Managing Sustainable Enterprise

GCSE 7508Griffith Business School

Asia Pacific Centre for Sustainable EnterpriseJanuary 2013

Jeremy Williamsjeremy.williams@griffith.edu.au

@jeremybwilliams@TheGreenMBA

facebook.com/profjeremybwilliamsjeremybwilliams.net

Session 8:

Business Approaches to Sustainable Development

Capitalism is not the problem

• Sustainable development is not compatible with mainstream economics thinking

• Capitalism is better than the alternatives, but a new paradigm is required

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The crisis in mainstream economics

• Those who adhere to one paradigm accept innovation within the context of that paradigm, but they strongly resist changes that threaten the fundamentals of the paradigm

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Anomaly and crisis• The first reaction to a state of anomaly is not to abandon the paradigm, but to

try harder to make it work

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‘Academic scribblers’• ‘Madmen in authority, who hear voices in the air,

are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy, there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians, and even agitators apply to current events are not likely to be the newest.’

Keynes, J.M. (1936)The General Theory of Employment, Interest and Money,

pp. 383-84John Maynard Keynes

(1883-1946)

http://www.jobsletter.org.nz/jbl04610.htm

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• Serious change in unlikely in any society so long as the people in the seats of power (and their advisors) continue to be the products of the mainstream paradigm

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People respond to incentives

• Human behaviour is such that it only responds to incentives, and so long as the incentive to embrace paradigm shift remains weak (or non-existent), the prospects of change are remote.

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The most powerful institution within the political economy

• Business is the only institution powerful enough to quickly foster the changes necessary for ecological and social sustainability

• The profit motive has an important role to play (something largely absent within academe and state bureaucracies)

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• John Stuart Mill (1806-73)– On the notion of the stationary state:

‘If the earth must lose that great proportion of its pleasantness which it owes to things that the unlimited increase of wealth and population would extirpate from it, for the mere purpose of enabling it to support a larger, but not a happier or better population……I sincerely hope, for the sake of posterity, that they will be content to be stationary long before necessity compels them to.’

John Stuart Mill, Principles of Political Economy, book IV, chapter VI, pp 756-57, (1848), as presented in J. E. Cohen, How Many People Can the Earth Support?, WW Norton, pp. 397-98, 1995.

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The rise of conspicuous consumption

(1899)

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Oil-fuelled economic growth: ‘The Golden Age’

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http://www.youtube.com/watch?v=VWsHLNIobdI

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Defining the steady state

• Ecological Economic Efficiency (EEE) is consistent with the notion of the steady state economy

• This is where throughput* remains constant at a level that neither depletes the environment beyond its regenerative capacity, nor pollutes it beyond its absorptive capacity.

* what flows through a system, entering as input and exiting as output

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• In summary, a steady-state economy may continue to develop greater capacity to satisfy human wants by increasing the efficiency of resource use, but not by increasing the resource throughput

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The key ingredient

• For business to take up the challenge, sustainable behaviour must be a source of competitive advantage

• The vital ingredient is education of business leaders.

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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 Sustainable Development http://www.bsdglobal.com/sd_journey.asp

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Sustainable business strategies

• SD means adopting strategies that meet the needs of the business and its stakeholders today, while protecting, sustaining and enhancing the human and natural 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 Sustainable Development http://www.bsdglobal.com/sd_journey.asp

Supply side factors

Demand side factors

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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 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 Approach to Climate, October, Harvard Business Review.

Michael Porter

Forrest Reinhardt

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• 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

The business case for sustainable development

http://www.wbcsd.ch

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Creating the next industrial revolution?

• Radical resource productivity

• Biomimicry

• Service and flow economy

• Investing in natural capital

See, also by Paul Hawken, (1994) The Ecology of Commercewww.naturalcapitalism.org

Paul Hawken, Amory and L. Hunter Lovins propose 4 central strategies of natural capitalism:

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Radical resource productivity

• Using resources more efficiently in ways that can already be achieved; e.g. process redesign (disembodied technical change) or energy efficient buildings, passive solar heating.

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Reorient to a service and flow economy

• Focuses more on selling and purchasing services rather than products

• Makes manufacturers more ecologically responsible as it reduces unit cost

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Invest in natural capital29

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Research biomimicry

Spider silk

Abalone shell

Stenocara beetle

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Case study:

• 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/

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http://www.youtube.com/watch?v=D9hetZuPzS4

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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”

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The role of government

• Unfortunately, governments are often motivated by the political cycle

• For this reason, command-and-control solutions are not expedient

• At the very least, governments need to provide the legislative framework to change behaviour; e.g. ecological tax reform

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The role of business• Business is more dynamic than government

• There is a competitive advantage to be gained from developing a business strategy based on sustainable development

• Supply-side: reduce costs

• Demand-side: attract environmentally-conscious customers

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The role of the individual

Time to have a rethink

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Optimal macroeconomic scale

• In a ‘full world’, the maximisation of EEE will produce a theoretical optimum for an economy; its optimal macroeconomic scale

• This optimum position will be consistent with the notion of the steady-state economy

• Operationally, arriving at this point and staying there – even with a sound understanding of the science – is most unlikely in a complex and increasingly dynamic world

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Operational objectives

• In practical terms, therefore, a workable goal is to stay below known thresholds and aim to keep ‘shocks’ small and local, (rather than large and global)

• It is evident that the health of many of the world’s ecosystems are already at (or close to) critical points

• An apt ‘operational’ rule would be to attempt to preserve and (where possible) restore the integrity of all natural capital so as to protect its vital ecosystem services … raw material inputs, waste assimilation services, life-supporting functions, etc

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Business continuity

• Ecological economists have suggested that one way to manage the transition is to pair a non-renewable mining project with a renewable project

• A part of the net receipts from liquidation of the non-renewable resource can be dedicated to finance investments in renewable natural capital

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Cross-subsidisation

• The net receipts from the exploitation a non-renewable resource need to be divided into two components– an income component – a capital to be set-aside component

• The capital set-aside is invested in a renewable substitute so that, by the time the non-renewable resource is depleted, the stocks of the renewable resource will have the capacity to replace the non-renewable resource

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The three principles of sustainability

1. Limit use of all resources to rates that ultimately result in levels of waste that can be absorbed by the ecosystem

1. Exploit renewable resources at rates that do not exceed the ability of the ecosystem to regenerate the resources

1. Deplete non-renewable resources at rates that, as far as possible, do not exceed the rate of development of renewable substitutes

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Closing statement

• ‘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.

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