to economic wealth, providing livelihoods, helping many people meet their needs and providing goods and services that add to the quality of life of many, companies today, both individually and collectively, also:

• Resist the imposition of environmental limits and seek to increase sales (or market share). In other words, they act as though limits don't exist, thus further breaching them. For example, even the leading oil-companies (those which admit that global climate change is real) are investing heavily in exploration for new oil-reserves and seeking to keep oil prices low.
  
• Usurp resources - such as land, forests and fisheries - from those using them for subsistence production, and respond to purchasing power, not need, thus widening inequalities between rich and poor. For example, forestry, pulp and paper companies - even some of those committed to 'sustainable forestry' are converting old-growth forests - used in multiple ways by indigenous peoples - into plantations for the timber export.
  
• Impose demeaning and repetitive tasks on their employees, and in extreme cases, abuse the human rights of their employees and their communities. Many also use advertising and marketing to stimulate and even create demand for new products - thus contributing to (if not creating) the consumer 'rat-race' that is eroding our quality of life. The long-running scandal of baby-milk marketing is not the only example of such abuses of market power.

Above and beyond these direct contributions to unsustainability, many companies use various types of green-wash to maintain and indeed increase their autonomy from regulation or collective action and associate in business and trade groupings which seek to maintain the status quo and protect short term profits.

It might be fair to argue that individually, very few companies have a real opportunity to act differently - at least in their business activities. There are a limited number of niche markets where premium prices can be easily extracted from consumers - and these are almost exclusively in the 'developed' northern world. The short-term financial benefits of the current situation are very real, and in a business world dominated by increasingly short-term investment horizons (driven by very real public and institutional demands for such returns), difficult to see beyond. 

However most companies also act collectively politically to reinforce the existing patterns of behaviour and this makes them actively complicit in the unsustainable development path we are on. In the longer term such political cartels will be broken - either by regulatory power, or by nature's backlash - of which more frequent hurricanes and the northward migration of deadly tropical diseases are merely a harbinger. In the long-term corporate survival will depend on sustainability. But even in the shorter-term there are sound arguments for embracing the transition. Sound environmental and social management systems are just one component of quality management. Consumers are increasingly aware and responsive to environmental and ethical concerns, and - as fund-managers have to publish their ethical policies - will look to use their influence as shareholders in the same way.

Firms in a sustainable economy will have to behave very differently in their political activities, business activities, governance and research and development. The Appendix sets these out at length, but I want to focus briefly on just three of them: 

• Eco-innovation: Delivering the factor-10 or more improvements in eco-efficiency that are necessary to bring resource consumption within environmental limits whilst tackling inequity, and doing so without adopting excessively risky technologies such as nuclear power or genetic engineering. This means that companies will need to seek radical rather than incremental innovations, and indeed many will need to reinvent themselves as something entirely different. For example there will be little call for oil companies in a world where most of the fossil fuel reserves we know about must be left in the ground to prevent unstable climate change. Serious investments in renewable energy will be the hallmark of an energy company with a real eye to the future.
  
• Social accountability: Becoming responsive and responsible to all the different stakeholders of the company - consumers, employees, communities and investors - in all their various needs, thus relegating shareholders to just one interest amongst many. This will require new approaches to corporate governance and transparency, not just fuller and more open reporting - to address these various demands and secure the 'public licence to operate' on which, in the long-term, companies depend. For example, meeting the needs of local communities will be a real challenge to mineral-extraction companies used to buying out (or simply evicting) opposition.
  
• Political responsibility: Using political influence in the collective interest of their stakeholders and the public, and doing so openly - in particular by promoting a level playing field of regulation, nationally and internationally, rather than opposing regulation and promoting liberalisation at all costs. This means that companies will support rather than oppose international environmental agreements - unlike the 'Global Climate Coalition' of oil and automotive companies - and advocate environmental tax reform (replacing labour taxes with taxes on energy, waste and pollution). 

These messages will become more and more palatable, as Governments seek to implement sustainability constraints. Companies that move now to embrace this agenda will be the market leaders of the 21^st century. But without eco-innovation, stakeholder accountability and political responsibility, the claims of any company to be sustainable will not survive for long, and once the good public reputation of a company is lost, it cannot be regained easily ... just ask Shell or Monsanto!

Appendix: Behaviour of a Sustainable Company

1. In their political activities, firms should (inter alia): 

• Promote effective and fair regulation to ensure fair competition, including regulation on restrictive business practices, intellectual property rights, investment and marketing and advertising;
• Promote effective and fair regulation to protect environmental and social interests including regulation designed to stimulate research and innovation into eco-efficiency, regulate markets to promote development of needs-based service industries, and reform tax and subsidy systems to promote eco-efficiency and employment and strong producer responsibility/liability to promote materials reuse and leasing;
• Promote effective and fair economic regulation (eg via tax reforms) to ensure effective financial incentives for the preceding, and to stimulate the creation of business opportunities. In this context, lobby only for regulation to 'make markets' - ie stimulate new opportunities, not dominate them;
• Openly and publicly disassociate themselves from lobby groups, trade associations and competitors who indulge in green-wash;
• Support strong, regulated transparency, liability and enforcement of environmental regulation;
• Accept taxes and regulations designed to internalise environmental and social costs based on targets (not contingent valuation or other dubious financial cost-benefit analysis approaches);
• Promote North-South technology transfer of appropriate technologies to high standards; and
• Respect the rights of national and local governments to regulate or intervene in business activities in the public interest of sustainable development.

2. In their business activities, firms should (inter alia):

Core business

• Adopt sustainability as a strategic goal;
• Apply the principles of industrial ecology and preventative environmental management. In particular, promote re-use, re-manufacture and recycling; 
• Question their core activities and investment decisions (in other words, adopt 'product ecology', not just 'green housekeeping') - with a focus on needs, and on services to meet needs;
• Accept and apply the precautionary principle;
• Commit to cleaner technology, pollution prevention and product stewardship. Direct and adopt modern production innovations (such as lean production, just-in-time supply chain management, total quality management, flexible automation and workforces, and computer integration) in ways that deliver environmental and social benefits. Use natural recapitalisation opportunities to invest in cleaner technologies;
• Develop and promote good practice on eco-efficiency through supply chains and trade associations; and
• Localise their supply chains and networks.

Marketing and advertising 

• Develop marketing and advertising strategies which genuinely reflect peoples needs;
• Refrain from advertising which exploits the vulnerable (especially children) or exploits psychological weaknesses (such as parents' natural concerns for their children); and
• Refrain from introducing products in inappropriate markets where they will undermine existing sustainable practices, and in particular refrain from marketing products which are banned or restricted in any other market.

"Housekeeping"

• Develop and apply demand management techniques to energy and water use, traffic generation etc;
• Adopt best practice in location - with respect to, for example traffic, and markets for wastes and inputs; and
• Adopt best practice in office management (for example in paper use).

Management and employment

• Maximise training and investment in staff, taking wider responsibility for employees and the communities from which they come; 
• Promote secure flexibility (building strong and effective relations with Trade Unions and allowing free association);
• Reduce working hours and adopt other family-friendly working practices; 
• Pay wages that provide a decent living; and
• Ensure respect for human rights and non-discrimination.

3. In governance

• Provide useful and transparent information to all investors to allow them to make informed decisions about their engagement with the company;
• Expand and strengthen employee ownership to encourage long-term planning;
• Work with insurers to arrange appropriate cover for pollution and associated liabilities; and
• Apply internal subsidiarity - in other words maintain power at the centre only equivalent to the functions needed at the centre.

4. In research and development

• Prioritise investment in research and development to underpin the innovations needed to achieve dramatic reductions in environmental resource use;
• Direct research and development activities towards needs and quality of life; and
• Learn more about the psychology of consumption to develop appropriate marketing strategies.