WHITFIELD MCNETT A Primer on Sustainability · A Primer on Sustainability In the Business Environment Ronald Whitﬁ eld • Jeanne McNett What does sustainability in the business

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A Primer onSustainabilityIn the BusinessEnvironment

The Environmental and Social Sustainability for Business Advantage CollectionChris Laszlo and Robert Sroufe Editors

A Primer on SustainabilityIn the Business EnvironmentRonald Whitfi eld • Jeanne McNettWhat does sustainability in the business environ-ment really mean? The concept has evolved from a vague goal to “save the planet” to become a stra-tegic imperative for business to enhance perfor-mance across many dimensions. We live in an age of increasing corporate accountability and if a busi-ness expects to survive for the long term, it must adhere to ever higher standards of behavior.

This book is dedicated to the understanding of sustainability in business by exploring the chal-lenges of assessing and measuring it, by studying the systems thinking required to analyze it, and by developing a deeper appreciation for the ambiguity and complexity of improving it. The book provides concrete and practical methodologies and tools for implementation that are evaluated and discussed by means of debating sharply opposing points of view and by performing business case study analy-sis. The book answers the question: “what can we do right now to improve the sustainability of our world?”

Ronald Whit� eld is the founding Director of the Business Sustainability Initiative at the D’Amore-McKim School of Business at Northeastern Univer-sity and Executive Professor of Finance. He directs Sustainability Field Research Programs in Costa Rica and Iceland and teaches courses on sustainability and business. He has an extensive background in applied economics.

Jeanne McNett is Senior Academic Researcher in the College of Business Administration, is Emerita Professor of Management at Assumption College, and former chair of the Academy of Management International Management Division’s Teaching Committee. She regularly teaches in Northeastern University’s MBA program, and has co-authored three textbooks, and many articles and cases.

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ISBN: 978-1-60649-634-3


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A Primer on Sustainability

A Primer on Sustainability

In the Business Environment

Ronald Whitfield and Jeanne McNett

A Primer on Sustainability: In the Business EnvironmentCopyright © Business Expert Press, LLC 2014.All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.

First published in 2014 byBusiness Expert Press, LLC222 East 46th Street, New York, NY 10017www.businessexpertpress.com

ISBN-13: 978-1-60649-634-3 (paperback)ISBN-13: 978-1-60649-635-0 (e-book)

Business Expert Press Environmental and Social Sustainability for Business Advantage Collection

Collection ISSN: 2327-333x (print)Collection ISSN: 2327-3348 (electronic)

Cover and interior design by Exeter Premedia Services Private Ltd. Chennai, India

First edition: 2014

10 9 8 7 6 5 4 3 2 1

Printed in the United States of America.

Abstract

What does sustainability in the business environment really mean? The concept has evolved from a vague goal to “save the planet” to become a strategic imperative for business to enhance performance across many dimensions. We live in an age of increasing corporate accountability and if a business expects to survive for the long term, it must adhere to ever higher standards of behavior and continuously develop more sustainable ways of doing business.

This book is dedicated to the understanding of sustainability in busi-ness by exploring the challenges of assessing and measuring it, by studying the systems thinking required to analyze it, and by developing a deeper appreciation for the ambiguity and complexity of improving it. The book provides concrete and practical methodologies and tools for implemen-tation which are evaluated and discussed by means of debating sharply opposing points of view and by performing business case study analysis. Our approach encourages action. The book answers the question: “what can we do right now – in both our business and private lives - to improve the sustainability of our world?” A key characteristic is its comprehen-sive treatment of the complex issues sustainability raises for the business world.

This book is targeted primarily to business students and professors at the undergraduate and graduate level in all traditional subjects and in interdisciplinary courses

Keywords

sustainability, precautionary principle, corporate accountability, envi-ronmental movement, green washing, triple bottom line, sustainable business operations, sustainable innovation, sustainable supply chain, cradle-to-cradle design, life cycle assessment, corporate reporting systems, the global reporting initiative, the global compact, the carbon disclosure project, carbon footprint, water footprint, indices on sustainability, trans-parency, stakeholder theory

Contents

Preface ��ixAcknowledgments ��xiii

Chapter 1 Sustainability: Meaning and Context .................................1

Chapter 2 Systems and Tools for Sustainability .................................17

Chapter 3 Thinking About Major Sustainability Issues .....................55

Chapter 4 Decision Making in Sustainability: Case Studies ..............93

Chapter 5 Concluding Thoughts ....................................................131

Notes��139References ��143Index ��151

Preface

We want to share with you how we came to the conclusion that a book such as this one would be needed and what made us write it. We also want to explain its role in the Business Experts Press collection on sustainability and preview the book’s organization.

A Primer on Sustainability takes a broad look at the ways in which the concept of sustainability is being applied in the business context. It answers the question, “What does Sustainability mean to the way we practice business?” A key characteristic is its comprehensive treatment of the complex issues sustainability raises for the business world. Our goal is to provide a concise, readable, introductory investigation of this far-reaching concept so that readers will have introductory access to the knowledge and skills needed to help their organizations understand and act upon the principles of sustainability. We also hope our readers gain a deeper understanding of the relationships between business, society, and the environment, and their critical role in these relationships.

When Ron Whitfield prepared to teach an introductory course on sustainability at the D’Amore-McKim School of Business at Northeast-ern University, he wanted the course, which addresses the complex issues sustainability raises for the business world, to provide students an intro-duction to the issues related to sustainability in the business context. He wanted a text that would assume no direct knowledge of the issues and at the same time, treat them in depth. He wanted to design a course that encourages interdisciplinary thinking. He also looked for student activities, such as debates and cases. Student activities are increasingly important as faculty and trainers seek to flip the classroom, or move from a directive and lecturing role to a facilitation role, with learners taking the lead in the classroom. Much to his surprise, there was no text to walk learners through the complex issues sustainability raises for businesses.

Ron established his course and tested materials and approaches in it, and then invited his Northeastern colleague Jeanne McNett to join him in the course and work with him to develop A Primer on Sustainability.

x PrEFACE

A Primer on Sustainability has also been written to function as the introduction to the Business Experts Press collection of books on sus-tainability. The following books will help readers build their in-depth knowledge in various areas of sustainability. Since Business Expert Press is committed to sharing knowledge in this growing field, you may want to visit their Environmental and Social Sustainability Collection to check for new resources at www.businessexpertpress.com/taxonomy/term/27/.

• Sustainable Business: An Executive’s Primer by Nancy Landrum and Sandra Edwards

• IT Sustainability for Business Advantage by Brian Moore• Responsible Management: Understanding Human Nature,

Ethics, and Sustainability by Kemi Ogunyemi• Sustainability Delivered: Designing Socially and Environmen-

tally Responsible Supply Chains by Madeleine Pullman and Margaret Sauter

• Sustainability Reporting: Managing for Wealth and Corporate Health by Gwendolen B. White

• Communication in Responsible Business: Strategies, Concepts and Cases by Roger N. Conaway and Oliver Laasch

• Developing Responsible Supply Chains to Drive Value: Management Insights, Issues, Concepts and Tools by Robert Sroufe and Steven Melnyk

Our exploration in A Primer on Sustainability begins with an investi-gation of what sustainability means in a business context. Once the scope of the concept “sustainability” is established, we look at the systems and tools for sustainability. The second chapter explores ways to think about the process of sustainability (systems) and the assessment or measure-ment tools sustainability requires (ways to show the impact of actions). Systems include life cycle assessment and cradle-to-cradle design. Tools include corporate reporting systems, the Global Reporting Initiative, the Global Compact, the Carbon Disclosure Project, carbon footprinting, water footprinting, additional indices on sustainability, a focus on roles of transparency, stakeholder theory, and triple bottom line reporting, along with the analysis of sustainability offered by financial institutions.

PrEFACE xi

We then move, in Chapter 3, to address critical issues in the area. The introduction of sustainability in situ is presented in a debate format, with both positions presented. The chapter also explores more deeply the criti-cal issues in sustainability than previously. Next, we are ready for a direct application of sustainability concepts, in a series of case study reviews. These case reviews offer the learner further opportunity to explore the implications of sustainability in a business decision-making context. We review and summarize the challenge of each case but do not offer solu-tions. We recommend these cases for students to work on their own or for instructors and trainers to assign because we have found them most useful in providing learners further opportunity to think through some of the complex issues of sustainability.

The concluding section summarizes the major ideas introduced in A Primer on Sustainability� We propose three strategies moving forward: business needs to reformulate product and markets to become more sus-tainable; business needs to focus on more than simply profit; and gov-ernment’s role needs to be a positive force for change. We also want the reader to feel more comfortable with the level of complexity thinking about sustainability can require.

Acknowledgments

No book is ever produced without the encouragement, help, and support of many individuals. In this case, the ideas and content for this book grew out of a new course that was introduced to the students of North eastern University in the 2010. In many ways, the first class was part of our exper-iment in how to teach the principles and practices of sustainability in the business environment to students of business. Some ideas worked; others needed to be reworked until we felt we had the right mix of theory, critical thinking topics, applications, and case studies. We received useful input from students along the way, and we are most grateful for this important feedback.

We have received generous and valuable support from our reviewers. We would like to thank Robert Sroufe and Chris Laszlo for their far-beyond what might be expected encouragement of our project. David Parker, the founder and president of Business Expert Press helped us develop the fundamental idea of a primer, Rob Zwettler provided us guid-ance once our project was underway, and Cindy Durant helped us with administrative issues. We want to acknowledge the help and support we received from everyone at Business Expert Press.

Our colleagues at the D’Amore-McKim School of Business at North-eastern University also supported us in this project. Colleen Pantalone helped launch the course at the undergraduate level, and Harry Lane, Marjorie Platt, and Harlan Platt helped launch the course at the gradu-ate level, where the basic framework for this text was implemented. Harry Lane was instrumental in encouraging us to take on this project as a team. We received excellent research and technical support from Shawn Mullet, a former student and current colleague at Northeastern, and Pegah Karimi, a former student and post doctoral colleague. We also wish to thank Kathy Campbell, a strong believer in making the world more sustainable, for her generous financial support. We could not have

xiv ACkNowLEdgmENtS

completed this project without her assistance. Finally, we wish to thank our respective families for their continued support of our work on this project and all our professional efforts. To all these individuals, we offer our sincere appreciation for their support, constructive criticism, and many useful ideas.

CHAPTER 1

Sustainability: Meaning and Context

Learning Objectives

• Understandthevariousmeaningsofsustainability,includingitsrelationshipswithnatureandtechnology,applyingaglobalpointofview

• Differentiatebetweentheconceptssustainability,corporate social responsibility,andcorporate accountability

• Becomefamiliarwithsustainabilityasseenfromacorporateperspective

• Grasptheconceptofthesupplychainanditsimportancetosustainabilityinthebusinesscontext

• BecomefamiliarwithA Primer’sapproachtosustainability

To begin our exploration of sustainability, we focus on its definition,anareathatisabitmorecomplicatedthanwemightthinkatfirst.Welookatthesupplychain,animportantpartofsustainabilitydiscussions,nextandthenmoveontoanexplorationofsustainability’scontext.ThechaptercloseswithadescriptionofA Primer’sapproach.

What Does Sustainability Mean?

Sustainabilityisaconceptwithnouniversallyacceptedmeaning,and,asaresult,itoftenmeansdifferentthingstodifferentpeople.Inthisregard,itissimilartoaconceptincinematographycalledtheRashomoneffect.IntheJapanesemoviebythesamename, foureyewitnesses toa singleeventtelltheirversionsofwhathappened.Eachwitnessofferssubstan-tiallydifferentbutequallyplausibledetailedaccountsofthesameevent.AsdirectorAkiroKurosawaletsthestoryunfold,thefilmaudienceneverknows for sure the truesequenceofevents.Studentsandscholarsmayhavesimilarfeelingsaboutreadingsonsustainability.

2 A PRIMER ON SUSTAINABILITY

Nature, Technology, and Global Considerations

Some experts believe that sustainability means that nature’s bountifulresources(purewater,cleanair,fertilesoil)arefiniteandneedtobepro-tected.Theydistinguishbetweenman-madecapital(e.g.,machineryandequipment)andnaturalcapital—theresourcesthatnatureprovides.Oneoftheirbasicconcernsisthequestionofhowmuchwewouldpayforthecreationoffertilefarmlandorotherecosystemservicesthatnaturepro-videsforfree.ThisperspectiveonsustainabilitybuildsupontheseminalworkofRobertCostanza,RudolfdeGroot,andothers.Costanzaandhiscolleaguesestimatethatifwehadtopayforecosystemservicessuchaspollination,soil formation,andoveradozenotherservicesthatnatureprovides at no cost, the value would exceed the global gross nationalproductbyasignificantmargin.1Ofcourse,themonetizationandesti-mationofecosystemserviceswillbeaherculeaneffortthatwilldependonmanyassumptionsandsophisticatedmodelsthatproduceawiderangeofmonetaryvalues.Nevertheless,fewdoubtthefundamentalconclusionthatifweactuallyhadtopayforecosystemservices,theglobaleconomicsystemwouldbequitedifferentfromwhatwewitnesstoday.

Man-madecapitaltypicallyisownedandcontrolledbyasingleindi-vidualorcorporation,butnaturalcapitalisgenerallyasocietalresource.Bothformsofcapitalarevaluableandbothcanbeimprovedordegradedover time.Whenman-made capital degrades, we can fix it or replaceit.Whennaturalcapitaldegrades,itcanalsobeprotectedorimproved,butthisoftenrequirescollectiveorgovernmentaction.Forexample,inthe absenceof regulation, cutting timberonpublic land results in theremovalofmoretreesthancanbereplacedbynormalreplenishmentandgrowth.Proponentsof theprotectionist viewargue forputting apriceontheseresourcesbecauseotherwisetheirvaluewouldbedeemedinsig-nificant.Asa familiarbusinessaxiomstates: “whatgetsmeasured,getsmanaged.”Ifindividualsandbusinessesactingintheirownself-interestdonothavetopayfortheuseoftheseresources,theresourceswilltendtobeover-used.Tociteanotherexample,whatifappleorchardownershadtopaybeekeepersprovidebeestopollinatetheirtrees?Orwhatifthebeekeepershadtopaytheorchardownertoprovideaccesstotheirappletreeblossomssothattheirbeescouldmakehoney?Weoftentakenature’s

SUSTAINABILITY: MEANINg ANd CONTExT 3

resourcesforgranted,especiallyiftheyareavailabletousatnocost.ThechallengeindevelopingmeasuresoftheseservicesinmonetarytermsisdealtwithbymanyauthorsincludingDavidPearceinhisbook,Blueprint for a Green Economy.

Another groupof experts focuses on the strong role that advancedtechnologyandsciencecanplayinidentifyingandimplementingsolu-tionstoourenvironmentalproblems.Foreveryproblem,theyseekandexpect tofinda solution.Theseexpertsbelieve that thereare technicalfixes to all of the planet’s ills and that they should be developed andimplementedaswidelyaspossible.Forexample,ifchlorofluorocarbons(CFCs) thatareused in refrigerationdeplete theozone layer, then sci-encecancreatenewchemicalcompoundsthatdonotdepletetheozonelayer.Thesenewrefrigerantsactuallyhavebeendeveloped.Similarly, ifburningfossilfuelsresultsineverincreasinglevelsofcarbondioxideandhigherplanetarytemperatures,thenactionisrequiredtofindavarietyoftechnologicalsolutionstotheproblem—rangingfromalteringthevol-umeofsolarradiationthatreachestheearth(giantmirrorsinspace)tostoringlargeamountsofcarbondioxideinundergroundgeologicforma-tions(carbonsequestration),topromotinggreateruseofnuclearpower.Withtheexceptionofnuclearpower,thesenewtechnologies,oftencalledgeo-engineering,havenotyetbeendeveloped.

The introduction of new technologies can create their own sets ofissues, because there may be unintended consequences that followfrom their implementation. As technology experts Michael and JoyceHuesemann argue, “… technologywill necessarily produce both posi-tive andnegative effects.This characterof technology creates a seriousintellectual challenge for technological optimistswho exclusively focusonthepositiveaspectsoftechnologywhileignoringthe,oftenenormous,negatives.”2

CFCsareagoodcaseinpoint.Untiltheywereinvented,householdrefrigeratorsused toxicandflammablegases likeammoniaas coolants.Smallleakssometimesresultedinexplosions,fires,damagetoproperty,andevendeath.Refrigeratorswereoftenplacedinseparateroomsorout-doorstomitigatethesedangers.CFCsarecolorless,odorless,nonflam-mable,noncorrosive,andnontoxicproductsthateliminatedthedangerposedbyrefrigeratorleaks.Injustafewyears,refrigeratorsusingCFCs


becamethestandardforhomekitchensandlaterforcommercialrefriger-ationandautomobileair-conditioningsystems.Itwasnotuntilthe1970sthat scientistsdiscovered thedamageCFCscaused to the stratosphericozone layer, anunintended consequence of their use.CFCshavenowbeenreplacedbymoreadvancedproductsthatdonotdamagetheozonelayer.

When faced with these scientific and technological uncertainties,someexpertsprefera“goslow”approachcalledtheprecautionaryprinci-ple.Advocatesofthisprincipledeemitbettertoenactprecautionarypol-iciesevenbeforescientificconsensusemerges,particularlyincaseswheretheuseofnoveltechnologiesmayhavesubstantial,irreversible,orevencatastrophicconsequences.Animportantmilestone intheevolutionofthisconceptwasreachedattheUnitedNationsConferenceonEnviron-mentandDevelopmentinRiodeJaneiroin1992(oftenreferredtoastheEarthSummit),whentheparticipantsendorsedArticle15,whichstates:

Inordertoprotecttheenvironment,theprecautionaryapproachshallbewidelyappliedbyStatesaccording to their capabilities.Whentherearethreatsofseriousorirreversibledamage,lackoffullscientificcertaintyshallnotbeusedasareasonforpostponingcost-effectivemeasurestopreventenvironmentaldegradation.3

Inthesecases,followingthisprinciplewouldavoidoratleastmitigatethepotentialdamagethatthesetechnologiescouldcausetohumanhealthandtheenvironment.Theprecautionaryprincipleislargelyunconcernedwithbalancingtheperceivedeconomicbenefitsofthetechnologyagainstitscosts,anapproachthatistheprimarybasisoftheregulatorysystemoftheUnitedStatesandmanyothernations.Becausescienceandscientistshavedifficultyinquantifyingriskorcharacterizinguncertainty,thepre-cautionaryprinciplegenerallyfavorsstatusquoandtiltstheplayingfieldtowardfalselyrejectingpotentiallybeneficial technology,asopposedtofalselyacceptingharmfultechnology.Ithasalsobeencriticizedbecausetheburdenofproofthatatechnologyissafe(asopposedtoprovingthatitdoesnotcauseharm)isbornebythetechnology’sadvocates.

Still another group of experts looks at sustainability issues from aglobalperspective. Issues relatedtosustainability—likeclimatechange,


waterscarcity,andpoverty—oftenrequirenotonlyaglobalperspectivebutalsoglobaldecision-makingcapacity.Theseexpertsoftenpointoutthedivergencebetween rich,developed countries andpoorer,develop-ingcountries.Theyoftenciteculturaldifferences,incomeinequality,andecologicalfootprintsasfactorstoconsiderincomparativestudiesacrossregions.Manyoftheseexpertspointouttheneedforglobalagreementsonparticulartopics,liketheKyotoProtocolsonClimateChange,withenforcementmechanismstoachieveparticulargoals.Manyindustrializedeconomiessignedthisagreementinthelate1990s,althoughtheUnitedStatesandAustraliadeclined,andCanadawithdrewfromtheagreementin2011,citingthehigheconomiccostofcomplyingwiththetermsofthetreaty.Globalsustainabilityissuesposeparticularlydifficultquestions.Howdocountriesprioritizetheirsustainabilitygoalsrelativetotheirothergoals,suchasfeedingthepopulation,fosteringrapideconomicgrowth,andalleviatingpoverty?Second,istheimpositionofWestern-styleenvi-ronmentalism on developing countries entirely justified? Some expertsclaimthatarapidlygrowingemergingeconomyhasdifferentpriorities,ofwhichsustainabilityisonlyoneofmany.Otherexpertsclaimthattheover-consumptivepracticesofthedevelopedworldmaybedeprivingthedevelopingworldofthefruitsofmodernsociety.

Sustainability, Corporate Social Responsibility, and Corporate Accountability

These conceptsof sustainability thatwehave reviewedhere are closelyrelated yetdifferent fromothermovementswith similar goals, such ascorporatesocialresponsibility(CSR)andcorporateaccountability(CA).CSRreferstovoluntarybusinessactivitiesthataccountforthesocialandenvironmentalimpactcreatedbythebusiness.Ascurrentlypracticed,thismeansthatcompaniescommittodeveloppoliciesthatintegratesociallyresponsiblepracticesintonormalbusinessoperationsandtoreportprog-ressonanannualbasistostakeholders.EarlyCSRreportsoftenfocusedon philanthropy as a driver ofCSR; for example, building schools inimpoverished areas where the company operated. More recently, thisconcept has been supplanted by a broad commitment to protect andimprovethelivesofworkersandthecommunitiesinwhichcompaniesdo


business.PublishedCSRreportsnowroutinelyaddressissuesimpactingvirtually every area of operations: corporate governance,worker hiringandtraining,relationshipswithsuppliersandpurchasingbehavior,andthecompany’senergyandenvironmentalimpact.Exhibit1.1comparestheCSRapproachwiththeconceptofsustainability.

CA,ontheotherhand,canbe“definedastheabilityofthoseaffectedbyacorporationtocontrol thatcorporation’soperations.”4Under thisstrictdefinition,companieswouldbeheldtoamuchhigherstandardofbehavior.Inplaceofvoluntaryactivitiesto improveacompany’ssocialandenvironmentalperformance,CAadherentsproposethecreationofinstitutionalmechanisms that hold corporations legally responsible fortheirbehavioron social, ethical, andenvironmentaldimensions.Thesemechanismswould impose duties on publicly traded companies, theirseniormanagement,andtheboardofdirectorswithrespecttothecom-pany’sperformanceandsocialandenvironmentalimpacts.UndertheCAconcept,legalliabilitywouldattachtocorporatebreachesofinternationallawsandagreements,andenforcementmechanismscouldbeimposed.

There are some common grounds in these different viewpoints ofsustainability,CSR,andCA—aconcerntopreservetheplanet’snaturalresourcesandtoimplementasetofgovernmental,corporate,andindi-vidualpoliciesandpracticesthatreducesourcarbonfootprintandwastewhileconservingourfiniteresources.Similarly,asdiscussedpreviously,

Exhibit 1.1. Comparison of Sustainability and CSR Approach

SustainabilityCorporate social

responsibilityValue proposition

Firm creates socioeconomic benefits with a low environmen-tal footprint—the company and community coming together

Firm acts as a good corporate citizen through philanthropy

Methods Actions are integral to competition and long-term profit maximization

Actions are discretionary or because of external pressure

Strategies Agenda is company-specific and internally generated

Agenda is determined by noncore business interests

Impact Large impact because its actions realign the entire company budget and operations

Limited impact because its actions are intended to improve company image with few operational changes

Examples Patagonia, Burt’s Bees British Petroleum


there are common grounds in the different perspectives about respectfornature,theroleoftechnology,andtheglobalaspectoftheconcept.Giventhesediverseperspectives,isitanywonderthatthedefinitionofsustainabilityhaselicitedsuchaheateddiscussion?TheUnitedNationsWorldCommissiononEnvironment andDevelopment,knownas theBrundtlandCommission,craftedthemostwidelyaccepteddefinitionofsustainability in its discussion of sustainable development: sustainabledevelopment “meets the needs of the present without compromisingthe ability of future generations tomeet their needs.”5This definitionrequiresbalancingeconomicprosperitywithenvironmentalresponsibil-ityandsocialjustice,anditistheoneweuse.Suchanunderstandingofsustainability has implications for howwe design, produce, distribute,andconsumegoodsandservices;howweestablishmarketpricesforthesegoodsandservices;howweprovideandconsumeenergy;howwerespectandregulatetheenvironment;andhowweensurehealthandwell-beingforalllivingcreatures.Sustainabilityrequiresuniqueapproachestoman-agement of governmental institutions,markets, business organizations,andourownpersonalbehavior.

Sustainability from a Corporate Perspective

Thepurposeofthisbookistointroducereaderstotheconceptofsus-tainabilitywithparticular attention to theways inwhich this conceptaffectscorporatestrategy,publicpolicy,andindividualdecisionmaking.Ourgoalistogivereaderstheknowledgeandskillstohelpthemunder-standandactupontheprinciplesofsustainability,andtogainadeeperunderstandingoftherelationshipsamongbusiness,society,andtheenvi-ronment.

Inthisbook,weexamineavarietyofenvironmentalproblems,includ-ingdepletionofnatural resources suchaswater andpetroleum,globalwarming,theintegrityofthefoodsupplychain,anduseanddisposaloftoxicsubstances.Manyoftheseproblemsarisebecauseoffailuresinthefreemarketsystem:failuretoaccountforexternalities(costsimposedonothersinvoluntarily),failuretofullyunderstandthescience,orfailuretobalancelong-termcostsagainstshort-termbenefits.Companiesfacetheseproblemsonaregularbasis.Herearesomenotedexamples:


• Freeport-McMoRan’s copper, gold, and silver extraction activities in Indonesia. Thisisanexampleofafailuretoaccountforexternalities.Freeport-McMoRanoperatestheGrasbergmine,thelargestgoldmineandthethirdlargestcoppermineintheworld,inthePapuaprovinceofIndonesia.Mineoperationshavegeneratedasignificantcontroversybecauseofthewastedisposalmethodsandtheirimpactonasensitiveecosystem.Themineproducesvastamountsofminewasteincludingsomethatarehazardous.Muchofthismaterialendsupinthenearbyriversastheyflowouttosea.Althoughthecompanyclaimsthattheminemeetsexistingenvironmentalstandardsforthearea,otherscontendthatthemineiscausingmajorenvironmentaldamage.Inadditiontotheenvironmentalimpactofthemine,thecompanyhasbeenheldaccountableforthedisplacementofindigenouspeople,criticizedforthelowpercentageofprofitssharedwiththelocalresidents,andaccusedofcorruptionandlackoftrans-parencyaboutitsactions.Thecostoftheseexternalitiesisnotreflectedintheexportedpriceofthecopper,gold,andsilver.

• DuPont’s delayed acceptance that CFCs were destroying the stratospheric ozone layer.Thisisanexampleofafailuretounderstandthescienceandtheunintendedeconomicandenvironmentalconsequencesofozonedepletion.CFCsareagroupofhighlyengineeredchemicalcompoundsusedinapplicationslikeairconditioningandrefrigerationequipment.Theyarechemicallystable,lowintoxicity,andnonflammable.Afterdecadesofcommercialsuccess,researchchemistslinkedCFCswithozonedepletionintheearly1970s.DuPontdisputedthefindinganddidnotaggressivelysearchforalternativeproducts.Onlyafterthefindingwasconfirmeddidthecompanyaccepttheultimatephasedownofthebusinessandrampuptheproductionofalternatives.

• Dow Corning’s breast implant business.Thisisanexampleofafailuretounderstandscientificevidenceofthehealthrisksforwomen.DowCorning’sbreastimplantbusinesscontributedonly1%toitsannualrevenuesof$2billionin


theearly1990s,butthecorporation’sinabilitytoaccuratelyassesstherisksofthisbusinessandtotakeappropriateactioninatimelymannerledthecompanyintoacostlybank-ruptcyin1995.Despitetheearlywarningsignalsoftrouble,itdecidedtocontinuemanufacturingthisproductwithoutadequatelyinformingpatientsoftherisks.Thisdecisioneventuallyresultedinover10,000lawsuits,manybillionsofdollarsinlegalcostsandjudgments,andseriousdamagetothecompany’sreputation.

• McDonald’s discovery that it was contributing to rain forest destruction in Brazil. Thisisanexampleofafailuretoaccountforexternalitiesnotbythecompanyitself,butbyanimportantsupplychainpartner.In2006,McDonald’screatedaworkinggrouptodevelopamoresustainablesupplychainforitssprawling,globalfoodrequirements.Asupplychainofthissizehastwomajorcharacteristics:significantpurchas-ingpowerandimmensecomplexity.Forexample,Europerestrictsimportsofgeneticallymodified(GM)foodstuffslikesoybeansandMcDonald’sneededreliablesuppliersofnon-GMsoybeansfortheirChickenMcNuggets.(Note:Soybeansareusedasamajoringredientinchickenfeed.)Becauseover90%oftheU.S.soybeancropisgeneticallymodified,majorMcDonald’ssupplierssuchasCargill,neededtolookelsewhereforlargequantitiesofnon-GMsoybeans.Cargillpurchaseditsnon-GMsoybeansfromrecentlydefor-estedAmazonlandinBrazil.RatherthantargetingCargill,environmentalactivistgroupslikeGreenpeaceboycottedMcDonald’srestaurantsinEuropetobringpublicpressureforchange.ThisactionresultedinMcDonald’sdiggingdeeperintothepracticesofitssupplychainpartnersandinitiatingremedialactions.

• Ford Fiesta’s decision not to introduce a diesel-powered car in the North American market. Thisisanexampleofthefailuretobalancelong-termbenefitsagainstshort-termcosts.TheFordMotorCompanylaunchedtheFiestaDieselcarinEuropein2008.Thecarachievedaratingof65milesper


gallon,oneofthemostfuel-efficientvehiclesinmassproduc-tionintheworld,surpassingeventhepopularToyotaPrius.It quicklybecamethebestsellingFordmodelintheEuropeanmarket.YetForddecidedtokeepthetechnologyoutoftheU.S.market,contendingthatitwouldbetooexpensivetoexportittoNorthAmericaandthatU.S.consumerdemandfordiesel-poweredcarswastoouncertain.ItremainstobeseenwhetherFordlostanopportunitytocapitalizeonthistechnologyintheNorthAmericanautomotivemarket.

Thereareanumberofwaystoaddressthesedecisionsrelatedtosus-tainability,fromacorporateaswellasfromapublicpolicyperspective.Someanalystssuggestincreasedgovernmentregulationasasolutionforthesemarketfailures.Suchregulationcouldtakeatleastthreedifferentforms.First,thegovernmentcouldsetstandards,mandates,orcodestoencouragethedesiredoutcome.Forexample,inanefforttoreducethe


nation’s dependence on imported crude oil, the government created acomplex set ofCorporate Average Fuel Economy (CAFE) targets thatare intended to increase fuel efficiency and thereby reduce petroleumconsumption.Theseregulationsareimposedonmanufacturers.Second,thegovernmentcould imposea taxonconsumers toachieve the sameoutcome. Such a tax onmarket activities that generate negative exter-nalitiesisoftencalledaPigoviantax(namedaftertheeconomistArthurPigou).Whenamarketactivitygeneratesnegativeexternalities,thesocialcostsarenotrecognizedbytheprivatesector,andthemarketoutcomeisnotefficient.Insuchcases,societywilltendtoover-consumetheprod-uct.Thetaxisintendedtocorrectthemarketoutcome.ReferringtotheCAFEexamplecitedearlier,thegovernmentcouldhaveimposedsignifi-cantlyhighergasolinetaxesthatwouldhaveachievedthesamereductioninpetroleumconsumption (albeitwith adifferentmixof automobilesontheroad).Third,thegovernmentcouldimposesevererestrictionsorevenanoutrightbanontheuseofaproduct.Examplesofpartialorcom-pleteproductbansincludethepesticideDDT,leadedgasoline,andtheartificialsweetenercyclamate.

Otheranalystshaveproposedmarket-basedsolutionsformarketfail-ures. Insomecases (weexplore someof these insubsequentchapters),entrepreneurscanidentifymarketfailuresandunderservedpopulationsandcreatenewbusinessesthataddressthesemarketneeds,intheabsenceof government subsidies or support. In other cases, businessmanagerscan identify sustainability issues in their individual organizations andprovideavarietyofinnovativesolutions.Weexaminesomeofthewaysbywhichcompanies reduce their impacton theenvironment.Usingacombinationofreadings,debates,andcaseanalyses,weassesshowbothgovernment regulations,suchastaxes,subsidies,buildingcodes,andpro-hibitions of use, andbusiness solutions, including zero emissions, greendesign,producertake-back,lifecycleassessment,andcorporateenviron-mentalreporting,addresstheseproblems.Welearnhowsomecompaniesareactingdecisivelytobecomemoresustainable,andhowtheyarewin-ninginthecompetitivemarketplace.Welearnhowothercompaniesaremovingslowlyandstrugglingwiththeday-to-dayimplementationissues.Wealsodiscoverthatthereareothercompaniesthatmakefalseclaimsof


their sustainability accomplishments, a behavior pattern called “green-washing.”Finally,sincethegeneralpopulationistheultimateconsumeroftheproductsandservicesproducedbythesebusinesses,wealsoaddresshowindividualdecisionmaking canplayacatalyticroleinthereductionoftheseproblems.

Sustainability and the Supply Chain

Sustainabilityinvolvesanewwayofthinkingaboutvaluecreation.Forexample,itrequiresanewwayofmeasuringtheimpactofourdecisionsand actions. In one traditional approach tomeasurement, the area ofaccounting,wemeasuretheeconomicimpactofbusinessdecisions,andnottheirsocialandenvironmentalimpacts.Historically,wehavetendedtoseetheimpactofourbusinessactivitiesasdisconnectedfromtheircon-texts.Sustainabilitysuggeststhatwethinkaboutouractivitiesinalargerway,aspartofacomplexsystemofrelationships.Thismeanschanginghowwethink,howweorganize,andhowwemeasuresuccess.

Intheearlydaysofthesustainabilitymovement,companieslookedprimarilyattheirownoperationsandmeasuredtheirenvironmentalandsocietalperformancegainsinanarrowway:howmuchlessenergy,water,and other resources their factories consumed that year comparedwithpastyears.Inotherwords,theydrewacirclearoundtheirphysicalassetsandsoughttooptimizeperformancewithinthecircle.Nowadays,com-paniesrealizethatitistheentiresupplychainthatneedstobeimprovedastheyaddresstheirsustainabilityissues—directsuppliers(andthecom-panieswhosupplythesuppliers),thedistributors,evencustomerswhomaywishtodisposeofproductsthatarenolongeruseful.Inthisbook,wedefineacompany’ssupplychainasallthoseactivitiesthattransformnaturalresources,rawmaterials,andcomponentsintofinishedproductsthataredeliveredtotheultimatecustomer.Thecirclehasbeenenlargedtoincludetheentiresupplychain,fromrawmaterialsextraction,throughmanufacturinganduse,toultimatedisposal.

Hereareexamplesofnarrowandwidesupplychainsfoundinmunic-ipalwateroperations.Most largemunicipalwaterutilitiesusechlorinegastodisinfecttheirdrinkingwater,whichtheyreceiveinbulkshipmentsbyrailortruck.ThissupplychainisdepictedinExhibit1.2.


Ifwe look at this supply chain in a broader context (Exhibit 1.3),theplantthatproducesthechlorinegasforthewaterutilityusesanelec-trolyticprocesstoseparatesaltywaterintochlorine,sodiumhydroxide,andhydrogen(aby-product).Thesaltisoftensuppliedfromasaltmine,whiletheelectricpowerisprovidedbythelocalpowerplant.Theelectricgridusesamixtureoffuelsthatcouldincludecoal,naturalgas,hydro-power,ornuclearpower.

Walmart offers another example of the supply chain’s centrality tosustainability.Walmart is a company that historically has beenheavilycriticizedforitsenvironmental,societal,andlaborpractices.Ithasbeeninundatedwiththeresultsofpoorpublicrelations,protests,andlawsuits,andtypicallyitdealtwiththeseissuesdefensivelyratherthanproactively.

Exhibit 1.2. Narrow Supply Chain Example.

Rawwater

Chlorine

Coagulants

Treatmentplant

Homeconsumption

Exhibit 1.3. Wide Supply Chain Example.

Rawwater

Chlorine

Coagulants

Treatmentplant

Homeconsumption

Salt

Chlor-alkaliplant

Electricity

NaOH Cl2

Distributor

T

T

T

T = Transportation of chlorine is done mainly by rail (90 tons tank cars thattravel between 500 and 1,000 miles) and truck (1 ton containers or 150 lbcylinders that travel about 250 miles); salt shipment sizes vary.


However, beginning in 2005,Walmart began to realize thatmaking aprofit by selling goods at everyday low prices and building a sustain-ablebusinesswerenotmutuallyexclusiveactivities.AsaseniormanagerofWalmartstated,“Werecognizedearlyonthatwehadtolookattheentirevaluechain.Ifwefocusedonjustourownoperations,wewouldhave limitedourselves to10percentof our effect on the environmentand,quite frankly, eliminated90percentof theopportunity that’soutthere.”6,7Thisisoneexampleamongmanypossibilitiesofhowacompanynotedforitsaggressivelylowpricingpolicyisdoinggoodanddoingwell.Asoneleadingexpertstates,“Supplychainsareincreasinglyseenasstra-tegicassets,andcompaniesareplacinggreateremphasisoncollaborationwithsuppliersandcustomersthatarepartoftheir‘businessecosystem’.”8

The Context of Sustainability

Nowthatwehavelookedatthemeaningofsustainabilityfrommultipleperspectivesandexaminedthesupplychain,wecanmakesomegener-alizations about the contextof sustainability.Oneof themostnotablecharacteristicsofsustainabilityandoneofitsmostchallengingisthatitsscopeislikelytobeatonceglobalandlocal.Forexample,climatechangeeffects are felt locally and individual actions to reduce greenhouse gasemissionsoccuratalocallevel,buttheprocessofclimatechangecannotbeaddressedinafragmentedway;globalcooperationwillberequired.

Managing any process in a global context is an increasingly diffi-cult challengebecause theglobal context is changingconstantlyand isincreasinglycomplex.Scholarsofglobalmanagementhavedescribedthisincreasedcomplexityintermsoffourattributes:multiplicity,ambiguity,interdependence,andflux.9Multiplicitydescribestheincreasingnumberofplayersorstakeholdersinvolvedinanyoneissue,whereasinterdepen-dencedescribes the increased levelsof interconnectedness among theseplayers. Ambiguity describes the increasing difficulty to give accuratemeaning to information and is due to lack of clarity, confusion aboutcause and effect relationships, and equivocality ormultiple interpreta-tions of the same facts.We alreadyhave seen aspects of this complex-ityaroundthedefinitionofsustainability.Acloseexaminationofmanylocal efforts to introduce sustainability in the area of energywill yield


additional examples of multiplicity, interdependence, and ambiguity.Theseattributescontribute, in turn, to thefinalattributeof theglobalcontext, flux. In short, everything in the global context is constantlychangingatanincreasingrate.

Our Approach

Given this increasingly complex and constantly changing environmentinwhichissuesofsustainabilityexist,ourgoalherewithA Primeristoopenthesecomplexissuestoadeeperunderstanding,ratherthantoleadto specific answers.We take this approach because in such a fluctuat-ing environment, any specific answersmay become dated before theyreachthereader.IfA Primercanconveyanintroductiontotheprocessofapproachingtheseissues,thereaderwillbeabletoapplythisapproachgoingforward.Ourmethodincludesexplorationoftheissuesandtheirdiscussion.We are convinced that, through an understanding of theseprocesses,webuildourability tograpplewiththeircomplexityandtoinfluence the many issues related to sustainability that we encounter.Thus,ourapproachencouragesaction.Itinvolvesresearch,debate,casestudies,andprojects.Ourbeliefisthatthroughsuchactiveengagement,wewillbeabletomeetourneedsnow“withoutcompromisingtheabilityoffuturegenerationstomeettheirneeds.”10

TheideasinA Primerareasynthesisofideasdrawnfromtheworkofscholarsandscientists.Wewanttobeupfrontaboutthispoint:Wearestandingontheshouldersofgiantsaswepulltogetherideasthatcontrib-utetothefundamentalconceptsofsustainabilityinthebusinessarena.

A Primer on Sustainability provides introductions to the areas ofsustainability relevant to the business context.Chapter 1has revieweddefinitionsofsustainability,placedtheconceptinacontext,andoutlinedA Primer’sgeneralapproach.Chapter2examinesthesystemswehaveforthinkingaboutsustainabilityandthetoolsavailabletoustoassessandmeasureit.Chapter3addressesthecomplexitysustainabilitypresentsandprovidesanin-depthexplorationofsevenmajorissuesinsustainability.We include theseexplorationsbecauseweneed tounderstand that thechallengesofsustainabilityarenoteasy,yettheyneedtobesortedoutandunderstood.Let’sbeupfrontandhonest:If sustainabilitywereeasyto


attain,wewouldalreadybethere.Whodoesn’twanttoleavesucceedinggenerationswiththesametremendousnaturalresourcestowhichwehavebeengivenstewardship?Chapter4continuesthisexplorationofsustain-ability’scomplexitywithreviewsofrecommendedcasestudiesthatcoversustainability in thebusiness context.Chapter 5 summarizesA Primerandlookstothefuture.Exhibit1.4summarizesourapproach.

Exhibit 1.4. Summary of A Primer’s Basic Concerns and Pedagogical Aspects

Chapter Basic concern Pedagogical functionChapter 1Sustainability: Meaning and Context

How can we understand sustainability in a business context?

Introduces the topic and terminology

Chapter 2Systems and Tools for Sustainability

How can we think about, measure, and compare sustainability?

Introduces conceptual and analytical approaches to sustainability and its measurement

Chapter 3Thinking About Major Sustainability Topics

What are some of the major issues and how can they be addressed?

Offers a model for analysis of complex sustainability issues

Chapter 4decision Making in Sustainability: Case Studies

What sorts of decisions related to sustainability do businesses face, and around what issues?

Offers application poten-tial

Chapter 5Concluding Thoughts

What can we do right now and in the future? How does our commitment to sustainability affect the way we conduct our business and private lives?

Summary and review of commitment to engagement with sustainability

CHAPTER 2

Systems and Tools for Sustainability

Learning Objectives

• Buildknowledgeabouttheconceptualsystemsthathelpusunderstandsustainabilityprocesses

• Reviewthemethodologyforlifecycleassessmentanditsapplication

• Becomefamiliarwithcradletocradledesign• Understandthechallengesofassessingandmeasuring

sustainability• Becomefamiliarwiththemajorcorporatesustainability

reportingsystemsandtheiruses—theGlobalReportingInitiative,theGlobalCompact,theCarbonDisclosureProject,carbonfootprinting,andwaterfootprinting

• BecomeawareoftheotherUNindexessuchastheHumanDevelopmentIndexandtheHumanSustainabilityIndex

• Buildawarenessofwaysorganizationsshowtheirtransparencyonsustainabilityissues,suchastriplebottomlinereporting

• Reviewwaysfinancialinstitutionsevaluatecorporatesustainability,includingtheFTSEKLD400SocialIndex,the DowJonesSustainabilityIndexes,andSAM

Thischapterlooksatthenutsandboltsofsustainability,waystothinkabouttheprocessofsustainabilityandtomeasuretheimpactofoursus-tainability efforts. First we consider the systems that have been devel-opedtohelpusthinkaboutsustainability,includinglifecycleassessmentandcradletocradledesign.Thenwemoveontothetools forsustain-ability,whichhelpusassessandsharethesuccessofouractionsrelatedto sustainability and the effect they have had.These tools include the


GlobalReporting Initiative, theGlobalCompact, theCarbonDisclo-sure Project, carbon and water footprinting, various United Nationsindexesonsustainability,triplebottomlinereporting,andtheevaluationof sustainability thatfinancial institutionshavedone,whichhas led toindexedfunds.

Systems for Sustainability

The ways to think about sustainability are a critical consideration asbusinessesbegintoimplementsustainabilityintothemanyprocessesinwhichtheyparticipate.Lifecycleassessmentandcradletocradledesignaretwoofthemostacceptedconstructsthathavebeendevelopedtothinkabouttheprocessofsustainabilityinabusinesscontext.Wetakeacloserlookateachofthese.

Life Cycle Assessment

Whatisalifecycleassessment(LCA)?Itcanbealotofdifferentthings,dependingonwhousestheterm,butatitscore,itisanattempttoevalu-atetheenvironmentalaspectsofaproductorservicefromthebeginningoftheproduct’susefullifetoitsend.Thus,LCAisoftencalleda“cradletograve”analysis.Nomatterwhattheproductorservice,everycompanyleavesanenvironmentalfootprintinitsproductionanddistribution,andmostcompanieshavecompletedLCAsfortheirmajoroperations.OneobservationtheseLCAshaveledtois,themorepollutionthecompanycreates,thelargerisitsenvironmentalfootprint.

TheLCAconcepthasasimplepremise:Ifweknowalltheenviron-mental impacts of a product or service, we canmake better decisionswithrespecttotheenvironment.Let’susethesimpleyellowpencilwithaneraserasanexample.Beginbyimaginingitsextremelysimplesupplychain.Fromapencilmanufacturer’sperspective,thereareonlyalimitednumberofcomponentpartsandmaterials—wood,graphitelead,glue,paint,metalferrule,vinyleraser,andothercomponents.

Therawmaterialscomeintothefactoryfromoneside,andfinishedpencilsgooutontheotherside.Astheyleavethefactory,thefinishedpencils arepackaged, loadedon transportationvehicles such as trucks,andshippedtodistributorsandcustomersaroundtheworld.

SYSTEMS ANd TOOLS FOR SUSTAINABILITY 19

In the past, asking the pencil manufacturer to trace its environ-mental footprintwasa request thateliciteda straightforwardresponse.Theexecutivewouldciteenvironmentalimpactsthatarisefromfactoryoperations—exhaust from the equipment on the factory floor, wastewateremissions,volatileorganicemissionsfromthepaintshop,andscrapwood,metal,andgraphite.

All these factors are inputs to thecompany’sLCA,andeach factororprocessisexaminedtoidentifycost-effectivealternativesthatmaybemore ecologically efficient. For example, installing solar panels couldreducetheamountofgreenhousegasesthepencil’smanufactureemittedtotheatmosphere.Thefactory’swastewatercouldbetreatedbeforeitsdischargeintothenearbystream.Andventilatorscouldbedeployedtoreduceexposuretovolatileorganiccompounds.Byimplementingthesepractices,thepencilfactorywillbecomemoreeco-efficient,thatis,moresustainableandmoreeconomical,andtherebyreduceitsenvironmentalfootprint.

Thereisamorecomprehensiveviewoftheenvironmentalfootprintof thepencil that extends the analysis beyond the strict boundaries ofthefactoryfloor.Thisextendedanalysisincludesthemanufacturingpro-cess forthepencil,asdescribedabove,andaddedtothatarealloftheupstreamprocessesconductedbysuppliersofthepencil’srawmaterials—thewood, graphite,paint, glue, eraser, ferrule, andother components.ThisbroaderviewofLCAalsoextendstheanalysisdownstream,tothe

Exhibit 2.1. The Pencil.


pencil’sdistribution, itsusebycustomers,and,finally, itsultimatedis-posal.Inthisbroaderview,whathappensoutsidetheboundariesofthefactory is justas important fromanenvironmentalperspectiveaswhathappenswithinthefactory’sgate.

Togainafullunderstandingofthepencil’stotalenvironmentalfoot-print,wemustaskquestionsabouttheoperationsofallofitssuppliersgoingbacktothecradle(i.e.,rawmaterials)andextendingtothegrave(i.e.,ultimatedisposal,reuse,orrecycle).Forexample,isthesupplierofcedarwood harvesting the cedar in a sustainablemanner?Have othersuppliersadoptedbetterpractices?Arethestain,wax,andpaintsuppliersprovidingmaterialthatissafeforuse,consideringthatconsumersmayputpencilsintotheirmouths?Whenthestain,wax,andpaintareappliedtothepencil,dotheyproduceharmfulairemissionswhichmightharmtheplant’sworkers?Whataboutthevinylusedtomaketheeraser?Doesitcontainphthalateplasticizers,whichhavebeenlinkedtohealthcon-cerns, includingendocrinedisorders,particularly inchildren?Wemustalso ask questions about the transportation anddistributionnetworks,and the energy and carbon dioxide emissions along the entire supplychain.Finally,whathappenstothepencilwhenitisnolongerused?Isitdiscardedintoalandfill?Andwhatistheenvironmentalfateofitsparts?

Theenvironmentalperformanceandpotentialimpactsofaproductcanbemeasuredonmanydifferentdimensions,andthechoicedependsagreatdealontheproductorserviceunderstudy.HereisalistofpotentialeffectsthatcanbemeasuredinanLCA:

• Globalwarmingpotential(carbondioxideequivalentemissions)

• Stratosphericozonedepletion• Wateruse• Toxicreleasestotheair,water,andland• Resourcedepletion(energy,minerals,fishstocks,forests)• Eutrophication(oxygendeficiency)andnutrification(excess

nutrients)ofwaterbodies,eitherofwhichaffectsaquaticlife

There isnoone idealway tomeasureenvironmental impacts inanLCA. Some studies look at impacts on only a single dimension, such


as greenhouse gas emissions, whereas others are more comprehensive.Furthermore,themeasurement’sunitsdifferbythetypeofimpact.Green-housegasemissionsaretypicallystatedinmetrictons(orkilograms)ofCO2equivalents,1whereascarcinogenscanbemeasuredinunitsthatcon-sidertheimpactonlifeexpectancyorqualityoflife.Twosuchmeasuresaredisability-adjustedlifeyears(DALY)2andquality-adjustedlifeyears(QALY).3Most LCAs track impacts in physical units; others dollarizethesephysicalunitsandmeasureimpactsonamonetaryscale.

Returningtoouryellowpencilexample,theLCAreflectsthepencil’scompletelifecycle—fromrawmaterialstomanufactureanduse,andfinallytodisposal.Inpractice,establishingtheprecisescopeandboundariesofanLCAisoftendifficult,especiallywhentheLCAincludesindirectimpactssuchasemissionsofthepowerplantthatgeneratedelectricityforthefac-tory,energyusewhentheconsumerusestheproduct,andthedifferentwaysinwhichproductsarediscarded(recycled,incinerated,orusedaslandfill).

Somecompaniesprefer amore limited scope for a life cycleanaly-sis.Forexample,a“cradletogate”analysisexaminestheenvironmentalimpactsofaproductfromresourceextractionthroughthemanufacturingprocess.Othercompaniesareinterestedonlyina“gatetogate”analysis,which focuses entirely on themanufacturing process.The broader thescope and themore factors that are considered, themore complete anLCAwillbe,butthemoretimeandmoneyitwillrequire.

JustasconsumersandpurchasingagentsuseInternetservicessuchasKayakandOrbitzthatcomparepricesforsimilarproducts,environmen-tallyconsciousconsumerscanalso lookonline for informationregard-ing the differential impact of various products on the ecosystem. Forexample,theEnvironmentalWorkingGroup(www.ewg.org)isanNGOwhosemissionistoprovideobjectiveresearchandeducationonarangeofenvironmentalissuestothepublic.Theirpublishedresearchincludesguidesoncosmetics,sunscreens,consumerproducts,cleaners,andpesti-cidesinfood.AnothersourceofconsumerinformationisGoodGuide(www.goodguide.com).GoodGuidecreatedanapplication that allowssmartphoneusers toscanaproduct’sbarcodeandaccess informationonthehealth,environmental,andsocialimpactsoftheproductandthecompany.Listedbelowaresomecommonproductgroups.Whichoptionyouchoosecanleadtosignificantlydifferentenvironmentalimpacts.


• Coffeecups.Areceramiccoffeemugsbetterfortheenviron-mentthandisposablepaperorStyrofoamTMcups?Theanalysisshouldconsidernotonlythemanufacturingcostofeachprod-uctbutalsoconvenience,disposal,waterandenergyusage,andhowmuchlongertheceramicmuglastscomparedtothepaperorplasticcup.Hint:Theanswerprobablydependsonhowlongtheproductwillbeinservicebeforeitisdiscarded.

Exhibit 2.2. Coffee Mug/Cup.

• Lightbulbs.ArecompactfluorescentbulbsmoresustainablethanincandescentorLEDbulbs?Theanalysisshouldconsiderthematerialcompositionandlifeexpectancyofthebulbandtheamountofenergythebulbrequireswhenused.Hint:Theanswerdependsonenergysavingovertime.CFLbulbslastonaverage10timeslongerandLEDbulbs25timeslongerthantraditionalincandescentbulbs.However,beawarethattheincandescentbulbisbeingphasedoutintheUnitedStates.

• Carpets.Isawoolencarpetbetterfortheenvironmentthananyloncarpet,asyntheticmaterialderivedfromoilandnaturalgas?TheLCAshouldconsiderthedifferencesinrawmaterialcosts,thedurabilityofthematerials,andthedifferenceinCO2emissionsfromraisingsheep(grazing,burping,manure)comparedwiththenylonmanufacturingprocess.Hint:Surprisingly,consumerswhochoosenyloncarpetsmakeadecisionthatisbetterfortheenvironment.AnyloncarpetwillemitfewerCO2emissionsoverthelifeoftheproductcomparedtoawoolencarpet.Sheepemitagreatdealofmethane,apotentgreenhousegas.


• Grocerybags.Arepapergrocerysacksmoreeco-friendlythanplasticcarry-outbags?TheLCAshouldconsiderthedifferentmanufacturingcosts,endoflifeoptions(recycle,incineration,landfill),andtheweightofthebag(shippingtheheavieritemtocustomerswillaffecttheCO2emissionsintheLCA).Hint:Thebestanswermaybeneitherone.

Exhibit 2.3. CFL Bulb, Incandescent Bulb.

Exhibit 2.4. Nylon Carpet, Sheep Wool Carpet.


• Diapers.Dodisposablediapershavealargerenvironmentalfootprintthanclothdiapers?Hint:Neitherproductisimpactfree.Recentstudiesindicatethattheseproductshaveverysimilarimpactsontheenvironment,allthingsconsidered.4

Exhibit 2.5. Baby in Diapers.

Lifecycleassessmentisanimportantprocessforunderstandingthebroad and cumulative impact of products thatwepurchase.TheLCAevaluatesallstagesofaproduct’slife,andtheirinterdependenciesarerec-ognized.Noonestageismoreorlessimportantthananotherstage.

An LCA can provide many benefits. A good LCA can highlightthe environmental pressure points and help decisionmakers select theproductorprocessthatresultsintheleastharmtotheenvironmentandreducesriskstoemployeesandconsumers.Inaddition,manufacturerscanuseinformationfromtheLCAinconjunctionwithotherfactorssuchascostandperformancedatatoidentifycostreductionopportunitieswhileimproving the social value the company creates. For example, supposeWal-Martischoosingbetweentworivalproducts:Option1isalineoftraditional cotton textile productswhereasOption2uses only organiccotton.ByperforminganLCAofthecottontextilesupplychain,Wal-Martlearnsthatconventionalcottoncropsconsumemorethan25%ofallchemicalinsecticidesandmorethan10%ofchemicalpesticidesinagri-culture.5Furthermore,manyofthesechemicalsaresuspectedcarcinogensand,afterapplicationonthecottoncrop,thesechemicalsaredispersedintothesoil,water,andair.Wal-Mart’suseofLCAhashelpedmanagers


choosetheorganiccotton,whichhas“savedtimeandmoney,andreducedtheenvironmentalimpactsassociatedwiththisbusinesssegment.”6

Besides choosing less harmfulmaterials in a company’s productionprocess,anotherbenefitofagoodLCAisthatithelpstoidentifywaysto improve resource productivity—for example, energy usage, waterconsumption,andtheamountofwastegenerated.

AgoodLCAhasmanyotherapplicationsinbusiness.Acompany’smarketing department can use it to decidewhether to advertise basedon the environmental improvements and benefits of its products andservices,andwhetherthesebenefitsjustifyahigherprice.Thepurchas-ing department can use it to decidewhether to choose their supplierssolelybasedontraditionalcriteria(cost,performance,on-timedelivery)and,ifyes,whatweighttoplaceonenvironmentalcriteria.Governmentprocurement bodies have taken the lead in establishing sustainabilityand environmental standards as a prerequisite for potential suppliers.7Corporateprocurementsystemshavemadesignificantprogressaswell,especiallywhensuchpolicieshelpthemavoidnegativepublicrelations.Theresearchanddevelopmentdepartment(orproductdesigngroup)canusetheLCAtodecidewhethertomodifyaproduct’sdesigntobemoreenvironmentally friendly by eliminating potentially harmfulmaterials,andwhethertoaskcomponentsupplierstodolikewise.Withintheexec-utivesuite,theLCAcanbeusedtobenchmarkthecompany’senviron-mentalperformanceovertimeandcomparethisperformancewithothersin the industry.Thus,agoodLCAwillcontribute toallaspectsof thetriplebottomlineandnotjusttoimprovingtheenvironmentalfootprint.

Somewell-publicizedexamplesofLCAsamongmajorcorporationsinclude:

• DowChemical’sprogramWasteReductionAlwaysPays(WRAP),whichwasdesignedtostimulateaculturalshiftinthethinkingofDow’semployeesconcerningthevalueofreducingwastereleasesandemissions.

• 3M’sprogramPollutionPreventionPays(3P),whichisbasedontheconceptthatpollutionpreventionismoreenviron-mentallyeffective,technicallysound,andeconomicalthanconventionalpollutioncontrolstrategies.


• Frito-Lay’s“nearnetzero”factoryinArizona.Frito-Laytookaproductionfacility“offthegrid,”runningprimarilyonrenewableenergysourcesandrecycledwater,whileproducingnearlyzerolandfillwaste.

• Subaru’szerolandfillplantinIndiana,whichbecamethefirstautomotiveassemblyfacilityinNorthAmericatorecycleorreuseallwasteandsendminimalamountstothelandfill.

Inmanyways, the eco-efficiencygainshighlighted inanLCArep-resents “low-hanging fruit” for a company.TheLCAhelps companiesimprove their environmental performance and typically reduce theircosts, at the same time. Retro-fitting plants, installing energy savingdevices,andinstallingcentralizedcontrolsforheating,lighting,andcool-ingsystemscanleadtohighreturnsoninvestmentandshortpay-backperiods.Somepaybacksarewithinmonths.

AsaresultoftheinputfromLCAs,companieshavemadeconsiderableprogressinincreasingtheireco-efficiencyandreducingtheircarbonandwaterfootprints.Despitethisprogress, though,modernindustrialpro-ductionisfarfromperfect.Ourconsumer-basedsocietyfacestoomanyresourceconstraintsandplacestoomanyburdensonourenvironment.ThegrowthofthemanufacturingsectorinChinatoservetheexportmar-ketsinthedevelopedworldprovidesacaseinpoint.TheWorldBank’sdetailedstudyofcleanwaterandclearair resourceconstraintsandthetensionbetweeneconomicgrowthandtheburdensplacedontheenvi-ronmentinChinaconcluded:

In recent decades,China has achieved rapid economic growth,industrialization, andurbanization. . . .Although technologicalchange,urbanization,andChina’shighsavingsratesuggestthatcontinuedrapidgrowthisfeasible,theresourcesthatsuchgrowthdemands and the environmental pressures it brings have raisedgrave concerns about the long-term sustainability and hiddencostsofgrowth.Manyoftheseconcernsareassociatedwiththeimpactsofairandwaterpollution.8

Cradle to Cradle Design

In the face of continuing concerns about long-term environmentalsustainability such as theWorld Bank’s with regard to China’s growth,


architectWilliamMcDonoughandothershave argued thatweneed tolook at environmental issues in a totally newway.Rather than using a“cradle-to-grave” model, McDonough proposes that companies shouldredesigntheirproductsandservicestocompletelyclosetheloop.Hecallsthiscradle-to-cradledesign,oftendesignatedasC2C.Inhis2002bookwithMichaelBraungart,Cradle to Cradle: Remaking the Way We Make Things, heprovidesguidelinesforhowcompaniescanachievethisclosedloopgoal.Thebookwasinfluentialandhelpedspuratransformationinmanufactur-ingdesigntoencouragetheuseofsaferproductsthatareeventuallybrokendown to become the sourcematerials for newproducts.Braungart andMcDonoughenvisionedaworldinwhichthereuseofthematerialswouldbebetterthantheprevioususe.Theycalltheseproducts“upcycled,”unlikethecommonpracticeof“downcycling”whenthenextuseofthematerialisdowngradedaswhenafoodgradeplasticsbottleisrecycledtobecomepartoffleeceouterwear.Recognizingthatthesortofrevolutionarychangetheyproposewillbeimplementedincrementallyinourdailylives,theauthorsexpandedupontheiroriginalworkintheir2013book,The Upcycle: Beyond Sustainability—Designing for Abundance.Thisbookprovidespracticalillus-trationsoftheireffortstotranslatetheoryintopractice.

TheC2C concept ismodeled on nature or biomimetics.Considertheecosystemofa forest.Trees turnsunlight into food,absorbcarbondioxide, and create oxygen.The tree’s root systemfilterswater and itsblossomsprovideseedsforfuturegenerationsoftreesandfoodforotherlivingorganisms.Itsfallenleavesdroptothegroundeachyearandpro-videnutritionformicroorganismsinthesoil,whichturntheleavesintorich compost to help sustain the trees.The system generates no toxicwasteorotherharmfulmaterials.Oneorganism’swastecycles throughtheecosystemtoprovideanotherorganism’snutrition.Andtheprocesscanberepeatedoverandoveragain.

IntheC2Cmodel,companiesareurgedtoimagineaworldofprod-ucts and services that are re-designed tomimic these natural systems.Here’showitworks.Inthemodel’sidealworld,productsarecomposedof twoprimarymaterials—technicalnutrientsandbiologicalnutrients.Technical nutrients are inorganic or syntheticmaterials—such as plas-ticsandmetals—thatcanbeusedandre-usedmanytimesoverwithoutanyloss inquality.Theyarelimitedtonontoxic,nonharmfulmaterialsthathavenoadverseeffectontheenvironment.Biologicalnutrientsare


organicmaterialsthatcandecomposeintothenaturalenvironment,liketheleavesintheforest.Thenaturaldecompositionprovidesfoodforbac-teriaandsmalllifeformswithoutaffectingthenaturalenvironment.So,focusingontheendofaproduct’s life,whichisbeingdisposedofinalandfill,designershavecreatedtheproductsothatitcanbebrokendownintobiologicalnutrientsthatsafelydecomposeandtechnicalcomponentsthatcanbere-usedinotherpartsofourindustrialsystem.ThisisshowninExhibits2.6and2.7.IntheC2Cmodel,Waste=Food.9

TherehavebeensomenotableexamplesofC2Cproductdesignoverthepastdecade.

• Nylon6isanidealmaterialforuseasatechnicalnutrient.Itisasyntheticmaterialmadefromcaprolactam,whichitselfis

Exhibit 2.7. Technical nutrients.

Technical nutrients

Canmanufacture

Recycle &remelting

Customeruse

Beveragecompany

Aluminumcan

Soda

Exhibit 2.6. Biological nutrients.

Biological nutrients

Maturetree

Decompositionprovides nutrients

for tree

Small lifeforms consumefallen matter

Leaves & branchesfall to ground

Tree


aderivativeofoilandnaturalgas.Traditionally,carpetfibermadefromNylon6endsupinalandfillattheendofitsusefullife.Now,companieslikeHoneywell,BASF,Collins&Aikman,Desso,Milliken,andInterfacehavedevelopedpro-gramstotakebacktheircarpetfromcommercialcustomersforre-useinaclosed-loopcycle.Someofthesecompanyprogramsaremoresophisticatedthanothers,butatitscore,thisapproachdepolymerizesNylon6tocaprolactam,whichisusedagainandagain.Insteadofbeingdiscardedinlandfillsordowncycledtolesser-valuedproducts,recycledNylon6canbeconvertedintoproductsofequalorgreatervalue.

• Nike,themajorsportswearandsportsequipmentsupplier,hasadoptedanumberofsustainabilityinitiatives.Intheproductdesignarea,ithascreatedalineofmoresustain-ableshoes,calledNikeConsidered.Theseshoesutilizerawmaterialsthatareprimarilyfoundwithinatwo-hundredmileradiusofthemanufacturingplant.Thepurposeofthenear-bysourcingistoreducetheenergyandgreenhousegasemissionsusedintransportation.NikeConsideredalsoreducessolventusebyover80%comparedwithotherNikeproducts,usesleatherthatisdyedwithvegetablebasedcolors,usesshoelacesandwovensectionsmadewithpolyesterandhempforeasierrecycling,andgreatlyreducesoreliminatestoxicsubstancesandmanufacturingwaste.

• TheThink®chairbySteelcasewasdevelopedwithC2Cprin-ciplesinmind.Itweighsonly32pounds,ismadefromupto44%recycledmaterials,andcontainsnohazardousmaterials(suchasPVC,chrome,mercury,orlead).SupplierssendmaterialstotheThink®chairmanufacturingplantinreusabletotestoreducepackagingwaste.Attheendofitsusefullife,thechairisdisassembledinabout5minutes,usingcommonhandtools.Partsweighingmorethan50grams(about2 ounces)areclearlylabeledforrecycling.

• Trigema,Germany’slargestT-shirtandtennisclothingmanufacturer,hasbeeninbusinessformorethan90years.ThecompanynowoffersalineofCradletoCradlecotton


apparelcompletelyfreeoftoxicdyes.Attheendoftheiruse-fullife,theclothingitemscanberecycledintonewgarmentsorprocessedtoprovidecomposttoenhancethesoil.

Despitethesepositivedevelopments,manyexpertshavequestionedthepracticalityoftheC2Cmodelandthedifficulties inits implemen-tation. Some of the difficulties include the information requirementsto fully understand the chemical and material properties of productsthroughoutthesupplychain,thecostofC2Ccertification,andthefactthat theC2Cmodel ignores the use phase of a product (e.g. a light-weightcarwillbemorefuelefficientthanamuchheaviervehicle).Never-theless,theC2Cmodelprovidesanexcellentstartingpointformanynewproductinnovations.

Resources on Sustainability Systems for Students

Here is a collection of online resources on sustainability thatwe havefounduseful.Thosethatrequiresubscriptionforaccessareoftenavailableinuniversitydatabases,socheckwithyourlibrarian.

• “LifeCycleAssessment:PrinciplesandPractice,”areportfor theU.S.EnvironmentalProtectionAgency,2006(http://www.epa.gov/nrmrl/std/lca/lca.html)

• InternationalStandardsOrganization,ISO14040“Environ-mentalmanagement—Lifecycleassessment—PrinciplesandFramework,”2006(availableforpurchasefromiso.org)

• The International Journal of Life Cycle Assessment(http://www.springer.com/environment/journal/11367)

• Journal of Industrial Ecology(http://onlinelibrary.wiley.com/journal/10.1111/%28ISSN%291530-9290)

• SustainableMinds(www.sustainableminds.com)• EcoInventdatabase(www.ecoinvent.org/database)

Assessment and Measurement Tools

Nowthatwe’vereviewedtwooftheconceptualsystemsavailabletouseinthinkingaboutsustainabilityinthebusinesscontext,wearereadyto


take a look at howwemeasure sustainability and assess the results ofoursustainabilityefforts.EverystudentwhohaspassedthroughManage-ment101knowsthatmanagementrequiresmeasurementandthatitskeychallengeistofindameaningfulunitofmeasureacrossdifferentsectorsthatcanserveasacommonyardstick.Threewidelyrecognizedindicatorsrelatedtosustainabilitymeasurequitedifferentthings:

• Operationalindicatorstrackstressesabusinesscreatesontheenvironment,suchasbyburningcoaloremittinggasses.

• Managementindicatorsareconcernedwithwhatactionscompaniestaketoreducetheirimpactsontheenvironment,suchasrecyclingandsustainablesourcing.

• Environmentconditionindicatorsmeasureaspectsoftheenvironment’squality,suchasairpollutionorglaciermelt.10

These indicators are related.Management indicators, such as trackingthetimespentonenvironmentaltraining,areinternaltothefirmandmay influence operational indicators, such as the use of electricity orfossilfuel.Theoperationalindicatorsfunctiontolinkthefirm’sactionswith the outsideworld. For example, a reduction in the firm’s use offossil fuel would influence environment condition indicators, such asaverageglobaltemperatures,greenhousegasemissions,andaveragesealevelrise.11

From a global perspective, we see several trends in environmentalreporting.One is that in some countries, governments have begun toimpose legal obligations on firms. For example, the European Union(EU) requires that companieswith industrial emissions apply the bestavailable techniques to their processes, cause no significant pollution,maximizeenergyefficiency,reducewaste,andconductanyremediationnecessary.Another trend is thecall for increasedtransparencyonenvi-ronmental issues. For example, inNovember 2012,China saw publicprotests against pollution, to which the government responded withincreased transparencyon sustainabilitymeasures.Trends suchas thesepushthepublic’sexpectationsforward,andoncefirmsbeginreporting,stakeholders ask for more—more information, more verification, andmorecomparableinformation.12


Corporate Sustainability Reporting Systems

The purpose of sustainability reporting is to provide a mechanism sothatorganizationscanmeasuretheirperformanceonfoursustainabilitydimensions (economic, environmental, social, and governance perfor-mance)andcommunicateabouttheirperformancetostakeholdersandothers.Thebasicideathatdrivessustainabilityreportingisthedesiretomakeitasreliableandcomparableacrosscompaniesasfinancialreporting.Thetwomostcommonlyusedreportingplatformsincorporatesustain-abilityreportingaretheUNGlobalCompactandtheGlobalReportingInitiative(GRI),and,fortunately,theyhavealignedasstrategicpartners.In addition to theGRI and theGlobalCompact, another commonlyusedcorporatereportingsystemistheCarbonDisclosureProject(CDP),a reporting systemdeveloped by aBritish organizationwhose focus isoncorporatereportingofgreenhousegasemissionsand,morerecently,waterdata.CDP’sbasicmodelisbasedoncollaborativemembership,andtheyhavebeensuccessfulinbuildingmajorcorporatemembership.Therearealsosomeeffortstomeasurecarbonandwateruseanddischarge,aprocesscalledfootprinting.Here,oncewelookatthetheoryonwhichmeasurementofcorporateactionsontheenvironmentrests,wedescribeeach of these organizations and efforts, and their contributions to themeasurementofcorporatesustainability.

The theoretical basis formeasuring the impact of activities on theenvironment is based on the work ofHerman E.Daley, former chiefeconomistattheWorldBank.Hisworkdrawsonthethinkingofecon-omistNicholasGeorgescu-Roegen, authorofThe Entropy Law and the Economic Process,andestablishesasetofrulestosupportecologicalsus-tainability.NowcommonlyknownastheDaleyRules,theyare:

1.Renewable resources such as fish, soil, and groundwatermust beusednofasterthantherateatwhichtheyregenerate.

2.Nonrenewable resources such asminerals and fossil fuelsmustbeusednofasterthantherateatwhichrenewablesubstitutesforthemcanbeputinplace.

3.Pollutionandwastesmustbeemittednofasterthannaturalsystemscanabsorbthem,recyclethem,orrenderthemharmless.13


ThetwoorganizationswhoseenvironmentalreportsofferamodelandsomeritourinitialattentionaretheUnitedNationsGlobalCompactandtheGlobalReporting Initiative.TheUnitedNationsGlobalCompact(UNglobalcompact.org) is of interest because it maintains the largestdatabaseofcorporateenvironmental sustainabilityreportsand itdrawsonthesocialcapitaloftheUNmemberstatestoencouragecompaniestoreport.TheGlobalReportingInitiative(GRI)isthemostcommonlyusedframeworkandisacollaborationofmanydifferentstakeholdersatmanydifferentlevels.TheGlobalCompactactuallyusestheGRIframe-workforitsreporting.

The Global Compact

The United Nations Global Compact is an agreement among busi-nessesbegunin2000attheurgingofthenUNSecretary-GeneralKofiAnnan.TheCompact addresses fourbasic areas—human rights, labor,environment,andanti-corruption—withthegoalofprovidingbenefitstobusinesses,societies,andeconomieseverywhere.InjoiningtheCom-pact,businesses agree todevelop strategies that support theCompact’stenprinciples, threeofwhichconcern theenvironment:Aprecaution-aryapproachtoenvironmentalchallenges,initiativestopromotegreaterenvironmental responsibility, and encouragement of the developmentanddiffusionofenvironmentallyfriendlytechnologies.14

TheGlobalCompactnowhasover8,700corporatemembers from135 countries, each of whom pledges to file an annual report, whichmakesittheworld’slargestcorporateresponsibilityinitiative.Alongwithitscorporatemembers,theGlobalCompacthasacademic,civilsociety,labor,publicsector,andcitymembers.Itprovidesaframeworkfor“thedevelopment, implementation, and disclosure of sustainability policiesand practices, offering participants a wide spectrum of workstreams,managementtools,andresources—alldesignedtohelpadvancesustain-ablebusinessmodelsandmarkets.”15TheGlobalCompactisvoluntaryandself-definesas“acomplementratherthanasubstituteforregulatoryregimes.”

The Global Compact is still in its formative stages. Its executivedirector,GoergKell,reportsthat40%ofthe500largestglobalcompanies


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aremembers,afigurethatconstitutes10%ofallmultinationals.Toputthesefiguresincontext,oftheworld’s10largestcompaniesidentifiedbymarketcapitalizationattheendofthesecondquarterof2012,sixweremembersof theGlobalCompact.Of4,000companies that submittedGlobalCompactannualreportsduringthelastyear,Kellobservedthat5%were judged to be at advanced levels of reporting, suggesting thatleadersinenvironmentalreportingarestillascarcecommodity.16

TheGlobalCompactrequiresitscorporatememberstofileanannualreportontheirtransparencyandaccountabilityknownastheCommu-nicationonProgress(COP).ThecontentoftheCOPneedstosuggesta serious and committed engagementwith sustainability.According toa report inThe Guardian,17 ExecutiveDirectorKellhasdelisted3,100Global Compact businessesmembers for their commitment to green-washinginlieuofsustainability.KellstressesthattheGlobalCompact’sbasicintentistorepresentacorporation’sseriouscommitmenttosustain-abilityas a way to survive,notasapublicrelationsactivity.Hedescribedthedelistedcompaniesas“freeriderswhojoinedbuthadnointentiontostayengaged.”

Inthespringof2010,theGlobalCompactalignedwiththeGlobalReporting Initiative, a solid step forward for both organizations. TheGlobal Compact has adapted the Global Reporting Initiative’s frame-work,initiallyasanoption,fortheCOP.ThiscollaborationincreasestheCompact’svalueasastandardmeasure.WelooknextatthisframeworkthathascontributedtotheGlobalCompact’srelevance.

The Global Reporting Initiative (GRI)

TheGRI isanetworkedorganizationofabroadarrayof stakeholders,including its core supporters, who together have developed this mostwidelyusedsustainabilityreportingframework.TheoriginoftheGRIisfoundintheeffortsoftwoBostonnonprofits,theCoalitionforEnviron-mentallyResponsibleEconomies(CERES)andtheTellusInstitute,whoworked together beginning in 1997 todevelop a reporting frameworkthatwouldbewidelyaccepted. Initial stakeholders includedcorporate,public, academic, and governmental representatives.When this frame-workreceivedapositivereceptionin2000,CERESbuiltapartnershipfor


theGRIwiththeUnitedNationsEnvironmentalProgram.CERESthenspunofftheGRIsothatitwouldexistasaseparateinstitution,andtodayitisheadquarteredinAmsterdam.ThousandsofcompaniesusetheGRIframeworktoreporttheirenvironmentalimpacts.

GRI’sSustainabilityReportingGuidelinescontainaclearstatementofprinciplesandasetofdisclosureitems,inordertodefinethecontentsof the report.Thecurrentversion, theGRIGuidelines3.1,was intro-ducedin2011,andthereisanearlydraftofGuidelines4,whichwillbecirculatedforcommentandthenedited,basedontheresponseofvariousstakeholders.TherearetwomainpartsofGuidelines3.1:Adetailedsec-tiononhowtoreportandasimilarlydetailedsectiononwhatshouldbereported,includingmanagementdisclosuresandperformanceindicators.Theperformanceindicatorscoverthreebroadcategories,economic,envi-ronment, and social.The social category includes labor,human rights,social,andproductresponsibility.EveryPerformanceIndicator(PI)hasIndicatorProtocols(IP)thatfunctionasitsrecipe:Definitions,directionsonhowtocompilethedata,theirscopeandrelevance,andreferences.TheGRIhasatotalofthirtyEnvironmentalPerformanceIndicatorsdividedinto eight aspects—Materials; Energy; Water; Biodiversity; Emissions,Effluents, andWaste;Products andServices;Compliance;Transport—andanoverallsummary.

Thissoundsquitecomplicated,andinaggregate,itis.Butatthelevelofan individual indicator, theGRI’sprecisionmakespossiblecompar-isonsamongthevariousreportingfirms.Forexample,theGRIPerfor-manceIndicatorEN10Watermeasuresthetotalvolumeofwaterrecycledandreused.Itdescribestherelevanceofthemeasure,givesadescriptionofhowtocompilethemeasure,whatwatertoinclude(bothtreatedanduntreatedwater,andwaterbasedonthedemandsofproduction,sorecy-cledwaterisincludedinthecalculationasmanytimesasitisused),whatmeasurestouse(cubicmetersperyear),whatconstitutesrecycling,anddocumentation (waterbills,watermeters, awater retailer).EN13Bio-diversitymeasuresthehabitatsprotectedorrestored.Again,theperfor-manceindicatordescribestherelevanceofthemeasure,howtocompileit,appropriatedefinitions,documentation,andreferences.Inadditiontotheseperformanceindicators,therearesupplementsfordifferentindustrysectorsandnationssothattheframeworkwillmeetthevaryingneedsof


itsbroadrangeofusers.YoucanfindexamplesoftheGRIframeworkatglobalreporting.org.18

There are threemore reporting initiatives thatmeritour focus, theCarbonDisclosureProjectorCDC,carbonfootprintingandwaterfoot-printing.Wenowlookatthese.

Carbon Disclosure Project or CDP

TheCarbonDisclosure Project,19 which recently changed its name toCDPtoreflectthegrowthofitsconcernsbeyondcarbon,isaU.K.-basednonprofitthatfocusesonthereductionofgreenhousegasemissionsandsustainablewateruse. JustasGRIhasdevelopedamajor sustainabilityreportingstandard,CDPappearstobeonitswaytoprovidingthemajorstandards forcarbonemissions reporting.TheCDP’sbasicapproach istopartnerwithglobalorganizationsand,morerecently,cities,amarkedcontrastfromthenation-basedeffortsoftheUN’sKyotoProtocol.CDPhas been successful in building partnerships with major corporationsandproviding themwith emissions reporting standards.Over 85%oftheglobal500corporationsreporttheiremissionstotheCDPanduseCDPtosettargetsandtoimprovetheirenvironmentalimpacts.CDP’ssupplychainprogramhassupportedcompaniessuchasIBMandHPin

Exhibit 2.9. Membership in United Nations Global Compact

Ten largest corporationsMembership

global compact GRI participationApple No Yes

China Mobile Communications Yes Yes

Exxon No Yes

general Electric Yes Yes

IBM No Yes

Industrial and Commercial Bank of China

Yes Yes

Microsoft Yes Yes

PetroChina Yes Yes

Royal dutch Shell Yes Yes

Walmart No Yes


theireffortstorequiretheirsupplierstodiscloseemissionstocontinueassuppliersandhasledtoCDPfastbecomingthepriceofdoingbusinesswithmanyglobalcorporations.20Theyrecentlyhaveexpandedtheirfocusbeyondcarbonconcernstoincludewater,forests,andclimatechange.

CDP’s fivemajor programs all encourage reduction in greenhousegasemissions,eachwithaseparatefocus:,investors,publicprocurement,water, supply chain, and cities. CDP also provides an annual CarbonDisclosure Leadership Index to recognize and reward companies withqualitydisclosureprocessesandperformance.Datafromthe2012IndexcanbefoundinExhibit2.10.Standardsandquestionnairesforthesedis-closure reports by sector (auto, electric utilities, oil and gas, ICT) areavailable on theCDP’s web site.The disclosure score is based on thecompany’sdisclosureandtheperformancebandratingisbasedonperfor-mance.Soahighdisclosurescoreindicatesthatthecompany’sresponseiscomprehensiveandshows“clearconsiderationofbusiness-specificrisksandpotentialopportunitiesrelatedtoclimatechangeandgoodinternal

Exhibit 2.10. Climate Disclosure Leadership Index Scores, 2012: Consumer Discretionary and Consumer Staples Categories

Sector CompanyDisclosure

scoreYears

in CDLIPerformance

bandConsumer Discretionary

BMW 99 2 A

daimler 99 1 A-

Philips Electronics 98 2 A-

TJx Companies 97 1 B

Honda Motor 96 1 B

Panasonic 96 3 A

Home depot 95 1 B

News Corp. 95 3 B

Consumer Staples

Nestlé 100 3 A

diageo 98 1 A

danone 97 1 B

Coca Cola 96 1 B

L’Oreal 94 1 B

PepsiCo 94 2 B

Source: data and report structure from Carbon disclosure Project at https://www.cdproject.net


datamanagementpractices forunderstandingGHG (greenhouse gas)emissions.”21 Note that this score does not reflect what a company isdoing tomitigateclimatechange.Theperformancebandmeasures theactionsthecompanyhastakentomitigateclimatechangealongwiththeadaptationtheyhavemadeandtheirtransparency.

LinkagebetweenCDPandGRIisunderwaysothatreportingguide-lineswillbethesameforbothframeworks,astheyarewithGRIandtheGlobalCompact.

Carbon Footprinting

Anothermeasurement process that businesses are beginning to use tomeasuretheirsustainabilityeffortsiscarbonfootprinting.Onaconcep-tuallevel,itisfairlystraightforwardtodefineasthetotalsetofgreenhousegasemissionscausedbyaproduct.Onapracticallevel,however,calcu-lating the total carbon footprint is quite difficult, because of the largeamountofdata required andbecause carbondioxide canbeproducedbynaturaloccurrences.Calculationofthecarbonfootprintisevenmoredifficultiftheboundaryconditionsconstitutenotaproductbutanentirefactory, or a diversified company, or a city. Following the guidance ofexpertsinthefieldlikeWright,Kemp,andWilliams,22wesuggesthereamoreworkabledefinition:Thecarbonfootprintofaproductisameasureofthetotalamountofcarbondioxideemissionsthatincludesallrelevantsources,sinks,andstoragewithinthespatialandtemporalboundariesoftheproduct(orsystem).Itiscalculatedasthecarbondioxideequivalent(denotedCO2e)usingtherelevant100-yearglobalwarmingpotential.

Inmost contexts, the goal is tomeasure the carbon footprint of aproductthroughoutthelifecycleofthatproduct,fromcradletograve.Greenhousegasescanbeemittedateverystageof the lifecycle,whichincludesduringrawmaterialextraction,production,transportation,landclearance,anduse.Incalculatingthecarbonfootprint,bothdirectandindirect sourcesof carbonemissionsneed tobe considered.For exam-ple,whenwedriveanautomobile,weemitcarbondioxidedirectlyintotheatmosphere.Wealsoindirectlyemitcarbondioxidebecausemanyoftheautomobile’scomponents—steel,glass,aluminum,andplastics—usefossil fuels and electrical energy in theirmanufacture, processing, and


transportation.Theseemissionsareconsideredindirectandareincludedinthecarbonfootprintanalysis.Fortheaveragehousehold,infact,mostof the carbon footprint emissions come from these indirect sources.To become more aware of your personal contribution to greenhousegas emissions,youmaywish tousea calculator like theone shown inExhibit 2.11.

Considerthefollowingexampleofhowcarbonfootprintingcansup-portcorporatesustainabilityefforts.Frito-Lay,adivisionofPepsiCo,Inc.,theleadingsupplierofsnackfoodsintheUnitedStates,achievedsomeimportantmilestonesin2011intakingitsCasaGrande,Arizonamanu-facturingplant“offthegrid”throughtheinstallationofthelatestenergysaving and water saving technologies. The plant makes Lay’s PotatoChips,Doritostortillachips,Fritoscornchips,andCheetoscheesefla-voredsnacks.Theplantusesenergyintwoprincipalforms:Naturalgas(directCO2eemissions)fromtheirlocalpipelinesupplierandelectricityfrom the grid (indirectCO2e emissions).The energy is used to powerproductionequipment,heatovens,andheatcookingoil.Thecompanyalsouseswaterfromthelocalwaterutility.Aftertheenergyupgradeswere

Exhibit 2.11. Calculating your personal carbon footprint.Source: http://fileforum.betanews.com/detail/Carbon-Footprint-Calculator/1206132265/1


installed, thecompanyachievedan80%reduction innaturalgas con-sumption,a50%reductioningreenhousegasemissions,between50%and75%ofitswaterisrecycled,andlessthan1%ofitsoverallwastegoestothelandfill.Frito-LaycallsthisplantheNet Zero Plan.

Inadditiontocarbondioxide,weneedtoconsideranumberofothergases that contribute to global warming and are used to calculate thecarbon footprint of a product. For simplicity, all these other gases arecomparedwiththeglobalwarmingpotentialofcarbondioxidebasedona100-yearatmospheric lifespan(bywayofexplanation,manyofthesegasesdonotdegradesignificantlyforthatlongatimeframe).Methane,forexample,hasaglobalwarmingpotential(GWP)of25comparedtocarbon dioxide’s (GWP) of 1.Thismeans that emissions of 1milliontonsofmethaneareequivalenttoemissionsof25milliontonsofcarbondioxide.Exhibit2.12showstheglobalwarmingpotentialforanumberofgases.

Water Footprinting

Over the past several years,wehave developed a better understandingofourcarbon footprint,whichhas led to the recognition that carbon,climate change, and water are inextricably linked. Yet the impacts ofchanging patterns ofwater availability are neither recognized norwellappreciated by most businesses and consumers. Demand for water isincreasingbecauseofarapidlygrowingworldpopulationandchangingpatternsofconsumption,whereaswatersupplyisthreatenedbyclimatechangeandhumanactivitiesthatleadtopollutedwater.Theimpactsof

Exhibit 2.12. Global Warming Potential for Various Gases

Gas Lifetime GWP—100 yearMethane 12 25

Nitrous oxide 114 298

HFC-23 270 14,800

HFC-134a 14 1,430

Sulfur hexafluoride 3,200 22,800

Source: Intergovernmental Panel on Climate Change, Fourth Assessment Report, Working group 1, Chapter 2, p. 212.


climate change include changes inpatternsofprecipitation (toomuchrainfallinsomeregions,toolittlerainfallinothers),reducedformationofglaciers,andincreasedconcentrationofsaltsinaquifers.Inmanypartsoftheworld,wehaveconsistentlyunderpricedwater,becauseofwhichithasbeenwastedandover-used.Severalorganizations,includingtheCDP(formerlytheCarbonDisclosureProject),arerespondingtoinvestorandbusinessconcernsaboutthisissuebycreatingareportingsystemforcom-paniestomeasureandreporttheirwaterfootprint.

Measuringandreportingwateravailabilityandusageisamorecom-plexprocessthanisthatforcarbondioxide.First,waterisalocalaswellas a global issue. Itdoesnotmatterwhether carbondioxide emissionsoccurred inCaliforniaorChina, theybothcontributeequally toenvi-ronmentalimpacts.Itmattersagreatdeal,ontheotherhand,whetherwater is extracted fromPhoenix (awater-short region)orPhiladelphia(awater-richregion).Second,thesourceanduseofwateralsomatteragreatdeal.Amplerainfallwillreplenishwatersupplies;removalofwaterfromaquifers indrought-strickenregionsmayrequiredecades,orevenmillennia,toreplenish.

Becauseofitsintricacies,themethodologyforwaterfootprintingisnotaswelldevelopedasisthemethodologyforcarbonfootprinting.Firstofall,theglobalnatureofbusinessandtheintricatewebofsuppliersthatusewateracrossmultiplegeographiesmakethechallengeoftrackingthewaterfootprintcomplex.Furthermore,obtainingreliabledataonwaterusageandwaterqualityrepresentsanotherchallenge.CDPhasrecentlyintroducedawaterdisclosureprocessaimedatimprovingwaterusemea-surement,settingbenchmarks,andprovidingdatatostakeholders.CDPisalsopresentlydevelopingamethodologyforscoring.

Againstthisbackground,theconceptofmeasuringwaterusealongsupplychainshasgatheredmomentumoverthepastdecade.Thewaterfootprint,definedasthetotalvolumeofwaterusedtoproduceaprod-uctoverthefullsupplychain,looksatdirectwateruseaswellasindirectuse. It is amultidimensional indicator that showswateruseby sourceandpollutedvolumeofwatercreatedbytheproductionprocess.Itoftensegmentswaterusebytype:Bluewaterisfreshwaterfromsurfaceandundergroundsources;greenwateriswaterfromrainfall;andgreywaterispollutedwaterfromtheproductionprocess.


InourinitialreviewoftheGlobalReportingInitiative,welookedattheperformanceindicatorsofrecycledandreusedwatertoillustratetheeffortsGRIismakingtostandardizemeasurement.Overall,GRIusesfivestandardsforcompaniestoreporttheirwater-relatedactivities.Theyare:

• Totalwaterwithdrawalbysource• Watersourcessignificantlyaffectedbywithdrawalofwater• Percentageandtotalvolumeofwaterrecycledandreused• Totalwaterdischargebyqualityanddestination• Identity,size,protectedstatus,andbiodiversityvalueofwater

bodiessignificantlyaffectedbythereportingorganization’sdischargesofwaterandrunoff

Let’slookatthewaterfootprintofa16.9fluidouncebottleofsoda.Itswaterfootprintdependsonitsingredients,andthesevarybymanu-facturer.Theproductionofasoftdrinktypicallyincludesthefollowingprocesssteps:Produceandformtheplasticbottle,cleanthebottle,pre-parethesyrup,mix,fillthebottle,label,andpack.Anondietsoftdrinkcontainssugar,andsugarisderivedfromthreegeneralsources,beetsugar,canesugar,andhighfructosecornsyrup(HFCS).Eachtypeofsugarhasa significantlydifferent impacton the totalwater footprintof the softdrink.Forexample,thetotalwaterfootprintofthe16.9oz.softdrinkis82gallons(310liters)whenthesugaroriginatesfromcanesugar,45gallons(170liters)whenthesugarcomesfrombeetsugarand47gallons(180 liters)when the sugar’s source isHFCS.Most of the totalwaterfootprintofthesoftdrinkcomesfromitssupplychain,mainlyfromitsingredients(95%).Asmallerfractionstemsfrompackagingandlabelingmaterials (4%),particularly from itsbottle.Theamountofwater con-sumedinproducingthefinalproductis1%ofthewaterconsumedinthesupplychain.Notethattheproductionstagewaterconsumptionismainlywaterincorporatedintotheproductitself.Thetotalwaterfoot-print, therefore, isestimatedbetween45and82gallonsper16.9fluidouncesodabottle.Inotherwords,foreveryounceofsodainthebottle,between340and720ouncesofwaterarerequired.23

Waterfootprintassessmentcanbeinstrumentalinhelpingusunder-standhowactivitiesandproductsrelatetowaterscarcityandpollution,


and what steps might be necessary to ensure that such activities andproducts do not contribute to unsustainable use of water resources.Companiesandinvestorsutilizethistooltobetterappreciatehowwateravailabilitymayimpactcompanyoperations.Waterfootprintingalsocanbeusedtodrivecompaniestomitigaterisksrelatedtowateruseandtoseizewater-relatedopportunities.

Inadditiontotheseeffortstomeasuresustainability,thereareotherindexesthatfocusonvariousspecializedareasofsustainability.Herewebrieflyreviewthetwomostwidelyrecognizedofthem,bothdevelopedbytheUN:TheHumanDevelopmentIndexandtheHumanSustainabilityIndex.

Other United Nations Indexes on Sustainability

TheHumanDevelopmentIndex(HDI)measures lifeexpectancy,edu-cation,andincome.DevelopedbyMahbubulHaq,economist,FinanceMinisterofPakistan, andadvisor to theUnitedNationsDevelopmentProgramme,theHDIprovidesahuman-centeredmeasureofwell-being,analternativeoradditionalviewofthegrossnationalproduct(GNP).Ul

Exhibit 2.13. Glass/Bottle of Soda.


Haqobservedthatoftentimes,GNPdoesnotmeasurethethingsthatmakethemostdifferencetopeoples’lives:

Thebasicpurposeofdevelopmentistoenlargepeople’schoices.In principle, these choices can be infinite and can change overtime.Peopleoftenvalueachievementsthatdonotshowupatall,ornot immediately, in incomeorgrowthfigures: greater accesstoknowledge,betternutrition andhealth services,more securelivelihoods,securityagainstcrimeandphysicalviolence,satisfyingleisure hours, political and cultural freedoms and sense of par-ticipationincommunityactivities.Theobjectiveofdevelopmentis to create an enabling environment for people to enjoy long,healthyandcreativelives.24

You can review the components of the HDI and how they aremeasured, as well as review the index itself at http://hdr.undp.org/en/statistics/hdi/,whichhasaninteractivesectionsothatyoucancomparespecificmeasuresacrosscountries.Belowaresomesampledataextractedfromthe2011HDIreport.

Exhibit 2.14. Sample HDI Data, Highest, Lowest, and World, 2011

HDI RankHDI Value

Life expect. at birth

Mean yrs. of

schooling

Expected years of

schoolingGNI/capita

(2005 PPP $)1. Norway 0.943 81.1 12.6 17.3 47,557

2. Australia 0.929 81.9 12.0 18 34,431

3. Netherlands 0.910 80.7 11.6 16.8 36,402

4. United States 0.910 78.5 12.4 16 43,017

5. New Zealand 0.980 80.7 12.5 18 23,737

6. Canada 0.980 81.0 12.1 16 35,166

182. Liberia 0.329 56.8 3.9 11 265

183. Chad 0.328 49.6 1.5 7.2 1,105

184. Mozambique 0.322 50.2 1.2 9.2 898

185. Burundi 0.316 50.4 2.7 10.5 368

186. Niger 0.295 54.7 1.4 4.9 641

187. d. R. Congo 0.286 48.4 3.5 8.2 280

World 0.682 69.8 7.4 11.3 10,082

Source: United Nations, Human development Index, http://hdr.undp.org/en/statistics/hdi/


The United Nations Development Programme (UNDP) also hasdevelopedatemplateforanindexthatmeasuresratesofhumandevelop-mentanditscosts,thatis,thecoststhatfuturegenerationswillencounter.ThisHumanSustainabilityIndexwilladdressthreekeyissues:Connectingtoday’schoiceswithfuturechoices,measuringtheuseofenvironmentalresources,andlinkingtheuseoflocalandglobalresources.25Ofsignifi-cantnoteisthattheHumanSustainabilityIndex,alongwiththeHDI,offersanalternativetomeasuringprogressbasedongrowth.TheHumanSustainabilityIndexeffortwasannouncedattheRio+20conferenceinBrazilin2012andispresentlyunderway.

Inourfocusonthemeasurementofsustainabilityefforts,welookedinitiallyattheGlobalCompactandGRI,andthenattheCDP.Inaddi-tion,wereviewedthedevelopingeffortsatcarbonfootprintingand,morerecently,water footprinting.ThenwebrieflyreviewedtwoUNindexesthatmeasurewellbeing based on alternatives to theGDP, theHumanDevelopmentIndexandtheHumanSustainabilityIndex.Youwouldberighttoconcludethattherearemanyapproachestomeasuringoureffortsat sustainability. In fact, theorganization InternationalCorporateSus-tainabilityReporting(enviroreporting.com)listsandexplainscontempo-raryframeworksthatareinuseatpresent.Youmaywanttoconsultitifyou are interested in exploring themany additional frameworks avail-able forsustainabilityreporting.Havingexaminedthewayscompaniescanmeasureandreporttheireffortsatsustainability,wenowlookatthetransparencyoftheirreportingonsustainability.

Transparency of Companies on Environmental Processes

Transparency in sustainability involves the company’spublicdisclosureof information in areas related to sustainability. In the financial area,forexample,wehavecometoexpecttransparencyandopennessaboutcorporate governance and performance results.This is largely throughtheRegulationFairDisclosure (promulgated in 2000), throughwhichtheSecurityandExchangeCommission requiredpublicly tradedcom-panies to disclose information to all investors at the same time andtheSarbanes-OxleyAct(passedin2002),whichlegislatedanewsetofrequirementsforcorporatebehavioringovernance:Auditindependence


andfinancial reporting that stipulated violationswould incur criminalliability.Onebasicassumptionthatunderliesall transparency is that itreducesillegalandunethicalbehavior.26

These regulated and legislated calls for financial transparency weresoonmatchedbycallsforcorporatesocialandenvironmentaltranspar-ency.Transparencyrelatedtosustainability,though,hasbeenmotivatedlargely by stakeholders other than the government. Potential investorswanttobeabletoassessliabilityandpositioningforaninevitablefuture,andpotentialconsumerswanttoknowhowtheproductionofwhattheyconsumeaffectsourenvironment.

The Role of Stakeholder Theory

Theideathattransparencyleadstobetterbehaviorsuggeststhatacorpo-ration’sresponsibilityanddutyaretoitsstakeholders,allthosewhoareaffectedor influencedby thecorporation, rather thanmoreexclusivelytoitsownersorshareholders.R.EdwardFreemandevelopedstakeholdertheoryinhisStrategic Management: A Stakeholder Approachandthedif-ferenceinaccountabilityhistheorydescribes,fromshareholderstostake-holdersmay seema small change,but it actually leads to considerablemodificationinhowwethinkaboutthepurposeofbusiness.Ifawidegroupof stakeholder interests isat thecenterof thebusiness, thenthemajor interestof shareholders,which is returnon their investment,orprofits,becomelesscentral.Yet,ofcourse,theyarestillnecessary,buttheynolongerholdtheexclusivecentralitytheyhadbeforetransparencyledtotheincreasedroleofstakeholders.EspeciallyintheUnitedStates,thisunderstandingofthepurposeofbusinessisslowlyearningacceptance.IntheEU,thatbusinesshas largersocialresponsibilitiesrelatedtoawidearrayofstakeholdershasbeenlongthecase.

Triple Bottom Line: Meaning and Origins

Todiscuss transparency in sustainability,measure sustainabilityperfor-manceandcompareitacrosscompanies,astandardizedreportingsystemthat reports sustainability resultsalongwithfinancial results isneeded.Thetriplebottomlineconceptaimstomeetthisneedbecauseitexpands


thebusinessmetaphorofthebottomline(economicprofit)toincludethesocialandenvironmentalbottomlines.JohnElkingtonisusuallycreditedwithcoiningtheterm“triplebottomline”(or3BLorTBL,andsome-timesreferredtoaspeople,profits,andplanet)inhis1999investigationofcorporatesustainability,Cannibals with Forks: The Triple Bottom Line of 21st Century Business. ThistitleisareferencetothePolishpoetStanislawLec’squestion,“Isitprogressifacannibalusesafork?”Elkingtonwon-deredifholdingcorporationsresponsibleforreportingonthe3BLwouldactuallyconstituteprogress.AndySavitz,inhisThe Triple Bottom Line,saysthattheTBL“capturestheessenceofsustainabilitybymeasuringtheimpactofanorganization’sactivitiesontheworld...includingbothitsprofitabilityandshareholdervaluesand its social,humanandenviron-mentalcapital.”BelowisasummaryoftheSavitzexplanationof3BL’scomprehensiveness.

Savitz shows that sustainable approaches such as those the 3BLdescribesmake financial sense because they help a company focus onemergingvaluesanddemands.Hesees3BLasessentially“theartofdoingbusinessinaninterdependentworld.”

Theissuesofwhat framework touse foreachof the3BLmeasuresandhowtomeasureresultsmaybecomeconcernsattimes.Fortheeco-nomicbottomlineintheUnitedStates,theGenerallyAcceptedAccount-ingPrinciples(GAAP),theframeworkusedforfinancialaccounting,arewidely accepted.GAAPprovides a solid basis for themeasurement ofeconomicresults.Aswemovetowardglobalharmonizationofaccount-ing standards, the InternationalFinancialReportingStandards (IFRS),followedbymostothercountries,willplayanincreasingroleinthisarea.Themeasures for environmental results also tend tobequantified andstandardizedaswell,aswehaveseeninourreviewofthemeasurement

Exhibit 2.15. Savitz on the Triple Bottom Line

Economic Social EnvironmentalFinancial results Community impact Air quality

Taxes Labor practices Water quality

Monetary flows Human rights Energy use

Jobs created Product responsibility Waste

Source: Savitz (2006), p. xiii.


toolssuchastheGlobalReportingInitiative(GRI).Thatisnotfullythecaseforthesocialimpactsofcorporateactivities,though.GRIdoespro-vide themost respected framework for the three areas of 3BL report-ing.VersionG3 includes indicators for economic, environmental, andsocialperformance(suchissuesaslaborpractices,humanrights,productresponsibility),alongwithindicatorsforspecificindustries,buttheGRImetricsarenotalwaysfullycomparable.

Results of Reporting

Wehaveestablishedtheneedtoreportsocialandenvironmentalresultsalongwitheconomicresults,andwehavereviewedtheframeworksusedtodoso.Nowcomesthecritical,“Sowhat?”question:Whataretheresultsofthisreporting?Researchintoreportedresultsshowsthatascompaniesadopt3BL,theirtransparencyeffortsaddvaluetotheirrelationshipswiththeirstakeholders, includingcustomers,employees,shareholders,direc-tors,andothercompanies.27

Inaddition,companiesappeartobelearningthatsustainabilityprac-ticesandtheirreportingtothepubliccanmakebusinesssensebeyondstakeholder relationships. The exercises themselves make operationalsense,andtheirreportingyieldsbestpracticesdataforothercompanies,alongwithreputationreinforcement.The2011McKinseyreportonsus-tainability,The Business of Sustainability,pointsout thatcompaniesarerecognizing the advantages sustainability can bring to their businesses.Thissurveydisclosesthatcostsavings,processimprovement,growth,andvaluecanimproveasaresultofsustainableoperations.McKinseyiden-tifies three key drivers that lead to increased value:Growth,ROI andRiskManagement:“WasteManagementaddedwastereductiontotheirproductlinetoachieveGrowth.DowandWalmartincreasedreturnoncapital by reducing expenses through improved global-supply chains,facilityimprovementsandmanufacturingwastereductionefforts.Nestlélaunchedaprogramtopromotesustainablecocoaasariskmanagementeffort.”28 Exhibit 2.16 shows how growth,ROI, and riskmanagementsupportpositivebusinessresults,asshownintheMcKinseyreport.

GwendolynWhiteoutlinesthebenefitsofsustainabilityreportingandcategorizes them into internalandexternal factors inherSustainability


Reporting.29Oneoftheinternalbenefitstotheorganizationshecitesforsustainabilityreportingisaunitythatconnectsstrategy(whatthecom-panysaysitwantstodo)withoutcomes(whatitdoes).Reportingalsoenablesthecompanytoidentifyareasofpotentialcostsavingsthatcanbegainedbyefficienciesintheuseofenergy,water,andmaterials.Theseincreasedefficienciescanleadtofinancialsavings.Whitealsopointsoutthatorganizational rewardsareachievedwhenallmembersof thefirmbuyintotheframeworkofaccountabilitythatthereportingprocessestab-lishes.Theexternalbenefits she lists includepositive impactson repu-tation,which can carrywith it furtherfinancialbenefits and increasedconnectionwithstakeholders.

Now that we’ve looked at the results of increased transparency inreporting,wegoontofocusonhowfinancial institutionsevaluatethesustainabilityeffortsofcompanies.

Financial Institutions: Evaluation of Company Sustainability Efforts

Whencompanies report their sustainability results inways that allowfor comparisons, the information can be used as investment criteria.Index funds,which are simplygroupsof stocks that exemplify a spe-cificsectorofthemarket(e.g.,theDowJonesIndustrialAverageortheS&P500Index)havebeencreatedusingtheresultsofenvironmentalscreening.Thereareseveralindexesthatfocusonhigh-performingsus-tainablebusinesses.TheyaredescribedindetailinWhite’sSustainable Reporting, andincludetheFTSEKLD400SocialIndex,theDowJonesSustainabilityIndexes,andSAM(formerlyknownasSustainableAssetManagement).

Exhibit 2.16. Ways Sustainability Leads to Capturing Increased Value

Growth Risk management Return on capitalInnovation, New Products Reputation Sustainable value chain

New Customers and Markets Regulations Sustainable operations

Business Portfolio Operations Risks Sales and marketing on green appeal

Source: data from Bonini and gorner (2011).


Ingeneral,theseindicesdifferfromthesociallyresponsibleinvesting(SRI)groupinthattheycategorizecompaniesbasedontheirfinancial,social,andenvironmentalresults,ratherthanontheirproductcategory.So there is no filtering of weapons, tobacco, and alcohol companies.TheDJSI includesBritishAmericanTobacco andHeineken.Onewaytothinkofthisisthatthecompany’sresults,social,environmental,andeconomic,replacetheSRI’sconcernwithmoralvalues.

TheFTSEKLD400SocialIndex,formerlytheDomini400SocialIndex, ismadeupof400companiesselectedforcommunityrelations,diversity,employee relations,humanrights,productqualityandsafety,andenvironmentandcorporategovernance.TheFSTEKLD400regu-larlyoutperformstheDowJonesIndex.

TheDowJonesSustainabilityIndexes(DJSI)areafamilyofindexescomposedofcompanieschosenfromamongthecompanieslistedontheDowJonesTotalGlobalStockMarketIndex,basedontheirsustainabilityreportingandtheirlongtermeconomic,social,andenvironmentalassetmanagementplans.The indices include theDowJonesWorld,variousgeographic-based indexes (Europe, Nordic, and North America), andindustry-specificindexes.In2012,DJSIcombinedwiththeS&Pindicestoofferanevenbroaderrangeofparticipatingcompanies.

Thefinal sustainability indexed fundswe look at are runbySAM,headquarteredinZurich,Switzerland,aholdingcompanythatincludessustainabilityindices,assetmanagement,andprivateequity.SAMpart-neredwithDowJonestolaunchtheDJSIin1999and,sincetheirmergerin2012,workswiththeS&PDowJonesIndicestoproducetheDJSI.In 2001,SAMdevelopedthefirstglobalsustainablewaterfund.

Summary

Theprimarygoalofthischapteristosetthefoundationforwaystothinkaboutsustainabilityasaprocessandthen,forwaystomeasureoureffortsatbuildingsustainablebusinesses.Wereviewedlifecycleassessmentandcradletocradledesignascognitivesystemsthathelpusintegratesustain-able thinking intoourbusiness activities.Thenwe examined the toolsthat have been developed to measure and assess sustainability efforts.TheseincludetheGlobalReportingInitiative,theGlobalCompact,the


CarbonDisclosureProject,carbonandwaterfootprinting,otherUNsus-tainabilityindexes,companyeffortstomeasuretheirownsustainabilitysuchasthetriplebottomline,andvariousindexedfundsdevelopedbythe finance industry to evaluate company sustainability efforts. Below,wecommentonthischapter’smaterialfromvaryingbusinessfunctionalperspectives.

General Management

Themessageof“ChapterTwo:SystemsandToolsforSustainability”formanagement is that there areways to think about the introductionofsustainability and the tools formeasuring anddiscussing sustainabilityeffortsare,insomeareas,welldeveloped,anddevelopinginothers.Thegeneralmanager shouldknow that there aremanyother companies—includingcompetitorfirms—walkingthesustainability trailalongwithher, so there is ample opportunity for dialogue, training, and learningfromothers

Operations

Knowledgeoftheresultsofsustainabilityeffortsoffersoperationsmanag-ersawaytocaptureincreasedvaluethroughthecreationofproductsthatusenonpollutingmanufacturingprocesseswhileconservingenergy,water,andothernaturalresources,inaword,theybecomemoreeco-efficient.Sustainabilityalsooffersreducedriskswhenassociatedwithproductionandmanufacturing-relatedliabilities.InChapter4wesummarizeseveralexamples (Clorox,HermanMiller)centeredonthebenefits,costs,andrisksassociatedwithoperationalissues.

Entrepreneurship

Sustainability approaches invite the development of new products,new customers, and innovative business models. With these creativeapproaches,theworld’sproblemsareturnedintobusinessopportunities.Theseproblemsincludehealth,waterandsanitation,chemicals,andfoodandagriculture.InChapter4wehighlightseveralexamplesofentrepre-neurialactivitieswithsustainabilityasacorevalue—Burt’sBees,WholeFoods,MoltenMetalTechnology,andSocialEntrepreneurs.


Marketing

Marketingmanagersoftenfaceadilemma.Iftheytoutthesustainabil-ity benefits of a company’s products too loudly orflagrantly, theywillbe accused of greenwashing. If they are silent about the demonstratedsustainabilitybenefits,theymaybemissinganopportunitytoattractcus-tomerswhocareagreatdealaboutsustainabilityandmayevenbewill-ingtopaymoreforsuchbenefits.InChapter4,wesummarizebusinesscasesinwhichbothtypesofmarketingissuesarise:FIJIWater,Clorox,HermanMiller,andNextEra.

Supply Chain

Supplychainprofessionalsinglobalenterprisesknowthatimprovementsinthesustainabilityoftheirlogisticsoperationsareessentialtolong-termprofitability.Keyareasofconcernincludeenvironmentalissues,riskman-agementandresilience,andreducingwaste.InChapter4,wehighlightseveral examples that focus on supply chain issues and sustainability:McDonald’s,Wal-Mart,andMetropolitanWater.

Finance

Financeandaccountingprofessionalstypicallyaskquestionsaboutaproj-ect’spaybackorthereturnoninvestment,andtheyareincreasinglyadopt-ingglobalstandardsforenvironmentalriskmanagement.Internalprojectstoimproveprofitabilityinoperationsandinthesupplychain,generally,dorequirespecialfinancialtreatment.Inaddition,businessmodelsthatcreateinnovativenewproductsandservicesortargethighly-valuedcus-tomermarketsegmentscanenhanceprofitabilityandenterprisevalue.InChapter4weexamineseveralexamplesthatcenterontheissueofsus-tainabilityandfinance:Frito-Lay,Patagonia,NextEra,andWindEnergy.

Going Forward to Chapter 3

Wenowmoveforwardin“Chapter3:ThinkingAboutMajorSustainableIssues,” to examine someof themajor arguments around sustainabilityissuestoday.Weencourageyoutogetinvolvedwithyouropinionsandtheevidence,rememberingtobeopentonewwaysofthinkingaboutthings!

CHAPTER 3

Thinking About Major Sustainability Issues

Learning Objectives

• Becomefamiliarwithwell-developedandsharplyopposedpointsofviewonsustainabilityissues

• Developabilitytoapplycriticalthinkingskillstotheopinionsofothers

• Developabilitytochallengewidelyheldbeliefsandformindependentjudgments

• Developanappreciationforthenatureandvalueofevidenceinforminganopinion

• Promotepersonalgrowthbyframingimportantissuesthatquestionassumptionsandbeliefsystems

Introduction to Debate as a Learning Tool

Debate,sometimesknownasforensics,isapowerfullearningtoolbecauseitgivesusameanstoreasonourwaysthroughdifficult,complexissues.Sustainabilitycertainlyfitsintothatcategory.Itiswidelyconsideredanareabothambiguousandcontroversial.Forevidenceofthis,thinkaboutthepresent controversy about globalwarming,whose very existence ischallenged,despitethescientificevidence.Eventhosewhoadvocateformore responsible concern for the environment often do not agree onthemeaningofwhat“sustainability”isallabout.Isitanadjective—forexample,wefavorsustainabledevelopment?Orisitanoun—forexample,ourbusinessmodelissustainable?Thewordhasbecomesopopularandithasbeenusedinsomanydifferentcontextsthatitsmeaninghasbecomehackneyed.TheScientific Americandecidedtoexplorethistopicingreaterdepthandpublishedaspecialeditionin2009entitled,“Top10MythsaboutSustainability.”1Amongthemythscitedwerethefollowing:


1.Nobodyknowswhatsustainabilityreallymeans.2.Sustainabilityisallabouttheenvironment.3.Sustainabilityistooexpensive.4.“Sustainable”isasynonymfor“green.”5.Newtechnologyisalwaystheanswer.

In this complicated, seemingly equivocal context, the debate pro-cesshelpstobuildourabilitiestoexpressourideasinthepublicforum,whereadvocacyoccursinademocracy.2AstheleadingintellectualJur-genHabermasnoted,publicdiscourse suchasdebateoffers studentsachancetocalloncapitalistsocietytojustifyperhapsitsweakestpoints.TheGermanphilosopherwritesthatstudentshavethepotentialtorollback“colonizationofthelifeworld”byencouragingpublicdiscussionofcriticalsocialissues.3

Tobeabletocontributetothedevelopmentofsolutionsthatarethecorechallengesofsustainability,weneedtheabilitytoseeandunder-standtheworlddifferentlythanwehavebeenconditionedtoseeandunderstandit,thatis,tore-visionourworld.4Re-visioningisameta-capability, away of thinking that enables us to function successfullyinnewandunknownsituationsand to integratenewunderstandingswithourexistingskillsandknowledge,leadingtoamorecomplexgraspof the issues. Re-visioning increases our ability to handle cognitivecomplexity.

Thus,thedebateformatoffersagreatwaytobuildcriticalandreflec-tive thinking skills, encourage re-visioning,build cognitive complexity,buttress communication skills, build research skills, both primary andsecondary,andreviewconceptsrelevanttocurrentissuesinsustainability,aswell as help us becomemore resilient.We recommend and rely ondebateasalearningtool.Exhibit3.1describesthemostsignificantspe-cificskillsdebatehelpstodevelop.

In thischapterwecollectargumentsonseven issues related to sus-tainabilityinthebusinessenvironment.Ourgoalistopresentopposingpointsofviewonthesamesubject.Byjuxtaposingtheseopposingpointsofview,youareencouragedtothinkcriticallyaboutthem,toexploretheauthor’sgraspoftheissue,tounderstandtheevidencethatispresentedtosupporteachpointofview,andtheassumptions—bothimplicitand

THINkINg ABOUT MAJOR SUSTAINABILITY ISSUES 57

explicit—thatareusedtoframetheargument.Dependingonthecontext,youmaybeeitherpersuadedorinducedtoformapersonalopinionaboutthetopic.InthisInternet-drivenagewhendigitalinformationissoread-ilyavailable,evenifitisnotcorrect,youarenowaskedtoevaluatetwodiametricallyopposedopinions.Whichonedoyouchoose?Andwhy?Thesequestionsarethesubjectmatterofthischapter.

Opposing Beliefs on Sustainability Issues

Eachofsevensustainabilityissuesispresentedwithtwoopposing,shortessays,followedbysomesuggestedfollow-upquestions.Thesevenissuesare stated below and, at the conclusion of this chapter, linked to thechapter’sfivemythsaboutsustainability

1.Issustainabilityarealisticobjectiveforsociety?2.Shouldecosystemservicesbemonetized?3.Are market-based systems better than government regulations in

achievingsustainability?

Exhibit 3.1. Debate as a Learning Tool5

Characteristic and skill Debate format helps develop• Cognitive complexity • Argumentation

• Respect for integrity of evidence• Integration of knowledge and multiple perspectives• Creation of new patterns of knowledge

• Critical thinking • Respect for reasoned discourse• Identification of arguments• Test of reasoning (fallacies)• Evaluation of evidence

• Reflective thinking • Understanding of how others think• Ease with uncertainty• Critical listening skills• Formation of arguments

• Resilience • Courage• Self-confidence• Acceptance of conceptual conflict• Ease with uncertainty• Social maturity• Persistence• Decision making under pressure


4.Does geo-engineering offer a sound approach to address climatechange?

5.Shouldwaterbeprivatized?6.IsshalegastheanswertoU.S.energyindependence?7.Istheprecautionaryprincipleasoundapproachtoriskanalysis?

Issue 1: Is Sustainability a Realistic Objective for Society?

The YES proposition:Sustainabilityisarealisticobjectiveforsociety—butweneedtomakeafewchanges.

If sustainabilitymeansmeeting theneedsof thepresentgenerationwithout compromising the ability of future generations to meet theirneeds,asperthedefinitionexpressedbytheBrundtlandCommission,6then sustainability isnotonly anoble goal, it is anecessity.Themostbasicargumentforthispositionisasimpleone,whatchoicedowehave?According to a recentU.N. report, the world population growth ratemust slow down significantly to avoid reaching unsustainable levels.7Ifwecontinueonourpresent course, futuregenerationswill inherit areducedqualityoflifethatmaywellincludeafurtherdegradedecologicalenvironment,aglobalwarmingtrendthathasbecomeirreversible,andpoliticaldiscordbasedonthoseincreasinglyfewwhohaveaccesstowhatwillbethoughtofasprofligateconsumptionandthosepushedclosertosurvival.

Yet our technologically-advanced economic system is structured todependonconsumptionofgoodsandservices.SincetheendofWorldWarII,thatconsumptionhasbeengraduallystimulatedbytwodesignelements:theconceptoffast-changingfashionandtheincorporationofplannedobsolescenceintoproductdesign.Bothoftheseapproachestoproductdesignimplyincreasinglevelsofpersonalconsumptiontosup-portcorporateandgovernmentalgoalsforprofitability,employment,andeconomicgrowth.Theywouldhavetochangeinasustainableworld.

The role of consumption in Western society, especially in NorthAmerica,hasbecomecentral tooursocial life.Wetendtoequateeco-nomicwell-beingwith happiness.No longer arewe “keeping upwiththeJoneses;”shoppingnowfunctionsasacentralsocialactivity.Peoplego to themalls in their spare time; theycruise the stores and look for


enticementstoconsume.Weself-actualizethroughconsumption,thankstothebrilliantmarketingphenomenonofbranding.Withfashion-basedobsolescence,consumptionispushedintoaseasonalstructure,andmanyofusreplacelastyear’scoats,sweaters,anddresseswiththelatesttrends,whileourcast-offclothingfindsitswaytosecondhandandthriftstores.Fashionconsumptionistingedwithacompetitiveapproachaswell:thebrandmarkerofourshirt, shoes,boots,orhandbagallowsustoassertourstatusandclassifyoneanotherinaneconomichierarchy.Let’stakealookatrecentyogafashionrage.FirsttherewastheperfectlyfunctionalathleticwearproducedlocallyorbycompaniessuchasRockport,Nike,andDanskin.Then thewomen’s athletic fashion segment arrived, andcompanies suchasTitle9andAthleta camealong.Then thenarrowersegmentofyogafashionarrived—LuluLemon,Hind,Lucy,andHyde.Ateachstepintheevolutionofthiscategory,manyofusfoundourteeshirtstoopedestrianforyogaandtradedup.Well,wedidn’ttrade,exactly.Wedonatedour“dated”yetperfectly functionalyogagearandboughtnewones.Such fashion statements identifyusand,paradoxically, con-tributetothecontinuationofaspiritualvoid,anemptinessinourlivesweseektofillbyourpracticeofyoga.Withfashion-basedobsolescence,therichnessofour individualhumanity is reducedtoGucciandPolo,Abercrombie&Fitch,andWaterGirl.Thisfashion-basedconsumptiontrendisnotgoodforusandcertainlynotgoodforsustainability.

Forsocietytoembracesustainability,weneedtoaddresstheseconddesignelementaswell—plannedobsolescencethatisincorporatedintoproduct design.Think about an appliance or piece of equipment thatnolongerfunctionsproperly.Isitbettertorepairitorreplaceit?Withmanytechnology-basedappliances(audioequipment,computercompo-nents),wesimplyreplaceit.Manyofuswouldnotevenknowwheretobegintofindsomeonetorepairanon-functioningDVDplayer.Severalbusinessesareforgingthewaytoproducelastinggoodsortore-usetheircomponents.ThefirstoftheseapproacheshasbeentakenbyPatagonia,theoutdoorequipmentcompanybegunbythefamedclimberoriginallyfrom Maine, Yvonne Choinard. Patagonia will repair any item, usu-allyatnocharge.AndPatagoniameans this, asa repaired rain jacket’szipper,caughtinacardoor,evidences.PatagoniaalsohasanalliancewitheBay,theconsumer-to-consumerauctionandsalescorporation,whichis


designedtoencouragepeoplewhohaverecyclablePatagoniagoodsthatstillhaveutility,toresellthem.

At the endof theiruseful life (which,unfortunately,maynotbe alonglife),theinputsforourdiscardedCDplayers,computers,kitchenappliances,andsoon,usuallyenterthewastestream,oftenaddingtopol-lution.Butwecandesignotherapproachestoobsolescence.Forexample,Interface, Inc. is the world’s largestmanufacturer of themodular car-pet,whichitmarketsunderseveralbrandnamessuchasInterfaceFLOR.Theproductsaretrendycarpetblocksthataredesignedtobemanufac-tured from recycled andbio-based rawmaterials, thereby reducing theresources required tomake them.Thisproduct is especially interestingsince the nylon fibers are a petroleum-based product. Ray Anderson,CEO,thefounderofInterface,transitionedcarpetmanufacturingfroma petroleum-intensive, high-waste, high energy consumption processintoasustainableprocess.Ittookhimyears,andhekeptatit,encour-agedbyPaulHawkenandothers.Itcanbedone!Anotherapproachtoobsolescenceisforustodemandhigherqualitygoodsthatlast.Wedon’tneednewcoffeemakerseveryfewyearsifwhatwehaveiswell-designed,high-quality,andfunctional.Changingthisaspectofourconsumptionmightbepsychologicallyeasierthanchangingouraddictiontofashion,andcouldbedonethroughconcertedconsumerdemandandeducation.8

Bothoftheseimpedimentstosustainability,ouraddictiontofashionandourwillingnesstoreplacelow-qualitygoods,couldbechanged,andwewouldbebetterbothasasocietyandasindividualsiftheywere.Thechangescouldbeconsumerstimulatedandencouragedbygovernmentactions,aswell.Wecanchange;weneedtochangeinordertoprovidefuturegenerationswithresourcessimilartothosewehave.Suchchangesaretherightthingtodoandwearecapableofdoingthem.Let’sgetgoing.

The NO proposition:Sustainabilityisnotarealisticobjectivebecauseweresistmakingchangestoourlifestyle.

Oureconomicsystemdependsongrowth,andgrowthdependsonconsumingmoregoodsandservices.Wearebyourverynature,consum-ers.AsAmericans,wearealsoinclinedtocommittotheshorttermandnottakealong-termviewofthings.Thispreferencefortheshorttermand for actingon rather than thinking throughan issue ispartofour


Americanpragmatism:wedon’texploreanddevelopthetheory.Rather,weget into the situationand faceproblemsas theypresent themselvesto us, with a wonderful on-the-fly adaptability. So the very attributesthata sustainableapproachneeds—a long-termviewanda thoughtfulresponse—aretheonestowhichwearenotespeciallyinclined.

That’sthenicewaytoputit.Othershavebeenmoreblunt.SharonBegley,writing inNewsweek,observes thatweare ignorant, apathetic,andselfish.9Shepointsoutthatwelackknowledgeabouthowtoliveinasustainableway.Forexample,mostpeoplebelievethatmoreenergyisrequiredtomakeanaluminumcanthanaglassbottle.Thefactis,usingnewmaterials,glasstakes1.4timesmoreenergy,andusingrecycledmate-rials,glasstakes20timesmoreenergythandoesthealuminumcan.

Notonlyisignoranceaninsurmountableproblem,butsoisapathy:wedon’t care at all about sustainability.Witness the lights lefton, theairconditioningsystemcoolingemptyroomsinthesummerandheat-ingemptyroomsinthewinter,nottomentiontheinefficienciesinournation’stransportationsystem.Individualsinindividualcars,mostwitha gasoline powered engine, consuming fossil fuel, and contributing toglobalwarming through carbon dioxide emissions as they creep alongcongestionhighwaysduringrushhour.Meanwhile,peoplefeeltheyarepromotingsustainabilitywhentheyturntheabandonedtraintrackintoabikepath.

Thenthereisourbasicselfishness.Wecannotovercomethat.Itispartofhumannatureandarguablythebasisofourcapitalisticeconomicsys-tem.Actually,aself-centeredapproachtonature,thatitisthereforustomasteranduse,hasbeenarguedsince5thcenturyAthens.Dominationofnaturehasledtotheassumptionthatitbelongstous,touseaswewant.Theideathatwecouldtransitiontoanewwayofthinkingaboutbothourselvesandourselvesinrelationshiptonaturehashistoryandcurrentpractice against it. So, you see, anymovement to sustainability inourlifetimesishopeless.Andthat’sjustthewayitismeanttobe.

Questionsfordiscussion:

1.Issustainabilityaconceptthatiscontrarytohumannature?Doweneed to accept a lower standardof living tobecomea sustainablesociety?


2.If consumers shift theirpurchasingbehavior tobuyproducts thathavea longproductlifeandthatdonotbecomeobsoletequickly,how will this affect economic growth, employment, and foreigntrade?

3.Whatpublicpoliciescouldbecreatedtoshiftconsumerpreferencestofavormoresustainableproductchoices?Canyouprovideexam-plesofexistingpoliciesinthisregard?

4.Whatistheroleofeducationalinstitutionstobuildabetterinformedcitizenry that is lessapatheticabout theenvironmentandsustain-ability?

Issue 2: Should Ecosystem Services be Monetized?

The YES Proposition:Thebestwaytovalueecosystemservicesistoputamonetaryvalueonthem.

Ecosystemservicesrefertothenaturalprocessesbywhichtheenviron-mentproducesresourcesthatwerelyonandoftentakeforgranted,suchascleanwater,timber,habitatforfisheries,thedecompositionofwastematerials,andthepollinationofplants.10TheUnitedNationsformalizedthistermwithitsinvolvementintheMillenniumEcosystemAssessment,aglobalstudyoftheecosystempublishedin2005,11thatcataloguedandcategorizedtheglobalecosystemintofourbasicgroups,bytheirfunction:provisioning(suchasfood,water),supporting(suchaspollination),regu-lating(suchascontrolofclimate)andcultural(suchasrecreation).

Yes,ecosystemshaveeconomicvalue.Althoughitisdifficulttoquan-tifyandgiveamonetaryvaluetoeverythingnatureprovides,clearlywhatnaturedoesprovidehaseconomicvalue.Onecanputapriceontheseser-vicesmuchlikeCostanzaandhiscoauthorsdidintheirresearch,whichpeggedthevalueofseventeenspecificecosystemservicesat$33trilliondollarsperyear.12Thinkoftheadditionalcostswewouldhavewerecleanwater not available.No onewould argue that ecosystem services havenovalue;preservingthemiswhatsustainabilityisallabout.Theissueiswhetherweshouldmonetize them,that is,measuretheirvalue ineco-nomic,monetaryterms.Howmanydollarsworthofcarbonabsorptiondoesanacreoftreesproduceperyear?Inordertoattachadollaramountto this service,wewillhave tomeasure it.Suchanaction,despite the


estimatesinvolved,willincreaseawarenessofthevalueofecosystemsandhowtoprotectthem.Oneestimatecalculatedin1979byCostanzaandhiscolleaguesputthenumberat$3.3trillionannually.13Thatwillhelpovercomeoneofthemajorproblemswithsustainabilityinitiatives,thatpeoplearenotawareoftheimpactoftheiractions.Now,ifweknowtheactualdollarvalueoftheeco-serviceprovidedbythatforestacre,wearemorelikelytothinkmoresystematicallyabouttheimpactofclear-cuttingthe acre, for example.Monetizing the ecosystem services will increaseawarenessoftheirvalueandanyactionswetakethatmayaffectthem.

There are also arguments formonetizing the ecosystem that go toshowhowassigningdollar values to the ecosystem services couldhelppeoplebuildafullunderstandingoftheircontributiontooureconomiclives.Thatis,weneedinputsbothfromecologistsandeconomists;oth-erwise,wewillnothave a completepicture.Witha completepicture,wewillbemorelikelytobeabletoaccountforandassessdecisionsthatinfluence the ecosystem. Over time, is the application of fertilizer toincreasecropyieldabenefitwhencomparedtothedamageofnitratesrelease into nearbywater supplies?Monetizingmakes possible an eas-ier linkagebetween the economicandecological analysisof ecosystemservices.14

Onemain objection tomonetizing ecosystem services, asmuch asdoingsomakessense,isthatmanyecosystemservicesarepublicgoodsthatarenottraded,sotheyhavenoestablishedmarketvalue.Howdoweassignamonetaryvaluetoamountaintrailthatculminatesinaviewofotherpeaks,withcliffsmovingtowardtheocean?Yettherearewaystoapproachthisvaluationchallenge,suchasutilitymodelsandreplacementcosts.

The NO proposition:Ecosystemservicesshouldnotbemonetized.Puttingapriceonnatureistroubling,forpractical,incompatibility,

andphilosophicalreasons.Someopponentsofmonetizationwouldaddethicalreasons,aswell.

Economicvalueisanimportantmeasureinamarketeconomy,whichisbasedonconsumptionmodelsandresourceavailability, fromplenti-fultoscarce.Supplyanddemandarecentralconcepts,andattachingamoneyvaluetotheseconsumeritemsis logical.Theproblemwiththis


market-based approach to the ecosystem is that the ecosystem is com-posedofself-sustainingcyclesandrenewabilityasnormalprocesses.Thebeedoesn’tengageinamarketprocessasapartofpollination.Water,air,thephotosynthesiscycle,allofthemoccurnaturally.Yes,wehavebuiltvaluebyharnessingthemortheirresults,suchas inagriculture(provi-sioning) and pollination (supporting). But these natural forces do notformamarket.Theecosystem isnot aboutconsumption; it is circularandself-renewing.

Fromapracticalperspective,monetizingtheecosystemservicesisnotpossible.Howdoyousetamonetaryvalueonphotosynthesisorthecar-boncycle?OK,weunderstand that theprocesswouldbothencountermanymethodologicalproblemsanddependonestimates.Withsuchapragmaticapproach,bynecessity, theestimateswouldbesobroadandthinthattheywouldnotbereliable.Understandinghowunreliabledatawouldbehelpful is difficult. In addition, theirunreliability could alsocauseharm.

Anotherreasonweshouldnottakethepathofmonetization,tempt-ingasitmaybe,isthattoattempttomonetizeecosystemservicescouldindulgeouranthropomorphismandleadustothinkthatwecancontroltheseservicesandthattheyareapartofourenvironment.Inactuality,itiswewhoareapart,howeversmall,oftheecosystem.

Troublingfromaphilosophicalorspiritualperspective is thattherearevaluesthatmanypeoplefindintherealmoftheecosystem,thatarenot monetized. Think of the New England transcendentalists such asHenryDavidThoreau, thephilosopherof theopen air,who found innature(theecosystem)anenactmentof theirspiritualbeliefsandphil-osophicalvalues.15Inamonetizedsystem,becausetheycannotbemon-etized,thesehumanspiritualandphilosophicalvalueswouldbecomeanewendangeredspecies.

Monetizationmaybeusefulinsomesmallandlimitedwaystohelpusbetterunderstandandprotectecosystemservices.Yet,weneedtobeawareofthedangersofmonetizationandnotallowitspragmaticpulltoover-simplifythecomplexworkingsofnature,includinghumans.Theremust be other, less over- simplifyingways to build our understandingofnatureandtofigureouthowtoliveinit.Thoreau,withhisdesiretominimizethematerialworldandlivesimplyandfullyinthenaturalone,


grappledwith the problem ofmonetizing and concluded that price isdirectlyrelatedtotime:“Thepriceofanythingistheamountoflifeyouexchangeforit.”Thatistosay,thepriceofthenaturalworldissoele-mentalthatwecanmeasureitonlywiththetimecontainedinourlives.Dollarsmissthemark,totally.


1.Inwhatwaysdoecosystemsprovidevaluableservices?2.Isitpropertovalueanecosystemserviceonasinglemonetaryscale?3.Infinance,weuseaweightedaveragecostofcapitaltoevaluateproj-

ectswhosecostsandbenefitsaccrueovertime.Whatistheappropri-atediscountfactorforecosystemservices?

4.Exploretheconceptofecosystemservices—whattheyare,whytheyareimportant,andhowtheymightbemeasured.

5.Discuss the advantages and disadvantages of placing a monetaryvalueonourenvironment.

6.Examinehowpaymentsforecosystemservicescanhelpimprovethemanagementofnaturalecosystems.

Issue 3: Are Market-Based Systems Better Than Government Regulations at Achieving Sustainability?

The YES proposition: Market-based systems are quite efficient andbetter thangovernmentregulationsatachievingsustainability.

Environmentalpolicyalwaysprovokesagreatdealofpoliticalrhetoricanddebateanditseemstohavebecomemorepolarizedinrecentyears.Noonedisputesthemajorgoals:wewanttoliveonaplanetwithcleanair,amplesuppliesoffreshdrinkingwater,landthatisnotcontaminatedwithtoxicmaterialsandfoodthatisnutritiousandhealthy.Wealsofindcommongroundonthe issueofclimatechange—wedesire living inaworldwheretheriseintemperaturesisnotcausingclimateextremesorchangesinthesealevel.Controversyarises,however,abouttheprimaryandsecondarycausesofenvironmentalproblemsand,mostimportantly,onthepolicyprescriptionsandmeanstoachievethesegoals.

Economic theory has demonstrated that under certain specificassumptions,thelawofsupplyanddemandwillinfluencepricestomove


toanequilibriumlevelthatbalancesthedemandsfortheproductagainstthesupplies.Attheequilibriumprice,themarketdistributestheprod-uct to consumers according to each purchaser’s preference andwithineachpurchaser’sbudgetconstraint.ThisresultisdescribedasbeingParetooptimal—noonecanbemadebetteroffwithoutmakingsomeoneelseworseoff.Thisconceptworksverywell intheory,buttheassumptionsmaynotholdupwellinpractice.Thetheoryassumesthefollowing:

• Producerslackmarketpower.• Marketparticipantshaveaccesstocompleteinformation.• Marketparticipantshavefreeentryandexit.

Inactualpractice,theseassumptionsareincorrect.Manyindustrieshavefewproducers,andtheyhavesignificantpricingpower.Also,manymar-ketsarecharacterizedbyasymmetricinformation,whereonepartytoatransactionhaspertinentinformationthatisnotavailabletoothers.Andmanyindustrieshavemajorbarrierstoentryandexit,suchasintellectualproperty,switchingcosts,economiesofscale,controlofcriticalresources,governmentregulations,andaccesstocapital.

ThedivergencebetweentheeconomictheoryofaParetooptimalsoci-etyandtherealworldisnomoreevidentthanwhenweconsiderenviron-mentalpolicy.Unfortunately,someproductionprocessescreatecostsforpeoplewhoarenotpartoftheconsumptionorproductionactivity.Theseexternalcostsarecallednegativeexternalities.

Consider a textile factory that is producing both consumer goodsforsaleandby-productwastesthatarepollutingnearbybodiesofwater.Whenthefactorycandisposeofthesewastesforfree,ithasanincentivetodumpmorewastethanissociallyoptimal.Fromthefirm’sperspective,aslongasitcomplieswithallapplicablelaws(andassumeforthemomentthatthisincludesenvironmentallawsandregulations),thenitisfollow-ingaprofit-maximizingstrategy.Fromasocietalperspective,however,thetextilefactoryhasunderinvestedinequipmentandtechnologytoelimi-natethepollutantfromthewaterasitleavesthefactory.Itsproductioncosts,therefore,arelessthanwhattheywouldhavebeeniftheirwasteswerenotharmful,andsociety’scostsarehigher.Residentsoftheareamaydrink thepollutedwater, suffer severe health effects, and impose costs


onthelocalhealthcareproviders.Neighborhoodrealestatevaluesmaydecline,asprospectivebuyerslearnaboutthepoorqualityofthedrinkingwaterinthearea.Themunicipalwatertreatmentplantmaybeaskedtoinstallspecialized,costlyequipmenttoremovethepollutants,resultinginhigherlocaltaxlevies.

Inthesesituations,theharmfuleffectoftheproducerwhoimposescosts on others—higher health care costs, lower asset values, highertaxes—isanegativeexternality.Togettheperpetratortopaydirectlyfortheharmfuleffectsisdifficult,anditisnotasimplematterforthosesuf-feringtheharmtoseekanappropriateremedy.Themarketpriceforthetextileproductissetinacompetitivemarketplace,andthecostoftheexternalityisnotbuiltintothisprice.

Webelievemarket-basedpolicy instrumentscanbeused tocorrectmarketfailurescausedbyunder-pricing.Withthesepolicies,thereisnoneed for heavy-handed and cumbersome government regulations. Wemerelyneedtoincorporatethecostoftheexternalityintothepriceoftheproduct.Thiscanbedoneinavarietyofways,suchasimposingataxorusingtradablepermits.Inthismanner,wecancontinuetoenjoytheben-efitsofafreemarketsystemwithonlyminimalgovernmentinvolvement.

Althoughnooneenjoyspayingtaxes,a“green”taxthatcorrectsanobviousmarketfailurehasmanyadvantages.First,thetaxwouldapplyonthevolumeofpollutioncreatedbythefactory,andthetaxrateshouldbesethighenoughtoincentivizetheproducertoreducethequantityofpol-lution.Producerswillevaluatenewtechnologiesandcapitalimprovementprojectsthatmitigateoreliminatethepollution,andtheincreasedcostswillbe reflected in theproducers’prices.Somecleverproducersmightevendiscoverinnovativewaystoeliminatethepollutionaltogetherandtherebyavoidthetax.Thiswouldgivethemaclearcompetitiveadvan-tage.Consumerswillcomparethevarietyofproductsinthemarketplaceandmake their purchasedecisionsbasedonproductperformance andcost—onlynowthecostreflectsthefullcost, includingthecostoftheexternality.

Market-basedpolicyinstrumentslike“green”taxeshavemanyadvan-tages.Theyareflexible,sincethetaxratecanbeadjustedasoftenasnec-essarytoprovideeffectiveincentivesforproducerstoreduceoreliminatepollution.Taxes alsohave relatively low compliance costs.Onemerely


hastomeasurethevolumeofpollutionandmultiplythatbythetaxrate.Routineauditsarenecessarytoassuretaxcollections.Revenuefromthetaxcanbeusedtooffsetothertaxes,oritcanberebatedtoconsumersthroughrevenuerecycling.Inaperfectworld,thetaxrevenuewilldisap-pearwhenthepollutiondisappears.Afterall,thiswastheobjectiveinthefirstplace—apollution-freeplanet.

The NO proposition:Market-basedsystemsarenotbetterthangovern-mentregulationsatachievingsustainability.

Market-basedsystemsand“green”taxesmaysoundgoodintheory,butoftentheyarenoteffectiveinpractice.Ifthetaxrateissettoolow,producerswillnotmakethenecessarychangestoproductionprocessestoreducepollution.Ifthetaxrateissettoohigh,itmaybenecessarytoshutthefactoryandlayoffworkers.Inaddition,domesticproducersmaysufferasignificantlossinmarketshare,sinceforeignproducersarenotsubjecttothese“green”taxes.Intheratesettingprocess,aconcentratedgroupofproducerswillgenerallyapplystrongpoliticalpressuretosetalowrate,provideexemptionsforcertaintransactionssuchasexports,andthusmitigatetheeffectofthetax.

We cannot depend on the vagaries of the market to correct theseenvironmentalmarketfailures.Directandtargetedregulationthatclearlydefinestherulesofwhatactivitiesareallowedandwhatactivitiesarenotallowed is necessary. Standards of performance need to be establishedthroughadeliberativeprocessthatweightsthebenefitsofapollution-freeworldagainstthecosts,usingavarietyofexistingandpotentialtechnol-ogies.Theseperformancestandardscanchangeovertimeasnewtechnol-ogiesarebroughttomarketallowingforhigherlevelsofenvironmentalperformancetobeachieved.

Direct regulationandsettingstandardsarenot sufficient toprotecttheenvironment.Wemustalsoestablishanenforcementmechanismtoinsurethatproducersliveuptothosestandardsfully.Failuretocomplywiththestandardsshouldresultinsanctionsandpenaltiesthataredefinedinadvanceandsevereenoughtobeaneffectivedeterrenttobadbehav-ior.Therearemanyexampleswherethisapproachtocorrectingmarketfailureshasbeensuccessful.Takethesimplecaseofwearingseatbelts,asafetyfeatureinautomobilesthatsaveslivesandlowersoverallhealthcare


costsforsociety.Isthereamarketmechanismthatcouldreplacedirectregulation?Probablynot.

Tociteanotherexample,evidencewasmountinginthe1980sthatchlorofluorocarbons(CFCs)releasedintotheatmosphereweredestroy-ingtheozonelayer.If leftunchecked,higherlevelsofultravioletradia-tionfromthesunwouldresultinmillionsofAmericansdevelopingskincancer,severedamagetocropsandaquaticlife,andtrillionsofdollarsinincreasedhealthcarecosts.Tocomplicatetheproblem,thedepletionoftheozonelayerisaninternationalenvironmentalissue—nosinglecoun-tryactingalonecouldsolveit.Mostindustrializedcountriesoftheworldcametogetheranddevelopedaninternationaltreaty,theMontrealPro-tocol,whichestablishedexplicitlimitsonproductionandconsumptionlevels and a twelve-year phase down schedule.Though therewere fewavailablesubstitutesatthetime,producersacceleratedresearcheffortsonCFCsubstitutes,andthephasedownschedulewassubsequentlyreducedtotenyears.Itwouldbedifficulttoimagineandmoredifficulttoadmin-isteramarketbasedapproachthatwouldhavebeeneffectiveasquicklyastheMontrealProtocol.AsMarioMolina,whoseworkonCFCsintheatmosphereearnedhimaNobelPrize inchemistry,wroteonthe25thanniversary of the Protocol, “This is a planet-saving treaty, protectingboththeozonelayerandtheclimatesystem.”16

Governmentregulationsarebetterthanmarketbasedapproachestoachievesustainabilitywhenurgentactionisrequiredtosolvepressingenvi-ronmental problems.The regulations impose fixed standards of perfor-manceandimposesanctionsonviolators.Theyneednotstifleinnovation,asdemonstratedinthecaseoftheMontrealProtocol.Unlikemarketbasedapproaches, government regulations can be crafted swiftly and providecertaintytobothproducersandconsumers.Governmentregulationisamoreefficientandtargetedapproachtoachievethegoalsofsustainability.


1.Aremarket-basedsystemseasiertoimplementthancommandandcontrolbasedpolicies?Whyorwhynot?

2.Whatarethepoliticalramificationsofeachtypeofsystem?3.Whataretheinternationaleffectsofmarket-basedsystems?Whatare

someapproachestomitigatetheseinternationaleffects?


Issue 4: Does Geo-engineering Offer a Sound Approach to Climate Change?

The YES proposition: Geo-engineering offers a sound approach toclimatechange.

Weallrealizethatclimatechangeisanissuethatneedstobeaddressed.Atpresenttherearethreegeneralwaysofthinkingaboutourapproachtoclimatechange:mitigation,adaptation,andgeo-engineering.

Mitigationinvolvesthereductionsofemissions,essentiallyundoingtheeffectsofglobalwarming.WithintheUnitedStates,theworld’ssec-ondlargestemitterofgreenhousegasesbehindChina,thepoliticalenvi-ronmenthas beenunfavorable todeveloping a comprehensive strategyforaddressingclimatechangethroughmitigation.Theprimarypointofcontentioncentersontheperceivedtrade-offbetweeneconomicgrowthandreducedemissions.Mitigationalsohasencounteredpoliticaldifficul-ties,especiallybetweendevelopedandemergingeconomies.

Adaptationacceptsglobalwarmingasafait accompliandaimstobet-terpositionsocietiesandeconomiestodealwiththeassociatedimpacts.Likemitigation,adaptationhasencounteredpoliticalandfundingchal-lenges,becausesuchfundingwouldbemovingwealthfromdevelopedtodevelopingeconomies.

The third approach is geo-engineering, a hybrid and innovativeapproachtoaddressclimatechangethatinvolvesaspectsofbothmitiga-tionandadaptation.Geo-engineeringisatermthatdescribesan“arrayoftechnologiesthataim,throughlarge-scaleanddeliberatemodificationsoftheearth’senergybalance,toreducetemperatureandcounteractanthro-pogenicclimatechange.”17Wehighlighttwogeo-engineeringtechnolo-giesforfurtherconsideration:

• Iron fertilization.Higherironlevelsintheworld’soceanswillstimulatephytoplanktonbloomsthatwouldcapturelargevolumesofatmosphericcarbondioxide.Asthebiomasssank,itwouldtakewithitthecarbon,whichwouldbesequestereddeepbelowtheoceansurface.

• Sulfur reflection.Scientistsbelievethatsulfurparticlesorsul-furaerosolsplacedintothestratospherewillreflectsolarradi-ationbackintospaceandtherebycooltheearth’ssurface.Thistechniqueisaformofsolarradiationmanagement,orSRM.


Althoughdecarbonizationtechniquesmaybepartofeitherareduc-tion or geo-engineering strategy, SRM includes cloud modification,sun-shading, and sulfur reflection. Cloud modification could involvereducingcirrusclouds,whichtendtoallowsolarradiationthroughwhilereflecting infra-redenergybackontotheEarth,ormarinebrightening,whereseasprayisemployedtomakecloudswhiterandthusmorereflec-tive.Sun-shadinguseslargemirrorsordustplacedinspaceinsuchawaythatlesssolarradiationwouldreachEarth.Sulfurparticlesmaybeplacedintothestratosphereasawaytoreflectsolarradiationbackintospace,orsulfuraerosolscouldbeinjectedintothestratosphere.Thefineparticleswouldthenreflectbackaportionofthesun’sradiation,thuscoolingtheEarth.

Theprojectedwarming in current forecasts is far greater than thatofprevious forecasts.Weknowthat thereductionapproachtoclimatechangeisinadequateanditspotentialeffectscannotbeoffsetsufficientlyby adaptation.This is largely due to the increasing pace of economicgrowth—hence, carbon emissions—in the developing world, and thepoliticalrealitiesofclimatechangepolicy.Thereisnooptiononthetableother than exploring geo-engineering alternatives, in addition tomiti-gation and adaptation. Geo-engineering has the potential to augmentreductionefforts,notreplacethem.Althoughthereshouldbesignificanteffortmadetounderstandalloftheimplicationsofgeo-engineering,withthepotentialimpactofglobalwarmingbeingassevereasitis,alloptionsmustbeimplemented.18

SRM via sulfur aerosols would result in global cooling, at least inthe short-term. We have ample evidence for the effectiveness of thisapproach,aswehavewatcheddecreasingglobaltemperaturesinthewakeofvolcaniceruptions.Ironfertilizationissupportedbylesscertainevi-dencepresently.But,attheveryleast,thepotentialofironfertilizationmeritsfurtherstudyaspartofapossiblecomprehensivesolutiontoglobalclimatechange.

PaulCrutzen,winneroftheNobelPrizeforhisworkonozonedeple-tion, has argued that the political realities of climate changemandatethatgeo-engineeringpossibilitiesmustbepursued.“Byfarthepreferredwaytoresolvethepolicymakers’dilemmais to loweremissionsof thegreenhousegases.However,sofar,attemptsinthatdirectionhavebeengrosslyunsuccessful....Therefore,althoughbyfarnotthebestsolution,


theusefulnessofartificially...cooling[the]climatebyaddingsunlightreflectingaerosolinthestratospheremightagainbeexploredanddebatedasawayto...counteracttheclimateforceofgrowingCO2emissions.”19Asimilarargumentcanbemadeforoceanfertilization.Althoughoppo-nentsoftheprocesspointtothepotentialforunintendedconsequenceandtheprecautionaryprincipleinopposinggeo-engineering,theseverityof global warmingmakes it increasingly difficult tomaintain the pre-cautionaryprincipleasajustificationforfailingtoact.Theprecaution-ary principle could, in a twist of the argument that debaters love, beappliedasajustificationforpursuinggeo-engineering,becauseapolicyofnon-action canbe seen tobeharmful, thus requiringopponents ofgeo-engineeringtoprovethatsuchnon-actionisjustified.Therisksofnotpursuinggeo-engineeringaregreaterthantherisksofpursuingit.

A final argument in favor of geo-engineering is cost-based.Geo-engineering could prove to be a very cost effectivemethodwhencomparedtomitigationandadaptation.ThedirectcostsofSRMcouldbe justa fewcentsonthedollarwhencomparedto thecostof reduc-ingcarbonemissions.20Similarly,thecostofironinducedsequestration,$0.30–$1.00per ton, is substantially less than the$12/toncost in theworld’s largest carbon trading scheme, theEuropeanUnionEmissionsTradingScheme.21

The NO proposition: Geo-engineeringdoesnotofferasoundapproachtoclimatechange.

Althoughthereisnoquestionthattheissueofglobalclimatechangerequires an immediate and significant response, theEarth’soceans andatmosphere arehighly complex systems and theuncertainty surround-inggeo-engineeringistoogreattomerititsbeingaviablesolution.Thisuncertainty is based on two concerns: efficacy and unintended conse-quences.Thefirstelementofuncertainty,efficacy,isillustratedbysulfuraerosols.Althoughtheirparticlesdoresultinglobalcooling,thateffectisshort-lived,ontheorderofweeksormonthsifinjectedintolowerlevelsoftheatmosphereandyearsintheupperatmosphere.Furthermore,theirefficacycouldbeunderminedbysignificantchallengestotheirproperdis-tribution.Withironfertilization,scientistsdonothaveacompletepic-tureofhowmuchcarbondioxideistakenupbyaniron-fertilizedbloom


andhowmuchof itwouldremainintheocean.Also,althoughrecentresearchdidsuggestthealgaebloomwouldsequestercarbonforextendedperiodsoftime,issuesofefficacyandpotentiallyadverseeffectsonmarineecosystemswere not satisfactorily addressed.With SRM, although theuseofsulfurtoreflectenergyfromthesunwouldbeeffectiveinreducingtheamountofheatabsorbedby theEarth, itdoesnotdoanything toaddress theunderlyingcauseofglobalwarming, the increased levelsofgreenhousegases.WeretheSRMprocesstobehaltedafterithasbegun,thentheevengreaterlevelsofgreenhousegaseswouldresultinamorerapidincreaseintemperaturethanwouldhaveoccurredintheabsenceofgeo-engineering.Thisincreasedrateofwarmingwouldmakeadaptationevenmoredifficultandexpensive.

Beyond the issue of efficacy, there is also the potential for unin-tended consequences. One example is with iron fertilization. Currentresearchconcludes,“Giventhenegativeeffectsof[aby-productofironfertilization] in coastal foodwebs, these findings raise serious concernoverthenetbenefitandsustainabilityoflarge-scaleironfertilizations.”22Beyondtheby-productsassociatedwithincreasedironlevels, themoreeffective theprocessisincapturingcarbonfortheatmosphere,themoreadversethe potentialimpactonthechemistryofthedeepocean.Researchinto the relationshipbetween iron fertilization andacidificationof theoceansconcluded,“Iftheamountofnetcarbonstorageinthedeepoceanbyironfertilizationproducesanequivalentamountofemissioncredits,oceanironfertilizationfurtheracidifiesthedeepoceanwithoutconfer-ringanychemicalbenefittothesurfaceocean.”23Meanwhile,increasedcarbondioxidelevelsinthedeepoceanresultinadecreaseinpHlevels,andcouldhaveanadverseimpactonavarietyofmarinelifeandposeathreattothesustainabilityoftheoceanicfoodchain.Withoutareductioningreenhouseemissions,ironfertilizationcanonlyharmthebalanceoftheocean.Furthermore,theexpandedbloomscouldresultintheacidifi-cationofthedeepoceanandinthedepletionofitsoxygenlevelsduetoitsconsumptionbyanimalsthatalsoconsumeoxygen.

Research on SRM suggests a number of potential adverse effects,including that increased sulfate levels result inozone layerdepletion,24that geo-engineering could bring several approaches into conflict—unintendedconsequences—thatcouldbedamaging,andthattheimpact


ofsulfurdioxideinjectionsintotheatmospherecouldhavethepotentialtodisruptthemonsoonsinAsiaandAfrica,andthus,theprecipitationnecessarytoensurethefoodsupplyforbillionsofpeople.25Whatevertheeffectsofglobalwarmingmightbe,theycouldnotbemuchworsethanthepotentialeffectofthisdisruption.

In addition, there is the ethical consideration raised by geo-engineering.Issuchasignificantinterventionintheclimate,inthenat-ural order of things, ethical?Whether humans should engage in suchanactivemanipulationoftheenvironmentisadifferentquestionfromwhethertheyhavetheabilitytodoso.Itdeservescarefulconsiderationatagloballevelbeforewemoveforwardwithgeo-engineeringinsuchawaythatwecommitourselvestoit.Andthatconsiderationisdespiteitsefficacy.


1.Does the rise in greenhouse gases justify climate intervention viageo-engineering? Is geo-engineering ethical? Given the adverseeffectsofglobalwarming,dothepotentialbenefitsofamoreinter-ventionistapproachoutweightherisks?

2.Whencomparedtomitigationandadaptationstrategies,howprom-inenta role shouldgeo-engineeringplay in the response toglobalwarming?

3.Giventhattheimpactofgeo-engineeringhasimplicationsforevery-oneontheplanet,howshouldthisstrategybeimplemented?Whatinstitutionshouldhavetheauthoritytodeploythegeo-engineeringtechniques? If certaincountriesobject tousing suchanapproach,howshouldthoseobjectionsbeaddressed?

Issue 5: Should Water Be Privatized?

The YES proposition:Watershouldbeprivatized.Waterisauniqueresource.Itisessentialtohumanlife, it isavital

component of our ecosystem, and the amount of fresh water on theplanethasbeenvirtuallyunchangedsinceprehistorictimes.Populationgrowthandeconomicdevelopmentareputtingstrainsonwatersuppliesasthedemandforfreshwaterhasoutstrippedpopulationgrowthoverthe


pastcentury.Additionalpressuresarebeingplacedonwatersystemsfromavarietyofsourcesincludingurbanization,increasedenergyproductionanduse,andchangingclimateconditions.Accordingtoareportbythe2030WaterResourcesGroup,thegapbetweenglobalwaterdemandandthecurrentlyavailablewatersupplymaybeashighas40%by2030.26Waterresourcesarebeingstretchedtothelimitandwillultimatelyreachcrisisproportionsunlesswe increase theproductivityofwateruse andbegintorecognizeitsintrinsicvalue.

In efficient markets for standardized products, price informationreflects thevalueof thecommodityandthecompetitionbetweenrivalsuppliers.Transparentpricespromoteefficienttradingandresourceallo-cationdecisions.Althoughimbalancesbetweensupplyanddemandmayoccuronoccasion,theyarenotpermanent.Ifpricesincreaseandremainatahigherlevelduetosoaringdemandorrestrictedsupply,somecon-sumerswill switch to substituteproducts and some supplierswill coaxadditionalvolumefromtheiroperations.Theseactionswillbringsupplyanddemandbackintobalance.Furthermore,ifthissituationappearstobelonglasting,investmentcapitalwillflowtothissectortoenablenewcapacityadditionsorimprovedproductivity.

Take the example of gasoline. It is an interchangeable, undifferen-tiated commodity. Price information is transparent, and most peopleknowitspriceonadailybasis.Whengasolinepricesrosedramaticallyin2007,consumersnoticedtheimpactontheirbudgetsandchangedtheirbehavior.Wewitnessedmore ridership of public transportation,morecarpooling, fewer trips to the countryside, and increased sales ofmorefuel-efficientautomobiles.Millionsofconsumersmaderationalchoicestoconservethisscarceresourcewhenfacedwithmuchhigherprices.

Wateralsoisaninterchangeable,undifferentiatedcommodity,butthewatermarketisnotstructuredlikeothermarkets.Itisabulkcommod-ity that isheavy relative to itsprice.Onecubicmeterofwaterweighsaboutametricton.Thetransportationinfrastructureisbulkyandheavyaswell—witnesstheductileironorconcretepipesusedinundergroundwatermains.Thepricingofwaterisalsounlikethepricingofothernatu-ralresourceslikeoil,naturalgas,orgold.Thepriceofwaterisnottrans-parent.Consumersarenotgenerallyawareofthepriceofthewaterfromtheirmunicipalwatersupplier,andpricesdonotfluctuateonadailybasis.


Pricingdoesnotseemrelatedtoscarcity,costofservice,replacementcost,volumeofuse,orotherstandardpricingmechanisms,althoughtherearenotableexceptionssuchasinSingaporeandIsrael.Subsidiesarepreva-lentthroughouttheindustry,resultinginfurtherpricingdisparities.Wetendtoover-consumewaterbecausewedonotpaythefullcostofusingit.Thismaybeduetosubsidiesorbecausewedonotaccountforalltheinfrastructurecostsassociatedwithdeliveryoffreshwatertoconsumers.

Thecountry’sinfrastructurewaslargelybuiltmorethan100yearsago.Itisaging,thetechnologyisoutdated,anditislargelyownedandoperatedbythousandsofsmall,localmonopolies.Thereareapproximately52,000independently-runcommunitywatersystemsintheUnitedStates.Sincemostsystemsaresmall tomid-sized,theygenerally lacktheeconomiesof scaleandscopethatwouldenable themtobeefficient.Ourarchaicwatermanagement practices are segregated intomultiple systemswithdrinkablewater,wastewater,stormwater,graywater,andrainwatereachoperatinginaseparatesilo,lackingcentralizationandintegratedresourceplanning.Asaconsequence,thewatersystemiscumbersometomanage,difficulttofinance,andveryinefficient.Estimatesofinvestmentrequiredoverthenext20years—torepair,replace,orupgradetheseagingfacili-ties,tomeetdemographicgrowth,andtomeetnewwaterqualitystan-dards—areupto$1trillion.27AccordingtotheresearchpublishedbytheJohnsonFoundation,“welosesome6billiongallonsofexpensive,treatedwatereverydaybecauseofleakyandagingpipes—some14 percentofthenation’sdailyuse.”28

Asthingsstandnow,weneedtostopwastingandmismanagingourwatersystems.Mostimportantly,weneedtoaddressthecountry’sfuturecapital requirements to repair, replace, andupgrade these systems.Therootcauseoftheproblemisthepricedisparitybetweentoday’sartificial,subsidizedpricesandthemarketpriceofwaterthatreflectsitstruevalue.Localwaterutilities and theirpublicly-electedofficials are ill-equippedtomanagethesechallenges.Theyprefertokeeppriceslowforpoliticalpurposes.Theselowpricesbarelycoveroperatingcosts,muchlessthanthecosttosupportlongrangecapitalrequirements.Furthermore,thesewatersystemsoftenlackaccesstofinancialmarketstoraisetheneededlong-term investment capital. Given the large number of small andverysmallpublicly-ownedwatersystems,theylacksizeandscaletohire


professionallytrainedstafftoundertakemajorcapitalprojects.Lessthan4%oftheroughly52,000watersystemsintheUnitedStateshaveaccesstothefinancialmarketstoissuetheirownbonds.29

Werecommendasolutionthatisconsistentwithourcountry’sfreeenterprisesystem:privatizeourwaterinfrastructure.Theprivatesectorisfullycapableofdealingwiththesechallenges.Itisaccustomedtodealingwithenormouscapitalrequirements,technologicalandoperationalsyn-ergies,andinnovativepricingstructuresthatbalancetheneedtoprotectcertaingroupsofcustomerslikethepoor,whilecharginghigherratesforindustrialandcommercialcustomers.Wecanexpectaprivatizedwatersystem to charge rates thatnotonly cover its costsbut also encourageinvestment,innovation,efficiency,andnewtechnology.Ataminimum,theprivatesectorcanbeexpectedtoincreasetheproductivityofthesys-temby reducingwater lossesandbyencouraginggreaterconservation.Theprivatesectorwillundertakethemuch-neededoverhaulofourwaterinfrastructure.

Somemightarguethattheprivatesector’sprofitmotivewilldenycer-tainpopulationgroupsaccesstowaterresourcesorthattheywillengageinpricegouging.Othersmightarguethatwaterresourcesarepartofournationalheritageand shouldneverbecontrolledbyprivate companiesthatmanageanddistribute.Wemaintainthatneitheroftheseargumentsis valid.The private sector will pay close attention to the cost of ser-viceandreturnoninvestedcapital.Theprivatesectoralsowillinvestinnew,innovativetechnologiesthatwillimproveproductivity.Privatizationwill encourage amore streamlined industry structure and a search foreconomiesofscalethateludegovernment-ownedenterprises.Thepublicinterestisnotwellservedbykeepingpricesbelowcostandencouragingoverconsumption, waste, and underinvestment. With proper govern-mentregulationandsupport,amarket-orientedapproachcanprotecttheneedsatthebottomoftheincomescaleyetalsoprovidesafe,reliable,andaffordablewaterresourcesforall.

The NO proposition:Watershouldnotbeprivatized.Waterisnotlikeanyothercommodity.Itisfundamentaltohealthand

lifeanditis,therefore,abasichumanright.Wecannotexpectprivatecom-paniestomakeimportantdecisionsthataffecteveryhumanbeingabout


thisbasicright.Whoshouldhaveaccesstocleanwater?Whatpriceshouldbecharged?Thesequestionsarebetterlefttothegovernmentsectorwheredulyelectedpublicofficialscananswerthemthroughademocraticprocess.

A private company’s main interest is the “bottom line.” They areresponsible to their shareholders, not the general public.They seek toreduce costs tomaximizeprofits, sometimes at the expenseofprotect-ingtheenvironment.Furthermore,whenwaterresourcesareprivatized,publiccontrolistransferredtoaprivatecorporationtomanageasitseesfit.Webelievethatwaterresourcesrequirepublicoversighttoensurethatpeoplecomefirst,notprofits.Wecannotexpectprivatecompaniestoputthepublic interestabove their self-interest.Privatization isnotaviablesolution forourdeterioratingandagingwater infrastructureproblems.Watershouldbeequitablypricedandaccessibleforeveryone,regardlessofincome.

Oneofthemainreasonstoopposeprivatizationofwaterresourcesisthatitwillleadtorateincreases.Privatewatercompaniesarebusinesseslikeanyotherbusiness.Theydeliverhighratesofreturntotheirshare-holdersbychargingcustomersasmuchasthosecustomersarewillingtopayforwater.Theyarenotinthebusinessofofferingsignificantdiscountsbasedonincomeorabilitytopay,andtheyareundertonoobligationtoprovidewatertoconsumerswhocannotpaytheirbills.Privatecompa-niesmaybemoreefficientthangovernment-ownedenterprises,buttheefficiencygainswillbecapturedbytheshareholdersandnotthepublicatlarge,whichwillbeforcedtopayhigherwaterbills.Profitsfromsuchavaluableresourceshouldaccruetothepublicandnottoshareholders.

Therehasbeenagreatdealofresearchontheissueofwaterprivatiza-tion.ThemostsuccinctconclusionofthisresearchisprovidedbyDavidHallandEmanueleLobina,twowaterresearchspecialists,whoconcludethat “the experiment with water privatization has failed.”30 They citenumerous problemswith privatization experiments.To summarize theresearchfindings:

• Privatization can foster corruption.Watersystemsarenat-uralmonopolies,andtheshiftfrompublictoprivateowner-shipoccursthroughnegotiationbetweenpublicofficialsandtheirprivatesectorcounterparts.Widespreadcasesofcorrup-tionhavebeenreported.31


• Privatization can lead to excessive pricing.Asmentionedearlier,privatecompanieswillseektoenterthewaterbusinessonlyifthereissufficientfinancialinducement.Thisgenerallymeansthatthecompanyrequiresahighdegreeofcontrolovertheexistingpricelevelandfuturepriceincreases,andanabilitytoearnareturnonthecapitalinvestmentsrequiredtomaintainandupgradethesystem.Poorlystructuredcontractsandregulationscanresultinexcessivepricingandconsumerbacklash.

• Privatization is difficult to reverse.Onceamunicipalityhasprivatizeditswaterresources,thecontractsaredifficulttounravelwithoutasignificantfinancialpenalty.Inaddition,iftheprivatecompanyfailstoliveuptothetermsofthecontract,remediescanbecomplicatedandcostly.Inarecentexample,ratherthanengaginginaprotractedlegalbattletobuybackitswatersystemfromaprivatecompany,theCityofChattanooga,TNendeditsbuy-backeffortsandagreedtoincreaseitswaterratesandotherfeesby12%.32

Wecannotdependontheprivatesectortoprovidethisbasicservice.Watersystemsarenaturalmonopoliesandtheseservicesareprovidedbestbyasinglegovernment-ownedandoperatedentity.Claimsbyprivatizationproponentsthatservicewillimproveandwaterrateswillfallareillusory.Anygainsfromgreaterproductivityandhigherpriceswouldbecapturedbytheshareholders,notthegeneralpublic.Weshouldinsteadstrivetomakeourgovernment-ownedandoperatingsystemsmoreefficientandaddressthemis-pricingissuewithoutopeningthePandora’sboxofprivatization.


1.Why will the issue of water availability be a major challenge forworldleadersinthe21stcentury?

2.Giventhesignificantcapitalrequirementstobuildandmaintainthewaterinfrastructure,canpubliclyownedandoperatedwaterutilitiessecurethenecessaryfinancingtomaketheseinvestments?

3.Shouldwaterbepricedatthefullcostofproductionforresidentialcustomers?Ifnot,howshoulditbepriced?

4.Shouldwaterconservationissuesplayabiggerroleinthedebate?


Issue 6: Is Shale Gas the Answer to U.S. Energy Independence?

The YES proposition: Shale gas is the answer to U.S. energyindependence.

• AmajorstrategicobjectiveofU.S.energypolicyfollowingtheOPECembargoesofthe1970shasbeenenergyindepen-dence.Inresponsetotheembargoes,U.S.governmentleaderspursuedawiderangeofprogramsdesignedtoachievegreaternon-importedenergysupply,includingsubsidies,low-interestloans,taxbreaks,andmandatesforwind,solar,ethanol,andotheralternativeenergysources.Untilrecently,theUnitedStateshadmadeonlylimitedprogressinrealizingthiselusivegoal.Fortunately,thesituationtodayisquitedifferent.With-outanyspecificgovernmentsupport,corporationsandprivateinvestorshavepouredbillionsofdollarsintothedevelopmentandproductionofshalegas,thenaturalgasthatistrappedwithindensesedimentaryrockformationsdeepbelowthesurfaceinNorthAmerica.Becauseitwasconsideredtoocostlytodevelopandrecover,shalegaswascategorizedasaformof“unconventional”gas.Advancesindrillingtech-nology,however,haverevolutionizedtheenergyexplorationindustryandledtoaboominshalegasextraction.Theseadvancesinclude:

• Horizontal drilling.Theabilitytodrilldownandthenturnthedrilltofollowthelateralformationoftherocklayerandincreasetherecoveryrateofthegas.

• Hydraulic fracturing (or fracking).Thetechniqueofinject-ingathighpressureamixtureofwater,sand,andchemicalstofracturetherockformationsandallowthetrappednaturalgastobereleasedandrecovered.

Usingtheseadvancedtechnologies,theUnitedStateshasthepoten-tial to unlock vast amounts of natural gas. Although estimates of theexact amount of shale gas vary significantly,many experts expect thattheUnitedStateswillnotrunoutofnaturalgassuppliesforatleastthenext100years.33Overthepastdecadeorso,over20,000shalegaswellshavebeendrilled in theUnitedStates and50,000additionalwells are


onthedrawingboards.Unlikeconventionalgaswells,shalewellshavearelativelyshortlifespan.Gasproductionfromanindividualwelltypicallydeclinesverysteeplyafterthefirstfewyearsofextractionandthenlevelsofftolow,sustainedproductionlevels.Consequently,newwellsarebeingdrilledonacontinualbasistomaintainstableproductionquantities.

Economiesofscaleandtechnologicaladvanceshavereducedthepro-ductioncostofshalegastolevelsthatmakethemnowcompetitivewithconventionalnaturalgasproduction.Boththesurgeinshalegasproduc-tionanditspromiseforfuturegrowthhavebeenmajorcontributorstotheverylowcostofnaturalgasintheU.S.Crudeoilandnaturalgasarebothenergycommodities,andtheirpricesshouldhaveahighdegreeofcorrelation.34Historically, theprice ratioofoil tonaturalgashasbeenrelatively stable, except in periods of extrememarket disruption.Thispattern,however,startedtodeteriorateafter2009,primarilyduetothecombinationofrisingdomesticproductionofshalegas,whichdepressednaturalgaspricelevels,andgeo-politicaleventsintheMiddleEastandAfrica,whichaddedaspeculativepremiumtooilprices.35

Theshalegasboominenergy-richregionsofthecountryisrevolution-izingtheU.S.economy.Drillingactivityisbringingmillionsofdollarsintocommunities,stateandlocalgovernments,andthepocketsofland-ownerswhomaybelocatedinimpoverishedareas.Majorshalegasplaysare occurring inmanyparts ofNorthAmerica.Names likeMarcellus,Bakken,Barnett,Haynesville,andFayettevilleShalehavebecomehouse-holdwords.ThenextbigboomcouldbetheMonterreyshaleformation,whichspans1,750squaremilesinsouthernandcentralCalifornia.

ThisturnaboutisallthemoreremarkablegivenpastpredictionsthatintheUnitedStatesandCanada,naturalgasproductionwasdwindlingandimportsofliquefiednaturalgaswouldbenecessarytosatisfydemand.Nowthedomesticnaturalgasmarketisoversupplied,andmanufacturingandchemicalcompaniesareconsideringmajorplantexpansionstotakeadvantageoflowenergycostsandsecuredomesticsupplies.

TheU.S.economystandstobenefitinanumberofsignificantwaysfromthesedevelopments:

• Lower energy costs. Lowerenergyandrawmaterialcostswillreducemanufacturingcostsandsavehomeownersbillionsofdollarsperyear.


• Greater demand for domestically produced products. The resurgenceindomesticmanufacturinghasbenefitedU.S.companies,particularlyinthechemical,metal,andindustrialsectors.36

• More jobs. Employmentattributedtounconventionaloilandgasproductionadded1.7millionjobsin2012,andisexpectedtogrowtoapproximately2.5millionjobsin2015.37

• Government revenue. In2012,unconventionaloilandnaturalgaseconomicactivitywasexpectedtocontributenearly$62billionisfederal,state,andlocaltaxreceipts.38

• Balance of payments. TheshifttodomesticallyproducedoilandgasimprovedthebalanceofpaymentsfortheUnitedStatesin2012byanestimated$75billion.39

• Geopolitical benefits.Bydependingmoreondomesticenergysourcesandlessonunreliableoverseassuppliers,theUnitedStateswillgainsignificantpoliticalandeconomicbenefitsinimprovednationalsecurity,lessrelianceonmilitarymuscleinsensitive,energy-richregionsoftheworld,andbetterrelationswithforeignpowers.

Theshalegasrevolutionisuponus,anditsfullramificationsareonlybeginningtobeunderstood.Theeconomicandpoliticalbenefitsaresig-nificantandstrategically importantontheworldstage.Althoughthereareenvironmentalconcerns,theEPAconcludedthathorizontaldrillingandfrackingwereenvironmentallysafepractices.Thetechnologyworks.Weshouldembrace theseopportunities, carefullymanage theenviron-mental risks, encourage innovation and engagement with communitystakeholders,andmoveforwardtoachieveenergyindependence.

The NO proposition: Shale gas is not the answer to U.S. energyindependence.

Noonedoubtsthedramaticeffectsthatthecountry’sheadlongrushtoexploitthenaturalgascontainedinshaleformationshavehadontheeconomy.Thesurgeingassupplieshasloweredthecostofelectricityandindustrial feedstocksandincreasedeconomicwell-beingformillionsofconsumers.Ithasevenspurredtheuseofnaturalgasasatransportation


fuel.Yet the rush todrillmany thousandsofwellshas economiccostsand environmental risks thatneed tobebalanced against thebenefits.Although the extraction processmay have been deemed “safe” by theEPA,thereareserious,potentiallyirreversiblethreatstotheenvironmentbecause of faulty and improper execution of the drilling and frackingtechnology.Someofthemajorproblematicissuesarehighlightedbelow.

• Shale gas production can stress existing fresh water supplies. Theamountofwaterneededtodevelopashalegaswellisontheorderoffourmilliongallonsperwell,anamountlargeenoughtochallengewatersuppliesandinfra-structureinsomeregionsofthecountry.Weneedtobalancethewaterneedsofshalegasproducerswiththeneedsofotherwaterusers,suchasdrinkingwaterforthepopulation,waterforwildlifehabitat,agricultureneeds,andrecreationuses,andtheneedsofindustrialusers.

• Shale gas production can pollute surface and groundwater resources. Frackingfluidsconsistofvariouschemicaladdi-tivesthatimprovetheeffectivenessoftheprocess.Someofthesechemicalsarehazardousinsufficientconcentrations,andproducershavebeenreluctanttodisclosetheexactnatureoftheseingredients.Theriskofcontaminationtosurfaceandgroundwaterresourcescanoccurintwoways.Someofthewaterusedinhydraulicfrackingflowsbacktothesurface.Thisflowbackwaterhasalltheingredientsusedintheoriginalfrackingfluid.Thevolumeofrecoveryofthewaterinitiallyinjectedintothewellisabout25%.40Therestofthefluidremainsabsorbedintheshaleformation.Thesecondsourceofcontaminationisfromthenaturallyoccurringwaterfoundinshaleformationsthatflowstothesurfacethroughoutthelifeofthewell.Thisiscalledproducedwater,anditoftenhashighlevelsofdissolvedsolidsandminerals,includingbarium,calcium,iron,andmagnesium.Thisproducedwaterthatiscollectedatthewellsitemustbemanagedbecauseofitshazardousnature.Someofitisrecycledandcanbereusedonsite;someofitmustbetruckedtoremotedisposal


sites;whereassomeissenttomunicipalwastewatertreat-mentfacilities,whicharegenerallynotequippedtohandleit.Finally,thefrackingfluidthatisnotrecoveredatthewellsitecancontaminatepotablewateraquifers.Althoughthetypicaldepthofshalewellsisoftenthousandsoffeetbelowthedrinkingwateraquifers,thereistheriskthatsomeofthefluidsunderhighpressure,bubblingupthroughcracksandfissures,couldpollutetheaquifer.

Therehavebeennumerousincidentsofleaksandspillsofhazardousdrillingfluidsarounddrillingsites.Theleakshaveoccurredinpumps,hoses,pits,andvehicles,andhavecontaminatedlocalstreamsandrivers.Forexample,intheMarcellusregionofPennsylvania,thestatedepartmentforenvironmentalprotectionissuedabout1,000violationstoshalewelloperatorsin2011,themajorityofwhichwereforleaks,spills,andillegaldischargesofcontaminatedwater.41Theseincidentshaveresultedinpollutedstreams,fishkills,andseriouserosionproblems.

• Methane leaks from shale gas activities contribute to global warming. Theproponentsofshalegasdevelopmentoftenpointtothecleanburningpropertiesofnaturalgascomparedtocoal.Coaliswidelyusedinelectricpowergener-ationandisamajorcontributortogreenhousegasemissionswhenitisburned.Naturalgasisacleanerburningfuelwhenusedforelectricpowergeneration.However,recentresearch42suggeststhatmethaneleaksassociatedwithshalegasdevelop-mentaremuchhigherthanexpected.Theleaksoccurduringupstreamactivitieslikewellcompletionsandnaturalgasproductionandduringmid-streamactivitieslikegasprocess-ing.Leaksareanimportantissuebecausetheglobalwarmingpotentialofmethaneismorethan20timesmorepowerfulthatcarbondioxide.Thesepreliminaryfindings,ifconfirmed,raiseseriousquestionsabouttheenvironmentalbenefitsofshalegasasareplacementfordirtiercoal.

• Shale gas production can create seismic risks. Therehasbeenonlyonecasewherefrackingwasfoundtohave


causedanearthquake,buttherehavebeenanothereightcaseswherewastewaterdisposalwellshavebeensuspectedofinducingseismicactivity.43Thelong-termeffectsofthesepracticesareunknownatthistime.Althoughmostexpertsconsidertheriskofinducedseismicactivitytobelow,mostshaledevelopmenthasoccurredinsparselypopulatedareas,whereearthquakesarenotcommon.ThisisnotthecaseforMonterreyshaleinCalifornia,whichholdssignificanthydrocarbonreservesinshaleformationsandwherethenaturalseismicriskishigh.

In conclusion, we agree that shale gas development provides theUnitedStateswithsignificanteconomicandstrategicbenefits.However,shalegasisafossilfuel,anditssupplywillnotlastforever.Furthermore,we argue that the rapid development of this technology exposes theecosystemtorisksthatarepoorlyunderstood,anydamagemaybeirre-versible,andtheunintendedconsequencesmightbeenormous.Ratherthantoinvestinanotherformoffossilfuel,weshouldcontinuetoinvestin renewable and affordable energy technologies to secure long-lastingenergyindependenceforourcountry.


1.Doweneedenergysobadlythatweshouldignoretheenvironmen-talriskstowaterresourcesandhumanhealth?

2.Howwillamplesuppliesofcheapnaturalgasaffectdevelopmentofrenewableenergysupplieslikewindandsolarpower?

3.Howwillshalegasdevelopmentaffectthelong-termenergystrategyoftheUnitedStatesandcontributetonationalsecurity?

Issue 7: Is the Precautionary Principle a Sound Approach to Risk Analysis?

The YES proposition:Theprecautionaryprincipleisasoundapproachtoriskanalysis.

Althoughtheprecautionaryprinciplehasbeenappliedandre-statedinanumberofdifferentforums,itlacksauniversallyaccepteddefinition.Per-hapsthemostwidelyciteddefinitionisthe1998WingspreadStatement


on the Precautionary Principle, which states: “when an activity raisesthreatsofharmtohumanhealthortheenvironment,precautionarymea-suresshouldbetakenevenifsomecauseandeffectrelationshipsarenotfullyestablishedscientifically.Inthiscontexttheproponentofanactivity,ratherthanthepublic,shouldbeartheburdenofproof.”44Broadlyspeak-ing,theprinciplesupportsgovernmentalactiontolimittheuseorman-ufactureofnewproductsevenbeforeascientificconsensusisestablishedthattheymaybeharmful.Theseactionsareofteninvokedincaseswhentheuseoftheinnovativetechnologymayhavesubstantialandirreversibleeffects.Forexample,theEuropeanUnionhasinvokedthisprinciplefortheregulationofchemicalsunderitsrecentlyenactedRegistration,Evalu-ation,Authorization,andRestrictionofChemicals,orREACH,program.Certainchemicalfamilieshavethepotentialtobepersistentintheenvi-ronment,bioaccumulateintheecosystem,andbetoxictolivingorgan-isms.Otherchemicalsmaybeendocrinedisruptors,whichcouldcausereproductive problems in men and women, impaired immune systemfunctioning,variousformsofcancer,andbrainandbehavioralproblems.According to theREACHprocedures thatbecameeffective in2007, ifthereisreliablescientificevidencethatachemicalmightcausedamagetohumanhealthortheenvironment,buttheextentofthepotentialdamageremainsuncertain,regulatorsareauthorizedtoexerciseprecaution.45

Therearemanyexamplesofsituationsinwhichapplicationofthepre-cautionaryprinciplewouldhavepreventedadversehealthconsequencesordamagetotheenvironment.Weciteafewwell-documentedcases:

• Asbestos—ultimatelydeclaredacarcinogen• Benzene—exposurewasultimatelytiedtoleukemia• DDT—ultimatelyledtothecauseofreproductivedisorders

inbirds• CFCs—ultimatelydeterminedtodestroystratosphericozone• Leadedgasoline—ultimatelydeterminedtobeaneurotoxin

withparticularlyharmfuleffectstochildren’sIQlevelsandthecauseofanti-socialbehavior.

Now these substances have been totally banned inmost countriesaroundtheworld,oratleastsubjectedtoothercontrolsonmanufacture,


exposure, or use. However, these regulatory measures were not takenuntilafter thedamagewasdone,becauseknowledgeabout theadverseimpactsofthesechemicalswasnotavailablebeforetheywereusedinlargequantities.Giventhedamagethattheseproductscausedtohumanhealthandtheenvironment,wearguethatsocietywouldbebetteroffiftheseproductshadbeensubjecttotheprecautionaryprinciple.

Anunderlyingthemeoftheprincipleisthatdecisionmakinginthefaceofextremeuncertaintyandignorancerequirescautiononthepartofpolicymakers and thepublic.Sciencecan informadecision,but itis often inadequate to prove cause and effect.Nor can science resolvedifficultissuesandtradeoffsintheabsenceofadequatedata.Scienceisalsolimitedinprovidingguidancewhenethicalandmoralconsiderationsemerge, as for example, with geneticallymodified foods, cloning, andstemcellresearch.ModernbiologyandgeneticsresearchhasadvancedsorapidlythatGeorgeChurch,ageneticsprofessoroftheHarvardSchoolofMedicine,statedthatitwouldbepossibletocloneaNeanderthalbabyfromancientDNAifresearcherscouldfindawomanwillingtoactasasurrogate.46Becausescientistscandoincrediblethings,doesthatmeantheyshould?Assessingtheriskofanoveltechnologyorproductisnotaneasytask,andriskcalculationsaresubjecttobiasanderrorsofinadequatescope.

Inthiscontext,theprecautionaryprincipledistinguishesthetwocon-cepts,riskanduncertainty.Unlikeuncertainty,riskcanbequantified—experimentscanbeundertaken,variouspossibleoutcomescanbedefined,andprobabilitiescanbeassignedtotheoutcomes.However,manynoveltechnologiescanhaveunintendedconsequences.Withthesenewtech-nologies, variouspossibleoutcomescanbe identified,butprobabilitiesofoccurrencecannotbedeterminedwithanyaccuracyorcredibility.Yetpolicymakersstillneedtomakedecisionsintheirregard.Furthermore,somepossibleoutcomescanhavelong-lasting,enormous,andirreversibleconsequences,evenwhentheirprobabilityofoccurrenceissmall.Underthese circumstances, theprecautionaryprincipleholds that theburdenof proof should fall on the proponents of the activity to demonstratethatitissafe.Thisisnotthetraditionalapproachtoenvironmentalreg-ulation,especiallyintheUnitedStates,wheretheburdenforproofthatanactivity shouldbe regulated isplacedon thegovernment.TheU.S.


EnvironmentalProtectionAgency(EPA)maintainsadatabaseofexistingchemicals,conductsperiodictesting,collectsdatatomanagerisks,andtakesregulatoryactiononlyifnecessary.AccordingtotheEPA,mostnewchemicalsareapprovedforusewithoutbeingrestrictedorregulated inanyway.Thereareover80,000chemicalsalready inusecommercially.OnlyafteraproblemoccursdoestheEPAtakeaction.Weneedtochangethisparadigmandshifttheburdenofproofthatanactivityissafetotheproponentsoftheactivity,notleaveittothegovernmenttoprovethatanactivityisunsafe.Afterall,itisbettertobesafethansorry.

The NO proposition: The precautionary principle is not a soundapproachtoriskanalysis.

Ourmodern,technologically-advancedsocietyiscomplicated:welivewithriskseveryday.Theprecautionaryprincipleisasimple,deceptivelyattractiveidea,anditsoundssosensible.Afterall,weinstallsmokealarmstowarnusoffirehazardsinourhomesandworkplace,wewearseatbeltsandmotorcyclehelmetsforprotectionincaseofahighwayaccident,andwetoleratefullbodyscanswhenweboardcommercialairliners.Regula-torsoftheseactivitieshavedeterminedthatthecostoftheseprecaution-ary actions (installing smoke detectors, wearing seat belts, undergoingtransportationsecurityscreens)areminorinconveniencescomparedwiththepotentialconsequencesintheeventofafire,anautomobileaccident,oraterroristattack.Wechoosetomitigatetheproblemratherthanpro-hibittheactivityentirely.Thisapproachisparticularlyappropriateiftherearenosuitablealternativesavailablethatconsumerscouldchoose.

Inmanyinstances,however,theproponentsoftheprecautionaryprin-cipleplacemoreemphasisonthepotentialrisksthanthepotentialbene-fitsofanactivity.Theprecautionaryprinciplefavorsstatusquobygivingtoomuchweighttoanecdotalevidenceandothertheoriesofrisktohealthandtheenvironment.Theprinciplecanerroneouslymagnifytherisksofverylow-probabilityoccurrences,leadingtoover-regulationandunwar-rantedprohibitionsorrestrictionsonpotentiallybeneficialproductsandtechnologies.Forexample,theartificialsweetenersaccharinewasnearlybanned by the Food andDrugAdministration. Experimental researchfoundthatwhenmiceconsumedhugedosesofsaccharine(equivalentto


anadultdrinkingover300glassesofdietsoda),theydevelopedbladdercancers.AnactofCongressoverturnedtheFDA’sban,andrecentlysac-charinewasremovedfromtheofficiallistofcarcinogens.47

Thenumberofallegedhazardsthatweareexposedtodailyfarexceedsthe number that can ever be proven by sound science, and the popu-lar press and Internet blogs are filledwithunproven claims of danger.Examplesincludethefollowing:

• ThefearthattheMMRvaccine(formeasles,mumps,andrubella)waslinkedtoautismcausedmanyparentstoresistvaccinatingtheirchildren,puttingtheirownchildrenandthebroadercommunityatriskforthesediseases.

• Theoppositionbysomeexpertstofluoridationofthewatersupplyonthegroundsthatitmaycauseserioushealthprob-lemsandbyothergroupswhosuspectthatthepracticeisaCommunistplottounderminepublichealth.

• TheoppositiontogeneticallymodifiedcropsincertainpartsoftheworldliketheEuropeanUnionhascenteredessentiallyonthelimitationsofscienceandthedesireforcertainty.Sincescientificfindingsareprobabilisticinnatureandthereforeuncertain,thecriticsofthepracticecitetheuseofprecautionagainsttheslightprobabilityofacatastrophicoutcome.

• Theartificialsweetenercyclamate,unlikesaccharine,wasoffi-ciallybannedforuseindietfoodandbeveragesbytheFDAafterintensepublicpressureandmasshysteria.Theagencybaseditsdecisiononlimitedscientificevidence,whichcouldnotbereplicatedbyotherscientists.ItisstilledbannedintheUnitedStates,althoughitisavailablein55othercountries.

There is an inherentbias in theprecautionaryprinciple that favorsstatusquoovernovel technologiesandproducts.Theprinciple focusesexclusivelyon thedownside risksof an activitybut largely ignores theactivity’spotentialbenefits.Considerthecaseofgeneticallymodifiedfood.Theopponentsfearthatgeneticmodificationwillresult inseriouseco-logicaldamageanddangerstohumanhealthsuchasinfertility,immune


systemproblems,andacceleratedaging,eveniftheycannotquantifythedownside riskswithanyprecision.Yetgeneticallymodified foodsholdout theprospect for significantlyhigherproductivity inagriculture,byprovidingcropsthatarelesscostlyandhealthierthantraditionalcrops.Thesebenefitsareparticularlyimportantinthedevelopingworld.

AninterestingparalleltotheprecautionaryprinciplecomesfromtheeconomicanddecisiontheoryexperimentsofAmosTverskyandDanielKahneman.48Theydemonstratedaconceptcalled“lossaversion.”Peopledislikelossesfarmorethantheylikecorrespondinggains.Forexample,someonewholoses$100issignificantlylesssatisfiedthananotherpersonwhogainsa$100windfall.Inthecontextoftheprecautionaryprinciple,out-of-pocketcostsorlossesfromthestatusquoseemsmuchworsethanopportunitycostsorbenefitsforegone.

In conclusion, we argue that there is no substitute for the properassessment of risk and that there is no better way to inform decisionmakers thansoundscience temperedwith rationaldebate.Weneed toconsiderandweighthecostsandrisksofanactivityagainstthepotentialbenefitsandallowforanadequatemarginofsafety.Werealizethatpeopletendtoover-reacttominisculerisks,andweneedareasonedapproachfordealingwiththistendency.Theapplicationoftheprecautionaryprinci-plealsotendstostifleinnovation.Thus,wearguethattheprecautionaryprincipledoesnotprovideasoundbasisforriskassessment,anditstiflesinnovation.


1.Shouldwepaymoreattentiontothepotentialrisksofanactivityorthepotentialbenefits?Defendyouranswer.

2.Howmaytheapplicationoftheprecautionaryprinciplesetobstaclesinthepathofdevelopingcountries?

3.Describe therelationshipbetweentheprecautionaryprincipleandscientificevidence.

4.To what extent must the precautionary principle require that allnationsrespondtoenvironmentalproblemsinthesameway?

5.Thinkingabouttheprevioussixdiscussionquestions,doesthepre-cautionaryprinciplechangeorchallengeyourassumptionsonanyofthepriorissues?


Issues Linked to Myths

Thesevenissueswehavejustexploredcanbelinkedtothefivesustain-ability myths Scientific American described earlier in this chapter. Toreview,thesemythsare:

1.Nobodyknowswhatsustainabilityreallymeans.2.Sustainabilityisallabouttheenvironment.3.Sustainabilityistooexpensive.4.“Sustainable”isasynonymfor“green.”5.Newtechnologyisalwaystheanswer.

Hereisthelinkagebetweentheissuesandthesemyths:

1.Issustainabilityarealisticobjectiveforsociety?Thisissueisanexampleofmyth#1—nobodyknowswhatsustainabilitymeans.

2.Shouldecosystemservicesbemonetized?Thisissueisanexampleofmyth#3—sustainabilityistooexpensive.

3.Are market-based systems better than government regulations inachievingsustainability?Thisissueisacombinationofmyth#2and#4—sustainabilityisallabouttheenvironmentandisasynonymforgreen.

4.Does geo-engineering offer a sound approach to address climatechange?Thisissueisanexampleofmyth#5—newtechnologyisalwaystheanswer.

5.Shouldwaterbeprivatized?Thisissueisanexampleofmyth#3—sustainabilityistooexpensive.

6.IsshalegastheanswertoU.S.energyindependence?Thisissueisanexampleofmyth#5—newtechnologyisalwaystheanswer.

7.Istheprecautionaryprincipleasoundapproachtoriskanalysis?Thisissueisacombinationofmyth#4and#5—itisasynonymforgreenandnewtechnologyisalwaystheanswer.


Summary

InChapter3wehavereviewedopposingpointsofviewonsevencriti-calissuesatthecenterofsustainability-relatedcontroversiesandlinkedtheseissuestocommonlyheldmythsaboutsustainability.Byjuxtapos-ingtheseopposingpointsofview,weencourageyoutothinkcriticallyabout them, to explore the authors’motivations and value systems, aswellastheirgraspoftheissues,tounderstandwhatevidenceispresentedtosupporteachpointofview,andwhatassumptions—bothimplicitandexplicit—areusedtoframethearguments.Themythsshouldassistthiscriticalthinkingprocess.Dependingonthecontext,youmayhavebeenpersuadedorinducedtoformapersonalopinionaboutthetopic.Whichpositiondoyouchoose?Why?

Ourunderlyinggoalinexploringthesecomplexissuesistohelpyouunderstandthatmostofthecontroversialissuesrelatedtosustainability,manyofwhichthepublicneedstounderstandsothatitcanweighinonthedevelopmentofpolicyrelatedtothem,arenoteasilyresolved.Theyareexceedinglycomplex.Theremaybenorightansweravailabletous,butrather,betterwaystoapproachtheissue’smanagement.Weneedtobuildourskillsinworkingwithcomplexthinkingandargumentationinordertounderstandwhatwouldconstitutethebest,nottheright,sus-tainableapproach.

CHAPTER 4

Decision Making in Sustainability: Case Studies

Learning Objectives

• Becomefamiliarwithsomeofthebasicissuesraisedinteachingcasesacrosstheareaofsustainability

• Identify,researchanddevelopsolutionstoproblemsraisedincases

We learned in thepreviouschapters that sustainability in thebusi-nesscontextinvolvescomplextrade-offs—forexample,choosingbetweenshort-termcostsandlong-termbenefitsorbetweenlow-riskestablishedtechnologiesandhigher-risk(andperhapsbetterfortheplanet)newtech-nologies.Inbusiness,thefactsandcircumstancesofanygivensituationoftenwilldiffer,dependingon the industry, the stateof the economy,and the core values of the company and its executives.We live in anambiguous world. In this context, educators for years have used casestudyresearchtohighlightreal-lifesituationsandpresentstudentswiththechallengeofusingalimitednumberofeventsorconditionstoana-lyzemanagerialdecisionsanddevelopstrategyoptions.Somecasestudiesaskthereadertomakespecificrecommendationstomanagement—andtosupport these recommendationswithcarefuland insightfulanalysis.Othercasestudiesprovideusefulhistoriesofbusinessissuesorrelevantbackgroundmaterialonparticulartopics.

Inthischapter,wecollectandsummarizeavarietyofcasestudiesonsustainability-relatedtopics.Ouroperationaldefinitionofsustainabilityinmakingthesecasechoicesistousethetriplebottomlineapproachor,asitisoftendescribed,thethreeP’s,theneedforcompaniestobalancetheProfitmotivewithadesiretosafeguardthePlanetandoperatewithaconcernforPeople—employees,thecommunity,customers,andother


stakeholders.Thesecases illustratedecisionmakingaroundsustainabil-ity issues.Forsimplicity,wehavegroupedthesecases intosixsections,basedontheirmajorfocus—entrepreneurialbusinessmodels,thegreenconsumer market, the regulatory environment, consumer pressure forchange, the implementation of change inmainstream companies, andsustainabilityandcorporatefinance.However,thiscategorizationisoneof convenience, and readersmay choose to use these cases to achievemanyotherlearningobjectives.Thecasescontainedineachsectionaredesignedforuseincoursesinsustainabilityinthebusinessenvironment,corporatestrategy,finance,marketing,entrepreneurship,businesspolicy,andsupplychainmanagement.Wesummarizethemajorpointsineachcasetoexploretheusefulnessofthecase,andwedonotproposeanycasesolutionsorhowreadersmightframeacaseanalysis.Reviewofthismate-rialwillalsogivestudentsasenseofthedecision-makingcontextaroundsustainabilityissues.Readersinterestedinlearningmoreaboutacasecanthenacquireitfromtheappropriatesourceidentifiedintheendnote.

Entrepreneurial Business Models

Thecasesinthissectiondescribeseveralexamplesofsuccessfulentrepre-neurswhohavedevelopednewbusinessmodelsthatseektoblendmarketandmission-orientedvaluesandstrategies.Inthesecases,theentrepre-neurs followednon-traditionalpaths toachievebusiness success.Thesecasesaredesignedtohelpthereaderevaluatealternativebusinessmod-els, investigatethesustainabilityissuesrelatedtothesevariousmarkets,andunderstandthatprofitmaximizationisnottheonlygoalofanewbusiness.

Burt’s Bees: Leaving the Hive1

Summary

ThiscaserelatesthestoryofhowRoxanneQuimbyandBurtShavitz,thefoundersofBurt’sBees,grewthecompanyfromthebackofapick-uptruck sellinghoney-basedproducts in ruralMaine in1984 tobecomethe leader of natural personal care products.Their original visionwas

dECISION MAkINg IN SUSTAINABILITY: CASE STUdIES 95

todevelopearth-friendlyproductsthatwouldoffersuperiorproductsatapremiumprice.Theyworkedhardtocreateproducts thatwerecon-sistentwiththeirmissiontooffertheircustomersthe“greatergood”—their corporate motto. The company’s culture and brand exuded ananti-commercial image of friendly quirkiness as exemplified by BurtShavitz’sfaceonthepackage.Thecompanywascommittedtotheenvi-ronmentandtousingnaturalingredients.Burt’sBeesdefineditsprod-ucts as harvested from nature, meaning that the essential ingredientswerederivedmostlyfromplants,fruits,andseeds,andtheyavoidedtra-ditional chemicals andfillers.Unlikemostof their competitors in thepersonal casebusiness, the companyusedonlynatural colors and fra-grances.Thecompanylabeledeachoftheirproductswitha“naturalbar”to informconsumerswhatpercentageof theproductwasnatural,andthey used small packages so that consumerswould finish the productbeforeitsexpirationdate.Inaddition,theyusedpackagingfromrecycledmaterials.Thecompanyattractedemployeeswhogenerally shared thiscorporatecultureandvision.

AsCEOofthecompany,Quimbywasabletoachievesignificantsalesgrowthovertheyears,whileShavitzshowedlessinterestinthebusinessandretiredtoMainein1999.Rapidgrowthinthecompanywasaccom-paniedbymanagementchallengesand,in2003,Quimbysoldan80%interestinBurt’sBeesfor$180milliontoaprivateequityfirmthatwouldcontinuetogrowthefirmbutallowhertomaintainanactiverole.Theprivateequityfirmhadareputationforbuyingsmallcompanies,improv-ingtheimageandsales,andtheneithersellingthemtoastrategicbuyeror taking them public.Quimby stayed on until 2004, and then JohnReplogle,anexperiencedmanagerfromUnilever’sNorthAmericandivi-sion,cameinasthenewCEO.Thenewteammadeimmediateimprove-ments by streamlining the product line, imposing tighter inventorycontrols,improvingthesalesforecastingprocess,and,overall,bybringingfresheyestothebusiness.In2007,theCloroxCompanyacquiredBurt’sBees.Thequestionremainswhetherthecompanycancontinuetogrowandmaintainitscorevaluesforthegreatergood.Forashortbackgroundonthecompany’sfoundersanditshistory,seethisInternetvideo:http://www.youtube.com/watch?v=NADaAvW5_4Q


Learning Objectives

ThiscasehasbeenusedincoursesonSustainabilityintheBusinessEnvi-ronment, Entrepreneurship, Marketing, and Corporate Strategy. Thelearningobjectivesare:

1.Understand how a mission-oriented business can thrive in anentrepreneurialenvironment.

2.Explorethetensionbetweenmaintainingaquirkycorporatecultureinahighgrowthenvironment.

3.Examine the issues around the transition from an entrepreneurialmanagertoamoretraditionalcorporateculture.

guideline Questions

1.CanBurt’sBeesbecomeamainstreamproductinthepersonalcaremarket—similartoStarbucks’positioninthecoffeemarket—whileremainingtruetoitscorevalues?

2.Canothercompaniesreplicatetheir“GreaterGood”businessmodel?3.What are the risks and opportunities for Burt’s Bees business

followingacquisitionbyClorox?

Social Entrepreneurs: Correcting Market Failures (A)2

Summary

Whenthere isamarket failure, that is,an inefficiencythatresults inalower overall level of economic value or social welfare, the traditionalresponsehasbeengovernmentintervention.Recentlyanewformofbusi-nessmodelhasdevelopedintheformofsocialentrepreneurship.Whilesocialentrepreneursaresimilartotraditionalentrepreneursinthattheybeginandmanagetheirownorganizationusingavarietyentrepreneurialskillsandmarketprinciples,theyaredifferentinanimportantway—theyprioritizesocialimpactoverthecreationofwealth.Thisdifferenceinpri-oritieshasenabledsocialentrepreneurstodevelopnewwaysofcreatingsocialvaluebyservingtheneedsofpoor,disadvantaged,andneglectedcommunities.


Thecasepresentsthebackgroundsandbusinessmodelsofthreesocialentrepreneurs.DavidGreenofProjectImpactwasaforensiccostaccoun-tantbytraining.Hedevelopedaninnovativeapproachtomanufacturinglow-cost,highqualitymedicalsuppliestotreatandpreventblindnessanddeafnessinthedevelopingworld.Green’sapproachfocusedoneliminatingthepricedisparity(notincomedisparity)thatkeptbasicgoodsandser-vicesoutofreachofthepoor.VictoriaHaleofOneWorldHealthworkedfortheU.S.FoodandDrugAdministrationandwasapharmaceuticalsci-entist.Shesoughttodevelopnewmedicinesfortheinfectiousdiseasesthatkilledmillionsofpeopleinthepoorestpartsoftheworld.HalesoughttocorrecttheissueofpromisingdrugsbeingabandonedbyWesternphar-maceutical companies because they were not sufficiently lucrative. JimFruchtermanofBenetechwas an engineer by training and a successfulSiliconValleyentrepreneur.Usingaventurecapitalapproachtostartnewbusinesses,hecreatedtechnology-basedprojectsthatrangedfromreadingmachines for theblind to innovative software toprotectboth informa-tionandthepeoplewhocollectitinthehumanrightsfield.Fruchtermanbrought a varietyofuseful technologies to the social sector,whichhadbeendismissedasinsufficientlyprofitable.ForashortdescriptionofJimFruchterman’sevolutiontobecomeasocialentrepreneur,takea lookattheInternetvideo:http://www.youtube.com/watch?v=4UMhTbkZYWg

Learning Objectives

ThesecaseshavebeenusedincoursesonSustainabilityintheBusinessEnvironment,BusinessEthics,CorporateSocialResponsibility,Businessand theDevelopingWorld, EconomicDevelopment, and Innovation.Thelearningobjectivesare:

1.Understandwhatmotivatessocialentrepreneursandhowtheydifferfromtraditionalentrepreneurs.

2.Become aware of some of the ways in whichmarket failures canariseandthevarietyofwaysinwhichthosefailurescanbeaddressedwithoutgovernmentintervention.

3.Understandtheskillsandexperiencethatagroupofsocialentrepre-neursdrewontolaunchtheirownenterprises.


guideline Questions

1.WhatspecificpersonalskillsdidGreen,Hale,andFruchtermanhavethatledtotheirsuccessassocialentrepreneurs?

2.Identify themarket failures faced by each entrepreneur and com-pare/contrast their approaches to correcting the market failures.Whatwerethekeysuccessfactorsforeachentrepreneur?

3.Whatgeneralrecommendationscouldyoumaketothethreeregard-ingtheseissues?

4.Can the social entrepreneurship business model be applied tonon-medicalmarketfailureswithoutdirectgovernmentaction?

Tapping the “Green” Consumer Market

Thecasesinthissectiondescribehowsomecompanieshavesucceededindevelopingnewproductstomeetincreasingconsumerdemandformoresustainable products. In some cases, the company’s original intentwastotapthismarketsegment.Inothercases,thecompanyhadtochangeits processes and practices to reach this targetmarket.These cases aredesignedasanopportunityforthereadertoevaluatethechallengesforan established company thatmay be associated with unsustainable orhazardousmaterials.Theypresenttheopportunitytothinkabouthowacompanycantrytorebranditselftocapturealargersliceofthegrowing“green”consumermarket.

Cradle to Cradle Design at Herman Miller: Moving Toward Environmental Sustainability 3

Summary

Having adopted the triple bottom line approach ofmeasuring perfor-mance infinancial,environmental,andsocial responsibility terms, fur-nituredesignerHermanMilleradoptedacradle-to-cradle(C2C)designprotocol that emphasized environmental sustainability. ImplementingtheC2Cprotocolrequirednotonlyacommitmentbyseniormanage-menttothedecision-makingprocessbutalsoasignificantcommitmentof stafftimeandmoney.Theirgoalwas tocreateazero-wasteproduct


where all thematerials could be re-used and remain in a closed loop.Zerowastewouldallowthecompanytoeliminatetheadverseeffectsoftheproduct’sdisposalinlandfillsorotherharmfulmeansofdisposal.Thecompanychosethisprotocoltodesignitsnewmid-levelofficechair,theMirrachair.TheC2Cprocess,however,wasnotwithouttrade-offsandrisks—technical,financial,andmarket.Thecentraldecisioninthecasewas thechoiceof twodifferentplasticmaterials in thearmpadof thenew chair.Thematerial usually chosen for the applicationwaspolyvi-nylchloride(PVC),widelyusedthroughoutthe industryandnotverycostly.Thepotentialreplacementplasticwasthermoplasticpolyurethane(TPU),more environmentally friendlybutmore costly. In addition tothecostissue,choosingTPUwouldintroducetechnicalrisks,sincetheengineersatHermanMillerwerenotfamiliarwiththismaterial.Itcouldalsopresenttimingissuesiftheproductionschedulecouldnotbemet.TherewerequalityandperformancedifferencesbetweenPVCandTPUthathadtobeweighed.UsingTPU,however,couldprovidethecompanywithpotentialfirst-movermarketingadvantagesbyofferingcustomersaPVC-freechairdevelopedwiththeC2Cdesignprotocol.

ThetacticalissuesofimplementingtheC2Cdesignprotocolpresentedone set of challenges—whether to choose PVC orTPU. On anotherlevel,thecasealsoraisedsomeimportantstrategicissues.ShouldHermanMiller try to capture thevalue createdby thenewprotocol?Althoughthefirmdesiredtobeenvironmentallyresponsible,muchifnotallofthevaluederivedfromtheC2Cprotocolwouldbecapturednotbythefirm,butby society.Yet successful implementationof this strategic initiativewouldenablethecompanytobeanenvironmentalandproductdesignleaderintheofficefurnitureindustryandprovidemarketingandpublicrelationsbenefits.AsthefirsttoadopttheC2Cprotocolanditshigherperformance standards,HermanMiller could hope to enjoy increasedinfluenceinlegislationandpublicopinioninawaythatcouldthen,overtime,resultinacompetitiveadvantage.Itisinthiswaythatthefurnituredesignerwouldbeabletocapturethevalueofitsinitiative.WhileC2Cimposeduponthecompanyanimmediatecost, itofferedapotentiallysignificantlong-termbenefit.ForbackgroundonWilliamMcDonough’sdescriptionofC2Cdesign,takealookattheInternetvideo:http://www.ted.com/talks/william_mcdonough_on_cradle_to_cradle_design.html


Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment,MarketingandInnovation,OperationsStrategy,andEnvi-ronmentalManagement.Thelearningobjectivesare:

1.IntroducereaderstotheC2Cdesignprotocol—howitworks,whatthechallengesofimplementingitare,andwhatsomeofitsbenefitsare.

2.Explore the tensionbetween implementing a far-ranging environ-mentalinitiativeandthepracticalaspectsofitsimplementationinday-to-dayoperations.

3.Understandhowthecreationofastrategicvisionimposesbehavioralchanges throughout the organization and the company’s relation-shipswithitssuppliers.

4.Showhowafirmcancapturefirst-moverstrategicadvantagefromanenvironmentalinitiative.

guideline Questions

1.HowdidHermanMillerimplementtheelementsoftheC2Cdesignprotocol for theMirrachair?Howdoes this implementationplandifferfromthetraditionalplan?

2.WhywastheC2Cdesignprotocolsoresourceintensiveandexpen-sive?

3.What factors shouldbe considered inmaking thedecision tousePVCorTPUfortheMirrachair?

4.Whatisyourrecommendation,choosingbetweenPVCandTPU?5.WhydidHermanMillermakethisstrategicenvironmentalinitiative

suchahighpriority?

Clorox Goes Green4

Summary

Clorox isawell-knownmanufacturerofhouseholdconsumerproductsincluding laundry additives and bleach, home and institutional clean-ingproducts,andwaterfiltrationsystems.Theirflagshipproduct,Clorox


Bleach,representsabout13%ofcompanysales,andthecompanyholdsthenumber one or number twomarket share position formost of itsbrands. Clorox cleaning products contain chemicals that have adversehealtheffects if improperlyexposed,andthecompany’sbrandedprod-uctsarenotconsidered“green.”Infact,Cloroxandotherindustrylead-ersinhouseholdconsumerproductsignoredthegreenproductsindustrythroughoutthe1990s.Clorox’smajorcustomerswerebig-boxstoressuchasWalmart,Target,andCostco.Meanwhile,anumberofsmaller,entre-preneurialcompaniessuchasSeventhGenerationandMethodProductsintroducedgreen cleaningproducts as early as 1987.These companiescapturedconsumersinincreasingnumbers,particularlyamongthemoreeducatedandthosewillingtopayapricepremiumconsistentwiththeirlifestyle.However,inmuchofthe1990s,greencleaningproductswereconsideredinferiorandoverpriced.

In themid-2000s, asgrowth in traditionalmarkets slowed,Cloroxbegantofocusonnewproductinnovationasthesourceforfuturemarketsuccess.Thegreenindustryhadimprovedproductperformance,and,withachangeinseniormanagement,Cloroxdecidedtodevelopitsownlineofenvironmentally-sensitiveproducts.Thetargetmarketsegmentwasthe“ChemicalAvoidingNatural” groupof consumers.This groupwantedgreenercleaningproductsbut felt that thepresentlyavailableproductsdidnotperformwell,camefromunknownorun-trustedbrands,weretooexpensive,ornotavailablewheretheyshopped.

In2008,CloroxannouncedthelaunchofGreenWorks,alineofnatu-rallysourcedcleaningproductsdevelopedthroughinternalR&Defforts.Theseproductsdidnotcompromiseonperformance,andCloroxpricedthem10%–20%above traditional cleaningproducts.Clorox evendis-closedtheingredientsinGreenWorks,asignificantdeparturefromestab-lished company norms.To boost the company’s marketing campaign,Cloroxestablishedapartnershipwith theSierraClub,whichendorsedtheproductlineinexchangeforashareoftheprofits.ThisprovedtobeacontroversialstrategyforbothCloroxandtheSierraClub.WhenGreen-Worksproductscametotheshelvesin2008,salesexceededexpectationsandquicklycaptured40%ofthemarketforgreencleaningproducts.WillthesuccessofGreenWorksprovideahaloeffect fortherestofClorox?Willtherebeacompetitivereactionfromthegreenmarketsegmentand


fromthetraditionalcompetitors?WhatnewopportunitiestoleveragethesuccessofGreenWorks shouldCloroxconsider?Theseandother issuesareraisedinthecase.ForabriefbackgroundonGreenWorks,takealookatthefollowingvideo:http://www.youtube.com/watch?v=S8FRatAJsB8

Learning Objectives

ThecasehasbeenusedincoursesonSustainabilityintheBusinessEnvi-ronment, Corporate Strategy, Entrepreneurship and Innovation, andEnvironmentalManagement.Thelearningobjectivesare:

1.Explorethechallengesofintroducingalineofnewproducts(greenproducts)thatareperceivedbythemarketplaceasdissimilartothecompany’sestablishedbrand(harshchemicals).

2.Explorethetensioninswitchingstrategiesfromfastfollowertofirstmover.

3.Showhowafirmcancapturestrategicadvantagebytakinganenvi-ronmentalinitiative.

guideline Questions

1.Whatfactorswentintothedecisionto(a)investinR&Dtodevelopanewbrand,(b)makeanacquisition,or(c)extenditsexistingprod-uctline?

2.WhatwasClorox’spricingstrategyforGreenWorksandwhatfactorscontributedtoitssuccess?

3.CanClorox leverage the successofGreenWorks inother areas? Ifso,how?

4.WhatareClorox’snextstrategicmovesinthegreenmarketplace?

Whole Foods Market, Inc.5

Summary

WholeFoodsstartedasasinglefoodstorein1980andby2006hadgrowntobecometheleadingnaturalfoodsretailerintheUnitedStatesandthe


country’s fastestgrowinggrocerychain.Thecompetitive landscapewasshifting from small independent natural and organic food outlets tomajortraditionalfoodchainsandbigdiscounterslikeWalmart.

ThecasedescribesWholeFoods’historyandculture,showinghowitdevelopeditsstrategyandbuiltastructurethatallowedrapidadaptationtolocalmarketconditions.JohnMackey,thefounder,beganhiscareeraspartofanorganicfoodco-opbutsoonexpandedthescopeofhisbusinesstoincludeawiderrangeof“natural”products.Alongtheway,thecompanyestablished itsown retail brandas its fortunes roseon thenatural foodtrend.WholeFoodsachieveditsrapidexpansionbyopeningnewstoresinstrategiclocationsandacquiringsmall,regional“niche”competitorsinnewterritories.Oneofitskeycorecompetencieswasitsexpertiseinman-aging freshmeat,fish, andproduce,which attracted customers to shopmoreoftenatWholeFoods.Abrightandpleasantstoreatmosphere,theabilitytosamplefoods,andseatingareasforpeopletoeatandmeetfriendsencouragedcustomerstovisitandspendmoremoney.Thecompanywasabletoachievehighlevelsofworkerproductivitybymotivatingteamsofemployeesandbyencouraginggreateremployeeretention.Furthermore,Whole Foods was successful in charging a significant price premium,whichenabledittoearnprofitmarginshigherthantheindustryaverage.

Successbreedsimitation,however,andWholeFoodsisfacingcom-petitivethreatsfromdirectrivalslikeWildOatsMarkets,Inc.andmassmerchandiserslikeWalmart,whowantabiggersliceofthenaturalfoodsmarketplace.JohnMackeyiscontemplatingtherapidexpansionofhisbusinessinorganicfoodstonaturalfoods.Notonlyishefacingseriouscompetitivepressures,heisalsodealingwithissuessuchasthetradeoffbetween environmental objectives and traditional shareholder valueimperatives.ForashortinterviewwithJohnMackey,takealookatthefollowingvideo:http://www.youtube.com/watch?v=ym-OusRtcoI

Learning Objectives

ThecasehasbeenusedincoursesonSustainabilityintheBusinessEnvi-ronment, Corporate Strategy, Marketing, and Entrepreneurship andInnovation.Thelearningobjectivesare:


1.Explorehowbusinessstrategyevolvesovertime.2.Showhowafirmcancapturestrategicadvantagebycapitalizingon

atrendtowardahealthierlifestyle.3.Explorethestrategicoptionsofcompetingagainstmuchlargerrival

firmsandtheuseofagilityasacompetitiveadvantage.

guideline Questions

1.Whatisthedefinitionof“naturalfoods?”Howdoesitdifferfromotherconceptslikeorganic,fairtrade,orsustainablygrownfood?

2.What makes the natural food market an attractive businessopportunity?

3.WhatwasWholeFoods’businessstrategyinitsearlyyears,andhowdiditchangeovertime?

4.WhatarethemajorthreatstoWholeFoods’leadershippositioninthenaturalfoodsindustry?WhatcanWholeFoodsdotomaintainitsleadershipposition?

Sustainability and the Regulatory Environment

Thecasesinthissectionassessthewaysinwhichgovernmentregulationofenvironmental issuesaltersmarkets, industrystructure,andbusinessstrategy.Theregulationsoftenareshapedtoaddressmarketfailuresorsit-uationswherefreemarketsfailtoallocateresourcesefficiently.Thisgroupofcases isdesignedtoanalyze thecomplexitiesofpolicydecisionsandexplorehowenvironmentalregulationsimpactabusiness,sometimesasaconstraintontheirpracticesandsometimesasabusinessopportunity.

Du Pont Freon Products Division (A)6

Summary

The case of theDu Pont Freon® products division highlights how theforcesofscientificdiscovery,competitivemarkets,andnationalandinter-national regulationcan influencecorporate strategyandenvironmentalsustainability.TheFreon®productsdivisionmanufacturedchlorofluoro-carbons(CFCs),agroupofhighlyengineeredchemicalcompoundsusedprincipallyinrefrigeration,solvents,foamblowing,aerosolpropellants,


andfireextinguishing.CFCshadbeeninventedbyDuPontinthe1930s,andthecompanyreapedsignificantearlyrewardsbecausetheseproductswereinherentlysafeforuse.Theywerechemicallystable,lowintoxicity,andnon-flammable.By the late 1980s, the division generated sales ofabout$600milliondollarsannuallyandwastheworldleaderininnova-tion,research,anddevelopment.DuPontalsoenjoyedstrongcustomerloyalty.

In1972,twochemistsfirstpostulatedalinkbetweenCFCsandthedepletion of the ozone layer, and in 1978, theU.S. government tookactionthatrestrictedtheiruseasaerosolpropellantsbecausethatappli-cationwasdeemedanon-essentialuse.DuPont thenopposed furtherregulationorrestrictionsontheuseofCFCs,claimingthatthescientificcaseagainstCFCswas inconclusive.However,evidencesupportingthelinkcontinuedtomountthroughoutthe1980s.MembergovernmentsoftheUnitedNationsbegantonegotiatesevererestrictionsonCFCsthatwould clearly affectDuPont’s businessprospects. InSeptember1987,aninternationalaccord,theMontrealProtocol,heldeachcountrytoits1986 levels ofCFCs andpromised to cutCFCproduction inhalf by1989.Avideothatexplainstheresearchonozonedepletionin1987canbeviewedat:http://www.youtube.com/watch?v=BiGX0V3u4XU

Thesettingforthecaseis1988.Facingthesesevereexternalpressures,DuPontdecided that itneeded to respondbydeveloping appropriatestrategyoptions.TheMontrealProtocol representedachallenge toDuPont’sexistingdivision.ItalsorepresentedanopportunityforDuPonttodramaticallyrampupresearchonCFCsubstitutes,establishasignificantmarketsharefortheseproducts,andenhanceits leadershiprolewithintheindustry.Therewerealsosignificantrisksassociatedwitheachstrategyoptionfromaprofit,corporateculture,andpublicrelationsperspective,aswellasrisksregardingfuturescientificfindingsandpersistentscientificuncertainties.Inthishighly-chargedatmosphere,DuPonthadtomakecriticaldecisionsaboutitsstrategygoingforward.

Learning Objectives

ThecasehasbeentaughtincoursesonRegulation,SustainabilityintheBusinessEnvironment,EnvironmentalManagement,andStrategy.Thelearningobjectivesare:


1.Explore the strategyoptions for afirmwhen thedemand, supply,and competitive conditions have been dramatically altered in ahighlychargedpoliticalsituation.

2.Understandhowcompaniescanrespondwhenscientificfindings—even those that have not yet been proven—create political andregulatorypressuresforchange.

3.Examinethenatureofexternalitiesandpublicgoodsinthecontextofbusiness-governmentrelations.

guideline Questions

1.Considering themarket forCFCs inNorthAmerica andEurope,howwilltheMontrealProtocolaffectthemarketstructure,produc-tionandconsumptionvolumes,andpricesineachregion?

2.Howwill theMontrealProtocol affect thepolitical landscapeandregulatoryclimateforCFCproducerslikeDuPont?

3.WhatarethestrengthsandweaknessesofDuPont’sCFCbusinessin1986?

4.WhatarethestrategyoptionsforJoeGlas,theCFCbusinessman-ager,movingforward?Whichoftheseoptionsdoyourecommend?

Molten Metal Technology (A)7 and (B)8

Summary

TheMoltenMetalTechnology (MMT) cases provide some interestinglessons in the challenges and pitfalls of building a dynamic high-techenvironmentalremediationandservicescompanyfromscratch.InCaseA, which covers the 1989–1995 period, the story unfolds like a fairytale. A young PhD graduate student atMIT,ChristopherNagel, per-formedresearchonanewprocesstotreathazardouswastesbydissolvingtheminabathofmoltenmetal.Thehightemperaturemetalbathbreaksthechemicalbondsof thehazardouschemicals so that theconstituentelements can be largely reformed into re-usable commercial productsor benign by-products. A video, Molten Metal Technology—Elemental Recycling: The Future of Environmental Technology, explains the processquitesimply(http://www.youtube.com/watch?v=kg1EaEGXdoI).


Sincetheprocessworkedsuccessfullyinthelaboratory,Nagelappliedfor and received a patent on the process, called the catalytic extractionprocess(CEP),withtheintentionofcommercializingit.HethenteamedwithWilliamHaney,a27-yearoldentrepreneurfromHarvard,whohadalreadystartedandsoldacompanythatearnedhimmillionsofdollars.MMTwasformedin1989withHaneyasCEOandNagelaschiefscien-tist.Thenext6yearssawafairlycontinuousstreamofbusinesssuccessesandpublicaccolades.CEPwashailedasthetechnologyofthefutureinthewastemanagementindustry,replacingconventionaldisposalmethodssuchas incineration. Successwas fueledby the energeticmanagement team,whichgarnered lucrativegovernmentcontractsandestablished strategicpartnershipswithleadingglobalcorporationslikeFluorDaniel,DuPont,Westinghouse,RollinsEnvironmental,andLockheedMartin.Inaddition,theregulatoryclimatewasfavorabletonovel,environmentallyattractivetechnologieslikeCEP.Furthermore,thegeneralpopulationwasbecomingincreasinglyawareoftheneedtosafelydisposeofhazardouswastestreams.TheU.S.CongressionalSuperfundAmendmentsandReauthorizationActof1986significantlyraisedthecleanupstandardsforpollutedmanufac-turingandlandfillsitesandheightenedinterestingame-changingreme-diationtechnologiessuchasCEP.Unlikecompetingtechnologies,whichoftenonlytriedtostabilizehazardouswastestreams,CEPpromisedtheirsimpledestructionandanopportunitytore-useandre-selltheresultingby-products.Politicians,includingAlGore,embracedMMTandpraiseditsbusinessmission,andthecompanyreceivedendorsementsandinterestfromeminent scientists,publicofficials, regulators, andpotential inves-tors.Thestarsseemedsoperfectlyalignedthatin1993thecompanyissuedstockthroughanInitialPublicOfferingthatraisedafresh$80million.

From1993to1996,thecompanycontinuedtoexpandforthepur-poseofdemonstratingtheeconomicandtechnicalviabilityoftheCEPprocesswithawidevarietyofprocessstreamsandoperatingconditionsoverlongperiodsoftime.Theleapfromsuccessinthelaboratorytofullcommercialization isnot an easyone.Yet the companyearned itsfirstprofit in 1995 and some independent financial analysts recommendedMMTasa“strongbuy”toinvestmentclients.However,otheradvisorswarned that,althoughthe technologyhadpotential, thefinancial riskswerestilltoohightojustifythelofty$500millionmarketcapitalization.


TheMMTCase (B) follows thecompanyover theperiod1996 to1997.DespitetherosyfinancialpredictionsandHaney’ssuccessinsecur-ing lucrative government contracts, MMT began to experience hardtimes.First,theDepartmentofEnergydeclinedtorenewalargeresearchcontractwithMMTinOctober1996.Thisnewsprecipitatedadramaticdecline in the price of MMT stock, which sent further shock wavesthroughtheinvestmentcommunityandthecompany.Second,theplantodemonstratetheprocessonafullcommercialscaleindicatedseriousflaws in the technology.This led to thecancellationornon-renewalofseveralimportantcorporatestrategicpartnerships.Therewereoccasionalglimmersofhope,but still theproblemspersistedand thenworsened.Headcount reductions and facility closings ensueduntil ultimately thecompanywasforcedtoseekprotectioninU.S.BankruptcyCourt.

Learning Objectives

ThetwocaseshavebeenusedincoursessuchasSustainabilityintheBusi-nessEnvironment,CompetitiveStrategy,EntrepreneurshipandInnova-tion,andEnvironmentalBusiness.Thelearningobjectivesare:

1.Understand the stepsnecessary toget a technology-based start-upcompanyofftheground.

2.Explore the different requirements for determining success in thelaboratoryandsuccessinfull-scalecommercialoperations.

3.Tobesuccessful,thetraditionalcompanyfacestheusualfinancial,market,andtechnologyrisksthatmustbeovercome.IntheMMTcases,thereaderisintroducedtopoliticalandregulatoryrisks—risksthat can arise suddenly,with little forewarning andwhich can beverydisruptive.

guideline Questions

Case A

1.WhatwasMMT’soverallbusinessmodelinitsearlyphase(1989–1995)andhowdiditchangeinitslaterphase(1996andbeyond)?


2.Whatarethedifferencesbetweenatypicalhightechnologystart-upcompany and a company designed to serve the hazardous wastemarket?

3.Whatwerethemajorfinancial,market,andtechnicalriskstosuccess-fulcommercializationthatthecompanyfacedattheendof1995?

4.What risk avoidance and risk mitigation strategies did MMTemploy?

5.Lookingaheadto1996andbeyond,whatrecommendationswouldyoumaketoBillHaney,theCEO?WhatrecommendationswouldyoumaketoChrisNagel,theChiefTechnologyOfficer?

Case B

1.Whateventsoccurredin1996thatupsetMMT’sbusinessplans?Inhindsight,whatcouldMMThavedonetopreventthemormitigatetheirimpact?

2.Whatlessonscanbelearnedfromthisexperience?

Range Resources: A Commitment to Transparency9

Summary

RangeResourcesisapubliclytradedindependentoilandgascompanywithheadquartersinPittsburgh,Pennsylvania.Since2007,ithasfocuseditseffortsonexploringfornaturalgasintheMarcellusregionofOhio,WestVirginia,Pennsylvania,andNewYork.Thepresenceofnaturalgasinshalerockhasbeenknownforyearsbutthetechnologytoextractthegaseconomicallyisafairlyrecentdevelopment.Newadvancesinhori-zontal drilling and inhydraulic fracturing (called fracking) technologyhavedramaticallychangedthesituation.Inthefrackingprocess,highlypressurizedhydraulicfluidsareinjectedintothewell.Whenpumpedwithsufficientforce,therockformations“fracture”andcreatenewchannelsforreleasingandenablingtherecoveryofnaturalgasandpetroleum.TherapiddeploymentofthistechnologyhasmadetheextractionofshalegasremarkablyproductiveandimportanttotheU.S.economy.Thevolumeofshalegasbeingproducedisrisingsoquicklythatithasthepotential


to supply up to 50% of natural gas production inNorthAmerica by2020,reducingthecountry’sneedforimportedpetroleumandcreatingmillionsofnewdomesticjobs.However,therapidincreaseinnaturalgasproductionintheUnitedStates,includingintheMarcellusregion,hasdepressedpricessothatthegapbetweenpetroleumandnaturalgashasdramaticallywidened,thusfurtherstimulatingdemandfornaturalgas.Yet becauseMarcellus gas iswell situated in the high-energy consum-ingMid-AtlanticandNortheastregions,producersofMarcellusgashaveenjoyed apricepremiumcomparedwith thebenchmarkprice.For aninterviewwiththeVicePresidentofGeologyandExplorationforRangeResources,WilliamZagorsky,takealookatthefollowingvideo:https://www.youtube.com/watch?v=wRKkjhtxiK4 The environmental impactsof fracking are discussed in the following video: http://www.youtube.com/watch?v=vyo9N1xkpY4

In 2004 the Environmental Protection Agency (EPA) released astudythatconcludedthatfrackingwasanenvironmentallysafepractice.Manygroupscriticizedthisreport.Oneofthemajorconcernswasthepotentialenvironmentalandhealtheffectsoffrackingonthequalityofgroundandsurfacewater.Eachfrackingwellrequiresabout3–4milliongallons of water to be injected into the well with chemicals added tothewatertofacilitatetheundergroundfracturingprocess.Thesechemi-calsmayincludefrictionreducers,stabilizers,acids,andbiocides.Theirexactchemicalcompositioncanvarydependingonthespecificgeologicchallenges.About50%ofthiscontaminatedwaterreturnstothesurfacefortreatment,whereit isstoredinabove-groundpondstoberemovedbytankerforinjectionintowastewaterwells.Theremaining“producedwater”isleftintheearth,whereitcanleadtocontaminationofground-wateraquifers,thoughtheindustrydeemsthishighlyunlikely.

Withthisbackground,thecentralissueinthiscaseiswhetherRangeResourcesshouldvoluntarilydisclosethevolume,chemicalcomposition,andclassificationoftheirfrackingfluids.AnewregulatorybillhasbeenintroducedinCongresslabeledtheFRACAct(FracturingResponsibilityandAwarenessofChemicalsAct).Ifpassed,theindustrywouldbefacingmorestringentgovernmentregulationofthefrackingprocessandunder-mineRange’s ability to drive growth through the use of the hydraulicfrackingprocess.However,thefateofthisproposedlegislationisuncertain


anddisclosureofcriticalinformationbyRangemighteveninfluencethelegislativeprocess.Would the companybenefit frombeing transparentinthisregard?Shouldthecompanygoagainstcurrentindustrypractice?Thesearethestrategicquestionsthatareaddressedinthiscase.

Learning Objectives

TheRangeResourcescasecanbeusedincoursessuchasSustainabilityintheBusinessEnvironment,GovernmentBusinessPolicy,CompetitiveStrategy,andEnvironmentalBusiness.Thelearningobjectivesare:

1.Understandthecomplexitiesofmakingpolicyandpublicrelationsdecisions.

2.Exploretheconflictsindecision-makingprocessesastheyrelatetostakeholdersatthenexusofenergyandenvironmentalissues.

3.Examinehowtoincorporatethebenefitsandrisksofacontroversialtechnologyintoabusinessstrategy.

guideline Questions

1.Why should Range Resources reveal proprietary technology andknow-howtothepublicwhenitisnotrequired?

2.HowdothebenefitsandrisksofRangeResources’short-termenvi-ronmentalstrategydifferfromitslong-termenvironmentalstrategy?

3.Would you recommend that Range Resources work pro-activelywithgovernmentregulatorsinthedevelopmentofpotentiallycostlyregulationsthatwillaffecttheirindustry?

Responding to External Consumer Pressures for Change

The cases in this section describe how some well-known brands maybecomethetargetofprotesterattacks.Oftenthecompanymaynotreal-izethattheiroperations(includingtheirextendedsupplychain)haveleftthemvulnerabletothesepressures.Thesecasesaredesignedtobuildandreinforce theunderstanding thatenvironmentalactivistsandconsumer


protestorsarestakeholderswhocaninfluencebusinessstrategyanddeci-sionmaking, and that there areways for companies todevelop robustbusinessstrategiesinthesecomplexsituations.

McDonald’s Corp.: Managing a Sustainable Supply Chain10

Summary

McDonald’sCorporation operates a highly complex and decentralizedglobalsupplychainforitsfastfoodrestaurants.Itsfourlargestpurchasesarebeef,chicken,packaging,anddairyproducts.Althoughitsmajorgoalsofquality,foodsafety,andcompetitivepricinghaveremainedunchangedovertheyears,creatingasustainablesupplychainhasalsoreceivedoffi-cialrecognitionasacorporategoal.ForMcDonald’s,thismeansthatitsglobal suppliersmust deliver the right products at the right times forthe long term, without interruption, following sustainable approachesthatreducewaste,minimizerisk,andprovideresiliencetosystem-wideshocks.Thesustainabilityinitiativeratessuppliersonparameterssuchassocialandeconomicindicators,environmentalperformance,andanimalwelfare.ForMcDonald’sEurope,asustainablesupplychainalsohastoconform to regulations andcustoms in theEuropeanUnion regardingtheimportofgeneticallymodified(GM)products.Europeancustomersactively request that supplies are certifiedasbeingnon-GM.However,becauseover90%ofglobal trade in soybeans isGMoriginmaterial,11purchasinglargevolumesofnon-GMproductsoverlongperiodsoftimeisdifficult.Themainsupplierofnon-GMsoybeansisBrazil.

In April of 2006, Greenpeace issued a report alleging that one ofMcDonald’s primary McNuggets suppliers had fed its chickens usingnon-GM soybeans from recently deforested land in the Amazon. Thesupplier in question was Cargill, a major international producer andmarketeroffoodandagriculturalproductswithsignificantoperationsinBrazil.However,becauseCargillwasnotwidelyknowntothepublicandMcDonald’swasahighlyrecognizedconsumerbrand,GreenpeacedecidedtofocusitsattackonMcDonald’s.ThereportwaswidelypublicizedandcoincidedwithenvironmentalactivistspicketingMcDonald’srestaurantsintheEU.ThereportandthesubsequentpublicitycaughtMcDonald’sby surprise, and they needed to frame a response in a short period of


time.WastheGreenpeacereportaccurate?WereitssuppliersencouragingadeforestationprograminBraziltogrowmorenon-GMsoybeans?WhatinfluencedidMcDonald’shaveoverthisfar-reachingsupplychain?

McDonald’sEuropereachedouttoCargillandothersintheirsupplychaintodiagnosetheproblem,developpragmaticalternatives,andfindasolution.TheyalsoreachedouttoGreenpeace.TheculminationofthiseffortwasthedevelopmentofapolicyamongMcDonald’sanditspartnersnottopurchasesoyafromdeforestedlandsandtocontinuetodevelopamoresustainablesoyaindustry.Inthewakeofitssuccessfulhandlingofthesoyaissue,McDonald’sformedtheSustainableSupplyChainWork-ingGroup(SSCWG)tohelpthecompanyachieveitssustainablesourc-inggoal.TheSSCWGwouldexpandthestrategyofsustainabilityacrossallaspectsofMcDonald’soperations,aswellasthoseofitssuppliers.

Indevelopingasupplychainthatbenefitedavarietyofstakeholdersaswellastheenvironment,McDonald’swaslookingtoenhanceitslead-ershiprolewithintheindustry.Asisoftenthecase,theattempttoestab-lish such a sustainable supply chainpresented the companywithbothchallengesandopportunities,suchasbalancingthedesireforsustainabil-ityagainstothersupplychaingoalsanddevelopingacommonstandardacrossthevarietyofcultureswhereMcDonald’soperated.Lookingfor-ward,therewerealsoopportunitiesforMcDonald’stocreateasustainablesupplychainthateffectivelywouldbecometheindustrystandardinthemindsofbothconsumersandsuppliers.

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment,BusinessandtheEnvironment,CorporateSocialRespon-sibility,CorporateStrategy,EnvironmentalPolicy,FoodPolicyandAgri-business Management, and Supply Chain Management. The learningobjectivesare:

1.Explorethelinkbetweencorporatestrategyandsustainability.2.Understandthecomplexityofglobalsupplychainsfromthediverse

perspectivesofinternalandexternalstakeholdersinalarge,multi-nationalcorporation.


3.Examinehowdifferentculturalnormsandpracticesaffectcorporatestrategyforaglobalenterprise.

4.StudyhowNGOs,environmentalactivistgroups,andgovernmentregulatorsinfluencecorporatepolicy.

guideline Questions

1.Besides sustainability, what are McDonald’s major supply chainobjectives, andhowwould youprioritize them? Inwhatways aretheseobjectivesmutuallycompatible?

2.Howcanamajorcorporationmanageaglobal,decentralizedsupplychaininwaysthatareconsistentwithitssustainabilityinitiatives?

3.HowshouldMcDonald’sengagewithenvironmentalactivistgroupssuchasGreenpeacetoresolvesustainabilityissuesinitssupplychain?

4.HowcanaglobalcompanysuchasMcDonald’sreconciledifferentregional perspectives about sustainability goals, protection of theenvironment, and economic development throughout its supplychain?

Metropolitan Water Supply Authority: Evaluating Security Risks12

Summary

Thiscasedescribes a complex riskmanagement challenge facedby thedirector of a ruralmetropolitanwater supply facility.The facility useschlorinegasinitswatertreatment,largelybecausechlorineisthemosteffectivetreatmentavailableintermsofsafety,cost,andenvironmentalimpact.Thechallengetothisdecisiontousechlorinecameinanimport-ant security alert from theDepartmentofHomelandSecurity (DHS).TheDHSconcernwasthatchlorine,ahazardouschemical,couldbeusedbyterroristsbothduringitstransporttothetreatmentfacilityandatthefacilityitself.Therewereseveralalternativetreatmentstrategiesthatthedirectorconsidered,andeachhadcertainadvantagesanddisadvantages.Atahighlevel,thechoiceinvolvedcentralizedtreatmentstrategiesversusde-centralizedtreatmentstrategies.Tosimplifytheanalysis,thedirectorcomparedthetechnologyoptionsbylookingattheentiresupplychainfromrawmaterial extraction tofinal consumption.He thenexamined


each option using three environmental criteria—greenhouse gas emis-sions,energyconsumption,andtransportationsystemeffects.Heneededtoweigh these factorsagainst thehomelandsecurity risks,andmakeadecision.

Learning Objectives

ThecasecanbeusedincoursesonSustainabilityintheBusinessEnviron-ment,Government andBusinessRelations,EnvironmentalPolicy, andSupplyChainManagement.Thelearningobjectivesare:

1.Explorehowanassessmentof terrorismrisksmayaffectcorporatedecisionmakingandstrategy.

2.Examinethecomplexitiesandpracticalconsiderationsofmanagingapublicenterpriseinasociallyresponsiblemanner.

guideline Questions

1.IstheDHSover-reactingtotheriskschlorineposes?2.How might a terrorist attack at the Metropolitan Water Supply

Authority’sfacilityinUnityleadtoapublichealthemergency?3.HowwouldMarkarguethattheriskofaterroristattackonchlorine

attheMetropolitanWaterSupplyAuthority’sfacilityinUnityisatanacceptablelevel?

4.Whenconsideringriskandpotentiallosses,whatactionscouldMarktake tomitigate bothof the factors, to lower theprobability thataneventoccurs,andtoreducetheconsequencesoftheevent(botheconomicandnon-economic)?

FIJI Water and Corporate Social Responsibility: Green Makeover or “Greenwashing”?13

Summary

ThecaseofFIJIWaterhighlightshowissuesofenvironmentalsustainabil-ityandcorporatesocialresponsibility(CSR)cancreatemarketingchal-lenges for a company as it seeks to expand into internationalmarkets.


FIJI Waterwasfoundedin1993toextractandbottleartesianwaterontheislandofVitiLevuintheFijiIslands.Itwasmarketedasaunique,pure,and exotic productwith anti-aging and immunity-boosting properties.Althoughthecompany’sinitialexpansionintotheUnitedStatesin1997wassuccessfulanddidnotresultinsignificantbacklashfromenvironmen-talgroups,its2004attempttoentertheUnitedKingdom,acountrywithhighqualitytapwater,encounteredresistance.Themaincriticismfocusedon the carbon footprint associated with the water’s traveling approxi-mately10,000milestomarket.ShortlyafterFIJI’sentryintothemarket,BritishgovernmentofficialsquestionedthebenefitofbringingwaterfromtheothersideoftheEarthwhenessentiallythesameproductwasavailableoutofthetaporcouldbebroughtinfrommuchclosersourcesinFrance.QuestionsovertheenvironmentalimpactofbottledwateringeneralandFIJIinparticularpersistedandbythefirstquarterof2008,owinginlargeparttoahighprofile,criticalBBCdocumentarythatfocusedonFIJIandapubliccampaigntoencourageLondonerstousetapwater,bottledwatersalesfellforthefirsttimeinyears.FIJIhadbeensingledoutasanexem-plaroftheadverseenvironmentalimpactoftheindustry.

Inresponsetoitspoorimage,FIJIunveiledits2008“carbonnega-tive”public relations campaign.Thecampaignhad twomain features.First,FIJIwouldcalculateanddisclosethecarbonfootprintofitsprod-ucts,bothintermsofitsownemissionsandthoseofitspartners,whomFIJI estimated to be responsible for 75%of its carbon footprint.Thisanalysis required carbon dioxide emissions be calculated across everystageoftheproductlifecycle.Second,FIJIpromisedtooffset120%ofitstotalcarbonfootprint,thusmakingthecompanycarbonnegative.Aspartofthiscampaign,FIJIannouncedinApril2008thatithadalreadyundertakenmeasurestoreduceitsemissions.Conservationistsquestionedthecalculationofitscarbonfootprintandcriticizedthecampaignasanexampleofgreenwashing,whilecontinuingtoextol theenvironmentalbenefitsoftapwater.

Learning Objectives

ThecasehasbeentaughtincoursesonSustainabilityintheBusinessEnvi-ronment, Corporate Social Responsibility, Marketing and Innovation,


Environmental Studies, and International Business. The learningobjectivesare:

1.UnderstandthetensionbetweenCSRandasustainablemarketingstrategy.

2.Provideaforumfordiscussingthechallengesofdevelopingcreativemarketing strategies in a contemporary world that values social,ethical,andenvironmentalissues.

guideline Questions

1.WhywasthemarketingstrategyofFIJIWatersosuccessful?2.HowwouldyoudeterminewhetherFIJIWaterisengagedingreen-

washing?3.If youwere advising FIJIWater, would you recommend that the

companygocarbonnegative?4.WhatcanFIJIWaterdotocreateasustainablebusinessstrategy?

Mainstream Companies: Implementing Change

Thecases in this sectiondescribehow traditional for-profit companieshavedevelopedcreativebusinessstrategiestocaptureasliceofthegrow-ingsustainabilitymarket—intheretail,food,andautomobileindustry.Eachindustrysectorhasahostofcompetingtechnologies,environmen-talregulationsandstandards,financialconsiderations,andmarketchal-lenges.Thesecasesaredesignedtocreateanopportunitytoevaluatethesemainstreammarkets,toexplorethechallengesofimplementingchangeinsuchlargeanddiversifiedorganizations,andtoidentifythebenefitsandrisksofpursuingsustainabilityinitiatives.

Walmart’s Sustainability Strategy14

Summary

In October 2005 Walmart announced a major sustainability strategyto reduce its environmental impact. Inaddressing the issueproactivelyratherthandefensively,asthecompanyhaddoneinthepast,Walmart’s


leadershipsawsustainabilityasanopportunitytoinnovateandimproveitscompetitivepositionratherthanasanachievementattheexpenseofprofitability.Suchashiftcameinthewakeofa2004strategicreviewofthelegalandpublicrelationschallengestoitsoperations.Inthecourseofthatreview,environmentalimpactwassingledoutforfurtheranalysis.Outsideconsultantsandadvisorsidentifiedthreeareasforimprovementfrombotheconomicandsustainabilityperspectives—energyconsump-tion,waste,andproducts.Thecompanygoalwastobecomemoreeffi-cientinitsuseofenergyandreducewastewhileworkingwithsupplierstoimprovethesustainabilityofitsproductsthroughoutthesupplychain.Thethreefocusareaswerefurtherbrokendowninto14sustainablevaluenetworks,eachwithitsownexecutivesponsor.Thiscaseexaminesthreespecificvaluenetworks—seafood,electronics,andtextiles.

Walmartdecidedthatintegratingsustainabilityintoitsexistingoper-ationswouldbeabetterapproachthantocreateaseparatesustainabilityorganizationbecause sustainabilitywas tobean integralpartofopera-tions,notatangentialinitiativecarriedoutbyadisconnectedgroup.Inimplementingthisnewstrategy,Walmarthadtoalteritsoperationsandcultureaswell.Althoughthecompanyhistoricallyhadastronginwardfocus,sustainabilitynecessitatedthatWalmartsolicitinputfromavarietyofexternalorganizations—consultants,NGOs,andsuppliers,forexam-ple.Asaresultofinformationfromitsnetworkpartners,Walmartwasabletoadoptmoreambitiousgoals.DevelopingpartnershipswithNGOsalsoenabled thecompanytoprovide its supplierswithknowledgeandprocessimprovements.

Learning Objectives

1.Thecasehasbeentaught incoursesonSustainability in theBusi-nessEnvironment,Corporate SocialResponsibility, SupplyChainManagement,EnvironmentalEntrepreneurship, and Strategy.Thelearningobjectivesare:

2.Understandhowa largemultinational companywithnoprevioussensitivitytoenvironmentalorsustainabilityconcernsopensuptoexternalstakeholderstoimplementchange.


3.Explorethestructureofthreespecificvaluenetworksandthechal-lengesrequiredtomaketheirglobalsupplychainsmoresustainable.

4.Understand how a company can measure its environmentalperformanceandcommunicatewithemployees,suppliers,custom-ers,policymakers,andthepublic.

guideline Questions

1.GiventheperceptionthatWalmart’scustomersareunwillingtopayapremiumforenvironmentallyfriendlyproducts,howcanthecom-panyjustifyitssustainabilitystrategy?

2.Which of the three value networks—electronics, seafood andtextiles—hasbeenthemostsuccessfulincreatingamoresustainablesupplychain?

3.Besidesofferingtopayasuppliermore,whatpoliciescanWalmartemploytomotivateitssupplierstoreducetheirenvironmentalfoot-prints?HowcanWalmartencouragetheadoptionofgame-changertechnologiesorpracticesamongitssuppliers?

Frito-Lay North America: The Making of a Net Zero Snack Chip15

Summary

Frito-Lay,adivisionofPepsiCola,isthelargestmanufacturerofsnackfoods in theUnitedStates.ThecaseofFrito-Lay’snet zero snackchiphighlightshowone companyused sustainability as ameansofdrivinginnovation that improved performance by reducing its environmentalimpactanditscosts,whileachievinganimprovedmarketposition.A“netzerosnack”meansthatthetotalgreenhousegasemissionstomanufacturethesnackarezero.

AlthoughFrito-Layexperiencedhealthygrowthintothe1990s,therewasconcernoverincreasingcostandpricevolatilityofenergyresourcesandtheavailabilityofwaterresourcesinthefuture.Goingbeyondtheirtraditionalregulatoryrole,Frito-Lay’senvironmentalcompliancegrouptooktheleadtofocusonresourceconservationasastrategyforreducingcosts.The initial results of this effortwere positive, and in 1999 they


expanded to a company-wide initiative to reduce resource usage andcosts.Thenext8yearsbroughtthedesign,building,andimplementationofavarietyofprojects.By2007,againstsalesofmorethan$1.5billion,Frito-Lay’sconservationeffortsweresavingthecompany$55millionperyear in reduced expenses.Beyond thedirect savings, the initiative alsoprovidedthecompanywithvaluabledataaboutoperations,productivity,andresourceusage.

Buildingonthesuccessoftheirconservationeffort,Frito-Laynextlooked to reduce not only its emissions per unit of production, butitsabsoluteemissions.Growthwouldbemorethanoffsetbyincreasedefficiency and conservation efforts. This goal resulted in the 2008proposal to convert an existing plant into a net-zero one thatwouldmaximizerenewableenergyandwaterconservation.WorkingwiththeNationalRenewableEnergyLaboratory,Frito-Laychose its facility inCasaGrande,AZ for thispilotprogram.Tomeet its goals, theplantused solar energy to reduce energy-related greenhouse gas emissionsandananofiltrationsystemtoprocesswastewaterintodrinkingwaterthroughout the production process. Such process changes were pro-jected to reduce consumptionofwaterby75%,natural gasby80%,andpurchasedelectricityby90%.Forabriefoverviewofthenetzeroproject, takea lookat the followingvideo:http://www.youtube.com/watch?v=0U5_pKoWc1s

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment,OperationsStrategy,EnvironmentalEntrepreneurshipandEnvironmentalManagement.Thelearningobjectivesare:

1.Understandhowalargewell-knowncompanyrespondstochangingconditionswithrespecttotheenvironmentandenergypricevola-tility.

2.Discuss the decision-making process within the company thatresultedinthenet-zerofacility.

3.Understandtherelationshipsamongsustainabilityinnovationstrat-egiesandthesupplychain.


guideline Questions

1.If you are the company’s resource conservation team leader,whatare themost important factors in considering thenet-zero facilitydecision?

2.Consideringthefinancial,market,andtechnicalrisksandbenefitsof the project,what are the arguments for/against the investmenttocreateanet-zeroplant?Preparetoargueyourcaseinfrontofthecompany’sseniormanagementteam.

3.Whatistheimportanceofleadershiptosustainabilityinnovation?

Launch of the Ford Fiesta Diesel: The World’s Most Efficient Car16

Summary

The Ford Motor Company is an icon of the automobile industry.FoundedbyHenryFordin1903,itwasanearlyinnovatorofnovelman-ufacturingmethodsofferingfuelefficientmodelsacrossabroadproductline.Fordledinmarketshareintheindustryuntilthelate1920s,whenitssalesweresurpassedbyGeneralMotors.Ford,likeotherU.S.auto-mobilemakers,was hit hard by the oil crises of 1973 and 1979 thatsawgasolineprices spikeupwardandsalesplummet.Todealwiththeenergycrisis,theU.S.governmentimposedfueleconomystandardsontheautomobileindustry.Fordresistedthegovernmentregulationsandconverteditsproductiontomorefuelefficientmodelsonlyasnecessarytocomplywiththelaw.Japanesecompetitors,ontheotherhand,seizedthe opportunity and entered theNorthAmericanmarketwith small,inexpensive,fuel-efficientcarsthatquicklygaineda20%marketshare.Domesticautomanufacturersfellonhardtimesforthenextdecadeasconsumers perceived the domestic product as a shoddy alternative toimportedmodels.

Fordspent thenext20yearsdevelopingnewfuel-efficient technol-ogies. In2000, it createda concept car capableof72milespergallon(mpg);and in2008, itunveiledanewsportsutilityvehiclecapableof120 mpg. Yet each time Ford engineers developed new fuel efficienttechnologies,theywereoverruledbybusinessandmarketingexecutives


whoconcludedthatthefuel-efficientcarswouldnotbepopularwiththecar-buyingpublic,orthatthecostofre-toolingfactorieswasprohibitive.Aslateas2004,Fordrankedatthebottomoftheindustryinfueleffi-ciency,accordingtotheU.S.EnvironmentalProtectionAgency.

The case describes the situation in November 2008 when Fordannounced the launch of the highly anticipated Fiesta Diesel to theEuropeanmarket.At65mpg,theFiestawasoneofthemostfuel-efficientcarsintheworld,easilybeatingToyota’sPriushybrid,ratedat51 mpg.European consumers embraced the car and it quickly gained marketacceptance.However,FordexecutivesdecidedtokeepthetechnologyoutoftheUnitedStatesfortheforeseeablefuture.FactoredintothisdecisionwasthecurrentlowmarketsharefordieselenginesintheUnitedStates,theperceptionthatdieselenginesweredirty,smoky,smelly,andslow,thehighcostofmanufacturingintheUnitedStates,andthehighbreak-evensalesrequirements.CouldFordcreateadifferentmarketentrystrategy?ShoulditlaunchthemodelinanotherregionoftheworldorcontinuesellingitexclusivelyinEurope?

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment,OperationsStrategy,InternationalBusinessStrategy,andEnergyandtheEnvironment.Thelearningobjectivesare:

1.Understandthedecision-makingprocesswithinFordthatresultedinlimitingthedieseltechnologytotheEuropeanmarket.

2.Exploretheuseoffocusgroupinformation,whichmaybeincorrectandout-of-date,toinfluencetheintroductionofnewtechnology.

3.Examinehowa large,well-knowncompany responds tochangingenvironmentandenergypriceconditions.

guideline Questions

1.Doyou supportFord’s decision to forego the introductionof theFiestadieselengineintheUnitedStates?Whyorwhynot?

2.How can Ford leverage its technological strength in clean dieselenginestoservetheNorthAmericanmarket?


Sustainability and Corporate Finance

Intheprevioussectionsofthischapter,wesummarizebusinesscasestudiesincategoriesthathighlightspecificaspectsofacompany’sbusinessmodelorcircumstancesthatabusinessmayencounter.Forexample,wefollowtheprogressionofBurt’sBees fromanentrepreneurialandquirkybusi-ness to an extremely successful andprofitable business for its founders,employees,andinvestors,whilemaintainingits“greatergood”vision.IntheHermanMiller,Clorox,andWholeFoodscases,weexaminedifferentstrategic approaches to tap the “green” consumermarketwhile earningsignificantfinancialreturnsintheprocess.IntheDuPontFreonProductscase,weexploreacomplexsituationinwhichscientificandregulatorypres-suresrequiredalargemultinationalcorporationtodoacomplete“aboutface”with its entire product line, phasing out the incumbent productswhileintroducinganewslateofmoreenvironmentallyfriendlyproducts.In theprocess,DuPontwasable tonavigate the transition successfullywhileimprovingitsstrategicpositionintheindustryandreapsignificantfinancialrewards,aswell.IntheWalmartcase,weinvestigatedhowtheworld’s largest retailer tackled the daunting challenge of making theirglobalsupplychainmoresustainablewhileimprovingtheirbottomline.Lastly,intheFrito-Laycase,westudiedthestrategicandfinancialdecisiontoadoptenergy-savingandwaterconservationtechnologiesthatwillallowitsArizonafactorytodrasticallyreducetheircarbondioxideemissions.

Thus, thebusinesscase forsustainability is illustrated inavarietyofwaysthroughouttheprevioussections—bycreatingasustainablebusinessmodelfrominception,bytappingnewrevenuestreamsfrom“green”cus-tomers,byeffectivelyrespondingtoexternalregulatorypressure,andbyrevampingexistingsupplychainsthatarenotsustainableforthelongterm.

In the remainder of this section, we describe additional cases atthe intersectionof sustainabilityandcorporatefinance.Thesecasesaredesigned to help build understanding of the market barriers to theseventuresandtheirtechnical,market,andfinancialrisks.

Patagonia17

Summary

Patagonia is an iconic name in the outdoor apparel and equipmentindustry.Thecompanywasfoundedinthe1970sbyentrepreneurYvon


Chouinard, an avidmountain climber, skier, and surfer.Thecompa-ny’sbasicbusinessphilosophycombinestwokeyelements:acommit-ment toproducehighqualityproducts that are also environmentallyfriendly.Thecompany’s commitment toqualitywas supportedby itssignificantinvestmentinresearchanddevelopment,whichresultedinnumerous innovativenewproducts andmaterials, such as Synchilla®,asoft,non-pillingdouble-facedfleecefabric.Thecompany’scommit-menttotheenvironmentwasevidentwhenitswitcheditsentirelineofsportsweartoorganicallygrowncottonin1996.Patagonia’scommit-menttosustainabilityextendstoitssupplychainandlogisticspartners,andto its recentProductLifecycleInitiativeto“reduce,repair, reuse,andrecycle.”

Under Chouinard’s leadership, the company achieved significantfinancialsuccess.Salesgrewby6%peryearformostofthe2000sandreached$330millionin2010.Grossmarginsin2010were52%,whileoperatingmarginsamountedto8.1%.Thecompanywasspendinglessthan1%of salesonmarketing, far less than the industrynorm.Pata-gonia created value through high quality and innovative products,environmentalcommitment,andironcladguaranteetotakebackunsat-isfactoryproductsfromcustomers.Itchargedabout20%morethanthecompetition.

ForashortbackgroundonYvonChouinard,thecompany’sbusi-nessmission and strategy, and its environmental initiatives, see thisshort Internet video: https://www.youtube.com/watch?v=O3TwU-Lu-Wjw

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment, Business Strategy, and Entrepreneurship. The learningobjectivesare:

1.Exploreabusinessmodelthatseekstobuildenvironmentalandsus-tainabilityobjectivesintoitscorebusinessstrategy.

2.Understandthelinkbetweenthevaluecreation/valuecapturemodelofPatagoniaandcompanyvaluation.


guideline Questions

1.WhyhasPatagoniabeensosuccessfultodate?2.IfMr.Chouinarddecidestosellthecompany,howwouldyoupre-

pareestimatesofthefirm’svalue?

Next Era’s EarthEra Renewable Energy Trust18

Summary

NextEraisthelargestgeneratorofwindandsolarpowerinNorthAmer-ica,reportinganetincomeofover$1billionin2011.NextEraoperatesmorethan100facilitiesin17statesand4Canadianprovinces.Approx-imately95%oftheirelectricitygenerationcomesfromcleanorrenew-ablesources.ThiscasedescribesNextEra’s launchofanewinitiativetoincreaseinvestmentinrenewableenergy.

Toencouragegreaterinvestmentanduseofrenewableenergy,twentyninestateshave institutedRenewablePortfolioStandards(RPS).Theseregulationsplaceanobligationontheelectricitysupplycompaniesinthatstate toproducea specified fractionof their electricity fromrenewableenergysourcessuchaswind,solar,biomass,andgeothermal.California,forexample,hasspecifiedthat33%ofitselectricitybegeneratedfromrenewable sources by 2020; themandate forKansas is 20%by 2020.Companiesthatgenerateelectricityearncertificatesforeveryunitofelec-tricitytheyproduceandcansellthesealongwiththeirelectricitytosupplycompanies.Supplycompaniesthenpassthecertificates,calledRenewableEnergyCertificates(RECs)totheappropriateregulatorybodytodemon-strate their compliance with the RPS. By definition, an REC entitlesitsowner to the environmental attributes (butnot the actual electricalpower)fromthegenerationof1megawatt-hourofrenewablygeneratedelectricity.Becauseitisamarketmandate,theRECstradefreelylikeanycommodityandare subject tomarketvolatility.Growth forRECswasstrongintheearlytomid-2000swhenconventionalenergypriceswerehigh, the regulatory climatewas favorable, government tax credits andsubsidieswere available, and financing costs were low. After the 2008financialcrisis,however,theeconomic,political,andfinancialconditionschanged,andinvestmentinrenewableenergyprojectswaned.


In2009,NextEradecided to launchanewRECpurchaseprogramthatwouldallowcustomerstoreducetheircarbonfootprintandacceleratetheinvestmentinrenewableenergyprojects.CalledEarthEraRenewableEnergy Trust, this new program’s business model had four main ele-ments—companiesorindividualscouldpurchaseaRECfromNextEra;EarthEraTrustreceivedallproceedsfromthetransaction;NextEracouldusethefundstobuildnewrenewableprojects;andEarthEracouldoperatethenewfacilitytogeneratemorerenewableenergy.Giventheeconomicrealitiesofasluggisheconomy,diminishedinterestinenvironmentalpro-grams,andrisingconsumerskepticismalongwithcorporategreenwashing,themarketingteamofNextEraneededacreativestrategytobesuccessful.

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment, Entrepreneurial Finance, Energy and the Environment,EnvironmentalManagement.Thelearningobjectivesare:

1.UnderstandthestructureandcharacteristicsoftheRECmarket.2.CategorizetheprioritymarketsegmentsforEarthEraRECs,andthe

mostlikelyprospectivefirmswithinthissegment.3.ExplorewhetherNextErawouldreapgreaterbenefitsfromabroad

marketingeffortoranarrowone.

guideline Questions

1.IfyouwereadvisingNextEra,whatindustrymarketsegmentwouldyousuggestoffersthegreatestpotentialreward?Why?

2.What are the characteristics of the firmwithin the targetmarketsegmentthatoffersthegreatestpotentialacceptancerate?

The Dual Sustainability of Wind Energy19

Summary

Entrepreneurs and innovators continue searching for cost-effectivesourcesofalternativeenergy,especiallyfromrenewablesourceslikewindandsolar.Thiscasestudylooksatwhatconditionsarenecessaryforalarge


windfarmconsistingof100turbinestoachievetwometricsforsustain-ability—environmentalperformanceandfinancialprofitability.A varietyoffederalandstategovernmentprogramsprovidefinancialincentivestoencourage private investment in wind energy projects such as acceler-ateddepreciation,productiontaxcredits,andrenewableenergycredits.Inaddition,technologyadvancesinwindenergyhavereducedcostsdra-maticallyoverthepastseveralyears.

Thiscasepresentsdataforthewindfarmprojectsuitableforfinancialanalysisandsensitivitytestingfromcost,technology,publicpolicy,andinvestmentperspectives.

Learning Objectives

The case has been taught in courses on Sustainability in the BusinessEnvironment, Entrepreneurial Finance, and Energy and the Environ-ment.Thelearningobjectivesare:

1.Understand the structure and characteristics of the wind energymarket.

2.Identifyhowgovernmentpolicytoolshavebeenutilizedtoencouragewindenergy.

3.Applystandardfinancialtoolslikenetpresentvalueandsensitivityanalysistounderstandthefinancialviabilityandriskofwindenergyprojects.

guideline Questions

1.Whenisgovernmentinterventioninenergymarketsdesirable?2.Whatarethekeyeconomicdriversforthiswindenergyproject?3.Giventheassumptionsinthecase,wouldyourecommendinvesting

inthisproject?Whyorwhynot?4.If government financial incentives like the production tax credit

expire,wouldyourrecommendationchange?

Summary

Sustainabilityisgarneringgreaterpublicattentionanddebate,andnowhereis thismore evident that in the corporate sector.Mostpublicly-traded


corporationspublishsustainabilityorCSRreportsontheirInternetsites.Somecompaniesclearlybuildsustainabilityintotheirstrategyanduseitgaincompetitiveadvantage.Othersarecautiouslyadoptingmoresustain-ablebusinesspractices,whilestillothersmakeenvironmentalclaimsthataredifficulttosubstantiate.Thislattergroupofcompanies,the“green-washers,”usesdeceptiveadvertisementtopromotetheperceptionofenvi-ronmentallyfriendlypolicies.

Giventhehighlycomplexnatureofsustainabilityinbusinesstoday,the case study approach is a useful pedagogical tool to explore thedecision-making framework in a varietyof companies and a varietyofcontexts.Thecompanieswe’ve lookedat in thesecase studies range insizefromsmallentrepreneurialventurestomajorinternationalorganiza-tions.Thebusinesscasestudieswe’vesummarizedarefromavarietyofdisciplines—strategy,generalmanagement,operations,entrepreneurship,marketing,supplychain,andfinance.Sincewebelievethatthecorporatesectorwillplayakeyroleinsolvingthelong-termissuesrelatedtosus-tainability,thereismuchthatwecanlearnbyexaminingthiscollectionofcasestudies.Theyhelpustoappreciatethecomplexityofdecision-makingandthenewwayofthinking,thesystemsapproach,thatbestsupportssustainability.Wehighlightbelowsomethekeylessonsfromthiscollec-tionofbusinesscasestudies:

• General management:Businessstrategyisneverbasedontheprofitmotivealoneinorganizationscommittedtosustainabil-ity.Mission-orientedbusinessesthatstrivetomeetthetriplebottomlineimperativecanthriveinhighgrowthindustriesagainsttraditionalcompetitors,aswitnessedbythecasestudiesonBurt’sBees,WholeFoods,andPatagonia.

• Operations:Eliminatingwasteandinefficienciesinoperationsandminimizingenvironmentalriskswillnotonlyimproveprofitability,itcanenhanceenvironmentalperformanceandsocietalwell-being.Inaddition,redesigningaproductusingconceptslikeC2Crequirescollaborationbetweenmanydifferentgroupsinacompany(operations,marketing,procurement,R&D,etc).Weexaminedhow


companiesaretacklingtheseissuesinthecasestudiesonHermanMiller,Frito-Lay,DuPont,andWalmart.

• Entrepreneurship:Newcreativeapproachestodoingbusi-ness,particularlywhentheyaddressmarketfailures,canbeprofitable,goodfortheenvironment,andprovidesocietalbenefitsforlargenumbersofpeople.Noteveryentrepreneur-ialventureisasuccess,andweoftenlearnmorefromananal-ysisoffailedventuresthatfromsuccessfulones.WeprovideexamplesofsuccessfulventureslikeBurt’sBeesandthethreesocialentrepreneursincontrasttothemeteoricriseandthenthecollapseofMMT.

• Marketing:Imaginativeapproachestothecreationandcaptureofvaluerequiresaneffectivemarketingeffortbuiltonactualsustainabilityratherthangreenwashing.Weexaminedhowsomecompaniesapproachthetaskofbuildingconsumertrust,likeClorox,Patagonia,andHermanMiller,whileothercompaniesusedmorequestionablepracticeslikeFIJIWater.

• Supply chain:Supplychainmanagersrecognizetheenor-mousopportunitiesthatglobalization,outsourcing,andincreasedstakeholderexpectationsrepresentasabusinessenterprisestrivestobecomemoresustainable.Tocapitalizeontheseopportunitiesrequiresseniormanagementcommitment,financialandhumanresources,andcreativity.Weexaminedhowcompaniesapproachtheseissuesfromdifferentperspec-tivesandcircumstances,andwesawsomeofthemajorchal-lengesofimplementation.TheexamplesincludeMcDonald’s,Walmart,Ford,andFIJIWater.

• Finance:Financialmanagersareanimportantpartofthetriplebottomlineassessment,andfinancialanalysisplaysaroleinnearlyeverybusinessdecisionthatinvolvessus-tainability—projectfinance(Frito-Lay),businessprocessimprovement(HermanMiller),firmvaluation(Patago-nia),pricing(CloroxandWholeFoods),riskmanagement(Ford),procurementandthesupplychain(WalmartandMcDonald’s),andcorporategovernance(RangeResources).


Going Forward to Chapter 5

Theexamplesinthischapterillustratethebusinesscaseforsustainabilityineveryfunctionalareaofabusinessenterprise:inentrepreneurialven-turesthatarebuiltonsustainabilityprinciples,intappingnewrevenuestreamsfrom“green”customers,ineffectivelyrespondingtoexternalreg-ulatorypressure, and in revamping existing supply chains that arenotsustainableforthelongterm.Nowthatwehavereviewedcasesthatspeaktosustainabilitychallengeswithinthebusinesscontext,wemoveforwardtothefinaltask,whichissummarizingourmessageonanintroductiontosustainabilityinthebusinesscontext.

CHAPTER 5

Concluding Thoughts

Learning Objectives

• Synthesizetheconceptsofsustainability• Committoacalltoaction

Theconceptofsustainabilityinthebusinesspressemergedabouttwentyyears ago. Since that time, the concept has evolved from a vague goalto “save the planet” to become a strategic imperative accompanied byimprovedinternalbusinessprocesses,assessmentandmeasurementtools,and tactics to enhance performance. Corporate leaders can no longerclaim, as Milton Friedman supposedly declared, that “the business ofbusinessisbusiness.”Rather,thepublicnowexpectsanddemandscor-porationstoberesponsibleandembracefinancialintegrityandtranspar-ency(asregulatedbySarbanes-Oxleyand,Dodd-Frank),workerhealthandsafety(asregulatedbytheOccupationalSafetyandHealthAdmin-istration),productsafety(asregulatedbytheConsumerProductSafetyCommission), andprotectionof the environment (as regulatedby theEnvironmentalProtectionAdministration).Weliveinanageofincreas-ingcorporateaccountability.Ifabusinessexpectstosurviveforthelonghaul, itmustadheretoeverhigherstandardsofbehaviorandcontinu-ouslydevelopmoresustainablewaysofdoingbusiness.Inthischapterwesummarizethemajorlessonslearnedinthepreviouschaptersandprovideourconcludingthoughtsaboutthefutureofsustainability.

• Business needs to reformulate products and markets.Using thesystemsandtoolsofsustainability,weexaminedhowbusinessescanreformulateproductsusingtheprinciplesofcradle-to-cradledesign,reducingwasteduringmanufac-ture,streamliningthesupplychain,andreusingorrecyclingmaterialattheendofaproduct’slifetominimizeoreliminate


theamountofmaterialthatmustbedepositedinlandfills.Wealsoexploredtheassessmentandmeasurementtoolsforsustainability,includingtheGlobalReportingInitiative,CarbonDisclosureProject,carbonfootprintingandwaterfootprinting.Theseareimportanttoolstoassessthecurrentsituationforacompany.

Thesesystemsandtoolsforsustainabilityaresimilartothoseaphysicianusestakingbloodpressureandcholesterolreadingsforamiddle-aged,fairlyoverweightpatient.Thetestsprovidemeaningfuldatatothedoctorwho,afterconsultingwiththepatient’shistory,advisesthepatientthatifcurrenttrendscontinue,thepatientwilllikelysufferadversehealthoutcomessuchasastrokeorheartattack.Thepatientmayask,“WhatcanIdotoreverseorslowdownthisprognosis?”Thedoctorresponds,“Adjustyourdiet,cutoutsweets,andgotothegymthreedaysaweekforatleast30minutes.”Thepatient,unfortunately,decides,“Ireallyenjoyfood,especiallysweets,andIreallyhategoingtothegym.Don’tyouhaveapillthatwillallowmetoeateverythinginsightandstillloseweight?”Forthispatient,thediagnosisiscorrectbuttheinabilitytoimplementthebehaviormodificationsmeansthatthepatientwillnotbeabletoreversethenegativehealthconsequences.

Manybusinessesfindthemselvesinaparallelpredicament.Theassessmentanddiagnosiscanbedonewithprecision,butthedevilliesinthedetailsofthefollow-upimplementation.There-designofoneproductlinebasedonthecradle-to-cra-dleprotocolisexceedingdifficult;foracompanytore-designallitsproductlinesisamonumentaltask.Analyzingthecom-pany’ssupplychainisanotherlaborintensiveandcomplextaskthatcanbedonewithaccuracy,oftenaccompaniedwithcarefullyconstructedmeasuresofcarbondioxideemissionsandwaterusage.Thetaskofdevelopingandimplementingstrategiestorevisethesupplychainwhilereducinggreenhousegasemissionsandwaterusage,however,requirescommitment,capital,workertraining,andoftenalongphase-inperiod.

CONCLUdINg THOUgHTS 133

Despitethesechallenges,thereisnomorepowerfulinstitutionintheworldtoenabletheplanettobecomemoresustainablethanthebusinesscommunity.Yetbusinessesoftenfeeltrappedbecausetheydefinevaluecreationfromanarrowperspective,theyutilizeoutmodedproductsupplychainsthatwerecreateddecadesago,andtheyaretetheredtoashort-termfinancialmindset.Inouropinion,businessneedsabroaderview.AndrewSavitzcallsthis“thesustainabilitysweetspot:theplacewherethepursuitofprofitblendsseamlesslywiththepursuitofthecommongood.”1Society’sneedsareenormous—improvedhealthcare,shelter,assistanceforanagingpopulation,nutritiousfood,financialsecurity,lessenvironmentaldamage,andcleanairandamplewater.Thebusinesscommunityhastheskills,experience,andresourcestomeetthesesocietalneeds.Businessescandesigninnovativeproductsandservicestomeettheseneeds;theycancreateeco-efficientsupplychainstodeliverproductstocustomers;andtheyhavethemarketingskillstomotivatecustomerstoincorporatetheseproductsintotheirlifestyleinasustainablemanner.WeexploredtheseissuesinthepreviouschaptersandexaminedexamplesofthesweetspotinourbusinesscasestudiesinChapter4.Weremainoptimisticthataslongascustomersvotewiththeirwalletsanddemandmoresustain-ableproducts,businesswillcreategoodsandservicesthatmeettheseneeds.

• Business needs to focus on more than profit. Thenarrow,profit-centeredviewofbusinessisnolongeracceptabletothegeneralpublic.Thenewviewissummedupbythephrase,thetriplebottomline,inwhichcompaniesareexpectedtobal-ancetheneedforprofitwithadesiretosafeguardtheplanetandwithaconcernforpeople—employees,thecommunity,customers,andotherstakeholders.

MichaelPorter,ProfessoratHarvardUniversity,callsthisnewparadigm,“creatingsharedvalue.”2Corporationscommonlystatetheirpurposeasonethatseekstomaximizeshareholder value,anobjectivethatputstheequityownersof


acorporationaboveallotherinterests.InPorter’sview,“theconceptofsharedvaluecanbedefinedaspoliciesandoperat-ingpracticesthatenhancethecompetitivenessofacompanywhilesimultaneouslyadvancingtheeconomicandsocialconditionsinthecommunitiesinwhichitoperates.Sharedvaluecreationfocusesonidentifyingandexpandingthecon-nectionsbetweensocietalandeconomicprogress.”3

Thisconceptofsharedvalueisquitedifferentfromcorpo-ratesocialresponsibilityorcorporatephilanthropy.Thelatterarediscretionaryactivitiesquiteapartfromthecorevaluecreationactivitiesofthecompany.Theyserveasagoodpublicrelationsmessagetothecommunity.Aswelearnedfromthematerialinthepreviouschapters,firmsthatareguidedbythesharedvaluevisiondevelopstrategiesandpracticesthatcreateeconomicvaluebycreatingsocialvalue.Thesefirmsarethewaveofthefuture.

• Government regulation needs to be a positive force for change. Ifdoneproperly,governmentregulationcanencour-ageinnovation,protectpeople,stimulateeconomicgrowth,facilitatefaircompetition,andimprovethefunctioningofmarkets.Unfortunately,governmentregulationsometimesactsintheoppositemanner.Governmentregulation,ifdonepoorly,candiscourageinnovation,protectjobs(notpeople),limiteconomicgrowth,impedecompetition,andhamperthenormalfunctioningofthemarket.Inmarketsfornaturalresourceslikewaterandpetroleum,poorlydesignedgovern-mentregulationscanpromoteover-consumptionbyfailingtosetpricesthatreflecttruecosts.Thesepoorlydesignedregula-tionscanalsoimposeburdensomereportingrequirementsandunnecessaryadministrativecosts.

Afewguidelinesforgoodgovernmentregulatorypracticesincludesettingcleargoalsandobjectives,settingpricesthatreflecttruecosts,settingperformancestandardsandphase-inscheduleswithoutimposingthemeanstoachievethestan-dards,andestablishingmeasurementsystemsthatallowforproperreportingofresults.Itisalsoimportanttocreatea


dynamicrule-makingprocessthatcanaccommodatechangesovertimeascompaniesdevelopnewinnovativeproductsandservicesandmarketconditionsevolve.

Anexampleofagovernmentdirectivethatservesasapos-itiveforceforchangeisextendedproducerresponsibilityreg-ulation,ortake-backlaws.FirstenactedinseveralEuropeancountriesinthe1990s,25statesintheUnitedStateshavenowadoptedtheseregulationsforspecificclassesofproductssuchaselectronicdevices.Theconceptisconsistentwiththeprinciplesofsustainability—makethemanufacturerofaproductresponsiblefortheentirelifecycleoftheproduct,whichincertaininstancesincludestakingtheproductbackfordisassembly,recycling,andultimatedisposal.Inaddition,thecostofrecyclinganddisposalisbornebythemanufac-turer,notbythelocalmunicipalgovernmentorotherwastecollectionservice.Thisformofregulationaccomplishessev-eraldesirablesocietalgoals:Manufacturersareincentivizedtodesignmoresustainableproductsthatareeasilytakenapart;theproductscontainlesstoxicmaterial;andproductpriceswillbetterreflectfullcostsacrosstheentireproductlifecycle.Idealproductsarethosewhichfollowthecradle-to-cradleprotocol.

As we discovered in the readings and several case studies, govern-mentpoliciescanhavedramaticandpowerfuleffectsoncompanyper-formance—bothpositiveandnegative.Companiesthatcanunderstandhow to shape effective policieswill bewell positioned to benefit fromthemwhile,atthesametime,benefitingsociety.

A Call to Action

Wehavenowtakenyou,thereader,onajourneythatpresentedyouwithanopportunitytoincreaseyourawarenessofthesustainabilitypracticesintheworldaroundyouandhavegivenyouanintroductiontothesys-temsandtoolstoguideyouonthisjourney.Awarenessalone,however,isonlythefirststepincreatingamoresustainableworld.AstheChinese


philosopherLaoTzuobservedinthesixthcenturyB.C.,“Thejourneyofathousandmilesbeginswithonestep.”Youneedtobeginyourownjour-neynowandtakestepstoclosethegapbetweenawarenessandaction.Itwillnotbeaneasyorastraightforwardtask,anditneedsyourattentiononmultiplelevels.

• First,asanindividual,youneedtobecomeaneducated,environmentally-awareconsumer.Thismeansthatyoumakelife-styledecisionsthatrespecttheprinciplesofsustainabil-ity—namely,meetingyourneedstodaywithoutcompromis-ingtheabilityoffuturegenerationstomeettheirneeds.

• Second,asamember of a community,youneedtoencouragecollectiveaction.Ithasneverbeeneasiertoreachouttoyourfriends,neighbors,businessassociates,andthepublicatlargetocatalyzecollectiveaction.AccordingtotheInternationalTelecommunicationUnioninGeneva,Switzerland,therearenearlyasmanycellphonesubscriptionsasinhabitantsintheworld.4Insomeregionsoftheworld,morepeoplehavecellphonesthanaccesstocleandrinkingwaterorpropersanitation.SocialmediasiteslikeFacebook,Twitter,andQzone(China’slargestactivesocialnetworkwebsite)makeitrelativelyeasytoreachmillionsofpeopleinstantly.Therearemorethan1billionFacebookregistereduses,500millionTwitteruses,andnearly600millionQzoneusers.

• Third,asanemployee(current,past,orprospective),youcanmakeyourvoiceheardinidentifying,analyzing,andimple-mentingimprovementsinbusinessprocessestobetterprotecttheplanetwhilemeetingtheotherneedsofthebusiness.

• Fourth,asacitizen inyourlocalcommunity,youneedtobeanactiveparticipantinthepoliticalprocesssothatgov-ernmentofficialscanbettereducatethepublicabouttheprinciplesofsustainabilityandmakewisepoliticalchoices.Governmentmustplayapositiveroleincreatingamoresustainableworld,andyou,asacitizenandvoter,cansupportsustainablegovernmentinitiativesandlegislation.


Inthisbook,wehavefocusedonthepositiveopportunitiesofsustain-abilityinthebusinessworldasopposedtothenegativechallengesofover-coming lethargy, indifference, and theperspective that sustainability issomeoneelse’sproblemorthatthegovernmentwilltakecareofthisissue.Movingforward,weneedtorecognizethatweliveinaninterdependentandinterconnectedworld.Thelinesbetweenindividuals,business,gov-ernment,andnon-governmentalorganizationsareblurred.Weeacharemembersofalltheseinstitutionsinonefashionoranother:Bypurchasingsustainablegoodsandservices,wearevotingwithourwallets;byworkingforcompaniesororganizationsthathaveadoptedsustainablepractices,we are votingwith the sweat of our brow; by electing thoughtful andintelligentpublicofficials,wearevotingthroughtheballotbox;andwithourphilanthropy,wearevotingwithourcharitabledonationstoNGOs.

Sustainability in the business environment is here to stay becauseitmakes economic and business sense. Even though the trade-offs arecomplex,eventhoughthereareambiguityandconflictingperspectives,thebusinesscommunityneedstoembracetheprinciplesofsustainabil-ity.Businesses,atalllevelsandinallfunctionalareas,canleadthewaybecause they have the skills, resources, andmanagement capability toachievewhatsocietyneedsandwhateventhebest-intentionedgovern-mentprogramscanrarelymatch.Inshort,wehavenoalternative—weare all in this together.We are all stakeholders in building sustainablebusinesses.

Notes

Chapter 1

1. Costanzaetal.(1997). 2. HuesemannandHuesemann(2011). 3. UnitedNationsEnvironmentalProgramme(1992). 4. FriendsoftheEarth(2005). 5. Brundtland(1987). 6. PlambeckandDenend(2007). 7. Avaluechainisdifferentfromasupplychain.Avaluechainisthesetofinter-

relatedactivitiesthatafirmperformsinordertocreatevalueforitsproductorservice.Forexample,anexpertdiamondcuttercancreatevaluebytransforminganunfinisheddiamondintoafinegemstone.

8. Laszlo,Christensen,Fogel,Wagner,andWhitehouse(2010). 9. Lane,Maznevski,andMendenhall(2004).10. Paraphrasing the U.N.’s World Commission on Environment and Develop-

ment,OurCommonFutureReport;seeBrundtland(1987).

Chapter 2

1. Notallgreenhousegaseshavethesameglobalwarmingpotential.Besidescarbondioxide,gaseslikemethane,nitrousoxide,sulfurhexafluoride,andchlorofluoro-carbonsalsocontributetoglobalwarming.Toadjustforthesedifferences,whichcanbequitelarge,scientistshaveestablishedamethodforconvertingemissionstoacommonunitusingcarbondioxideasabasis.

2. DALYisaWorldHealthOrganizationstandard.DALYisameasureofoveralldiseaseburdenexpressedasthenumberofyearslostduetoill-health,disability,orearlydeath.

3. Thismeasureassumesthatayearoflifelivedinperfecthealthisworth1QALYandthatayearoflifelivedinastateoflessthanthisperfecthealthisworthlessthan1.

4. Thiscomparisonhascreateda seriesofcompetingstudieswithdifferingcon-clusions.Fora summary, readersarereferredtothisABCNewsstory:http://abcnews.go.com/Technology/story?id=789465&page=1#.Ubjp-ZxQBmB

5. PlambeckandDenend(2007),p.18. 6. PlambeckandDenend(2007),p.21. 7. OnDecember8,2006,theGreaterLondonAuthority(GLA)becamethefirst

public-sectorbody topublish a sustainableprocurementpolicy,promising toawarda“distinctcompetitiveadvantage”tothosecompaniesthatdemonstrated

140 NOTES

a commitment to sustainable procurement concerns. The GLA group hasdefined“responsibleprocurement”asthepurchaseofgoods,works,andservicesinasociallyandenvironmentallyresponsiblewaythatdeliversvalueformoneyand benefits to the contracting authority and to London. See http://www.london.gov.uk/media/press_releases_mayoral/londons-regional-government-sets-benchmark-fair-procurement

8. WorldBank(2007),p.14. 9. In2006,RobvanHattumexploredthisconceptthroughinterviewswithlead-

ingproponentsinadocumentaryfilmofthesamename.Seehttp://icarusfilms.com/new2007/waste.html

10. DitzandRanganathan(1997),p.4.11. DitzandRanganathan(1997),p.5,citingWackernagelandRees(1996).12. Kolk(1999).13. U.S.GeologicalSurvey(n.d.).14. Seeunglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html15. UnitedNationsGlobalCompact(n.d.).16. Confino(2012).17. Confino(2012).18. GlobalReportingInitiative(n.d.).19. Seewww.cdproject.net20. Newell(2010).21. CDC, Leadership Indexes and the CDP 2012 disclosure and performance

scores, at https://www.cdproject.net/en-us/results/pages/leadership-index.aspx(accessedJuly27,2013).

22. Wright,Kemp,andWilliams(2011),pp.61–72.23. WaterFootprintNetwork(n.d.).24. Seehttp://hdr.undp.org/en/humandev25. http://www.undp.org26. Pinkham(n.d.).27. Taylor(2006).28. BoniniandGorner(2011).29. White(2009).

Chapter 3

1. Lemonich(2009). 2. Mitchell(1998),p.41. 3. AsreferencedinMitchell(1998),p.51,fromHabermas(1985),TheTheoryof

CommunicativeAction. 4. Thomas, Lane, and Maznevski (2008). This section draws the connection

betweenre-visionandreflectivethinkingfromthiswork. 5. AfterthefiguredevelopedinThomasetal.(2008).

NOTES 141

6. GroHarlemBrundtlandwaschairoftheUnitedNationsWorldCommissiononEnvironmentandDevelopment,commonlyreferredtoastheBrundtlandCom-mission,in1987,whosereport,OurCommonFuture,establishedsustainabilityasadevelopmentmodel.

7. WorldPopulationProspects(2011). 8. SharonBloyd-Peshkinhasaddressedtheseissuesinher2009featureinInThese

Timesandusesthetermsfunctionalobsolescenceandfashionobsolescenceforthesedesignapproaches.

9. Begley(2010).10. EcologicalSocietyofAmerica(2000).11. MillenniumEcosystemAssessment(2005).12. Costanzaetal.(1997).13. Costanzaetal.(1997).14. Polasky(2008),pp.42–46.15. Parington(1928).16. MolinaandZaelke(2012).17. BracmortandLattanzio(2013).18. Prinn(2009).19. Crutzen(2006).20. Morgan(2009).21. For thecostof iron fertilizationseeWorstall (2012).For thecostofa tonof

carbondioxideseeEnvironmentalandEnergyStudyInstitute(2012).22. Tricketal.(2010).23. CaoandCaldeira(2010).24. Tilmes,Müller,andSalawitch(2008).25. Robock,Oman,andStenchikov(2008).26. 2030WaterResourcesGroup(2009).27. U.S.GovernmentAccountabilityOffice(2002),p.10.28. TheJohnsonFoundation(2012),p.2.29. TheJohnsonFoundation(2012),p.11.30. HallandLobina(2009),p.1.31. HallandLobina(2009),p.2.32. ThissectionisbasedonthereportbySher(2012).33. Kuuskraa,Stevens,Leeuwen,andMoodhe(2011),p.4.34. BrentcrudeoilpriceindollarsperbarrelandHenryHubnaturalgaspricein

dollarspermillionBtu.35. Seehttp://www.eia.gov/todayinenergy/detail.cfm?id=583036. PriceWaterhouseCoopers(2011),p.1.37. IHSCERA(2012),p.2.38. IHSCERA(2012),p.8.39. Yergin(2012).40. Schramm(2011).

142 NOTES

41. TestimonyofKatyDunlapbeforetheSubcommitteeonWaterandPoweroftheCommitteeonEnergyandNaturalResources,October20,2011.

42. For example, see the background paper prepared for the National ClimateAssessmentbyRobertHowarthandothers,“MethaneEmissionsfromNaturalGasSystems,”February25,2012.

43. NationalResearchCouncil(2012),p.3.44. Forfurtherinformation,seehttp://www.sehn.org/wing.html45. CommissionoftheEuropeanCommunities(2001),p.5.46. ChurchandRegis(2012),p.11.47. Graham(2004),p.2.48. TverskyandKahneman(1974),pp.1124–1131.

Chapter 4

1. WinigandWalthieu(2007). 2. PhillsandDenend(2005). 3. LeeandBony(2007). 4. Cammarata,Gough,Moss,Nowygord,andSpringer(2010). 5. WellsandHaglock(2008). 6. VietorandReinhardt(1995). 7. Hoffman(2010a). 8. Hoffman(2010b). 9. Avrahamietal.(2011).10. GoldbergandYagan(2007).11. ThissectionisbasedonTheGlobalGMMarket:ImplicationsfortheEuropean

FoodChainbyBrookes,Craddock,andKniel(2005).12. McNettandWhitfield(2013).13. McMasterandNowak(2009).14. PlambeckandDenend(2007).15. LarsonandTeichman(2009).16. SpitalandWesley(2010).17. Reinhardt,Casadesus-Masanell,andKim(2010)18. Aginsetal.(2012).19. WelchandVenkateswaran(2009).

Chapter 5

1. Savitz(2006),p.22. 2. PorterandKramer(2011). 3. PorterandKramer(2011),p.66. 4. InternationalTelecommunicationsUnion(2013).

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Index

AAdaptation, 70

BBurt’s Bees: Leaving the Hive, 94–96

CCA. See Corporate accountabilityCarbon Disclosure Project (CDP),

37–39Carbon footprinting, 39–41Carpets, life cycle assessment, 22C2C Design at Herman Miller:

Moving Toward Environmental Sustainability, 98–100

CDP. See Carbon Disclosure ProjectCFCs. See ChlorofluorocarbonsChlorofluorocarbons (CFCs), 3–4Climate change, 70–72Clorox Goes Green, 100–102Cloud modification, 71Coffee mugs, life cycle assessment, 22Corporate accountability (CA), 6–7Corporate finance, sustainability,

123–127Corporate social responsibility (CSR),

5–6Corporate sustainability reporting

systems, 32–33Cradle to Cradle (C2C) design,

26–30CSR. See Corporate social

responsibility

DDebate, as learning tool, 55–57Decarbonization techniques, 71Diapers, life cycle assessment, 24DJSI. See Dow Jones Sustainability

IndexDow Jones Sustainability Index

(DJSI), 51

Dual Sustainability of Wind Energy, 126–127

Du Pont Freon® products division, 104–106

EEcosystem services, 62–65Entrepreneurial business models

Burt’s Bees: Leaving the Hive, 94–96

Social Entrepreneurs: Correcting Market Failures, 96–98

FFIJI Water and Corporate Social

Responsibility: Green Makeover/Greenwashing, 115–117

Financial institutions, 50–51Frito-Lay North America: The

Making of a Net Zero Snack Chip, 119–121

FTSE KLD 400 Social Index, 51

GGeo-engineering, 70–74Global Reporting Initiative (GRI),

35–37Green consumer market

C2C Design at Herman Miller: Moving Toward Environmental Sustainability, 98–100

Clorox Goes Green, 100–102Whole Foods Market, Inc.,

102–104“green washing,” 12GRI. See Global Reporting InitiativeGrocery bags, life cycle

assessment, 23

HHDI. See Human Development IndexHorizontal drilling, 80

152 Index

Human Development Index (HDI), 44–46

Hydraulic fracturing, 80

IIron fertilization, 70

LLaunch of the Ford Fiesta Diesel:

The World’s Most Efficient Car, 121–122

LCA. See Life cycle assessmentLife cycle assessment (LCA)

corporations, 25–26description, 18–21product groups, 22–24

Light bulbs, life cycle assessment, 22

MMan-made capital, 2Market-based systems, 65–69McDonald’s Corp.: Managing a

Sustainable Supply Chain, 112–114

Metropolitan Water Supply Authority: Evaluating Security Risks, 114–115

Mitigation, 70MMT. See Molten Metal TechnologyMolten Metal Technology (MMT),

106–109

NNarrow supply chain, 12–13Nature capital, 2Next Era’s EarthEra Renewable

Energy Trust, 125–126Nt-made capital, 2

PPatagonia, 123–125Precautionary principle, 85–90

RRange Resources: A Commitment to

Transparency, 109–111Realistic objectives, 58–62

SSAM. See Sustainable Asset

ManagementShale gas, 80–85Social Entrepreneurs: Correcting

Market Failures, 96–98Solar radiation management

(SRM), 71SRM. See Solar radiation managementStakeholder theory, 47Supply chain and sustainability, 12–14Sustainability

change implementationFrito-Lay North America: The

Making of a Net Zero Snack Chip, 119–121

Launch of the Ford Fiesta Diesel: The World’s Most Efficient Car, 121–122

Walmart’s Sustainability Strategy, 117–119

chlorofluorocarbons, 3–4corporate accountability, 6–7and corporate financeDual Sustainability of Wind

Energy, 126–127Next Era’s EarthEra Renewable

Energy Trust, 125–126Patagonia, 123–125corporate perspectives, 7–12corporate social responsibility, 5–6external consumer pressures

responsesFIJI Water and Corporate Social

Responsibility: Green Makeover/Greenwashing, 115–117

McDonald’s Corp.: Managing a Sustainable Supply Chain, 112–114

Metropolitan Water Supply Authority: Evaluating Security Risks, 114–115

future of, 131–137global context, 14–15global perspective issues, 5major issuesecosystem services, 62–65geo-engineering, 70–74

Index 153

market-based systems, 65–69precautionary principle, 85–90realistic objectives, 58–62U.S. energy independence, 80–85water privatization, 74–79man-made capital vs. nature

capital, 2meaning, 1pedagogical approach, 15–16precautionary principle, 4and regulatory environmentDu Pont Freon® products division,

104–106Molten Metal Technology,

106–109Range Resources: A Commitment

to Transparency, 109–111and supply chain, 12–14

Sustainable Asset Management (SAM), 50–51

Systems for sustainabilitycradle to cradle design, 26–30life cycle assessment, 18–26resources for students, 30–31

TTools for sustainability

Carbon Disclosure Project, 37–39carbon footprinting, 39–41

corporate sustainability reporting systems, 32–33

financial institutions, 50–51Global Compact, 33–35Global Reporting Initiative,

35–37Human Development Index,

44–46results of reporting, 49–50stakeholder theory, 47transparency, 46–47Triple Bottom Line, 47–49water footprinting, 41–44

Transparency, 46–47Triple Bottom Line, 47–49

UUnited Nations Global Compact,

33–35U.S. energy independence, 80–85

WWalmart’s Sustainability Strategy,

117–119Water footprinting, 41–44Water privatization, 74–79Whole Foods Market, Inc.,

102–104Wide supply chain, 13

OTHER TITLES IN OUR ENVIRONMENTAL AND SOCIAL SUSTAINABILITY FOR BUSINESS ADVANTAGE

COLLECTIONChris Laszlo, Case Weatherhead School Of Management

And Robert Sroufe, Duquesne University

• Strategy Making in Nonprofit Organizations: A Model and Case Studies by Jyoti Bachani

ALSO IN FORTHCOMING IN THIS COLLECTION

• IT Sustainability for Business Advantage by Brian Moore• Applying Systems Thinking to Understanding Sustainable Business by Kerul Kassel• Change Management for Sustainability by Houng Ha

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The Environmental and Social Sustainability for Business Advantage CollectionChris Laszlo and Robert Sroufe Editors

A Primer on SustainabilityIn the Business EnvironmentRonald Whitfi eld • Jeanne McNettWhat does sustainability in the business environ-ment really mean? The concept has evolved from a vague goal to “save the planet” to become a stra-tegic imperative for business to enhance perfor-mance across many dimensions. We live in an age of increasing corporate accountability and if a busi-ness expects to survive for the long term, it must adhere to ever higher standards of behavior.

This book is dedicated to the understanding of sustainability in business by exploring the chal-lenges of assessing and measuring it, by studying the systems thinking required to analyze it, and by developing a deeper appreciation for the ambiguity and complexity of improving it. The book provides concrete and practical methodologies and tools for implementation that are evaluated and discussed by means of debating sharply opposing points of view and by performing business case study analy-sis. The book answers the question: “what can we do right now to improve the sustainability of our world?”

Ronald Whit� eld is the founding Director of the Business Sustainability Initiative at the D’Amore-McKim School of Business at Northeastern Univer-sity and Executive Professor of Finance. He directs Sustainability Field Research Programs in Costa Rica and Iceland and teaches courses on sustainability and business. He has an extensive background in applied economics.

Jeanne McNett is Senior Academic Researcher in the College of Business Administration, is Emerita Professor of Management at Assumption College, and former chair of the Academy of Management International Management Division’s Teaching Committee. She regularly teaches in Northeastern University’s MBA program, and has co-authored three textbooks, and many articles and cases.


The Environmental and SocialSustainability for BusinessAdvantage CollectionChris Laszlo and Robert Sroufe, Editors

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WHITFIELD MCNETT A Primer on Sustainability · A Primer on Sustainability In the Business Environment Ronald Whitﬁ eld • Jeanne McNett What does sustainability in the business

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