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Unit 3, GRE401


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Sustainable development and the Market; Case: 'The good, the bad, and the ugly'.

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Unit 3, GRE401

  1. 1. Sustainable Development and Competitive Advantage Unit 3, Part 1:Sustainable Development and the Market © Jeremy B Williams 2012
  2. 2. 2 Outline1) What is the appropriate domain of the market?2) Ecological consciousness and ‘market maturity’3) The evolution of company environmental performance4) A new corporate accountability © Jeremy B Williams 2012
  3. 3. 3 1) WHAT IS THE APPROPRIATE DOMAIN FOR THE MARKET?• SD is largely incompatible with neo-classical economics• SD is NOT incompatible with capitalism © Jeremy B Williams 2012
  4. 4. 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. © Jeremy B Williams 2012
  5. 5. 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 © Jeremy B Williams 2012
  6. 6. 6 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 © Jeremy B Williams 2012
  7. 7. 7 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 © Jeremy B Williams 2012
  8. 8. 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 © Jeremy B Williams 2012
  9. 9. 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. © Jeremy B Williams 2012
  10. 10. 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. © Jeremy B Williams 2012
  11. 11. 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 © Jeremy B Williams 2012
  12. 12. 12Intervention 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 © Jeremy B Williams 2012
  13. 13. 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 forSustainable Development © Jeremy B Williams 2012
  14. 14. 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 burdenSource: International Institute for that reduces competitiveness.Sustainable Development © Jeremy B Williams 2012
  15. 15. 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 alsoSource: International Institute for serve to reduce operating costs.Sustainable Development © Jeremy B Williams 2012
  16. 16. 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 andDemand 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 forSustainable Development © Jeremy B Williams 2012
  17. 17. 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. © Jeremy B Williams 2012
  18. 18. 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 © Jeremy B Williams 2012
  19. 19. Sustainable Development and Competitive Advantage Unit 3, Part 2:Sustainable Development and the Market © Jeremy B Williams 2012
  20. 20. 20 Outline1) The business case against sustainable development2) The business case for sustainable development3) Case study: Interface4) Summary and conclusions © Jeremy B Williams 2012
  21. 21. 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. © Jeremy B Williams 2012
  22. 22. 22 The sceptics • These academics argue that the trend towards greater corporate Corporate Social Responsibility (CSR) is a mistake because it distorts market forces and 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: 2001/misguided_virtue.pdf © Jeremy B Williams 2012
  23. 23. 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 © Jeremy B Williams 2012
  24. 24. 24 Spotting the difference Depletes non-renewable Social responsibility resources at rates that do notexceed the rate of development of renewable substitutesExploits renewable resources at rates that do not exceed the ability of the ecosystem to regenerate these resources Business as usualLimits resource use to rates that allow waste to be absorbed by the ecosystemCorporate sustainability Corporate social responsibility © Jeremy B Williams 2012
  25. 25. 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 © Jeremy B Williams 2012
  26. 26. 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 © Jeremy B Williams 2012
  27. 27. 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. © Jeremy B Williams 2012
  28. 28. 28 2) THE BUSINESS CASE FOR SUSTAINABLE DEVELOPMENT• WBCSDs 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 © Jeremy B Williams 2012
  29. 29. 29 The WBCSD‟s 10 building blocks1. The market Encourages the efficiency and innovation necessary for sustainable human progress2. The right frame Full-cost pricing, dismantling of perverse subsidies, effective use of tax system, reduction in ‘command-and- control’ mechanisms3. 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.’ © Jeremy B Williams 2012
  30. 30. 30 The WBCSD‟s 10 building blocks4. 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 firm6. From dialogue to partnerships Reduces misunderstanding, risk and liability, and increases public acceptance of corporate activity © Jeremy B Williams 2012
  31. 31. 31 The WBCSD‟s 10 building blocks7. Consumer choice Informed, responsible consumer choice helps achieve sustainability8. Innovation Allows the global economy to depend more on the progress of technology than on the exploitation of natural capital9. Reflecting the worth of the earth Proper valuation of natural capital to maintain biodiversity10. Making markets work for all Poverty is a major contributor to environmental degradation. LDCs must have equitable access to world markets © Jeremy B Williams 2012
  32. 32. 32 The Johannesburg Summit• At the World Summit on Sustainable Development (September 2002) the emphasis was on ‘walking the talk’• How successful 10 years on? © Jeremy B Williams 2012
  33. 33. 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 Interfaces 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) © Jeremy B Williams 2012
  34. 34. 34A 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” © Jeremy B Williams 2012
  35. 35. 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. © Jeremy B Williams 2012
  36. 36. 36© Jeremy B Williams 2012
  37. 37. 37 Case Study:“The good, the bad, and the ugly” Sustainable Development and Competitive Advantage © Jeremy B Williams 2012
  38. 38. 38Think © Jeremy B Williams 2012
  39. 39. 39Sustainable development in practice• Consider the sustainable development journey …• Which companies are reactive, which are proactive? © Jeremy B Williams 2012
  40. 40. • Which companies 40 have a bad record? • Whic h are• Which companies plain have a good record? ugly? © Jeremy B Williams 2012
  41. 41. 41Read© Jeremy B Williams 2012
  42. 42. 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 © Jeremy B Williams 2012
  43. 43. 43Discuss © Jeremy B Williams 2012
  44. 44. 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! © Jeremy B Williams 2012
  45. 45. 45Deliver © Jeremy B Williams 2012
  46. 46. 46 Prepare a 10 minute presentationproviding an example (and critique) of each Go ahead… make my day! © Jeremy B Williams 2012