Reshaping incentives, remaking industries
Reshaping Incentives, Remaking Industries
Many business leaders have begun to realize that achieving truly sustainable enterprises will require going beyond incremental improvements in product and process efficiency to restructuring markets and changing the economic incentives that drive business and consumer behavior. (See The Corporate Responsibility Movement.) One point of entry into this kind of transformation is to begin defining business success more in terms of the services or benefits provided rather than the quantity of products sold. In the United Kingdom, Ford Motor Co. used this approach to reduce costs and environmental impacts associated with painting its new vehicles when it hired DuPont to manage its entire paint shop operation, rather than simply to supply paint. Ford pays DuPont not for the amount of paint it applies, but for the number of vehicles painted. DuPont’s incentive now is to use its chemical expertise to minimize the paint used per vehicle and to develop a more durable finish, rather than simply increasing the volume of paint it sells [11]).
In other instances, the transformation to sustainability may mean reconfiguring an entire industry. The plastics industry is a good example. Interest is building now in chemical processes that depolymerize, or "unzip," used plastics -- a step well beyond traditional recycling technology, since it will yield materials equivalent in quality to virgin plastic that could be used in all the applications of the original material. Polyester can already be unzipped in this way in commercial quantities with a process perfected by DuPont, and work is proceeding with nylon and other common polymers [12].
Widespread use of this kind of recycling process could help close the materials loop in the plastics industry, greatly decreasing the need for virgin materials and ultimately saving on production costs. Yet making this kind of recycling meaningful will mean increasing the collection and return rate of plastics to a level that is much higher than the current one.
DuPont is working toward this goal, at least with polyester, by licensing its recycling process to others in the industry and jointly developing a comprehensive collection system for used polyester. In other words, DuPont is enlisting the help of the entire industry to reshape the polyester business into a more sustainable and profitable form, allowing the business to expand into new applications while trading on polyester’s reputation as the “greenest” of polymers [13] [14].
The developments outlined above, and many others, are being incorporated into business culture and daily operations through environmental management systems, voluntary codes of conduct, the use of performance indicators, and regular reports to "stakeholders," including employees, the local community, environmental activists, government authorities, and shareholders. The growth of innovative programs and self-regulation are important indicators of change. Yet it is clear that the steps taken so far represent just the start of a complex, lengthy transition to more sustainable enterprises.
Many environmentalists argue that the voluntary approaches currently prevalent will be too slow to deal with urgent problems of pollution and resource degradation and depletion. This is especially the case in newly industrializing countries where pollution is accelerating, but environmental concerns rank lower among business, government, and public priorities. In addition, in industrialized countries, progress in cleaning up production has not been matched by improvements in resource efficiency, especially when compared with the gains in labor productivity achieved during this century. To date, policy measures intended to improve resource efficiency -- notably energy taxes -- have been strenuously resisted by industry.
Above all, progress is still generally confined to large companies and multinationals; their achievements are not matched by the vast mass of small- and medium-sized enterprises. Smaller companies often lack the knowledge and resources needed to make significant changes in their organization or technologies. Incentives are also lacking; the financial benefits of "going green" remain controversial. A recent review of 500 firms across industrial sectors suggests that pollution prevention does indeed benefit operating and financial performance [15], but many small companies remain unconvinced [16].
Lingering skepticism suggests the need for a greater focus on ensuring that sustainable industrial development is compatible with profitability. Government’s best role may lie in restructuring the ground rules -- the environmental and health regulations, tax codes, and other government policies that influence the business environment -- to increase incentives for embracing "green" investments and practices.
The corporate responsibility movement
During the 1980s, the "corporate responsibility" movement emerged in response to the retreat of the state from what has been called the "moral domain of the economy" in the wake of widespread deregulation and privatization. Pressure on the private sector to consider its wider social duties also increased from external interest groups such as environmental nongovernmental organizations. The result has been a move toward greater democracy, disclosure, and accountability, particularly in industry sectors with a high public or environmental profile. The social dimension of sustainable development is still poorly defined from industry’s perspective, but it is coming to be identified with responsibilities to local communities affected by corporate operations and to employees and their families. An additional component is a consideration of ethical issues surrounding, for example, conservation, biodiversity, and animal rights. Measurement of a company’s social and ethical performance is necessarily difficult and was at first resisted by business. However, "social auditing" is now emerging as a key technique through which companies can demonstrate their openness to key stakeholders, improve staff loyalty, and gauge their wider public standing. Social audits were undertaken in the early 1990s by a small number of companies with assertive environmental and ethical policies -- notably Bodyshop International and Ben & Jerry’s Homemade, Inc. Today, there is increasing mainstream interest in such audits: the Co-Operative Movement (wholesale and retail services) in the United Kingdom has completed a first audit, and Shell Oil and British Petroleum announced publicly in 1997 that they would undertake social audits of their operations. Source: New Economics Foundation, London, August 1997 (personal communication). |
References and notes
11. Matt Arnold, "The Road to Sustainablilty," draft paper (World Resources Institute, Washington, D.C., 1997), pp. 6-7.
12. Susan Warren, "Polyester Trash is Pure Plastic After an 'Unzip,' " Wall Street Journal (November 6, 1997), p. B-1.
13. Ibid.
14. Robert Day, "DuPont Films: Sustainability as a Business Strategy," draft case study (World Resources Institute, Washington, D.C., 1997), p. 10.
15. Stuart L. Hart and Gautum Ahuja, "Does It Pay to Be Green? An Empirical Examination of the Relationship Between Emission Reduction and Firm Performance," Business Strategy and the Environment, Vol. 5, No. 1 (March 1996), pp. 30-37.
16. Groundwork Trust, "Small Firms and the Environment: A Groundwork Status Report," cited in Financial Times (November 15, 1995, London), p. 16. This Gallup survey of 300 small- and medium-sized enterprises in the U.K. revealed quite low levels of environmental awareness and deep scepticism over the benefits of environmental action.
