Unit 3, GRE401

Sustainable Development and
Competitive Advantage

Unit 3, Part 1:

Sustainable Development
and the Market

© Jeremy B Williams 2012

2

Outline
1) What is the appropriate domain of the
market?
2) Ecological consciousness and ‘market
maturity’
3) The evolution of company environmental
performance
4) A new corporate accountability


3

1) WHAT IS THE APPROPRIATE
DOMAIN FOR THE MARKET?
• SD is largely incompatible with neo-classical
economics
• SD is NOT incompatible with capitalism


4

The power of the market
• The market mechanism – powerful,
dynamic. Harnessed appropriately, can be
the catalyst for change
• The challenge is to ‘incentivise’ economic
agents so that economic activity proceeds
along ecologically sustainable lines.


5

A word or two from the forefather
of modern capitalism
• „It is not from the benevolence
of the butcher, the brewer, or
the baker that we expect our
dinner, but from their regard to
their own interest. We address
ourselves, not to their humanity
but to their self-love, and never
talk to them of our own
necessities but of their
advantages.‟ Adam Smith
Wealth of Nations, 1776


6

A word or two from the forefather of
modern capitalism


7

A word or two from the forefather of
modern capitalism


8

Markets vs intervention
• Each has drawbacks … tendency for moral,
distributional, sustainability issues to be overlooked
vs allocative inefficiencies

• Belief systems vary between different societies and
cultures – some rely more on markets, others place
greater reliance on state institutions


9

No magic formula
• The art is to balance price-determined
outcomes and price-influencing decisions

• Continuous adjustment should ensure the
gradual evolution of an appropriate market
domain.


10

2) ECOLOGICAL CONSCIOUSNESS AND
„MARKET MATURITY‟
• The scale of market intervention will be a reflection
of the political economy in the country concerned

• More intervention may be necessary in some
countries compared to others, and some countries
may have more than is necessary.


11

The transition from industrial
capitalism to natural capitalism
• The more ‘mature’ the market and its
institutions, the more likely it is that
businesses will be in the process of making the
transition to natural capitalism from industrial
capitalism


12

Intervention is less likely when …
• Businesses are engaging with the natural
environment and not behaving in a
reactionary manner

• They are proactively seeking competitive
advantage by going beyond compliance
with environmental regulations


13

3) THE EVOLUTION OF COMPANY
ENVIRONMENTAL PERFORMANCE

• Public pressure and stricter
regulations have changed the
way firms conduct business
• What started with compliance
to environmental standards, has
changed to environmental risk
management and, more
recently, to a focus on long term
sustainable development
strategy.

Source: International Institute for
http://www.bsdglobal.com/sd_journey.asp


14

Regulatory compliance
• Compliance can create unexpected
costs; e.g. costs associated with
remediation, clean-ups and penalties
for breaches of legislation
• To avoid liabilities, businesses put in
place remediation and abatement
measures
• This reactive approach often
precludes the establishment of
efficient cost control systems and
growth strategies.
• Operating in ‘compliance’ mode,
businesses look upon environmental
protection as an unnecessary burden
Source: International Institute for that reduces competitiveness.


15

Environmental risk management
• Liability for the cost of claims prompts
businesses to opt for a more proactive
approach
• To improve their control of
environmental performance, some
companies conduct environmental
health and safety (EHS) assessments,
develop environmental policies, and
implement environmental management
systems (EMSs)
• Techniques such as pollution prevention
or recycling are used to put policy
objectives into practice, which can also
Source: International Institute for serve to reduce operating costs.


16

Sustainable business strategies
• At the firm level, SD means adopting
strategies that meet the needs of the
business and its stakeholders today,
while protecting, sustaining and
Demand side Supply side enhancing the human and natural
factors factors resources that will be needed tomorrow
• Initially, sustainable development
strategies might be regarded as costly
• Results include new business processes
with reduced external impacts, improved
financial performance, and an enhanced
reputation among stakeholders.

Source: International Institute for

17

4) A NEW CORPORATE ACCOUNTABILITY

• In practical terms, corporate accountability now
amounts to more than maximising shareholder
profit
• For proactive and successful companies, it is
about maximising stakeholder value – a different
goal with a broader set of beneficiaries (see Unit
4)
• Inevitably, this involves the recognition of a triple
bottom line that focuses on people and the
planet as well as profit.

18

The triple bottom line
• “Is it progress if a cannibal uses a
fork?” – Stanislaw Lec
Elkington (1997) asks this
question in the context
of 21st century capitalism
as he ponders whether
holding corporations
accountable to a ‘triple
bottom-line’ of economic
prosperity,
environmental quality,
and social justice
constitutes progress.
John Elkington


Sustainable Development and
Competitive Advantage

Unit 3, Part 2:

and the Market


20

Outline
1) The business case against sustainable
development
2) The business case for sustainable development
3) Case study: Interface
4) Summary and conclusions


21

1) THE BUSINESS CASE AGAINST
SUSTAINABLE DEVELOPMENT
• The evolution of company environmental
performance indicates that a commitment to SD
makes a lot of sense from the supply-side; i.e. it can
reduce a firm’s costs of production
• Hawken, Lovins and Lovins (1999) provide numerous
examples to support this
• Yet this is something not always appreciated by those
in the business community who oppose SD.


22

The sceptics
• These academics argue
that the trend towards
greater corporate
Corporate Social
Responsibility (CSR) is a
mistake because it distorts
http://www.companydirectors.com.au/conference/0cont/b/
market forces and http://www.jhu.edu/news_info/news/faculty/images/hanke.gif
gl/henderson.html
increase firms’ costs
Professor David Henderson Professor Steve H. Hanke
Visiting Professor, • They also challenge the Senior Fellow at the Cato
Westminster Business view that the world is Institute and Professor of
School, UK; former Head of Applied Economics at the
Economics & Statistics
facing worsening social Johns Hopkins University
Department, OECD and environmental
problems.

View Prof Henderson’s paper at:
http://www.nzbr.org.nz/documents/publications/publications-
2001/misguided_virtue.pdf © Jeremy B Williams 2012

23

Note well:
• Corporate Social Responsibility (CSR) is not
synonymous with Sustainable Development

• Those who do not have a deep
understanding of sustainability tend to use
the terms interchangeably


24

Spotting the difference
Depletes non-renewable Social responsibility
resources at rates that do not
exceed the rate of development
of renewable substitutes

Exploits renewable resources at
rates that do not exceed the
ability of the ecosystem to
regenerate these resources Business as usual

Limits resource use to rates that
allow waste to be absorbed by
the ecosystem

Corporate sustainability Corporate social
responsibility


25

‘Responsible’ business?
• BP and Shell issue CSR reports, but oil is to remain
dominant source of energy through to 2050
• BAE has announced it has a new range of
environment-friendly weapons, including ‘lead
free’ bullets, rockets with reduced toxins and
grenades that produce less smoke
• BAT issues a Sustainability Report, but still
contributes to the premature death of millions of
people


26

Corporate sustainability
• Engaging in strategies and practices that
aim to meet the needs of company
stakeholders today, while seeking to
protect, support, and enhance the human
and natural resources that will be needed
in the future


27

Porter and Reinhardt (2007)
• "Companies that persist in treating climate
change solely as a corporate social
responsibility issue, rather than a business
problem will risk the greatest consequences”
• Porter and Reinhardt believe that businesses
need to look both ‘inside out’ (the company’s Michael Porter

impact on climate) and ‘outside in’ (how
climate regulatory change may affect the
business environment in which the company
competes).
Michael E. Porter and Forrest L. Reinhardt (2007), A Strategic
Forrest Reinhardt
Approach to Climate, October, Harvard Business Review.


28

2) THE BUSINESS CASE FOR
SUSTAINABLE DEVELOPMENT
• WBCSD's 2001 publication The Business Case for
Sustainable Development suggests new
governance strategies to accelerate the transition
toward sustainable development in the form of
10 building blocks

http://www.wbcsd.ch


29

The WBCSD‟s 10 building blocks
1. The market
Encourages the efficiency and innovation necessary for
sustainable human progress
2. The right frame
Full-cost pricing, dismantling of perverse subsidies,
effective use of tax system, reduction in ‘command-and-
control’ mechanisms
3. Eco-efficiency
‘The delivery of competitively priced goods and services
that satisfy human needs and improve quality of life, while
progressively reducing ecological impacts and resource
intensity to a level at least in line with the earth’s estimated
carrying capacity.’


30

4. CSR
‘the commitment of business to contribute to
sustainable economic development [by] working with
employees and their families, the local community
and society at large to improve their quality of life.’
5. Learning to change
Corporate concern for the ‘triple bottom line’
requires radical change throughout a firm
6. From dialogue to partnerships
Reduces misunderstanding, risk and liability, and
increases public acceptance of corporate activity


31

7. Consumer choice
Informed, responsible consumer choice helps achieve
sustainability
8. Innovation
Allows the global economy to depend more on the
progress of technology than on the exploitation of natural
capital
9. Reflecting the worth of the earth
Proper valuation of natural capital to maintain biodiversity
10. Making markets work for all
Poverty is a major contributor to environmental
degradation. LDCs must have equitable access to world
markets


32

The Johannesburg Summit
• At the World Summit
on Sustainable
Development
(September 2002) the
emphasis was on
‘walking the talk’
• How successful 10 http://www.johannesburgsummit.org/

years on?

http://news.bbc.co.uk/2/hi/in_depth/world/2002/earth_summit/


33

3) CASE STUDY: INTERFACE
• Interface is the world’s leading commercial carpet
and interior fabrics manufacturer
• Sales in more than 100 countries and manufacturing
facilities at 23 sites on four continents
• For the first 21 years of Interface's existence, no
thought was given to ecological implications of their
production, except to obey laws and regulations
• Things changed after Ray Anderson read The Ecology
of Commerce (Paul Hawken, 1993)

http://www.interfacesustainability.com/

34

A model of sustainability?
“Not one company on earth is
truly sustainable.”
Ray Anderson, CEO, Interface, and author of Mid-
Course Correction: Toward A Sustainable Enterprise

Interface‟s Commitment

“Climbing Mount Sustainability”


35

4) SUMMARY AND
CONCLUSIONS
• „Capitalism, as practiced, is a financially profitable,
non-sustainable aberration in human development.
What might be called „industrial capitalism‟ does not
fully conform to its own accounting principles. It
liquidates its capital and calls it income. It neglects to
assign any value to the largest stocks of capital it
employs – the natural resources and living systems,
as well as the social and cultural systems that are the
basis of human capital.‟

Hawken, Lovins and Lovins (1999), Natural Capitalism, p. 5.

36


37

Case Study:
“The good, the bad, and the ugly”

Sustainable Development and Competitive
Advantage


38

Think


39

Sustainable development in practice

• Consider the
sustainable
development
journey …
• Which companies
are reactive, which
are proactive?


• Which companies 40
have a bad record?

• Whic
h are
• Which companies plain
have a good record? ugly?


41

Read


42

• PowerPoint slides for Unit 3
• Study Guide notes for Units 2 and 3,
especially:
• Economic man, cleaner planet
• The business case for sustainable
development


43

Discuss


44

Consider, for example, …
• A company that is well advanced on its
sustainable development journey
• A company that hasn’t made much
progress at all
• A company that hasn’t even started on the
journey!


45

Deliver


46

Prepare a 10 minute presentation
providing an example (and critique) of each

Go ahead…
make my
day!


Unit 3, GRE401

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