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Introduction

The purpose of this chapter is to explain the crucial role that businesses play in the global effort towards sustainability. Climate change is a wicked problem that cannot be solved while businesses operate under traditional methods of operation. The private sector is not separate from environmental, social, and economic well-being but is an actor within all three. The overlap between them can be used as a tool for powerful change. Businesses have the resources and connections to play an influential role in achieving a sustainable future. The power of consumer demand and businesses’ collective ability to meet the needs of society can affect monumental change in the development of a circular economy. Implementing methods of creating shared value, attaining measurable certifications, and participating in collective action will generate cross-industry awareness and positive societal change.

Free Market Capitalism

Under the economic model of free-market capitalism businesses or firms, act as the key drivers of societal development and controll all natural resources. The theory of capitalism claims that society should depend on private companies for all of their goods and services, and reject regulation from governing bodies. Without government regulation, capitalism depends on the quality, affordability, and overall value of products to be regulated by competition.

However, without legal restrictions and government regulations, nothing is stopping these profits maximizing corporations from polluting public reservoirs, over-exploiting natural resources, and underpaying their workers.

Private companies today have more power than some governments, which is why they are key actors in the global issue of sustainability. Out of the world’s 100 largest economies, private corporations make up 52 of them. However powerful the private sector may seem, most modern day free-market economies still implement necessary regulations to prevent private companies from causing an excessive amount of harm. In America the government has the authority to place a carbon tax on companies creating excessive greenhouse gases and additionally ban all single-use plastic, but they currently choose not to. It is in situations like this where the responsibility to regulate sustainable business practices fall upon the private sector. Growing market trends show that modern consumers are becoming more aware of the environmental impacts of global manufacturing and industrialization. Consumers have power in each dollar they spend to call upon businesses to hold accountability. Some companies are now using recycled materials, renewable energy sources, and other more sustainible practices. These practices can actually help companies reduce thier costs and increase customer loyalty, both which lead to greater profits. If the sole intentions of creating less polution is not enough, eco-conscious companies have a head start in the rapidly growing and previously untapped market of sustainable goods and services.

The Triple Bottom Line

In 1984, Edward Freeman introduced a new approach to business, which differed from how a typical business would aim their efforts. Freeman’s stakeholder theory suggests that a business should value all stakeholders of a business while also considering profits. A stakeholder can be defined as a person or entity that is affected by or has an interest in the company. A business’s stakeholders would consist of customers, employees, the local community, the environment, and any other influenced entity. This approach is now referred to when a business implements a Triple Bottom Line. The Triple Bottom Line is a business structure with the three responsibilities of People, Planet, and Profit. This theory requires a business to not only generate value within the economy, but to also reduce, and hopefully eliminate, negative externalities in the societal and environmental sectors.

With this new focus of the triple bottom line approach, negative impacts caused by profit-focused companies can now be reduced. Businesses implementing the triple bottom line structure focus on creating value for their stakeholders, rather than exploiting them. The TBL approach has been implemented by many companies and is seen as a solution to balancing profits with mitigating externalities. Most businesses can’t afford to make the drastic changes to put all three of these bottom lines on an equal scale, because it would be too costly to redirect business operations from profit. Most businesses implementing a TBL structure must gradually shift by making small changes within the business without compromising profit. These gradual changes in business operations differ from businesses and will be covered later in the chapter. Finding a balance between creating value within people, planet, and profit is where business can begin to reduce, and possibly reverse negative impacts, whilst growing the economy.

Figure 1 The Triple Bottom Line, created by Marten van den Berg, ChainPoint, 2018

Linear Economy vs Circular Economy

The free-market capitalist model currently operates under a linear economy. The linear economy follows a process that many refer to as the “Take, Make, Dispose” system.  It begins with taking natural resources, making them into something useful, and finishes with disposing of the product after its short-term use. In a world with people that have unlimited wants and needs with a limited number of resources, we run into the problem of scarcity. In the past three decades alone, one-third of our natural resources have been consumed. The solution lies in rethinking and redesigning our relationship with the materials that we use and thus the circular economy was born.

The circular economy is an economic model that is designed to create zero waste. This system was designed to mimic the biological cycle, where species start their life and grow old until eventually their nutrients are returned to the Earth to provide for the life of another species. Closed loop firms would design their products with the intention to either be reused in the future or made out of biodegradable materials. These products are also designed to have the longest possible useful life, instead of being designed to be disposable or cheap and replaceable. At the end of the product’s useful life, they are returned and regenerated into something useful, and the cycle repeats.

Two models showing the contrast between the linear economy and the circular economy.  (Image by Sust 501 Students, 2020)

Companies with products that are not designed to be compostable or recyclable or biodegradable follow a different process. Technology can be deconstructed into its basic components, battery, screen, camera, and instead of upgrading your entire phone for a new one, you could interchange the old features for future innovations. In this example, our economy shifts from being a “buy to own” product-based economy, to one that is more reliant on continuous services. The circular economy challenges any excuse to deplete our resources, and instead gives businesses an incentive to minimize waste, design for future reuse, and build stronger customer relations.

Corporate Social Responsibility vs. Creating Shared Value

When businesses decide that they want to pursue a triple bottom line approach they have two major options to choose from and they can actually do both. Corporate Social Responsibility is when a business identifies an issue within society and then uses its own resources to solve that issue. CSR is separate from the business itself, for example if a Lawyer Firm paid its employees to volunteer to plant trees, that decision does not help them directly financially but the firm sees it as their responsibility to help out and plant trees. Another example of CSR is if a business pays for packaged meals to be given to a food pantry, this helps eliminate hunger, it does not add any direct value to the business but it can help their image and brand in the eyes of the public. This concept of Corporate social Responsibility is separate from another term called Creating Shared Value. Creating Shared Value is a way of generating a profit, for businesses by addressing societal needs and challenges. The key difference between CSR and CSV  is creating shared value is directly connected to a business’s economic and financial success. CSV helps a company gain a competitive advantage over other businesses. It satisfies a business’s responsibility to its shareholders and their stakeholders. CSV makes money as well as helps the business complete  their long term goals of solving specific societal issues.

Creating shared value can happen in three ways, reconceiving products and markets, redefining productivity in the value chain and building supportive industry clusters.

Reconceiving Products and Markets

Reconceiving products and markets happens when a business researches what resources or services a community needs the most and then forming a plan on how to deliver those products or services to the community. They can then create a profit off their new product to sustain the business and in turn help more communities. The goal of the reconceived product is to gain a competitive advantage by redesigning the product to solve a societal need.  An example is Toyota reconceiving their sedan car model and producing the first hybrid car, the prius. The Prius cut CO2 emissions by 50% compared to other cars and its sales helped boost Toyota into being the largest automobile manufacturer in the world.

Redefining Productivity in the Value Chain

Traditionally, businesses have increased profits by manufacturing products as cheaply as possible. However, businesses must analyze their entire production process, including social and environmental systems, to maximize savings. Walmart has traditionally been able to charge the lowest possible prices for their products because their products are cheaply manufactured. While this has increased profits for the company, they were ignoring the social and environmental damages caused as a result of this. When they stepped back and considered these social and environmental factors in their supply chain, they realized there were more places they could be saving money. They began covering the roofs of their store in solar panels, and switching their delivery trucks to be more energy efficient. In the short term it cost them a lot of money, but in the long term they have seen incredible savings. Their trucks reduced their CO2 emissions and saved the company $26 millions in fuel costs and on average their stores saved 25% on energy, saving them $300 million on store costs. These savings led to more profit and gave them the ability to allocate those resources to other parts of the business. Their decisions led to them being a more environmentally friendly business, a more competitive business and a more profitable business; all by redefining their value chain.

Building Supportive Industry Clusters

Industry clusters are groups of related firms that share common markets, technologies, and business relationships. The success of a company is often dependent on the success of other businesses within their cluster. For example, a manufacturing company relies on the success of the company who produces their raw materials. When companies within an industry cluster work together, it can result in success for all parties involved. The best way a company can do this is by investing in the other industries within their cluster. Nestlé, a food corporation commonly known for their chocolates and other sweets, did this by investing in the farmers who grow the cocoa beans and sugars for their products. Farmers used this money to obtain new technologies and utilize new farming techniques to produce a higher yield of product in subsequent years. With more supplies coming in from the farmers, Nestlé was able to increase the sale of their products. While Nestlé supplying this extra money did significantly improve the quality of the farmers lives, this was by no means an example of a charity. By supporting another business within their industry cluster, Nestlé was able to increase their annual earnings. This investment also ensured job security for the farmers and an increase in products available for consumers, making this situation a win for all involved parties. Building supportive industry clusters can strengthen local economies by creating new employment opportunities and increasing the efficiency of existing jobs. Additionally, consumers will be encouraged to spend more because there will be greater access to the goods they desire. With these increased earnings, companies will be encouraged to continue investing in their employees and other businesses within their cluster. When companies have the ability to lean on their cluster for support, an economy is created that is both stable and sustainable.

Business Certifications

The free market system in the U.S. allows entrepreneurs to innovate endlessly to keep up with current trends to have continued success. Businesses must pay attention to consumer demands if they want to stay afloat. Consumers today are more critical of the products they buy; they want to know that what they’re buying has been produced sustainably. Luckily, It’s never too late for a company to incorporate sustainability into their mission. Today there exists a variety of certifications that businesses can apply for to prove their commitment to sustainability. These certifications can often serve as guidelines for businesses, highlighting areas where they are already having success and areas in need of improvement. Some examples of business certifications which consumers are looking for include B-Corp, Fair Trade, LEED, and USDA Organic certification.

B- Corp Certification

To get certification as a benefit corporation, better known as a B-Corp, a company must meet criteria that measures a business’s value outside of profit. The certification is based on a points system which considers emissions, waste, energy usage, transparency, and overall impact. Benefit corporations are also judged on their social responsibility, transparency, and accountability. They are driven by their ability to create positive change and have lasting impacts. B-corp certifications set a standard for sustainable and measurable business operations, to which all businesses should strive towards. These reflect the concepts of shared value and idea to build their business models on the principle of the triple bottom line. They infuse ideals of the circular economy into the market and challenge competitors to do the same and rise to their level of leadership. By following set standards for sustainable development, they create resilient communities, encourage healthy lifestyles, support equitable relationships, and encourage conscious consumerism. Commonly known B-Corps that are currently leading the way include Patagonia, Bombas, and Athletica.

Fair Trade Certification The Fair Trade certification ensures fair wages are paid at all levels of the supply chain. In many cases, middlemen can marginalize and exploit producers, offering less than adequate prices for products. However, Fair Trade certified companies cut many of the middlemen in the supply chain and offer fair wages directly to producers, many of whom are found in developing countries. The making of these products also do not use child labor or forced labor of any kind. Consumers who buy Fair Trade certified products will know that their products were made with social equity. Green Mountain Coffee Roasters and Whole Foods are both companies that have Fair Trade certified products.

USDA Organic Certification

USDA Organic certification can be achieved by any producer of food products. This certification is awarded for individual food products made without the use of genetic engineering, synthetic fertilizers, synthetic pesticides, and non-organic ingredients. These products must also be grown without compromising wetlands, woodlands, or surrounding ecosystems. This certification guarantees a consumer that the production of their food was made using environmentally sustainable practices. In an increasingly industrialized agricultural market, the USDA Organic certification makes it easy for conscious consumers to support farms and businesses that are dedicated to sustainability.

LEED Certification

Leadership in Energy and Environmental Design is more commonly referred to as LEED. Like the B-Corp certification, the credentials for a LEED certification are dependent on a point-based ranking system. This certification is applied to buildings that exceed standards in water efficiency, energy efficiency, and indoor environmental quality. These buildings must also be constructed with sustainable materials and resources, and include innovative sustainable designs. The LEED certification can be attained by commercial buildings, homes, schools, and other developments. There are four levels of the LEED certification which represent the score reflected from the certification assessment. Certified represents a score of 40-49, Silver is 50-59, Gold is 60-79, and buildings with a score of 80+ earn a Platinum rating. LEED-certified office spaces are sought out by companies that may not have major externalities but want to commit to sustainable initiatives.

Greenwashing

As consumers are becoming more inclined to work with businesses that have certifications such as  B-Corp, Fair Trade, LEED, and USDA Organic some companies are using false advertising to make their companies seem more sustainable. They have started using the greenwashing technique as a marketing tactic to appeal to society’s environmentally conscious ways of thinking. The term itself refers to the way certain aspects of a brand, such as the way products are made or packaged or are falsified to be more environmentally sound. The companies may claim that their products are made of recycled materials or have energy-saving benefits. They tend to use terms such as “non-toxic”, “eco-friendly”, “certified green” and many others to trick consumers. The term greenwashing was developed in the early ’80s when companies would spend more money on marketing themselves as environmentally friendly than actually working to reduce their environmental impacts. An example of greenwashing in the automobile sector is Volkswagen. According to the Clean Air Act, car manufacturers have to develop engines that follow certain emission guidelines. Volkswagen was known as having very clean engines with low emissions and even advertised that their engines were some of the cleanest in the world. In 2015 the EPA found that Volkswagen used a device to trick the emission tracking software and in reality their cars were emitting forty times the amount of emissions that they stated. As a result of the scandal they had to pay the U.S. government 3.8 billion dollars, their stock price fell 25% and they had to compensate every person who purchased a car that the emission level was lied about.

The Power of the Consumer

The main focus of this chapter has been on what businesses should do for the environment. But we as individuals have a say in what we use and buy every day and it’s our job as the consumer to make conscious choices to support businesses that take their environmental impact seriously. Over the last decade, numerous studies have shown that millennials are willing to pay more for a sustainable product. These studies have been like a wake-up alarm for businesses. By showing the big business that we support sustainable products it will signal to all other businesses in the economy that if they want to remain competitive they need a more sustainable approach to the way they do business. We as consumers will help frame a more sustainable economy one purchases at a time.

Collective Action

In order to progress towards a sustainable future, we need to utilize businesses, nonprofits, academia, government, as well as the consumers. Collective Action is the collaboration between all necessary stakeholders to advance their status and accomplish a common goal. This type of collaboration is necessary to generate long-lasting, practical solutions for complex challenges such as climate change, poverty, clean water, etc. Without the private sector being included in the sustainability goals, we are missing a strong stakeholder that embodies great power in many nations, especially the United States.

Business operations reach many different people throughout the value chain, from retailers, manufacturers, distributors, investors, consumers/clients and more through their business partners. Industries may also partner to research a public policy. Governmental institutions can also work formally and informally with businesses to conquer market failures. Lastly, businesses need to be more active in sustainability conversations. As people become more involved in politics and the media they can help businesses be more engaged in sustainable development partnerships and government initiatives.

Conclusion

As seen in this chapter, businesses are some of the most powerful forces shaping people’s lives and have the ability to have a large scale impact on society.  Businesses are adjusting their focus towards making sustainable changes on top of making a profit. This being said it will take collaborative efforts from all stakeholders to make this shift towards businesses making positive impacts on the environment around them. Businesses can achieve positive changes by supporting a circular economy that allows the generation of products that can be used for a long time and then be recycled. They should also adopt the triple bottom line framework which considers stakeholders by addressing people and the planet as well as profit. Shared value is economically beneficial to businesses and socially beneficial to the communities they’re in.  Lastly, businesses can reach sustainability goals that benefit them through collective action with stakeholder groups. Implementing methods of creating shared value, attaining measurable certifications, and participating in collective action will generate cross-industry awareness and positive societal change.

Comprehension Questions:

1. What’s the difference between shared value and corporate social responsibility?
2. What are the three different methods of creating shared value?
3. What are the three phases of a circular economy?
4. Why is the traditional business model unable to meet the challenge of a wicked problem?
5. How can certifications like becoming B-corp benefit businesses and consumers?