Social and environmental issues

People and business has become more environmentally-friendly in recent years and corporate social responsibility is now a major emphasis for many businesses.

Products, systems, transport and buildings are now designed to minimise their impact on the world.

This page looks in detail at the issue of sustainability.

Sustainability

 Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (WCED 1987).

Sustainability can be thought of as an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future.

• It relates to the continuity of economic, social, institutional and environmental aspects of human society, as well as the non-human environment.

Definitions of sustainability

The concept of sustainability has become important with growing awareness of the impact of organisations on the environment. It is linked to the concept of globalisation and large companies seeking to show that they wish to limit environmental damage. The production of corporate and social responsibility (CSR) reports by approximately 50% of global companies identifies commitment to this belief.

First definition

The first definition above focuses on sustainable development, which is the main focus of CSR reports. In other words, business activities should be sustainable. Companies including BP, Nokia, Shell and Volvo refer to this concept in their reports. Development is sustainable as long as future generations can also meet their requirements.

Sustainable development therefore refers to the concept of inter-generational equity, i.e. equality between one generation and another in terms of needs being satisfied. However, this definition is limited to environmental concerns. Recent thinking has also linked sustainability to economic and social concerns.

Second definition

This definition also incorporates economic and social concerns. To be precise, the definition includes the concept of the Triple Bottom Line (TBL) of John Elkington. TBL attempts to show the full cost of development and that businesses should have a triple goal set incorporating not only economic, but also social and environmental objectives.

Economic perspective

This perspective recognises that there are limits to economic growth (as outlined by Meadows in 1974 in the Report to the club of Rome - The limits to growth). Meadows recognised that the earth is a finite system and therefore economic development, based on this finite system, must also be limited.

Sustainability relates to the organisation in terms of planning for long-term growth, ensuring that the organisation will continue to be in existence for the foreseeable future.

Examples of unsustainable activities include:

• strategies for short-term gain (e.g. increase in share price)
• paying bribes or forming cartels (which are potentially unethical as well as unsustainable in terms of activities that can be continued indefinitely without adversely affecting markets)
• suspect accounting treatments and underpayment of taxes - being unsustainable in terms of the organisation not contributing to maintaining the countries' infrastructure (schools, roads, etc.).

Social perspective

This perspective recognises that organisations have an impact on communities and may in fact change their social make-up. The perspective is relatively new (1990s onwards) and results from recognition of the impact of businesses, with particular reference to the less-developed regions of the world.

Sustainability in this context relates to the concept of social justice. A UN report in 2001 (Report on the world social situation) noted large and increasing differences between income and wealth with reference to richer and poorer nations.

• Examples of situations where social justice appears to be required include:
  • rich consuming countries and poorer manufacturing countries, and
  • urban 'rich' and rural 'poor'

Environmental perspective

This perspective recognises that organisations have an impact on the environment and that lack of concern means deterioration and eventual loss of some resources. The perspective was the first to be recognised, being linked initially to forestry management.

Sustainability in this context relates to the effective management of environmental resources so that they continue to be available for future generations. Human activities use environmental resources, so sustainability implies limiting use or replacing those resources in the medium- to long-term.

Examples of situations where the environmental perspective is seen as critical include:

• the use of non-renewable resources including oil, gas and coal
• long-term damage to the environment from carbon dioxide and chlorofluorocarbons (CFCs)
• whether future generations can actually enjoy the same standard of living, given the finite nature of many resources.

Significance of sustainability

Sustainability affects every level of organisation, from the local neighbourhood to the entire planet.

• It is the long-term maintenance of systems according to environmental, economic and social considerations.
• Sustainability can be measured empirically (using quotients) or subjectively.

 Illustration - Rio Tinto

Rio Tinto is one of the world's largest mining corporations with operations spanning the globe. Its products include aluminium, copper and iron ore. One example of the size of their operations relates to iron ore extraction in Guinea which is forecast to exceed 600 million tonnes of iron ore per year in the near future.

To combat criticism relating to the depletion of non renewable resources and the inevitable environmental and social impact its operations incur, the company has fought hard to improve its position regarding sustainable development.

In 2007 Rio Tinto was listed on the FTSE4Good and Dow Jones Sustainability index , achieving platinum rating on the Business in the Community's Corporate Responsibility, Environment and Community indexes.

Its environmental goals include a 10% reduction in freshwater usage and a 4% reduction in green house gas emissions within a five year period and the need to ensure all sites achieve ISO14001 certification within 2 years of acquisition or commissioning.

There are a number of different environmental and social effects which should be considered when examining economic activity.

• Economic activity is only sustainable where its impact on society and the environment is also sustainable.

Environmental footprint

In the same way that humans and animals leave physical footprints that show where they have been, so organisations leave evidence of their operations in the environment. They operate at a net cost to the environment.

• The environmental footprint is an attempt to evaluate the size of a company's impact on the environment in three respects:
  • The company's resource consumption.
  • Any harm to the environment brought about by pollution emissions.
  • A measurement of the resource consumption and pollution emissions in terms of harm to the environment in either qualitative, quantitative or replacement terms.
• Where resource use exceeds provision, then the activity can be termed unsustainable.

Measuring the impact of economic activity

Economic activity has social and environmental effects. In general terms, that activity is only sustainable where the long-term impact on the environment and effect on society is sustainable. If the impacts are not sustainable, then the economic activity itself is unsustainable.

In terms of organisations, the effect of their social and environmental activities, i.e. their social and environmental footprints, must be sustainable. Lack of sustainability implies that the organisation is also not sustainable.

There are two methods of measuring sustainability; the quotients approach and the subjective approach.

Social footprint

The social footprint evaluates sustainability in three areas of capital:

• social capital
• human capital
• constructed capital.

Organisations need to ensure that their economic activities are sustainable in each of these three areas.

Organisations need to ensure that their economic activities are sustainable in each of these three areas. For example, regarding social capital, the government will set taxation rates, with those taxes being used to provide various services. Where the amount raised is less than the amount required for the provision of social capital, then the activities of society as a whole are unsustainable. The government will need to raise taxes meaning that companies will pay more tax.

Sustainability is achieved where the social capital needs of society are being met. It can be argued that economic activity itself is unsustainable if education is insufficient to meet the needs of society.

The importance of the social footprint is that more capital can be generated if required. E.g. people can decide to improve their knowledge. The aim of economic activity may therefore be to generate sufficient social capital, or have a large enough social footprint, to ensure sustainability.

Accounting for sustainability

Two methods which attempt to account for sustainability are 'full cost' and 'triple bottom line' accounting.

Full cost accounting

Full cost accounting (FCA) attempts to include all the costs of an action, decision or manufacture of a product into a costing system. Most budgets and financial accounts are based on actual costs incurred. FCA includes the additional (and in many situations non-financial costs) of those actions. The aim is to internalise all costs, including those which are incurred outside of the company.

Taking car manufacture as an example:

• An initial outlay on a factory will be included within one year's budget. However, that factory will incur costs in every year it is used and therefore those costs must be shown as being incurred over the life of the factory.
• The location of the factory may incur costs even though no cash outlay is involved. For example, the time lost from traffic queues as workers attempt to reach the factory, or the additional cost of pollution from cars in those queues are costs, even though the company has no financial outlay for them.
• The cars being manufactured will have a finite life, however the company has no obligation to dispose of the used product at the end of that life. FCA would include the disposal cost and associated environmental damage. Some car manufacturers have recognised this cost and now advertise their cars as being recyclable, even if the company does not actually carry out that recycling (yet).

FCA is therefore the normal 'costs' in terms of running a company with the additional costs to recognise the additional external costs.

Triple Bottom Line (TBL) accounting

TBL accounting means expanding the traditional company reporting framework to take into account environmental and social performance in addition to financial (economic) performance.

The concept is also explained using the triple 'P' headings of 'People, Planet and Profit'.

TBL attempts to show the full cost of development, and that businesses should have a triple goal set incorporating not only economic, but also social and environmental objectives. This is commonly shortened to the triple 'P' headings.

People

People expands the concept of stakeholder interests from simply shareholders (as in financial reporting) to other groups including employees and the community where the company carries out its business. Actions of the company are therefore considered in light of the different groups, not simply from the point of view of shareholders.

For example, a TBL business would attempt to pay its workers fair wages, maintain a safe working environment and not use child labour, although these practices will decrease the amount of profit available for shareholders.

Similarly, the company would promote its surrounding community, e.g. by providing educational opportunities or a safe community to live in (as in the Bourneville estate established by Cadbury the chocolate maker in England).

Planet

Planet refers to the environmental practices of the company to determine whether they are sustainable or not. The TBL company attempts to reduce the 'ecological footprint' by managing resource consumption and energy usage. The company therefore attempts to limit environmental damage. For example, production processes will be efficient in terms of resource use and environmentally damaging outputs such as toxic waste eliminated. The company believes it is inappropriate to produce toxic waste as the environmental cost of disposal is normally borne by the government and society as a whole.

The drive for environmental stability also means that TBL companies will not be involved in resource depletion. For example, fish stocks are maintained at sustainable levels and timber use is balanced by replanting to retain the resource into the future.

Profit

Is the 'normal' bottom line measured in most businesses. As noted above, a non-TBL company will seek to maximise this measure to improve shareholder return. A TBL company on the other hand will balance the profit objective with the other two elements of the TBL.

TBL and business ethics

TBL implies that businesses must consider the full cost of their impact on the environment. However, that cost may also be seen in terms of the potential to contribute to sustainability.

Ethical practice may therefore simply relate to businesses limiting environmental, economic and social damage according to their actual ability in those areas. Accounting techniques are important for measuring success, but sustainability also implies desire for action which provides the ethical approach to the issues.

A further discussion of the management systems required to control the environmental impact of the firm can be found here. 

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