Understanding Business Ethics

Stanwick and Stanwick

3rd Edition

Chapter 8
Ethics and the Environment
 Ethical Thoughts

“Earth provides enough to satisfy every man’s need, but not every
man’s greed.”

Mahatma Gandhi

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 Learning Objectives

After reading and studying this chapter, students should be able to:
1. Explain the concept of the Tragedy of the Commons.
2. Comment on the natural environment as a stakeholder and as a
competitive advantage.
3. Identify areas in which firms can be environmentally proactive.
4. Explain what does it mean to "Be Green" & sustainable strategies using
firm's transformation.
5. Describe the various environmental stakeholders.
6. Explain Environmental Auditing, Environmental Justice &
Environmental Sustainability.
7. Explain Greenhouse Effect and Kyoto Protocol.
8. Explain the Effects of Climate Change on a firm.
9. Define and explain the scope of a firm’s carbon footprint
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 The Tragedy of the Commons

• The tragedy of the commons refers to a situation in which

individuals with access to a public resource, act in their own
interest and, in doing so, ultimately deplete the resource.
• Credited to Garrett Hardin, but its roots go back to Aristotle.
• Aristotle stated that what is common to the most people will
receive the least amount of care.
• Underlying belief is that free access with unrestricted use of
any resource that is finite will ultimately ruin the resource
through overexploitation.
• From a natural environment context, the tragedy of the
commons would predict the eventual use of all the natural
resources on Earth due to the lack of control over their use.
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 The Tragedy of the Commons

• Hardin argues that there is a finite amount of energy available

and as the population grows, the human race needs to reduce its
level of energy consumption instead of increasing it.
• Hardin refutes Adam Smith’s invisible hand by arguing that the
self-interests of each individual do not always translate into the
promotion of the public good for everyone.
• Hardin recommends solution to the tragedy of commons, to
privatize the resources, having polluters pay for their damage,
and having government regulations to control for the use of
natural resources.
Examples:
Overfishing, Fast Fashion, Coffee Consumption, Traffic congestion,
Groundwater Use

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 Natural Environment as a Stakeholder

• Considered a stakeholder without a voice.

• Natural environment is a vital component in which the firms compete and
it needs to be incorporated in the decision-making process.
• Non-human stakeholder that has an impact on the operations of the firms.
• Decision makers consider it a stakeholder if firms actions impact the
natural environment or natural environment impact the firm’s operations.

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 Natural Environment as a Competitive
Advantage
• By focusing on environmentally friendly strategies, firms are
able to market their goods as Ecofriendly which helps
differentiate their products from others.
• By focusing on the efficiency issues in the production
process, firms can reduce the amount of waste generated, and
the costs.
• Proactive approach of employees to the natural environment
enhances their level of satisfaction within the firm because it
generates a positive corporate image and increases their
loyalty.

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 Natural Environment as a Competitive
Advantage
Generic Competitive Environmental Strategies

• Strategy 1: Eco-Efficiency
• Strategy 2: Beyond Compliance Leadership
• Strategy 3: Eco-Branding
• Strategy 4: Environmental Leadership
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 Generic Competitive Environmental Strategies

1. Strategy 1: Eco – Efficiency:

• Productivity is the key element that allows companies to gain an environmentally competitive
advantage.
• Increase in manufacturing process, and better use of the by-products in the manufacturing process
enhances resource productivity.

2. Strategy 2: Beyond Compliance Leadership:

• Firm makes a conscious effort to acknowledge the demands of its stakeholders.
• Firms can provide “proof” (like EMS Certification and ISO) to their stakeholders pertaining to
their commitment to the natural environment.

3. Strategy 3: Eco - Branding:

• Firms use their proactive environmental commitments in an attempt to differentiate their products
and services for their customers.
• Eco-branding allows potential customers to consider the natural environment when they are
purchasing products and services.

4. Strategy 4: Environmental Cost Leadership:

• Firms that compete on low price can offset their environmental investments.
• Firms that use this strategy embrace proactive environmental ideals as long as they can help reduce
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the overall costs of production.
 Voluntary Environmental Compliance
13 areas in which environmentally proactive firms should address
environmental issues to establish an environmental compliance system:
1. Release an environmental policy that is available for all stakeholders to review.
2. Establish specific targets to be measured for annual environmental performance
benchmarks.
3. Publish an annual environmental report.
4. Implement an Environmental Management System.
5. Use environmental criteria when making purchasing decisions.
6. Provide employees with environmental training.
7. Make the employees accountable and responsible for the overall environmental
performance of the company.
8. Use Life Cycle Analysis that evaluates the environmental impact of a product
from its creation until it is no longer in use.
9. Have top-level managers who understand and attempt to address the issues of
sustainable development.
10. Implement a system to try to reduce the level of fossil fuel use.
11. Implement a system to reduce toxic chemical use.
12. Implement a system to reduce the use of unsustainable products.
13. Ensure that the same environmental standards are consistent globally. 11
 What does it mean to "Be Green"?

• To be a “green” company, the company must make many adjustments in

its strategic choices.
• The following table shows several types of strategic adjustments that
could be made in a corporation to make it a more “green” company.

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 How to adopt sustainable strategies using
firm's transformation?
The transformation of a firm to integrate sustainable strategies is a six-
stage process. The stages are:
1. Develop the Strategy— envisioning a new future
2. Translate the Strategy— the need for new analytic frameworks
3. Align the Organization— developing and deploying the
sustainability strategy
4. Plan Operations— implementing the sustainability plan
5. Monitor and Learn— evaluating sustainability performance, and
6. Test and Adapt— re envisioning sustainability

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Employees as Environmental Stakeholders

• Firms must use employees to implement the environmental commitment

of the firm and to be actively involved in the formulation of the firm’s
environmental commitment.

Three types of environmental initiatives that can be generated from an

employee:
1. Initiatives that decrease the environmental impact of the company
through the policies of reuse and recycling.
2. Initiatives that solve an environmental problem such as reduction
in the use of hazardous substance.
3. Initiatives that develop a more eco-efficient product or service that
uses fewer resources and/or less energy.

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NGOs as Environmental Stakeholders

• Over the years, NGOs supporting environmental causes have grown

significantly.
• Initially, the pressure from NGOs forced some firms to reevaluate their
strategic focus as it related to the environment.

• Some of the major global environmental groups are:

o Greenpeace
o Sierra Club
o Environmental Defense Fund
o Friends of the Earth

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Communicating the Firm’s Environmental
Commitment to its Stakeholders
• Environmental disclosures are usually the first information source used
by stakeholders.
• Easy to obtain from a company’s website
• Usually comprehensive in describing the different methods used to
address environmental issues.

• There is a relationship between a firm’s environmental disclosures and its

financial performance.
• Firms that have both a formal environmental policy and a detailed
description of their environmental commitment have higher financial
performance levels than firms that are low financial performers.

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 Environmental Auditing

• Periodic, objective and documented assessment of an organization’s

operations compared with audit criteria.
• Allows management a measure of ensuring that they comply with
environmental regulations.
• Helps management identify the ways that environmental issues can be
integrated into their current operating strategy.

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 Environmental Justice

• The systematic equal allocation of environmental benefits and burdens.

• Evolved from the perception that lower income areas with minority
ethnic groups within a community would receive a disproportionate
amount of environmental burdens and a disproportionately low allocation
of environmental benefits.
• NIMBY – Not in my back yard, was based on the view that local
communities, regardless of their economic standing, wanted to have
fewer heavy polluting facilities within their communities.

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 Environmental Sustainability

• Ability of an organization or country to protect the use of future

resources by properly maintaining and protecting the resources that are
currently being used.

Sustainability has three major components:

• A system to ensure the sustainable management of the earth’s natural
resources.
• The development of social and institutional structures that would
support the sustainable management of the natural resources.
• Changes in the economic framework so it would support the
sustainable management of the earth’s natural resources.

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 Global Environmental Sustainability
• Different countries address environmental sustainability differently, based on
their stage of economic development.

The three type of economies are:

Major Challenges to Sustainability:

• Survival Economies
• Emerging Economies
• Developed Economies 20
 Ethics and Climate Change

The Greenhouse Effect:

• Greenhouse gases provide heat and help Earth avoiding to be too cold to
support life.
• Approximately 30% of the solar radiation that points toward Earth is
reflected back toward the Sun. The remaining 70% is absorbed by Earth.
The greenhouse gases trap the radiation so it stays within Earth’s
atmosphere.
• This creates a blanket, or greenhouse effect whereby the heat remains on
Earth and does not escape back into space.
• The amount of greenhouse gas has increased rapidly in the past hundred
years. As a result, more and more of the Sun’s radiation remains trapped
in Earth’s atmosphere, and Earth’s temperature continues to increase.

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 Ethics and Climate Change

The Kyoto Protocol:

• The Kyoto Protocol to the UN Framework Convention on Climate
Change was created in December 1997.
• Aim was to have every industrialized nation in the world involuntarily
reduce the level of greenhouse gas (GHG) emissions into the
atmosphere by 5.2% compared with 1990 GHG emission levels.
• There are six GHGs: carbon dioxide, methane, nitrous oxide, sulfur
hexafluoride, hydrofluorocarbons (HFCs), and perfluorocarbons
(PFCs).
• Initially not ratified because the US did not sign the agreement.
• Finally ratified in 2005 when Russia joined the treaty.

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 Climate Change as a Strategic Option

• Under Kyoto Treaty, countries around the world are expected to

implement government regulations that will greatly restrict the level of
acceptable GHG emissions by firms.
• Firms whose assets are directly affected by weather patterns must plan
for fundamental changes in the global climate
• Firms involved in insurance, real estate, agriculture and tourism will be
impacted by shifting climate patterns.
• Adjustments in the manufacturing process could include using less
energy or increasing the level of production efficiencies.

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 Effects of Climate Change on the Firm

There are numerous risks to the firm because of the impact of climate
change, including :
• Regulatory: governments should adopt stronger and more rigid
regulations to control GHG emissions.
• Supply Chain: as climate change continues to affect the world, the
vulnerability of suppliers and the raw materials needed for
manufacturing will decrease.
• Litigation: firms with high GHG emission levels will be threatened
more frequently with lawsuits
• Reputational: negative image of a firm because of its high level of
GHG emissions, could reduce or eliminate the firm’s competitive
advantage in the marketplace.
• Physical: relates to how changes in climate result in weather
disasters such as droughts, floods, storms, and rising sea levels.

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 A Firm’s Carbon Footprint

• A carbon footprint refers to the amount of carbon via GHG emissions

that have been generated by a firm.
• It is called a carbon footprint because the GHG emissions have an impact
on the earth but do not disappear as a footprint on the ground does.
• The firm’s carbon footprint is based on the total annual GHG emissions
that are a direct result of the firm’s operations.
• This includes the combustion of fossil fuels and different types of
chemical reactions that can occur in some manufacturing industries as
well as GHG emissions related to electricity that has been purchased by
the firm.

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 A Firm’s Carbon Footprint

Scope of Carbon Footprint:

There are three levels of scope for both the organizational and product
footprint:
• Scope 1 refers to direct emissions that are generated by sources that are
owned or controlled by the firm. such as the production of electricity,
steam, heat, or power from equipment, physical and chemical processes
during the heavy manufacturing processes.
• Scope 2 refers to indirect emissions sources that are not owned or
controlled by the firms. These emissions could include purchased
electricity, heat, and steam from external sources.
• Scope 3 includes all other indirect GHG emissions based on employee
travel, the extraction and processing of raw materials, the transportation
of the firm’s products to its distribution centers, retailers, customers, and
product disposal.
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