Sustainable Markets for Sustainable Business

A Global Perspective for Business and Financial Markets

Güler Aras

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317047735
• Edition: 1
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Around the world the focus is on the relationship between ethics and governance codes and how widely this should be interpreted. Sustainability has three main accepted dimensions: economic growth, social responsibility, and environmental protection. It is a truly multidimensional and multidisciplinary concept, and one which directly affects the risks and opportunities for markets and businesses. In three distinct parts, Sustainable Markets for Sustainable Business explores the relationship between markets and business and sustainable development, as well as issues such as climate change, pollution, land degradation and biodiversity loss. Firstly the authors, all experts from around the world, consider a variety of theoretical issues concerned with sustainability in the new environment. In Part Two the emphasis is on looking at these issues in the market and business practice under various guises. Although every chapter contains discussion and recommended solutions, the final part specifically focuses on future perspectives and the solution strategies for implementation of sustainability measures. Throughout the book the authors address the need for business and market sustainability reforms. The world's markets have the potential to improve the lives of billions in developing countries, reducing poverty and securing environmental quality for future generations. Often they fail to capture the full value of natural resources or promote the interests of poor people. Therefore, an effective public policy framework is required. Sustainable Markets for Sustainable Business and future titles in the Finance, Governance and Sustainability Series address this need.

PART I
Theoretical Perspectives and Current Issues

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Chapter 1
Causality and Interaction: Sustainable Markets and Sustainable Business

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GÜLER ARAS

Introduction

In recent years, sustainability has become an important topic for academics, businesses, investors, and policy makers. There has been a vast increase in the interest and concern for corporate governance, and there has been a similar growth in interest in sustainability. The growing attention of sustainability importance has created substantial interest in both markets and businesses. It is frequently mentioned as central to corporate activity without any attempt to define exactly what sustainable activity entails. However, the understanding of what sustainability means remains unclear as well as how complex this issue is for businesses and financial markets.

It is clear that sustainability is one of the main issues facing businesses at present. However, the real question is: Does the way in which the system is designed to operate actually work against its needs? The market system can be designed to control the use of scarce resources even when they are different and more concerned with environmental resources. Market mechanisms tend to do this to an extent through price. The most important issue is to create an understanding of where and how businesses can best contribute to sustainable markets and how the sustainable markets can support sustainable businesses.

Traditional accounting theory and practice assumes that value is created in the business through the transformation process, and that distribution is merely concerned with how much of the resultant profit is given to the investors in the business now and how much is retained in order to generate future profits and hence future returns to investors. This is, of course, overly simplistic for a number of reasons. Even in traditional accounting theory it is recognized that some of the retained profit is needed merely to replace worn out capital, ensuring sustainability in its narrowest sense. Accounting, of course, only attempts to record actions taking place within this transformational process, and even in doing so regards all costs as things leading to profit for distribution. This traditional view of accounting is that the only activities with which the organization should be concerned are those which take place within the organization.¹ Consequently it is considered that these are the only activities for which a role for accounting exists. Here, therefore, is located the essential dialectic of accounting: some results of actions taken are significant and need to be recorded, while others are irrelevant and need to be ignored. This view of accounting places the organization at the center of its world and the only interfaces with the external world take place at the beginning and end of its value chain. It is apparent, however, that any actions which an organization undertakes will have an effect not just upon itself but also upon the external environment within which that organization resides. In considering the effect of the organization on its external environment, it must be recognized that this environment includes the business, the local/societal, and the wider global environments at once (Aras and Crowther, 2009a).

In this chapter it is emphasized that there is a significant and natural interaction between market and business performance, and sustainability. We also try to show the causality between the market and business. Their success is important for a sound economy and sustainable development. For the markets to become sustainable and resilient, radical changes need to take place with the development of a truly thorough global sustainable system.

Markets Sustainability and Globalization

Globalization can be defined as the free movement of goods, services, and capital. Globalization is also a process which integrates world economies, culture, technology, and governance. It involves the transfer of information, skilled employee mobility, the exchange of technology, financial funds flow, and geographic arbitrage between developed and developing countries. Moreover, globalization has religious, environmental, and social dimensions. Therefore globalization affects the markets, economy, business, society, and environment in different ways:

• increasing competition

• technological development

• knowledge/information transfer

• portfolio investment (fund transfers between developed countries and emerging markets)

• regulation/deregulation

• international standards

• market integration

• intellectual capital mobility

• financial crisis—contagion effect—global crisis.

These are further represented in Figure 1.1 (overleaf).

It is well known that globalization, together with developments in financial markets and the ability to transfer knowledge at greater speeds, has led to an increase in the need for new international standards concerning such matters as international financial reporting, corporate governance, ethics, and corporate social responsibility. The standards have been drafted with a view to minimizing uncertainty and developing an atmosphere of confidence in a web of emerging complex relations. It is very important for financial markets, and the organizations operating within these markets, to accommodate and implement these standards because they will only be successful to the extent that they can secure this confidence. Legal provisions, control mechanisms, and sanctions are not sufficient on their own to ensure the sound operation of the system and to create confidence. Therefore, the introduction of corporate governance principles aims to increase compliance with legal provisions and create an atmosphere of confidence by giving security to stakeholders and safeguarding the interests of all parties (Aras, 2008a). The objective of sustainable financial markets is to increase trust in those markets in the context of elimination of the uncertainties, investor protection, and more efficient resource allocation.

Figure 1.1 Features of globalization

Source: Aras and Crowther, 2011.

Sustainable financial institutions and markets will address such points as creating sustainable value, achieving the institutions’ and markets’ goals, and keeping a balance between economic and social benefits with a long-term perspective. In fact sustainability offers long-term benefits for markets and institutions, such as reducing risk and attracting new investors and shareholders.

Indicators of sustainability, therefore, tend to emphasize either stocks of wealth or, more specifically, how a portfolio of assets is managed over time. Changes in this portfolio include investments in conventional forms of produced assets (infrastructure, buildings, and machines) and human capital (via training and educational expenditures, and primary health care). The contribution of the recent debate makes it clear that portfolio management must also take account of, for example, the depletion of non-renewable and living resources, and changes in environmental liabilities arising as a result of pollution (Atkinson et al., 2000).

For financial organizations, sustainability is much more important since they produce and provide rather intangible services in the economy. The difficulties that such a business would face when they lose their credibility in terms of their relevant circles are the numbers and types of customers. The losses they would suffer, as a result, are much higher. Financial organizations are no different from other businesses in terms of their purposes of establishment. On the other hand, confidence in management is more important in financial organizations than in other businesses. This is because gaining customers, and therefore profitability, in the financial services sector depends on the confidence built up by the organization. Financial organizations need to give more emphasis to ethical values and good governance, and the fact that their job often contains riskier and more complex relations (Aras, 2006).

When considering sustainability in financial institutions we are generally confronted with more complex problems due to the nature of finance and, therefore, of financial services and instruments. These problems are concerned with intangible services, and risky instruments and transactions. The fact that the characteristics and functions of finance, financial services, and these instruments are rather complex and, when combined with both insufficient information on the part of customers or consumers and a differentiation in their expectations, can lead to skepticism, disappointment, and extreme reactions. Often, there are suitable opportunities for abuse by financial service providers under such conditions.² When all these factors combine, customers can readily claim that they are deceived and this in turn contributes to the bad reputation of finance in terms of ethics and ethical behavior (Aras and Crowther, 2009a, pp.279–88). Indeed, sustainable markets should ensure that markets contribute to positive social, environmental, and economic outcomes.

These factors also imply that the financial services sector should be governed by legal regulations, and should be closely monitored. However, although most people are aware of this requirement, it is rarely fulfilled. This is particularly true in developing countries, because legal regulations have either not become fully established or their implementation has not been successful. This leads to problems in the operation of these markets. It is evident that some of the reasons for the financial crisis in 2008 were operational and regulatory problems in these types of markets.

Analyzing Corporate Sustainability: After the Brundtland Report (1987)

There has been a significant increase in interest and concern for corporate governance; so too has there been a similar increase in interest in sustainability. A growing number of writers in the late twentieth and early twenty-first centuries recognized that the activities of an organization impact the external environment, and suggested that such an organization should be accountable to a wider audience than simply its shareholders. Such a suggestion probably first arose in the 1970s.³ Some researchers had concerns about taking a wider view on company performance and on the social performance of a business as a member of society at large. This view was stated by Ackerman (1975) who argued that big business was recognizing the need to adapt to a new social climate of community accountability. The orientation of business to financial results, however, was inhibiting social responsiveness. McDonald and Puxty (1979) on the other hand maintain that companies are no longer the instruments of shareholders alone, but exist within society and therefore have responsibilities to the society itself. There has been a shift toward a greater accountability of companies to all participants. Implicit in this concern, with the effects of the actions of an organization on its external environment, is the recognition that it is not just the owners of the organization who are concerned with the organization’s activities.

Additionally, there is a wide variety of other stakeholders who justifiably have a concern and are affected by those activities. These other stakeholders have not just an interest in the activities of the firm but also a degree of influence over the shaping of those activities. This influence is so significant it could be argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organization. Indeed, Gray, Owen and Maunders (1987) challenge the traditional role of accounting in reporting results and consider that, rather than an ownership approach to accountability, a stakeholder approach, recognizing the wide stakeholder community, is needed. The benefits of incorporating stakeholders into a model of performance measurement and accountability have, however, been extensively criticized (Freedman and Reed, 1983; Sternberg, 1997, 1998; and Hutton, 1997). Moreover, Rubenstein (1992) goes further and argues that there is a need for a new social contract between a business and its stakeholders. Central to this social contract is a concern for the future, which has become manifest through the term “sustainability”. This term has become ubiquitous both within the discourse of globalization and within the discourse of corporate performance (Aras and Crowther, 2008a).

According to Aras and Crowther (2009c), the need for social responsibility is by no means universally accepted. However, evidence shows that ethical and socially responsible behavior is being engaged in successfully by a number of large corporations. This number is increasing all the time. Additionally, there is no evidence that corporations which engage in socially responsible behavior perform any worse in terms of profitability and the creation of shareholder value than other corporations. Indeed there is a growing body of evidence that socially responsible behavior leads to increased economic performance, at least in the longer term, and consequentially greater welfare and wealth for all involved. All of this means that a wide variety of activities have been classed as representing corporate social responsibility (CSR), ranging from altruism to triple bottom line reporting. Different approaches have been adopted in different countries, in different industries and corporations. Recently the agenda has shifted from a concern for CSR to a concern for sustainability, and many activities have been redesignated accordingly.

The definition and measurement of sustainability is still subject to debate. There are two broad responses to the sustainability measurement problem. The first begins with the proposition that there is little in the notion of the “sustainable business,” beyond defining it as a set of pragmatic guidelines whereby a corporate entity can improve its environmental performance. The measurement issue here is to find meaningful environmental indicators that capture the flavor of the broader sustainability debate, for example, by conveying environment–economy linkages. The second response is that lessons drawn from the green national or macro accounting literature allow us to define more formally what it means for a business to be either sustainable or unsustainable. Common to both approaches is an increased emphasis on accounting for external pressures or impacts attributable to a corporate entity (Atkinson et al., 2000).

Sustainability is also a controversial topic because it means different things to different people. Nevertheless, there is a growing awareness that one is indeed involved in a battle about what sustainability means, and the extent to which it can be delivered by corporations in the easy manner they promise (as covered by the United Nations Commission on Environment and Development (Schmidheiny, 1992)). The starting point must be taken as the Brundtland Report (World Commission on Environment and Development, 1987). The Brundtland Report deals with sustainable development and the change of politics needed to achieve it. The definition of this term in the report is well known and often cited as: “Sustainable development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This has become part of a policy landscape being explicitly contested by the United Nations and big business through the vehicles of the World Business Council for Sustainable Development and the International Chamber of Commerce (see, for example, Beder, 1997; Mayhew, 1997; Gray and Bebbington, 2001; Aras and Crowther, 2009a).

There seems, therefore, two commonly held assumptions which permeate the discourse of corporate sustainability. The first is that sustainability is synonymous with sustainable development. The second is that a sustainable company will exist merely by recognizing environmental and social issues and incorporating them into its strategic planning. Most analysis of sustainability recognizes a two- or three-dimensional approach: environmental, social, and organizational behavior (see, for example, Dyllick and Hockerts, 2002; Spangenberg, 2004). Most work in the area of corporate sustainability does not recognize the need for acknowledging the importance of financial performance as an essential aspect of sustainability and, therefore, fails to undertake financial analysis alongside, and integrated with, other forms of analysis for the research.

Aras and Crowther (2007d) argue that this is an essential aspect of corporate sustainability and, therefore, adds a further dimension to the discussion. Furthermore, they argue that the third dimension, sometimes recognized as organizational behavior, needs to actually comprise a much broader concept of corporate cultur...

Table of contents

• Cover Page
• Half Title page
• Series page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Figures
• List of Tables
• Editor Biography
• Contributor Biographies
• Foreword
• Introduction What are the Key Aspects and Challenges for Sustainability?
• Part I Theoretical Perspectives and Current Issues
• Part II Corporate and Market Approaches
• Part III Future Perspectives and Solutions
• Index