Chapter
9
Business, The Environment
and Sustainability
McGraw-Hill/Irwin
Business Ethics: Decision-Making for Personal Integrity
& Social Responsibility,
Copyright © 2008
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The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives

After exploring this chapter, you will be able to:
1.
Describe a range of values that play a role in environmental decisionmaking
Explain the difference between market and regulatory-based
environmental policies
Describe business’ environmental responsibilities that would flow from
each approach
Identify the inadequacies of sole reliance on a market-based approach
Identify the inadequacies of regulatory-based environmental policies
Define and describe sustainable development and sustainable business
Highlight the business opportunities associated with a move towards
sustainability
Describe the sustainable principles of eco-efficiency, biomimicry, and
service.
2.
3.
4.
5.
6.
7.
8.
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Opening Decision Point:
Should Toxic wastes be exported?
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What facts do you need to know to form an opinion on the practice of
exporting toxic wastes to foreign countries?
What values are implicit in the economic reasoning that leads to the
decision to export such wastes?
Does it matter if the countries that accept such wastes are democratic?
How should the decision to locate toxic wastes sites be made?
What are the consequences of making this decision on the basis of
costs?
What principles are relevant to this decision?
Can you think of undesirable land uses (trash dumps, incinerators,
smokestack industries) in your own region? Describe the
neighborhoods in which they are located?
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Environmentalism:
A Historical Perspective
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There is a tendency to believe that environmental issues have
been a concern only in recent times.
Environmentalism flourished in the latter half of the twentieth
century, with such issues as air and water pollution, and the
protection of endangered species becoming public policy
concerns only in the 1970s.
Certainly few businesses gave the natural environment much
thought at all prior to this time.
But environmental degradation has been a part of human
history forever.
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Environmentalism:
A Historical Perspective
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Yet, the industrial revolution of the 18th and 19th centuries
brought with it the ability to degrade the natural environment
to a greater extent and at a faster rate than ever before.
By the start of the 21st century, the earth was experiencing the
greatest period of species extinction since the end of the
dinosaurs 65 million years ago.
Humans are also threatened by global climate change.
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Simply put, the way we have done business over
the last two centuries has brought us up against
the biophysical limits of the earth’s capacity to
support human life, and has already crossed
those limits in the case of countless other forms
of life.
Thus, the major ethical question of this
chapter:
What responsibilities do contemporary
businesses have regarding the natural
environment?
Sustainability as
the New Paradigm?
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There is some evidence that, at the start of the 21st century, a new
model of business is emerging, perhaps first initiated in Europe and
followed by North America and Asia.
Sustainable business, and sustainable economic development seek
to create new ways of doing business in which business success is
measured in terms of economic, ethical and environmental
sustainability, often called the Triple Bottom Line approach.
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Sustainability as
the New Paradigm?
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Environmental responsibilities are seen as a fundamental
part of basic business practice.
Indeed, sustainable business ventures may find that
environmental considerations offer creative and
entrepreneurial businesses enormous opportunities.
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Business Ethics and
Environmental Values (insert obj. 1)
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Deciding what we should do is the ultimate goal of practical reason; our
values are standards that encourage us to act one way, not another.
Therefore, what values are supported by the natural environment? Why
should we act in ways that protect the natural environment from
degradation? Why should business be concerned with, and value, the
natural world?
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Human Self-Interest!
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All human beings depend on the natural environment in order
to survive.
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Humans need clean water to drink, healthy air to breathe, fertile
soil and oceans to produce food, an ozone layer to screen out solar
radiation, and a biosphere that maintains the delicate balance of
climate in which human life can exist.
Two aspects of contemporary environmental realities
underscore the importance of self-interested reasoning.
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1. The Threat to Life
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Past human societies have often run up against the limits of
the local environment’s ability to sustain human life.
In these historical cases, environmental degradation has been
localized to a particular region and has seldom affected more
than a generation.
In contrast, some contemporary environmental issues have the
potential to adversely affect the entire globe and change
human life forever.
Global climate change, species extinction, soil erosion and
desertification, and nuclear wastes will threaten human life
into the indefinite future.
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2. The Threat to
Everything Else
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The science of ecology and its understanding of the interrelatedness of
natural systems have helped us to understand the wide range of human
dependence on ecosystems.
 Where once we might have thought that buried wastes were gone
forever, we now understand how toxins can seep into groundwater and
contaminate drinking water across great time and distances.
 We now understand how pesticides accumulate throughout the food
chain and pose greatest dangers not only to top predators such as bald
eagles, but to human beings as well.
 Where once we thought that ocean fisheries were inexhaustible and the
atmosphere too big to be changed by humans, we now understand the
precise balance necessary to maintain life-supporting systems.
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The Conservation
Movement
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By the late 19th century, humans came to recognize the selfinterested reasons for protecting the natural environment.
The conservation movement, the first phase of modern
environmentalism, advocated for a more restrained and
prudent approach to the natural world.
From this perspective, the natural world was still valued as a
resource, providing humans with both direct benefits (air,
water, food), and indirect benefits (the goods and services
produced by business).
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The Earth as Instrumental Value
vs. Other Value
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The natural environment is essential and valuable to use for many other
reasons. Often, these other values conflict with the more direct
instrumental value that comes from treating the natural world as a
resource.
The beauty and grandeur of the natural world provides great aesthetic
and inspirational value. Many people value the natural world as a
manifestation of religious and spiritual value. Parts of the natural world
are valued for their symbolic value, their historical value, and for such
diverse psychological values as serenity and exhilaration.
These values can clearly conflict with the use of the earth itself as a
resource to physically, as opposed to spiritually, sustain those who live
on it.
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Environmental Value vs.
the Animals
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The moral status of animals has been the value that, arguably, has
raised the greatest challenge to business.
Referred to as the animal rights, animal liberation, or animal welfare
movement, this approach attributes a moral standing to animals.
Such a status would create a wide variety of distinctive ethical
responsibilities concerning how we treat animals and would have
significant implications for many businesses.
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Two Approaches to
Animal Moral Standing: (1)
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Many animals, presumably all that have a central nervous system,
have the capacity to feel pain.
Reminiscent of the utilitarian tradition, this view asserts an ethical
responsibility to minimize pain.
Inflicting unnecessary pain is taken to be an ethical wrong; therefore,
acts that inflict unnecessary pain on animals is ethically wrong.
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Approaches to
Animal Moral Standing: (2)
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A second approach argues that at least some animals have the
cognitive capacity to posses a conscious life of their own.
Reminiscent of the Kantian ethical tradition, this view asserts
that we have a duty not to treat these animals as mere objects
and means to our own ends.
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Business’ Environmental
Responsibility:
The Market Approach (insert obj. 2)
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An overwhelming consensus does exist about the prudential
reasons for protecting the natural environment-- humans have
a right to be protected from harm.
What controversy remains has more to do with the best means
for achieving this goal.
Historically, this debate has focused on whether efficient
markets or government regulation is the most appropriate
means for meeting the environmental responsibilities of
business.
Each of these two approaches has significant implications for
business.
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The Market vs. Regulation?
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From one perspective, if the best approach to environmental
concerns is to trust them to efficient markets, then the
responsible business manager simply ought to seek profits
and allow the market to allocate resources efficiently.
By doing this, business fills its role within a market system
which, in turn, serves the greater overall (utilitarian) good.
On the other hand, if government regulation is a more
adequate approach, then business ought to develop a
compliance structure in order to insure that it conforms to
those regulatory requirements.
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The Market vs.
Regulation?
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Defenders of the market approach contend that environmental
problems are economic problems that deserve economic
solutions.
Fundamentally, environmental problems involve the
allocation and distribution of limited resources.
Whether we are concerned with the allocation of scare nonrenewable resources such as gas and oil, or the earth’s
capacity to absorb industrial by-products such as CO2 or
PCB, environmental challenges can be addressed through
efficient markets.
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The Market Approach (insert obj. 3)
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Some argue that there is an optimal level of pollution that
would best serve society’s interests.
This optimal level is best attained by leaving it to a
competitive market.
Denying that there is any “natural” or objective standard for
clean air or water, we would begin with a goal of “safe” air
and water quality, and translates this goal to a matter of
balancing risks and benefits.
Society could strive for pure air and water, but the costs (lost
opportunities) that this would entail would be too high.
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The Market Approach
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A more reasonable approach is to aim for air and water
quality that is safe enough to breathe and drink without
costing too much.
This balance, the “optimal level of pollution” can be achieved
through competitive markets.
Society, through the activities of individuals, will be willing
to pay for pollution reduction as long as the perceived
benefits outweigh the costs.
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The Market Approach
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The free market also provides an answer for resource conservation.
From a strict market economic perspective, resources are
“infinite.”
There is an argument that resources should not be viewed as
material objects but simply as any means to our ends.
History has shown that human ingenuity and incentive has always
found substitutes for any shortages. As the supply of any resources
decreases, the price increases thereby providing a strong incentive
to supply more, or provide a less costly substitute.
All resources are “fungible” - They can be replaced by substitutes
and in this sense resources are infinite. Resources that are not
being used to satisfy consumer demand are being wasted.
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Inadequacy of the Market
Approach: Externalities (insert obj. 4)
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The market approach results in externalities, such as
environmental pollution.
Since the “costs” of such things as air pollution, groundwater
contamination and depletion, soil erosion, and nuclear waste
disposal are typically borne by parties “external” to the
economic exchange (e.g., people downwind, neighbors, future
generations), free market exchanges cannot guarantee optimal
results.
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Inadequacy of the Market
Approach: No Exchange Value
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A second type of market failure occurs when no markets exist
to create a price for important social goods.
Endangered species, scenic vistas, rare plants and animals,
and biodiversity are just some environmental goods that
typically are not traded on open markets.
With no established exchange value, the market approach
cannot even pretend to achieve its own goals of efficiently
meeting consumer demand.
Markets alone fail to guarantee that such important public
goods are preserved and protected.
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Inadequacy of the Market Approach:
Individual vs. Group Decisions
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Important ethical and policy questions can be missed if we
leave policy decisions solely to the outcome of individual
decisions.
Because many important ethical questions may remain
unasked from within market transactions, we must conclude
that markets are incomplete (at best) in their approach to the
overall social good.
In other words, what is good and rational for a collection of
individuals is not necessarily what is good and rational for a
society.
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The Market Approach – Defenses
and Counters
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Internalizing external costs and assigning property rights to unowned
goods such as wild species are two responses to market failures.
But there are good reasons for thinking that such ad hoc attempts to
repair market failures are environmentally inadequate.
 One important reason is what has been called the first-generation
problem. Markets can work to prevent harm only through information
supplied by the existence of markets failures.
 That is, we learn about markets failures and thereby prevent harms in the
future only by sacrificing the “first-generation” as a means for gaining
this information
 When public policy involves irreplaceable public goods such as
endangered species, rare wilderness areas, and public health and safety,
such a reactionary strategy is ill-advised.
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The Regulatory Approach:
History (insert obj. 5)
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A broad consensus emerged within the United States in the
1970s that unregulated markets are an inadequate approach to
environmental challenges.
Instead, governmental regulations were seen as the better way
to respond to environmental problems.
Much of the most significant environmental legislation in the
United States was enacted during the 1970s.
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The Regulatory Approach:
Historical Perspective
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These laws share a common approach to environmental
issues.
Before this legislation was enacted, the primary legal avenue
open for addressing environmental concerns was tort law.
Only individuals who could prove that they had been harmed
by pollution could raise legal challenges to air and water
pollution.
That legal approach placed the burden on the person who was
harmed and, at best, offered compensation for the harm only
after the fact.
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The Regulatory Approach:
Historical Perspective
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Except for the incentive provided by the threat of compensation, U.S.
policy did little to prevent the pollution in the first place.
Absent any proof of negligence, public policy was content to let the
market decide environmental policy.
Because endangered species themselves had no legal standing, direct
harm to plant an animal life was of no legal concern and previous
policies did little to prevent harm to plant and animal life.
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The Regulatory Approach:
Impact of the Laws
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Each law enacted during the 1970s established standards that
effectively shifted the burden from those threatened with
harm to those who would cause the harm. Government
established regulatory standards to try to prevent the
occurrence of pollution or species extinction rather than
compensation after the fact.
These laws established minimum standards to ensure air and
water quality and species preservation.
Business was free to pursue it own goals as long as it
complied with the side constraints established by this
minimum standards.
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The Regulatory Approach:
Ethical Perspective
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Philosopher Norman Bowie defended a modified version of
this narrow view of corporate social responsibility.
Bowie argued that, apart from the duties to cause no
avoidable harm to humans and to obey the law, business has
no special environmental responsibility.
In so far as society desires environmental goods, e.g.,
lowering pollution by increasing the fuel efficiency of
automobiles, it is free to express those desires through
legislation or within the marketplace. Absent those demands,
business has no special environmental responsibilities.
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Inadequacies of the
Regulatory Approach (1) (insert obj. 5)
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This approach underestimates the influence that business can have
in establishing the law.
The Corporate Automotive Fuel Efficiency (CAFE) standards
provide a good example of how this can occur.
A reasonable account of this law suggests that the public very
clearly expressed a political goal of improving air quality by
improving automobile fuel efficiency goals (and thereby reducing
automobile emissions).
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Inadequacies of the
Regulatory Approach (2)
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This approach also underestimates the ability of business to
influence consumer choice.
To conclude that business fulfills its environmental
responsibility when it responds to the environmental demands
of consumers is to underestimate the role that business can
play in shaping public opinion.
Assuming that business is not going to stop advertising its
products or lobbying government, this model of corporate
environmental responsibility is likely to prove inadequate for
protecting the natural environment.
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Inadequacies of the
Regulatory Approach (3)
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If we rely on the law to protect the environment, environmental
protection will extend only as far as the law extends.
Yet, most environmental issues, pollution problems especially, do not
respect legal jurisdictions.
While hope remains that international agreements might help control
global environmental problems, the failure of the Kyoto agreement
suggests that this might be overly optimistic.
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Inadequacies of the
Regulatory Approach (4)
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Perhaps most troubling from an environmental standpoint,
this regulatory model assumes that economic growth is
environmentally and ethically benign.
Regulations establish side-constraints on business’ pursuit of
profits and, as long as they remain within those constraints,
accept as ethically legitimate whatever road to profitability is
chosen by management.
What can be lost in these discussions is the very important
fact that there are many different ways to pursue profits
within the side-constraints of law.
Different roads towards profitability can have very different
environmental consequences.
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Business’ Environmental
Responsibilities:
The Sustainability Approach (insert obj. 6)
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Beginning in the 1980s, a new model for environmentally
responsible business began to take shape, one that combines
financial opportunities with environmental and ethical
responsibilities.
The concept of sustainable development and sustainable
business practice suggests a radically new vision for
integrating financial and environmental goals, compared to
the growth model that preceded it.
These three goals, economic, environmental, and ethical
sustainability, are often referred to as the “Three Pillars of
Sustainability.”
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Sustainability Approach:
Historical Perspective
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The concept of sustainable development can be traced to a
1987 report from the United Nations’ World Commission on
Environment and Development (WCED), more commonly
known as the Brundtland Commission, named for its Chair
Gro Harlem Brundtland.
The Commission was charged to develop recommendations
for paths towards economic and social development that
would not achieve short-term economic growth at the expense
of long-term environmental and economic sustainability.
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The Brundtland Commission offered
what has become the standard definition
of sustainable development.
Sustainable development is
development that meets the needs of the
present without compromising the
ability of future generations to meet
their own needs.
The Nature of Sustainability:
The Circular Flow Model
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We can begin with the standard understanding of economic
activity and economic growth found in almost every
economics textbook.
What is sometimes called the “circular flow model” explains
the nature of economic transactions in terms of a flow of
resources from businesses to households and back again.
(Continued)
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Circular Flow Model
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Business produces goods and services in response to the
market demands of households.
These goods and services are shipped to households in
exchange for payments back to business.
These payments are in turn sent back to households in the
form of wages, salaries, rents, profits, and interests.
These payments are received by households in exchange for
the labor, land, capital and entrepreneurial skills used by
business to produce goods and services.
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Business Opportunities in a
Sustainable Economy (insert obj. 7)
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While the regulatory and compliance model tends to
interpret environmental responsibilities as constraints upon
business, the sustainability model is more forward-looking
and may present business with greater opportunities than
burdens.
Indeed, it offers a vision of future business that many
entrepreneurial and creative businesses are already pursuing.
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A Visual Example
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The Natural Step uses an image of a funnel, with two
converging lines, to help business understand these
opportunities.
The resources necessary to sustain life are on a downward
slope.
While there is disagreement about the angle of the slope,
there is widespread consensus that available resources are in
decline.
The second line represents aggregate worldwide demand,
accounting for both population growth and the increasing
demand of consumerist lifestyles.
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A Visual Example
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Barring an environmental catastrophe, many but not all
industries will emerge through the narrowing funnel into an
era of sustainable living. Businesses unable to envision that
sustainable future will hit the narrowing wall. Innovative and
entrepreneurial business will find their way through.
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The Funnel Example
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The Natural Step then challenges business to “backcast” a
path towards sustainability.
We are all familiar with forecasting, in which we examine
present data and predict the future. “Backcasting” examines
what the future will be when we emerge through the funnel.
Knowing what the future must be, creative businesses then
look backwards to the present and determine what must be
done in order for them to arrive at that future.
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Why be Sustainable?
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For reasons of business self-interest alone, a strong case can
be made for taking steps now to achieve a sustainable future.
At least five reasons establish a persuasive case for
concluding that it is almost always in business’ self-interest to
pursue a strategy of sustainability.
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Why be Sustainable? (1)
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Sustainability is a prudent long-term strategy.
Business will need to adopt sustainable practices in order
to insure long-term survival.
Firms that fail to adapt to the converging lines of
decreasing availability of resources and increasing
demand risk their own survival.
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Why be Sustainable? (2)
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There is a huge unmet market potential among the world’s
developing economies that can only be met in sustainable
ways.
Enormous business opportunities exist in serving the billions
of people who need, and who are demanding, economic
goods and services.
The base of the economic pyramid represents the largest and
fastest-growing economic market in human history.
Yet, the sheer size of these markets alone makes it impossible
to meet this demand with the environmentally damaging
industrial practices of the 19th and 20th centuries.
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Why be Sustainable? (3)
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Significant cost savings can be achieved through
sustainable practices.
Business stands to save significant costs in moves towards
eco-efficiency.
Savings on energy use and materials will reduce not only
environmental wastes, but spending wastes as well.
Minimizing wastes make sense on financial grounds as well
as on environmental grounds.
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Why be Sustainable? (4)
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Competitive advantages exist for sustainable businesses.
Firms that are ahead of the sustainability curve will have an
advantage serving environmentally-conscious consumers, as
well as enjoying a competitive advantage attracting workers
who will take pride and satisfaction in working for
progressive firms.
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Why be Sustainable? (5)
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Sustainability is a good risk management strategy.
There are many downsides in refusing to move towards
sustainability that will be avoided by innovative firms.
Avoiding future government regulation is one obvious
benefit.
Firms that take the initiative in moving towards sustainability
will also likely be the firms who set the standards of bestpractices in the field. Thus, when regulation does come, these
firms will likely play a role in determining what those
regulations ought to be.
(continued)
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Why be Sustainable? (5) (continued)
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Avoiding legal liability for unsustainable products is another
potential benefit.
As social consciousness changes, the legal system may soon
begin punishing those firms who are now negligent in failing
to foresee harms caused by their unsustainable practices.
Consumer demand and consumer boycotts of unsustainable
firms are also a risk to be avoided.
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Principles for a Sustainable
Business (insert obj. 8)
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Firms can evolve toward a sustainable business model by not
allowing resources to enter into the economic cycle from the
biosphere at rates faster than which they are replenished.
Ideally, waste should be eliminated or, at a minimum, not produced at
a rate faster than which the biosphere can absorb them.
Finally, the energy to power the economic system should be
renewable, ultimately relying on the sun, the only energy that is truly
renewable.
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Principles for a
Sustainable Business
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The precise implications of sustainability will differ for
specific firms and industries; but three general principles
will guide the move towards sustainability.
1. Firms and industries must become more efficient in using
natural resources;
2. They should model their entire production process on
biological processes; and
3. They should emphasize the production of services rather
than products.
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Principle 1: Eco-Efficiency
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Versions of the first principle, sometimes called ecoefficiency, has long been a part of the environmental
movement. “Doing more with less” has been an
environmental guideline for decades.
Business firms can improve energy and materials efficiency
in such things as lighting, building design, product design,
and distribution channels.
Some estimates suggest that with present technologies alone,
business could readily achieve a 4-fold increase in efficiency
and as much as a 10-fold increase.
Consider that a 4-fold increase, called “Factor-Four” in the
sustainability literature, would make it possible to achieve
double the productivity from one-half the resource use.
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Principle 2: Biological
Process Models
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Imagine the waste that is leaving the economic cycle is being
turned back into the cycle as productive resource.
“Closed-loop” production seeks to integrate what is presently
waste back into production.
In an ideal situation, the waste of one firm become the
resource of another and such synergies can create ecoindustrial parks.
Just as biological processes such as photosynthesis cycle the
“waste” of one activity into the resource of another, this
principle is often referred to as biomimicry.
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Principle 3: Shift from
Products to Services
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Traditional economic and managerial models interpret
consumer demand as the demand for products, e.g., washing
machines, carpets, lights, consumer electronics, air
conditioners, cars, computers, and so forth.
A service-based economy interprets consumer demand as a
demand for services, e.g., for clothes cleaning, floor-covering,
illumination, entertainment, cool air, transportation, word
processing, and so forth.
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Discussion of Opening Decision Point:
Should Toxic wastes be exported?
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In the early 1990s, an internal World Bank memo discussing
the export of toxic wastes was leaked to the public.
The memo was written by then World Bank chief economist
Lawrence Summers.
Summers later became Secretary of the Treasury under
President Clinton and, after that, president of Harvard
University.
Summers makes the economic case for exporting wastes in
this memo. (See text or notes.)
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Discussion of Opening Decision Point:
Should Toxic wastes be exported?
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During the controversy that followed the release of this
memo, defenders of the Summers and the World Bank alleged
that this memo was intended as ironic and tongue-in-cheek.
Whether this was true of not, this memo does provide a clear
description of some ethical and environmental implications of
a fairly common pattern of economic thinking.
If we were to apply the principles of free market economic
thinking to business decision making and corporate social
responsibility, we would seek to put a price on everything,
including “increased morbidity and mortality” (illness and
death).
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Discussion of Opening Decision Point:
Should Toxic wastes be exported?
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This economic way of thinking then advises that we make decisions by
applying a utilitarian calculus: act in whichever way will maximize
overall happiness.
In the case of exporting toxic waste, “the economic logic behind
dumping a load of toxic waste in the lowest wage country is impeccable
and we should face up to that.”
On the other hand, deontological principles of justice would seem to
imply that economic benefits and burdens be distributed fairly and that
those who reap the benefits of industrial economies ought to be the same
people who bear the burdens created by that economy.
Justice would require that that we not burden the least advantaged people
in the world with the additional harms that industrial wastes create.
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Discussion of Opening Decision Point:
Should Toxic wastes be exported?
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Of course, the ideal would be to create industrial processes
that do not produce toxic wastes in the first place.
“Take-back” regulations that are being developed by many
European countries will produce incentives for business to
ensure that the by-products of industrial processes are benign.
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Chapter Nine Vocabulary Terms
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After examining this Chapter, you should have a clear understanding of the following
Key Terms and you will find them defined in the Glossary:
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Backcasting
Biomimicry
Corporate Automotive Fuel Efficiency (CAFE) Standards
Cradle-to-Cradle
Eco-Efficiency
Service-based Economy
Sustainable Development
Sustainable Business
Three Pillars of Sustainability
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