Regardless of what many environmentalists and economists argue, I believe that fundamentally a business should not take action to improve its environmental or social responsibility unless there is a very clear economic rationale.
Having spent many years debating the role of sustainability I have come to the realisation that there are three broad economic reasons which drive an organisation to deploy capital and resources to its sustainability agenda.
The first two reasons are reactionary and tend to lack strategic foresight. The third reason is usually manifest through a proactive mandate to explore new market opportunities in product / service development and changes in demand.
As Milton Friedman argued, the purpose of business is to maximise returns to shareholders.
Hence, any action that works against this purpose essentially acts against growth in shareholder value. Although my views on corporate social responsibility (CSR) and sustainability are not as extreme as Friedman’s, I fundamentally believe that it is incongruent for a business to address its environmental or social responsibility without considering the economic imperative for the firm.
This type of statement often gets the back up of many environmentalists who believe businesses have a responsibility to society.
For me however, that social responsibility is borne out of an economic logic.
Irresponsible actions which result in a social impact that erodes shareholder value is not good for business. My experience working with businesses, big and small, suggests that there are three reasons why businesses undertake CSR and sustainability initiatives.
Legislative requirements and reputation / brand management
In most countries around the world, businesses have a legal duty of care to the environment, as well as a raft of other environmental and social regulatory requirements which they need to meet in order to operate.
Breaking these laws can be extremely costly for a business and hence at a minimum businesses make sure that they meet their legal obligations. But potentially more damaging than the fines and penalties imposed by legal requirements is the impact that irresponsible behaviour can have on brand and corporate reputation.
Many firms that have been caught out for poor sustainability performance have experienced a serious erosion in brand equity. For this reason companies invest in sustainability strategies which meet legal requirements and protect their brand and reputation.
Operational efficiency and cost
Many firms undertake CSR and sustainability initiatives as they see an opportunity to pursue cost reduction strategies at the same time.
In fact, sustainability outcomes are typically a by-product of actions to improve operational efficiencies.
For example, using less electricity and water is both good for the environment and for cost performance. Similarly using less packaging also offers opportunities to reduce exposure to rising energy, raw material and waste costs.
The challenge for a business looking to invest in their sustainability performance is one of a simple cost benefit analysis as well as an understanding of payback periods.
Innovation and new product / market development
This final reason why a business invests capital and resources on CSR and sustainability has, over the last two decades, begun to gather much more momentum in the business world.
For many companies, product / service innovations which deliver improved environmental and social performance offer a real opportunity to differentiate for competitive advantage. The trend of companies developing products / services with environmental and social attributes is driven by an increased consumer awareness as well as changes in market demand.
Nowadays, many companies invest lots of money in R&D, product development and marketing to develop and promote their products / services which have sustainability attributes. Getting this investment right offers the opportunity for companies to grow and thrive into the 21st century.
So why do businesses invest in CSR and sustainability strategies?
Well, from my perspective they do so because it makes sense from an economic point of view. Investments help them meet their legal responsibility and thus protect brand / reputation equity. They also help them save costs through operational efficiencies and develop new products / services with which they can gain competitive advantage.
What do you think?
Jess has spent years travelling the world full-time. Nothing else comes close to the reaches of this emotive activity...