Week 3 – Environmental Audit, PEST Analysis, Corporate Social Responsibility & Ethical

Challenges in Environmental Audit

Learning Outcomes

LO.1. Define an organizational problem or opportunity and scope the associated issues

LO.2. Acquire, analyse, critically evaluate and apply information to a range of organizational
contexts

LO.3. Develop creative and feasible solutions within their context

LO.4. Critically evaluate and integrate theory and practice in a wide range of situations and
appreciate the relationships and interactions across various organizational areas

1. Environmental Audit – Brief Explanation

An environmental analysis surveys the business landscape to determine how external variables will
affect its decision-making. Robert Grant (2016) categorizes environmental influences as either
source or proximity. Grant explains that sources include political, economic, social and
technological factors; these factors form what’s known as a PEST analysis. The business is not
always in a position to control these variables; it can only plan for them and make decisions
accordingly. Companies use an environmental analysis to prepare for a variety of potential
scenarios. For instance, an organization may prepare for a downturn in the economy by drafting
several production schedules that are contingent on different levels of consumer demand.

Environmental auditing is essentially an environmental management tool for measuring the effects of
certain activities on the environment against set criteria or standards (Dagg, 2005). Depending on the types
of standards and the focus of the audit, there are different types of environmental audit. Organisations of all
kinds now recognise the importance of environmental matters and accept that their environmental
performance will be scrutinised by a wide range of interested parties. Environmental auditing is used to:

• investigate
• understand
• identify

These are used to help improve existing human activities, with the aim of reducing the adverse effects of
these activities on the environment. An environmental auditor will study an organisation's environmental
effects in a systematic and documented manner and will produce an environmental audit report. There are
many reasons for undertaking an environmental audit, which include issues such as environmental
legislation and pressure from customers (Aslam, Rehman, & Asad, 2020; Churilova, Strelnyk, & Hres,
2018).
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Hillary (1998), supports that auditing, in general, is a methodical examination - involving analyses, tests,
and confirmations - of procedures and practices whose goal is to verify whether they comply with legal
requirements, internal policies and accepted practices.

The International Chamber of Commerce (ICC) produced a definition in 1991 which is along the same
lines:

‘A management tool comprising systematic, documented, periodic and objective evaluation of how well
environmental organisation, management and equipment are performing with the aim of helping to
safeguard the environment by facilitating management control of practices and assessing compliance with
company policies, which would include regulatory requirements and standards applicable’ (International
Chamber of Commerce (1991).

There are other definitions available, although the above definition is still seen as the industry standard. The
key concepts, which occur in all the definitions, are as follows.

• Verification: audits evaluate compliance to regulations or other set criteria.

• Systematic: audits are carried out in a planned and methodical manner.
• Periodic: audits are conducted to an established schedule.
• Objective: information gained from the audit is reported free of opinions.
• Documented: notes are taken during the audit and the findings recorded.
• Management tool: audits can be integrated into the management system (such as a quality
management system or environmental management system).

Environmental auditing is carried out when a development is already in place, and is used to check on
existing practices, assessing the environmental effects of current activities (ex post). Environmental
auditing therefore provides a 'snap-shot' of looking at what is happening at that point in time in an
organisation.

Environmental auditing means different things to different people. Environmental auditing is often used as a
generic term covering a variety of management practices used to evaluate a company's environmental
performance. Strictly, it refers to checking systems and procedures against standards or regulations, but it
is often used to cover the gathering and evaluation of any data with environmental relevance - this should
actually be termed an environmental review. The distinction between an environmental audit and an
environmental review has become blurred, but the table in 2.1.1 should enable you to understand the
differences between the two (Dagg, 2005).

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 2. PEST Analysis for Environmental Audit

PEST analysis examines four categories of external environmental factors, namely: Political factors
(P): these cover various forms of government interventions and political lobbying activities in an
economy. Economic factors (E): these mainly cover the macroeconomic conditions of the external
environment, but can include seasonal/ weather considerations. Social factors (S): these cover
social, cultural and demographic factors of the external environment. Technological factors (T):
they include technology related activities, technological infrastructures, technology incentives, and
technological changes that affect the external environment (Ho, 2014).

As per Ho (2014), PEST analysis highlights the following ideas, grouped under three headings
here, namely: (a) related to its nature, (b) related to its contribution to other planning activities and
(c) related to its practice:

(a) Related to its nature

- It is a framework that categorizes environmental factors as political, economic, social and

technological forces (Thompson and Martin, 2006).

- Examples of these factors are: a. Political factors: tax policy, government stability and trading
agreements, environmental regulations, security controls, merger restrictions. b. Economic factors:
interest rates, exchange rates, inflation rate, GDP. c. Social factors: language, demographic trends,
consumer tastes, education standards, living standards, gender roles.

(b) Related to its contribution to other planning activities

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- It is a company’s environmental factors audit to inform strategic decision-making, marketing
planning, organizational change, and product development, etc. (CIPD, 2014).

- It identifies key drivers of change, which can be used in scenario-building exercises by a company
(Johnson et al., 2009).

- It provides vital informational support to a company’s SWOT (i.e. strengths, weaknesses,

opportunities, and threats) analysis (Fleisher and Bensoussan, 2003).

(c) Related to its practice

- It needs to be conducted regularly (CIPD, 2014).

- It can be employed with SWOT analysis in a combined way (Ha and Coghill, 2005).

- It relies on managers at various levels of a company, even including outside board members, to
collect and analyze the relevant data in order to enable the analysis to be conducted (Fleisher and
Bensoussan, 2003).

A PEST analysis prepares the business for handling external factors. Robert Chapman
(2011), explains a PEST analysis helps the business be proactive with market trends. Instead of
reacting to market forces, Chapman explains that a PEST analysis gives the business the tools to
prepare for potential risks. For instance, this type of analysis may disclose that government
legislation will increase the cost of raw materials by 20 percent. If the business can anticipate this
as a possibility, it can switch vendors, stock up on raw materials or find cheaper alternatives. Such
preparation ultimately saves the company money and in turn gives it a competitive advantage.

In actual business world practice, there are three main challenges involved in PEST analysis,
based on literature review:

Challenge 1: Managers need to strengthen their managerial intellectual capability, as they often
have “difficulty in conceptualizing or defining what their environment is”, “hold narrow, limited, or
invalid perceptions about the environment” and have difficulty to “grasp the implications of
numerous environmental and organizational interactive dynamics” for a diversified business
(Fleisher and Bensoussan, 2003).

Challenge 2: PEST analysis practitioners need to be aware of the existence of a number of

perspectives on environment itself, such the Industry Structural Model perspective, the Cognitive
Model perspective, the Organizational Field Model perspective, the Ecological and Resource
Dependence Model perspective and the Era Model perspective (Fleisher and Bensoussan, 2003).
Unawareness of these perspectives easily leads to confusion in PEST analysis when different
practitioners hold dissimilar perspectives on the environment.

Challenge 3: The environmental scanning system of a company, which supports the PEST analysis
process, more often than not, fails to detect strategic inflection points 4 and asymmetric attacks5
from competitors (Huffman, 2004). This also implies PEST analysis blind spots.

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 3. Corporate Social Responsibility & Ethical Challenges in Environmental Audit

The theme of environmental and social responsibility appears in a number of political and legal
documents and is gaining ever-greater importance at the international level. Today, corporate
leaders face a dynamic and challenging task in attempting to apply societal ethical standards to
responsible business practice. Companies, especially those operating in global markets, are
increasingly required to balance the social, economic and environmental components of their
business, while building shareholder value (Morimoto, Ash, & Hope, 2005). A corporate
socially responsible audit is an assessment of your company's performance on corporate social
responsibility objectives. It evaluates measurable goals intended to help your business meet the
expectations your stakeholder groups have regarding your social and environmental
responsibilities.

By environment one means the total surroundings of external conditions within which an
organisation or committee of organisations exists. In general sense environment embraces
anything that is external to humans in their immediate or remote surroundings that they interact
with or that impinge on their welfare (Okafor, Hassan, & Doyin-Hassan, 2008). According to
Ikporukpo (2001) environment is the totality of human surroundings, hence human environment is
derived from physical environment. Human environment is regarded as human construct created
by man in their struggle for survival and resistance on earth crust at times called the inhabited
environment. This is usually classified based on certain criteria, such as population size, economic
activities and special characteristics. The relationship between physical and human environment
are not mutually exclusive. In other words, human environment is a modification of physical
environment. This is done through primary, secondary, tertiary, and quaternary production
activities. Since man operates on the earth surface he needs to be reckoned with (Ajayi and
Adesina, 2005). Environmental degradation is largely caused by man’s activities and it can also be
a consequence of man’s hazard. The result is that the natural processes of ecosystem are altered
and possibly damaged irreparably. When the environment becomes degraded, all forms of life are
threatened (Okafor, Hassan, & Doyin-Hassan, 2008). Also, Osibanjo (1998) refers to the
environment as “man’s immediate surrounding’s (that is, water, air, land, including associated living
and non-living resources) which provides life support system for mankind”. These definitions imply
that the environment provides the natural resources on which national economics are built and
sustained. For conceptual analysis, the ethical, social, political, technological, legal, etc
environments can be distinguished. The social environment consists of attitudes, desires,
expectations, degrees of intelligence and education, beliefs and customs of people in a society or
group. The political and legal environment refers to laws, regulations and government agencies.
The ethical environment, which can be subsumed under the social environment, includes sets of
generally accepted and practiced standards of personal conduct (Koontz and Weihrich, 1998). The
sustainability of the environment has been stressed to be of utmost importance in achieving
sustainable development.

McCarthy (1992) defines sustainable development as “development that meets the needs of the
present without compromising the ability of future generations to meet their own needs”. He
explains further that sustainable development “implies radically new economic policies for the state
and a change in habits for the individuals. It certainly means abandoning the pursuit of simple self-
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interest”. The Brundtland Report (World Commission on Environment and Development, 1987),
commissioned by the United Nations to examine long-term environmental strategies, likewise
argue that economic development and environmental protection could be made compatible, but
that this would require radical change in economic practices throughout the World (Welford and
Stranchan, 2005). Welford (1993) contends that sustainable development involves three closely
connected issues and associated conditions:

· Environment: The environmental stock must not be treated as a free good but must rather be
protected, which implies minimal use of nonrenewable resources and minimal emission of
pollutants.

· Equity: Recent discourses on gender and development have revealed that gender disparities in
economic opportunities, education, health services, nutritution etc, greatly contribute to poverty in
developing nations. Gender equity is significant to achieving sustainable development.

· Futurity: Futurity implies that society, business organisations and individuals must not operate
under competitive pressures to achieve short term goals which endanger long-term environmental
protection and intergenerational development. Rather, business policy needs to be proactive and
not reactive such that intergenerational considerations and long-term environmental protection are
observed.

As per Okafor, Hassan, & Doyin-Hassan (2008), sustainable development poses a challenge to
industry to produce higher levels of output using lower levels of input and generating less waste. In
the context of the systems theory, the flow of inputs and outputs is the basic start point which
describes an organisation. Organisation takes resources (input- human and natural resources)
from the larger system (environment), processes these resources and returns them in changed
form (output). Thus, organsiations are open systems, which receives inputs or energy from their
environment, convert these resources into outputs into their environment, as shown in figure 1.
However, organisations must not merely produce products and services to satisfy their numerous
clients, they must also produce actions that will ensure the protection of the environment. Like most
organisational theories, the systems theory does not indicate how activities of business firms can
impact negatively on the environment or what strategies can be adopted to curb environmental
degradation. This the authors have done by indicating potential negative impacts on the
environment that may result from organisation’s activity. Wastes that may be generated and the
need to incorporate environmental management strategies in their feedback of information and
results are equally incorporated into the model in figure 1. This will make organisations
environmentally conscious and bring organisation strategies in line with environmental
sustainability

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Effective and efficient environmental management strategies can only be achieved if humans will
cultivate practices that will sustain the environment and abstain from that which deplete and
degrade it.

Finally, corporate Social Responsibility (CSR) is associated with the conduct of corporations and in
particular whether corporations owe a duty to stakeholders other than shareholders. While the
phrase ‘Corporate Social Responsibility’ may be gaining momentum, the concept itself is not new.
Social responsibility is a major concern for management from a reputation risk perspective.
Typically, reputation risk is associated with fraudulent reporting, regulatory actions against a
company, or misconduct of individual officers (for example, personal tax fraud). However the scope
of social responsibility has been expanding continuously to include several aspects that are
perceived by the public to be the social impact of business actions. Social responsibility is
concerned with doing “the right thing” and also protecting the reputation of an organization beyond
short-term considerations of profit maximization. Ethics and social responsibility are closely related
and can be either an asset or a liability. An organization’s management/board members should
understand social responsibility as both a public duty and a necessity of long-term organizational
value. Corporate Social Responsibility (“CSR”) is a broad term however, for the purpose of
addressing the scope of a CSR Audit, CSR is about managing and taking into consideration
organization’s operational, processes and behavioral impact on society and stakeholders from a
broad perspective. Contrary to common belief CSR is more than basic legal compliance and is
highly connected with and affects organization’s bottom line. In order to ascertain an organizations
effective CSR policy, practices and culture, the notion of auditing CSR in organizations is becoming

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key. However, this requires a substantial shift in the audit profession to include beyond the
traditional lines of finance and information technology to wider operational practices that respond to
client and professional pressures brought about by a growth in the practice of risk management.

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