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Corporations and Sustainable Development |
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The move toward sustainable development has been building for twenty years,
and as we approach the millennium, the time has come for corporations to
begin preparing for a sustainable future. They must become proactive and
help to lead the way, or risk being swallowed in a reactive, heavily legislated,
and adverse business environment.
The successful company during this transition will need to be nimble. Communication will be critical as the waves of information, change, and opportunity build. Ferreting out of trends and developing issues will also require external business networks such as The Global Business Network and the Future 500. Preparing for the future will require forward thinking. By taking the lead, corporations can move society toward sustainability far more efficiently and with less turmoil than governments and legislation. There will be many challenges, and perhaps many more opportunities. Companies with the vision to help shape the future will have a much greater chance of recognizing opportunities than those who merely react to the changes. The Need for Sustainable Development
The concept of sustainable development burst into visibility in 1972 with
the publication of Dennis Meadows' book, The Limits to Growth, and
with the United Nations' Conference on Human Environment in Sweden which
coined the words "sustainable development." Since then, it has received growing
discussion and support from global conferences, such as the Earth Summit
in Rio de Janeiro in 1992, to civic meetings in small cities. Policies and
plans, from AGENDA
211 to city zoning, have been
influenced by these same concepts. The primary forces which drive the rising
concerns behind sustainability show no sign of diminishing in the near term:
The impacts of these forces grow increasingly troubling as one looks to the future. The inexorable growth in population drives a range of issues, including demands on natural resources, the "have/have not" gap, civil rights, ethics, environmental impact, and health. Our global commons are undergoing changes as our atmosphere and oceans accumulate carbon dioxide, chlorofluorocarbons, particulates, pesticides, and so on, while biotoxins such as organochlorines accumulate in the tissues of those near the top of the food chain--including ourselves. At the same time, materials are not priced at their ultimate cost, recognizing replacement and disposal, but at their cost of acquisition, leading to artificially low prices for our goods. These artificially low prices, in turn, discourage efforts to correct or respond to the forces behind these problems. The recognition of these effects has led society to move forward to address sustainability, as well as atmospheric and oceanic issues at a global level and traffic flow and energy savings at a civic level. Corporations, meanwhile, are left with little choice but to continue to exploit under-priced resources. Given that the only viable scenario for a globally desirable future involves some form of sustainable development, it seems inevitable that business will either help lead the move to sustainability or be forced to go along. The appropriate questions seem to be whether business will lead or follow, and when this shift will occur. |
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Defining Sustainable Development
Before the relationship between corporations and the concept of sustainability can be addressed, one must define the term. Despite the fact that twenty years have passed since the term sustainable development was coined, there is no broadly accepted definition for the terms sustainable development and sustainability. While there is some evidence that a useful and meaningful definition of sustainability is gaining acceptance within the public and academic sectors, public understanding and corporate acceptance lag.
Paul Hawken provided one of the clearer and more comprehensive definitions of sustainability in his book The Ecology of Commerce:
Sustainability is an economic state where the demands placed upon the environment by people and commerce can be met without reducing the capacity of the environment to provide for future generations. It can also be expressed in the simple terms of an economic golden rule for the restorative economy: Leave the world better than you found it, take no more than you need, try not to harm life or the environment, make amends if you do.
While every organization seems to have a different definition of sustainability,
many of the definitions share common elements from Hawken's definition:
- a goal of conserving irreplaceable resources (preservation as a more rigorous goal)
- a goal of environmental maintenance (enhancement as a loftier goal)
The International Institute for Sustainable Development, in conjunction with Deloitte & Touche, developed the following description of sustainable development for business strategy.
For the business enterprise, sustainable development means adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining, and enhancing the human and natural resources that will be needed in the future.This definition falls far short of the concept of "full sustainability" or the rigorous definition of sustainable development. The conflict of stakeholder needs versus resource protection opens the door to ambiguity and interpretation. This definition also falls short by failing to provide for measurability. Despite weakness of this definition, the existing business climate (including political and economic infrastructures, and technology) does not provide a suitable environment for pursuing rigorous sustainability. The Deloitte and Touche definition is arguably the most practical definition for the short term future. As sustainability becomes an increasingly visible issue it seems likely that corporations will find themselves facing more rigorous definitions.
A scan of corporate literature reveals definitions ranging from sustained growth to sustained profitability, from environmental responsibility to total renewability2. It is as though corporations have adopted the term, but not the underlying concepts. Under this broad range of definitions, communication regarding the issue of sustainable development is at best clouded and potentially confused. There is a definite need for standardization to facilitate future communication.
While the civic, government, and academic interest in the issues surrounding sustainability has risen substantially over the past twenty-five years, the response by industry has been mixed and inconsistent. Some entire industries, such as agriculture and forest products, have made substantial progress toward recognizing and even embracing the concept. In other industries the results have been quite disparate.
The word sustain is beginning to appear in corporate mission statements, and goals with less ambitious implications. Monsanto, for example, pledges, "Work to achieve sustainable agriculture...". Dr. Joseph T. Ling of 3M speaks of " sustaining the environment ... because the environment sustains us."
While environmental issues have appeared in advertising for some time, the concept of sustainability is just becoming visible in corporate advertising. During the summer of 1995, DuPont began highlighting the development of a new process for "unzipping" polyester resins for recycling in national television commercials. The advertisement went on to explain that this process could be used to reduce raw materials demand for a 30 billion pound per year product. Additional sustainability-oriented advertisements are undoubtedly on the way.
The environmental movement became a reality in the 1960's with the publication of Rachel Carson's pivotal book, The Silent Spring. Over the next decade, corporations, environmentalists, legislatures, and citizens developed a combative, adversarial relationship regarding environmental issues and regulation. Corporations applied economic analysis to meeting the regulations and generally did the minimum possible under the law--unless economics justified larger expenditures. By the early 1970's, petroleum and chemical companies generally felt that they were spending money on unprofitable environmental projects which placed them at an economic disadvantage against global competition.3
Nowhere did the petroleum companies complain more loudly in 1970 than in California, where the most rigorous environmental laws were being passed. When the first Arab oil embargo occurred in 1972, the California refineries found themselves at a competitive advantage-- the projects which had met the environmental laws had reduced losses. When oil soared from $2.55 per barrel in October 1973, to $10.46 per barrel by the end of 1974, the money-losing environmental projects often paid out in a few months.
Numerous loss and waste reduction projects were initiated as environmental projects over years that followed. When the second oil crisis shot Saudi crude oil to $34 per barrel in 1981, more projects were initiated. Cost increases related to the elevated petroleum pricing have justified similar projects in many industries since 1972.
While these projects and programs were not aimed at sustainability, they were a move in the proper direction in that they reduced raw material and energy waste, thus conserving raw materials. Companies have learned that pollution reduction and energy/resource conservation can be very profitable. In 1992 General Motors pollution prevention program saved the corporation $22 million. The following year Bank of America's energy efficiency program saved 30 million kilowatt hours and $2.5 million, and Coors saved over $1.0 million through source reduction and internal recycling.
As Peter Coors comments, "These and other companies followed the path of waste reduction quietly, without prodding by government or laws, because of the undeniable power of market forces." Frank P. Popoff, President of Dow Chemical Company, says that Dow is saving at least $10.5 million annually as a result of Dow's Waste Reduction Always Pays (WRAP) program.
In addition to environmental and waste reduction efforts, some companies began to lead the move to more environmentally friendly products. While DuPont initially defended chlorofluorocarbon refrigerants (CFC's) as not contributing to ozone hole growth, it ultimately led the movement, proposing a ban on the production of CFC's before the government.
In Europe, "Volkswagen AG and Adam Opel AG have already committed themselves to taking back, recycling, and disposing of several of their cars [car models]. Other companies are almost tripping over themselves to get into that line." In the United States, Ashland Oil is leading the move to recycle used motor oil.
Patagonia, Inc. has taken the most aggressive action of any American corporation toward the concept of sustainability, implementing a plan based on being around "for a hundred years." This has led the company to reduce its product base from 380 products to 275 and to assess every product from perspectives of both functionality and environmental impact. "The most responsible thing we can do is to make each product as well as we know how so it lasts as long as possible.... We shouldn't build in obsolescence." Recognizing that no matter what they do, Patagonia will still be a polluter, Patagonia has committed one percent of their total sales to protect and restore the natural environment.
As Paul Hawken states, "Many industries are now trying to re-source their raw materials to take into account sustainability, methods of extraction, means of processing, and impact on local cultures and ecosystems. For example, Herman Miller, the Knoll Group, and Wal-Mart have all committed themselves to paying higher prices for sustainably produced timber." As the move to sustainability gains strength, more companies are expected to follow this lead.
The Earth Summit in4 Rio de Janeiro in 1992 provided a major punctuation mark in the evolution of sustainability. Never had so many heads of state gathered together. The product of that summit, AGENDA 21, provides a plan for addressing the economic and environmental problems of the late 20th century. This document is based on the premise that sustainable development of the earth is not only feasible, but that it is not an option. Author Daniel Sitarz, who devoted an entire book to AGENDA 21, states, "AGENDA 21 proposes an array of actions which are intended to be implemented by every person on Earth.... Suggestions are furnished for individuals and companies world-wide to develop new industries, pioneer innovative technologies, evolve fresh technologies, and institute novel trade arrangements".
While AGENDA 21 has many messages of interest to industry and the industrialized nations, one of the most important is that curbing fossil fuel consumption is the single most important action that must be taken to reduce the adverse effects of energy use on the atmosphere.
In May of 1992, the Business Council for Sustainable Development issued the book Changing Course: A Global Business Perspective on Development and the Environment in response to AGENDA 21. Later in 1992, The Conference Board hosted a meeting of corporate presidents and CEO's entitled "Business: Championing the Global Environment." Both of these programs have taken strong stands that business must become proactive and lead toward environmental responsibility and/or sustainability. While these documents represented responses to AGENDA 21, they echo familiar messages:
"It is time for business to take the lead; change by business is less painful, more efficient, and cheaper for consumers, for governments, and for businesses themselves"."In the short term, the focus must be on reducing the environmental impacts of fossil fuels and encouraging energy conservation".
"The time has come for energy prices to reflect environmental costs. We propose a reorientation of national energy plans toward a rational and coherent resource policy with a longer time horizonÓ.
While sustainability means more than curbing energy and reducing pollution, these actions are important first steps toward stabilizing our environment and setting the stage for the next steps.
Ecological Economics
The need for a comprehensive definition and understanding of sustainability which offers measurability has led to the merger of environmentalism and economics in the form of ecological economics. The International Society for Ecological Economics provides the following definition of this new field:
Ecological Economics is a transdisciplinary field of study that addresses the relationship between ecosystems and economic systems in the broadest possible sense.Ecological Economics goes beyond conventional conceptions of scientific disciplines and attempts to integrate and synthesize many different disciplinary perspectives in order to achieve an ecologically and economically sustainable world.
Conventional economics do not factor resource depletion or environmental
impacts into the cost of resources or business. This new field seeks to address
this problem and to answer some of the following questions:
- What are the most sensible ways of assigning value to natural resources and natural capital?
- What is the role and value of biodiversity?
- How can we create better accounting systems that integrate resource depletion and ecological impacts into national and international economic performance?
As ecological economics grows and matures and sustainable development becomes more urgent, it seems certain that the answers to these questions will influence the corporate business environment. It would seem prudent for corporations to get involved in helping to develop and define this new field.
With the exception of a few companies, such as Patagonia, corporate involvement with sustainability remains limited to conservation (based upon relatively short-term economics)5 and dialogue. Given the current economic environment, there is little more that corporations can do. They can apply lower return criteria for environmental projects and use longer payback periods, but the ability to finance environmental and efficiency projects is diminished at current "bargain" energy prices.
Given an outlook of continued bargain energy pricing (in an unregulated, uncontrolled environment) for the coming twenty years, the incentive to conserve energy and to invest in efficient machinery is diminished. As Stephan Schmidheiny wrote, "The lower the energy price, the longer old and inefficient technology remains in use".
Competition has made many products better, and last longer. Televisions, cars, airplanes, lawnmowers, power tools, tires, all last longer than they did 30 years ago. Competition has also encouraged reducing materials consumption in manufacturing such that excess weight has been reduced from many products. Waste has been reduced across the board in many industries. All of these were small steps toward a more sustainable future that were driven by market forces.
We have made a lot of progress, but we can always do better. As Yvon Chouinard notes, "We realized that all of Patagonia's facilities should be involved in recycling and composting and have edible landscaping, low energy-use power, and insulation. We should use recycled paper everywhere, even in our catalogs, encourage ride sharing, eliminate paper cups, and so forth." There will always be room for more!
The concepts that underly sustainable development must assume increasing significance in the coming years. The alternatives are either idealistic, or morally and socially unacceptable. We simply cannot count on technology to resolve the systemic problems that are evolving. Without action, famine and disease are an inevitable temporary respite to the problems of a booming global population. The only attractive and feasible futures available seem to require a move to reduce resource demands in the developed world.
The path society will follow toward sustainable development remains vague and undetermined. But we can anticipate, for example, that consumption of fossil fuels for transportation in the United States will decrease. Why? When? Perhaps it will be because of petroleum shortages in 2030. Or perhaps it will be due to global legislation in 2010. Or perhaps it will be due to the introduction of viable hybrid automobiles6, possibly as soon as 1998.
Whether the issue be population, pollution, biodiversity, petroleum, water, food, ferro-alloys, or the rights of Fiji islanders one can anticipate controversy. The move to sustainable development will make these and many more issues even more volatile than they are now. Corporations can expect to be hard pressed to know what issues are important and how to deal with them. Sustainable development will take an accelerating world of change and make it change that much faster, and in unfamiliar directions.
The good news is that there is no energy shortage in the near term, but growth in global fossil fuel consumption is troubling because of the uncertain and potentially devastating climatic impact. As Kenneth Derr, CEO of Chevron points out, there is no practical, price competitive substitute for gasoline and petroleum at this time.
The desire to limit growth in carbon dioxide emissions will press developed countries to increase efficiency substantially. Given the current availability of petroleum, unadjusted energy prices will remain low, discouraging investments in efficiency. We can anticipate that energy prices will rise from current levels as subsidies are reduced, or some form of energy tax or price control reflecting life-cycle costing is implemented.
Nonrenewable energy prices will almost certainly rise, making energy conservation and renewable energy sources more attractive. Life-cycle pricing for other resources may take longer, but can be expected.
As energy prices rise, alternative modes of transportation will be more competitive. High speed trains will increasingly replace airplanes over land. Lighter-than-air freight carriers (blimps) will be evaluated once more. With electronic communication reducing the need for speedy business travel, passenger blimps could be revived.
Rising energy costs will also lead to increased optimization of shipping costs in manufacturing. Many businesses will become more localized, with smaller manufacturing facilities, local raw-material sourcing where practical, and market regionalization.
As one moves beyond energy and resources, the impact of a movement to sustainability becomes less broadly predictable. Each industry has its own peculiarities. By looking at the energy and resource implications upstream and downstream one can should be able to assess the likely impact of these factors.
Resource conservation will be an important consideration. Increased emphasis on quality, durability, repairability, and useful-life can be expected. Disposable products could be taxed or otherwise discouraged.
The faint, but visible, trend of companies selecting their suppliers carefully with respect to corporate policies and philosophy is likely to grow, particularly if the public endorses the concepts of sustainability and sustainable products become fashionable. Just as Herman Miller has committed to buy sustainably grown lumber for their furniture, chains of sustainably-oriented companies are likely to develop. It would not be surprising if a symbol for sustainably-produced goods becomes a trademark, similar to the one for cotton or wool.
Sustainable development has substantial social implications, not just in car-pooling, but town and village layout as well. Many believe that a movement to sustainable development will encourage a flow of the population in developed countries to smaller towns and cities. Town layouts will change and might be expected to mirror town layouts in the time before energy was so readily available. And, as Yvon Chouinard suggested, it may mean using ceramic cups instead of paper ones.
Uncertainty demands flexibility, but it does not imply helplessness. It is difficult to prepare a single vision of the future that is useful in all industries. Each corporation faces a different set of challenges and will benefit from its own vision of the future as its guide. In facing the future, we (the public, corporations, cities, and nations) can decide which alternatives are more desirable, and work toward the more desirable of them.
A Corporate Strategy to a Sustainable Future
The world's largest corporations are well poised to lead the movement to sustainable development and business leaders display an increasing orientation toward leading that movement. "The five hundred largest companies in the world control 25 percent of the world's gross output..." according to Hawken. Peter Coors says, "Business must take a lead role in the evolution of this movement (a new environmentalism)." The Business Council for Sustainable Development says: "In general, during the past 20 years business has tended to be overcautious and conservative in its approach to the environmental challenge."
Society can no longer afford this. It is time for businesses to take the lead; change by business is less painful, more efficient, and cheaper for consumers, for governments, and for businesses themselves. By living up to its responsibilities, business will be able to shape a reasonable and appropriate path toward sustainable development.
The Business Council for Sustainable Development further states that, "An increasing number of corporate leaders are convinced that it makes good business sense to integrate the principles of sustainable development into their operations...". In a presentation to The Conference Board in 1992, Allen F. Jacobson, Chairman and CEO (retired) of 3M stated, "In the 1990s, business is going to have to take the lead in tackling environmental challenges". At the same presentation, John R. Hall, Chairman and CEO of Ashland Oil, .... commented that "the benefits of not generating wastes are tremendous: Waste is a cost that is not productive, and any reduction can become...bottom line income. Furthermore in our litigious society, as we reduce waste we also reduce liability."
In seeking a strategy to deal with the uncertain arrival of sustainable development, it seems evident that the primary keys will include flexibility and forward thinking.7 In a time when corporations have downsized aggressively and the flow of information creates an increasingly burdensome deluge that makes looking beyond tomorrow difficult, it may be asking a lot to suggest that flexibility and forward thinking are practical. Still, it seems logical that those who succeed in the turmoil of transition will be those companies who are prepared for the future. While there is no path which can guarantee success, there are some actions which can provide flexibility and information to facilitate survival in the turmoil.
As a first step, corporations must continue to reduce pollution and seek energy savings on a cost efficient basis. Pollution reduction, effluent improvement, waste reduction, resource reduction and recycling, and energy conservation, all deserve continued support, but will ultimately not be enough to prevent regulation. Corporations should plan for higher energy and resource prices. Payback criteria on energy, pollution, and conservation related projects should be extended to the extent practical. Looking back from 2010, it will be difficult to view these actions as a mistake if conservation prevents a rise in prices.
As a second step, corporations should consider appropriate revisions to mission statements and goals to reflect a world seeking sustainability, and take a proactive stand. Get involved with the movement to sustainability. Help shape the future. Help your community understand the implications of sustainability. Help define and lead the movement nationally and globally to reduce government involvement and regulation.
For those in the energy sector this can become a troublesome issue, but failure to get involved appears almost certain to lead to regulation, hostility, and surprises. In other industries, there is little to be lost by saving energy and resources. Pursue improvements in product life, recyclability, repairability, and resource consumption. Talk about what you are doing. Establish dialogue with your customers. Get involved in their disposal problems (packaging, product recycling, etc.). The result should be increased goodwill and improved customer relationships.
Seek to conserve water. Clean, potable water will become increasingly scarce in the coming century. Conservation, new processing technologies, and revolutionary effluent treatment technologies promise significant gains in the water balance, but conservation will become quite important.
With sustainable development reshaping the competitive landscape and providing unknown opportunities and challenges, the role of trend identification will be of increased importance. Every employee should feel that one of their roles is to serve as the eyes and ears of the company. Sharing the information collected will be important to identifying the trends that will affect the corporation's future.
In addition to exploring new organizational models which facilitate communication, corporations will need to be involved in informational networks, such as The Future 5008 and The Global Business Network9, in order to gain access to the perceptions of other knowledgeable organizations.
Recognition of patterns in complex systems is often aided by system thinking. Dennis Meadows and his team used system analysis of the earth to develop a basis for his book The Limits to Growth. In the 25 years since Dennis began his work, system thinking has grown in power and applicability. The application of system thinking to businesses and problems provides new insights and opportunities. Corporate managers should seek to develop their system thinking skills to enhance their ability to recognize emerging trends.
Scenario planning provides another tool for improving management in an uncertain environment. By building scenarios, managers visualize sets of trends and indicators which represent future opportunities and challenges, facilitating early recognition and informed response rather than reacting to a surprise at a later date. As Peter Scwartz so eloquently put it, "Often, scenarios can help people foresee decisions--usually difficult decisions--that they would otherwise miss or deny".
As the world moves toward sustainability, lesser-developed countries will provide new global markets for many products. The challenge to the corporate world will be to maintain competitive stature while providing advanced products and technology such that the emerging markets can leapfrog the older, inefficient technologies that remain in use in developed countries.
For example, from resource and environmental perspectives, it makes far more sense to build a hundred million highly efficient, state-of-the-art refrigerators for China, than to build a hundred million inefficient, obsolete refrigerators. Corporations have a role in insuring that the "right" decisions are made by providing sound analysis and information to the appropriate decision makers.
Perhaps the greatest challenge of all for some, perhaps most, corporations will be the ultimate transition to a low, or even negative, business growth environment. At this point in time it is uncertain whether sustainable development ultimately implies zero growth or if some level of growth will be deemed sustainable. In any event, it appears certain that some limit to population growth will exist, but-- barring some catastrophe--the peak in population may be a hundred years away. In many resource intense industries sustainability will imply curtailed growth. In some, like petroleum, negative growth may be expected in developed countries.
Adjustment to reduced growth will be painful; negative growth, quite challenging. Companies in such areas should look for opportunities to offset demand in developed countries by growth in the developing countries.
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