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.


Franco Guerra 21 junio 2008 - 00:23

Eco-innovation is probably a really hard investment when we are talking about Small Business. When a small company is obligated by the law to construct an Industrial Waste Water treatment plant just to meet the requirments, it may represent at least 10 to 15% of its Total Assets. Why do small business have the same requirements than a big business the pollutes at least 100 times more? Big business can disolve more easily what the invest in their daily cash flows. Start ups are required to follow the law, and means a big deal of investment in environmental issues, this affect the cash flows and take away opportunities to invest in technology and innovation, which in my opinion have a better effect in sales. Environmental laws should have diffrent scales of impact, depending on the size of the industries. Another real big problem is, what happens when your competitors bribe the government authorities so that they are not obligated to invest in environmental issues. Automatically you lose competitiveness in cost of production because you did invest in these issues. In some industries the eco-innovation depends on the R&D done by your providers. In food industries eco-innovation could be using a package that is environmentally friendly but for sure is more expensive than the normal packaging. The same food but a diffrent and more expensive package. It’s the marketing divisions job to get sure you can educate your consumers on how to use the package. It takes great amount of money and time to educate consumers. Eco-innovation attract and amuse only high end buyers, in Third World Countries, which represent 5% of the total population. Eco-innovation practices could still have a long way to go in markets where low prices rule!

Fernando Peral 7 julio 2008 - 17:03

I disagree fundamentally with Mr. Carrillo’s views that “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” and “unclear effects of environmentally-driven investments on the financial future of the company bring great uncertainty for decision-makers at board level”.

As for the first statement, I would rather say it implies fundamental changes on the ways the company has to think. Why? Because environmental considerations are a two-folded issue: on the one hand, law and regulations modify the context but, as far as they establish a level playing field, it becomes a mere matter of competition. On the other hand, there is always more than one way of doing things, and environmental considerations not always have detrimental consequences for investment or benefits; one would be surprised how many opportunities there are in industry to improve the “environmental balance” of the activity without any sort of investment nor consequence on the profit and loss account. Soemtimes it is enough to adapt working processes or worker’s education.

As for the second statement, the first motive provided also applies. Effects of environmentally-driven investments on the financial future of the company can only be positive provided they are considered as true investment, i.e. an input of capital goods or resources to improve outputs so as to better meet customers demands. This means that, sometimes, decision-makers at board level create excessively rigid entrepreneurial structures that are later unable to adapt to the market demands, and whether such structures or companies disappear due to bad “environmental” investments or any other sort of investment (or, for that matter, to the lack of investment) is a mere consequence of the law of market.

My conclusion is that, to be a true entrepreneur requires nowadays not only technical competence but also insight and imagination… Did I say nowadays? Now that I come to reflect on it, this has always been the case.

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