Managing the Business Case for Sustainability

The Integration of Social, Environmental and Economic Performance

Stefan Schaltegger, Marcus Wagner

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351280501
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The difficulties in moving towards corporate sustainability raise the question of how environmental and social management can be integrated better with economic business goals. Over the last decade, the relationship between environmental and economic performance, and more recently the interaction between sustainability performance and business competitiveness, have received considerable attention in both theory and practice. However, to date, only partial aspects of the relationship between sustainability performance, competitiveness and economic performance have been studied from a theoretical as well as an empirical perspective. And, to date, no unique relationship has prevailed in empirical studies. A number of explanations have been put forward to explain this, including methodological reasons, such as the lack of statistical data, the low quality of that data, or the fact that such data is often available for short time periods only. Other theoretical explanations have been developed, such as the influence of different corporate strategies or the relatively small influence of environmental or sustainability issues as one factor among many on the economic or financial success of firms. So, how should the business case for sustainability be managed?

This is the starting point for this book, which compiles insights on a large number of aspects of the link between sustainability performance, business competitiveness and economic success in an attempt to provide a comprehensive and structured view of this relationship. The book provides an unrivalled body of knowledge on the state of theory and practice in this field and identifies prospective future fields of work.

The book includes: conceptual frameworks for the interaction of social, environmental and economic issues in business environments; case studies of companies that have successfully integrated social, environmental and economic issues; analyses of the causal and empirical relationship between environmental and/or social performance, business performance and firm-level competitiveness; concepts and tools useful for improving business value with proactive operational strategies; assessment of the factors influencing operational sustainability strategies and their economic impact; and comparisons of interactions between sustainability performance and firm competitiveness across industry sectors and countries.

Managing the Business Case for Sustainability is the definitive work in its field: the most comprehensive book yet published on the theory and practice of managing sustainability performance, competitiveness, environmental, social and economic performance in an integrated way. It will be essential reading for managers, academics, consultants, fund managers, governments and government agencies, NGOs and international bodies who need a broad and comprehensive overview of the business case for sustainability.

Part I
Theory – Conceptual Approaches

Chapter 1
The Link between Environmental and Economic Performance

Environmental and Economic Performance

The Basic Links

Leena Lankoski

Helsinki University, Finland

Abstract: This chapter outlines the basic mechanisms that connect environmental performance with economic performance. It presents possible positive and negative economic outcomes that have been suggested to result from environmental performance improvements and develops an approach that accommodates all the suggested, seemingly contradictory outcomes. It defines the concept of environmental profit to describe the incremental impact that environmental performance has on economic performance, shows that environmental profit is an inverted U-shaped function of environmental performance and draws management implications.

1. Introduction

Whether there is a link between a company’s environmental and economic performance and what is the nature of this link have been extensively debated. While some have argued that there is no reason why the two should be connected, tens of studies have been conducted by a number of researchers since the 1970s to establish whether the relationship is positive or negative.

Drawing from Lankoski (2000), this chapter outlines the basic mechanisms that connect environmental performance with economic performance. Although economic performance may also affect environmental performance by making resources available for environmental improvements, this chapter deals only with the links between environmental and economic performance.

First, possible positive and negative economic outcomes that have been suggested to result from environmental performance improvements are presented. Then, an approach is developed that accommodates and integrates all the suggested, seemingly contradictory outcomes.

Before this, however, two points should be made that are important for understanding and clarifying the environmental–economic performance link. First, environmental performance pertains to the level of harmful environmental impact caused by the activities of a company. The more ‘environmentally friendly’ a company is, the better its environmental performance. Environmental performance, however, is a multidimensional concept: the activities of a company may cause a multitude of environmental impacts in terms of land use, resource use and pollutant releases to air, water and land. The company may be performing well with regard to one environmental issue and poorly with regard to another. The company’s environmental impacts may even be positive with regard to some issues and negative with regard to others. Thus, the dimensions of this concept are not necessarily linked. Moreover, and more importantly for the purposes of this chapter, the dimensions are different when it comes to their link with economic performance. Different environmental issues involve different options for solutions, give raise to different regulatory efforts and provoke different reactions in customers and other stakeholders. Therefore, when assessing the environmental–economic performance link, environmental performance must be considered issue by issue.

Secondly, economic performance is also a multifaceted concept in which different operational measures capture different aspects. For example, some measures of economic performance are indicators of commercial success (growth, market share) while others are indicators of financial success (profitability). Accounting measures portray past performance and stock market measures portray expectations of future performance. In order to grasp conceptually the environmental–economic performance link, it is necessary to move beyond single operational measures of environmental performance and to distinguish between economic values on the one hand and accounting or commercial values on the other (Randall 1987). Thus, in this chapter, all costs and revenues are understood as economic costs and revenues, present and future, including uncertain elements discounted to present time. The concepts are thus significantly broader than the corresponding accounting terms.

2. The Linking Mechanisms

2.1 Possible Links to Costs

2.1.1 Cost Increases

The core of the argument that improving environmental performance harms economic performance rests on the premise that environmental performance improvements result in increased costs. Put simply, the environment is a factor of production both as a source of raw materials and energy, and as a sink for pollution and waste. If the company’s options are constrained by limiting the availability of this production factor, production costs will necessarily rise (see, for example, Palmer et al. 1995; Siebert et al. 1980).

Installing and operating pollution control or prevention technology is an obvious source of cost increases. Capital investments such as machinery, equipment and buildings, as well as operating costs such as energy, labour and materials are likely to be required. Even if environmental performance can be improved simply through changing operating practices, costs are still involved in identifying and analysing possible options (see, for example, Jaffe et al. 1995; Sprenger 1996). Another suggested source of cost increases is that the implementation of environmental initiatives adversely affects productivity, thus increasing the volume of inputs required to produce a certain amount of outputs. Productivity may suffer from a change to more environmentally friendly processes and production practices if these are less efficient than the previous ones and if the transitional period involves switching costs, obsolete capital or production disruptions. Moreover, environmental investments crowd out other, perhaps more productive investments and inputs aimed at producing environmental quality reduce the amount of managerial and financial resources the company has available to produce its saleable output (Jaffe et al. 1995).

2.1.2 Cost Savings

To challenge the traditional view, Porter and van der Linde (1995) argued that instead of cost increases, environmental performance improvements can often result in net cost savings but that a dynamic perspective is required to realise these savings. The logic of the argument is that the search for environmental improvements will prompt innovation that results in improved resource productivity, improved efficiency and avoidance of waste—thus offsetting the initial environmental costs.

Many other authors have embraced the idea of cost savings from improved environmental performance (for example: Bonifant et al. 1995; Dechant and Altman 1994; Shrivastava 1995). Increased efficiency brings cost savings in production by reducing the use of purchased inputs, substituting less expensive inputs for hazardous materials, eliminating risky production steps, simplifying designs and recovering valuable materials from waste streams. Regulatory costs are reduced as: less environmental taxes and charges need to be paid and fewer pollution rights purchased; liability costs are reduced; continuous compliance with environmental regulations is ensured, thus avoiding fines and litigation; and anticipating future regulations allows more flexibility and the possibility to influence standard development. Because of lower risks, cost savings are available when obtaining capital and insurance, and savings may also be achieved from good labour and community relations brought by the improved environmental performance. The possibility to obtain cost savings through environmental management is also a core topic in environmental accounting (see, for example, Schaltegger and Müller 1998).

2.2 Possible Links to Revenues

2.2.1 Revenue Losses

The reason why environmental performance improvements could result in revenue losses is that the environmental improvements may have adverse product quality impacts, which reduce sales volume or sales price. Such impacts occur if the environmentally preferable product is—or is perceived to be—less efficient in use, less attractive in appearance, less tasty, of less consistent quality, etc.

2.2.2 Revenue Increases

In addition to cost savings, the other half of the argument by Porter and van der Linde (1995) was that environmental performance improvements may also result in value-improving innovations. These increase the value of the product or service to the customer and, hence, allow increasing revenue through charging a price premium or increasing market share. It is worth noting that the revenue-increasing property of environmental performance improvements may also manifest itself in a less apparent manner—as the ability to maintain the current price or the existing market share in situations where these would otherwise be threatened.

Environmental performance improvements improve the company’s general image, which increases customer loyalty and supports sales efforts. Furthermore, they allow the company to attract customers in environmentally conscious market segments, to obtain eco-labels and other means of distinction that affect customer choice favourably, to sell to companies that screen their suppliers using environmental criteria and to tender for contracts to public organisations with an environmental procurement policy. They can also result in better quality, improved safety, lower operating and disposal costs for customers, or higher resale or scrap value—all of which directly increase the value that the customer obtains from the product or service. A separate, growing market in which environmental improvements may open opportunities is that for specific environmental goods and services (see, for example, Gallarotti 1995).

Table 1 summarises the different types of linking mechanisms that have been suggested to exist between a company’s environmental and economic performance.

Table 1. Types of suggested links between environmental and economic performance

	Possible links to costs	Possible links to revenues
Possible negative links	Environmental performance improvements require managerial time, c...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• CONTENTS
• Foreword
• Foreword
• Introduction. Managing and Measuring the Business Case for Sustainability. Capturing the Relationship between Sustainability Performance, Business Competitiveness and Economic Performance
• PART 1 THEORY – CONCEPTUAL APPROACHES
• PART II EMPIRICAL SURVEYS – FINANCIAL MARKETS; INDUSTRY AND COUNTRY SURVEYS
• PART III EVIDENCE – STRATEGIES, CASE STUDIES AND MANAGEMENT SYSTEMS
• About the Contributors
• Index