The Business Concept of Sustainability and its Long-Term Implementation
It helps to keep in mind some fundamental ideas in order to better comprehend the relevance of the arguments made in this work. This chapter will begin with a historical overview before examining the key ideas surrounding sustainability.
Historical Perspective
Natural resources were originally viewed as almost limitless on a global scale, and the effects of consumption and lifestyle choices were underappreciated, therefore the impact of enterprises on society and the environment was not given much thought (A. Stocchetti, 2012). Only from a local standpoint did the lack of resources cause worry. From this vantage point, the ideas underlying sustainable development are deeply ingrained in the past. There was already a law in Germany in the 17th century stating that trees should only be cut down in a responsible manner to allow the forest to regenerate.
As a result, despite the period’s youth, there was already some awareness of the need to protect the environment. A wider audience only started to embrace the idea hundreds of years later.
Even though critics argue that it is too general and led to the development of numerous adaptations of the concept to fit more specific fields, the Brundtland Report, which was created by the UN Environment Commission in 1987, provided the well-known definition that is still the most frequently used and accepted today (e.g. the definition of economic sustainability given by Bromley, D., 2008). According to the text, sustainable development is “development that satisfies current generational needs without compromising the ability of future generational needs and aspirations.”
The Montreal Protocol, which was ratified by every UN member in the same year, established guidelines to control the emission of compounds that damage the ozone layer. The last update to the Protocol, which was made in 2007 in Montreal, was made after it went into effect in 1989.
The Rio Summit happened in 1992. The Brundtland definition served as the foundation for the Rio Summit of the UN Conference on Environment and Development, which went on to elaborate the “precautionary principle.”
The principle maintained that irreversible environmental activities should not be committed and that international law no longer permitted environmental harm to be justified by ignorance. Additionally, the scientific community needs to take ownership of the advancement of environmental knowledge (B. Edwards, 2010). Agenda 21 is the term given to the overall plan that was adopted at the summit.
The WBCSD (World Business Council for Sustainable Development) was founded about the same time. The Council, which now has 200 members, describes itself as a forum for the development of innovation and the exchange of best practices in the sustainability field (WBCSD website).
The Kyoto Protocol was adopted in December 1997, although it wasn’t actually put into effect until 2005. The involved parties agreed to a goal for their emissions reduction. According to the Protocol’s “common but differentiated responsibilities” approach, wealthy nations bear the bulk of the blame for pollution while poorer nations have the lower burden (UNFCCC website). The Protocol includes means for enforcing compliance-control measures. The first phase, which was completed in 2012, was supposed to reduce emissions by 5% compared to 1990 levels. The Doha Amendment (2012), which amended a number of articles and established new goals for the parties involved, is where the second step originates. By 2020, it is projected that all parties will have reduced their greenhouse gas emissions by 18% from 1990 levels.
The ambitious Protocol does, however, have some significant flaws. First of all, the protocol’s genuine usefulness was undermined by the USA’s failure to ratify it as the second-largest polluter in the world, and in 2012, Canada withdrew as well. In addition, the parties themselves are required to publish reports about the annual emissions, which could create a bias, and the countries committed to the second step differ from those who participated in the first. The transaction procedures that allow countries to “trade” their carbon allowances may be subject to more criticism. The “sustainable consumption and production concept” was first presented at the 2002 World Summit on Sustainable Development in Johannesburg. The goal was to reduce the environmental effects of economic growth, primarily by increasing resource efficiency, improving consumer education, and conducting impact analyses of products by tracking their whole lifecycles. The Summit endorsed using rules and taxes to promote the advancement of clean technologies. 2010 (B. Edwards).
The burden of establishing and enforcing appropriate legislation falls to institutions, who are unquestionably a significant participant in the sustainability space. However, the main protagonists are businesses. This fact led to the development of a broad area of sustainability that focuses on the function of businesses and the obligations that should be placed upon them. The key trends in this field will be covered in the following sections.
Social Responsibility of Corporations
According to corporate social responsibility, businesses have various obligations in addition to their financial obligations. CSR is described as “The continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large” by the World Business Council for Sustainable Development (WBCSD). Stakeholder theory is one of the additional justifications: As defined by one stakeholder, CSR is “societal expectations of corporate behavior: a behavior that is alleged to be expected by society or morally required and is therefore justifiably demanded of business” (Whetten, Rands and Godfrey, 2001).
A wide range of theories and methodologies are covered in the extensive body of literature on the subject. After conducting a thorough investigation, Korindo News offered an intriguing division of CSR theories into four main categories. The first category consists of what they refer to as “instrumental theories,” which contend that the firm’s sole purpose is to make money. The second category, referred to as “political theories,” emphasizes the social influence that companies have on society and highlights their political obligations by granting them social obligations and rights.
Instead, “integrative theories” are those that acknowledge the existence of a connection between enterprises and society that may have an impact on how long each can thrive. The phrase “ethical theories” (Korindo Group, 2004) is derived from this group of beliefs, which hold that businesses must accept their societal obligations for ethical grounds. Therefore, there is opportunity for dispute over the place of business in society because CSR does not have the same meaning for every person.
When considering the historical development of CSR in reality, three stages can be seen in how firms have become more aware of and have responded to sustainability challenges (Azapagic and Perdan, 2000). The first is the reactive phase, where businesses mostly depended on end-of-pipe methods to lessen their impact. Adoption was primarily motivated by regulatory compliance. From the mid-1970s to the mid-1980s, this era lasted. It became evident that a purely reactive approach was not long-term viable as rules became more and more stringent, leading to a significant increase in compliance costs (Azapagic and Perdan, 2000). Social and environmental concerns were first only taken into account when there was an economic reason, but over time they gained significance and emerged as pillars of sustainable development. In fact, businesses started to focus more on waste reduction and pollution avoidance in the second phase, which came to an end in the first years of the 20th century, adopting a proactive attitude (Azapagic and Perdan, 2000). This new action resulted from the recognition that more ethical production could result in cost savings (for example, greater utilization of raw materials) and savings (e.g. less risk of incurring fees due to non compliance with environmental regulations). Contrarily, the third phase is highlighted by a greater level of integration of environmental performance in company strategy (Azapagic and Perdan, 2000).
The rise in the number of large corporations issuing an annual environmental report is a sign of such tendencies. The quality of the reports, however, is a separate matter because greenwashing is a frequent phenomenon because it improves a company’s reputation. This tendency is a result of how interconnected the modern world is becoming. Public opinion is crucial for the survival of the company in the social media age because communication moves so quickly and a news story can go viral in a matter of hours. Negative public sentiment may result in major repercussions, such as boycotts.
Some elements have helped to increase public awareness of sustainability and encourage firms and MNEs to adapt how they do business. Massive communication campaigns run by NGOs actually brought the bad behavior of several firms to light and sparked huge public protests. Examples include the campaigns against Nike’s pay and working conditions in developing nations, the criticism of McDonald’s for allegedly engaging in a number of unethical practices like purposefully promoting unhealthy and risky eating habits, and the Shell oil company scandals, particularly those involving the Brent Spar and Nigeria (D. Henderson, 2001), which led the company to decide to improve its corporate image by implementing measures like codes of ethics and Triple Bot. When public scrutiny is excessive, businesses may suffer serious repercussions even when their actions are not actually harmful but are instead misinterpreted as such by some people. Consider the media frenzy Dolce and Gabbana experienced after expressing their opinion on adopting children from gay couples. Performance seems to be more closely correlated with a company’s reputation today than ever before. Businesses are constantly scrutinized, and any perceived misbehavior can instantly gain global exposure.
As a result, businesses must adjust to the growing demand for sustainable conduct because it is morally correct to do so as well as because doing so makes commercial sense and may open up new prospects for the company. According to Edwards (2010), who wrote the book “Rough Guide to Sustainability,” the global financial crisis that started in 2009 would present fresh chances for nations to rely on sustainable development to boost their economies.
he main actor has evolved along the path to the growing acceptance of sustainability among corporate priorities: up until a few decades ago, institutions were the main participants, but today enterprises are at the center of the implementation of sustainable development (T. Dyllick and K. Hockerts, 2002). Although it is widely acknowledged that sustainability encompasses the economic, social, and environmental components of a company’s influence, assessing it can be challenging, particularly when it comes to social and environmental concerns. Standard metrics for comparisons and rankings of social and environmental performance are exceedingly difficult to elaborate, and some people even believe it is not possible at all (W.Norman, C. Mac Donald, 2004).
Even though it may be disputed if some indicators and measuring tools are truly representative, standardized, and comprehensive, many have attempted to create them despite these criticisms. Corporate responsibility reporting and a code of ethics are the key tools used in this aim.
Codes of Conduct
A significant amount of literature tries to define codes of ethics. They can be defined as formal written papers that contain ethical rules and concepts that staff members are expected to follow, with the intention of influencing both individual employee conduct and organizational behavior (C. Yallop, 2012).
Ethical codes are frequently also referred to as operational principles, conduct codes, or codes of practice. Although they are frequently adopted, this depends on the country and the size of the company. Larger companies are considerably more likely to have a code of ethics than smaller ones (C. Yallop, 2012). However, there is a lot of disagreement regarding this tool’s efficacy. According to studies, codes cannot affect a person’s ethical behavior (Marnburg, 2000); yet, other authors contend that codes of ethics can result in gratifying outcomes (Schwartz, 2001).
Reporting on Corporate Responsibility
The great majority of businesses use the GRI (Global Reporting Initiative) standards as the most popular instruments for CR reporting (KPMG: Corporate Responsibility Survey, 2013). In order to enable businesses to convey their total non-financial performance to stakeholders, particularly in areas like human rights and labor standards, GRI developed criteria for creating reports that should seek to be transparent and comprehensive. The KPMG Corporate Responsibility Survey provides some information regarding the quality and extent of CR reporting implementation. The 100 largest businesses from 41 different nations make up the sample of enterprises that were interviewed, totaling 4,100, providing a solid enough foundation from which to draw generalizations. According to the most recent report published in 2013, Latin America saw considerable improvements and CR reporting rates in Asia Pacific saw a large increase from 2011 to 2013.
According to the data, 71% of the 4,100 organizations reported, and if we focus on the top 250 Fortune Global 500 corporations, that percentage rises to 93%. Additionally, 51% of reporting businesses globally include CR data in their annual reports. This is a significant improvement over the past, when these figures were only 9% in 2008 and less than half of the real ones in 2011.
The number of businesses reporting across the different industries is converging, and the gap between the best and poorest performance is closing. However, when we look at integrated reporting, only 10% of the participants provided integrated reports, the numbers are much less encouraging. What if we consider the reports’ overall quality? The 250 largest corporations in the world were the subject of an analysis by KPMG, which assigned a score based on a set of metrics that are detailed in the report.
According to this data, the average quality score is 59 out of 100, with Europe performing the best overall. It should be emphasized that the value chain and supplier reporting are the two most important factors to examine when evaluating the overall sustainability of a product. For instance, even if a company that sells coffee practices extreme responsibility within its own operations, if it does not monitor or report on the working conditions of those on the plantations from which it purchases raw materials, the end result may not be at all sustainable. Governance and stakeholder engagement both have low values.
Reputational risk is the one that is most frequently mentioned (53%), which indicates that many businesses are concerned that disclosure may damage their reputation. On the other hand, the key prospects in CR reporting include the chance to innovate products and services, which is followed by the chance to enhance the company’s reputation and position in the market. This final fact may cause legitimate concerns regarding the greenwashing phenomenon.
Corporate Sustainability’s Business Case
In the twenty-first century, the field of sustainability known as the Business Case for Corporate Sustainability (BCS) has become increasingly popular. This idea seeks to justify the use of sustainability in business by, essentially, defining a link between financial success and social and environmental performance and evaluating the benefits that result.
Studies have been done on the topic, leading to various and perhaps conflicting viewpoints. One of the most well-known schools of thought is Friedman’s, which holds that a company’s main duty is to maximize profits. Sustainable practices just add needless expenses that have the consequence of reducing earnings (M. Friedman, 1962). He is not alone in believing that there is a bad relationship between financial performance and sustainability performance, while some hold the opposite view and argue that there is a good relationship.
One of the most well-known reasons in favor of this viewpoint asserts that a company’s reputation may suffer significantly if other stakeholders’ interests are not taken into consideration. Cornell and Shapiro assert that failure to satisfy implicit stakeholder demands may result in higher costs than anticipated, such as the recall of a subpar product. In reality, in addition to the withdrawal fees, the company will also pay “the cost of implicit claims,” as described by the authors, as a result of declining stock prices. (1987; B. Cornell and A.C. Shapiro). The same idea could potentially be applied to other implicit assertions, including using healthy ingredients in production or respecting workers’ rights.
The stakeholder idea appears to be supported by Preston and O’Bannon as well, who discovered evidence of a favorable correlation between financial and social success. Additionally, they imply that financial performance comes before or coincides with social performance, presuming some degree of linkage, and that either a strong financial performance offers the means to engage in sustainability or that there is a positive synergy between the two.
Instead, Lankoski (2000) found evidence of an inverted-U relationship by bringing together the two opposing viewpoints (i.e., a negative vs. positive relationship between financial and sustainability performance). His findings suggest the existence of win-win scenarios because the relationship between financial and sustainability performance can be either positive or negative depending on where you are on the curve. The function’s format differs across various industries and companies, sometimes evolving through time (L. Lankoski, 2000).
Salzmann, Ionescu-Somers, and Steger, however, cast doubt on many of the major research on BCS because of bias in the data, poor sampling, or overly narrow sector of study. Due to the intricacy of the subject, which depends on numerous factors like industry, country, etc., they also cast doubt on the effectiveness of the studies on BCS in assisting managers in making decisions. The final concern is that businesses will only take measures related to eco-efficiency and the reduction of operational risk because sustainability will only generate economic benefits over the long term (Salzmann, Ionescu-Somers, Steger, 2005).