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BASIC CONCEPTS OF SUSTAINABLE DEVELOPMENT FOR BUSINESS STUDENTS
Peter N. Nemetz, Ph.D. Professor of Strategy and Business Economics Faculty of Commerce and Business Administration University of British Columbia Journal of International Business Education, 2003, in press. Revised May 11, 2003
The recently completed World Summit on Sustainable Development in South Africa, convened to assess global progress since the landmark Rio conference of 1992 (UN, 1992), has reaffirmed the international commitment to the concept of sustainability. One result of this conference will be increasing pressure upon the business community to incorporate principles of sustainability into their business practices. Several critical questions face managers and owners unfamiliar with this potential new threat to business as usual: What is sustainable development? How should business respond? What kind of opportunities and threats lie in the new business environment, and how are such conditions related to sustainable development? Are the opportunities and threats related to each company’s ability to achieve or move closer to sustainable development, or do opportunities and threats arise from implementing sustainable development practices? This paper attempts to answer these questions and provide an introductory guide to issues of sustainable development and associated analytical tools for business school students at both the senior and MBA levels.
Environmental issues have had an increasingly important impact on the conduct of business since the decade of the 1960s. The past four decades have been punctuated by high-visibility, environmentally-related disasters such as Seveso (1976), the Amoco Cadiz (1978), Three Mile Island (1979), Bhopal (1984), Chernobyl (1986), Exxon Valdez (1989), Indonesian forest fires (1997-2000), the sinking of the oil tanker, Prestige, off the western coast of Spain (2002), etc. Each such event and lesser, more local, instances of environmental degradation has raised public awareness and helped propel increasing governmental environmental regulation of business.
Fisher and Schot (1997) have tracked a progressive change in corporate responses to environmental issues over the last quarter century: the first period, from 1975-85 was characterized largely by corporate resistance to regulation and a begrudging acceptance of what were perceived as uniformly cost-increasing, regulatory requirements. Part of this attitude was conditioned by a relatively inflexible regulatory stance that focussed on command and control mechanisms which mandated pre-specified levels of end-of-pipe treatment of industrial emissions.
The authors have identified the period following 1985 as one of slowly emerging strategic responses to environmental issues based on the realization that such issues carry with them the opportunity for competitive advantage through an array of responses at every stage of the value chain. Underlying all these changes has been the emergence of a complex new network of forces which are directly and indirectly influencing corporate decsionmaking at all organizational levels. Figure 1 presents a summary overview of these forces, most of which pose challenges to tradi-
Evidence of and
Direct Effects of
tional business practice. The factors driving corporate response to the environmental challenge are multifaceted, and include inter alia the direct impact of environmental degradation on corporate operations, media exposure, a vast array of changing stakeholder attitudes, and national and international regulatory requirements [See Annex A]. Governmental regulatory philosophy and practices have evolved significantly in this period as many jurisdictions have begun to adopt innovative, market-based instruments to facilitate the more efficient attainment of socially-mandated environmental goals.
Within the last decade, a new more powerful challenge to business has emerged, with the expansion of traditional concerns over pollution control to encompass ecological, social and economic issues under the general rubric of sustainable development. The successful response of the international business community to this new challenge can only be achieved if there is a clear understanding of the fundamental scientific, social, political and economic issues which underlie this concept. As such, this paper is divided into five parts: the first, briefly defines the concept of sustainable development and outlines some of the major scientific issues at play; the second describes the potential contribution of economics to this debate; the third discusses how issues of sustainable development are influencing government policies; the fourth describes the impact of this issue on business and how it can and does respond; and the final section speculates briefly about the future course of business in a planet under threat.
PART I: SUSTAINABLE DEVELOPMENT – SCIENTIFIC ASPECTS
The term “sustainable development” emerged from the World Commission on Environment and Development established by the United Nations in 1983. Known as the Bruntland Commission, after the chair Gro Harlem Bruntland, the Prime Minister of Norway, this conference was convened to discuss the critical issues of ecological degradation and Third World development. The definition of sustainable development which emerged from the Conference was beguilingly simple: development that “meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987, p. 8).
The concept has proven to be much more intractable than first anticipated; one study by the World Bank (Pezzey, 1992) enumerated almost three dozen definitions of the term. In fact, on the face of it, the concept seems profoundly oxymoronic, as no process of continual development can be sustained in a closed system. Several attempts have been made to address this paradox: first, by focusing more on the sustainability of human activities rather than sustainable development per se; and second, by adopting a more narrow definition of development, focussing on the quality – as distinct from the quantity – of output; yet the fundamental challenge of how to both conceptualize the principle and implement it remains unresolved.
One of the most common interpretations of the concept is based on the analogy of a three-legged stool. Sustainable development requires the simultaneous achievement of sustainability in three disparate spheres: economic, ecological and social. In the last category, sustainable development must address both intragenerational and intergenerational equity; i.e. issues of empowerment and distributional equity not only among the current inhabitants of the earth, but also across generations yet to be born. Clearly, empowerment across generations is beyond realization, and inter-generational equity itself poses an extraordinary challenge given basic human values and time preference. It is an inherent human trait to value the present more than the future, if for no other reason than mortality. A system with even modest discount rates assigns any future costs and ben-
efits (i.e. specifically those which affect future generations) past 50 or more years a minimal or essentially zero value. This problem affects the distribution of resource availability across generations and, in extremis, can lead through rational economic behaviour to the depletion or extinction of a renewable resource base required for continued human sustenance or survival.
Several pieces of emerging evidence have led a majority of the scientific community to the conclusion that the human species and the planet we inhabit are facing unprecedented levels of ecological stress: (1) anthropogenic emissions of several climate-forcing and other pollutants (such as carbon dioxide, methane, sulphur dioxide and nitrogen oxides) equaling or exceeding natural emissions for the first time in human history; (2) damage to the stratospheric ozone layer and global warming, with accompanying climatic change; (3) loss of land borne and aquatic species and consequent decrease in planetary biodiversity; (4) the pervasive global presence in waterbod-ies, plants and animal tissue of heavy metals and chlorinated organic chemicals; (5) increasing pressure on global supplies of freshwater; (6) extensive soil degradation due to water and wind erosion, (7) continued degradation of global forests, a keystone species in most ecological systems; and (8) the spread of vector-borne diseases into geographic areas previously inhospitable to the establishment and transmission of such diseases (Settle and Patterson, 1980; AMAP, 1997; UNEP, 1999, 2002; IJC, 2000; McNeill, 2000; WRI et al., 2000; WWF et al., 2000; UNEP et al., 2001; WMO and UNEP, 2001; Barnes et al, 2002; Harvell et al., 2002; IOMC, 2002; Kolpin et al., 2002; Rosegrant et al., 2002; UNEP, 2002; Werth and Avissar, 2002).
With the exception of the first factor, the interpretation of none of these signs or symptoms is without contention. Until recently, for example, no scientific consensus had formed whether global climate change was indeed occurring and, if so, whether it was being significantly influenced by human activity. A major research study recently published by the U.S. National Academy of Sciences (NRC, 2001) represented a crucial advance in scientific thinking on this issue and stated conclusively that “Greenhouse gases are accumulating in Earth’s atmosphere as a result of human activities, causing surface air temperatures and subsurface ocean temperatures to rise. . . . Global warming could well have serious adverse societal and ecological impacts by the end of this century.” (See also Justus and Fletcher, 2001).
Part of the problem of interpretation is that some symptoms of ecological distress have remained masked. A case in point is global fisheries where well-publicized declines in such important commercial catches as Atlantic cod (Speer et al., 1997) have appeared to have been offset by continued increases in total global fish harvests. Only recently, with advances in fisheries theory and empirical research, has it become apparent that the fundamental threat to sustainable fisheries has been hidden by the progressive depletion of species (Speer et al., 1997; see also Jackson et al., 2001; Dayton et al., 2002) and a process of “fishing down the food chain” where fish within successively lower trophic layers are targeted for harvest. This not only threatens the survival of species within each trophic level but also robs fish within higher trophic levels of the food necessary for stock rebuilding or survival (Pauly, 1999).
Why have we been only recently alerted to these major ecological threats? Because of the arithmetic of exponential growth, only now have human population growth and economic development reached a level which poses a threat to global ecological integrity. Figures 2 and 3 track the path of both variables over history. These types of graphs are intimately familiar to ecologists who see in this history of human activity a species growing exponentially without constraints in a closed system. Few such examples exist in nature. Our ecological system, based on a highly complex web of interdependencies and controls, operates to limit the unconstrained growth of any species
-3000 -2500 -2000 -1500 -1000 -500
Source: U.S. Bureau of the Census
1000 1500 2000
FIGURE 3 $100,000
-3000 -2500 -2000 -1500 -1000 -500 1 500
1000 1500 2000
Source: Professor J. Bradford DeLong, Economics, Department, UC-Berkeley
which can threaten the integrity of its immediate environment, the survival of other species, and even its very own continued existence. In those rare instances where such natural constraints have been removed – usually by the conscious or unconscious actions of mankind – the results are predictable: an initial exponential increase in population, followed inexorably by a population collapse. One sobering example of this type of phenomenon as it applies to human civilization has been demonstrated by recent research on the now disappeared population of Easter Island.
Case Study #1: Easter Island
When Dutch explorers first discovered Easter Island in 1722, they found only the squalid remains of a once thriving population reduced to warfare, cannibalism and barely subsistence level food production on an island stripped of its forest cover. Juxtaposed on the collapsed civilization were 600 massive stone statues towering as high as 65 feet and weighing up to 270 tons (Diamond, 1995). The population, which had peaked at approximately 7000 almost two centuries prior to their discovery, had built an advanced society sustained by the liquidation of the stock of forest capital which blanketed the island. The trees had provided essential material for fuel, construction of housing and boats, fishing nets and the transportation of the stone statues from inland quarries to the shore. The inevitable loss of forest cover led to a devastating array of ecological consequences, imprisoning the inhabitants on an island without houses, canoes, proper fishing nets or fertile soil. The population collapse was inevitable.
The unsettling lesson of Easter Island is that despite the fact that the islanders could observe the exhaustion of the forest resource which was essential for their survival, they were unable to devise a social-economic-political system that allowed them to find the right balance with their environment. One suggested explanation for this suicidal behaviour was the increasingly fierce competition for the remaining dwindling resources among rival groups on the island. This bears a disturbing resemblance to modern day national behaviour toward dwindling resources such as certain fish stocks (e.g., cod and whales). The dismal history of Easter Island provides a striking example of the dependence of human societies on their environment and of the consequences of irreversibly damaging that environment. Like Easter Island, the earth has only limited resources to support human society and all its demands. Like the islanders, the human population of the earth has no practical means of escape. The economist, Kenneth Boulding, coined the phrase “Spaceship Earth” in an attempt to capture the essence of this dilemma faced by mankind. (See also: Ponting, 1991; Brander and Taylor, 1998) In fact, Easter Island is but one example of numerous civilizations throughout history which have “committed ecological suicide by destroying their own resource base” (Diamond, 1999, p. 411).
In essence, Easter Island represents a worst case scenario of global futures. Without a concerted and coordinated international response, the current growth of human population and industrial output pose the ultimate challenge – to find some level of sustainable interaction between humankind and the ecological system before natural control mechanisms such as disease and famine lead inevitably to the “Easter Island effect” – the collapse of the environment which sustains current levels of human activity.
It is interesting to observe that as a shift in scientific thinking has taken place, a similar change in worldview has occurred in at least one sector of the business world. One of the most conservative sectors of the business community has already concluded that global warming is indeed taking place and is actively campaigning for a concerted corporate and governmental re-
sponse. The insurance industry has published data (www.munichre.com.) to support their contention that the increasing number and severity of certain types of natural disasters, such as floods, storms and tornadoes, is linked to human-driven climate change. (For more recent evidence, see Goldenberg et al., 2001; Wigley and Raper, 2001; U.S. PIRG, 2001).
One important signal in assessing the current status of sustainability can be derived from environmental trends at the national level. Here, the evidence is mixed at best. One keystone gauge of the success or lack thereof in achieving sustainability is national levels of greenhouse gas (GHG) emissions. The 1997 Kyoto Protocol, reaffirmed in July 2001 by 178 nations (New York Times, July 24, 2001) and again in Johannesburg in September 2002, adopted as a central goal the reduction of GHG emissions from the 38 industrialized countries1 “by at least 5 per cent below 1990 levels in the commitment period 2008 to 2012” (UN, 1998). The most recent data suggest that GHG emissions in most developed countries are in fact on the increase. Tables 1-4 illustrate the large international variance in the levels and growth of carbon dioxide emissions (US EIA, 2001b). Figure 4 summarizes historical CO2 emission data for the United States, the world’s largest producer (US EIA, 2001; ORNL, 2001). The trends in these data are not surprising considering the increasing use of energy – most notably fossil fuels — and the intimate connection between energy consumption and carbon dioxide production.
In order to move closer to a path of sustainability, it is essential to delink energy consumption and CO2 production from Gross Domestic Product (GDP). It was conventional wisdom prior to the oil crises of 1973 and 1979 that the delinkage of energy consumption and GDP was not possible. It has now become apparent that some countries have achieved such a delinkage with respect to energy and CO2 emissions. If such a delinkage were broadly possible, it could bring sustainable development one step closer to realization. Under these circumstances, Third World countries, striving to increase their standard of living, could increase their use of energy without a comparable contribution to climate change.
Figure 5 compares the economic performance of several major countries with changes in their GHG emissions over the last decade. Those countries below the diagonal line in Quadrant I (the upper right) have managed to keep their growth in GHG emissions below their annual growth rate of GDP. The best performance is manifested by those nations in Quadrant IV (the lower right) which appear to have achieved some degree of delinkage (Germany, the UK and France). Germany may represent a special case, however, since its reductions in CO2 emissions over the last decade, despite continuing economic growth, are partially related to the retirement and replacement of older, more pollutant-intensive equipment in the former East Germany. Interestingly, the three countries whose rate of increase in GHG surpassed that of GDP over the period 1990-98 (China, Denmark and the Netherlands) have managed to achieve reductions in GHG over the period 1998 to 2000 (US EPA, 2001; NRDC, 2001). China may also be a special case, as it has been undergoing a process of industrial restructuring, part of which entails the shifting of its energy base away from its extensive reliance on coal. Its rapid industrialization has entailed significant increases in the use of more efficient production technologies. Such results are encouraging, but China’s rapid growth from a relatively small and inefficient industrial base is not typical of most developed economies. Part of the reason for the delinkage of CO2 emissions and GDP in Germany and other European countries such as Denmark, The Netherlands and the United Kingdom may be the adoption of innovative ecological tax reform. (See Part III).
Several critical factors temper the optimistic conclusions that might be drawn from such recent successful examples of policy innovation and industrial restructuring which are consistent
Table 1: Total CO2 Emissions (as C), 1999 - Selected Countries
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