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The Concept and Business Case of Sustainability

written by Charlotte Heine, Ernst & Young, and Victor Scheurecker, ESB Reutlingen >“Do Well by Doing Good? Don’t Count on It” is the doubtlessly provoking title of a study conducted by Margolis and Elfenbein (2007), which demonstrates the conflict potential of this topic. Certainly, the headline alludes to a similarly named book by Chris Laszlo (2008), who is pointing out the opportunity for businesses to create “Sustainable Value”, respectively, to do well by doing good.

This working paper is going to evaluate the business case for sustainability and is divided into two sections. The first part will demonstrate the increasing challenges due to the economic development of the past decades. Furthermore, we will present the most frequently discussed approaches trying to protect the world’s ecosystem and highlight their shortcomings in comparison to the concept of sustainability.

In the second part sustainability is explained from a business perspective with special emphasis on the opportunities for companies integrating the concept of sustainability appropriately. For this purpose, the fundamentals of an effective approach are going to be introduced by means of the Sustainable Value Framework, the model of corporate responsiveness, and the Triple Bottom Line. Finally, this working paper will to lead to the conclusion that in today’s and the prospective environment integrated sustainability is essential and opens up indeed chances for value creation for businesses.

1. Impacts on the environment
Acid rain, droughts, floods and soil erosion are just a few ecologic “footprints” the industriali-sation of the past decades has left behind. Although economic growth has certainly improved human living standards in the developed countries, Hartman and DesJardins (2007) alert that this way of growth has “brought us up against the biophysical limits of the earth’s capacity to support human life”. In particular, they consider the global climate change as a main threat to humans. Independent scientists – as it is presented in the well-known “Stern Review” (2007) which was released by the economist Lord Stern of Brentford for the British government – confirm these concerns and recommend an urgent response to avoid irreversible global changes, which will affect “the basic elements of life for people around the world”, such as “access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding”.

Additionally, Hart (1997) points out that the prospective roots of these problems, population growth and rapid economic development in the emerging economies, are even expected to intensify over the following years. It is estimated that the world population will roughly double over the next 40 years. If this is not addressed responsibly, it will further tighten the speed of environmental change embodied by climate change, pollution, resource depletion, poverty, and inequality between developed and developing worlds. Hart (1997, 68) illustrates today’s precarious situation by the comparison “if the entire world lived like North Americans, it would take three planets Earths to support the present world population.” Obviously, a solu-tion is needed. But should we simply refuse economic growth in developing countries arguing that they would contribute otherwise extensively to environmental challenges? This appears ethically and also practically questionable.

2. Different approaches
Due to these obvious challenges a consensus exists about the necessity to manage them. How-ever, there is still no agreement on the right method to achieve a solution to the impacts hu-mans have on their environment. Especially with a focus on the responsibilities of businesses in this context, the discussion appears controversial. While Hart (1997, 76) points out that the responsibility for a sustainable world falls largely on the shoulders of “the economic engines of the future”, the world’s companies, Friedman (1970) considers these warnings as “unadul-terated socialism”, the only social responsibility of business were to increase profits. For this reason, Hartman and DesJardins (2007, 376-387) give an overview of the main ideas how to manage today’s environmental challenges and present as well their shortcomings. These ap-proaches are going to be summarised in the following.

2.1. The market approach
Following the underlying assumption that the mentioned problems are economic problems, they need an economic solution. This is embodied by a free, efficient, competitive market measuring the cost-benefit ratio. For instance, there is no natural, objective standard for envi-ronmental goods, such as air or water. It is then simply sufficient to have air and water which are healthy or safe enough “to breathe and drink without costing too much” (also in terms of lost opportunities). The objective is to find the “optimal level of pollution” assuming that so-ciety would have to pay for pollution reduction as much as the perceived benefits are worth it. The shortfalls of this model can be found in several market failures:

• The environmental burden (cost) is typically carried by parties which do not participate in the economic exchange (e.g., future generations).
• Environmental goods are typically not traded on open markets and do not have an es-tablished market price (e.g., clean air, ocean fisheries).
• Individual decisions do usually not consider the group consequences. For instance, an individual would assume that her decision to drive an SUV will make no difference, whereas such a collective decision will have a significant impact.
• Finally, market failures can only be cleared if they become obvious. Therefore, the first generation affected by a market failure is always sacrificed.

So, the market approach does not appear adequate to solve the problems sustainably.

2.2. The regulatory approach
Since the 1970s governments have established minimum legal requirements businesses would have to fulfil to meet their environmental responsibilities. For instance, certain objectives for air or water quality have been set up. Businesses are free to achieve these in a reasonable way. Furthermore, in this system consumers have the choice to demand environmentally friendly products and citizens can contribute to environmental legislation. Though, the regulatory ap-proach disregards the following circumstances revealing its inappropriateness to deal with today’s challenges.

• Businesses’ lobbying pressure on legislation is enormous. This could, for instance, be recognised in the EU commission’s recent compromise on CO2 limits for cars (Corpo-rate Europe 2007).
• Businesses’ influence on consumer decisions and public opinion through marketing ef-forts is significant as well.
• Fisher and Lovell (2005) note that political decisions are influenced by a short-term thinking from election to election.
• Additionally, legislation shows a problematic geographic discrepancy. While envi-ronmental challenges have a global dimension, laws still only have a local authoritative influence.

2.3. The sustainability approach
Therefore, the concept of sustainability is suggested to serve as a solution for today’s and future challenges. Its most frequently used definition has its origin in the UN World Commis-sion on Environment and Development, which published the Brundtland Report, named after its Chair, Gro Harlem Brundtland, in 1987:

“Sustainable development is development that meets the needs of the present without com-promising the ability of future generations to meet their own needs.”

This contains within it two key concepts:
• “The concept of ’needs‘, in particular the essential needs of the world’s poor, to which overriding priority should be given; and
• The idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.” (UN Documents 1987)

This concept led to the further UN initiative known as the “Rio Summit” and the resulting document “Agenda 21” in 1992 focussing ecologic problems, such as climate change and biodiversity (UNCED 1992).

Also according to The Natural Step (2008), the narrowing of the planet’s resource funnel due to declining resources, accompanied by an increasing demand for them, lead to a bottle neck. This can only be re-extended by a sustainable supply and a sustainable demand com-bined with technological innovation and creativity. So, through sustainable “innovation, crea-tivity and the unlimited potential for change, we can open up the walls of the funnel”.

3. The business perspective
Nevertheless, many companies have so far considered corporate responsibility (respectively, the compliance with the principles of sustainable development) simply as a burden, a cost, or a PR instrument (Crane and Matten 2007). However, corporate responsibility can finally even become a source of inimitable competitive advantage. In the following we will present the main models demonstrating the prerequisites for achieving this final goal of each company.

3.1. Sustainable Value
By having invented the concept of “sustainable value”, Laszlo (2005) presents companies a way how they can create value by viewing their stakeholders as potential business partners. This framework forces managers to “see the world from the perspective of stakeholders” (in-side-out perspective) and to think about impacts on them along the value chain (outside-in perspective).

For instance, mere shareholder benefits at the expense of stakeholders would finally not en-hance the net sustainable value for the company – and vice-versa. Therefore, according to Laszlo (2005), a company only creates sustainable value when it creates positive value for both its shareholders and stakeholders, respectively, when a business adds to the capital or well being of its stakeholders (Laszlo 2008).

3.2. Corporate Social Performance Model
Additionally, Carroll (1979) developed The Corporate Social Performance Model categorising four strategies of social responsiveness to clarify the different approaches of businesses responding to social concerns and expectations. Carroll’s four modes of social responsiveness have been widely cited and modified and resulted in the following Processes of Corporate Responsiveness, which have been combined with the previously mentioned model of Sustain-able Value1:

“The corporation denies any responsibility for social issues, for example by claiming that they are the responsibility of government, or by arguing that the corporation is not to blame.”
>>> Unsustainable value

The corporation admits responsibility but fights it, doing the very least that seems to be re-quired. Hence, the corporation may adopt an approach based mainly on superficial public re-lations rather than positive action.”
>>> Unsustainable value

“The corporation accepts responsibility and does what is demanded of it by relevant groups.”
>>> (On the cusp of) Sustainable value

The corporation seeks to go beyond industry norms and anticipates future expectations by doing more than is expected.”
>>> Sustainable value (identification of new sources of value and risks)

In their awarded article “The Link Between Competitive Advantage and Corporate Social Responsibility” Porter and Kramer (2006) highlight as well the importance of responding proactively to today’s social, environmental, and economic challenges. Companies should implement sustainability into their business strategy and initiate coordinated activities in line with their core business activities.

1 The following illustration is based on Crane and Matten (2007, 53) and Laszlo (2008)

3.3. Triple Bottom Line
The supporting – and frequently used – model of business sustainability is called the “Triple Bottom Line” going beyond a (short-term) focus on profits. As “those who think that sustain-ability is only a matter of pollution control are missing the bigger picture” (Hart 1997), the Triple Bottom Line invented by John Elkington (2001) aims at economic, ecologic, and social performance, which all have influence on the financial bottom line. The model expresses the philosophy of sustainability in a language accessible to companies and their shareholders and is intended to facilitate the identification, accounting, auditing, reporting, risk rating, and benchmarking of a business’ sustainability performance.

3.4. The benefits for businesses
In general, the reasons for integrating the principles of sustainable development can be classi-fied as positive and negative.

Negative reasons
According to a global survey of 4000 business executives in 116 countries, 84% of those questioned believe that Milton Friedman’s statement (that “The Social Responsibility of Business is to Increase its Profits”, Friedman 1970) no longer describes the reality of a com-pany’s role and responsibility in society (McKinsey 2006). Due to the growing pressure of governments, communities, non-governmental organisations (NGOs) and the media towards companies to account for the social and ecological consequences of their activities, more and more senior managers realise the emerging risk of their companies to reputation damage, customer boycotts, destruction of financial value etc. when economic, social and environ-mental aspects are not properly understood and managed. Corresponding to this, the ques-tioned executives believe that increasing transparency and information on the risks of products and processes, developing and implementing internal policies on corporate responsibility and engaging stakeholders would deliver far better results (McKinsey 2006) – leading to the positive reasons for integrating sustainability.

Positive reasons
The following aspects transcend the approach of simply reacting on increasing pressure and scrutiny. The positive reasons see the opportunities of integrating sustainability into business strategy, interacting with their stakeholders, and assuming responsibility for their societal im-pacts and their impacts on the environment. Hartman and DesJardins (2007) point out that “the way we have done our business over the last two centuries has brought us up against the biophysical limits of the earth’s capacity to support human life” and that the assumption of environmental responsibility is of self-interested reasoning.

The findings of the Stern Review support Hatmann’s and DesJardin’s argumentation. Ac-cording to Stern (2007), the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year if the global economy continues doing business as usual. Furthermore, if a wider range of risks and impacts is taken into account, the estimated damage could rise to 20% of GDP or more. In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

Furthermore, several other positive business advantages can be gained by sustainable busi-nesses – advantages revealing that sustainability makes good business sense and that compa-nies can do well by doing good. For instance, significant cost savings can be achieved through sustainable practices. A concrete example of how companies can create sustainable value through corporate responsibility is the improvement of a company’s waste management. Through an efficient recycling and waste reduction along the value chain and/or in the product lifecycle, companies can obtain a win-win-situation as they can not only reduce their impact on the environment but also realise cost savings. Further examples for the achievement of sustainable value through this ecoefficiency are efficient energy and material use, reduction of water consumption, and a more efficient organisation of transport routes.

Another major benefit of sustainability is that it serves as an appropriate risk and reputation management tool and reduces costs of the corporate management departments.2 By newly developed managerial competencies, businesses can easier identify current and future risks and take counteractive measures faster and more efficiently. In addition, an enhanced corpo-rate reputation due to corporate sustainability facilitates the recruitment of highly trained employees and helps to reduce fluctuation of employees. Moreover, an enhanced reputation increases brand and company value whereby the company can achieve an increase in turn-over through, for example, the attraction of environmentally conscious customers and the acceptance of premium prices.

2 For instance, the American chemical company DuPont which was criticised by several stakeholders for its unsustainable business model integrated the principles of sustainability into their core business and changed within ten years from one of the “Shameless: 1995’s ten worst corporations” to one of the „The Top Green Companies“ in 2005 (Laszlo 2008)

Above all, Prahalad and Hart (2002) point out that low-income markets such as China, India, and Latin America present a prodigious opportunity and a managerial challenge for multina-tional companies: “Selling to the poor and helping them improve their lives by producing and distributing products and services in culturally sensitive, environmentally sustainable, and economically profitable ways.” According to Prahalad and Hart (2002), the bottom of the pyramid represents a multitrillion-dollar market potential which can only be met in sus-tainable ways. Companies realising this opportunity in an early stage and activating these markets can furthermore benefit from a first-mover advantage.

From an internal point of view, enhancement of labour relations and employee commit-ment, as well as the achievement of overall better strategic and financial results indicate the appropriateness of the sustainability approach (Laszlo 2008).

So, by proactively responding to today’s challenges, by integrating sustainability in the corpo-rate strategy, and by engaging positively with stakeholders, companies can create a classic win-win situation for the economy, society, and their environment. Companies can finally drive innovations, differentiate themselves from competitors, and gain a favourable market position in the long run – illustrating that it is in the businesses’ self-interest to adopt the con-cept of sustainability.

4. Conclusion
We can firstly conclude that the growing environmental and societal challenges and stake-holder pressure has caused the need for global solutions embodied most appropriately by the sustainability approach. Especially, companies anticipating the prospective developments are forced to reconsider their way of business.

Nevertheless, sustainability approaches or CR activities are frequently considered – like e.g. in the initially mentioned study (Margolis and Elfenbein 2007) – as an isolated cost/investment such as advertising efforts, which are then compared to other investments in order to measure efficiency. This approach is questionable since it comprehends the concept of sustainability on the wrong business level. It is rather suggested that sustainability is integrated into business strategy (Porter and Kramer 2006, 13) to gain long-term competitive advantage. Thus, realising the prosperous business case would require a “dramatically different thinking” and the establishment of transparency trough quantification. Laszlo (2008) adds that the concept of sustainability involves a reorientation of the whole business, which constitutes both an enormous challenge and enormous opportunities (Hart, 1997).

So, implemented correctly by considering the mentioned requirements, the realisation of the concept of sustainability will contribute to the final objective of creating sustainable value, or in more tangible words, “doing well by doing good”. Ultimately, we can even doubt – revers-ing the initially mentioned headline – whether businesses would in the future be able to truly achieve long-term success by following hitherto predominantly existing views on economy, environment and society.


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