For some, either of these arguments may be true, but on the whole, sustainability is largely a question of good business. In fact, there is no fundamental contradiction between concern for the environment or social responsibility and the profit motive that has largely created the developed world as we know it today. In short, greed is still good for you.
Not that unrestrained market forces will deliver sustainability. There is clearly a role for government in setting the right framework for markets to deliver those broader based outcomes we all want for our planet. On the environment side, there are externalities–costs not borne by the polluter–that are excluded from influencing the market at present. This has occurred for various reasons, but mainly because resources, like fresh air and clean water, were simply treated as costless until recently. Historically, we have seen examples of such externalities being successfully internalised–the bringing of common grazing lands into private ownership, thereby creating the incentive to conserve, is one case–though not without conflict. Greenhouse gas emissions that cause global warming are an obvious environmental externality that we now know needs to be internalised. Only in a few countries are emissions regulated or taxed in some way. In most countries, it is “costless” for firms to emit CO2, so of course there is little incentive for them to change their behaviour unless governments act. Indeed, many companies support efforts to reach worldwide agreement on combating climate change in order to make the necessary economic adjustments in an orderly fashion.
Governments also have a crucial role to play in setting the right framework for markets to function in socially responsible ways. Tax and spending policies should be set in ways that complement the market economy by providing public goods efficiently. More controversially perhaps, governments are mainly responsible for ensuring human rights and fighting corruption, although companies, especially large global ones, cannot and do not ignore these issues.
However, it is good business for companies to act in a more sustainable way, even where the market does not yet provide the appropriate signals. Take climate change as an example. The cement industry is a significant producer of CO2, the principal greenhouse gas, causing about 5% of the world’s emissions. As the world’s largest cement producer, Lafarge has an interest in reducing its carbon intensity, not only to prepare itself for a future carbon-constrained world, but also to help avoid rushed and poorly designed legislation. Not only Lafarge in the cement industry, but also companies such as BP and Shell in the oil industry, TransAlta in the power sector and Dupont in chemicals have a similar view of climate change.
On the social side too, our concern for sustainability is grounded in good business reasons. Our cement plants and our quarries often dominate other industries in their local communities. Lafarge has learned over its almost 170 years of existence that the implicit “license to operate” from local communities, gained through actions coming out of dialogue and transparency, is as important as the regulatory permits from the authorities. Without the support and understanding of local communities, changes such as quarry extensions or fuel switches to use waste fuels like used tires, which reduce costs and save fossil fuels, would be more difficult if not impossible to obtain. Our business would become precarious and less flexible.
Acting in a sustainable way can make firms more competitive, more resilient to shocks, nimbler in a fast-changing world, more unified in purpose, more likely to attract and hold customers and the best employees, and more at ease with regulators and financial markets.
Financial markets are beginning to notice these positive effects. Between 1 January 1999 and 30 June 2000, the Dow Jones Sustainability Group World Index–composed of sustainability-driven companies including Lafarge–outperformed the Dow Jones Global World Index by 127 basis point in US dollar terms. The index consists of the top 10% of companies seen as leaders in sustainable development. Their value advantage held in both bull and bear markets.
A strategy that pays
The main business drivers of sustainability for manufacturing firms make a good strategic concept for improving business performance:
• Eco-efficiency: Reducing inputs of limited natural raw materials or fuel consumption, reducing waste production and utilising by-products from other industries, allow firms to cut costs;
• Improving product added value: With a sustainability approach, firms expect to be able to expand their product lines to sell more complex and technological products, with more value added (licenses, exclusive technology, etc). Links with customers and users will become closer and better established in the long term and loyalty will be improved;
• Creating new market opportunities: A sustainability policy should facilitate firms’ expansion into new countries or regions through more sensitive and proactive methods of integration and an enhanced environmental approach. New products will allow firms to respond better to the emerging expectations of their customers;
• Strengthening socially responsible management: Such a policy will strengthen corporate culture, help firms to maintain the loyalty of their employees and attract high-potential new employees;
• Improving reputation: A proactive strategy will help firms keep their “license to operate”, and improve their corporate image in order to maintain brand value, as well as their relationships with local authorities and communities. This helps to reduce the prospect of inappropriate new taxes and regulations and avoid crises.
Given the right framework, competitive and open markets are the right way to move towards sustainability. Markets, with all their imperfections, are nevertheless the best means that man has found to produce innovation and efficiency. By rewarding success, markets harness creative energy. It is difficult to imagine that government officials, however well-meaning or efficient, will be better at organising a route to sustainability than the market mechanism, as long as this is properly framed to encourage sustainability.
Certainly, sustainable development should not become an excuse for governments to impose yet more heavy-handed regulation and yet more taxes. Just look at the French government’s attempts to impose sustainability reporting by law with over thirty indicators proposed in the social field alone or the US Superfund legislation, which benefits mostly lawyers. More energy should be spent on getting the price and other signals right so that markets work in a more sustainable fashion. This means convincing, not coercing. After all, sustainability will not progress if those that are meant to implement it are alienated from the concept. It also means that governments should take a comprehensive approach. Sustainable development is by its very nature not amenable to the partial, unco-ordinated methods that different government departments tend to employ. An example is the enormous subsidies still paid to fossil fuels in many countries, which conflict with climate change concerns.
No one has a monopoly of knowledge on how to progress towards sustainability. Dialogue and partnership, between governments and civil society in general on the one hand and business on the other, is the way forward. Who knows exactly what will emerge in terms of agreements and initiatives? But what is clear is that markets can and must be made to work for the benefit of all. Without them progress towards global sustainable development will be much more difficult, if not impossible, to achieve.
*Chris Boyd was a speaker at OECD’s Forum 2001 on Sustainable Development and the New Economy in May. He is Chair of the Environment Committee of the OECD’s Business and Industry Advisory Committee (BIAC). Lafarge is a world leader in building materials, with 85 000 employees in 75 countries. The views expressed in this article are those of the author only.
Forum: “OECD Guidelines for Multinational Enterprises”, series of opinion articles, in OECD Observer, No. 225, March 2001.
Also see Policy Brief at www.oecd.org/publications/Pol_brief/
Schmidheiney, Stefan, Changing Course: A Global Perspective on Development and the Environment, Business Council for Sustainable Development, MIT Press, Cambridge, 1992.
Sustainable America, The President’s Council on Sustainable Development, US Government Printing Office, Washington D.C., 1996.
Witherell, B., Maher, M., “Responsible corporate behaviour for sustainable development”, OECD Observer No. 226/227, Summer 2001.
©OECD Observer No 228, September 2001