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C H A P T E R T E N

Managing for Sustainability

Growing public concern about sustainability has prompted political, corporate, and civil society leaders to become increasingly responsive to environmental issues. In the United States and other nations, government policymakers have moved toward greater reliance on economic incentives, rather than command and control regulations, to achieve environmental goals. At the same time, many businesses have become increasingly proactive and have pioneered new approaches to effective sustainability management, sometimes in partnership with advocacy organizations. These actions have often given firms a competitive advantage by cutting costs, gaining public support, and spurring innovation.

This Chapter Focuses on These Key Learning Objectives:

LO 10-1 Knowing the main features of environmental laws in the United States and other nations.

LO 10-2 Understanding the advantages and disadvantages of different regulatory approaches.

LO 10-3 Assessing the costs and benefits of environmental regulation.

LO 10-4 Defining an ecologically sustainable organization and the stages through which firms progress as they become more sustainable.

LO 10-5 Understanding how businesses can best manage for sustainability.

LO 10-6 Analyzing how effective sustainability management makes firms more competitive and improves their financial performance.

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Levi Strauss & Company was widely recognized as a sustainability leader in the apparel industry. The maker of the iconic Levi’s jeans had worked with cotton farmers to reduce their use of water and pesticides, integrated recycled plastic from soda bottles into their fabric, and worked with the World Bank to provide low-cost loans to suppliers that met sustainability goals. The company encouraged its customers to wash their jeans less often and to keep them longer and provided grants to early career designers to help them adopt eco-friendly practices. The company aimed for a day when all Levi’s apparel would be recycled in a closed loop, worn for many years and then returned to be made into new gar- ments. “What would happen if we could change culture in such a way that consumers imagined the end of life of the product they bought?” asked the company’s head of global product innovation.1

Even as the Trump administration in 2017 announced its intention to pull the United States out of the international climate change agreement negotiated in Paris, several Cana- dian provinces and U.S. states were joining forces in their efforts to reduce carbon emis- sions. The Western Climate Initiative (WCI) was a nonprofit corporation that managed a common cap-and-trade market for Quebec, Ontario, British Columbia, and California. These subnational governments had established limits on greenhouse gas emissions and set up a system that allowed companies that had cut their emissions to sell permits to others that had exceeded their quota. This provided these companies with a financial incentive to reduce pollution below their quota. “Having a larger number of emitters, power plants, factories, [and] fuel increases the diversity of opportunities to reduce emissions at a lower cost than [a single province or state] would be able to do on [its] own,” explained a former WCI board member.2

The Environmental Defense Fund (EDF), a leading environmental advocacy organi- zation, has formed partnerships with several companies, including McDonald’s, DuPont, Starbucks, and FedEx, to improve environmental performance and gather information. In its most recent effort, EDF partnered with Google Earth Outreach to find, measure, and map natural gas leaks in selected cities across the United States. Specially equipped Street View cars, which Google uses to photograph streetscapes for its map application, gathered data on even small gas leaks. Escaping gas—mostly from aging pipes—was a problem because it cost customers money, heightened the risks of explosion, and worsened climate change. This information enabled utilities, such as PSE&G of New Jersey and New York, to prioritize the replacement of leaking gas mains, focusing on the worst offenders. The partnership later expanded its scope to create detailed maps of health-damaging pol- lutants such as nitrous oxides and particulates. “Seeing pollution mapped this way makes us better advocates for cleaner air and smart development choices,” said a representative of EDF.3

In the early years of the 21st century, many businesses, governments, and environ- mental advocacy organizations became increasingly concerned that old strategies for promoting environmental protection were failing and new approaches were necessary. Government policymakers moved toward greater reliance on economic incentives to

1 “Levi’s Is Radically Redefining Sustainability,” Fast Company, February 9, 2017. The company’s sustainability initiatives are described at www.levistrauss.com/sustainability. www.levistrauss.com/unzipped-blog. 2 “Will Other States Join California’s International Climate Pact?” The Atlantic, August 10, 2017. The website of the Western Climate Initiative is at www.wci-inc.org. 3 “Methane to Its Madness,” Fast Company, October 27, 2017. “Google Uses Street View Cars to Collect Pollution Data,” June 5, 2017, at www.money.cnn.com, and “Mapping Pollution with Mobile Sensors.” Google’s efforts are described at www.google.com/earth. The methane maps are available at http://edf.org/methanemaps. More information about EDF’s corporate partnerships is available at www.edf.org/approach/partnerships/corporate.

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achieve environmental goals. Environmentalists engaged in greater dialogue and cooper- ation with industry leaders. Many businesses pioneered new approaches to sustainability, such as developing products with fewer adverse environmental impacts.

The challenge facing government, industry, and environmental advocates alike, as they tried out new approaches and improved on old ones, was how to promote ecologically sound business practices in an increasingly integrated world economy.

Role of Government

In many nations, government is actively involved in regulating business activities to pro- tect the environment. Business firms have few incentives to minimize pollution if their competitors do not. A single firm acting on its own to reduce discharges into a river, for example, would incur extra costs. If its competitors did not do the same, the firm might not be able to compete effectively and could go out of business. Government, by setting a common standard for all firms, can take the cost of pollution control out of competition. It can also provide economic incentives to encourage businesses, communities, and regions to reduce pollution, and offer legal and administrative systems for resolving disputes. Gov- ernment cannot accomplish environmental goals by itself; its role, rather, is to make a critical contribution to a collective effort, together with business and civil society, to move toward sustainability.

In the United States, government has been involved in environmental regulation since the late 19th century, when the first federal laws were passed protecting navigable water- ways. The government’s role began to increase dramatically, however, in 1970, when Congress passed the National Environmental Policy Act (NEPA). The Environmental Protection Agency (EPA), the nation’s main environmental regulatory agency, was created shortly afterwards. Figure 10.1 summarizes the major federal environmental laws enacted by the U.S. Congress since then. It is organized into four categories: air; water; solid and hazardous waste; and cross-media (referring to the regulation of forms of pollution that have multiple impacts on air, water, and land). Various regional, state, and local agencies also have jurisdiction over some environmental issues in their respective areas, as one of the opening examples shows.

Major Areas of Environmental Regulation In the United States, the federal government regulates in three major areas of environmen- tal protection: air pollution, water pollution, and solid and hazardous waste (land pollu- tion). This section will review the major environmental issues and the U.S. laws pertaining to each, with comparative references to similar initiatives in other nations and examples of how businesses have responded.

Air Pollution

Air pollution occurs when more pollutants are emitted into the atmosphere than can be safely absorbed and diluted by natural processes. Some pollution occurs naturally, such as smoke and ash from volcanoes and forest fires. But most air pollution today results from human activity, especially industrial processes and motor vehicle emissions. Air pollution degrades buildings, reduces crop yields, mars the beauty of natural landscapes, and harms people’s health. The American Lung Association (ALA) estimated in 2017 that 125 million Americans, nearly four in ten people, were breathing unsafe air for at least part of each year. Fully 70 percent of the cancer risk from air pollution is due to diesel exhaust from trucks, farm and construction equipment, marine vessels, and electric generators. People

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living near busy highways and workers in occupations that use diesel equipment are partic- ularly at risk.4

One approach to reducing diesel pollution is a service called IdleAir, operated by Convoy Solutions of Knoxville, Tennessee. IdleAir provides an alternative for long- haul truck drivers who idle their engines at truck stops in order to provide power to the cab during rest breaks. An inexpensive window-mounted adapter allows drivers to hook up to a service module, so they can continue to enjoy heating, cooling, cable TV, and Internet access with their engines off. The solution is less expensive

4 American Lung Association, “State of the Air: 2017,” www.lung.org; and “Health Effects of Diesel Exhaust,” http://oehha.ca.gov.

FIGURE 10.1 Leading U.S. Environmental Protection Laws • CLEAN AIR ACT (1970) Established national air quality standards and timetables.

• CLEAN AIR ACT AMENDMENTS (1977) Revised air standards.

• CLEAN AIR ACT AMENDMENTS (1990) Required cuts in urban smog, acid rain, and greenhouse gas emissions; promoted alternative fuels.

• WATER POLLUTION CONTROL ACT (1972) Established national goals and timetables for clean waterways.

• SAFE DRINKING WATER ACT (1974 and 1996) Authorized national standards for drinking water.

• CLEAN WATER ACT AMENDMENTS (1987) Authorized funds for sewage treatment plants and waterways cleanup.

• HAZARDOUS MATERIALS TRANSPORT ACT (1974) Regulated shipment of hazardous materials.

• RESOURCE CONSERVATION AND RECOVERY ACT (1976) Regulated hazardous materials from production to disposal.

• TOXIC SUBSTANCES CONTROL ACT (1976) Established national policy to regulate, restrict, and, if necessary, ban toxic chemicals.

• COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT (SUPERFUND) (1980) Established Superfund and procedures to clean up hazardous waste sites.

• SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT (SARA) (1986) Established toxics release inventory.

• PESTICIDE CONTROL ACT (1972) Required registration of and restrictions on pesticide use.

• POLLUTION PREVENTION ACT (1990) Provided guidelines, training, and incentives to prevent or reduce pollution at the source.

• OIL POLLUTION ACT (1990) Strengthened EPA’s ability to prevent and respond to catastrophic oil spills.

• CHEMICAL SAFETY INFORMATION, SITE SECURITY, AND FUELS REGULATORY RELIEF ACT (1999) Set standards for the storage of flammable chemicals and fuels.

AIR

WATER

SOLID AND HAZARDOUS WASTE

CROSS-MEDIA POLLUTION

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for truckers because it uses one-tenth the energy of idling, and reduces pollution by completely eliminating diesel emissions during rest breaks.5

The major law governing air pollution is the Clean Air Act, passed in 1970 and amended in 1990. The 1990 amendments toughened standards in several areas, including stricter restrictions on emissions of acid rain–causing chemicals.

The EPA has identified six criteria pollutants, relatively common harmful substances that serve as indicators of overall levels of air pollution. These are lead, carbon monoxide, particulate matter, sulfur dioxide, nitrogen dioxide, and ozone. (Ozone at ground level is a particularly unhealthy component of smog.) In addition, the agency also has identified a list of toxic air pollutants that are considered hazardous even in relatively small concen- trations. These include asbestos, benzene (found in gasoline), dioxin, perchloroethylene (used in some dry-cleaning processes), methylene chloride (used in some paint strippers), and radioactive materials. Emissions of toxic pollutants are strictly controlled. In 2014, the Supreme Court ruled that the EPA could regulate emissions of carbon dioxide (one of the main contributors to climate change) at facilities it already regulated for other pollutants.6

In 2017, Volkswagen, the German carmaker, pleaded guilty to charges of violat- ing the Clean Air Act and agreed to pay $4.3 billion in fines. The company had programmed its diesel cars to switch on emissions controls when the vehicle was undergoing smog testing and then switch them off when the vehicle was on the road, to boost performance and gas mileage. The result was that the cars emitted up to 40 times the allowed levels of nitrogen oxides, a toxic mixture including nitrogen dioxide, which causes health problems and contributes to smog.7 (This situation is further discussed in the discussion case at the end of Chapter 14.)

A special problem of air pollution is acid rain. Acid rain is formed when emissions of sulfur dioxide and nitrogen oxides, by-products of the burning of fossil fuels by utilities, manufac- turers, and motor vehicles, combine with natural water vapor in the air and fall to earth as rain or snow that is more acidic than normal. Acid rain can damage the ecosystems of lakes and rivers, reduce crop yields, and degrade forests. Structures, such as buildings and monuments, are also harmed. Within North America, acid rain is most prevalent in New England and eastern Canada, regions that are downwind of coal-burning utilities in the Midwestern states.8

Water Pollution

Water pollution, like air pollution, occurs when more wastes are dumped into waterways, lakes, or oceans than can be naturally diluted and carried away. Water can be polluted by organic wastes (untreated sewage or manure), by chemicals from industrial processes, and by the disposal of nonbiodegradable products (which do not naturally decay). Heavy metals and toxic chemicals, including some used as pesticides and herbicides, can be par- ticularly persistent. Like poor air, poor water quality can harm ecosystems, decrease crop yields, threaten human health, and degrade the quality of life. Failure to comply with clean water laws can be very expensive for business, as the following example shows.

In 2010, a wellhead blowout at a deepwater drilling platform operated on behalf of BP (formerly British Petroleum) in the Gulf of Mexico caused the largest marine

5 The company’s website is www.idleair.com. 6 PBS Newshour, “Supreme Court Limits EPS’s Authority to Regulate Carbon Dioxide Emissions,” June 23, 2014, www.pbs. org/newshour. 7 “Volkswagen Set to Plead Guilty and to Pay U.S. $4.3 Billion in Deal,” The New York Times, January 10, 2017. 8 More information about acid rain may be found at www.epa.gov/acidrain.

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oil discharge in U.S. history. For three months, as crews struggled to cap the well, more than three 3 million barrels of oil gushed into the waters of the Gulf of Mexico, causing extensive damage to marine life and devastating the coastal economies of adjacent states. Subsequent government investigations found that BP’s relentless cost cutting and inadequate safety systems had contributed to the disaster. In 2015, BP agreed to pay more than $20 billion to settle claims by federal, state, and local governments arising from the spill, the largest environmental settlement in U.S. his- tory. BP estimated that the total cost of the spill—including the actual cleanup, pay- ments to individuals and shareholders, criminal fines, and other costs not included in the settlement—would be more than $66 billion.

The impacts of the BP disaster on business, society, and the environment are profiled in a case at the end of this book.

In the United States, regulations address both the pollution of rivers, lakes, and other surface bodies of water and the quality of the drinking water. The main U.S. law governing water pollution is the Water Pollution Control Act, also known as the Clean Water Act. This law aims to restore or maintain the integrity of all surface water in the United States. It requires permits for most point sources of pollution, such as industrial emissions, and mandates that local and state governments develop plans for nonpoint sources, such as agricultural runoff or urban storm water. The Pesticide Control Act specifically restricts the use of dangerous pesticides, which can pollute groundwater. The quality of drinking water is regulated by another law, the Safe Drinking Water Act of 1974, amended in 1996. This law sets minimum standards for various contaminants in both public water systems and aquifers that supply drinking water wells.

The impacts of hydraulic fracturing, a method for extracting natural gas from under- ground shale formations, on the quality of drinking water—and how these impacts should be regulated—is explored in the discussion case at the end of this chapter.

Solid and Hazardous Waste

The third major focus of environmental regulation is the contamination of land by both solid and hazardous waste. The United States produces an astonishing amount of solid waste, adding up to more than four pounds per person per day. Of this, 47 percent is recy- cled, composted, or incinerated, and the rest ends up in municipal landfills.9 Many busi- nesses and communities have tried to reduce the solid waste stream by establishing recycling programs.

Sweden is one of the world’s leaders in reducing solid waste. Astonishingly, less than 1 percent of the country’s household waste ends up in landfills. Swedes sort their trash, separating paper, plastics, metal, glass, food waste, light bulbs, and bat- teries. All residential areas have convenient recycling stations, and special trucks pick up electronics and other hazardous waste. About half of these materials are recycled and reused in some way, and the other half are burned to generate energy. Sweden’s waste incineration plants have become so efficient that the country routinely imports waste from its neighbors. Swedish companies have joined the effort, too; the retailer H&M, for example, accepts used clothing from customers in exchange for coupons. “Zero waste, that’s our slogan,” said the CEO of the Swedish Waste Management and Recycling Association.10

9 Environmental Protection Agency, “Advancing Sustainable Materials Management: 2014 Fact Sheet,” www.epa.gov. 10 “The Swedish Recycling Revolution,” March 29, 2017, https://sweden.se/nature/the-swedish-recycling-revolution/.

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The safe disposal of hazardous waste is a special concern. Several U.S. laws address the problem of land contamination by hazardous waste. The Resource Conservation and Recovery Act of 1976 (amended in 1984) regulates hazardous materials from “cradle to grave.” The Toxic Substances Control Act (TSCA) of 1976 (amended in 2016) requires the EPA to inventory the thousands of chemicals in commercial use, identify which are most dangerous, and, if necessary, ban them or restrict their use.

In 2014, an aging and rusty storage tank holding toxic chemicals used to wash coal leaked, spilling 7,500 gallons into the nearby Elk River near Charleston, West Vir- ginia. Three hundred thousand people who relied on the river for their water supply were told not to drink or bathe with it for several weeks afterwards. (The owner of the tank, Freedom Industries, shortly afterwards declared bankruptcy and shut down.) This frightening incident led Congress to strengthen the almost 40-year-old TSCA, and several states, including West Virginia, passed new laws requiring the inspection of chemical storage tanks.11

As this example illustrates, states can pass regulations that are stricter than federal rules. (They can also regulate industries that do not engage in interstate commerce.)

Some studies have suggested that hazardous waste sites are most often located near eco- nomically disadvantaged African American, Hispanic, and Native American communities. Since 1994, the EPA has investigated whether state permits for hazardous waste sites vio- late civil rights laws and has blocked permits that appear to discriminate against minori- ties. The effort to prevent inequitable exposure to risk, such as from hazardous waste, is sometimes referred to as the movement for environmental justice.12 For example, Native American tribes in Utah, Nevada, and New Mexico have organized to block the construc- tion of nuclear waste disposal facilities on their land, saying the facilities would threaten their health, culture, and economic viability.13

The major U.S. law governing the cleanup of existing hazardous waste sites is the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, popularly known as Superfund, passed in 1980. This law established a fund, supported primarily by a tax on petroleum and chemical companies that were presumed to have cre- ated a disproportionate share of toxic wastes. The EPA was charged with establishing a National Priority List of the most dangerous toxic sites; around 1,700 sites were eventually designated as Superfund sites. Where the original polluters could be identified, they would be required to pay for the cleanup; where they could not be identified or had gone out of business, the federal government would pay. One of the largest hazardous waste sites on the Superfund list was an almost 200-mile long stretch of the Hudson River, which GE factories had contaminated with cancer-causing chemicals called PCBs. In 2018, GE said it had completed its cleanup of the site, at a total cost of around $2 billion, but was still awaiting final EPA approval.

The Houston metropolitan area has one of the largest concentrations of Superfund sites in the nation. When Hurricane Harvey devastated the city in 2017, many of these sites flooded, and some were damaged. At the San Jacinto River Waste Pits, for example, toxic waste from a long-since closed paper mill was released when

11 “Obama Set to Sign Bipartisan Update of 1976 Toxic Substance Law,” The New York Times, June 22, 2016; and “A Year after West Virginia Chemical Spill, Some Signs of Safer Water,” National Geographic, January 10, 2015. 12 Robert D. Bullard, “Environmental Justice in the 21st Century,” Environmental Justice Resource Center, available at www.ejrc.cau.edu/ejinthe21century.htm; and Christopher H. Foreman, Jr., The Promise and Perils of Environmental Justice (Washington, DC: Brookings Institution, 2000). 13 Nuclear Information and Resource Service, “Environmental Racism, Tribal Sovereignty, and Nuclear Waste,” at www.nirs.org.

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floodwaters damaged a concrete cap that had covered the pits. An EPA dive team that visited the site soon afterwards found dioxin, a dangerous carcinogen, in high concentrations, and the agency fast-tracked a $115 million cleanup. But some criticized the agency for its past inaction. “Superfund sites are known to be the most dangerous places in the country,” and they should have been protected against flooding,” said one environmental activist.14

Remarkably, nearly one in six U.S. residents now lives within three miles of a Super- fund site. As of 2016, cleanup had been completed at around 380 of them.15

Since 2000, most changes in federal regulatory oversight have come through agency rulemaking and executive action rather than legislation. In the first year of the Trump administration, the EPA changed or proposed changes to dozens of rules, with the cumu- lative effect of weakening environmental regulations. Some of these changes are described in Exhibit 10.A.

Alternative Policy Approaches Governments can use a variety of policy approaches to control air, water, and land pollu- tion. The most widely used method of regulation historically has been to impose environ- mental standards. Increasingly, however, government policymakers have relied more on market-based and voluntary approaches, rather than command and control regulations, to achieve environmental goals. These different approaches are discussed next.

14 “Toxic Waste Sites Flooded in Houston Area,” September 3, 2017, at https://apnews.com; and “EPA Oks Plan to Rid Toxics from Waste Pits,” Houston Chronicle, October 11, 2017. 15 “Polluted Sites Linger Under U.S. Cleanup Program,” Chemical and Engineering News, April 3, 2017.

Rule-Making to Weaken Environmental Protections

During the year and a half of the Trump administration, regulators overturned or announced their intention to overturn more than 70 environmental rules. (Some rules were reversed, but then put back in effect after legal challenges.) Among other actions, regulators

• Proposed to open more than 90 percent of offshore areas to oil and gas drilling, giving energy companies access to lease areas off the coasts of California, the Arctic, and the Eastern Seaboard.

• Suspended clean water rules that required farmers, ranchers, and developers to limit pollution in streams running across land they owned that fed larger bodies of water. These bodies of water, such as the Ches- apeake Bay and Puget Sound, provided drinking water for one in three Americans.

• Revoked a rule that prevented coal companies from dumping mining waste into local streams. This rule had made a big impact in Central Appalachia, where debris from mountaintop surface mining often ended up in valleys, where it polluted running water.

• Reversed a ban on the use of lead ammunition and fishing tackle on public lands (lead is toxic to wildlife and humans).

• Proposed changes that would weaken fuel-efficiency standards for cars and trucks made between 2021 and 2025.

• Ended a requirement that oil and gas companies report their emissions of methane (a potent greenhouse gas).

Some welcomed these rollbacks as releasing businesses and individuals from burdensome regulations, but others thought they represented dangerous attacks on protections of the nation’s air, water, and land.

Sources: “Environmental Rules on the Way Out Under Trump,” The New York Times, July 6, 2018; “Trump Moves to Open Nearly All Offshore Waters to Drilling,” The New York Times, January 4, 2018; and “EPA Blocks Obama-Era Clean Water Rule,” The New York Times, January 31, 2018.

Exhibit 10.A

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Command and Control Regulation

The traditional method of pollution control is through environmental standards. Standard allowable levels of various pollutants are established by legislation or regulatory action and applied by administrative agencies and courts. This approach is called command and control regulation, because the government commands business firms to comply with cer- tain standards and often directly controls their choice of technology.

One type of command-and-control regulation is an environmental-quality standard. In this approach a given geographical area is allowed to have no more than a certain amount or proportion of a pollutant in the air. Polluters, such as utilities and factories, are required to control their emissions to maintain the area’s standard of air quality. For example, in 2014, the EPA issued new, more stringent standards for air concentrations of ground-level ozone, which the agency called the “most pervasive and widespread pollutant in the coun- try.”16 A second type is an emission standard. For example, the law might specify that manufacturers could release into the air no more than 1 percent of the ash (a pollutant) they generated. Sometimes, the EPA mandates that companies use the best available technology, meaning a specific process that the agency determines is the best economically achievable way to reduce negative impacts on the environment.

Market-Based Mechanisms

In recent years, regulators have begun to move away from command and control regula- tion, favoring increased use of market-based mechanisms. This approach is based on the idea that the market is a better control than extensive standards that specify precisely what companies must do.

One approach that has become more widely used is to allow businesses to buy and sell the right to pollute, in a process known as cap-and-trade. California’s tradable permit program for carbon emissions, described in one of the opening examples of this chapter, illustrates this approach. The U.S. Clean Air Act of 1990 also incorporated the concept of tradable permits. The law established emission levels (called “caps”) and permitted companies with emissions below the cap to sell (“trade”) their rights to the remaining permissible amount to firms that faced penalties because their emissions were above the cap. Over time, the government would reduce the cap, thus gradually reducing overall emissions, even though individual companies might continue to pollute above the cap. Companies could choose whether to reduce their emissions—for example, by installing pollution abatement equipment—or to buy allowances from others. One study showed that the tradable permit program for acid rain may have saved companies as much as $3 billion per year, by allowing them the flexibility to choose the most cost-effective methods of complying with the law.17

Another market-based type of pollution control is establishment of emissions charges or fees. Each business is charged for the undesirable waste that it emits, with the fee varying according to the amount of waste released. The result is, “The more you pollute, the more you pay.” In this approach, polluting is not illegal, but it is expensive, creating an incentive for companies to clean up. In recent years, governments have experimented with a variety of so-called green taxes or eco-taxes that levy a fee on various kinds of environmentally destructive behavior. In addition to taxing bad behavior, governments may also offer var- ious types of positive incentives to firms that improve their environmental performance. For example, it may decide to purchase only from those firms that meet a certain pollution

16 “E.P.A. Ozone Rules Divide Industry and Government,” The New York Times, November 26, 2014. 17 For more on the tradable permit system for acid rain, see www.epa.gov/acidrain.

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standard or offer aid to those that install pollution control equipment. Tax incentives, such as faster depreciation for pollution control equipment, also may be used. Governments may also levy eco-taxes on individuals.

Norway has declared that to meet its obligations under the 2015 Paris climate accord, it will reduce its carbon emissions by 40 percent. One way it has done so is by offering both positive and negative incentives. The government imposes high taxes on new car purchases, except for nonpolluting electric cars. Operators in Norway’s North Sea oil fields are required to capture carbon dioxide discharged during drilling and pump it back underground or pay a stiff fee per ton. Companies have responded by developing technology to do so.18

In short, the trend has been for governments to use more flexible, market-oriented approaches—tradable allowances, pollution fees and taxes, and incentives—to achieve environmental objectives where possible.

Information Disclosure

Another approach to reducing pollution is popularly known as regulation by publicity, or regulation by embarrassment. The government encourages companies to pollute less by publishing information about the amount of pollutants individual companies emit each year. In many cases, companies voluntarily reduce their emissions to avoid public embarrassment.

The major experiment in regulation by publicity has occurred in the area of toxic emis- sions to the air and water. The 1986 amendments to the Superfund law, called SARA, included a provision called the Community Right-to-Know Law, which required manufac- turing firms to report, for a list of specified toxic chemicals, the amount on site, the number of pounds released, and how (if at all) these chemicals were treated or disposed of. The EPA makes this information available to the public in the Toxics Release Inventory, or TRI, pub- lished annually. Evidence shows that at least initially, reporting manufacturers in the United States cut their releases and disposal of these chemicals to the air, water, and land, apparently fearing negative publicity. Recently, however, the TRI numbers have been quite stable.19

The advantages and disadvantages of alternative policy approaches to reducing pollu- tion are summarized in Figure 10.2.

Civil and Criminal Enforcement

Companies that violate environmental laws are subject to stiff civil penalties and fines, and their managers can face prison if they knowingly or negligently endanger people or the environment. Proponents of this approach argue that the threat of fines and even impris- onment can be an effective deterrent to corporate outlaws who would otherwise degrade the air, water, or land. In 2017, the EPA brought criminal charges against 137 defendants. Companies can also be charged, as the following example shows.

Anadarko Petroleum, an oil and gas exploration company, paid more than $5 billion to settle charges of widespread environmental contamination and to pay for cleanup. Anadarko had purchased Kerr-McGee, a company responsible for dumping radioac- tive uranium, rocket fuel, wood creosote, and other contaminants at 2,000 sites in

18 “Sucking Up Carbon, Combatting Climate Change,” The Economist, November 18, 2017; and “Both Climate Leader and Oil Giant? A Norwegian Paradox,” The New York Times, June 17, 2017. 19 TRI data are available at www2.epa.gov/toxics-release-inventory-tri-program. Maps showing the geographical distribution of chemical releases reported under TRI are available at http://toxmap.nlm.nih.gov.

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FIGURE 10.2 Advantages and Disadvantages of Alternative Policy Approaches to Reducing Pollution

Policy Approach Advantages Disadvantages

Command-and- control regulation

Market-based mechanisms

Information disclosure

Civil and criminal enforcement

Cap-and-trade systems

• Enforceable in the courts • Compliance mandatory

• Gives businesses more flexibility • Achieves goals at lower overall cost • Saves jobs by allowing some less-e�cient plants to stay open • Permits the government and private organizations to buy allowances to take them o� the market • Encourages continued improvement

• Taxes bad behavior (pollution) rather than good behavior (profits)

• Rewards environmentally responsible behavior • Encourages companies to exceed minimum standards

• Government spends little on enforcement • Companies able to reduce pollution in the most cost- e�ective way

• May deter wrongdoing by firms and individuals

• Across-the-board standards not equally relevant to all businesses • Requires large regulatory apparatus • Older, less-e�cient plants may be forced to close • Can retard innovation • Fines may be cheaper than compliance • Does not improve compliance once compliance is achieved

• Gives business a license to pollute • Permit levels are hard to set • May cause regional imbalances in pollution levels • Enforcement is di�cult.

• Fees are hard to set • Taxes may be too low to curb pollution

• Incentives may not be strong enough to curb pollution

• Does not motivate all companies

• May not deter wrongdoing if penalties and enforcement e�orts are perceived as weak

Emissions fees and taxes

Government incentives

11 states over an 85-year period. Kerr-McGee had tried to spin off its environmental liabilities before selling its remaining assets to Anadarko, but the court had rejected that argument. “Today’s settlement is a just resolution of an historic injustice to the American people and our environment,” said one of the prosecutors.20

European regulators and prosecutors have also actively pursued corporate environmen- tal lawbreakers. For example, the EU standardized its laws against marine pollution and

20 “United States Announces $5.15 Billion Settlement of Litigation Against Subsidiaries of Anadarko Petroleum Corp.,” press release, U.S. Department of Justice, April 3, 2014.

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raised maximum penalties after a series of oil tanker wrecks fouled the coasts of France, Spain, and Portugal. Europe is the world’s largest importer of oil, and 90 percent is trans- ported to the continent by seagoing ships.21

The U.S. Sentencing Commission, a government agency responsible for setting uniform penalties for violations of federal law, has established guidelines for sentencing environ- mental wrongdoers. (These guidelines are also discussed in Chapter 5.) Under these rules, penalties would reflect not only the severity of the offense but also a company’s demon- strated environmental commitment. Businesses that have an active compliance program, cooperate with government investigators, and promptly assist any victims would receive lighter sentences than others with no environmental programs or that knowingly violate the law. These guidelines provide an incentive for businesses to develop active compliance programs to protect themselves and their officers from high fines or even prison if a viola- tion should occur.

Costs and Benefits of Environmental Regulation

One central issue of environmental protection is how costs are balanced by benefits. In the four decades or so since the modern environmental era began, the nation has spent a great deal to clean up the environment and keep it clean. Some have questioned the value choices underlying these expenditures, suggesting that the costs—lost jobs, reduced capital investment, and lowered productivity—exceeded the benefits. Others, in contrast, point to significant gains in the quality of life and to the economic payoff of a cleaner environment.

Businesses in the United States have invested heavily in environmental protection. Man- ufacturers have spent billions of dollars on both capital expenditures (e.g., installing pol- lution controls) and operating costs (e.g., paying for wages and supplies) to comply with environmental regulations. Business spending to comply with environmental regulation has diverted funds that might otherwise have been invested in new plants and equipment or in research and development, and strict rules have sometimes led to plant shutdowns and loss of jobs. Some regions and industries have especially been hard hit by environmental regulation, especially those with high abatement costs, such as paper and wood products, chemicals, petroleum and coal, and primary metals. Inevitably, many of these costs are passed on to customers. On the other hand, emissions of nearly all pollutants have dropped significantly since the beginning of the modern environmental era. These improvements have benefited human health and the environment.

For any specific regulation, weighing the costs and benefits—called a regulatory impact analysis—is mandated by law. For example, the EPA estimated that its recent regulations on ozone, mentioned earlier in this chapter, would cost busi- nesses $15 billion in 2025, when the rule would be fully implemented (based on the middle of three possible scenarios). However, the estimated benefits were even big- ger: $19 to $38 billion, the valuation the EPA calculated for fewer premature deaths, heart attacks, asthma attacks, and other adverse impacts on human health. Not surprisingly, reactions differed among stakeholders. “We’re facing a series of regulations, and the cumulative cost of compliance . . . is significant,” said the pres- ident of the American Chemistry Council, which had vigorously opposed the new rules. But the American Lung Association praised them, saying, “The science is

21 “The Community Framework for Cooperation in the Field of Accidental or Deliberate Marine Pollution,” at http://ec.europa. eu/echo/civil_protection/civil/marin/mp01_en_introduction.htm.

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clear. A more protective standard is needed to protect the health of millions of Americans breathing polluted air every day.”22

As this example illustrates, whether a specific regulation is worthwhile depends on the stakeholder’s point of view, since its costs and benefits often accrue to different parties.

More broadly, environmental regulations stimulate some sectors of the economy. While jobs are lost in industries such as forest products and high-sulfur coal mining, others are created in areas like recycling, environmental consulting, wind turbine and solar panel production and installation, waste management equipment, and air pollution control. For example, operators of coal-fired power plants predicted that big required cuts in mercury emissions, adopted in 2012, would cost thousands of jobs. But trade groups said that the regulations could add 300,000 jobs a year through 2017 in companies that make equipment to reduce emissions.23 Jobs are saved or created in industries such as fishing and tour- ism when natural areas are protected or restored. Moreover, environmental regulations can stimulate the economy by compelling businesses to become more efficient by conserving energy, and less money is spent on treating health problems caused by pollution.

Sectors of the economy that produce goods and services with an environmental benefit are known as the clean economy. A 2018 study by the International Labor Organization esti- mated that the clean economy would be a major source of job growth in the future. Although the transition to a more sustainable society would lead to job loss in carbon-intensive indus- tries, these would be more than offset by jobs created in clean sectors such as alternative energy, electric vehicles, and energy-efficient construction. The report concluded that if the long-term goals of the Paris Agreement were reached, the net impact would be the creation of 18 million jobs.24

Because of the complexity of these issues, economists differ on the net costs and bene- fits of environmental regulation. In some respects, government controls hurt the economy, and in other ways they help, as summarized in Figure 10.3. What is clear is that choices in environmental regulation reflect underlying values, expressed in a democratic society

22 EPA, “Regulatory Impact Analysis of the Proposed Revisions to the National Ambient Air Quality Standards for Ground-Level Ozone,” November 2014, www.epa.gov; “Health Professionals across the Nation Urge EPA to Finalize Most Protective Ozone Air Quality Standard,” March 17, 2015, www.lung.org; and “EPA Ozone Rules Divide Industry and Environmentalists,” The New York Times, November 26, 2014. 23 “Regulations Create Jobs, Too,” Bloomberg Businessweek, February 9, 2012. 24 World Employment Social Outlook 2018: Greening with Jobs (Geneva: International Labour Organization, 2018).

FIGURE 10.3 Costs and Benefits of Environmental Regulations

Costs Benefits

• Manufacturers, mining companies, and utilities spend billions of dollars annually to comply with environmental regulations.

• Some jobs are lost in particularly polluting industries.

• Competitiveness of some capital-intensive, “dirty” industries is impaired.

• Consumers pay more when companies pass along increased costs of regulations.

• Emissions of pollutants drop.

• Air and water quality improves; toxic-waste sites are cleaned up; and natural beauty is preserved or enhanced.

• People live longer and healthier lives in less polluted environments.

• Jobs are created in the clean economy sector, such as environmental products and services, alternative energy, and tourism.

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through an open political process. Just how much a society is prepared to pay and how “clean” it wants to be are political choices, reflecting the give and take of diverse interests in a pluralistic society.

Managing for Sustainability

Environmental regulations, such as the laws governing clean air, water, and land described in this chapter, establish minimum legal standards that businesses must meet. Most compa- nies try to comply with these regulations, if only to avoid litigation, fines, and, in the most extreme cases, criminal penalties. But many firms are now voluntarily moving beyond compliance to improve environmental performance in all areas of their operations and to manage proactively for sustainability. This section describes the stages of corporate envi- ronmental responsibility and discusses the organizational approaches companies have used to manage environmental issues effectively. The following section explains why managing for sustainability can improve a company’s strategic competitiveness.

Stages of Corporate Environmental Responsibility Although environmental issues are forcing all businesses to manage in new ways, not all companies are equally proactive in their response. One widely used model identifies three main stages of corporate environmental responsibility.

According to this model, companies pass through three distinct stages in sustainability management.25 The first stage is pollution prevention, which focuses on “minimizing or elim- inating waste before it is created.” The second stage is product stewardship. In this stage, managers focus on “all environmental impacts associated with the full life cycle of a product,” from the design of a product to its eventual use and disposal. HP, for example, has designed its laser printer ink cartridges so they can be refurbished and reused, and provides a mailing label for customers to return them free of charge. Finally, the third and most advanced stage is clean technology, in which businesses develop innovative new technologies that support sustainability—that provide actual environmental benefits, rather than simply prevent harm.

General Electric, a company long associated with pollution, from building coal-fired power plants to dumping toxic chemicals in the Hudson River, took a dramatic turn in 2005 when it announced a new strategy dubbed “ecomagination.” GE pledged to double its investment in developing renewable energy, fuel cells, efficient lighting, water filtration systems, and cleaner jet engines, which it viewed as a huge commer- cial opportunity. In 2017, a dozen years into the initiative, GE reported that it had invested $20 billion in clean tech research and development and had earned $270 billion in revenues from its ecomagination portfolio of products and services.26

Evidence suggests that many companies are now moving quickly toward the final stage in this model. Surveys of senior executives by McKinsey & Company document a notable shift from 2012, when the main reason cited for addressing sustainability was to “improve operational efficiency and cut costs,” to 2017, when the main reason cited was to “align with [the] company’s business goals, mission, or values.”27

25 Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, January–February 1997. All quotes in this paragraph are taken from this article. An alternative stage model may be found in Dexter Dunphy, Suzanne Benn, and Andrew Griffiths, Organisational Change for Corporate Sustainability (New York: Routledge, 2003). 26 “Ecomagination Progress,” www.gesustainability.com. 27 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.

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The Ecologically Sustainable Organization

An ecologically sustainable organization (ESO) is a business that operates in a way that is consistent with the principle of sustainable development, as presented in Chapter 9. In other words, an ESO could continue its activities indefinitely, without altering the carrying capacity of the Earth’s ecosystem. Such businesses would not use up natural resources any faster than they could be replenished, or substitutes found. They would make and transport products efficiently, with minimal use of energy. They would design products that would last a long time and that, when worn out, could be disassembled and recycled. They would not produce waste any faster than natural systems could absorb and disperse it. They would work with other businesses, governments, and organizations to meet these goals.28

Of course, no existing business completely fits the definition of an ecologically sustain- able organization. The concept is what social scientists call an ideal type; that is, a kind of absolute standard against which real organizations can be measured. A few visionary businesses, however, have embraced the concept and begun to try to live up to this ideal.

One such business is Interface, a $1 billion company based in Atlanta, Georgia, the world’s largest maker of commercial carpet tiles. In 1994, CEO Ray C. Anderson announced, to many people’s surprise, that Interface would seek to become “the first sustainable corporation in the world.” Anderson and his managers undertook hundreds of initiatives. For example, the company started a program by which customers could lease, rather than purchase, carpet tile. When tile wore out in high-traffic areas, Interface technicians would replace just the worn units, reduc- ing waste. Old tiles would be recycled, creating a closed loop. The company later adopted a goal of “Mission Zero”—no negative impact on the environment—by 2020. Another initiative was to tag all products with a special label called an envi- ronmental product declaration (EPD). Like a nutrition label on packaged food, the third-party verified EPD listed the raw materials, energy use, emissions, and waste generation associated with each product, allowing Interface customers to make environmentally informed decisions. In 2017, Interface was selected by a panel of experts as one of world’s most sustainable companies, the only company to do so for each of the 20 years the survey had been taken.29

No companies, including Interface, have yet become truly sustainable businesses, and it will probably be impossible for any single firm to become an ESO in the absence of supportive government policies and a widespread movement among many businesses and other social institutions. However, many companies are demonstrating leadership in responding to environmental challenges. The next section will describe actions leading companies are taking now to operate their businesses as sustainably as possible.

Sustainability Management in Practice Companies that have begun to move toward sustainability have learned that new structures, processes, and incentives are often needed.

An emerging role at many leading firms is the chief sustainability officer (CSO). In 2004, DuPont was the first company to appoint a chief sustainability officer; a 2014 survey found

28 Mark Starik and Gordon P. Rands, “Weaving an Integrated Web: Multilevel and Multisystem Perspectives of Ecologically Sustainable Organizations,” Academy of Management Review, October 1995. 29 GlobeScan/SustainAbility, “The 2017 Sustainability Leaders: Celebrating 20 Years of Leadership,” 2017. Interface’s sustain- ability initiatives are described at www.interfaceglobal.com/sustainability. Ray Anderson’s story is told in Ray C. Anderson with Robin White, Business Lessons from a Radical Industrialist (New York: St. Martin’s Press, 2011).

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36 CSOs at large U.S. firms. Most of these CSOs reported directly to the CEO or to an individual who did. They often supervised staffs of specialists and coordinated the work of managers across many functional areas, including research and development, marketing, facilities, and supply chain management, whose work was related to the firm’s sustainabil- ity mission.30

An example is Justin Whitmore, appointed chief sustainability officer at Tyson Foods, the world’s second-largest processor and marketer of chicken, beef, and pork, in 2017. The newly created position reported directly to the CEO. Whitmore quickly set out to establish science-based targets for Tyson in the areas of green- house gas emissions, water conservation, animal welfare, and food transparency. He also worked on ways to reduce meat waste during processing and on the devel- opment of vegetarian meat alternatives. Whitmore described the challenges facing Tyson: “There are more people in the world, and more of them are rising them- selves out of poverty, so that’s driving protein consumption. You have to set targets for companies that will continue to grow.”31

Sustainability managers reported that when they first took the job, they thought that the most important determinant of success would be their subject-matter expertise—how much they knew about pollutants, energy efficiency, regulations, and the like. But after serving in the position, these managers changed their minds, saying that interpersonal skills—being able to work effectively with people across the organization—were the most critical. “[CSOs] must typically work across the organization to implement their change initiatives,” explained the chief sustainability officer for the clothing maker Reformation. “That means they must be very effective at influencing others.”32

Chief sustainability officers may be based in departments with a variety of names, such as sustainability, citizenship, and corporate affairs. But wherever they are located, recent research shows that effective sustainability management shares several common characteristics:33

Top management commitment. The most environmentally proactive companies almost all have CEOs and other top leaders with a strong espoused commitment to sustainabil- ity. Paul Polman, the CEO of Unilever, a firm that was judged the world’s most sustain- able in 2017, told an interviewer that a different executive team could come into the company, shut down all sustainability initiatives, wring out costs, and drive the share price up—at least in the short term. But he favored the long-term view. “I would like to be remembered for leaving the place a little bit better than I found it,” he said. Boards of directors have also become involved, overseeing the implementation of environmental policies and assessing environment-related risks. For example, Prudential Financial, a financial services company that sells insurance as well as other products, now requires candidates for the board to have sustainability expertise.34 Thirty-one percent of firms integrate sustainability into board committee charters.

30 CSO Back Story II: The Evolution of the Chief Sustainability Officer (Weinreb Group, 2014). 31 Meat Industry Must Grow Sustainably, Tyson Executive Says,” February 8, 2018, www.bloomberg.com; and “The Science Behind Tyson’s Meaty New Sustainability Agenda,” February 26, 2018. 32 “Who’s in Charge of Sustainability at Your Favorite Brand?” November 23, 2016, www.racked.com. 33 Data in this section are drawn from “Turning Point: Corporate Progress on the CERES Roadmap for Sustainability,” February 2018, www.ceres.org, unless otherwise noted. The CERES study was based on a survey of executives of 600 companies, representing 80 percent of the total market capitalization of all publicly traded companies in the United States. 34 CERES, “Lead from the Top: Building Sustainability Competence on Corporate Boards,” 2017.

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Clear goals and metrics. Another characteristic of leading companies is that they set measurable, science-based sustainability goals and regularly assess and report their per- formance. A 2017 report by Pivot Goals found that 94 percent of the world’s 200 largest firms had measurable sustainability goals, and 33 percent had adopted science-based goals.35 By setting specific goals, these firms hold themselves accountable (and allow their stakeholders to do so). A particularly dramatic example is the German sportswear firm Puma, one of the first firms to release an environmental profit-and-loss statement, covering all significant environmental impacts from the production of raw materials to the final sale. After the company learned that most adverse impacts occurred during the production of raw materials, it introduced new products made from recycled content or that could themselves be recycled.36

Employee engagement. Sustainability leaders have found they are most effective when they involve line managers and employees from across the organization in the process of change. Thirty-eight percent of large firms engage their employees on sustainability issues. In 2016, for example, Cisco Systems launched an internal engagement platform called GreenHouse, on which employees could learn about ways to reduce their envi- ronmental footprint and inspire others. In its first six months, 1,750 employees had par- ticipated. One group started a “bring your own cup” campaign and gave out Starbucks cards to others who registered their reusable cup. They calculated that this action had diverted 2,900 pounds of waste in one year.37

Alignment of rewards and incentives. Businesspeople are most likely to consider the environmental impacts of their actions when their organizations acknowledge and reward this behavior. The most sustainable organizations tie the compensation of their managers, including line managers, to environmental achievement and take steps to recognize these achievements publicly. In 2018, 24 percent of U.S. companies linked executive compen- sation to sustainability metrics, but only 8 percent of companies linked pay to meeting goals that went beyond legal and regulatory requirements. For example, at Xcel Energy, a utility that is a leading supplier of wind power, a portion of the CEO’s bonus was linked to meeting specific sustainability goals set annually by the board, including reductions in energy use by customers. A study of U.S., Canadian, and German firms found those com- panies that did link pay to sustainability metrics boosted their performance in this area.38

Environmental Auditing and Reporting As noted earlier, leading companies not only organize themselves to achieve sustainability goals; they also closely track their progress toward meeting them. Chapter 3 introduced the concept of corporate social reporting and presented evidence on what proportion of compa- nies report results to their stakeholders. In the 1990s, in a parallel development, many com- panies began to audit their environmental performance. More recently, many firms have moved to integrate their social and environmental reporting into a single sustainability report. In 2017, as reported in Chapter 3, 93 percent of the world’s largest companies issued a corporate responsibility report; most of these covered both social and environmental issues. A significant trend is toward the inclusion of corporate responsibility data in the

35 “The Rise of Corporate Sustainability Goals: Some Hard Data,” December 1, 2017, www.sustainblebrands.com. The data- set is available at www.pivotgoals.com. 36 For information about Puma’s Environmental Profit & Loss Account and other sustainability initiatives, see www.puma.com. 37 “A Look Back at Cisco’s Recent Sustainability Accomplishments,” February 13, 2017, at https://blogs.cisco.com; and “Changing the Way We Waste, One Cup at a Time,” September 7, 2016, at http://weare.cisco.com. 38 “It’s Time to Tie Executive Compensation to Sustainability,” Harvard Business Review, August 17, 2017.

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annual financial report; this rose from 44 percent of these companies in 2011 to 78 percent in 2017. This is called integrated reporting (also discussed and defined in Chapter 3).39

An example of a company that was an early leader in integrated reporting is Novo- zymes, a Danish biotechnology firm. The company produced its first environmental report in 1993 and its first combined social and environmental report six years later. Since 2002, it has produced a single report to stakeholders that integrates its finan- cial, social, and environmental results. The company acknowledges the challenge of preparing a single report “in accordance with more than one set of rules and guide- lines,” but says that the process improves transparency and accurately reflects its commitment to sustainability.40

As discussed earlier in Chapter 3, the movement to audit and report on social and environ- mental performance—and to integrate these efforts with financial auditing and reporting— has gained momentum in recent years in many regions of the world.

Environmental Partnerships Many businesses that are seeking to become more sustainable have formed voluntary, col- laborative partnerships with environmental organizations and regulators to achieve spe- cific objectives, as illustrated by the Google Earth Outreach example at the beginning of this chapter. These collaborations, called environmental partnerships, draw on the unique strengths of the different partners to improve environmental quality or conserve resources.

Starbucks Corporation is the largest coffeehouse company in the world, with more than 27,000 stores in 75 countries. For more than 15 years, the company has part- nered with Conservation International (CI) to promote coffee farming methods that protect biodiversity, mitigate climate change, and reduce harm from pesticides and fertilizers. For example, in Chiapas, Mexico, and Sumatra, Indonesia, the partners have worked with local farmers to develop coffee varieties that thrive in the shade of native trees, conserving habitat and sequestering carbon. The company has also worked with CI to develop a set of purchasing guidelines based on sustainability and has committed to paying a premium price to suppliers who meet the standards. The two organizations also joined the Sustainable Coffee Challenge, an industrywide ini- tiative to make coffee the world’s first completely sustainable agricultural product. Conservation International noted that it viewed Starbucks “as a natural partner to our work because of shared geographies: most of the world’s key coffee-growing regions are the same areas where biological diversity is richest and most threatened.”41

Sustainability Management as a Competitive Advantage

Some researchers believe that by moving toward sustainability, business firms gain a com- petitive advantage. That is, relative to other firms in the same industry, companies that proactively manage environmental issues will tend to be more successful than those that do

39 The Road Ahead: The KPMG Survey of Corporate Social Responsibility Reporting 2017, at www.kpmg.com. The figures reported here are for the G250 companies. 40 Novozymes’ website and integrated reports are at http://novozymes.com/en. For a full discussion of the movement toward triple bottom line reporting, see Robert G. Eccles and Michael P. Krzus, The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality (Hoboken, NJ: John Wiley & Sons, 2014). 41 The partnership’s progress can be followed at www.conservation.org/partners/Pages/starbucks and www.starbucks.com/ responsibility/sourcing/coffee.

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not. Effective sustainability management confers a competitive advantage in five different ways, as follows. 42

Cost Savings Companies that reduce pollution and hazardous waste, reuse or recycle materials, and operate with greater efficiency can reap significant cost savings. An example is Subaru’s automobile assembly plant in Lafayette, Indiana, which has gone to great lengths to reduce waste, saving a great deal of money in the process.

Subaru’s 3.5 million square foot Indiana factory has achieved its goal of “zero waste”: it sends no waste at all to landfills. The company returns packaging materials— including the Styrofoam used to protect engines in transit—to suppliers, to be used again. Cafeteria scraps go to a nearby waste-to-energy power plant. The company processes and reuses solvent and oil. Dried paint sludge is shipped to other com- panies that use it to make railroad ties, parking lot bumpers, and bicycle helmets. Used lightbulbs are used to make reflective road striping. Leftover metal slag goes to a company that extracts the copper it contains. These initiatives not only reduce the plant’s environmental impact, they also save the company more than $2 million a year.43

Many companies have found they are able to obtain significant cost savings by more efficiently managing their real estate portfolios. How some companies have managed the built environment to save money and improve their environmental performance is described in Exhibit 10.B. One company that has benefited from this trend is Autodesk, a maker of software for architects and other designers. The company has developed special- ized software that enables architects to calculate the energy and water usage of proposed designs, and to make the most efficient use of daylight and shadows. “Autodesk is commit- ted to helping designers and engineers create a future where we all live well and within the limits of our planet,” said the company on its website.44

Brand Differentiation Companies that develop a reputation for environmental excellence distinguish their brand and attract like-minded customers. Sustainable products and services can attract environmen- tally aware customers. For example, shoppers might select cell phones with power-saving features, such as “unplug charger” reminders, or cleaning products formulated with ingre- dients that are not environmentally harmful. Services can also be marketed based on their environmental attributes, as the following example illustrates.

One company that has benefited from its reputation for sustainability is Intrepid Travel. Founded in Australia in 1989, the tour operator now offers itineraries for adventurous travelers on seven continents. Early on, Intrepid Travel embraced the principle of sustainable development and committed to reducing its environmental footprint, so its travel destinations could be enjoyed for many generations to come.

42 Daniel C. Esty and Andrew S. Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (New Haven, CT: Yale University Press, 2006); and Sanjay Sharma and J. Alberto Aragon-Correa, eds., Corporate Environmental Strategy and Competitive Advantage (Northampton, MA: Edgar Elgar Academic Publishing, 2005). 43 “The Zero-Waste Factory,” Scientific American, July 13, 2017. The website of Subaru Industries of America is at www. subaru-sia.com. 44 The Autodesk website is at www.autodesk.com.

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The company employed local guides, used public transit, offset the carbon emis- sions of its air travel, and gave back to local communities through its foundation. In the past 10 years, the company has grown at an annual compound rate of 25 percent. Said one of the company’s founders: “We became known as a responsible company, and responsible travel became a selling feature for Intrepid.”45

In general, promoting specific products or services based on their environmental attributes, a practice sometimes known as green marketing, has not been particularly effective. Evidence shows that most consumers select products and services based on price, convenience, and quality—not “greenness.” However, what consumers do respond to is a company’s overall rep- utation for environmental responsibility and the credibility of its communications with stake- holders. A study of 30,000 consumers in 60 countries found that almost half were more likely to purchase a product or services from a company known as being environmentally friendly. This was especially true of young people. Only ten percent, however, had purchased products specifically labeled as eco-friendly.46 Joel Makower, an expert on environmental marketing, concluded that “It’s at the company or brand level that this [environmental marketing] makes sense: Why offer a few good, eco-labeled products if the organization behind them is headed in the wrong direction?” In his view, consumers generally do not seek out “green” products, but they do buy from companies they perceive as responsible.47

Technological Innovation Environmentally proactive companies are often technological leaders, as they seek imagi- native new methods for reducing pollution and increasing efficiency. In many cases, they

45 Geoff Manchester, “Why We Must Act Now on Sustainability,” May 1, 2014 [blog post], at www.travelweekly.com.au. For Intrepid Travel’s reports on its progress on sustainability, see www.intrepidtravel.com/rb-our-progress-sustainability-policy. 46 “The Sustainability Imperative: New Insights on Consumer Expectations,” Nielsen, October 2015. 47 Joel Makower, “Five Reasons Green Marketing is Going Nowhere,” March 12, 2013, www.linkedin.com.

Greening the Built Environment

For most companies, their buildings—the offices, factories, stores, and warehouses where their employees work—account for a huge share of their overall environmental impact. The U.S. Energy Information Admin- istration has estimated that commercial buildings and industrial facilities together account for slightly more than half of the nation’s energy consumption (most of the rest comes from transportation and residential use). Many companies have realized that improving operating efficiencies in their real estate holdings can yield tremendous savings, as well as reduce their environmental footprint. One approach is to design buildings from the ground up to conserve resources both in their construction and use. The U.S. Green Building Council has developed a certification process called LEED (Leadership in Energy and Environmental Design) for both new and retrofitted buildings. Adopting these standards has brought com- panies many benefits. For example, Adobe, the maker of digital authoring tools, has obtained 25 LEED certifi- cations, including for corporate headquarters in San Jose, California, which was completely retrofitted. Adobe introduced scores of improvements—from motion sensors that turned off lights when people left their offices to landscape irrigation linked to weather satellites, so sprinklers did not operate when it was raining. The improve- ments cost a total of $1.4 million but saved Adobe $1.2 million per year. “I was one of the naysayers saying, no, green costs money, it doesn’t save money. [But] once I started seeing the cost savings, [I jumped] right up on that bandwagon . . . because it works,” said the company’s director of global facilities services.

Sources: Rocky Mountain Institute, “Adobe Systems Corporate Headquarters” [case study], and “Green Building for a Profitable Future.” The website of the U.S. Green Building Council is at www.usgbc.org. Adobe’s sustainable building initiatives are described at www.adobe.com/corporate-responsibility/sustainability/green-building.

Exhibit 10.B

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produce innovations that can win new customers, penetrate new markets, or even be mar- keted to other firms as new regulations spur their adoption.

IBM’s semiconductor chip-making plant in Burlington, Vermont, uses vast quanti- ties of ultrapure water to clean its products. The water bill for this single facility has been as high as $10,000 a day. To reduce costs, IBM managers devised an elaborate system of electronic sensors to track the movement of water at every point and used the data to drive greater efficiencies—nearly doubling the “water productivity” of the plant over 10 years. “We did fifty different things,” reported the plant’s opera- tion manager. “Angles of usage, treatment, energy capture, using less pump capac- ity, capturing internal pressure that comes with the water in the line—fifty different things.” In the process, IBM had the startling revelation that it had done more than save money on water; it had created an entirely new business of consulting with other organizations on how to do the same thing. IBM later created a robust busi- ness called “Intelligent Water,” which helped governments, utilities, and businesses use advanced data analytics to conserve water and save money.48

Reduction of Regulatory and Liability Risk Another benefit for companies that are proactive with respect to their environmental impacts is that they are often better positioned than their competitors to respond to new government mandates. For example, when new rules went into effect in Europe that banned all electronics products that included six toxic substances, including lead, cadmium, and mercury, companies that had learned how to make their products free of these substances prior to the ban suddenly had a big advantage in winning European accounts. When the United Kingdom announced that all large British companies would be required to report annually on their greenhouse gas emissions, the companies that had taken earlier steps to measure and report on carbon voluntarily were better prepared for compliance. Similarly, proactively managing for sustainability can avoid expensive fines and lawsuits, such as those experienced by Anadarko, in the example mentioned earlier in this chapter.

Strategic Planning Companies that cultivate a vision of sustainability must adopt sophisticated strategic plan- ning techniques to allow their top managers to assess the full range of the firm’s effects on the environment. The complex auditing and forecasting techniques used by these firms help them anticipate a wide range of external influences on the firm, not just ecologi- cal influences. Wide-angle planning helps these companies foresee trends—new markets, materials, technologies, and products. For example, Toyota, well known for its ability to anticipate market trends, was among the first to produce a commercially successful hybrid vehicle, the Prius. As U.S. car makers struggled—and some went into bankruptcy—in the deep recession of the late 2000s, Toyota fared relatively well. The same sophisticated planning that enabled Toyota to weather the recession had also contributed to its abil- ity to meet the public’s increased interest in less polluting, more efficient transportation.49 McKinsey & Company found in the survey mentioned earlier in this chapter that 44 percent of companies have formally integrated sustainability into their strategic planning process.50

48 “IBM Intelligent Water,” at www-935.ibm.com/services/multimedia/Intelligent_Water.pdf; and Charles Fishman, The Big Thirst: The Secret Life and Turbulent Future of Water (New York: Free Press, 2011), Chapter 5, “Money in the Pipes.” 49 Information on Toyota’s sustainability initiatives is at www.toyota.co.jp/en/environment. 50 McKinsey & Company, “Sustainability’s Deepening Impact,” December 2017.

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Figure 10.4 lists the companies viewed by a panel of experts as the world’s leaders in integrating sustainability into their business strategy.

If managing for sustainability confers a competitive advantage, it follows that it should have a measurable impact on financial performance. Scholars have begun to study this relationship. A comprehensive examination of almost two decades of data on U.S. companies by Robert Eccles and colleagues at the Harvard Business School concluded that “high-sustainability firms” significantly outperformed others, as measured by both financial and stock market returns.51 The most recent work on this topic has focused on material sustainability issues. To explain, the term material in financial reporting refers to issues that are relevant to eval- uating a firm’s financial condition; the law requires that firms report to investors and the public not all information, but material information. In the same way, material sustainabil- ity issues refer to those that are particularly relevant to an evaluation of a specific company or industry’s sustainability management. For example, greenhouse gas emissions are highly material in the transportation industry, but of lower materiality in the financial ser- vices industry. Building on this concept, recent research shows that firms with good per- formance on material sustainability issues significantly outperform firms with poor performance on these issues. A 2018 study of large U.S. firms found that 32 percent had conducted a materiality assessment.52

51 Robert G. Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of a Corporate Sustainability on Organizational Pro- cesses and Performance,” Management Science 60(11), 2014. 52 Mozaffar Khan, George Serafeim, and Aaron Yoon, “Corporate Sustainability: First Evidence on Materiality,” November 9, 2016, The Accounting Review, Vol. 91, No. 6; and CERES (2018), op. cit.

FIGURE 10.4 Corporate Leaders in Integrating Sustainability into Their Business Strategy Question: What specific companies do you think are leaders in integrating sustainability into their business strategy?

Source: Globe Scan/SustainAbility, The 2017 Sustainability Leaders, p. 13. Based on a survey of more than 1,000 qualified sustainability experts from government, NGOs, academia, corporations, and the media from 79 countries. Respondents were asked to list a maximum of three companies. The numbers shown are the percentage of respondents who named that specific company.

0 5 10 15 20 25 30 35 40 45 50

GE

BASF

Nike

Nestle

Tesla

Natura

IKEA

Marks & Spenser

Interface

Patagonia

Unilever

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A theme of this chapter is that achieving a sustainable economy and society will require a collaborative effort among government, business, and civil society. The U.S. government, like that of many other countries, has adopted many environmental laws and regulations constraining business behavior. These are critically important, as they assure that mini- mum standards are met by all. But many proactive companies are moving beyond com- pliance, recognizing that operating sustainably will help them become more competitive in the global marketplace by cutting costs, attracting environmentally aware customers, spurring innovation, reducing regulatory and liability risk, and encouraging long-range strategic planning. Recent research shows that managing for sustainability pays off for companies in the long run.

∙ Government environmental laws and regulations focus on protecting the ecological health of the air, water, and land, and limiting the amount of pollution that companies may emit.

∙ Environmental laws have traditionally been of the command and control type, specify- ing standards and results. New laws, in both the United States and Europe, have added market incentives to induce environmentally sound behavior.

∙ Environmental laws have brought many benefits. Air, water, and land pollution levels are in many cases lower than in 1970. A continuing challenge is to find ways to promote a clean environment and sustainable business practices without impairing the competi- tiveness of the U.S. economy.

∙ Companies pass through three distinct stages in the development of green management practices. Many businesses are now moving from lower to higher stages. An ecologi- cally sustainable organization is one that operates in a way that is consistent with the principle of sustainable development.

∙ Effective environmental management requires an integrated approach that involves all parts of the business organization, including top leadership, sustainability managers, and employees in many functional areas, as well as strong partnerships with stakehold- ers and effective auditing.

∙ Many companies have found that proactive environmental management can confer a competitive advantage by saving money, attracting customers, promoting innovation, reducing regulatory risk, and developing skills in strategic planning. Emerging evi- dence shows a positive relationship between sustainability practices and stock market and financial performance.

Summary

Key Terms market-based mechanisms, 219 material sustainability issues, 232 Superfund (CERCLA), 217 sustainability report, 227

acid rain, 215 cap-and-trade, 219 chief sustainability officer (CSO), 225 clean economy, 223 command and control regulation, 219

ecologically sustainable organization (ESO), 225 environmental justice, 217 environmental partnerships, 228 Environmental Protection Agency (EPA), 213

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234 Part Four Business and the Natural Environment

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Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced?

Hydraulic fracturing—or fracking, as it is sometimes known—has been called the gold rush of the 21st century because so many companies and people are rushing to make their fortunes by extracting oil and natural gas from underground shale formations. What are the environmental impacts of fracking, and what can business, government, and society do to reduce them?

In recent years, technology has evolved to make possible the economic extraction of crude oil and natural gas from vast underground shale formations. In hydraulic fracturing, a vertical well is drilled as deep as 7,000 feet before turning horizontally into the oil- or gas-bearing layer. Operators then pump in vast quantities of water, sand, and chemicals under high pressure to break up the shale and release hydrocarbons, which are then brought back up the drill hole. By rotating the horizontal turns in successive passes, a single well can reach a large area underground.

Hydraulic fracturing grew rapidly in the United States in the first two decades of the century. In 2016, more than 1 million oil and gas wells were operating in 31 states. The biggest fracking booms were underway in several shale formations: the Baaken (North Dakota), Marcellus (Pennsylvania, West Virginia, New York, Ohio, and Maryland), Barnett (Texas), and Permian (western Texas and eastern New Mexico).

Hydraulic fracturing has several benefits. In 2012, the United States became the leading natural gas producer in the world, overtaking Russia, and in 2013, became the leading oil producer, overtaking Saudi Arabia. At current rates of growth, the United States will be energy self-sufficient by 2030. The fracking boom has created jobs, tax revenue, and royal- ties to property owners who lease their mineral rights. Natural gas burns cleaner than either coal or oil, providing a possible bridge to a future economy based on renewable energy.

But fracking also carries serious environmental risks. Trucks and heavy equipment cause noise and air pollution in and around drilling sites. The process uses vast quantities of water—at least 239 billion gallons since 2005, according to some estimates—depleting supplies available for drinking and irrigation. Chemicals injected underground include a host of toxins. Fluid that returns to the surface—called flowback—is often further con- taminated by radioactive substances, heavy metals, and volatile organic compounds from deep in the Earth. Improper disposal of this wastewater can contaminate land, wells, and rivers—and even cause earthquakes in such normally quiescent places as Oklahoma and

Internet Resources

www.epa.gov Environmental Protection Agency www.envirolink.org Environmental organizations and news www.GreenBiz.com Green Business Network www.sustainablebusiness.com Network of sustainable small businesses www.environmentalleader.com Briefing for executives www.sustainability.com SustainAbility (consultancy) www.sustainablog.org Blogs on green and sustainable businesses www.theguardian.com/us/sustainable-business The Guardian [newspaper] coverage of

sustainable business

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Kansas. Methane can be released at multiple stages in the fracking process, powerfully contributing to climate change. Wildlife habitat is destroyed as forests and fields give way to industrial drilling sites.

In 2017, the Trump administration cancelled federal regulations, issued two years ear- lier, governing hydraulic fracturing on public and tribal lands. These regulations would have required companies to disclose the chemicals they used and set stricter rules for the storage and disposal of wastewater. States, which had jurisdiction over fracking on pri- vate and state-owned land, had taken a wide range of approaches. At one extreme, three states—Vermont, New York, and Maryland—had banned fracking outright; some cities had as well. In announcing the decision, the health commissioner of New York said, “The potential risks are too great. In fact, they are not even known.” At the other extreme, gov- ernment oversight in North Dakota—site of a huge oil boom—was considered highly per- missive; in fact, the state’s top environmental regulator described himself on a radio show as “not a regulations guy.” Some states had charted a middle course; California, for exam- ple, implemented regulations in 2015 that allowed fracking but required strict monitoring of groundwater and air quality near wells. Most states taxed fracking operations.

As the practice of hydraulic fracturing spread, some companies experimented with new technologies to extract oil and gas with less environmental damage. Halliburton devel- oped solar-powered storage silos and natural gas fueled pumps, reducing on-site emissions. Southwestern Energy installed infrared cameras to detect fugitive methane emissions, so leaks could be plugged. General Electric tested a system that enabled water to be treated and reused on site, and GasFrac, a Canadian company, introduced a fracking method that used no water at all.

Said a professor who studied these trends, “[It is] the same as with any industry—if you come out with a game-changing technology, you can get in the market first and ride that.”

Sources: “The World’s Top Oil Producers of 2017,” Investopedia, February 19, 2018; “To Round Out a Year of Rollbacks, the Trump Administration Just Repealed Key Regulations on Fracking,” The Washington Post, December 29, 2017; “Fracking by the Numbers: The Damage to Our Water, Land, and Climate from a Decade of Dirty Drilling,” Environment America, April 2016; “New Federal Rules are Set for Fracking,” The New York Times, March 20, 2015; “Citing Health Risks, Cuomo Bans Fracking in New York State,” The New York Times, December 17, 2014; “The Downside of the Boom,” [series of articles], The New York Times, various dates starting November 22, 2014; “Green Fracking? 5 Technologies for Cleaner Shale Energy,” National Geographic, March 21, 2014. Maps showing the distribution of fracking wells in the United States are available online at www.fractracker.org/map.

Discussion Questions

1. What is hydraulic fracturing, or fracking, and what are its costs and benefits? 2. Using the classification system presented in this chapter, what type(s) of pollution is

(are) generated by fracking? 3. Using the classification system presented in this chapter, what type(s) of government

regulation has (have) been used to address the concerns you identified in question 1, and which do you think would be most effective?

4. What are the benefits to companies of moving beyond compliance and developing more sustainable methods of fracking?

5. What factors might influence a company to use more or less environmentally responsi- ble methods of fracking?

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