Should Your Business Adopt Environmentally Friendly Strategies?

All businesses should consider environmentally friendly strategies.

Ideally, business decisions should not only be concerned with meeting the objectives of shareholders (maximizing profits for investors), but also be influenced by the needs of external stakeholders such as customers, employees and the local community.

Individual people, non-governmental organizations and governments are not directly involved in a business’s decision-making. But, they are affected by its operations and are increasingly concerned about the negative impacts of business activity on the natural environment.

Some businesses are more environmentally friendly than other businesses. One of the ways to be socially responsible, is to make environmentally-friendly business decisions, as the natural environment can be greatly affected by business activity. For example, air pollution from manufacturing, traffic jams caused by delivery trucks, expansion of factories at the expense of arable land, the use of scarce non-renewable natural resources for energy production, etc.

When a business accepts its legal and ethical obligations towards all of the other business stakeholders, it is said to be acting in a socially responsible way. Recent changes in the society regarding environmental protection have meant that businesses are increasingly reviewing their ecological practices considering whether to adapt more environmentally friendly strategies.

For being environmentally friendly

Arguments for business to adopt environmentally friendly business strategies:

Pressure from customers. Customers have been becoming increasingly aware of environmental issues. There is a growing number of them who will willingly support businesses that adopt ‘green’ policies. It makes businesses to ensure that their environmental policies are genuine and that they are not just covering-up environmentally damaging practices. If they do ‘greenwash’ the society, it may backfire on them causing bad publicity leading to loss of reputation.
Risks of losing reputation. Businesses that do not respect the natural environment are at risk of ruining their reputation. Harming the environment can be costly for business reputation in a way that it increases informal Pressure Group activity which can create negative publicity. Companies that damage the environment can suffer negative consumer reactions who can even completely boycott of the businesses’ products. Damage to reputation directly affects sales and will lead to losing long-term profitability.
Easier to recruit qualified workers. Businesses that switch to a more environmentally friendly strategies often have it easier in recruiting quality applicants. It is because potential workers would rather work for a business that reflects their own personal views and environmental standards.
Marketing advantages. Businesses that reduce pollution by using the latest ‘green’ equipment or use recycled materials in the production process can have promotional advantages over ‘dirty’ competitors.
Long-term cost-saving advantages. Generating electricity by using solar panels or wind farms requires very heavy capital expenditure at the start. However, if the cost of energy generated from oil and gas increases due to world shortages, the businesses that had invested in solar and wind power would gain substantial cost savings in the future.
Avoiding costly penalties and additional TAXes. Low-polluting production methods and responsible waste disposal will reduce the chances of businesses breaking laws designed to protect the environment. In this way, the business can avoid heavy court fines.
Avoiding increased governance. The governments may impose laws putting limits on pollution levels or laws against dumping waste to encourage recycling. By being environmentally friendly, the business will not need to worry about the impact of those laws on daily running of the business.
Eliminating external costs. External costs are the costs of production methods that are paid for by the rest of the society, not the producing firm, e.g. damaging health effects from air pollution or the cost of clearing rivers with polluted waste. If the government introduces additional penalties on businesses, such as pollution permits or the right for local residents to sue for health risks, then it is the businesses that would have to pay for these costs.

Example 1: Many world’s largest oil companies such as Shell, BP and Exxon Mobile are now assuming in their Profit and Loss Accounts so called ‘Carbon TAX’ to imposed. It will be added to estimates of the total costs when considering opening and operating new oil refineries and other electricity-consuming plants that use crude oil, coal or gas to produce energy. If each ton of oil costs USD$150, and the electricity generated from burning one ton of crude oil can be sold on the market for USD$250, then the profit for the business is USD$100. However, because the environmental damage of burning one ton of crude oil is valued at $50 (according to government’s estimations), then the profit for the business is reduced to only USD$50 per ton because of that additional ‘Carbon TAX’.

Against being environmentally friendly

Arguments against adopting environmentally friendly business strategies:

Lower prices for customers. By keeping costs as low as possible, even though the environment is damaged as a result, lower prices may increase sales and consumers will benefit from these low-priced goods, hence overlook the environmental consequences.
Reduced profits limit future business growth. Expensive low-polluting equipment or disposing in responsible ways rather than just dumping waste into rivers will both increase expenses. If profits are lower as a result, then this will limit how much firms can invest in the future.
Lack of environmental regulations. Weak legal protections of the environment that lack adequate inspection systems in many countries will result in very little risk of legal actions and heavy fines against business activity, even if they use low-cost yet very polluting production methods to keep costs to the minimum.
Importance of economic development. In developing countries, it is argued that economic development is far more important than protecting the natural environment. Therefore, it is claimed that those countries can achieve more ‘goodness’ to the local economy by producing cheaply than if forced to always adopt the ‘greenest’ production strategies.
Business objectives not aligned with natural environment. The extent to which businesses consider environmental issues also depends on the business aim and business objectives as well as the attitudes of owners and managers.
Little impact on certain companies. It may be difficult for new and small business to regularly analyze its energy usage, waste disposal practices and pollution levels. Or, it may even be unnecessary as these businesses do not have far-reaching effects on the local community and other businesses in the area, comparing with large companies. Also, it might be extremely difficult for inexperienced managers to work out the cost-benefit analysis as ambiguous costs of environmental protections make it hard to apply quantitative values.

So, the question remains whether managers should be adopting environmentally safe policies which are usually more expensive? Or, should they always take the cheapest option (to maximize profits for shareholders) no matter what the consequences for the environment might be?

When social benefits outweigh the social costs, then interests of the various stakeholders need to be considered. If compliance costs are too high, then firms may choose not to become more environmentally friendly.

However, without government intervention, private sector businesses are unlikely to consider the external costs of business activity, e.g. second-hand smoking causing non-smokers to suffer in public, air and noise pollution, packaging waste or global warming leading to climate change that causes natural disasters, etc.

Therefore, the national governments need to play an active role in imposing legal controls in protecting natural environments.