Today I am going to explore some of the ideas previously discussed in this blog more deeply.

Over the last decade there has been considerable discussion about the relationship between businesses and the natural environment. There is no doubt that the way companies organise their manufacturing processes and the characteristics of the products and services they launch have a critical impact on our environmental surroundings. It is also broadly accepted that businesses cause environmental problems and that they are called on to play a decisive role in their solutions. Integrating the demands of sustainability in a business, however, is a challenge for management, since it implies fundamental changes in some of the ways the company is run. These changes will depend on companies’ assessment of their potential benefits and risks. Moreover, unclear effects of environmentally-driven investments on the financial future of the company bring great uncertainty for decision-makers at board level. The difficulties experienced by firms when moving towards corporate sustainability raise the question of how environmental and social management can be integrated better with economic business goals.

The relationship between environmental sustainability, economic performance and competitiveness has been debated strongly for many years and still remains unclear. The many available studies, prepared from a theoretical as well as an empirical perspective, have not arrived at a definite consensus so far. Literature gives us two main views of the link between environmental and economic performance, which give rise to rather different perspectives on this relationship. They are:

1) The ‘traditionalist’, or neoclassical, view of a trade-off between environmental performance and competitiveness. According to this view, the purpose of environmental regulation is to maximize social welfare, making polluting firms responsible for the costs of the negative externality they produce, thereby correcting the market failure. As a consequence, environmental policies may have an adverse impact on competitiveness, insofar as this regulation imposes additional costs to firms. This burden may be of particular concern in industries with substantial environmental impact, where the share of environmental costs in total production costs is considerably higher than for the manufacturing sector on average. A defensive business strategy and the adoption of end-of-pipe technologies may be expected.

2) The ‘revisionist’ view adopts a more dynamic perspective of the relationship between sustainability and competitiveness, and assigns a central role to technological change and innovation. A better environmental performance can lead to lower costs of production and enhance competitiveness through efficiency, productivity and new market opportunities. According to the so-called “Porter hypothesis”, stringent environmental regulation could force polluting firms to seek innovations to reduce the cost of compliance and production, improving the firm’s competitiveness and leading to a positive relationship between environmental and economic performance. Additionally, companies can obtain ‘first mover advantages’ by marketing the innovation itself and through the creation of new markets or market segments. Hence ‘properly designed environmental policies’ may help firms discover their inefficiencies and sources of comparative advantage, promoting innovation and creative thinking.

Regardless of the abovestated theoretical discussions, and in more practical terms, it is clear that technological development and institutional considerations play an important role in the transition of the economic system towards sustainability. In other words, technological change is probably a necessary, albeit insufficient condition to achieve sustainability. Institutional changes, including changes in routines, social norms, formal regulations etc, are needed not only to induce the required technological changes, but also to encourage behavioural changes at all levels of society in more sustainable directions.

Today’s major environmental problems, such as climate change, the destruction of the ozone layer, loss of biodiversity, the degeneration and erosion of soil, and water pollution are characterised by their delocalization, considerable uncertainty, irreversibility and extreme complexity in terms of consequences and the likelihood that they will occur. The increasingly wide spectrum of environmental issues make it necessary to adopt a preventive approach to the link between manufacturing activities and said environmental quality. Additional factors in this equation include uncertain scales and duration, which may lead to irreversible damage, and growing social preferences for environmental quality. The nature and scale of present-day environmental problems call for innovation as a solution. In short, it is clear that in order to improve the quality of the environment without limiting economic activity, concerted efforts must be made to encourage eco-innovation, which is something I will expand on in a later post.