BUS604: Innovation and Sustainability

Learning Objectives

1. Identify what it means to be a sustainable business.
2. Define what constitutes sustainable business practices and provide examples.
3. Describe the main motivations for engagement in sustainable business practices.
4. Discuss the barriers that businesses can encounter in adopting sustainable business practices.

The sustainable business perspective takes into account not only profits and returns on investment but also how business operations affect the environment, natural resources, and future generations. Sustainability at the business level can be thought of as taking steps, such as recycling and conserving nonrenewable material and energy use to reduce the negative impact of a business's operations on the environment. While managing operations to reduce negative environmental impact is an important part of business sustainability, these types of activities are increasingly part of a deeper strategic perspective on sustainability for businesses.

Businesses implement sustainability in their organization for a variety of reasons. The benefits from pursuing sustainability can include the following:

• Reduction of energy and materials use and waste and the costs associated with these. McDonald's reducing the packaging with hamburgers and French fries is an example of this.
• Lowering of legal risks and insurance costs. For example, BP, with some investment in safety features to protect against environmental disaster, could have avoided huge liability costs that will be associated with  the Gulf of Mexico oil spill.
• Differentiation of product or services and brand. Companies such as Green Mountain Coffee Roasters and Stonyfield Farm have differentiated their brands and increased consumer awareness and sales of products with their focus on sustainability.
• Drive toward innovation to create new products and serve new markets. Seventh Generation developed new products to address environmental concerns of households and positioned themselves as the leader in that market, sustainable consumer household products.
• Improvement of company image and reputation with consumers, particularly the increasing numbers of consumers who are concerned about the environment and their own impact on the environment for more discussion of consumer preferences for sustainable products and services).
• Enhancement of investor interest. Increasing numbers of investors take into consideration company sustainability practices when they make their decisions on how to invest. Companies that act with concern for social and environmental matters operate at lower risk and their future growth rates can be positively affected. Both of these are positive factors for investors.
• Increase attraction and retention of employees who care about the environment and sustainability.

The most important factors that motivate companies to become more sustainable are internal. This includes the number one objective of companies - to maximize profits. The beliefs and personal values of management and employees can also significantly influence engagement in sustainable business practices. Many managers and employees have an interest in sustainability and its benefits to society. They can move the company forward on sustainable business practices because it's the right thing to do - that is, owners, managers, and employees believe that sustainable business practices are the moral and ethically right thing to do. Companies with senior management and owners who are committed to sustainable business practices for ethical reasons are more likely to put in place sustainable business practices even without having a detailed assessment of how it will affect revenue, costs, and profitability.

There are also important external factors that influence a business's decision to become more sustainable, including governmental laws and regulations and consumer and investor interests and expectations. These external factors are strongly influenced by societal trends and values, demographics, new knowledge (including scientific findings and the media.

Sustainable businesses strive to maximize their net social contribution by embracing the opportunities and managing the risks that result from an organization's economic, environmental, and social impacts. In many respects, the best measure of business contributions to society are profits. Profits represent the value of products and services that companies provide (as reflected in the prices that consumers are willing to pay for a company's products and services) minus the direct costs of producing the products or services.

However, private market transactions do not take into account so-called external costs to market transactions. For example, the external costs associated with the production of electricity from coal include climate change damage costs associated with the emissions of carbon dioxide (CO2) and damage costs (such as impacts on health, crops, etc). associated with other air pollutants (such as nitrous oxide and sulfur dioxide). These pollutants threaten the future sustainability of natural resources and have a cost, and these costs are not included in the price of energy and not passed on to consumers. Thus market prices do not reflect costs to society perfectly, and this can result in significant differences between profits and the net societal contributions of companies and can present challenges to businesses interested in maximizing their net positive social impact and acting in a sustainable way. Government often acts to address market failure and to reduce the external costs associated with pollution and environmental damage incurred in market activities. Controlling negative externalities is used to justify government restrictions, regulations, taxes, and fees imposed on businesses. Governments at the federal, state, and local level in the United States have acted on this. In general, European nations have been more active in trying to address market failures and trying to control external costs associated with market activities in environmental, social, and other arenas than the United States.

Sidebar

The Role of Government Policies in Sustainable Business

Government policies, such as a carbon tax (a tax on pollution), can address externalities by having companies and consumers internalize the costs associated with what were externalities. This can help move private companies focused on profits to activities that better reflect their net social contributions.

The challenge of acting in a sustainable way in a private market economy in which the external costs, including those associated with carbon dioxide emissions, are not included is reflected in the Green Mountain Coffee statement that follows.

And while we are committed to achieving greater sustainability in our products and practices, we compete in a marketplace where economic value drives demand. This is the challenge of trying to do the right thing in a commercial system that does not yet fully account for its global impact.

A challenging task for Green Mountain Coffee and other businesses today is to effectively integrate the traditional business performance objectives (profit maximization) with striving to continuously increase the long-term societal value of their organizations. This challenge is represented by the mission statement from the CEO of Ford Motor Company:

To sustain our Company, meet our responsibilities and contribute to tackling global sustainability issues, we must operate at a profit. I have long believed that environmental sustainability is the most important issue facing businesses in the 21st century. Fortunately, unlike 20 years ago, or even five years ago, a growing number of people in our industry now agree, and we are doing something about it. Our vision for the 21st century is to provide sustainable transportation that is affordable in every sense of the word: socially, environmentally, and economically…I am convinced that our vision makes sense from a business point of view as well as an ethical one. Climate change may be the first sustainability issue to fundamentally reshape our business, but it will not be the last. How we anticipate and respond to issues like human rights, the mobility divide, resource scarcity, and poverty will determine our future success.