SUSTAIN SUSTAINABLE ABLE VA VALUE LUE CRE CREATION AT I O N As a Challenge to Managers and Controllers

SUSTAINABLE VALUE CREATION

Sustainable Value Creation as a Challenge to Controllers and Managers There is no longer any serious doubt that the limit to economic growth by small or large companies following traditional, time-honoured, business-as-usual production and trading methods is clearly in sight. The international business community is facing some of the most urgent and serious challenges of our age. It is time for urgent culture change to ensure survival. This most informative and useful book, written by a university lecturer with wide experience of the business world, provides clear explanations regarding some of the key issues, including: Strategies to achieve Sustainable Value; Corporate Governance and Corporate Social Responsibility; Environmental Management & Accounting; Sustainable Supply Chains and The Green Economy. Dr Teun Wolters challenges the status-quo, explains the problems and the need for entrepreneurship and innovation to integrate sustainability into the principal business processes. As Applied Research Professor and lecturer at Wittenborg University of Applied Sciences, located at Apeldoorn in The Netherlands, Dr Wolters is well-known to his students, who come from many different countries.They all share ambitions to enter the world of international business and management. For them this book provides a valuable source of knowledge and information. For people already in the ‘real world of work’ where the issues Teun Wolters describes are part of the daily agenda, this academic overview with a plea to take seriously the whole subject of sustainability will give comfort and support!

Teun Wolters

wittenborg.eu

Teun Wolters Wittenborg University Press

Business School

Business School

SUSTAINABLE VALUE CREATION As a Challenge to Managers and Controllers

Teun Wolters

2013 Wittenborg University Press

FOREWORD In the summer of 2010, twenty-three years after our initial establishment, Wittenborg University of Applied Sciences moved from its original home in the Dutch town of Deventer to our new location in the nearby municipality of Apeldoorn. That decision was most timely. Deventer had served us very well, but having reached a significant stage in our progress towards becoming an International Institute of Higher Education, Wittenborg was now ready to move operations into a fresh new location providing modern, purpose-designed premises for teaching and learning. Within the impressive new Aventus College building next to the station in Apeldoorn, a special wing had already been prepared for high level academic studies and was equipped and ready for immediate occupation. Our arrival in Apeldoorn marked the beginning of a unique, successful and symbiotic relationship between Aventus and Wittenborg, encompassing a rare combination of Dutch state and private education under one roof. One of the personal and immediate benefits to emerge from this harmonious new partnership was my meeting with Teun Wolters, who until recently had been closely involved in the formulation of courses intended for advanced-level degree work. Teun soon proved himself to be an enthusiastic contributor to the development of curriculum research at Wittenborg, where he soon became a leading colleague involved in the creation of our new bachelor programme on Entrepreneurship. In August 2011 Teun was appointed as Wittenborg’s first Applied Research Professor (in Dutch: lector) in corporate sustainability. He has since made significant contributions to the development of various projects under the umbrella of an emerging Wittenborg Research Centre, as well as becoming a much valued lecturer on both Bachelor and Master programmes, while supervising his students on the completion and presentation of their individual research projects. Teun always shows himself to be keenly conscious of academic expectations as well as the social and pastoral needs of our international students, who arrive at Wittenborg with a wide assortment of backgrounds from many different (and sometimes remote) corners of the world, but who all share in common a strong belief in Holland’s reputation as an innovative, entrepreneurial and free-thinking country.

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When I first visited The Netherlands in the early eighties, as a British teenager on an educational exchange with a Dutch school in Leiden, I became absorbed in the animated discussions and debates taking place across our forum of Dutch and British students and teachers. In the true subversive-student-style of those days we challenged just about everything associated with the ‘status quo’ in society. Our targets ranged from Schools to Education to Politics to Economics and the State of the Nation, but at the end of the day it all boiled down to three questions: “What are we doing? Why must it be like this? Where are we going in the future?” Some ten years later, after I had moved from England to live and work in Holland, an on-going concern on many social issues seemed to be spreading across Dutch society. In recent years, the debate on global warming has led to challenges to industry, including large multi-national companies, as scientists have revealed to the world their predictions for future life on our planet if mankind continues to develop its escalating and competitive economies at increasing pace, without any genuine regard to environmental consequences. This anxiety has led in turn to anxious consideration of the damage that has already been caused to our environment and the likely effects this is going to have on future generations unless we act now. In The Netherlands, along with other major economies across the globe, the notions of longterm planning and sustainability have now become urgent issues. Firstly, at individual family level, Dutch people have been in the forefront in seeking to achieve a greener, healthier lifestyle and many small companies are now doing their best to take a responsible role. However, in the fiercely competitive multi-national world of international trade and commerce, often supported by national governments, much still needs to be done. At this time of financial uncertainties, small business firms, manufacturing companies and global organisations are all being required to examine their operations closely and truthfully, with the aim of improving their own sustainability profiles. Legislation now exists to impose severe sanctions against companies that continue to adopt unsustainable business practices, but infringements are still widespread. Although Wittenborg is still a small, growing university, we see it as one of our missions to take a leading role in exploring together issues of critical international importance in the fields of economics, business and trade. All industrialised continents are represented in our student body as well as on Wittenborg’s international teaching staff. The notions of long-term planning and sustainability are particularly relevant to the current studies and future working lives of all our Apeldoorn students. Those who have chosen to come to Holland from more than fifty different countries will be returning home after graduation, many to become leaders of the business world, equipped with clear ideas and knowledge of sustainability and the best global business practices which they have studied at Wittenborg.

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Teun Wolters has introduced sustainability as a core factor in our curriculum which he suggests can be integrated into the key areas he examines in detail, such as Diversity - Corporate Governance - Entrepreneurship - Thinking Globally and Acting Locally - Thinking Outside the Box. I recommend this excellent book. Peter Birdsall Director Wittenborg University Apeldoorn June 2013

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PREFACE This book is dedicated to corporate sustainability, conceived as the creation of sustainable value enshrined in a company’s strategy. Achieving this is a real challenge to managers and controllers. This book is a guide written for practitioners who appreciate a text that is both comprehensive and compact. Equally, it has been written for students in Higher Education, especially in fields like Economics and Management, who expect to face in their future careers issues of corporate sustainability and wish to be prepared for that. Corporate sustainability cannot be seen any more as a special subject for a select group of enthousiasts. All business people will be confronted with it. It will depend on them, in terms of values, motivation and capabilities, whether they will be part of the problem or become part of the solution. This book makes it quite possible to teach Corporate Sustainability as a separate subject. However, it is also possible to integrate sustainability into regular subjects such as Strategic Management, Innovation, Accounting, and Human Resource Management (HRM). Because of its moderate size, the book (or individual chapters) could be easily used in addition to a main textbook. Each chapter is finished by a list of key notions and concepts and a number of study questions (the answers to them can be obtained from Wittenborg University’s website: www.wittenborg.eu). This book is indebted to many other sources. My Dutch background explains why quite some sources are of Dutch origin. Nonetheless, corporate sustainability is an international subject. This I have experienced when participating in various European research and implementation projects and meeting colleagues at international conferences. I am grateful for Wittenborg University’s willingness to publish this book, which is associated with my activities as Applied Research Professor in corporate sustainability and senior lecturer. I hope it will promote further studies in corporate sustainability and encourage students to embrace sustainability as part of their personal responsibility and mission. I wish to express my appreciation to Mr. Patrick Birdsall, who has reviewed this book’s entire text to make sure it appears in plain and correct English. Of course, for any remaining errors I am the only one to be held responsible. Teun Wolters [email protected] Apeldoorn June 2013

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ABOUT THE AUTHOR Dr Teun Wolters (1948) is an economist by training. He obtained his PhD in economics (labour studies) at VU University in Amsterdam (NL). Most of his career has been dedicated to research and consultancy in the field of labour issues and environmental problems. At the same time he has shown considerable interest in development issues, in particular in the area of promoting sustainable commodities and improving the livelihoods of small farmers. Much of his research work and publications took place in the context of European projects in the area environmental accounting, sustainable innovation, the development of ‘new economy’ indicators and ‘Green Economy’ policies. Since 2011 the author is working with Wittenborg University of Applied Sciences in Apeldoorn (The Netherlands) as Applied Research Professor in corporate sustainability and senior lecturer. By means of this book he intends to contribute to the promotion and integration of sustainability in management and business education.

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TABLE OF CONTENTS

CHAPTER 1

12

Sustainable value creation and management responsibilities

CHAPTER 2

29

Sustainable development

CHAPTER 3

45

Sustainable business at sector and supply chain level

CHAPTER 4

57

Environmental management

CHAPTER 5

65

The human factor in the sustainable company

CHAPTER 6

77

Corporate Governance and CSR as vehicles of corporate sustainability

CHAPTER 7

90

Environmental accounting

CHAPTER 8

108

The Green Economy

ANNEX 1

126

Sources of information for corporate environmental management

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CHAPTER 1

Sustainable value creation and management responsibilities 1.1 Sustainable Value Creation: necessary and full of opportunity Corporations which have operating income create economic value that adds to society’s prosperity. At least that should be the case, but value creation at the corporate level can on balance turn out to be negative for society at large. For instance, it may be harmful to the environment. In general, although modern modes of operation have boosted production, it has become evident that they have left a deficit in terms of depletion of natural resources, deterioration of ecological systems and have often caused a great deal of pollution. Because of a growing world population and continuous economic expansion, the limits to economic growth are in sight. Therefore, the business community is being challenged to change course and make sure that corporate value creation is sustainable. Governments have the power to advance sustainability as they can set certain rules that businesses are required to follow - especially in the areas of environment, health and justice. In the final analysis, however, corporate sustainability can only be imposed to a certain degree as its acceptance also depends on inner motivation and freely-adopted social responsibility. This book makes an appeal to (future) entrepreneurs, managers and controllers to follow the path of sustainable value creation. Corporate sustainability demands a new way of thinking and acting: how can we create value while honouring environmental and social values? In recent years there has been international pressure to take sustainability seriously because of climate change, depletion of natural resources, pollution and persistent poverty in many parts of the world. At the same time, opportunities for launching sustainable goods and services are widening. This does not mean sustainability is easy to achieve as it requires innovation. Sustainable innovation (whether it is about taking small or big steps) depends on genuine entrepreneurship and good management to become successful in the end. The credit crisis (2009-2010) was not necessarily at the expense of sustainable business and Corporate Social Responsibility (CSR). For instance, since then there has been a plea to let (extra) government expenditure to pull the economy out of its dip consist of sustainable

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investments. In the end, it appeared that only 15.6 per cent of the 2800 billion US dollars worldwide expenditure stimulus budget could be marked as ‘sustainable’ (UNEP, 2009). Taken together, that was a considerable amount but relatively of a modest size. More is needed, in terms of both government-led expenditure and corporate strategies. Corporate sustainability has many aspects, especially when it is linked to corporate governance and social responsibility. This book pays attention to the primary production process because there one finds the centre of value creation and the key to a sustainable business. This book also pays attention to other corporate functions and the various ethical and communicative aspects of CSR.

1.2 Sustainability in business In the area of sustainability in business there are various frequently-used terms that focus on a part of the issues at hand. Through cross-fertilisation the various terms have started to converge. In particular, that is true for the terms ‘corporate sustainability’ (sustainable business), ‘corporate governance’ and CSR. To understand these terms well, it is important to clarify and delineate them. These three terms can be characterised as follows: 1 | Corporate sustainability (sustainable enterprise, sustainable business): has a strong focus on the economic, social and ecological sustainability of the primary production process, and how that can be improved by means of management and innovation. The main stakeholders are the future generations whose prosperity should not be endangered by the present generation’s patterns of production and consumption. 2 | Corporate governance: this means the rules, processes or laws by which businesses are operated, regulated, and controlled. Originally, the terms primarily referred to the management structure designed to ensure that the hired management operated in the shareholders’ interests. Nowadays it also emphasises the importance of enterprises keeping to accepted ethical standards and best practices in line with other forces such as consumer groups, clients, and government regulations. 3 | Corporate Social Responsibility (CSR): is practised by involving various stakeholders at the strategic and operational level of a business (employees and their organisations, shareholders, neighbours, suppliers, customers and social interest organisations) and by giving due recognition to these groups. By taking into account stakeholder interests, a company attempts to ensure its continuity (acquiring a ‘license to produce’). As stakeholders nowadays tend to stress the importance of sustainability (from their different angles), a direct relationship between corporate sustainability and CSR has emerged.

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This book pays attention to the three concepts, but, as noted, it gives priority to sustainability of the primary production process. In the opinion of the author, this is a significant point because without a sustainable primary production process other facets of sustainability - such as good personnel management and community-oriented voluntary work undertaken by employees - run the risk of being seen as trivial. Besides considering corporate sustainability in broad terms, special attention will be given to the role of managers and controllers in the process of implementing sustainability. In recent years the roles of CFOs and controllers have changed, because the financial outlook, while still having a prominent place, now has to consider non-financial aspects as well. This has been an interesting development, especially as it often appears that non-financial aspects are stepping stones to the promotion of corporate sustainability.

1.2 Managers’ key role in sustainable value creation Making a sustainable enterprise demands real contributions from each of a company’s segments from top management down to shop floor workers. Management, however, has the special responsibility of integrating sustainability in a company’s strategies. That is fundamental to sustainable value creation. To begin with, the company must opt for appropriate personnel policies, such as recruiting personnel who are interested in sustainability, while its pay policies should support compliance with sustainability requirements. Furthermore, all aspects of running a company have to do with sustainability. Subsequent chapters will show that. Every company has its own unique features and specialities. That also applies to sustainability. Nonetheless, however specific each sustainability approach may be, it appears that in all cases the role of top management is crucial. One thing applies to companies: corporate sustainability asks for a leadership that is both competent and sincere. A manager’s integrity has both personal and professional aspects, which all become manifest in the way he or she behaves and operates. A manager needs to be authentic and reliable, knowing, on the basis of a positive approach, how to strike a balance between various interests. When giving guidance, a true manager knows how to enable and inspire his or her co-workers to do a good job. Part of this is knowing how to confide in them. He or she will avoid, whenever possible, situations where co-workers are confronted with serious moral dilemmas. That can be done by setting clear ethical rules and by preventing co-workers from being exposed to serious temptations. A true manager does not only set clear rules of conduct, but is also capable of enforcing them and resolving difficulties which might occur. Already in the recent nineties explicit attention was given to intangible assets. Even if these had no place on the balance sheet, these intangibles were at least as important to a company’s competitive strength as those shown on the balance sheet, if not more so. In a situation of

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increasing international competition (globalisation), companies are advised to utilise their unique assets (even if intangible) as a source of competitive advantage (Teece et al., 1997). A company’s ability to incorporate ethical values in its strategy, leading to a good reputation that is also commercially effective, can also be seen as an immaterial (intangible) asset. For many companies, this is still an underdeveloped area, although there are now appearing more and more examples of companies which succeed in accomplishing this. On the other hand, in a number of commodity markets and sectors, companies prefer to work on sustainability on a pre-competitive basis. This is often shaped as a common improvement programme. Then, all companies involved are under the same objectives and rules so that the sustainability to be achieved is no significant factor in their rivalry. Even though sector-based collaboration can be highly effective in creating certain facilities (like in the area of recycling), common programmes may develop slowly (the slowest parties determining the pace), as a result of which entrepreneurship is insufficiently challenged to target sustainability. Pioneers should be given enough space to create sustainable value and catch a (temporary) premium in the market. When a pioneer’s approach becomes best practice, it can be regulated (standardised) so as to realise economies of scale and ensure a fair sharing of costs. At a certain point in the process of dissemination, early adopters may wish to see legislation speeded up so that there is no advantage for competitors in going slowly. It is likely that eventually sustainability principles will be commonly accepted, although their translation into sustainable products and services is open ended. What will actually happen in this area depends on both socio-cultural and technological developments. Corporate sustainability is an unprecedented dynamic force capable of transforming markets and economies. For that to happen, however, there is a need for (strategic) managers who are able to internalise sustainability and constantly work on sustainable products and sustainable organisations as well, so that sustainability can penetrate all economic activities. There is no need for companies to wait for this to happen; they can take the lead in achieving a sustainable economy. For decades the roles were clear: most of all, companies were in business to make profits. Hence they were expected to focus on their short-term self-interests. The government was there to foster society’s long-term common interests and therefore it introduced environmental regulation to force companies into adopting ‘clean’ and responsible behaviour. Today, these roles are being reversed as the business community increasingly takes the lead in targeting sustainability, with their own long-term interests in mind, while government is finding it increasingly difficult to maintain its lead in environmental initiative and control.

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TEXT BOX 1 CEOs of Dutch large corporations took a leading role in the environmental lobby Just take, for instance, the 27 CEOs of large European corporations such as Philips, Tesco, Nestlé en Vodafone, who this year pleaded for an increase in CO2 reduction targets. The 20 per cent set by the politicians is not enough. The captains of industry would like to see CO2 emissions reduced by 30 per cent in 2020. They want to force up the price of emission rights so that investments in climate-friendly

operations continue to pay off. Another example is the consortium of NGOs and large corporations such as AHOLD and Unilever, which is aiming at investing € 525 mln over the next four years in making flows of materials sustainable. In a letter to the Dutch parliament, the corporations involved appealed to government to co-invest in the greening of international trade. The plan includes concrete proposals to make the production of products such as cocoa, tea, cotton, electronics and sports shoes more sustainable (source: MT 2.12.2010).

1.3 CFOs and sustainable management Chief Financial Officers (CFOs) are expected to have the capacity to carry out financial analyses and to be versed in financial reporting and control. The CFO’s role in strategy formation has been reinforced over recent years. This is not merely a matter of putting on the financial brakes, but also of contributing positively to promising business. The strategic contributions of CFOs differ from company to company. According to Ernst & Young (2010), approximately one third of the CFOs who participated in their research claimed to play an active role in developing and determining their company’s entire strategy. For a greater part, the CFO role is mainly a matter of supporting the CEO by ensuring that strategy and its main consequences comply with sound financial criteria. Also, CFOs fulfil tasks at a more operational level, such as in the area of Information and Communication Technology (ICT). Although, on the one hand, the CFO’s strategic role has increased, the financial crisis of 2008-2010 and its aftermath, on the other hand, have required extra time from the CFO, involving the company’s liquidity and cash flows, managing particular risks, and overall control systems. These areas may reduce the time the CFO can spend on strategic matters. Equally, the CFO is expected to play a role in the area of communication with stakeholders, with particular regard to the financial aspects of corporate policies (Ernst & Young, 2010). The CFO should also be concerned with levels of sustainability. As these issues increase in substance and importance, it becomes necessary to have specific key performance indicators in place to cover this area. The CFO is responsible for those indicators, especially when they are capable of revealing substantial financial impacts (Park et al., 2010). Such indicators do not only serve the purpose of external reporting; they also enable a company to adopt economically justifiable programmes (including sustainable innovation) which improve the primary process and other business processes in terms of sustainability.

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Even though such programme will be primarily in areas of production and sales, corporate governance is also on the agenda when it comes to an integrated management of risks. Good governance requires that companies make an inventory of their risks and give them sufficient attention. To accomplish that, there is a need for both human judgement and adequate software.

Not calculations alone There can be some tension in the area of figures and calculations. Executives should not be guided by calculations alone. They must know very well how to deal with uncertainties and be capable of weighing varying interests. It is a matter of strategic management. This also applies to business cases in the area of sustainability. Those who restrict themselves to matters expressed in money terms are likely to fail to make the right strategic choices. Here lies one of the major problems of the sustainability issue. The financial models used by financial analysts, investors and others seem to be deficient in valuing the opportunities and threats associated with sustainability projects. Nonetheless, in certain sectors there have been breakthroughs in favour of sustainability; other sectors are expected to follow (CFO Magazine, Jan. and Feb. 2010). A bad strategic assessment, leading to an unsustainable strategy, can easily cause a company to shake to its foundations. It is the CFO’s duty to be on the alert to prevent such a calamity. In this process the role of a CFO is to bridge the world of those who design sustainability projects with the world of the financial analysts. To be credible for financial specialists (and not only for them), sustainability reporting should not contain (exaggerated) positive news only; a balanced picture is required. Moreover, sustainability project proposals should address the really urgent issues that emanate from a company’s strategy rather than issues of secondary importance. The CFO connects the financial world with the company and therefore is the one who can create a better mutual understanding, leading to productive approaches par excellence (CFO Magazine, Jan. and Feb. 2010).

Financial underpinnings The caveat “not calculations alone” needs to be supplemented. Sustainability is part of the strategic values and the direction which the company is to take. For the basic strategic decisions calculations are of limited significance. However, to work out the strategic pathways and related investment trajectories that bring sustainability closer to reality, quantitative and financial underpinnings are important. For sustainable value creation business continuity is an essential condition, even though uncertainties cannot be avoided.

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TEXT BOX 2 The CFO taking sustainability seriously According to Yvo de Boer (previous head of the UN’s Climate Office UNFCCC and now active for KPMG as worldwide adviser on climate and sustainability), to ensure that all companies take sustainability seriously, there are a number of crucial factors. “First of all, environmental pollution should be given a fair price”, he puts forward. “Besides, corporate accounts should consist of more than just a financial side. Equal attention should be given to sustainability. For me, it does not matter much whether that is done by means of a separate report or a chapter in the financial report. However, it

cannot be ignored”. In this area De Boer sees a major role for the CFO. “The CFO should not only look at the traditional side, but should realise that sustainability is a criterion that is as equally demanding as costs and benefits. Fortunately, CFOs have started to realise that. In the talks I have had, it struck me that frequently members of the board, the CEO and the CFO had personally committed themselves to these kinds of topics. Companies are experiencing an evolution from a report on internal environmental matters to a reporting on sustainability in the supply chains and finally to integration of sustainability with the entire running of the business. (source: FM.NL, 30 Nov. 2010).

Management information (business intelligence, business analytics) which is relevant to sustainability is likely to be dependent on sustainability accounting (showing the relevant costs and benefits) and supply chain analyses (showing the relevant boundaries). Here, use can be made of conventional calculation schemes and statistical techniques.

1.4 The role of controllers Controllers must play a major role in the field of sustainability. To clarify that role, the following seven developments (already brought forward by Elkington, 1998) will be outlined. 1 | Markets Markets are showing an increasing interest in sustainability and CSR. This interest leads both to general requirements which in principle apply to all goods and services and to emerging new market segments which distinguish themselves by special labels (such as Fair Trade, organic, label for sustainable wood, sustainable fish). 2 | Values Over the years there have been notable instances of companies that suffered because of their unacceptable social and environmental behaviour. Various bookkeeping scandals have led to the downfall of companies. Behavioural codes have become stricter. The recent credit crisis (2008-2010) has been described by people from different walks of life as a moral crisis. They have reinforced the call for changes in the moral codes of companies. However, these changes should not get stuck in good intentions; they should become visible evidence of concrete performance measurements.

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TEXT BOX 3 Sustainable Business and Business Intelligence The Eco-Efficiency Action Project’s website succinctly demonstrates the importance of management information and economic analyses. The site combines various research outcomes: 1 | The best performing companies make use of management information and quantitative analyses to face increasing economic complexity five times as much as less successful companies (Lavalle et al., 2010). It is also noted that companies that are most experienced with business analytics apply this to a broader range of topics than companies that have no or limited experience in that area. It is, however, necessary to start with asking the right questions before involving the data. 2 | According to an IBM research report (based on an online-survey among 1600 business people, policy makers, journalists

and NGO representatives) corporate ecoefficiency will be the most important game changer in the coming twenty years. This requires collaboration of various stakeholders focusing on new business models which require a minimum of capital and operational costs (Dirks and Gurdgiev, 2010). The strategic importance of business analytics (as indicated under 1) can also be apparent in this process, as it is broadly defined and open to the use of various instruments. In general, successful business analytics requires access to available information, providing insight into what is happening and why, followed by a clear vision on what can be expected in the future and the ability to act accordingly without much delay. All segments of the organisation should acquaint themselves with the strategy and align their actions with it. These general guidelines also apply to the realisation of an eco-efficient business organisation. Business success calls for a strategy geared towards eco-efficiency, supported by sound business analytics.

3 | Transparency Internationally, both governments and companies are forced to become more transparent about how they create value. They are more closely watched and obliged to disclose the actual state of their economic affairs. The Global Reporting Initiative (GRI) - started in 2001 symbolises this trend. External reporting is now expected to express this new broader culture of transparency. 4 | Chain-based Responsibilies Companies today are increasingly being asked to explain how they deal with sustainability aspects of their supply chains. Company responsibility is deemed to cover the successive links that happen in their chains from the very beginning (commodities, agrarian products) up to and including end products, reuse and waste processing. By this progressive system companies are encouraged to pursue consistent chain-based policies.

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5 | Collaboration There are forms of collaboration between companies and other parties, such as governments, media and NGOs to help develop a responsible business. Special partnerships may arise that focus on innovative ways of social responsibility via entrepreneurship. However, as well as collaboration, conflicts of interest may also occur. 6 | Time dimension Topical developments point at the importance of the short term. Events wherever they happen are transformed overnight into news that will be available everywhere via Internet and TV. Thanks to the Internet, markets have broadened to a worldwide scale without the loss of time. However, sustainability is a long-term issue. In both politics and business the question as to how the long term can be taken into account has become increasingly important. Creative approaches that go into this are catching attention more and more. 7 | Corporate governance Corporate governance is an area that has grown in importance. Besides the greater strategic interest of corporate governance and sustainability issues - implying that they cannot just left to external communication and marketing departments - there is a need for greater management control in these areas, among other things by assessing the risks and possible reputational damage involved. The above seven developments will influence companies in different ways: strategy, investments, risk management and operational management. In all these areas controllers have particular tasks to fulfil (depending on how their function is defined). This can be clarified as follows. 1 Formulation of a strategy that incorporates sustainability: • In preparation of sustainability, there will be consultations with major stakeholders; the controller will assess preferences and demands on their cost and benefit implications. • There will be drawn up a programme of continual consultations and communications. The controller calculates its costs and arranges the necessary budgeting. • There will be internal and external reporting about plans and results (in which the controller plays a preparatory role). 2 Preparation of concrete investments with social and environmental targets: • The controller ensures that investments to promote sustainable business and CSR are given a fair chance when competing with other investment proposals. • For this, the controller takes a critical look at the applied criteria, hurdles, discount rates and pay-back periods (that could be used rather gratuitously). Benefits based on avoided costs should be based on adequate cost allocations.

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3 Risk management is to take into account: • The benefits and costs of environmental and labour-related risks. • The benefits and costs of preventing such risks. The controller is responsible for the best possible calculation of these benefits and costs. 4 The operational production processes are the controller’s concern as they: • Involve accounting of the various operational aspects of sustianability (economic, social and environmental) to monitor, report and correct • Beyond that, corporate governance and social responsibility will have their impact on what happens on the shop floor. Once someone compared controllers with jugglers who have to keep various balls in the air at the same time. They occupy a position that requires plenty of professional knowledge, flexibility and perseverance. Such qualities will not show up well when it comes to sustainability and social responsibility if the controller’s primary role is about compliance. His or her playing field has to be broad enough to cope with the above four new challenges. Commitment to the process of sustainable value creation and social responsibility implies that the controller is not only observing the interests (ambitions) of management but also the interests of other parties, both internal and external. This is akin to emphasising the importance of consulting the company’s stakeholders and giving them a say in matters of their concern. Despite the fact that top management is his/her superior, in certain cases the controller needs to offer resistance and question the way management is acting. The controller has to fulfil an independent and critical role in the process towards sustainability. This could put the controller in a difficult position. Of course, the exact role the controller has to play depends on how his/ her responsibilities have been defined. The following roles can be distinguished (Hoorn et al., 2003): 1 | The Scorekeeper: That is the person who ensures good administrative processes. Today many organisations have centralised these processes (often in so-called shared services). Therefore, the number of controllers in such a role has diminished. A prominent controller task here could be contributing to better accounting procedures, so that the costs and benefits of a company’s sustainability profile and related investments become clear. 2 | The Technician: This officer is engaged in the development of (reporting) models and the implementation of new ICT systems, such as ERP systems, so that the efficiency of a company’s recording activities is likely to improve. At the same time, business processes can be enhanced by explicit attention given to performance measurement. This opens possibilities for the controller to integrate sustainability with the way a company is run and how its performance is managed.

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3 | The Financial Controller: This person is focused on prognoses and planning schemes and will search for what is behind the figures. Such a controller is ‘the spider in the web’ when it comes to the accuracy, completeness and integrity of that information is gathered, both financial and non-financial, for instance by means of a structuring of the Balanced Scorecard in the reporting. The controller can be expected to contribute to adapting the Balanced Scorecard to the company’s sustainability objectives. 4 | The Corporate Officer: He/she is responsible for the monitoring of the company’s financial and business-economic health; this also implies the management of risks. He/she analyses the financial implications of strategic information and presents them in discussions on how the company’s performance can be improved. In this capacity the controller becomes a business partner. The controller tests the sustainability objectives and concomitant strategy for feasibility, risks and performance and is active in meeting these objectives. Combination of roles In practice the controller’s role will often differ from what has been indicated above; it can be a combination of the four presented types. Depending on the company’s nature and size, the controller will have a broader or more specific function. Most controllers, however, will be engaged in reporting, planning, budgeting and monitoring business efficiency and effectiveness (the planning & control cycle). In many cases the controller is involved in strategic developments while also adopting the moral role of management’s financial-economic conscience. Sustainability accounting In the past sustainability was underexposed in both financial and management accounting. After World War II there were several attempts to supplement conventional accounting practices. Especially in the seventies, there was a movement that aimed at the development of ‘social accounting’ considering that companies had no dealings with shareholders alone, but also with other groups in society such as employees, customers and citizens who lived in the company’s direct surroundings. Companies and consultants who were specialised in accounting experimented with various reporting formats and added to the usual annual reports’ chapters on the social aspects of operating a business. Also, universities included the subject in their research programmes (Schaltegger and Burritt, 2006). Although during that time environmental issues were given attention, these were primarily seen as nuisance problems of those directly involved. This movement came to a standstill, probably because companies tended to use social reporting as a public relations instrument, as a result of which the reporting covered up negative external effects up rather than clarified them. Before that, there had already appeared a gap between theory (which tended to be very critical) and practice. Moreover, the economic depression of the early eighties reduced interests in social accounting. However, there was an on-going tendency to give more weight

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to environmental issues - not the least by governments. This and the rise of the concept of sustainable development reinforced the (still present) need for supplementary corporate accounting and reporting (Schaltegger and Burritt, 2006). During the nineties much work was done to further develop corporate environmental accounting. The Triple Bottom Line’s growing popularity contributed to the realisation that the links between the economic, social and ecological aspects of running a business had also to find expression in accounting1. This has eventually led to the term ‘sustainability accounting’, even though there had not appeared to be a really cohesive accounting practice while other labels were also used, such as TBL accounting and (the earlier used) social accounting. In recent years, work has been done to build up and expand the subject and - because of its limited success - such efforts are still being made. The following chapters pay attention in various ways to items in the area of sustainability accounting, such as differentiation of environmental costs, measurement of eco-efficiency and specific applications of the concept of opportunity costs. Here follows a further explanation of the subject of sustainability accounting (based on Schaltegger en Burritt, 2006, Chapter 2). Many companies (and other organisations) have broadened the monitoring of their business by adding key performance indicators (KPIs) in areas such as energy consumption, quantities of produced waste, reuse ratios and relevant training efforts. These involve both financial and non-financial indicators. It is still rare for companies to lay a direct relationship between sustainability and its contribution to financial performance. Here lies a great challenge for sustainability accounting and reporting. Companies that manage to clarify this relationship will increase their credibility with investors, which in turn will confirm the power of their own sustainability strategy1. The interest that can be attached to financial reporting is beyond doubt; on the other hand, financial figures can also obscure what is going on in the company. Whether figures are useful strongly depends on the purpose for which they are used. To clarify this, it makes sense to go back to the fundamentals of accounting. Financial accounting is information which is made for external stakeholders about corporate performance. The balance sheet and the profit and loss account have a central place here. They are based on transactions. There is separate information on cash flows. In the course of time there have emerged conventions as to how certain transactions have to be recorded with a view to the information’s credibility. Cost accounting is a separate subject, although at the beginning it was closely linked with financial accounting because of the worries about how assets should be valued. From there, it developed towards what is called ‘management accounting’, which is mainly focused on 1 2

The Triple Bottomline (TBL) is also referred to as the three P's (People Planet Profit). See also Chapter 2. As the panel of the 'ACCA UK Awards for Sustainability Reporting' put it (2008 recommendations).

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information for planning, control and internal decision making. In recent years the strategic information that management accounting is capable of providing has been given emphasis. Within this framework, one looks closely at the connections between market requirements and the available means. How can one convert competitive pressure into concrete organisational goals? Accounting is there to support the messages that are exchanged about these connections. In light of these developments, sustainability accounting can be approached from two sides: it can be positioned either as a totally new accounting system (set of systems) or it can be dealt with as an adaptation and extension of conventional accounting disciplines. The first approach is attractive as it makes it possible to rethink fully the whole complex of economic, ecological and social aspects of benefits, costs and risks and the relationships between them. The second approach remains closer to existing practice. It is about minor changes that, however, are more likely to be adapted than drastic systemic changes. Recent changes in conventional accounting have resulted in: 1. Environmental accounting as a basis for external environmental reporting; it emphasises environmental effects and improvements achieved in that area expressed in physical (i.e. non-financial) form. 2. Triple Bottom-line Accounting (TBL Accounting) with breakdowns for economic, social and environmental effects and achievements. Both forms - developed by a few knowledge centres and companies - have now been disseminated worldwide. They, however, suffer from the well-known weaknesses of conventional accounting. First of all, financial accounting has been subject to criticism. Part of the objections is the so-called ‘legal entity concept’ used to determine the economic activities that have to be recorded and accounted for. Secondly, conventional accounting strongly focuses on the conventional business-as-usual agenda, in particular with regard to profit and profitability, ignoring ecological and social interests. Thirdly, there are accounting principles in the area of transactions, consistency and prudence which in the light of possible ecological impacts have lost validity. Fourthly, financial accounting is criticised because it mixes various types of valuations: against past, current or replacement prices, or against Net Present Value. These different values are added together while in reality this procedure cannot lead to comparable sets of information. A strong emphasis on monetary entities is liable to provide a limited view on risks and uncertainties - not in the least in the ecological domain. By this, aspects such as the irreversibility of certain environmental effects are prone to remain out of sight. Such criticism has led to continuous efforts to further disclose how economic achievements are linked with environment and social gains or losses.

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Accountants and others have worked on new reporting models that also hold non-financial information in the area of People, Planet and Profit. By so doing, accounting is expected to be capable of contributing to an integrated reporting and communication strategy. By giving a balanced picture of both positive and negative developments, it can also be expected that management’s trust in the relevance of accounting is increased. Sustainability accounting addresses two main informational deficiencies: a lack of futureoriented information and also a lack of information needed by investors and other stakeholders. Further developments in the area of sustainability accounting will be stimulated if companies wish to know (and demonstrate) how far their efforts in the area of sustainability contribute to the company’s created value. Here, accounting becomes an integrated part of information management. On the road towards sustainability The role of government is evident as regulator, policymaker and economic power factor in reaching a sustainable economy. Many companies will pay attention to sustainability because of what governments and clients expect from them. A smaller (but growing) part of them is becoming innovative and begins to see market opportunities for new goods and services which excel in sustianability.

TEXT BOX 4 Sustainable business is moving on To indicate how far sustainable business has moved on and what remains to be done, it is useful to have a look at an international survey among 1500 executive directors and managers (Berns et al., 2009). In one way or another, 92 per cent of the respondents were engaged in sustainability. A majority of respondents,

however, stated that they did not fully support it because of the risks involved. Regulatory requirements came first. Remarkably, over 70 per cent had not yet envisaged a clear business case for sustainability. Nonetheless, a limited number of companies fully embraced it; in general, this has led to favourable business results. The more one takes sustainability on board, the greater are the chances to apply it successfully.

Many companies believe that respect for environmental regulations is beneficial to their brand names and reputation in general. Companies that have taken further steps on the road to sustainability emphasise factors such as social aspects and the importance of sustainable chain management as these make sustainability an integral part of the organisation’s value creation.

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When striving for a sustainable economy it is important to think globally (without forgetting to act locally). The unsustainable nature of an economy is primarily a matter of surpassing existing ecological boundaries (in terms of both using natural resources and discharging pollutants into the natural environment). Besides this, the world is confronted with the fact that despite economic growth many millions of people have to live in extreme poverty. Sustainable enterprise is a major key to open doors to a better future.

KEY NOTIONS AND CONCEPTS • Value creation at the corporate level can on balance turn out to be negative for society at large. For instance, it may be harmful to the environment. • Corporate sustainability demands a new way of thinking and acting: how can we create value while honouring environmental and social values? • Management has a special responsibility to integrate sustainability in a company’s strategies. • A company’s ability to incorporate ethical values in its strategy, leading to a good reputation that is also commercially effective, can also be seen as an immaterial (intangible) asset. • The business community increasingly takes the lead in targeting sustainability, with their own long-term interests in mind, while governments seem to find it increasingly difficult to maintain its lead in environmental initiative and control. • The CFO should also be concerned with levels of sustainability. It becomes necessary to have specific key performance indicators in place to cover this area. • A bad strategic assessment, leading to an unsustainable strategy, can easily cause a company to shake to its foundations. It is the CFO’s duty to be on the alert to prevent such a calamity. • Corporate sustainability has many aspects, especially when it is linked to corporate governance and social responsibility. • Controllers must play a major role in the field of sustainability. In what way this should be done depends on how their role has been defined. • During the nineties much work was done to further develop corporate environmental accounting. Further thinking contributed to having the links between the economic, social and ecological aspects of running a business expressed in accounting. This has eventually led to the term ‘sustainability accounting’.

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• Sustainability accounting addresses two main informational deficiencies: a lack of futureoriented information and also a lack of information needed by investors and other stakeholders. • The unsustainable nature of an economy is primarily a matter of surpassing existing ecological boundaries (in terms of both using natural resources and discharging pollutants into the natural environment).

STUDY QUESTIONS 1. Try to explain to what extent the concepts of corporate sustainability, corporate governance and corporate social responsibility overlap. 2. How would you underpin the statement that corporate sustainability requires managers who are authentic and reliable? 3. How could you defend the statement that a company’s ability to incorporate ethical values in its strategy, leading to a good reputation, can also be seen as an immaterial (intangible) asset? 4. Especially a number of large companies seem to have taken the lead in promoting sustainability while governments find it harder to maintain their previous lead. How would you explain this development? 5. The CFO should also take responsibility for a company’s sustainability. What arguments can be given in support of this statement? 6. Controllers could play a major role in promoting sustainability accounting? Do you agree with this statement? Underpin your answer.

References Berns, M., A. Townend, Z. Khayat, B. Balagopal, M. Reeves, M. Hopkins, N. Kruschwitz (2009), “The Business of Sustainability. Findings and Insights from the First Annual Business of Sustainability Survey and the Global Thought Leaders’ Research Project”, MITSloan Management Review Special Report.  Dirks, S. and C. Guerdgiev (2010), “The emergence of the eco-efficient economy”. IBM Jam on Eco-Efficiency 2010. IBM Institute for Business Value.

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Elkington, J. (1998), “Cannibals with forks. The Triple Bottom Line of 21st Century Business”, New Society Publishers, Gabriola Island, Canada. Ernst & Young (2010), “The DNA of the CFO - a study of what makes a chief financial officer” (downloadable from www.ey.com). Hoorn, H.P., J. Slagter en D.M. Swagerman (2003), “Portret van de Noord-Nederlandse controller”, Controller Magazine, December 2003. Lavalle, S., M.S. Hopkins, E. Lesser, R. Shockley, N. Kruschwitz (2010), “Analytics: The New Path to Value”, Research Report Fall 2010, MIT Sloan Management Review. Park, C., R. Whittier and M. McElroy (2010), “Sustainability: developing key performance indicators. Measuring sustainability is the bottom line”, Insights series, www.deloitte.com. Schaltegger, F. and R. Burritt (2006), “Corporate Sustainability Accounting. A catchphrase for Compliant Corporations or a Business Decision Support for Sustainability Leaders?”; in: S. Schaltegger, M. Bennett and R. Burritt (Eds.), “Sustainability Accounting and Reporting”, Springer, Dordrecht, The Netherlands, 2006; Chapter 2. Sijtsma F.J., M. Broekhof, M. Nijboer (2002), "Maatschappelijk Verantwoord Ondernemen: de kern van de zaak", Spil, 187-188, p. 25. 32. Teece, D.J., G. Pisano and A. Shuen (1997), “Dynamic Capabilities and Strategic Management”, Strategic Management Journal, 18 (7), 509-533.

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CHAPTER 2

Sustainable development 2.1 Companies have a central role to play Moving towards a sustainable economy requires the involvement and dedication of all segments of society - government, companies, citizens and NGOs. They all have to join in a worldwide transformation process that will lead to drastic economic change. The worldwide nature of this process has already become apparent through the commitment of various international United Nations (UN) organisations such as the United Nations Environmental Programme (UNEP) and the Food and Agricultural Organisation (FAO). Economic change for the sake of sustainability, however, cannot occur without the direct commitment of companies. They have a central role to play. Mankind is capable of moulding nature so that it delivers what consumers wish to buy. In this respect, both companies and consumers appear to be seriously short-sighted: they do not appear to take into account alarming implications for the Future of the Planet. As long as human influence on nature was relatively small - because of modest population sizes and limited technical means - there was not much harm done. However, as the world’s population has been steadily growing (and still continues to do so), nature is under a continuous pressure that poses a threat to all life on earth. Sustainable development cannot be taken for granted. While duly recognising our modern globalised economy’s impressive achievements, it has become evident that at the same time it is wasteful, socially unacceptable and untenable. As the problems are predominantly in the economic domain, sustainable enterprise and sustainable production are indispensible components of the rescue package. In spite of all kinds of movements that have emerged to make things better, until now the entire intervention package has been insufficient. Much more is needed. When talking about sustainable business (or similar terms), it should be realised that it is about genuine entrepreneurial activity, meaning entrepreneurs working on real solutions based on their own creativity and willingness to take economic risks. Moreover, social entrepreneurship can contribute to meeting the basic needs of large groups of people whose livelihoods are below any acceptable minimum standard.

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Our Common Future Sustainable development was the central concept in the report “Our Common Future” of the UN’s World Commission on Environment and Development (the Brundlandt Commission), issued in 1987. This report made a clear link between economic growth, environmental issues, poverty and development problems. Human poverty prevented a sustainable use of nature while combined efforts of nature conservation and economic development were necessary to reach sustainable development. According to the Brundtland Commission, sustainable development is a development path for the world economy that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Therefore, economic growth that causes serious harm to the regenerative power of nature is unsustainable. The concept of sustainable development connects economy with both ecology and ethics. Insight into the relationship between economy and ecology (the natural basis for human existence) makes human kind responsible for the future. The moral dilemmas that emerge from this insight should not lead to ‘head in the sand’ policies. Sustainable development has to deal with intergenerational justice. This highlights the ethical significance of sustainable development. Later, in international politics, sustainable development was directly linked with energy and biodiversity issues (see Text box 5).

TEXT BOX 5 Energy and biodiversity Another milestone was the Biodiversity Treaty of Rio de Janeiro in 1992. During this UN Conference, the member states agreed to develop new policies for environment and development. The new development framework involving all countries was called ‘Sustainable Development’. In 2002 the greatest UN Conference ever was held: the World Summit on Sustainable Development, Johannesburg, South Africa. During those conferences it was concluded that it was not self-evident that Western

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countries’ prosperity could maintain the same high level for ever. This is caused by scarcity in natural resources. We have to use our natural resources more efficiently and save on energy and biodiversity. Besides, we have to invest in knowledge and education, so that low input technologies are developed that make it possible for future generations to ensure for themselves an acceptable prosperity level. Sustainability is surrounded by great uncertainties about the future as it is about the long term. The longer the time span, the greater the uncertainties involved, especially in the areas of demography, technical development and the carrying capacity of our life-supporting systems (Wikipedia, 2011).

The concept of sustainable development takes nature into account to the extent that it is essential to satisfy human wants. It is not a matter of conservation detached from human interests (as may be found in movements such as Deep Ecology). Therefore, sustainable development primarily is an economic concept. For radical environmentalists this is not enough, but in any case the concept has - beyond political divisions - motivated people to take relevant action. Text box 6 gives a number of sustainability conditions at the level of countries and continents.

2.2 Two models of sustainability The central question that the quest for sustainable development evokes is: how far can we make use of natural resources and the environment without jeopardising long-term economic survival? The answer to this question can be based on two models of sustainability. The first model (the Scientific Model) uses scientific knowledge of the earth’s carrying capacity, leading to technical and political guidelines as to what action should be taken. The second model (the Ethical Model) is about ethical considerations based on the assumption that norms and human behaviour need to change fundamentally to maintain a certain level of prosperity. This is a matter of responsibility and determination. Both models complement each other.

Optimism and pessimism As far as the Scientific Model is concerned, it is possible to distinguish between two extremes: an optimistic and a pessimistic version (Faber, Manstetten en Proops, 1996). The optimistic version assumes that it is possible to replace essential functions of nature (as provider of lifesupporting resources or as catchment of emissions) by human products (this is called: ‘weak sustainability’). The pessimistic version assumes that such substitutions are not possible (this is called ‘strong sustainability’); in the latter case sustainability means that you refrain as much as you can from making use of nature, because then you can keep going for longer (see also Ayres et al.,1998). Both extremes testify to relevant insights. Each situation needs to be judged as to which one applies best. Of each of them there are interesting examples. For instance, in the past, use of wood was replaced by hard coal, which has led to important inventions such as the steam engine. Today, replacement of fossil fuels is a major topic because of CO2 emissions (causing climate change) and the depletion of oil reserves. Various new forms of energy are already available and are being further developed to replace fossil fuels. Nonetheless, there are many irreversible processes: many mineral reserves are being depleted, many animal species are getting extinct; virginal forests once cut might come back, but this takes several generations to happen. In the final analysis the human race depends on nature’s ecological systems. Where certain boundaries are being crossed, the world will be unliveable.

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Continuous world population growth, for instance, is becoming a major threat to the earth’s life-supporting system.

TEXT BOX 6 Three conditions for a sustainable development According to Daley (1991) a sustainable society has to meet three conditions: 1. The extent to which society uses renewable resources should not be greater that the extent to which these resources recover.

2. The extent to which non-renewable resources are used should not be greater than the extent to which sustainable renewable resources are being developed. 3. The extent to which polluting substances are emitted should not be greater that the environment’s absorptive capacity.

The Scientific Approach The Scientific Approach (stressing a technical and economic point of view) is based on three firm assumptions: 1. We know the answer to the following questions: a. What is the relevant time horizon (how many generations should be taken into account)?; b. To what extent does the present generation consider the interests of future generation? In cost-benefit analyses the answers to these questions are implicit in the social discount rate (by which future costs and benefits are converted into present values). See text box 7. 2. We know the answer to the question: how quickly may present stocks of natural resources be consumed so that alternatives will be developed neither too early nor too late? Answering this question requires a great deal of information. 3. The political process that is put into motion by what science indicates as necessary to reach sustainable development will lead to timely worldwide decision-making between countries and other parties. It is to be expected that the ensuing decisions imply a serious worldwide redistribution of income. In reality the above assumptions are surrounded by great uncertainty. However, there is more to say about it. The complexity of these assumptions suggests that a purely science-based approach (including technical-economic considerations) is too limited.

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Human knowledge is restricted and not everything that can be thought of as a solution can be put into practice (Faber et al., 1996)

TEXT BOX 7 Social Discount rates “Social discount rates have universally been taken to be positive, on grounds that the rate of return on investment is positive. But if consumption and production activities give rise to environmental pollution as a by-product, the social rate of return on investment could be zero even when the private rate is positive;

at the very least, the social rate would be lower than the private rate. The current practice among most global energy modellers of relying exclusively on (risk-free) market rates of return for estimating optimal carbon taxes is conceptually faulty”. (Source: Dasgupta et al., 2000)

The Ethical Approach The second model is of an ethical nature. The realisation that working on sustainability is a necessity, carries with it the moral duty to take action. Duties and responsibilities are part of ethics. Moral duties have meaning only if they are recognised as such and complied with. Therefore, they call on the goodwill of individuals and society at large. The central duty that sustainability evokes is to ensure that posterity is not deprived of major life-supporting sources. Future generations should inherit whatever they need to enjoy a standard of living that is not much lower than our own. It is a matter of justice. One aspect of mainstream economics plays a major role, the assumption that human needs are endless. Continued economic growth is assumed to be necessary to keep the economy going. A growing material welfare has come to be regarded as normal procedure. That is also implied when economists assert that scarcity is a permanent condition. There are always shortages, so more has to be produced. Fundamental human rights require that individuals’ preferences have to be respected as much as possible. At the level of society as a whole, however, there appear to be limits to the growth of material welfare. Rather than moving ahead towards absolute limits to growth, society must begin to choose which type production can be considered to be useful and responsible. This asks for political choices prior to the point where a free market takes effect. Modern economic theory sees striving for more goods as ethically neutral as long as the individual operates within existing legal boundaries. From the viewpoint of sustainability, this is promising because laws can be used to limit deterioration of the earth.

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TEXT BOX 8 The good life With a view to the earth’s limitedness, it is interesting to go back to the concept of ‘the good life in the community’ as described by Aristotle. Such a good life requires a certain

level of material wealth, but it is subject to limitations. He considered it unnatural and unrighteous if one possesses many things but still wants more and more. If such greed occurs on a large scale, society will degenerate.

No regret As the future will remain shrouded in uncertainty, it makes sense to consider implementing no-regret policies. Here ‘no regret’ means that if the primary aim of a policy is not achieved, there are other aims which can justify measures taken. For instance, planting new forests can reduce CO2 in the atmosphere and by so doing contribute to the limitation of climate change. If in future it is proved that climate change is not (significantly) influenced by human action, the new forests will still be worth while as they improve the micro climate (e.g. local rainfall), leading to less erosion and fewer draughts. These advantages reflect some of the no-regret aspects of the approach.

2.3 The Ecological and the Social Aspects The way sustainability used to be discussed suggests that its ecological aspects are the most important ones. As people’s very existence is at stake if sustainability is not achieved, this primacy is understandable. Nonetheless, the social aspects of sustainability are equally important. The Brundtland Commission justified the importance of continuous economic growth by pointing at poverty in the world. This is an extremely important point, which also touches on the question of whether and how incomes should be redistributed, because poverty is not only caused by absence of the means to live, but also by the unequal distribution of these means. To the extent that poverty reflects absolute shortages, economic growth is necessary. However, when poignant poverty goes back to a serious unbalance in the way incomes are distributed, a redistribution of income is justified. In reality, though, this appears difficult to be realised. Development aid is one of the possibilities here. In many cases free trade is deemed to be more effective in offering opportunities to create prosperity (‘no aid, but trade’) as this means that various financial and non-financial barriers are broken down. In this area the World Trade Organisation (WTO) plays a major role. Nonetheless, there are still poor countries and regions

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that, once exposed to free trade, cannot cope with intensive competition. These countries are dependent on aid and international cooperation focused on basic needs and learning processes that can provide economic reinforcement. Although highlighting worldwide poverty as a serious problem calling for public attention is fully justified, social sustainabiliy cannot be reduced to it. Social sustainability occurs when the formal and informal processes, systems, structures, and relationships actively support the capacity of current and future generations to create healthy and liveable communities3. Each society has a “stock” of social and human resources. Economic development can either contribute to or deplete those social resources. Sustainability does not make much sense if it does not contribute to a society’s social and human resources. In the wealthiest countries, social issues are also extremely relevant. Average figures on income and prosperity often hide substantial differences in living conditions, food security, health, job security and educational opportunities. Therefore, involving the social aspects of sustainability when defining sustainability strategies is essential to the cause of sustainability4.

2.4 The Millennium Development Goals Internationally, the social side of sustainability received special attention when the UN launched the Millennium Development Goals, strongly directed at the eradication of worldwide poverty and deprivation. In September 2000 political leaders of 189 countries signed the United Nations Millennium Declaration by which they pledged themselves to the Goals. The Millennium Goals have stipulated eight concrete targets, which - unless otherwise stated - had to be realised in 2015. These targets have since been undermined by the worldwide financial crisis (2008-2010), although previously it had already become clear that rapid world population growth was thwarting the good intentions. According to the Population Research Bureau, world population will grow up to seven billion by the year 2015, one year earlier than predicted. Since 1975, each period of twelve years the size of the world’s population expanded by 1 billion people. Between 1999 and 2011, 95 per cent of population growth is attributable to the developing countries. This creates a problem for the Millennium Development Goals, because particularly in the least developed countries (where poverty is widespread) more and more people are in need of basic services, education and medical support. Huge investments are needed to keep pace with the growing population. Other reasons why the Millennium Development Goals are hard to reach are smaller budgets for developing cooperation, and volatile food and energy prices. 3 4

Source: http://integral-sustainability.net/wp-content/uploads/sas4-2-hodgson.pdf (visited 29-4-2011) Source: http://newcity.ca/Pages/social_sustainability.html (visited 29-6-2011)

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2.5 The Triple Bottom-Line | People, Planet, Profit Before, it was pointed out that the business community had to play a major role in making sustainable development a reality. In other words, business had to become sustainable. To offer companies concrete tools to achieve that, Elkington (1998) launched the so-called Triple Bottom Line (People, Planet, Profit). Sustainable business (inclusive of Corporate Social Responsibility, CSR) implies striking a balance between the social (People), ecological (Planet) and economic (Profit) dimensions of running a company. Rather than exclusively focusing on profits, a company should also build up a respectable record in the social and ecological domains. Especially where it seems that the latter domains only impact on a company’s profits obliquely, a company’s behaviour in terms of sustainability will depend on its values and vision. As Elkington put it, the Triple Bottom Line (TBL) refers to “a situation where companies harmonize their efforts in order to be economically viable, environmentally sound and socially responsible.” This seems to suggest that the TBL cannot be reduced to a few financial performance indicators. The three elements of the Triple Bottom Line can be briefly described as follows: PEOPLE How does the company meet the needs of people and how does it deal with their interests? Here, the people concerned are not only the company’s own personnel but also consumers and suppliers, and society in general. Frequent subjects under the People dimension are occupational health and safety, keeping personnel happy and motivated, labour rights, human rights, schooling, internships, labour conditions associated with outsourced or purchased services, the company’s social involvement, discrimination and diversity on the shop floor. PLANET How does an organisation deal with the environmental effects it causes? Many issues under the Planet dimension relate to the impacts of products, processes and services on air, water, soil and biodiversity, and what can be done to prevent or mitigate these impacts. PROFIT Corporate responsibility is to be shaped in a way that fits the company and its projected performance. In this context, performance is a multiple concept. It is not just concerned with financial profits but also depends on pride, trust, commitment, innovation, quality, attachment, positioning, reputation, and having an appeal to the growing number of clients who ask for sustainable goods and services. Sustainable investment, sustainability reporting and stakeholder dialogue frequently appear under the Profit dimension.

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Relationships between the three P’s. Although the three P’s (or the social, ecological and economic dimension) represent independent values and interests, it is possible to establish links between them. At the corporate level possible links between the three P’s are shown in Figure 1.

Figure 1 Economic

Business esthics

Eco-efficiency

Scocial

Ecological Environmental justice

Eco-efficiency: the measure of useful production per unit of environmental input. The concept points at the importance of making the best out of the scarce environmental goods. Both the numerator and the denominator have to be considered. Numerator: not only market value but also broader values have to be considered ( are the products useful?; is production carried out efficiently?; has the production of waste been reduced?; is there reuse and recycling?; is the waste processing adequate?). To take great forward strides, there is a need for radical, new technology. Environmental Justice: it appears that poorer segments of the population are more heavily affected by harmful environmental effects than the richer ones. Also, calamities such as floodings caused by deforestation hit poor people the most as they cannot protect themselves against the water. Besides, there is the intergenerational agenda: what do we pass forward to our successors in terms of repair costs and irreparable environmental damage? The human hand in climate change has, for instance, an especially negative effect on small-scale farmers in Africa, while the causes lie in the rich Western world. Business Ethics: many a morally reprehensible act is against the law, but this is not always the case. Short-sighted profit-seeking and greed often lie at the bottom of irresponsible enterprise, even though it is not necessarily illegal. Ethical questions become topical issues because of moral relaxation (leading to less decency, integrity and trust) or developments that incite

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opportunistic behaviour (such as an excessive bonus system based on short-term profits). These links are interesting stepping-stones for the development of corporate sustainability. However, before defining concrete actions, it is important for a company to formulate its goals. These make it possible to define the company’s values, mission and vision that together are capable of underpinning a strategy followed by concrete targets and indicators for performance measurement. By doing this, a company is considered to be able to strike a balance between short-term profitability and the conditions for long-term value creation and continuity. These conditions are strongly related to company reputation (Strikwerda, 2009). Boerner and Sickles (2009) have presented their Strategic Governance Model, stressing values and norms, which through a company's culture have a strong impact on strategic decisions leading to the sustainable enterprise (see Figure 2). This model confirms the importance of the tryad ‘values - business environment - enterpreneurship (willingness to take risks)'.

Figure 2 Strategic Governance Model (Source: Boerner and Sickles, 2009)

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TEXT BOX 9 Three Corporate Duties The first corporate duty (and responsibility) is to produce (through development and innovation) and then bring to market goods and services that contribute to society’s prosperity. Companies have to do this in such a way as to maximise economic value while the economic production process operates efficiently. The created value’s distribution should answer to norms of propriety and justice.  The second corporate duty states that a company should make use of society’s material and immaterial resources as carefully as possible. In the first place, this applies to society’s human capital. This is society’s most important resource and a major mechanism to distribute welfare. This may mean that now and then production processes have to be reorganised, mostly because of technical developments. In these modern times reorganisations are the order of the day. They are accepted by society if they do not one-sidedly serve the interests of managers and/or owners, but consider in a

balanced manner the various interests of the people and the local economy. This puts pressure on companies; they have to deal with environmental goods sparingly and wisely. The third corporate duty states that companies have to take into consideration various societal institutions which take care of governance and structuring, according to existing values and norms. This means abiding by the law and when attempting to influence politicians and public servants observing democratic principles. The latter, in particular, refer to large corporations, which have considerable power to look after their direct interests (especially through lobbying and using juridical means). A special responsibility for the functioning of society rests with the large banks. The credit crisis has shown that over the last ten to twenty years the banks had lost sight of their societal role.. (source: Strikwerda, 2009).

2.6 Ranking of Values To create clarity as to a corporation’s values, there is more to accomplish than formulating a broad mission which mentions a range of values. As then these values are placed next to each other, a manager can easily justify his actions by referring to one of these values. This arbitrariness can be limited by indicating a ranking of those values; then you will know which comes first and which are next so that a manager’s deeds can also be judged on the basis of certain priorities. (Strikwerda, 2009). An example of such ranking is the credo of Johnson & Johnson (see text box 10).

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TEXT BOX 10 Johnson & Johnson: Our Credo We believe our first responsibility is to the doctors, nurses and patients, to mothers and farthers and all others who use our product and services. In meeting there needs, everything must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women wo work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognise their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their familiy responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, devel-

opment and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in order the property we are priveliged to use, protecting the environment and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realise a fair return.

In today’s conduct of business , performance management is embedded in the totality of a company’s mission, values and vision. Mission indicates what the owners and management imagine they want the company to be and what they see as their commercial and societal assignment. Values express a company’s responsibility vis-à-vis various stakeholders. A company’s vision is its concrete medium-range view of the market and its wider economic environment. Vision is fundamental to formulating strategic choices. In this way measurable goals, both financial and non-financial, are embedded in a value system and placed within a certain time horizon. Via a business model or strategy map the measurable goals are also underpinned in causal terms, because then it will be shown how a company’s capacities and views work out in concrete operational processes and customer satisfaction. This approach has the advantage that a company can make clear to its external stakeholders what it does (and does not) represent. Internally, it enables the company to explain what its mission and ranked values mean and how they relate to the personal achievements of its employees (Strikwerda, 2009).

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This approach also reduces the risk of internal budgeting processes and the definition of tasks for each department being manipulated by managers for the benefit of their personal agendas that might be at odds with the company’s interests. Parameters such as a business unit’s profit, shareholder value or ROI are susceptible to undesirable decisions when they are separated from corporate values and (possible) social and ecological effects. Potential employees can decide for themselves whether a company’s values match with their own personal values while shareholders can take into account a company’s values and how they are ranked when assessing shares. The same applies to customers and suppliers. Similarly, public opinion can make itself known by expressions of judgement on these values. The results of all these considerations inform the company about its actual contribution to the development of prosperity (Strikwerda, 2009). Figure 3 visualises the plea for embedding performance management in the entirety of conducting a business. Figure 3 Embedding of performance management in non-financial values and norms (Source: Strikwerda, 2009)

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KEY NOTIONS AND CONCEPTS • Sustainable business (or similar terms) is about genuine entrepreneurial activity, meaning entrepreneurs working on real solutions based on creativity and a willingness to take economic risks. • Social entrepreneurship focuses on meeting basic needs of large groups of people whose livelihoods (in total or in specific areas) are below acceptable levels. • Sustainable development is a development path for the world economy that meets the needs of the present generation without compromising the ability of future generations to meet their own needs (the Brundtland Commission, 1987). • Sustainable development has to deal with intergenerational justice. This highlights the ethical significance of sustainable development. Later, in international politics, sustainable development was directly linked with energy and biodiversity issues. • The realisation that working on sustainability is a necessity, carries with it the moral duty to take action. Duties and responsibilities are part of ethics. Moral duties have meaning only if they are recognised as such and complied with. • In the wealthiest countries, social issues are also extremely relevant. Average figures on income and prosperity often hide substantial differences in living conditions, food security, health, job security and educational opportunities. • Internationally, the social aspect of sustainability received special attention when (2000) the UN launched the Millennium Development Goals, strongly directed at the eradication of worldwide poverty and deprivation. • As Elkington (1998) put it, the Triple Bottom Line refers to “a situation where companies harmonize their efforts in order to be economically viable, environmentally sound and socially responsible”. This is indicated as the three P’s (People, Planet, Profit). • Ethical questions become topical issues because of moral relaxation (leading to less decency, integrity and trust) or developments that incite opportunistic behaviour (such as an excessive bonus system based on short-term profits). • Parameters such as a business unit’s profit, shareholder value or ROI are susceptible to undesirable decisions when they are separated from corporate values and (possible) social and ecological effects.

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STUDY QUESTIONS 1. Scientific discovery plays an important role in finding solutions for serious ecological problems. Some people are optimistic while others are pessimistic about the possibilities to reach sustainability through technological innovation. What is your position in this? Underpin your answer as much as you can. 2. How would you define environmental justice? Give a few examples to demonstrate what a lack of environmental justice could mean in practice. 3. Why are corporate values fundamental to formulating strategic choices? 4. Give two examples of companies which have incorporated sustainability goals in their mission statement. Do you think this makes a difference in the way these companies operate? 5. Via a business model or strategy map the measurable goals (including sustainability goals) are also underpinned in causal terms. Explain this statement.

References Boerner, H. and M.W. Sickles (2009), “Strategic Governance. Common Language, Common Ground and Common Cause”, Governance & Accountability Institute, New York. Christopher, M. (2005), “Logistics and Supply Chain Management. Creating Value-Adding Networks”, Third Edition, FT Prentice Hall (imprint of Pearson Education), Harlow, England etc. Daley, H. (1991), “Steady-State Economics”, Second Edition with New Essays, Island Press, Washington, DC, 1991. Dasgupta, P., Maler, K. G. and Barett, S. (2000), “Intergenerational Equity, Social Discount Rates and Global Warming” In: Portney, P. and Weyant, J. (eds.), Discounting and Intergenerational Equity, Washington DC: Resources for the Future 1999. Elkington, J. (1998), “Canibals with forks. The Triple Bottom Line of 21st Century Business”, New Society Publishers, Gabriola Island, Canada. Faber, M., R. Manstetten and J. Proops (1996), “Ecological Economics. Concepts and methods”, Edward Elgar, Cheltenham UK/Brookfield US.

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Strikwerda, H. (2009), “Wat is de opdracht van het bestuur van de onderneming?”, Holland Management Review, 128, November-december 2009; 31-39. World Commission on Environment and Development (1987), “Our Common Future”. A Global Agenda for Change.

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CHAPTER 3

Sustainable business at sector and supply chain level 3.1 To a common offensive at sector level Companies considering their own sustainability Strategyhave to realise that they need to reach consumers and investors. Why this is not always easy is explained by focusing on two types of major stakeholders: consumers ans investors5. The consumer Companies contribute to economic development by their efforts to improve efficiency and product quality. However, why do companies so frequently close their eyes to extreme poverty and environmental damage? A search for what prevents them from doing this, leads to one answer: cost.drivan competition. It should also be noted that in many cases consumers have shown only a limited interest in sustainability. The number of consumers who are highly motivated by pursuing sustainability comprise just a small percentage. It appears, however, that sustainability is capable of touching a sensitive chord among a wider audience if this does not bring with it (substantially) higher prices. Most of the time the average consumer has no awareness of how a product is made and so he or she is unlikely to appreciate in full the sustainability aspects of every purchase. It can be observed, however, that the public’s interest in sustainable products is growing as the subject receives increased media attention. There is a difference between (i) how consumers behave when concrete choices have to be made and (ii) the stance that consumers take when operating as responsible citizens who are asked how the world should develop and what that should mean for today’s consumption. When interviewed about sustainability issues, most people appear to respond primarily as (responsible) citizens. What they say when interviewed can be in contrast with their actual buying behaviour. The investor There is a great deal of competition associated with capital and property. This is most visible on the capital markets. Investors anonymously buy via the stock exchange pieces of a company and sell them on whenever they wish to do so. The private investor may have a certain preference for particular sectors (such as IT or Real Estate), but often knows little of the detail. Professional and institutional investors will have planned an investment strategy which includes ways to spread risks and to analyse markets and currencies. However, their efforts do not always include a detailed study of what individual companies are doing or planning 5

This section largely derives from Sijtma et al. (2002)

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in the area of sustainability. Nonetheless, there already exists a considerable market for sustainable investments, with an increasing number of investment organisations having added sustainability criteria to their check lists. This does not alter the fact that there still is a long way to go before investors accept that they should apply recognised sustainability standards as a natural condition before putting their money into any security fund or investment project. Ensuring commitment in two steps Enterprises cannot develop sustainability policies in isolation from what their competitors are doing. A variety of issues require cooperation and common procedures because the vastness and potential impact of the ecological and related problems are strongly determined by the sum total of what all companies undertake in a particular region. Frequently, governments intervene to create a regulatory framework aimed at the desired improvements, while preventing excessive costs. Depending on the culture, this may lead to public-private partnerships in implementing sustainable production methods. Companies need to develop their own sustainability policies. However, they can often benefit from sector-based approaches. This chapter suggests ways in which company-based sustainability policies may be successfully developed. Cooperation at the sector level creates possibilities for taking the offensive in the area of sustainability, as at that level it is possible to work on new competition rules that promote sustainability. These rules can be created by establishing a sector-based framework for the stakeholder. Here, two steps can be distinguished. As a first step, a sustainability audit for the sector can bring to light those sustainability issues that can best be addressed collectively. Determining what needs to be arranged in detail is a matter of negotiation, whereby several interacting forces are at play, such as an urgency to find solutions for the problems in hand, the capacity of the companies involved (also in terms of expertise) to take action within a relatively short period of time and the sector’s commitment to the issues concerned. A sector-based sustainability audit may have major advantages. Firstly, in this way high ambitions can be honoured because the costs to be incurred can be shared. Secondly, where NGOs are involved as well (such as consumer interest and human rights organisations), collective action makes it possible to come to terms with their limited staff. Thirdly, it is also a matter of efficiency as most companies that belong to the same sector are subject to similar threats and opportunities. Last but not least, many sustainability problems will become visible only when scaled up beyond a single organisation. It would not be a surprise to learn that companies in the same sector already meet on a regular basis. It can be meetings organised by an existing sector-based organisation or an employers’

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organisation. Globalisation is a force that has already led to changes in mutual competition invoking new forms of coordination and sector promotion. That is why in many cases new steps in the area of sustainability at sector level cannot be regarded as something beyond reach. Action may involve the entire sector, or it could be a matter of collaboration between the major players. It is important here to focus on matters that can make a real difference and prevent a priority-free wish list, which could run the risk of failure. Producers’ responsibility During the nineties of the last century business communities were beginning to be influenced by, what was called, Extended Producer Responsibility (EPR). This was a government-led strategy designed to promote the integration of environmental production costs into the market price of the products. Producers became responsible for what was going to happen with the waste which was being created by the consumers of their products. This prevented the burden of waste management from being entirely shouldered by local government. For instance, at the EU level, there is now regulation in the area of electronic product disposal. Each producer is individually responsible for the collection and recycling of his products after they have been discarded by the consumers. This, of course, does not preclude joint policies and practical cooperation. Although the entire supply chain is involved in the process, the final producer is held responsible for a safe disposal. Unfortunately, EPR is not yet common procedure. In many cases only a limited part of the discarded product is collected according to the rules. For instance, there is illegal export of discarded electronic products to certain African countries like Ghana. Besides observing mandatory disposal regulations, producers can also opt for voluntary action in countries where there is no obligation to collect and process waste products. Some good practice in this area already exists but there are many more opportunities for cost-effective, if not profitable, forms of reuse and recycling.

3.2 Sustainable Chain Management6 Introduction In general, chain management is about collaboration in the supply chain (from raw materials to end products and beyond) which creates additional functional value for the final consumers, while aggregated costs throughout the chain are reduced. First of all, chain management is a matter of managing relationships. This becomes a challenge, as short-sighted self-interests of individual parties have to be subordinated to the interests of the supply chain as a whole. It should be realised that chain management is focused on the satisfaction of clients, like quality management. Moreover, it should be realised that chain management does not only consider subsequent links in a chain but also the networks associated with them.

6

The information for this section is stongly based on the Dutch CSR Platform (MVO Platform, 2011)

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Chain management (often called Supply Chain Management, SCM) offers all kinds of possibilities to create value and control costs. However, simply operating production and dispatch activities at larger scales will often fail to lead to greater efficiency. Moreover, in many supply chains it has become more difficult to achieve competitive advantage based on brand and image. This implies that product differentiation has become less relevant. More and more, advantages lie in additional services (such as delivery service, aftersales service, financing and technical services; see Christopher, 2005). Sustainable Chain Management is about chain management that takes into account the social and environmental effects of the activities that are prepared and carried out. Sustainable activities can be a matter of introducing new products. Here, however, it is not just about customers; the broader group of stakeholders have to be taken explicitly into consideration. Implementing sustainability in the chain has all kinds of dynamic effects, such as: • • • •

Parties change their strategic choices after assessing the significance of sustainability. Product features and properties change because of sustainability requirements (for instance: the product should be recyclable, quickly degradable and non-toxic) Processes change in line with sustainability requirements (for instance: cleaner processes; ergonomic quality) Distribution of costs and benefits between the parties in the chain may change, which then requires trustful relationships between those who must negotiate over a widely acceptable deal.

Chain-based collaboration will incur specific costs, as will the introduction of sustainability. For instance: chain partners will have to invest in adapting their own production processes and pay for the capital that is required to do that (human and physical capacities, including information systems). Collaboration itself will also incur costs (which are commonly called ‘transaction costs’). They may refer to consultations, making contracts, monitoring, redesigning chainbased processes and solving conflicts. Sustainability may give rise to new dilemmas that cause companies to reposition themselves in terms of how they value collective interests compared to their own short-term interests. How can Sustainable Chain Management be realised? The following steps should be made for a company to realise sustainable chain management (derived from: New Zealand Council for Sustainable Development, 2003): Step 1 | Have a look at your own internal processes and identify the risks Before one contacts other partners in the chain about chain-based sustainability, it is necessary to find out what for your company itself are the main sustainability issues. You should also

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know which subjects you do not wish to be put on the agenda. Further steps must be backed up by senior management. It should be considered what the consequences are of not changing anything at all in the supply chain. One may think of issues ranging from continuity in supplies up to reputational damage as a result of environmental and health & safety issues. Step 2 | Map your supply chains By knowing your present supply chains and other (potential) supply chains, sustainability could turn the scale inducing a shift towards other chains. Appointing a chain manager may help to unite the organisation in making the right choices and be consistent in this. A number of large companies have appointed chain directors to ensure sufficient commitment among the Board of Directors when it comes to implementing sustainability. Step 3 | Make sustainability part of your business strategy It is important to make sustainability part of your Key Performance Indicators (KPIs). Sustainability indicators can be as significant as financial indicators in - for instance - the Balanced Scorecard. Step 4 | Use measuring instruments that fit with your organisation To these instruments belong clear policy guidelines, selection of suppliers based on clear sustainability criteria, clear purchasing guidelines and collaboration with well-considered suppliers. Many companies lack instruments that are helpful in recognising risks and seeing the advantages of coherently managing their supplies. The road from complying with regulations via risk management to sustainability strategies for the long run may itself be fairly long. Step 5 | Inspire co-workers to contribute to sustainable chains Sustainable chains have to be supported by top management but will not get off the ground if they are not supported by all co-workers. Commitment may arise as a result of certain campaigns or programmes (such as a zero waste policy or an energy efficiency policy) that make sustainability visible to a majority of co-workers (even though it is just part of it). Aspects of international chains The following aspects are key to getting insight into possibilities to develop (international) sustainable chain management: • Influential companies in consumer markets (such as groceries, sellers of upmarket products and white goods sellers, also do-it-yourself) have led to chains that are controlled by retail organisations. Therefore, to a large extent chain power is to be found there.

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• • • • • •

In agriculture, chain integration means: agricultural production that is better coordinated, low product prices, better forecasting of changes in demand, lower transportation costs and coordinated demand stimulation. Supermarkets have a strong position in the food chains and because of that can shift the consequences of low consumer prices on to their suppliers. Chain management often involves negotiations with the government about sufficient facilitation (for instance, sufficiently available clean water). Traceability of products throughout the chain is gaining in importance, as that makes it possible to conduct audits and issue guarantees concerning quality and sustainability. Product Stewardship throughout the chain is a product-oriented approach that is helpful in conducting successful environmental and social policies in the chain. To accomplish this, it is necessary that all links in the chain take their own responsibility. Producers have to reduce their products’ environmental impact, which can be done only if they work together with retailers, consumers and the environmental sector. This is an area that offers tremendous entrepreneurial opportunities. There are all kinds of instruments to develop sustainability and Sustainable Chain Management at the corporate level, such as integrated economic calculations, material balances, voluntary agreements between governments and companies, environmental labelling and the use of guidelines for eco-design. The greatest sustainability problems still lie upstream and downstream, while the manufacturing companies in the middle of the chains tend to pay relatively little attention to them. Chains that confront major social and environmental problems upstream (such as extremely low wages, appalling working conditions, child labour) inter alia are: chains for the production of computers and mobile phones, chains for tropical vegetables and fruits and chains for the production of apparel and clothing (E. Quak, 2009). Nonetheless, sustainability in chains is increasingly improving but it needs continuous public attention and campaigning (see also Vos et al., 2008).

Chain responsibility If not the same, chain responsibility can be seen as an essential element of the wider social responsibility that companies are considered to have. This, for instance, becomes manifest in the definition of Corporate Social Responsibility (CSR) used by the Dutch CSR Platform: “CSR is a result-driven process whereby a company takes responsibility for the entire chain of its activities and their social, ecological and economic effects. It gives account of them and enters into a dialogue about them with its stakeholders”. Thus, our starting point here is responsibility for the entire chain. The extent to which a company can actually be held responsible for a chain is determined by its influence in the chain and the potential impact of the hazards concerned. Chain transparency (openness by companies) is a means to take chain responsibility as it exists today to higher levels. Thanks to chain liability (which is the juridical embedding of chain responsibility), there is emerging a set of minimum requirements that applies to all companies.

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In the areas of human rights, labour conditions and environment, companies are repeatedly party to abuses in their supply chains. In particular, in developing countries which have trade relations with western companies, such problems frequently come to the surface. Abuses may take place in all links of a chain. They may be about pollution (e.g. created by oil winning or mining), fatal infringements of natural resources (such as deforestation, desertification and erosion), air and water pollution created by industry and solid waste issues (such as the dumping of electronic appliances and the irresponsible wrecking of sea vessels). In the social domain, abuses may refer to exploitative labour conditions (such as shamefully low wages and dangerous exposure to toxic chemicals), child labour and sweatshops. For different reasons, governments appear to direct and control international companies as little as possible. International norms are hard to maintain by juridical means, especially in the area of human rights, labour conditions (as defined by the International Labour Organisation, ILO) and the environment. Even if companies clearly break the law, it is difficult to take effective legal action. Only when the most fundamental human rights are at stake, do international norms (within their sphere of influence) also apply to companies (for instance, as in the case of a company being accessory to war crimes). Insofar as these norms have been incorporated into national criminal law, a company can be brought to justice in its home country, even if the abuse or atrocity took place abroad. Other strong international norms inter alia apply to corruption and disasters such as serious oil pollution. However, with that, all international norms that can be legally enforced have been covered. As yet, governments have limited means to counter violations of human rights that take place in globalised markets. A number of multinational companies have actively taken the responsibility for complying with human rights, labour conditions and environmental care within their supply chains. They oblige their suppliers to live up to particular codes of conduct and have in place control systems to check compliance. Such arrangements between buyers and suppliers are voluntary in nature. They are not always based on internationally accepted norms. Even though interesting milestones, the largely voluntary and self-made rules concerning chain responsibility seem to fall short in promoting: • healthy living conditions for people • sustainable use of natural resources, human rights and workers’ rights • protection of consumers against products that have been produced unsustainably • animal well-being As the previous discussion indicated, chain responsibility can be approached from three different angles (Dutch CSR Platform): 1. Chain transparency and traceability, 2. Voluntary action based on self-regulation and 3. Juridical liability in the chain to address abuses and deal with laggards.

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Ad 1 | Chain transparency There are various possibilities for companies to adopt a policy of chain transparency: • indicating in one’s annual report what the company’s social and environmental situation looks like • a description of the codes of conducts, international CSR norms and control systems that the company has adopted and how they work in practice • adoption of a special sustainability label so that the consumer is informed of the nature of a product’s ascribed sustainability (for instance FSC label for wood and paper, the MSC label for fish, Fair-trade labels supporting Third World small-scale farmers and workers and the EKO label for organic food). Also, NGOs promote sustainability by asking companies to provide company-specific information on how they operate in their chains. In principle, governments have several instruments to enhance the traceability of products and to stimulate companies to be chain transparent. These instruments can be: • laws on food safety • governmental procurement policies by which all purchasing by government organisations has to comply with sustainability requirements (companies have to prove that their products meet these requirements) • publishing benchmarks which evaluate the sustainability reporting of the largest companies • providing information to consumers about the nature of the various green labels • having misleading final-product labels addressed by the government’s Consumer Authority. National governments can oblige (large) companies to publish an annual sustainability report, inclusive of the criteria that the reporting has to meet (such as complying with the guidelines issued by the UN’s Global Reporting Initiative). Governments can also give consumers the right to be informed of certain ethical aspects of the production process. In this way compliance with CSR standards becomes part of product quality. Through this, the consumer can take the role of an active player on the market by voting with his or her 'shopping cart’. Competition between the various producers will be stimulated by well-informed consumers and along that line will improve compliance with CSR norms in international markets. Governments can also encourage companies to involve stakeholders, both in their home country as in the countries where CSR issues arise. Ad 2 | Voluntary chain-based action based on self-regulation It is a hopeful sign that chain responsibility has been recognised as a major CSR asset. Governments and companies seldom deny their chain responsibility entirely. Forerunner companies take steps to improve their chain’s sustainability as a way to reduce the risk of value destruction by reputational damage and to create additional value on the market.

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CSR features and chain responsibility have to be integrated in a company’s policies and (risk) management systems. This takes a long - term view on a company's future and commensurate HRM policies (focused on commitment, knowledge development and adequate learning curves; see Mefford, 2011). A number of companies have already started to operate like this, albeit mostly in a rather fragmented way. It is highly recommendable to go for an integrated approach as this promises to lead to better motivated workers and establishes a greater trust among clients and business partners. Together, they generate a better overall performance. NGOs may play a significant role when entering into constructive dialogue with individual companies or entire sectors. They can suggest solutions for abuses and clarify the value of chain responsibility. NGOs and other civil society organisations may take a ‘social conscience’ role and create countervailing power against the vested interests of governments and corporations. Companies involved in abuses in the chains are hard to be legally prosecuted. Rules on chain liability could end this unwanted situation. Chain traceability and liability have already been accepted in the food sector. Food security is a huge societal and political issue. European food companies are obliged to document the origin and destination of used ingredients in such a way that they can deliver information about them within two days when summoned by the authorities to do so. At the EU level further steps are being taken to go beyond food security, especially to correct abuses in the areas of child labour and illegal logging. Ad 3 | Juridical liability in the chain The juridical measuring stick to find out whether a company can be held responsible for a particular abuse could be based on the following questions: • Could the company know about the abuse in its chain? • How serious is the abuse? • What steps has the company taken to prevent abuses, ameliorate the situation or end its involvement? • To what extent is the abuse within the company’s sphere of influence? Moreover, it is also important to find out to what extent a company under fire is dependent on the supplier who is directly associated with the abuse. The European Coalition for Corporate Justice (www.corporatejustice.org), a platform of CSR organisations in EU countries, pleads for regulation of chain liability on that basis. Legislation to that effect will also have a preventive effect. If not European companies alone, but also non-European companies that operate on the European market fall within its ambit, equality before the law will be strengthened. However, for this kind of legislation to meet expectations, it is necessary to arrange that plaintiffs outside the EU are granted a better access to the courts, both juridically and financially. Also, there has to be a mandatory disclosure of relevant internal corporate information to the court, as answering the above questions relating to an abuse is dependent on that information.

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KEY NOTIONS AND CONCEPTS • The public’s interest in sustainable products is growing as the subject receives increased media attention. • There already exists a considerable market for sustainable investments, with an increasing number of investment organisations having added sustainability criteria to their check lists. • Cooperation at the sector level creates possibilities for taking the offensive in the area of sustainability, as at that level it is possible to work on new competition rules which promote sustainability. • During the nineties of the last century business communities were beginning to be influenced by, what was called, Extended Producer Responsibility (EPR). Producers became responsible for what was going to happen with the waste which was being created by the consumers of their products. • In general, chain management is about collaboration in the supply chain (from raw materials to end products and beyond) which creates additional functional value for the final consumers, while aggregated costs throughout the chain are reduced. • Sustainable Chain Management is about chain management that takes into account the social and environmental effects of the activities that are prepared and carried out. • There are all kinds of instruments to develop sustainability in supply chains at the corporate level, such as integrated economic calculations, material balances, voluntary agreements between governments and companies, environmental labelling and the use of guidelines for eco-design. • Chains that confront major social and environmental problems upstream (such as extremely low wages, appalling working conditions, child labour) frequently are: chains for the production of computers and mobile phones, chains for tropical vegetables and fruits and chains for the production of apparel and clothing. • A number of multinational companies have actively taken the responsibility for complying with human rights, labour conditions and environmental care within their supply chains. • Even though interesting milestones, the largely voluntary and self-made rules concerning chain responsibility seem to fall short in promoting: healthy living conditions for people, sustainable use of natural resources, human rights and workers’ rights, protection of consumers against products that have been produced unsustainably, animal well-being.

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• Companies involved in abuses in the chains are hard to be legally prosecuted. Rules on chain liability could end this unwanted situation. Chain traceability and liability have already been accepted in the food sector.

STUDY QUESTIONS 1. The public’s interest in sustainable products is growing as the subject receives more media attention. Can you give a few examples of this phenomenon? 2. At the EU level there is legislation to prevent pollution. What do you think? Is it a good thing to tackle environmental problems at the EU level rather than leaving it to the individual countries to take measures? 3. When dealing with sustainable chain management, the number of stakeholders will increase compared to policies which focus on one particular company only. What can a company do to handle a large number of stakeholders when taking supply chain-based initiatives to promote sustainability? 4. What does chain integration means, especially in agricultural chains? 5. In your opinion, what are the most significant aspects of international supply chains when developing sustainability strategies? 6. Many international companies comply with codes of conduct and the like in the area of human rights, environment and the protection of consumers. What are the advantages and disadvantages of such voluntary commitments? 7. Chain responsibility can be approached from three different angles: 1. Chain transparency and traceability, 2. Voluntary action based on self-regulation and 3. Juridical liability in the chain to address abuses and deal with laggards. Indicate what the main issues are under each of these headings.

References Christopher, M. (2005), “Logistics and Supply Chain Management. Creating Value-Adding Networks”, Third Edition, FT Prentice Hall (imprint of Pearson Education), Harlow, England etc. Mefford, R.N. (2011), “The Economic Value of a Sustainable Supply Chain”, Business and Society, 116 (1), 109-143.

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New Zealand Council for Sustainable Development (2003), Business Guide to a Sustainable Supply Chain. A Practical Guide. Quak, E. (2009), “Het onzichtbare label - Perspectief op duurzaam handelen”, KIT publishers, Amsterdam. Sijtsma, F.J., M. Broekhof, M. Nijbooer (2002), "Maatschappelijk Verantwoord Ondernemen: de kern van de zaak", Spil 187-188. Vos, B., G. Dijkstra en K. van den Berg (2008), “De meerwaarde van Maatschappelijk Verantwoord Ketenmanagement - van moeten naar willen”, Van Gorcum, Assen.

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CHAPTER 4

Environmental management 4.1 Environmental management and central objectives The previous chapters discussed some key concerns related to the sustainability strategies of companies, the role of financial managers and the scope of these strategies. From there, however, more operational aspects of corporate sustainability have to be highlighted. One major issue is environmental management. Without proper environmental management corporate sustainability has no chance of making a clear positive appearance. Environmental management is part of a company’s efforts to safeguard its long-run competitive capabilities. For that matter, environmental management is also part of reaching a company’s goals, including market goals (turnover, market share and profits), financing goals (dividends, financing capabilities) and societal goals (social responsibilities, achieving a good reputation and social acceptance).

4.2 The essence of environmental management Environmental management can be described as the totality of a company’s efforts focused on: 1. Gaining insight into the company’s environmental impact, both internally and externally 2. Limiting and controlling damage caused by environmental effects and wherever possible preventing it 3. Maintaining communication on environmental issues both within and outside the company. Environmental management is not just relevant to manufacturing companies but equally to service providers such as shops, accountancy firms, educational institutions and hospitals. In principle, prevention of harmful environmental effects by means of a superior technology is the best solution, because then the environment is free of the strain caused by productive activities. In practice, this is achieved to a limited extent only, partly due to the fact that for a long time the environment was denied any priority. Consequently, much irrevocable damage to our environment has already been caused. In environmental management it is useful to apply the so-called prevention ladder, which

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consists of nine rungs (see Mantz-Thijssen en Van der Woerd, 1991). The highest rung is about choosing or designing alternative products which are totally free from environmental effects (total prevention). But for existing firms this is likely to be a long-term objective that can only be reached by taking intermediate steps. These steps may involve efficient use of imputs, careful storage and use of imputs, reuse and recycling of imputs and products, minimal use of water and energy, filtering of emissions to air and water, using the best available clean technologies, responsible waste management. Searching for synergy Over the last twenty years the search for synergy between market goals and environmental goals has resulted in the development of various supportive initiatives. Some of these are: 1. Management systems in the areas of quality, work and environment, which companies can implement. These result in the control of critical factors and continuous improvement programmes. 2. Environmental costs that are hidden in the administrative systems are increasingly made explicit. 3. Methods to develop prevention options so that wastage in productive activities can be stopped. 4. Life-Cycle Analysis (LCA) as a method to detect a product’s environmental effects throughout the chain. 5. Methods to develop eco-friendly products (eco-design). 6. Thanks to the concept of Integrated Chain Management (closing of material cycles), there have emerged practical ways to extend chains by means of using residual waste (rather than dumping or burning it), and the reuse and recycling of products. The traditional product column (which is comparable to the supply chain and related to the economic concept of industrial column; see also Text box 10) is a model of the technological production process of a specific product (or group of products), passing from its origin (a factory) to its final destination (the consumer). From an environmental point of view, this presentation is too limited as it sheds insufficient light on the possibilities of saving energy, applying reuse and recycling in the different phases of making and then delivering a product. The product column is to be adapted so as to reflect all forms of environmental effects; it is then called the product life cycle (Mantz-Thijssen en Van der Woerd, 1991): 1. 2. 3. 4. 5. 6.

Depletion of raw materials and energy Pollution of air, water and soil Nuisance caused by noise or stench Wastage Deterioration of landscapes Disaster risks

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A producer is primarily responsible for the environmental burden created by his own company: This responsibility covers both the primary process and the various supportive processes (such as maintenance of buildings, having a car park and a canteen). In line with what has been discussed about Sustainable Chain Management, a producer must be fully aware of the environmental effects caused by any external productive activities that are necessary to make and market his products. They add to the environmental profile of the company’s products. In many cases it is effective to take a holistic approach to environmental problems by making changes such as reinventing processes, developing new kinds of relationships with business partners and even collaborating with competitors to achieve scale (Lee, 2011)

TEXT BOX 10 One of Nokia’s supply chains

http://www.nokia.com/corporate-responsibility/supply-chain/substance-management/originof-raw-materials (visited: 16 October 2011).

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4.3 Environmental audit To steer their environmental management in the right direction, many companies have employed environmental coordinators (also called environmental managers). Depending on the size of the company, this coordinating staff member has a management unit of his own. Frequently, companies combine the areas of quality, labour conditions and environment, having one coordinator (or manager) who takes care of them. Also, business controllers may have to deal with environmental management. They may be required to find out what the company’s environmental costs are, in terms of both the consequences of current environmental effects (such as filtering and waste disposal) and the prevention of them (investments in clean technology). Controllers may also participate in an environmental audit as part of a company’s environmental management (for instance, they can be charged with the verification of any information collected). The role of controllers and others in environmental management do not mean to underestimate the role of the environmental manager as he/she is to provide basic insights in the technical and processual aspects of environmental hazards and in ways these can be addressed (McLean, 2011). Environmental auditing is an instrument to support the effective execution of a company’s environmental management. There are different types of audits, depending on the type of business that is to be audited, the reason for the audit, and the depth and breadth of the audit. These audit types include: corporate audits (considering the entire company), site audits, compliance audits (to check that rules have been followed), risk audits, production audits (tracing materials and energy) and acquisition/divestitute audits (testing environmental liabilities). To summarise them, environmental auditing has three broad aims (see Ledgerwood et al., 1993): 1. Corporate development towards green missions (such as monitoring green policies and assessing relevant control systems) 2. Compliance with regulatory codes (such as legal conformity, review of mitigative and ameliorative programmes) 3. Assistance in acquisition and disposal valuations (sale or acquisition of a facility, valuation/ appraisal of property for insurance or loan security). Environmental audits can be part of a cyclical auditing programme. This form of audit could be a central product of an environmental unit. It may be conducted by specialists drawn from inside the company or from external consultants. There are also single audits for a special purpose, which are more likely to be conducted by outsiders.

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The environmental audit as a process can be divided into three parts: Part one: Observance of the company’s relevant environmental effects. Sources of information include external documents (e.g. statistics, sector reports), internal documents, and interviews with various levels of staff. The auditors take into account existing policies and the goals they entail, the organisational means to reach these goals, and the methods and procedures applied. Part two: Assessing the state of affairs by comparing the facts with previously-established environmental criteria and Part three: Reporting the findings.

4.4 Environmental Management Systems An environmental management system (in particular one that complies with ISO 14001) is established to support the control and improvement of a company’s environmental performance. Through such a system a company’s environmental effects will be monitored in a structural manner with special attention to two issues: • The company has to comply with existing environmental legislation and related regulations. This requires a meticulous appraisal of procedures and management of environmental risks. • The company is obliged to continually improve its environmental performance (continual improvement). Through the controls and improvements that an environmental management system promises to achieve, cost savings are likely to be possible because of less input per unit of production and prevention of fines. An environmental management system offers a coherent set of policy, organisational and administrative measures. There are eight elements that the system needs to incorporate: 1. 2. 3. 4. 5. 6. 7. 8.

An environmental policy statement (goals) An environmental programme Integration of environmental management into the total management structure Measurements and Registrations Internal Controls Internal information and training Internal and external reporting Auditing of the entire system

Why do companies need an environmental management system? An environmental management system ensures a structural monitoring of emissions, waste streams, used raw materials, energy and other environmental aspects. Because of that, a company’s environmental goals and the actual results can be made concrete and clear.

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Senior management can use this information to underpin its management decisions. This information is also relevant to a company’s different stakeholders including clients, governments, neighbours, financial institutions and NGOs while it can also be used to inspire internal departments to do a good job. Many companies are still quite passive when it comes to environmental policy. This may for instance - lead them to take measures that are just enough to keep their environmental permits and continue in business. Fortunately, in recent years more companies have become increasingly proactive, finding out that implementing an environmental management system can be instrumental in gaining competitive strength and improving relationships with external parties such as neighbours and government agents (see e.g. Gerritsen en Van den Berg, 2009). Having an environmental management system in place will strongly facilitate a company to meet government requirements by producing evidence that it complies with environmental regulations. It may even open up the possibility for a company to receive less stringent governmental checks to confirm that it stays within the limits of its environmental permits. The (less frequent) checks then can concentrate on the overall environmental performance, while how that was reached remains within the company’s own discretion. This means less bureaucracy and therefore the saving of time and expense. Certification Since 1996 the worldwide ISO 9000 family of quality management standards has been accompanied by the ISO 14000 family of environmental management standards. In 2004 ISO 14000 was adapted in order to fit with the ISO 9000 norms. ISO 14001 contains the basic requirements for an environmental management system. Furthermore, the ISO 14000 family consists of supportive means to allow an environmental management system to function well. ISO 14001 can be certified by a recognised external auditor. Besides ISO 14001, there is also the EU’s Eco Management and Audit Scheme (EMAS). The two systems resemble each other, although EMAS is more demanding and requires external reporting.

KEY NOTIONS AND CONCEPTS • Environmental management is part of a company’s efforts to safeguard its long-run competitive capabilities. • Environmental management is not just relevant to manufacturing companies but equally to service providers such as shops, accountancy firms, educational institutions and hospitals. • Life-Cycle Analysis (LCA) as a method to detect a product’s environmental effects throughout the chain.

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• Thanks to the concept of Integrated Chain Management (closing of material cycles), there have emerged practical ways to extend chains by means of using residual waste (rather than dumping or burning it), and the reuse and recycling of products. • Controllers may also participate in an environmental audit as part of a company’s environmental management (for instance, they can be charged with the verification of any information collected). • Environmental auditing is an instrument to support the effective execution of a company’s environmental management. • An environmental management system (in particular one that complies with ISO 14001) is established to support the control and improvement of a company’s environmental performance. • Having an environmental management system in place will strongly facilitate a company to meet government requirements by producing evidence that it complies with environmental regulations. • ISO 14001 contains the basic requirements for an environmental management system. Furthermore, the ISO 14000 family consists of supportive means to allow an environmental management system to function well.

STUDY QUESTIONS 1. Environmental management is not just relevant to manufacturing companies but equally to service providers such as shops, accountancy firms, educational institutions and hospitals. What kind of environmental issues are relevant to schools and hospitals? 2. The product column is to be adapted so as to reflect all forms of environmental effects; it is then called the product life cycle. Explain what is to be taken into account when transforming a product column into a product life cycle? 3. If you were asked to convince a company to adopt an environmental management system, how would you do that? Itemize your main arguments. 4. When do you think environmental audits should be best executed by outsiders (rather than by internal staff)?

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References Gerritsen, R. en O. van den Berg (2009), “KAM-management in de praktijk”, geheel herziene druk, Kluwer, Deventer. Lee, H.L. (2011), “Don’t tweak your supply chain – Rethink it end to end”; in: Harvard Business Review (2011), “Managing Supply Chains”, Harvard Business Review Press, Boston MA. Ledgerwood, G., E. Street and R. Therivel (1992), “The Environmental Audit and Business Strategy. A Total Quality Approach”, Pitman Publishing, London UK. Mantz.-Thijssen, E.L. en K.F. Van der Woerd (1991), “Milieuzorg in bedrijf”, in: C.W.A. Evers, E.L. Mantz-Thijssen en K.F. van der Woerd, “Milieumanagement in stappen”, Kluwer Bedrijfswetenschappen, Deventer. McLean, R. (2011), “Environmental leadership”, Environmental Quality Management (Winter 2011), 105-112.

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CHAPTER 5

The human factor in the sustainable company 5.1 Introduction This chapter discusses the social aspect of sustainable business insofar as it relates to a company’s internal organisation. Sustainable value creation asks for co-workers who are competent in terms of motivation, preparation and know-how. How does the work organisation that accommodates the sustainable enterprise does look like? This question cannot be easily answered. Therefore, to put on steam, this chapter takes a look into recent discussions on modern management and Human Resource Management.

5.2 Trust and reputation Sustainable business has been associated with new forms of enterprise which have been developing in recent times. This relates to new requirements that modern companies have to comply with (Lindgreen et al., 20097): • Knowledge is becoming more and more universal and generally accessible. Because of that, the asymmetry in information between employer and employee, as well as between supplier and client, seems to disappear: everyone has access to the same knowledge. For the enterprise the key is in recognising how existing knowledge can be used to solve problems. It is not knowledge alone but its application that will make the difference. Hierarchical power structures based on capital and/or position become less influential, while the ability to solve problems and add value by creating and enriching applicable knowledge becomes more influential. • There will be other forms of value creation which are more democratic in nature. Examples are open source, wikinomics and open innovation. These phenomena change the character of companies. More often than before they have to build their existence on those new ‘open’ realities. A central place in this is taken by the creation of value, the (ethical aspects of the) distribution of the created value and social responsibility. • Many markets have become more efficient and more intelligible because of Internet developments. At the same time citizens have become more assertive and influential. Companies have had to become more transparent to keep their credibility and continue to be trusted by their social environment. 7

Most of this section has been derived from this publication.

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• The credit crisis has seriously damaged public trust. In the long run, however, there will be new opportunities to build trust. After all, without mutual trust no transactions will take place. Various parties involved have the feeling that the lack of trust cannot be solely solved by additional laws and regulations. It requires new way of thinking and organising. • Many entrepreneurs and CEOs are experiencing the present social climate - that puts extra emphasis on abiding by the rules - as a serious impediment to entrepreneurship and creativity. Many a daring but exciting plan will be put aside as long as a fear of failing to comply with laws and rules is always the uppermost concern. • Enterprise and entrepreneurship go together with emotions; this is at odds with distant relationships. Trust within this context does not necessarily imply unconditional trust. There is a middle-ofthe road modality which may be called informed trust: trust that is justified by information. Therefore, trust is not a remedy for all crisis-related problems. There is a need for new forms of organisation which are geared at making use of informed trust while doing justice to new ways of working together and participation. If that is realised, the legislative and supervisory roles of the government can be limited because then there are other forms of direction and correction. This could also apply to relationships with other stakeholders such as shareholders, employees and NGOs, resulting in fewer issues being brought sub judice. Decentralised decision making The successful enterprise will give its employees ample opportunity to bear responsibility. There is, in fact, no alternative as the complexity of contemporary society rules out a central leadership that takes its decisions from the top. More than ever before, it is necessary to decentralise decision making, especially as nowadays lead times are short. This organisational form can only succeed when individual contributions to the company’s goals are based on a clear mission and shared values while being made transparent to all parties concerned. Under these conditions, the real task of top management consists of developing and maintaining the company’s long-term strategy in concertation with the entire organisation. Strategies will be informed and shaped by consumer and civic power as information symmetry is spreading. A number of companies will be subject to the steering force of a collective, which on the basis of that are able to command a degree of credibility and reliability that ensures their continuity. Wikinomics is an interesting case showing how an unorganised collective is steering and correcting. Then there are many amateur supervisors rather than one central supervisor. Reputation The value of a company’s reputation will increasingly become a crucial factor. In the past financial information took a dominant place in corporate reporting. A company that made a

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substantial profit was a good company. Nowadays quite different factors play a major role, such as social impact, societal involvement and integrity. These issues determine the reputation that a company needs to establish and maintain in order to gain the public’s confidence. A dip in one’s reputation is much more threatening to continuity than a dip in profits. This trend is likely to hold on in the wake of societal changes. Current monitoring instruments - with a focus on conventional annual reports and other forms of accountability that primarily deal with finances - have not yet been adapted to this situation. To change that, it is necessary to measure different things and use other forms of information. Non-financial information in various areas - such as environment, services to clients, complaints and ethics - have gained in importance when it comes to building up external confidence in a company. In essence shareholders will be interested in knowing one thing: how good is a particular company’s reputation? The answer to that question is the key to whether you can attract clients and good personnel. The concept of reputation is defined broadly as it also encompasses matters such as quality, reliability, innovation and leadership. It should also be realised that because of economic exchange between Western and Asian countries, reputation and trust may be subject to culturally determined variations. Business success ultimately depends on taking such changes into account.

5.3 Towards a sustainable work organisation An organisation (such as a company) has to adapt itself to a changing social environment. The Open System Approach, which emphasises the importance of this, considers an organisation (including its objectives and activities) as being connected with its social environment. In this, it is related to the Contingency Approach, which is known from areas such as management accounting (‘Different costs for different purposes’). To guarantee a company’s continuity, it is not enough to translate one’s vision of the future into a proper strategy. Besides having a strategy, it is also necessary to have a suitable work organisation. ‘Suitable’ means that it should lead to the adoption of desirable forms of behaviour. This can be accomplished if the work organisation becomes an accurate reflection of the principles that have been laid down in the company’s mission and vision. If sustainability is part of them, then that should become evident in the way the work is organised. In brief, the sustainable work organisation can be described as a responsible system which radiates respect for people and how they live. However, continuity is the organisation’s overarching interest. Where the interests of both organisation and its co-workers are sufficiently integrated, it follows that they will reinforce each other. Persistent Taylorism Despite lip service to the contrary, too often there are companies which continue to rely on Tayloristic organisational principles. This thwarts the development of a sustainable work

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organisation. These principles originate from the times when markets were far less complicated and turbulent than they are today. Then, there was still plenty of unskilled labour, while labour relations were often antagonistic. Under these circumstances it was assumed that intensive supervision and strict controls were necessary. Nowadays these old-fashioned principles are mostly seen as counter-productive and therefore undesirable. A major point is that these principles showed no respect for the co-workers’ capacities and qualities. After all, they were based on a separation between work preparation and execution, thinking and doing, as a result of which helplessness became a learnt habit. Procedures took the place of self-help and an ability to solve problems. Self-steering teams A work organisation capable of accommodating a complicated production process (including services) is likely to have the following features: • regulatory powers placed at the lowest possible organisational level • regulatory powers and the need to (be able to) regulate balance with each other • management’s point of departure is confidence in its co-workers • the organisation is process-oriented • organisational structure is based on existing interdependencies Self-steering teams are considered to be able to meet the above requirements. However, in practice, it often appears that after some time such teams turn back to the old principles and therefore cease to be autonomous. One of the reasons is a lack of balance between regulatory powers and the need to be able to regulate. Where teams have little authority to regulate what they are supposed to regulate, they cannot perform according to expectations. This scenario leads to the conclusion that self-steering teams need to comply with a number of conditions before they can support a sustainable work organisation. First of all, organisational design should be based on authentic thinking (authenticity is a concept that is central to sustainability), in two ways. A company’s leadership should believe sincerely in the concept of self-steering even if there are setbacks. It should also be willing to take a critical look at itself. Discussion of self-steering teams should not take place easily unless embedded in a proper theoretical framework. (See e.g. Prakken, 2000). A major aspect of autonomy (that self-steering teams should have) is ‘double-loop learning’. ‘Single-loop learning’ is learning how to apply given principles and norms in concrete assignments. Learning to contemplate the correctness, effectiveness or efficiency of these given principles and norms is ‘double-loop learning’. The latter is a way of thinking that is fundamental to creativity and innovation. This explains why sustainability is associated with authenticity and innovativeness.

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Given the limited success of self-steering teams, it makes sense to discuss the importance of the sustainable work organisation in other ways. One of them is Human Resource Management (HRM).

5.4 Human Resource Management (HRM) The period 1975 - 1985 is characterised by reorientations in different areas, one of them being personnel management. Human Resource Management (HRM) reflects that process of change. At different levels management is committed to unite people, information and technology; this results in an organisational design that defines the various tasks that have to be carried out. This design is to ensure that the organisation’s interests and goals match those of the employees. This balance determines whether the employees can use their qualities to the full while feeling involved with the company’s strategic goals. What makes HRM really modern? There are five points to demonstrate this: 1. Employees are not looked upon as mere cost items but also as a source to generate revenues. 2. Personnel management is based on clear personnel policies (including a long-term vision). 3. Personnel policies are directly derived from the company’s strategy as they are expected to contribute to the attainment of strategic goals. 4. Personnel management is first of all a responsibility of the line management. 5. The various methods, techniques and instruments available to the personnel management are integrated into a coherent set. HRM, therefore, can be defined as a form of personnel management which is explicitly linked with a company’s strategic policies with a view to utilising the human resources within the company in an optimal way. There is a hard version of HRM which emphasises the value that co-workers must have based on a cost-benefit analysis. There are also softer versions which put much more emphasis on the development of co-workers which eventually is beneficial to the organisation. Sustainable HRM According to De Lange and Koppens (2004)8 the HRM concept is still useful, albeit that sustainability should be added to it. Today’s Corporate Social Responsibility should be reflected in a company’s personnel management. The HRM concept opens up opportunities for sustainable management. Sustainable HRM is HRM which balances the interests of the employer, the employer and society.

8

Most of this section has been drived from this source.

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Major characteristics of sustainable personnel management are as follows: • A balance between employer interest and employee interests. For instance, services to customers or cost reductions should not be to the detriment of (respect for) one’s coworkers. • Mature labour relations. That means, there is equality between employer and employee, for instance, as to their inputs to decision-making processes. • Inclusiveness: all major aspects of personnel management need to be considered, based on a coherent vision. • Trust. A lack of trust is mostly behind failures to renew a company’s personnel policies. In organisations where there is a lack of trust, suspicion and manipulation have free play. Then subordinates are given hardly any space to operate according to their own ideas. Rights and duties are laid down in detail etc. • Involvement is part of trust. Lack of involvement leads to a lack of identity, which may cause distrust in one’s social environment. Competence Management Competence management can be used to shape sustainable HRM. It invites a company to invest in career development, make personal development plans and conduct work evaluation interviews. It has both a strategic dimension (improvement of competitive strength) and a development dimension (learning and developing processes). It helps to make HRM concrete and combine the hard and soft features of HRM. Competence are to be seen as organisational features. They represent unique combinations of knowledge, skills, structures, technologies, culture and processes which make it possible to realise competitive advantage. At the individual co-worker level it is about knowledge, skills, motivation, values and norms, and personal characteristics. Key competences are competences which all co-workers are supposed to have. Moreover, particular competencies may belong to certain functions or groups of co-workers. Where co-workers appear to lack certain competences, a special development plan can be defined so as to close the gap in a reasonable period of time. Such a plan can also apply to an entire team. A company which has adopted sustainability can be expected to regard competencies in the area of sustainability as key competences. This is matter of credibility. However, it still is a rare practice.

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How can competence management serve the purpose of sustainability? Competence management has a number of features which makes it consonant with sustainability: 1. It brings with it a clear awareness what happens in the social environment so that external developments such as a call for sustainability become a factor in developing the work organisation. This creates the needed flexibility as competences are seen as changeable. 2. Line managers are directly responsible for personnel policies. However, the co-workers are actively involved in defining their own development goals and become co-responsible for their own employability. HRM staff have a supporting role only. 3. Managers, teams and individual co-workers are held accountable for results and developments achieved. Within this framework, sustainability goals can be included. There is a clear place for moral considerations. 4. The concept of balance fits well with sustainability. There is a need for a balance between economic, social and ecological aspects of running a company. Areas of greatest contribution According to Wittenberg et al. (2007), basing themselves on nine best-in-class companies, the greatest contributions by the HR function to sustainability effectiveness were seen in: leadership development, training and development, diversity/multiculturalism, and ethics and governance. Significant contributions in areas of effectiveness also were seen across many of the companies in talent management and workforce engagement. The foundation of these contributions contained deeply held corporate values consistent with sustainability, top management’s visible support for sustainability and its placement as central to overall corporate strategy.

5.5 The New Way of Working Modern ways of thinking about how business should develop have not only lead to talks about new ways of management but also about the ‘New Way of Working (NWW)’. The question is whether the latter concept is capable of contributing to the sustainable work organisation. It can be described as a special combination of new management capabilities (Dynamic Management), innovative principles of organisation (Flexible Organising) and forms of smart work to enhance a company’s productivity and competitive strength. In brief, the NWW is a package of principles to make work more effective, efficient, more interesting and enjoyable. Concrete phenomena which are often associated with the NWW are inter alia flexible work, work at home, less middle management, outsourcing and concentration on what you can do best, application of smart technology such as work from a distance supported by video conferencing, online collaboration, social networks via Internet and working with

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TEXT BOX 11 Sustainable HRM gives you energy Sustainability and social responsibility have started to penetrate all segments of society. It also has an impact on HRM. To strike a balance between People, Planet and Profit, sustainable HRM is a must. Who does not know the feeling at a long day’s night of being extinguished, having no energy to cook, to sport or read a book. You watch TV until it is bedtime; after all you have to wake up early to go to your work fresh and good humoured. Slowly but surely you get the feeling that you put more energy into your work than you get out of it. You cannot go on with this for long. Stress and burnout among co -workers, therefore, are known phenomena in most organisations. Now is the time to deal with human capital carefully, striking a balance between the energy that people put in their work and the energy that they derive from it. Such an environment requires natural working conditions, a sound economic climate, that is one that complies with the triple bottomline People, Planet, Profit.

According to Maslow every human being is aiming for the highest, that is self-realisation. That means that people by their own nature are constantly searching for new challenges to satisfy that need. This gives energy and meaning to their lives. New challenges are found in sports, making music and one’s work. If co-workers are denied opportunities to realise themselves in their work, they may be affected by discontent, fatigue and stress leading to loss of energy, reduced productivity and finally to illness. Sustainable HRM will prevent this by investing in people and offering them new challenges. It is based on an awareness of the qualities that the co-workers have, because there lie the possibilities for personal development and self-realisation. Applying that part of yourself that you can do naturally well, will not require much energy. Moreover, being challenged to accomplish something special, for instance, implementing a sustainability promoting innovation will render energy. In this way, a new balance will come into being between what a co-worker gives and receives. The company benefits from the co-worker’s enhanced productivity and the newly created innovations making for competitive advantages. (Source: M. Devilee, Zwolle).

open standards. It is about a new style of employment that reduces workplace costs for the employer and enhances work satisfaction for the employee (see also Bijl, 2011). The NWW fits well with the nature of a sustainable work organisation, especially in terms of decentralised tasks and responsibilities, the building up of trustful relationships, appreciation for people because of their knowledge and commitment and not per se because of their hierarchical position. Connecting the NWW with innovation is of importance here. The NWW and innovation can be helpful in making sustainability come true. The NWW and innovation will not automatically lead to sustainability. It is a matter of a purposeful policy to achieve that.

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5.6 A new labour ethos Labour relations in the fifties and sixties were heavily based on long-term labour contracts. Because of such long-standing relationships, employees often felt an emotional bond with their company. Since the seventies labour relations have become more calculated and aloof as a result of all kinds of efficiency drives, closures and relocations. There was also a market for companies themselves for reasons of broadening (conglomerates) and contraction (focus on core competences) as well as for short-term profits via buying, splitting up and reselling of companies (hedge funds, free-roaming capitalists). In the course of time the number of very large companies have diminished while the number of strategic groups and networks have increased. This situation complicates communication processes and internal entrepreneurship. This development explains for the fact that decentralised decision-making has increased, requiring a climate of trust, shared values, and mutual respect for the reputations and interests involved. The new flexible forms of organisation tend to blur the internal and external boundaries of responsibilities and specific organisational culture. This makes loyalty towards a particular company (inclusive of a readiness to be positively critical and alert for the sake of the organisation’s success) less selfevident. The work ethos under the employed younger generations has been developing likewise. Nijhof and Wesseling (2010) distinguish two types of work ethos which seem to represent the modern feeling of life: a. the transaction-based work ethos and b. the profession-based work ethos. The transaction-based work ethos considers a labour relation as a (short-lived) economic exchange relationship which is totally determined by the actual situation. This goes together with a policy of bonuses and settlement based on results. Fierce international competition in a globalised economy seems to encourage such an ethos. The profession-based work ethos is linked with a professional identity and a concomitant ability to deliver at a high level. Loyalty here is not so much a matter of feeling part of a particular organisation (with its own objectives and culture) as it is a matter of identifying with own professional networks as well as behavioural and ethical odes. From an integrity point of view, the one perspective is not superior to the other. However, when designing and executing an integrity policy (to ensure that co-workers comply with certain values and norms), it is necessary to take these differences into account. From a sustainability point of view, the short-termism that seems to be inherent in the transactionbased work ethos is somewhat worrying. The credit (2008-2009) crisis has led to a serious criticism of this phenomenon, especially when short-termism takes anti-societal dimensions. As a result of on-going urbanisation and globalisation, integrity will increasingly be a matter of personal civilisation and conviction. The latter will be strongly determined by upbringing

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and education as it is through them that basic values are passed on as elements of one’s identity. It is obvious that civic society has a role to fulfil in translating existing cultural values into a modern appeal to take the long-term interests (survival and distributional equity) of mankind seriously. Research has shown that in general employees highly value working for an organisation that has more to offer than short-term financial gain. Social coherence and contributing to the solution of societal problems are prominent among them. From this point of view, the two types of work ethic need to be supplemented by the work ethic of the many workers who may not be in the strategic frontlines of the companies they work for but by their presence and self-conscientiousness can make a difference in terms of sustainable value creation.

5.7 Occupational health Sustainable HRM may involve all kinds of issues that are taken into account. However, a decent health & safety policy is an indispensable part of all thinkable HRM strategies. There are various ILO conventions that stipulate what interests are at stake and what should be done to protect the workers’ health and guarantee a fair degree of safety. National health and safety laws back this up and provide detailed rules which have to be followed by all companies. Major elements of a health & safety policy can be summarised as follows: • Employers are to assess the health & safety risks inherent in the company’s operations. Based on that, the company has to develop a plan according to which health and safety risks are dealt with and measures are planned in case of an emergency. • There should be a policy in place to minimise workplace absenteeism. A medical officer should be available to advice workers who are absent because of health problems. Health problems caused by the work itself or by the work environment have to be subject to concrete policies to prevent them. Part of such policies are special prevention advisers on the shop floor and the possibility of medical check-ups in particular to discover whether health problems are created by working conditions. • In all companies there should be available an in-house emergency and first-aid service.

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KEY NOTIONS AND CONCEPTS • Sustainable business has been associated with new forms of enterprise which have been developing in recent times . • There is a need for new forms of organisation which are geared at making use of informed trust while doing justice to new ways of working together and participation. • The successful enterprise will give its employees ample opportunity to bear responsibility. There is, in fact, no alternative as the complexity of contemporary society rules out a central leadership that takes its decisions from the top. • A company’s reputation will increasingly become a crucial factor. • A suitable work organisation leads to the adoption of desirable forms of behaviour. If sustainability is part of a company’s vision and mission, then that should become evident in the way the work is organised. • A work organisation capable of accommodating a complicated production process needs to be based on decentralised decision-making while being process-oriented. • Learning to contemplate the correctness, effectiveness or efficiency of given principles and norms is ‘double-loop learning’. The latter is a way of thinking that is fundamental to creativity and innovation. This explains why sustainability is associated with authenticity and innovativeness. • HRM can be defined as a form of personnel management which is explicitly linked with a company’s strategic policies with a view to utilising the human resources within the company in an optimal way. • The HRM concept opens up opportunities for sustainable management. Sustainable HRM is HRM which balances the interests of the employer, the employer and society. • From a sustainability point of view, the short-termism that seems to be inherent in the transaction-based work ethos is somewhat worrying. • Sustainable HRM may involve all kinds of issues that are taken into account. However, a decent health & safety policy is an indispensable part of all thinkable HRM strategies.

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STUDY QUESTIONS 1. Explain what is meant by ‘informed trust’. 2. Why are self-steering teams seen as fitting well with ‘the sustainable work organisation’? 3. The chapter states that a dip in a company’s reputation can be worse than a financial dip. Do you agree with this statement? Explain. 4. What are Tayloristic organisation principles? And why are they considered to be counterproductive in today’s economy? 5. Explain the importance of ‘double loop’ learning in a sustainable work organisation.

References Bijl, D.W. (2011), “The New Way of Working - creating sustainable performance and joy at work”, ParCC, Zeewolde (NL). De Lange, W. en J. Koppens (2004), “De duurzame arbeidsorganisatie. Een geloofwaardig gevolg op maatschappelijk verantwoord ondernemen”, Netwerk Pers, Zwolle. Lindgreen, E., J. Strikwerda en N. Wielaard (2009), “Het Nieuwe Ondernemen”, Stichting Maatschappij en Onderneming (SMO), Den Haag. Nijhof, A. en H. Wesseling (2010), “Human Resources in ethisch perspectief”, Van Gorcum, Assen. Prakken, B. (2000), "Information, Organisation and Information Systems Design. An integrated Approach to Information Problems". Kluwer Academic Publishers, Dordrecht (NL). Wittenberg, J., J. Harmon, W.G. Russell, Fairfield, K. D. (2007), “HR’s Role in Building a Sustainable Enterprise: Insights From Some of the World’s Best Companies”, Human Resource Planning, 30 (1)

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CHAPTER 6

Corporate Governance and CSR as vehicles of corporate sustainability 6.1 Corporate governance Looking after a company’s economic, social and ecological interests requires proper corporate management. The latter is implied when we refer to the concept and practice of corporate governance. In essence, corporate governance is a matter of administering a company within the confines of the law and generally acceptable ethical principles. It is a company’s leadership that is accountable for this while it should also be keen to render account of it. A company’s stakeholders can be confident that their interests are in good hands only if the company is transparent and trustful. Corporate governance can be regarded as a part of a company’s business and society relations. It belongs to the range of issues concerning corporate power, legitimacy and responsibility (see e.g. Pettigrew, 2009). Corporate governance can be evaluated from different angles (Pruijm, 2010, chapter 2). From al business-administrative point of view, there is a need for good management based on wellthought-of strategies, motivating leadership and effective management systems. Economically speaking, the company is to create economic value which can justify its existence. Corporate sustainability implies that value creation has to be sustainable in accordance with the three P’s (People, Planet and Profit). Failure to achieve this may cast a slur on a company’s corporate governance. From a juridical point of view, a company’s board is responsible for what happens in a company; it represents the company as a legal identity. Historically, the interests of shareholders took priority, but nowadays there is a broad consensus on a company’s responsibility for the interests of other stakeholders as well. Good governance is to some degree a matter of having effective management control (with controllers and CFO’s playing a major role).

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Pruijm (2010) is in line with the broader conception of governance as formulated by Strikwerda (2002): 1. There is a systematic planning by means of a strategic plan and subsequent budgets. 2. There is a logical organisational structure, that is to say, the total task of a company is divided fully and unmistakably over departments which have to make achievements which are measurable and open to evaluation. 3. Department heads have been assigned clear tasks which are systematic, normative and measurable. 4. There are conditions set for self-steering (e.g. by way of management information), so that departments and individuals are able to establish whether they have performed satisfactorily or not and, when needed, to improve their processes. 5. There are values and norms defined and communicated (the company’s mission, and norms regarding goals and boundaries). 6. There is communication (which is partly systematic and partly free) to discuss goals, their attainment and possible (causes of) deviations. 7. There is a systematic evaluation, that is, an evaluation of achievements in light of objectives, principles and external developments (including alignment with how co-workers are assessed and paid). 8. In line with this, there are corrective action plans. Business continuity Within this framework it is appropriate to also pay attention to business continuity as a factor in defining rules for corporate governance. For a long time business continuity was most of all part of a company’s safety procedures as well as ICT policies. It was highlighted by means of company-level rescue aid programmes and safety plans. Emphasis was given to what needed to be done, for instance, in the case of a fire outbreak. Because of increasing regulations, more weight was given to liability issues and a growing number of (safeguard) inspections, business continuity is now strongly focused on uninsurable risks; therefore, business continuity tends to be converted into a financial problem and a control problem. A company’s Business Continuity Plan is to focus on minimalizing a calamity’s consequential damage. This in particular refers to critical business processes which as a result of a calamity come to a standstill; for instance, when essential services to clients cannot be continued (ZBC.nu, 2010). In various countries special Corporate Governance codes have been developed as instruments to prevent crises in the area of Corporate Governance . At the same time, however, the new rules create new forms of non-compliance; in fact, these represent new risks which are at least as real as the possibility of a fire outbreak. To prevent a lack of adequate policies, senior management needs to avail itself of action plans to address the ‘new’ calamities.

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The business environment has to be monitored on a continual basis, while there is a case for integrating management of the business environment and risk management. The board of directors bears the final responsibility for the entire organisation, also when most tasks are delegated to staff members. Therefore, there emerges a serious control issue, which is a primary concern for the true controller (rather than bookkeepers or agile managers) (ZBC.nu, 2010). Software and sustainability Corporate governance also requires considerable attention to be given to the application of software which is used to administer a company. Of course, software can never replace the human factor when it comes to warranting responsible ways of conducting a business, the control of risks and the implementation of best practices. However, software can be of considerable help in achieving them. In particular, software can contribute to (CFO Magazine, January-February, 2010) involving all layers of the organisation in formulating company strategies (including objectives) and in linking initiatives and projects to existing strategies. Moreover, software can be helpful in composing and operationalizing key performance indicators in order to show whether objectives are being met. Part of this is the perception of changes in the business environment which could change the company’s risk profile. Where sustainability objectives are part of corporate strategy, the implementation of sustainability is also promoted by general management-support software. Besides ERP systems geared at integrated solutions, there is special software support in areas such as energy consumption, management of waste and logistics. There is also software support which deals with a coherent policy and practice in the area of quality, labour and environment.

TEXT BOX 12 Legislation and certainty In October 2010 Apple in the United States resigned from the Chamber of Commerce, because the company could no longer agree with this organisation’s resistance against legislation to reduce greenhouse gases. Apple is not the only company which takes this point of view, but it is one of the large prominent corporations which do this. This development

can be explained by the fact that an increasing number of companies become aware of the importance of worldwide sustainability strategies. Many of these companies also advocate a clear policy and legislation framework in the environmental field. Its absence makes the future more uncertain than it already is which is not attractive to investors. (source: Financieel Magazine, 2010)

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Sustainability and finance Often, risk management at a strategic level continues to suffer from a gap between those thinking about investing in sustainability and financial specialists. In many sectors, sustainability creates new perspectives, which could imply drastic change in competitive relationships. It is, of course, crucial that companies take this into account. The situation may be complicated by the fact that such new perspectives are difficult to be translated into the financial indicators which financial specialists are used to work with. It is, however, the CFO’s responsibility to bridge the gap so as to prevent arrears in crucial strategic investments. One and two tier models In most European countries like the Netherlands and Germany corporations have a two-tier board. For example, the German Corporate Governance Code mandate companies to have two boards: the management board (executive board) and the supervisory board. The main task of the supervisory board is to supervise, to appoint, and to dismiss members of the management board, provide advice to the management board and to monitor them (Jungmann, 2006). Traditionally, corporate governance is strongly focused on a separation between the company’s capital providers and those who lead the company. The capital providers (shareholders, banks, private lenders etc.) cannot be certain without any verification that those in charge of leading the company (the executive directors) give sufficient priority to their interests. Therefore, governance is meant to render that certainty. The shareholders appoint the members of the supervisory board, who on their turn exercise authority over the executive board. Unlike most countries in Europe, the United Kingdom has a one-tier board system. In the one-tier board model, both management and control belong to the board of directors (Hopt and Leyens, 2004; Jungmann, 2006). This board of directors is comprised of executive directors, who are employed as managers by the corporation, and non-executive directors, who are not involved in the daily activities and business affairs of the corporation. All directors have the same powers, and in principle have the same duties to the company; they are normally elected by the shareholders. In practice, it is senior managers who execute these tasks; they need not be board members. Non-executive directors should not be involved in the day-today management of the company (Jungmann, 2006). The distinction in tasks between the executives and the non-executives can be compared to the distinction in tasks between the management board and the supervisory board in the two-tier board system. Also, the US has a one-tier board system. A “board of directors” is associated with companies organized as corporations, while partnerships and sole proprietorships (as legal identities) do not have boards. The board’s duties are defined by the corporate charter which, in turn, is structured by state and/or federal law. Corporate boards have members, usually called “directors”, who are elected by the stockholders. The board typically hires a CEO, president, and other officers to run the day-to-day operations of the company, subject to the board’s supervision.

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TEXT BOX 13 Bookkeeping scandals and stricter regulations The bookkeeping scandals that took place at the beginning of this century clearly demonstrate that the existing corporate governance structures are not always successful in ensuring ‘good government’. Well-known example is ENRON (and in its wake accountancy firm Andersen) which by manipulating its accounts contrived to make up large profits, on the basis of which the management received huge

bonuses. Victims were large numbers of investors, who saw the value of their security documents dwindle while large numbers of employees witnessed the evaporation of their work and pension rights. The situation was characterised by strong pressures on staff to realise short-term profits, efforts to tie up supervising directors and external accountants by financial rewards and to persuade politicians to deregulate the energy sector and allow selfregulation of the accountancy sector (see e.g. Smith and Quirk, 2009, Chapter 10).

Previous bookkeeping scandals (see Text box 13) have caused stricter regulations regarding bookkeeping and audits by external accountants. In the US this led to the Sarbanes-Oxley Law (SOX) of 2002. This law forces senior management to bear greater responsibilities for the provision of reliable figures (the CEO and CFO in person are held responsible for a truthful reporting) while fraud has become subject to heavy punishment. The law makes strict requirements as to the independence of external accountants as well as the independence and knowledgeability of a company’s supervisory directors. Stakeholders The company has to do with all kinds of parties who are capable of influencing it and vice versa. These are called the company’s stakeholders. To them belong the traditional stakeholders (i.e. the capital providers), employees and their organisations, customers and the suppliers of goods and services. Also, the government is one the stakeholders, as it has a clear (and possibly decisive) influence on a company’s performance via taxation, subsidies, licences and inspection. Besides these primary stakeholders (who have by definition a transactional relationship with the company), there may also be other stakeholders who interfere with the company’s course of action, such as various interest groups NGOs and the media. A company should take account of these social stakeholders and communicate with them. Taken together, there are close ties between corporate governance and - what is called - stakeholder management.

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6.2 Stakeholder management The instability and complexity of today’s economy makes it difficult for a company to find a suitable course of action. That is why it is important to involve the company’s stakeholders in its development. After all, they share the same business environment and have an interest in what the company undertakes. Stakeholder management in steps Stakeholder management is building relations with one’s stakeholders in a sensible way and communicating with them as effectively as possible. Although it is of interest not to be restrictive when identifying one’s stakeholders, the available means should be used as effectively as possible; this implies setting priorities. The following steps can be followed in this (see also Preble, 2005): A. Identification of stakeholders and setting priorities B. Identification of areas for attention C. Communication with selected stakeholders D. Monitoring and control. Ad A. Identification of stakeholders and setting priorities It cannot be avoided to determine which stakeholders deserve priority in terms of time and attention. Mitchell et al. (1997) provide three criteria to discern stakeholders: 1. The stakeholder’s power to influence the company 2. The legitimacy of the stakeholder’s desiderata and requirements in terms of correctness, legal and moral acceptability, and fairness 3. The urgency of what the stakeholder wants to achieve: how crucial is it; is short-term action really needed? On the basis of these three features it is possible to distinguish different types of stakeholders. Latent stakeholders are characterised by just one of the three features and therefore are not very relevant, at least for the time being. Changes may occur; for instance, a stakeholder who has a legitimate claim but is without power may at a certain moment gain power by starting a court case or by obtaining public support through the media. Moreover, if there is a threat of a boycott, then the case becomes urgent. There are instances of such dramatic incidences which have led companies to broaden and intensify their stakeholder management (such as in the case of Nike and Shell).

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Ad B. Identification of areas for attention Stakeholders may sometimes be identified for negative reasons, that is, they could in one way or another cause inconvenience to the company. Some stakeholders can be of great importance to implementing a company’s strategy, for instance in the field of innovation and distribution. Then it is crucial to win such stakeholders over to one’s side and reach agreement on working together. It will depend on the negotiation process whether certain inconsistencies in interests can be overcome so that there will be sufficient cohesion to be successful. Ad C. Communication with selected stakeholders After identifying, analysing and prioritising stakeholders, there is a need for making concrete plans as to how sustainability goals can be attained. This implies exchanging relevant information and deciding on the budgets needed. It should be agreed in advance how costs and benefits will be shared. Ad D. Monitoring and control The newly developed stakeholder relations have to be maintained. Based on previously arranged procedures, measurement of results and adequate reporting, both internally and externally, monitoring and control can play a part in keeping up effective collaboration with stakeholders. In fact, this complies with the well-known management cycle based on the plan-do-check-act model. Coherence A company’s stakeholder management is responsible for creating coherence between the various activities involving stakeholders. For instance, CSR activities which target society have to be consistent with the company is communication with shareholders, co-workers and customers. It may also be considered to involve various stakeholders in the company’s strategic planning cycle (see also Goodijk, 2009). Undeniable corporate responsibility Both internal and external stakeholders can - and should - have a say in a company’s CSR policies. However, senior management cannot hide behind the opinions of others. For instance the latter have to be evaluated in the light of the actual environmental impacts and health effects insofar as these can be objectively ascertained (taking into account ranges of probability). Besides immediate harmful effects, within this context, again we touch upon the essence of sustainability, that is, the interests of future generations. If current stakeholders exhibit a lack of knowledge or interest as to future generations, the company must not be led astray by them. In such a situation the company’s own responsibility for a sustainable future is at issue. Without taking that responsibility, sustainable value creation is not possible.

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6.3 The CSR process A company’s corporate governance and stakeholder management can be seen as the main components of implementing Corporate Social Responsibility (CSR). It should be kept in mind that CSR consists of various often heterogeneous parts. In many cases, before naming it in terms of corporate governance or CSR, companies have already implemented policies (albeit partial and incomplete) in the various areas of the three P’s (such as an environmental policy, a code of conduct telling how to communicate with customers and suppliers and a coherent HRM policy). These policies are often supported by available governance rules, explicit administrative frameworks, management systems and stakeholder involvement. One may wonder what else should be done to shape a company’s CSR. The answer lies in the need for a coherent and explicit CSR policy and rendering account of it. As long as these are absent, one is dependent on a rather long story about the various aspects of CSR that have already been given thought, when asked the question: does your company have an explicit CSR policy? When there is a coherent and explicit CSR policy in place, that question can be answered by a simple yes. ISO 26000 In the year 2010 “The Guidance on Social Responsibility” (ISO 26000) was issued. ISO 26000:2010 provides guidance to all types of organisations, regardless of their size or location, on: • concepts, terms and definitions related to social responsibility; • the background, trends and characteristics of social responsibility; • principles and practices relating to social responsibility; • the core subjects and issues of social responsibility; • integrating, implementing and promoting socially responsible behaviour throughout the organisation and, through its policies and practices, within its sphere of influence; • identifying and engaging with stakeholders; and • communicating commitments, performance and other information related to social esponsibility. ISO 26000 provides clarity on both the content and the process of CSR. It distinguishes seven general principles of social responsibility which are applied to seven core subjects (which are worked out into CSR issues). The seven general principles are: accountability, transparency, ethical behaviour, respect for stakeholder interests, respect for the rule of law, respect for international norms of behaviour and respect for human rights. Moreover, ISO 26000 holds more specific principles, such as environmental principles. However, it is likely that for the individual company not all CSR issues are equally important. There are certain priorities based on relevance and urgency. Nevertheless, one should not be inclined to quickly drop an issue. A first step is identifying all issues that could be relevant

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to your company; at this stage, each issue deserves to be looked into. During this screening process, one has to involve the company’s stakeholders. After that, you can set priorities: What are the CSR issues which cannot be missed in your company’s CSR policies? This initial audit is a sort of impact analysis by which one investigates which social and ecological effects are inherent in the company’s operations (relevance), which stakeholders (also in the supply chains) are affected by them (significance) and what the company can do to influence them (sphere of influence) (Moratis & Cochius, 2010).

6.4 Sustainability reporting Communication with the various stakeholders is an essential part of CSR. Many companies already have separate environmental and/or social reports. Depending on the size and nature of a company, there exist mandatory forms of sustainability reporting. There may be long-term targets on emission reductions agreed between companies and the governments. Part of such agreements is reporting on whether these targets are being attained. Companies which have adopted annual sustainability reporting could consider using it to flag the quality of their operations. Through this they can distinguish themselves in the market. Sustainability reporting is helpful in complying with increasing external pressures on companies to be transparent as to how they operate and realise sustainability. Sustainability reporting may also contribute to strengthening the management internally, so that risks can be better controlled and financial performance improved. A variety of stakeholder groups can be expected to be interested in sustainability reports. For instance, people living close to a plant will take an interest in the health and safety aspects of emissions; consumers may be interested in product safety and ethical issues; investors are likely to focus on a company’s environmental and social reputation along with indicators that reflect a its financial strength. The actual accomplishment of sustainability reporting requires a careful preparation and planning. In a company of some size it needs the cooperation of a broad group of employees. Also, the various stakeholders have to be consulted in order to know what kind of information (which indicators) they are interested in. The actual sustainability reports can be published in different ways: as a printed report, a digital report or a combination of them. There are different forms of follow-up, such as interactive communication on the website (such as questions and answers). In certain cases a companyc can organise special meetings with external groups in which the reporting (or certain chapters) can be discussed and commented on.

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A systematic and efficient sustainability reports needs to be directly connected with a company’s information systems. This belongs to the responsibility of the CFO (Ernst & Young Magazine-2-2010). Companies leading in sustainability reporting (such as Philips and Akzo Nobel) already issue reports which go both into finances and sustainability in an integrated manner. It can be expected that this development will continue with stricter verification standards. At the moment no strict rules exist as to the way sustainability reports, environmental reports or CSR reports have to be produced.

TEXT BOX 14 The Dutch Code Corporate Governance Companies whose shares are traded publicly are obliged to report on their CSR policies. This is the result of the adapted Code Corporate Governance of the Frijns Commission in the Netherlands. Moreover, the Dutch Council for

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Annual Reporting has issued Guideline 400, which is a guideline on corporate social reporting. Guideline 400 is based on the internationally recognized Global Reporting Initiative (GRI).

KEY NOTIONS AND CONCEPTS • In essence, corporate governance is a matter of administering a company within the confines of the law and generally acceptable ethical principles. • It is appropriate to also pay attention to business continuity as a factor in defining rules for corporate governance. • Business continuity tends to be converted (from safety regulations) into a financial problem and a control problem. • In various countries special Corporate Governance codes have been developed as instruments to prevent crises in the area of Corporate Governance. In the US the Sarbanes– Oxley Act of 2002 is law prescribing strict rules in the area of reporting and decision making. • Corporate governance also requires considerable attention to be given to the application of software which is used to administer a company. • Where sustainability objectives are part of corporate strategy, the implementation of sustainability is also promoted by general management-support software. • In many sectors, sustainability creates new perspectives, which could imply drastic change in competitive relationships. • Traditionally, corporate governance is strongly focused on a separation between the company’s capital providers and those who lead the company. • Unlike most countries in Europe, the United Kingdom has a one-tier board. In the one-tier board model, both management and control belong to the board of directors. • Also, the US has a one-tier board system. A “board of directors” is associated with companies organized as corporations, while partnerships and sole proprietorships (as legal identities) do not have boards. • Over the last few decades corporate governance is conceptualised much broader than before. The company has to do with all kinds of parties (stakeholders) who are capable of influencing it and vice versa.

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STUDY QUESTIONS 1. How would you describe the meaning of corporate governance from an businessadministrative, an economic and a juridical point of view? 2. Discuss the evolution in the concept of business continuity. 3. Indicate in what way software could support corporate sustainability. 4. Why would the CFO be the right person to bridge the possible gap between finance and sustainability in a company? 5. Why do you think stakeholder management is linked with corporate governance?

References Goodijk, R. (2209), “Ondernemen in interactie met de omgeving. Het belang van stakeholdermanagement”; in: L. Moratis en M. van der Veen (2009), “Basisboek MVO”, Van Gorcum, Assen. Chapter 3. Jungmann, C. (2006), “The effectiveness of corporate governance in one-tier and two-tier board systems - evidence from the UK and Germany”, European Company and Financial Law Review, 2006, 426-474. Mitchell, R.K., B.R. Agle and D.J. Wood (1997), “Towards a Theory of stakeholder identification and salience: Defining the principle of who and what really counts”; Academy of Management Review 22; 853-886. Moratis, L. en T. Cochius (2010), “ISO 26000. Handleiding voor MVO”, Van Gorcum, Assen. Park, C., R. Whittier and M. McElroy (2010) “Sustainability: developing key performance indicators. Measuring sustainability is the bottom line”, Insights series, www.deloitte.com. Pettigrew, A.M. (2009), “Corporate Responsibility in Strategy”; in: N.C. Smith and G. Lenssen (Editors), “Mainstreaming Corporate Responsibility”, Wiley, Chicester UK. Chapter 3. Preble, J.F. (2005), “Towards a Comprehensive Model of Stakeholder Management”, Business and Society Review, 110, 407-431. Pruijm, R.A.M. (2010), “Grondslagen van Corporate Governance. Leidraad voor behoorlijk ondernemingsbestuur”, eerste druk, Noordhoff Uitgevers, Groningen/Houten.

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Smith, N.C. and M. Quirk (2009), “From Grace to Disgrace: The Rise and Fall of Arthur Andersen”; in N.C. Smith and G. Lenssen (Editors), “ Mainstreaming Corporate Responsibility”, Wiley, Chicester UK. Chapter 10. Strikwerda, J. (2002), “Wat is ondernemersbestuur? Aanzet voor een toetsingskader”, Maandblad voor Accountancy en Bedrijfshuishoudkunde, januari/februari 2002, 54-64.

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CHAPTER 7

Environmental accounting 7.1 Three domains of running a business From an accounting point of view, three different corporate domains can be distinguished: the internal organisation, the supply chains and the immediate social context (government, consumers, and civil society). These domains should be considered on the basis of the three elements (the three P’s) of sustainable business: People, Planet and Profit. This chapter goes into the Planet aspects, that is to say, the ecological environment (also indicated as ‘environment’ and ‘environmental’). The three domains are reflected in the following matrix (see Table 7.1).

Table 7.1 Three domains of an environmentally conscious management (Bennett & James, 1998)

Financial focus Non-financial focus

Own organisation Green financial management Recording of materials used and energy consumption

Supply chains

Society

Chain-oriented cost analyses Analyses of material cycles and energy consumption in the supply chains

Costs of external effects Calculation of environmental impact, both priced and non-priced.

The three domains can be helpful in indicating a company’s achievements (or lack of progress) as to the extent it has made use of possibilities of greening its business. A company’s own organisation (the first domain) will understandably be given priority if its short-term survival is at stake. However, in the long run a company’s continuity cannot be secured without considering its supply chains and its societal context. To a great extent, a company’s supply chains determine the use of nature in terms of raw materials, equipment, logistics and the kind of technology applied. Supply chains offer all kinds of opportunities to economize and deploy alternative materials and energy. Society (the third column in Table 2) is important when it comes to setting priorities in the light of current governmental policies and societal pressures. It should be kept in mind that a company’s supply chain manager and senior management have to consider a variety of societal contexts, given the fact that chains often to cross borders.

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The society column can be based on two different types of environmental goals (Van Bergen and Strikwerda, 2003): 1. Environmental goals pertaining to external effects (externalities) which can be taken into account by assessing their (possible) impact on investment plans and company value (for instance, licences, fines, legal liabilities and reputational harm). 2. Environmental goals deriving from moral conceptions about responsible stewardship which go beyond narrow boundaries and time horizons. As to the first type of environmental goals, senior management has to indicate how externalities should be dealt with, in particular when they could lead to financial claims by third parties. Some companies may take a defensive stance by involving legal advisers and lobbyists. Other companies are more sympathetic towards such claims, even if their legal basis is still unclear. Policies in this area can be seen as belonging to the regular decisions which senior managers take to maximize the company’s long-term value. The second type of environmental goals - which are inspired by moral considerations - may lead to a conflict with the shareholders. After all, environmental goals which are not treated as economic matters per se can be interpreted by shareholders as a kind of ‘on-the-job consumption’, which by its nature reduces the company’s value. However, according to the international conception of corporate governance (as formulated by the American Law Institute), in certain situations a corporate board is entitled to spend money on societal and humanitarian goals (Bradley et al., 2000) even if that spending seems incompatible with profit maximization. A corporate board is not only allowed to take measures aimed at preventing or neutralising negative effects of certain company operations (as the board deems appropriate, even if it is not possible to attach an economic value to these measures), it can also take further steps (as long as there is a company interest involved). The latter measures cannot be part of normal investment decisions; they have to be expressed in terms of special criteria, projects and capital budgets. How much can be spent on this is a matter of subjective judgement. Obtaining the green light for such projects (which cannot be based on economic or legal necessity) from the Supervisory Board or the Shareholders’ Meeting may be hard to realise. It will depend on the management’s persuasiveness combined with the views and verdict criteria of the various company bodies. Existing statements derived from a company’s mission and vision may be indicative of how easy special projects of a humanitarian nature will be accepted and implemented. A number of companies will adopt a rather passive approach when it comes to preventing or mitigating moral dilemmas implying a possible violation of generally accepted social norms which condemn ruthless exploitation of natural resources, child labour and other forms of exploitation. However, these social norms are constantly under pressure or may be disregarded when competition is fierce or when financial gain has become the one and only objective.

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TEXT BOX 15 Internalisation of norms Because of a change in ownership, it may happen that social norms which have been respected for many years are abandoned. Korten (1995; page 210) gives an example of this possibility. For many years, Pacific Lumber Company practised forestry in harmony with nature. As soon as corporate raider Charles Hurwitz took over Pacific Lumber, the number

of trees to be cut was doubled, as a result of which the ecological balance was disturbed. This example indicates that companies can internalise social norms and by doing so restrict environmentally harmful investments. However, social norms can also fade away, for instance, by societal changes which reduce social cohesion.

Internalisation of societal norms is less of a problem when a company knows that its competitors also respect these norms. However, globalisation makes companies uncertain as to whether their competitors will stick to moral limits to economic exploitation (Rifkin, 2001). As a result, companies which for many years have operated according to a moral code of conduct may start wondering whether the code can be maintained in the competitive global arena.

7.2 Eco-efficiency It requires counter-policies at an international level to prevent zetbacks in this area. Ecoefficiency can be measured at either national, sector level or company level. For instance, it is possible to include the supply chain by relating total sales at the end of the chain to the total CO2 equivalents emitted, covering the complete array of input elements to realise the manufacturing and distribution of the final product. Eco-efficiency is an important concept as it shows how well companies deal with their inputs; most of them originate from nature (environmental inputs); they subsequently lead to harmful emissions of polluted air and waste water, as well as to the production of solid waste. As nature’s ‘carrying capacity’ is limited, environmental inputs must be used as efficiently as possible. Eco-efficiency can be measured in various ways. One of them is using eco-efficiency to compare a company’s figures with the sectoral average. In this way, it is possible to compare companies operating in the same sector as to how well they perform environmentally. Possible indicators are emissions of a certain kind divided by value added. The challenges of eco-efficiency began to be taken more seriously when the World Council for Sustainable Development (WBSD) started to pay attention to it (Verfaille and Bidwell, 2000). Products and services would have to be produced with fewer inputs and a reduced environmental impact covering all phases of their life cycle.

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To improve eco-efficiency, the WBSD lays down seven objectives: • • • • • • •

Smaller quantities of materials in goods and services (dematerialisation) A lower energy intensity of goods and services Reduced emissions of environmentally harmful substances Fewer (potential) risks associated with products and services with regard to health and the environment. Improvement of the recyclability of products Improvement of the efficient use of renewable resources A wider application of the concept of eco-efficiency.

The OECD defines eco-efficiency as the extent to which human needs can be satisfied with ecological resources (environmental goods). It is the ratio of an output (the value of a product or service) divided by an input in terms of the total environmental burden involved. It is also possible to calculate the eco-efficiency of each individual input. Over a longer period of time, it is possible to observe certain trends with a view to finding out whether the objective (greater eco-efficiency) will be reached. Decoupling It should be kept in mind that, whereas the concept of eco-efficiency is fairly straightforward (economic value divided by environmental value), the indicators actually used and their system boundaries (company, sector, supply chain, country) are not fixed in advance. The concept of eco-efficiency can also serve the purpose of ensuring absolute decoupling (as targeted by various governments and the EU). This means that the environmental effects (either in terms of inputs or emissions) are reduced in absolute terms, even if the economic value (often implying higher production volumes) still increases. Eco-efficiency as such does not require this; it will already improve as long as the economic value increases more than the environmental input (in other words, when there is relative decoupling). That is why ecoefficiency is not seldom supplemented by additional criteria, in terms of both the usefulness of the products (market value being an insufficient measuring rod for this) and the nature of the environmental impacts. The absolute reduction requirement is commensurate with the concept of ‘strong sustainability’ (which was outlined earlier). At the same time, it is possible to add to eco-efficiency social requirements (health, poverty reduction, community development, personal development). As long as economic growth continues to take place, absolute decoupling is necessary to keep the world economy within certain safe ecological boundaries. In the area of climate change, for instance, absolute CO2 reductions of 50 to 85 per cent will be necessary to reach the 2050 reduction goals as defined by the Intergovernmental Panel on Climate Change (IPCC): 450 ppm. Although energy and material intensities have diminished in the course of time, until now there are no clear indications that decoupling will be strong enough to neutralise continued economic growth.

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The question is to what extent decoupling at a worldwide scale can be a feasible target, technically and economically. Without a doubt, much can be accomplished when companies take sustainability seriously (see Jackson, 2009, Chapter 5). However, sustainability is not just a matter of dealing with a few unwelcome side-effects of our present economic system. Basic design problems cause a continuous flow of harmful materials into the environment. For instance, many products suffer from a design which does not take recycling fully into account. Under these circumstances, even though recycling may nominally increase eco-efficiency, all kinds of undesirable substances continue to permeate the environment (see Braungart & McDonough, 2007; Chapter 2). Innovation and new business concepts The additional quality requirements to which eco-efficiency has been subjected leads to more emphasis on the importance of radical innovation (in particular, its design phase) so that the environment will be considered and protected. Such breakthroughs are not of a technological nature only, but also require new business concepts. For instance, in many cases it seems possible to launch services to replace the sales of material products (hiring and leasing). The service providers remain owners of the material products; they can ensure that these products are efficient and environmentally-friendly. Other revisions in what people consider as normal business could also lie in the area of food crops and transport distances. Why should food crops be available throughout the year (whatever the season may be) and irrespective of the distance that has to be bridged to provide them? Sustainability requires new food patterns which take seasonality into account and (thus) avoid excessive transport movements. End-of-pipe measures Initially, the production of environmental figures was strongly determined by governmental policies in the area of emissions and waste. At that time, so-called ‘end-of-pipe’ measures attracted much attention; these are measures directed at the mitigation of the consequences of undesirable environmental effects associated with existing production processes. They do not alter the nature of the dominant production technology. For instance, in the area of air and water emissions, filtering and purification are ways to prevent them to be released into the environment in an uncontrolled way. Legislation may prohibit certain emissions; then, the companies involved have no other choice than to comply (assuming adequate enforcement policies). It may also be possible that certain emissions or discharges are not forbidden, but are subject to certain levies which are meant to discourage them. Then, a company has to assess which costs are lower: either the cost of filters and purification equipment on the spot or the cost of investing in a preventative technology which precludes emissions or discharges. Preventative technology As Table 7.1 indicates, the most sustainable technology is that technology which really prevents pollution. Then, there is no need to take protective and clean-up measures into consideration because already from the outset certain substances will not enter the company.

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Whether the preventative technology is taken on, will depend on various matters. One of these is the government which imposes regulations and/or provides subsidies. However, the costs involved and the company’s objectives are likely to play a part.

TEXT BOX 16 Product or company Schaltegger and Burritt (2000) preferably define eco-efficiency as ‘value added divided by added environmental impact’. One could adapt this definition depending on the problem and the availability of information. For instance, take the production of waste. When one considers one particular product, then

one could define eco-efficiency as contribution margin (which is the difference between sale price and variable costs) per tonne of waste. In case one wishes to consider the entire company, it would be better to take operating profit per tonne of waste.

7. 3 Allocation of environmental costs One of the first benefits of environmental cost accounting was opening one’s eyes to the importance of a correct allocation of environmental costs to the company’s different products. Figure 7.1. may clarify this phenomenon. It shows overhead item Toxic waste. The costs involved could be allocated to products in two different ways: 1. The overhead costs of toxic waste are first added to total overhead costs. After that, these costs are divided over the two products, one of them being a toxic product and the other a non-toxic product. This procedure implies that only a part of the costs relating to producing the toxic product are actually apportioned to the toxic product. 2. All costs of toxic waste are directly allocated to the toxic product. This is the only way to obtain a correct picture of which product is causing high environmental costs. That could be a reason to replace that product by another which is much less harmful. Even though the second approach seems logical, because of embedded practices, it may not be common practice. Managers may also maintain a lack of in transparency in cost structures for different reasons (for instance, they know that they should take action when it becomes clear what the real situation is, while their work load is already heavy). Cost accountants have to play a critical role here, as the information they present needs to give insight into what is going on. It must not disguise relevant facts.

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Figure 7.1 Two ways to allocate the costs of toxic waste

(

)

Organisational partitions The visibility of costs by a correct allocation is thwarted not only by poor accounting, but also by the existence of organisational partitions within companies (and governments) which preclude an integrated consideration of costs and revenues. For instance, the existence of various profit centres (divisions, business units) may obscure an integrated financial outlook. A sustainable product, for instance, could lead to less waste, less energy consumption or less maintenance. These effects may involve notable cost reductions. However, as long as ‘lowest price’ dominates purchase decisions, a company will tend to ignore these cost advantages, especially so, if accounting practices fail to highlight them (under such circumstances, decisions taken may appear to be “penny wise, pound foolish”).

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Preventative technology Environmental accountants have pointed out that ‘residual materials’ eligible for disposal consist of substances which once were bought and involved in logistics and storage. If the costs relating to these activities were proportionally allocated to the residual materials, then investing in preventative technologies (instead of paying for waste disposal and the purchase of end-of-pipe technologies) could well appear to be very advantageous. The higher the visible costs, the higher will be the benefits of replacing production methods causing them. Because of inadequate cost allocations, potential cost savings remain hidden. Diversity in internal environmental costs Internal environmental costs are costs which a company incurs to control and reduce the negative environmental effects associated with the conduct of business (Hafkamp and Bouma, 1995, p. 169). Environmental costs can be diverse. Therefore, there is a need for categories which give further insight into the nature and background of environmental costs. Furthermore, also in the case of environmental cost the well-known cost indications apply: ordinary costs, extraordinary costs (costs relating to incidents), direct costs, indirect costs and also potential costs (costs which are expected to occur in the future). Costs related to inputs and outputs Environmental costs can be split into those associated with inputs and those associated with outputs. Table 7.1 gives an overview of both angles. Table 7.1 Internal environmental costs associated with inputs and outputs

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Environmental activities and environmental costs Hafkamp and Bouma (1995) provide an alternative way of categorising environmental costs, based on a check list of environmental activities and environmental costs, which indicate what matters in practice. They distinguish various aspects of environmental management activities: prevention, cleaning-up, acquiring environmental permits, juridical procedures and other activities. They also distinguish three conventional categories of costs. Based on these two angles, one can make cost matrices for various operational areas. Table 7.2 gives an example for the area of soil-related environmental costs. Table 7.2 Environmental costs Soil

Environmental benefits After paying attention to environmental costs, it is also important to consider environmental benefits. Here, one can distinguish two categories: direct and indirect environmental benefits. Direct environmental benefits: 1. Revenues from the sale of recycled products (as a new product line or market). 2. Additional turnover from products which have been environmentally improved (brought about by both volume and price effects) 3. Costs savings as a result of preventative measures or increased handling efficiency. Here, there is a direct relationship between less use of environmental resources and avoided costs. Indirect environmental benefits are less tangible. To them belong effects of a better company image and increased satisfaction among consumers (on the use of the purchased products) and employees (on the fact that one is working with an environmentally-friendly company).

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When attempting to collect data on environmental effects and environmental costs within a company, one has to consider that there are various information sources, such as storage records, the environmental manager’s office and accounting.

TEXT BOX 17 The Environmental Quality Costs Model Mogezomp et al. (1992) provide the Environmental Quality Costs Model, which gives in its own way insight into the nature of environmental costs and into the possibilities of prevention: 1. Prevention costs: costs of preventing environmental effects as early in the production process as possible. 2. Process-integrated correction costs: costs resulting from adapting and adjusting existing production processes, installations and steering processes aiming at reducing environmental effects. 3. Internal failure costs: costs resulting from environmental effects which could not be prevented at an earlier stage of the production process (such as internal collection of waste) 4. External failure costs: costs resulting from handling the final consequences of environmental effects (which could not be prevented), such as costs of external waste disposal and dealing with complaints filed by other parties relating to environmental effects.

The size of each cost category is determined by different types of costs (such as interest, depreciation and raw materials). Which cost is relevant, depends on the firm. Dividing environmental costs into prevention costs, correction costs and failure costs may be very useful as they prevent an inconsistent consideration of environmental costs over the years. Nonetheless, the model’s division of environmental costs is only an imprecise estimate. Therefore, using the model to compare environmental costs between companies may be rather rough. In general, one may say that determination of the absolute value of environmental costs is far from simple. However, one could use the previously mentioned types of environmental costs to determine a number of relevant ratios, turn them into index numbers and follow them over a number of years. The ratios’ relevance is particularly a matter of whether they are helpful in determining whether a previously formulated policy is actually carried out.

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Baxter The American company Baxter Healthcare Corporation has been active in making environmental accounts since the beginning of the nineteen seventies. From the figures it became clear that thanks to environmental investments during the initial years of measurement the savings and avoided costs were considerably higher than expenditure on environmental matters. In terms of profit after taxes the sum of savings and avoided costs amounted from 5 to 10 per cent. Moreover, the company takes the position that these financial advantages stemming from a greater eco-efficiency were not the only benefit. The greatest benefits lay in an increased social responsibility which the company assumed, leading to a strong reputation and public appreciation of the company as a brand name. This made it possible to attract the best people as employees. Productivity increased thanks to a highly motivated personnel and a stronger market position (Howes, 2004). Table 7.3 gives a summary of Baxter’s environmental accounts. Table 7.3 Baxter International Inc. 2008 (turnover: $ 12,2 billion) 2004 Total environmental costs in mln US dollars

n/a

Total environment-related revenues, savings and avoided costs in mln US dollars

n/a

2005

$ 21.2 mln $ 92.6 mln

2006

$ 22.6 mln $ 82.7 mln

2007

$ 25.0 mln $ 83.5 mln

2008

$ 26.0 mln $ 91.9 mln

(Source: www.sustainability.baxter.com/documents/2008_translations/dutch.pdf)

These rather intangible benefits do not preclude a clearly business-like approach. First of all, for Baxter, environmental management is a means to create economic value. The company wishes to minimize environmental costs and where they cannot be avoided, they have to contribute to the highest possible financial result, not the least because of cost avoidance. Cost avoidance is a matter of taking measures directed at reducing future environmental costs, for instance, preventive checks, technical improvements and timely replacement of parts. For instance, when a measure taken in year 1 leads to a reduction in environmental costs of $ 1 mln in year 2, cost avoidance in year 2 is $ 1 mln. In the short run, cost avoidance policies may imply cost increases, but eventually costs will decrease over the entire production process (life cycle costs). The amount of $ 91.9 mln (see Table 7.3) is the net result of environmental costs, environment-based revenues, savings and avoided costs in 2008. Cost avoidance has put its stamp on this notably positive result. It is obvious that the production of the foregoing figures must have been a demanding task for the company’s environmental accountants. As the figures are to be made public, they need to be fairly reliable and consistent. This requires an adequate model of environmental

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costs in terms of definitions and collection method. As noticed earlier, the total environmentrelated revenues, savings and avoided costs are notably higher than the environmental costs. The company has obviously conducted a successful environmental policy targeting a win-win situation: both the environment and corporate income have benefited from it. Baxter’s own method is an interesting case of how environmental accounting can be used to conduct a proactive policy. However, a difficulty lies in the fact that it is not easy to compare Baxter with other companies on the basis of these figures. It should be stated that Baxter’s environmental accounts have been developed primarily for internal purposes (Bennett and James, 1998). Baxter’s website also provides other figures which can be used to compare Baxter with other companies, among other things, by applying the rules of the Global Reporting Initiative (GRI). Total Cost Accounting The various aspects of environmental accounting which have been discussed before had already emerged in the nineties within the framework of Total Cost Accounting (TCA). Although this costing method broadened the usual scope, it remains limited to the individual company (and therefore does not consider, for instance, the supply chain). TCA was mainly developed to increase the chances for corporate environmental investments, because it appeared that the usual present-value calculations (indicating which investments are economically justifiable) were based on a limited set of direct and indirect costs. The benefits of environmental investments (directed at improving the production process), are largely a matter of cost savings. As the recognized costs are taken narrowly, so will be the cost savings involved. As a consequence, the benefits of environmental investment tend to be underexposed and underestimated. Eventually, the present value of contemplated environmental investments often appeared to be negative or at least smaller than that of other types of investments competing for the same limited financial means available for investments. Within the framework of TCA, to attain a better insight into current costs, the following recommendations are made: 1. Conventional indirect costs should be allocated to individual products more accurately. This issue has already been discussed (see Figure 7.1.). 2. Attempt to take into account various kinds of costs which are often hidden in the company’s financial administration (hidden costs); these costs could make a notable difference in certain cases. In particular, one could think of management costs such as feasibility studies, training sessions, checks and reports, licencing costs, follow-up costs. 3. Allow for costs that might be incurred depending on the situation (called: contingent costs). Examples are costs associated with incidents and calamities, giving rise to substantial costs, such as cleaning-up costs, fines, legal costs, damage to property and extra costs resulting from a temporary decrease in productivity. These costs can be included by taking into account probabilities.

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4. Accept relational costs, meaning costs made to keep up good relations with parties who take an interest in the company’s environmental performance. In cases involving the Net Present Value, it may be important to question certain routines such as automatically applied high discount rate, short pay-back periods and high hurdle rates. It is quite thinkable that certain interesting environmental investments are possible if they are allowed to pay off over a longer period of time than usually considered. If the usual pay-back period is five years and the usual discount rate 10 per cent, then an interesting environmental investment has no chance of being selected; other investments will be given priority. A company’s business economists and controllers have the (moral) duty to look into these matters and wonder whether the routinely handled values and pre-suppositions are justifiable in the light of the company’s sustainability objectives.

7.4 Environmental costs throughout the chain Already Hafkamp and Bouma referred to the supply chain when defining environmental costs. These are costs made to control and reduce environmental impacts involving the winning of raw materials up to the final discarding, and possible refurbishing and reuse of a product or service (Hafkamp & Bouma, 1995; p.169). How far one should pursue such cost calculations depends on their purpose. In the nineties several new ideas on environmental policies were launched which took supply chains explicitly into account. These ideas have led to a great interest in the quantitative side of environmental costs: the amounts of input, emission and waste inherent in a particular supply chain. To take that up, Life Cycle Analysis (LCA) was the method which was developed in those days. An LCA can be executed either in a limited and full-fledged way. A complete LCA requires much research. Therefore, it will be executed only in cases where decisions have to be made on large investments, carrying with them clear societal interests. Reduced LCAs will mostly focus on differences between alternatives, as then it can be expected that a limited number of environmental effects have to be taken into account. Often, one uses averages per region or sector. There are databases available which contain such averages. During the nineties a number of environment-related concepts were introduced. In the Netherlands, one of them was Integrated Chain Management (ICM). This concept was used to build up a policy geared towards ‘closing material flows’. Some of the substances studied were chlorine (including all kinds of chemicals), carbon dioxides and phosphate (including compounds). The leading principle was that these substances should not be used in an uncontrollable manner, whereby they end up in the environment, polluting soil and water and threatening human and animal health. By preventing ‘leakages’ in the material cycles and ensuring low levels of usage, the environment can be protected. To implement effective

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TEXT BOX 18 An LCA for jeans Levi’s has executed an LCA of the 501 jeans. The study comprised: growing of cotton, textile production, jeans production, transport and distribution, wear of the jeans, recycling and the final waste processing. On the average a pair of jeans altogether led to 32,3 kg of CO2 emission 3500 litres of water and a total energy consumption of 400 MJ. It was striking

that the environmental burden was heaviest during the wearing phase: there 57 per cent of all energy was consumed and 45 per cent of all water (especially because of laundry and drying with the aid of machines). Taking everything into account, the wearing phase is responsible for 58 per cent of a jean’s contribution to climate change (Source: Greenpeace).

policies in this area, it is necessary to address the economic sectors which produce the goods containing the substances concerned. Then, forms of saving and reuse can be considered. In certain cases, it is interesting to look for cooperation between different sectors. An example of this is the collaboration between pig farming and greenhouse cultivation to implement a closed circuit of CO2 and thermal storage. Because of that, considerable reductions in emissions will be achieved, improving the environmental image of both types of production (Verkerke at al., 2010). Another concept which was launched during the nineties was ‘product-oriented environmental management’; this was promoted by the Dutch government. The aspect of product orientation was an addition to the environmental management practices which were en vogue at that time; these were characterised by a focus on a company’s own internal production process. Under ‘product-oriented environmental management’ a company chooses one of its products; the company works together with its partners in the supply chain to improve that product’s environmental profile. The concept also leads to finding out what the product contributes to the economic goals of the companies concerned as well as the costs and benefits of the product-oriented project. As environmental improvements may require a great deal of preparation and financial means, they need not be completed all at once. There is room for the principle of continuous improvement (such as inherent in ISO 14001). When the first product has been sufficiently dealt with, a following product can be focused on. The approach implies that weighing costs against benefits of improvement projects is part of the decision-making process. Sustainable procurement Sustainable procurement is a prominent aspect of sustainable chain management. As mentioned before, purchasing against the lowest price is no guarantee that running costs will be minimized. Other factors are a product’s longevity and how often it is subject to defects and failure. Also, aspects of user-friendliness, volume and ease of disposal are important. The concept of ‘Total Costs of Ownership’ (TCO) takes all these aspects into consideration. Environmentally friendly products seem to perform favourably when applying TCO. That means,

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even if an environmentally friendly product is higher priced when purchased compared to its environmentally unfriendly alternative, eventually it turns out to be the most cost-effective solution when all effects are considered. To come to grips with all cost (savings) implications, it may be necessary to take an extra step further down the chain. It may be that, rather than the company buying the environmentally friendly product itself, other downstream companies reap the advantages (this effect is also referred to as ‘Total Value of Ownership’). When cost savings throughout the chain are considered, the issue of an adequate calculation and allocation of environmental costs returns. ‘Life-cycle costing’ is a method, however, which, especially in the case of large investments, opens up the possibility of making the costs of investing, use, control and maintenance mutually comparable. Thanks to that, the costs of alternative investments can be adequately assessed and compared. This method can be applied either to all costs involved or to a subset, such as environmental costs. As a complete application of ‘life-cycle costing’ requires a host of data and may be very time-consuming, it is seldom carried out to the full. However, a shortened (even qualitative) version could also be very useful, as it may open one’s eyes to cost implications which previously remained unnoticed.

7.5 Society and external effects It is beyond doubt that a company’s environmental effects are incompletely expressed in corporate costs. There are also external effects (externalities); which are effects for which the company that has caused them will not be charged in case they are negative or will receive any material benefit in case they are positive. Harmful external environmental effects can be caused by various kinds of emissions of harmful substances, damage to nature caused by buildings and vehicles and the loss of biodiversity. These external effects do not show up in the accounts of companies. However, part of them may affect a company’s cost accounts indirectly if, for instance, its employees’ health is damaged because of its own production process (such as damage to the bronchial tubes as a result of atmospheric pollution). However, unless special accounting is set up to make them visible, such costs will remain undisclosed. Moreover, legal measures (rules and/or levies) may be proclaimed to reduce or prevent adverse external effects. There has already been implemented much environmental regulation. Furthermore, action undertaken by NGOs or more informal protest movements may lead to substantial reputational damage (leading to a reduction in sales).

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Full-cost accounting (FCA) intends to quantify the negative external effects in terms of costs, including forgone revenues, with a view to determining a good’s or service’s full costs. Even though calculating the costs associated with external effects is hard to do accurately, working with a full-cost accounting framework is helpful in raising awareness of what corporate activities may lead to and stimulates investments which take a wider range of effects into account. Beyond all this, FCA could also play a role in the process of realising a company’s ethical calling to close the gap between a company’s private-economic value and its value for society. Company owners are challenged to face the possibility that their company’s societal value is negative despite the fact that the company manages to survive as a private business. Here, FCA is likely to be able to clarify what the critical issues are, even on the basis of a qualitative appraisal (Antheame, 2007). To close the above-mentioned gap, a company may have to adapt or replace its production processes. This transformation may imply the need to alter its product range.

KEY NOTIONS AND CONCEPTS • From an accountancy point of view, three different corporate domains can be distinguished: the internal organisation, the supply chains and the social context (government, consumers, and civil society). • The three domains can be helpful in indicating a company’s achievements (or lack of progress) as to the extent it has made use of possibilities of greening its business. • Senior management has to indicate how externalities should be dealt with, in particular when they could lead to financial claims by third parties. • Environmental goals which are not treated as economic matters per se can be interpreted by shareholders as a kind of ‘on-the-job consumption’ which by its nature reduces the company’s value. • Existing statements derived from a company’s mission and vision may be indicative of how easy special projects of a humanitarian nature will be accepted and implemented. • Increasing eco-efficiency means that products and services have to be produced with fewer inputs and a reduced environmental impact covering all phases of their life cycle. • The concept of eco-efficiency can also serve the purpose of ensuring absolute decoupling (as targeted by various governments and the EU).

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• Even though recycling may nominally increase eco-efficiency, all kinds of undesirable substances continue to permeate the environment. • Technological breakthroughs (radical innovations) are not of a technological nature only, but also require new business concepts. • So-called ‘end-of-pipe’ measures to mitigate undesirable environmental effects do not alter the nature of the dominant production technology. • The most sustainable technology is that technology which really prevents pollution. Then, there is no need to take protective and clean-up measures into consideration because already from the outset unwanted substances cannot enter the company. • One of the first benefits of environmental cost accounting was opening one’s eyes to the importance of a correct allocation of environmental costs to the company’s different products. • The higher the costs made visible thanks to proper accounting, the higher will be the benefits of replacing production methods causing them. Because of inadequate cost allocations, potential cost savings remain hidden.

STUDY QUESTIONS 1. Argue why dealing with a company’s externalities has to do with its long-term value. 2. Environmental costs deriving from moral conceptions about responsible stewardship which go beyond narrow boundaries and time horizons could lead to conflicts with shareholders. Explain why that could occur. 3. How could the improvement of the recyclability of products lead to an increase in ecoefficiency? Explain. 4. What is the nature of radical innovation? Give two example of such kind of innovation. 5. Explain the difference between direct and indirect environmental benefits at the corporate level. 6. How would you describe Total Cost Accounting (TCA)? In what way could it support environmental management?

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References Antheaume, N. (2007), “Full cost accounting: Adam Smith meets Rachel Carson?”; in: Unerman J., J. Bebbington and B. O’Dwyer (eds.) (2007), “Sustainability Accounting and Accountability”, Routledge, London and New York. Bennett, M. and P. James (1998), “Making Environmental Management Count. Baxter’s International’s Environmental Financial Statement”; in: M. Bennett and P. James (contributing editors), “The Green Bottom Line. Environmental Accounting for Management. Current Practice and Future Trends”, Greenleaf, Broom Hall, Sheffield, UK. Van Bergen, B. en J. Strikwerda (1993), “Sustainability/milieu bij Philips”, KPNG/NOVEM. Bradley, M., C.A. Schipani, A.K. Sundaram and J.P. Walsh (2000), “The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads”. www.ssrn.com. Braungart, M. and McDonough, W. (2002), “Cradle to Cradle: Remaking the way we make things”, First Edition, North Point Press. Hafkamp, W. en J.J. Bouma (1995), “Milieukosten”; in: F.L.M. Braakhuis, M. Gijtenbeek en W.A. Hafkamp, “Milieumanagement, van kosten naar baten”; Samson Tjeenk Willink, Alphen aan den Rijn, 1995. Jackson, T. (2009), “Prosperity without Growth”, Earthscan, London. Korten, D.C. (2005), "When Corporations Rule the World", Kumarian Press/Berritt. Kochler, Brulden, USA. Mogezomp, H.G.,Diependaal, M.J. en Leroy, P. (2002), “Het milieukwaliteitskostenmodel”, Milieu : tijdschrift voor milieukunde, Nummer 7 (1992). Rifkin, J. (2001), “The Age of Access”, Ken Tarcher/Putnam, New York. Schaltegger S. and R.L. Burritt (2000), “Contemporary Environmental Accounting”, Greenleaf, Sheffield UK. Verfaille, H.A. and R. Bidwell (2000), “Measuring eco-efficiency. A guide to reporting company performance”, World Business Council for Sustainable Development (WBCSD). Verkerke, W., P.A. van Weel en O. van Dijk (2009), “Sluiten van stofstromen tussen glastuinbouw amd varkenshouderij”, Rapport 307, WUR, Wageningen NL.

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CHAPTER 8

The Green Economy

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8.1 Introduction Corporate sustainability is part of a wider movement in which people take up their responsibility for a sustainable future. At the international level, one way of expressing this wider responsibility is a call for joint efforts to move towards a green economy. In particular, the UNEP (United Nation Environmental Programme; the UN’s overall coordinating environmental organisation) has been playing a prominent role in promoting the realisation of the green economy. The concept was also on the agenda of the UN’s Earth Summit Conference (Rio +20) held in 2012. According to the UNEP, the green economy is an economy that results in improved human well-being and reduced inequalities over the long run (social equity), while significantly reducing environmental risks and ecological scarcities. It implies that growth in income and employment is driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services. The concept of the green economy refers to already existing knowledge but could have the power of a mobilising concept, that is, a concept capable of motivating and mobilising people, governments and companies to make extra steps, in this case, towards a sustainable world. For a concept to be ’mobilising’, it needs to be strong enough to transcend existing social divides (such as between rich and poor, employers and employees), broad enough to allow different emphases and applications so that large parts of society can be actively involved in its realisation. Therefore, it should not contain strong contradictory elements or broadly felt shortcomings. These features do not imply that from the outset a mobilising concept is to fully meet the requirements of scientific clarity and interpretation. In fact, in the past mobilising concepts such as clean(er) production and eco-efficiency were launched and were put into practice even before scientific research was called in to find out what they ‘exactly mean’.

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This chapter is based on one of the author's contributions to the following project: "The Green Economy in the European Union's External Actions", which was commissioned as an internal scoping study by the European External Action Service (EEAS) in 2011.

8.2 Sustainable development The various documents on the green economy bring to light that this concept is closely related to the concept of Sustainable Development as launched by the UN’s World Commission on Environment and Change (the Brundtland Commission) in 1987 in its report "Our Common Future". A Global Agenda for Change (see also Chapter 2). However, the comparison is between Our Common Future as a change programme and the UN’s Green Economy Initiative rather than between the concepts of Sustainable Development and the green economy. Development and environment Despite the similarities, there seems to have emerged a need for a new concept that can boost new initiatives. This evokes the question: What has been the outcome of ‘Our Common Future’ and where lies its limitation? The answer may begin with an evaluation of ‘Our Common Future’ on the occasion of its twentieth anniversary (Hauff, 2007). ‘Our Common Future’ was a seminal report that marked a time in history at which development and environment enjoyed increasing awareness and attention. However, development and environment did not go along with each other easily. Up to date the tension between the two still exists. The concept of sustainable development - meeting the needs of the present generation without compromising the ability of future generations to meet their needs - could in principle be the key to a durable match between development and environment. In 1987 this was a new perspective. It established the notion of equity and justice within and between generations and the idea of developing a shared understanding of the long-term goals for human life on earth. From there, ‘Our Common Future’ pleaded for new international governance instruments and action programmes. To realise this, there was a need for leadership and mutual trust. The Rio Conferences are a direct result of the suggestion made by ‘Our Common Future’ to have an international conference to address these issues. What has been achieved sofar? The question arises whether, after 23 years, ‘Our Common Future’ has had its desired effect. In spite of what has been done to promote sustainability, it cannot be denied that the world economy is still moving ahead in a way which implies that ecological boundaries will be overstepped. There is no common future unless that process is stopped. Moreover, the distribution of economic wealth and use of natural resources is still greatly unequal, potentially implying social conflict at the global level. Command and control policies have to be intensified but cannot do it alone. It is necessary to involve civil society and the business community with awareness, social responsibility and dedicated entrepreneurship as leading values. The notion of 'overstepping' has a stronger appeal if one uses a definition of sustainable development that was launched by UNEP in 1991, namely ‘improving the quality of human life while living within the carrying capacity of supporting ecosystems’(Brander, 2007). From this perspective, the green economy agenda is a means to find new ways of working on sustainable development rather than replacing it by new ways of thinking.

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New realities Since the appearance of ‘Our Common Future’, the world has undergone significant changes (Hauff, 2007). These have to be taken into account when pondering on how to update and reinforce its message. At the end of the eighties the Cold War was terminated: a bipolar political divide changed into a multipolar world: • Since then, a number of so-called Third World countries have entered into a remarkable process of development and economic growth, leading to a changing international political landscape (with China as the most prominent player). Globalization has resulted into a world economy that has become much more interdependent than before. • Throughout the nineties and beyond, information technology has been a powerful engine of economic change, reinforcing the world’s interdependence. • The dramatic disaster of 9/11 (2001) has led to new political and military realities. The credit crisis has taken a heavy toll and calls for the resumption of economic growth. • Moreover, the credit crisis (2008; followed by the euro crisis) has been a catalyst for a rethink of corporate responsibility and policies to realise sustainability but has not been able to turn the tide of things. Issues insufficiently addressed The UN’s Earth Summit Conferences have had a strong influence on many UN policies. However, in spite of the various international agreements, which initiated important sustainability policies, the issues that ‘Our Common Future’ presented have not yet been sufficiently addressed while the need for adequate policies has become more urgent than ever before. Among these issues are poverty, energy and climate, soil devastation, food security and urbanisation (Hauff, 2007). The energy crisis, financial crisis and food crisis are quite different phenomena, but they have in common that capitals have been wrongly allocated. They demonstrate a lack of long-term vision, social responsibility and setting the right priorities. The green economy movement can only have value added if it recognises these misallocations and brings about investments that testify of a change of course.

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For the green economy to be a convincing remake of ‘Our Common Future’, the following points have to be taken into account: • There should be established adequate links between the world of politics and the corporate world. For sustainability strategies to be successful, both policies (at different levels) and corporate strategies are indispensable. These are bound to reinforce each other. • The strongly growing economies of large developing and emerging countries call for a really common approach in the development and execution of sustainability policies. The issue of leapfrogging should be on the agenda with a view to having the booming nations make use of the best available clean technologies and develop better ones. Justifications for ‘growth first and ecology next’ should be counterbalanced by better informed, longer term visions. This is a matter of international cooperation involving both governments and corporations. • The dwindling availability of natural resources (including biodiversity) requires the development of new policies. If not given timely attention, their distribution between continents and nations could become a serious source of conflict. Market solutions are unlikely to be satisfactory, if these are not embedded in a wider internationally agreed distributional framework. • Sustainability will increasingly be part of economic competition. The relevance (and the delays in reaching it) of international political agreement should not justify any delay in the development and implementation of the bussines world's own sustainability strategies. These points derive from a first evaluation of ‘Our Common Future’. The following sections make an attempt to gain more insight in what they imply for today’s economic policies. Here we distinguish between ecological sustainability and social sustainability.

8.3 Ecological Sustainability Popular belief There is one disturbing issue that is looming large: sustainable economic growth. How can it be realised? In the aftermath of the economic crisis of the early eighties, ‘Our Common Future’ pleaded for economic growth. The publication even mentioned growth percentages for the different continents taking into account low consumption levels among many low-income groups and population growth. Of course, “Our Common Future” did indicate that economic growth should be in the interest of the poor while at the same time ecological boundaries had to be respected. Despite the restrictions it brought to the fore, ‘sustainable development’ in the public’s eye seemed to allow economic growth to come first. From there, sustainability could come in as a modifying element.

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Will the green economy movement do better? A text bar, for instance, which states: “The Green Economy Initiative is pro-growth, pro-jobs and pro-poor. It seeks enhanced economic growth, income opportunities and social inclusion”, could lead to a similar misunderstanding. Of course, the need to protect natural resources and biodiversity is no doubt taken in the various green economy documents; but again, there is a danger that both governments and corporations take greenness too lightly. In the political arena, in spite of the ‘light version’ of sustainable development, which does not question economic growth as such, talking about ‘sustainable development’ may be seen by developing and emerging economies as an impediment to growth invented by the rich countries. Poorer countries tend to oppose this and claim they are entitled to economic growth without environmental constraints. The Green Economy Initiative seems to aspire to overcome this controversy. It is about investments and creating jobs. By basing the investments on the green agenda, economic growth and job growth can go together with saving the planet. Factor 4 and Factor 10 In the past (the eighties and nineties) the quest for sustainable development (sustainability) led to important research and action programmes which attempted to get the message of ‘Our Common Future’ across and make it more concrete. For instance, prominent sustainability research flags were ‘Factor 4’ and ‘Factor 10’ . Both advocate a drastic improvement of the eco-efficiency of production processes (resource productivity) by means of better technologies. Factor 4: The ecological state of the world demands swift action, otherwise it may run into unprecedented troubles and disasters. The good news is: difficult though it may be, it can be done. Factor 10: Either we continue the old ways and vainly fight the mounting ecological consequences of our wealth-generating machine or we opt for a system change. Infinite material growth of the technosphere is not possible without risking the survival of the human race on planet earth. Of all we know, the point of no return will be upon us during the first half of the 21st century. Prices of raw materials Although Factor 4 and Factor 10 have put a strong focus on technology, both point to systemic economic weaknesses that prevent the needed technology from being developed or used. For instance, they mention the fact that many raw materials’ prices are too low, given their harmful external effects that are not taken into account.

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From Factor 10’s perspective, for the sake of human survival, welfare generation by 2050 is to be subject to the following per capita ecological footprint per annum: 1) 1.8 hectares of land, 2) 5-6 tons of non-renewable material resources, and 3) maximum 2 tons of CO2 emissions. These goals require a manifold dematerialisation in the western world but allow reasonable growth in many poorer countries. These goals should be independently reviewed and, if needed, adjusted and refined in the light of growing experience and a changing world population. Higher input prices would lead to less demand for them and would be an incentive to find eco-efficient substitutes. More recently, especially because of booming economies in Asia, resource prices tend to increase. It is, however, still unclear how this will work out on the world economy. On the one hand, it will evoke new resource-saving technologies, on the other it will intensify the ‘digging for’ the wanted materials. Factor 10 also points to the adverse effects of current taxation and subsidy policies. As a remedy, its supports the idea of lowering taxes on labour and increasing taxes on material inputs. This will lead to structural change promoting employment and discouraging the use of natural resources. Conventional economics has always emphasised the importance of increasing labour productivity; the time has come to focus on how to increase resource productivity, whereby taking into account the cumulative ecological effects (‘ecological footprints’) of the use of natural resources in production processes.

8.4 Social sustainability Social sustainability occurs when the formal and informal processes, systems, structures, and relationships actively support the capacity of current and future generations to create healthy and liveable communities (McKenzie, 2004). Each society has a “stock” of social and human resources. Economic development can either contribute to or deplete those social resources. Greening the economy would not make much sense if it does not contribute to a society’s social and human resources. Therefore, involving the social aspects of sustainability in the greening process is essential. The concept of socially sustainable development (including urban development) has received less attention than the concept of environmentally sustainable development. Social sustainability is the result of a development10 that: • meets basic needs for food, shelter, education, work, income and safe living; • ensures equitable working conditions, so that the benefits of development are distributed fairly across society; • enhances the physical, mental and social well-being of the population; • promotes education, creativity and the development of human potential for the whole population; 10

Source: T. Hancock (http://newcity.ca/Pages/social_sustainability.html); visited 20 November 2012.

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• preserves each country’s cultural and biological heritage, thus strengthening a sense of connectedness to our history and environment; • promotes conviviality, with people living together harmoniously; • is democratic, promoting citizen participation and involvement; • is about liveable cities and villages, in terms of built environments and the good life in an emotional sense. Taken together, there are two types or levels of resources in the community that are available to build social sustainability (and other forms of sustainability): 1. individual or human capacity, and 2. social or community capacity. For many people in the world social sustainability is primarily a matter of poverty reduction and ensuring a basic livelihood. This refers to the ‘bottom billion’ of poor people in the first place. However, in the more wealthy countries, social issues are also extremely relevant. Average figures on income and prosperity often hide substantial differences in living conditions, food security, health, job security and educational opportunities. In general, one may argue, that, as average GDP levels increase, the softer aspects of social sustainability will become more important. For instance, where job security is relaxed for reasons of economic competitiveness, educational opportunities should be offered to be able a person to acquire a decent and rewarding job in the labour market. Those who cannot cope because of age or inability should be protected by social security measures. Where there is an unbalance between risk and opportunity in these fields, social sustainability is under threat. The rights of people at work have been an international theme for a long time. There are eight ILO Conventions which have been identified by the ILO’s Governing Body as being fundamental to the rights of people at work, irrespective of levels of development of individual member states. Mindset and organisational culture The green economy movement should try and encourage governments to work together with companies wherever possible. Such collaboration should be particularly beneficial to those that have already shown an inclination to give sustainability sufficient priority. The reliability and consistency of governmental policies will have an impact on a company’s risk assessment. The clearer, firmer and more convincing government policies on sustainability are, the more they will have a pro-sustainability influence on corporate strategies. How serious a company is about sustainability can be identified by means of a sustainability audit. This looks into the extent to which a company has developed an articulated sustainability strategy (including a clear business case for its sustainability efforts and metrics

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that have been integrated into the company’s performance measurement) and has integrated sustainability into its management and control systems. One could also apply sustainability audits to national and transnational governments. Then, the question arises whether and how far a governmental organisation has integrated sustainability into its organisational culture. Of course, governmental sustainability strategies and policies will also depend on the influence of their stakeholders, who for each country and policy domain may be different. However, in the final analysis it is the extent to which sustainability has become part and parcel of a governmental organisation’s culture that determines how much effort and energy will be put into achieving a green economy. In other words, sustainable economic growth will to a considerable extent depend on the quality and motivation of its supporters.

8.5 New scarcities and market forces Market forces are important in reaching the green economy (in particular, green innovations need to be profitable), but are also inclined to make use of the ‘loopholes’ in the current economic systems that still tolerate or even encourage many unsustainable practices. Therefore - as previously stated - market forces should be embedded in wider policy frameworks focusing on sustainability. For instance, market transparency that according to economic theory is good for markets should not apply only to prices but also to the ecological impacts of industry and commerce. A number of large companies have taken steps towards transparency. By so doing, clients and consumers are enabled to compare products and services based on their ecological impact. Supply-chain-tracking software makes companies understand where their largest negative impacts are located and how to find sustainable alternatives. As more and more companies feed such (open source) databases, they together will build an information commons so that the costs of having access to the entire field of product information will tend to be very low (Goleman, 2010). High transparency against low transaction costs will be conducive to efficient markets, and in this case sustainable markets. The role of economics Economics as a science has much to say about where market forces can operate for the better and where they need to be corrected or replaced. The standard economic theory of externalities indicates where taxation should come in (theoretical foundation laid by A.C. Pigou), underpins emissions trading (the allocation of property rights according to R. Coase) and shows areas where direct regulation is appropriate. However, the theory mostly assumes certainty, perfect competition and a single government. In contrast, climate change involves many jurisdictions, a weak representation of those most affected (future generations), long-

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term horizons, a global scale, major uncertainties and interactions with other market failures. There has emerged a problem of intertemporal, international collective action that calls on a broad range of economic and other expertise. Moreover, the nature of the problem implies a range of ethical issues such as equity, fairness, freedom, rights and responsibilities that economics as such cannot solve (Stern, 2006). Defining a credible development path towards a sustainable world is likely to be beyond what economics is capable of achieving, especially where such a path transcends current values and time horizons. However, sustainability as an ‘end state’ (so to speak) can only be reached step by step based on real business cases, both for corporations and governments. Although such business cases may call on consumers’ and citizens’ social consciences, to be successful they have to remain within the framework of existing preference structures and time horizons. It is of course necessary for that framework to evolve so as to meet the conditions of sustainability, but this takes time and is surrounded by uncertainty. Economics can be of great help where, within that framework, it can indicate and define new opportunities for sustainable business. This can be a matter of designing new incentive structures or showing that huge present-day economic achievements are at stake by not tackling today's sustainability issues. It may, for instance, refer to the development of alternative energy which is not based on fossil fuels. This development can be stimulated by adequate price policies, new trading systems to internalise externalities, understanding the implicit economic value of nature and natural resources to underpin investments that protect them. The adverse economic effects of climate change in many developing require commensurate support by the rich countries to counter these effects. Current estimates associate climate change with losses of tens of billions of euros due to climate related disasters. There is a great need for careful measurement of the risks that climate change poses for investment portfolios. Over the coming decades a continuous slowdown of policy development and lack of international coordination in the area of climate change are likely to cost institutional investors billions of euros. On the other hand, climate change and other sustainability issues will create new opportunities for investors in infrastructure, real estate, private equity, clean technology, and land for agriculture and forestry. There is a broad consensus among economists and business strategists that climate change and the need for sustainability in general require collective action by governments and the business community based on leadership and a collaborative spirit (Stern, 2006). The mutual dependence of business and society underlines the need to look for shared value leading to fruitful sustainability strategies (Porter and Kramer, 2006).

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Social sustainability: how to reduce poverty? Poverty is another main issue of sustainable economic growth. In the emerging economies the poor have legitimate hope that theirs and their children’s livelihoods will improve in the foreseeable future. In fact, in many emerging economies the middle class is growing, which implies that the livelihood of many millions of people are moving to a higher level of prosperity. The poor in the countries of the ‘bottom billion’ (most of them living in Africa and parts of Asia), however, do not have such a hopeful future. Although world-wide poverty may have been decreasing, in around fifty countries the world’s poorest people face an impending tragedy that is growing inexorably worse. This bottom billion lives on less than one dollar a day. These poorest of the poor are being left further and further behind with potentially serious consequences not only for them but for the stability of the rest of the world (Collier, 2010a). The poor and the Millennium Development Goals For them, the UN Millennium Development Goals (MDG) - as introduced in Chapter 2 - are extremely relevant. It has become clear, however, that the goals will not be reached by 2015 (as has been planned). In a number of areas notable improvements have been achieved, such as some successes in the reduction of poverty, accessibility of drinking water and the fight against Aids. Nonetheless, most goals are unlikely to be reached as can be derived from the UN’s MDG website: • Since the economic crisis, more workers find themselves and their families living in extreme poverty • Hope dims for universal education by 2015, even as many poor countries make tremendous strides • Poverty and lack of education perpetuate high adolescent birth rates • Poverty is a major barrier to education, especially among older girls • Child deaths are falling, but not quickly enough to reach the target • Recent success in controlling Measles may be short-lived if funding gaps are not bridged • Most maternal deaths could be avoided There is much to say in favour of a powerful pursuit of the Millennium Development Goals, especially where the programmes are promising but failing just because of a lack of funds. This is also a green economy matter. Export of minerals For the bottom billion the most important economic opportunities lie in the surge in the extraction of natural resources from their territories, in particular minerals. The scale of the involved financial flows will be without historic precedent. However, this will pose huge challenges to economic governance (Collier, 2010a). To realise credible forms of economic development (albeit a matter of ‘weak sustainability’ here; see also Chapter 2) it is crucial to make sure that the value of the exported resources is invested in projects that really contribute

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to the creation of prosperity in the long run (such as road infrastructure, education and food security). Major players here are the governments of the poor countries, the resource extraction companies, financial institutions, governments of the rich buying countries and international organisations. Also, China is playing a major role in the economic affairs of Africa and Latin America, driven by its continuing hunger for natural resources (Change, 2010; Chapter 8). In general, more transparency is an important means to realise fairer and more sustainable deals. This is a multi-faceted problem: 1. Will the poor countries receive a reasonable price for the resources they sell? International action could (help) provide a data base containing good geological information on minerals as well as relevant market information (prices). This will enhance market transparency and strengthen the supplying countries’ bargaining power vis-à-vis the resource extraction companies. 2. Do the poor countries have a fair chance to export their products to the rich countries? The least-developed countries have access to most OECD markets but further improvements are possible and wanted. 3. Will the governments that collect the revenues from resource exports truly invest the money sustainably for the common good or will they primarily use them to line private pockets? Also here transparency may be helpful. Various forms of law and charters are worthy of consideration: laws requiring Western banks to report deposits by ‘kleptocrats’ and charters to regulate the exploitation of natural resources, to uphold media freedom and to prevent fiscal fraud. “It may be hard to force corrupt governments to sign such conventions. But they give reformers some extra leverage” . Collier (2010b) further suggests that the emergence of major resource extraction companies outside the Organisation for Economic Co-operation and Development (OECD) has made the World Trade Organisation (WTO) the more appropriate institution for international cooperation on this issue. Compliance by resource extraction companies with payments integrity could be built into WTO rules of membership. The poorest nations need standards that match their own situation, such as the Extractive Industries Transparency Initiative (EITI) and the Natural Resource Charter. 4. Will the poor countries move forward towards positions that enable and empower them increasingly to partake in the manufacturing of (exportable) products? This is a crucial question as industrial growth normally leads to a significant reduction in poverty (UNIDO, 2009). Moreover, in general, manufacturing is less susceptible to the effects of climate change than agriculture. As a consequence of the growth of trade in manufacturing, the location of production plants has been shifting from developed to developing countries. However, this relocation has been highly concentrated in Asia. Many middle-income countries and most African countries stay behind. Not only are manufactured products

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traded, but the process of production is increasingly broken down into tasks that are themselves traded (unbundling). Potentially, trade in tasks is a lifeline for countries yet to industrialise, because it simplifies the process of getting started (UNIDO, 2009). International policies are necessary to support developing countries in having their shares in manufacturing whilst being safeguarded from opportunistic short-term foreign investments that target the lowest cost without showing any sign of social responsibility. Here, in principle, the best policies are integrated policies, that is, policies that also take the previous points into account (fair deals, access to export markets, investments of export revenues in projects which promise a better future).

8.6 Food security and climate change Ecological and social Food security is a topic that directly touches upon the main issues of ecological and social sustainability. It seems that agriculture has been largely neglected in the widespread discussion on climate change. There is ample reason to remedy this default, because agriculture can both be an engine of rural development that is helpful to the poor and play a crucial role in containing the progress and damaging effects of climate change. Estimates suggest that agriculture and forestry together contribute almost a third to production of global greenhouse gases. However, it should be acknowledged that agriculture can also be part of the solution. This perspective has to be combined with that of food security. This in its own right requires that agricultural production in developing countries undergo significant changes. Food production must increase by at least 70 per cent to meet demand by 2050. Climate change seems likely to reduce agricultural productivity, production stability and incomes. The development of climate-smart agriculture, therefore, is crucial to food security and climate change goals. Modern advances in agriculture such as inorganic fertilizers, pesticides, high yielding varieties, land management and irrigation techniques have considerably increased food production. However, this apparent advance has also contributed to levels of ecological damage, degradation of soils, unsustainable use of resources and health problems both to animals and people. Effective climate-friendly practices are already in existence and could be applied in developing countries. Adopting an ecosystem approach, working at landscape scale and implementing intersectoral coordination and cooperation are the necessary ingredients of such a development. This involves considerable investments in filling knowledge gaps by means of R&D in technologies, methodologies and new varieties (FAO, 2010). Transformations are needed both in large-scale commercial agriculture and in small-scale commercial and subsistence agriculture. In large-scale agriculture the reduction of emissions and abandonment of unsustainable practices are main concerns. In countries where smallholders comprise a major part of the economy, improvement of the productivity of smallholder farming systems is important both for food security and poverty reduction (FAO,

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2010). Improvement lies in areas such as water harvesting and irrigation, pest and disease control, ecosystem management, biodiversity, seed production systems and post-harvest controls.

8.7 Beyond climate change Climate change is the undeniably central issue in today’s discussions and newly drafted policies on sustainability. This has led to a strong focus on CO2 emissions for which ‘decoupling’ has not (yet) succeeded. However, various scholars have pointed to the fact that the world is equally (or more) threatened by other pollutants. For instance, Schmidt-Bleek (2008) is very critical of the fact that current efforts to reduce CO2 emissions are not embedded in a systematic strategy to protect the services of nature (requiring a general reduction in the consumption of nature in human production). Instead, CO2 reduction seems to hve become a single-minded fight against one symptom of the mismatch between economy and nature. Braungart & McDonough (2002) discuss the many substances that are released into the atmosphere, waters and soils. They represent wastage of valuable materials that could be used as inputs for production or in an earlier stage be replaced by eco-friendly materials which meet the requirements of the biological cycle. Besides, there is the technosphere with its own features. Mixing the biosphere and the technosphere thwarts many options for recycling (without losing ecological value: upcycling). Analysis of a TV set showed the presence of 4360 chemicals whose reuse and whereabouts after disposal remain uncertain. This is just one illustration of the uncontrolled presence of so many chemicals. In fact, the unscrupulous overuse of the earth’s sink function is not less harmful to its survival than its overburdened source function. Transition to a sustainable economy As discussed before, already the previous century witnessed serious warnings about the limits to economic growth. The previously discussed Factor 4 and Factor 10 have primarily focused on technology that, if implemented, would engender drastic increases in resource productivity so that the wasteful effects of on-going economic growth could be prevented. Economic evils were also seen as having been caused by distorted prices (as these insufficiently reflected all costs involved). More recently, there has been renewed discussion on economic growth itself, especially in the rich countries in which average income has reached a level from where further income growth will no longer contribute to well-being, especially when it tends to make ‘the rich richer and the poor poorer’. In the end a narrow-minded pursuit of economic growth will be counterproductive and pose a serious threat to human values. In the beginning, recovery from the credit crisis (which started in 2008) was intended to be stimulated by considerable public spending to restore production and consumption levels (inspired by Keynesianism, responding to the crisis of the thirties in the last century). By making this recovery ‘green’, the green economy could become closer to realisation. In practice,

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some but not much of this happened (Jackson, 2009, chapter 8). Out of a total commitment of almost $ 2.8 trillion towards recovery plans, $ 436 billion (15.6 per cent of the total) could be seen as green stimulus (HSBC, 2009). Moreover, it is quite possible that general recovery spending - without a green agenda - will be a threat to sustainability. There is a clear case for suggesting that green investment and green jobs should dominate economic recovery programmes (Jackson, 2009, chapter 8). Then investments will be the hallmark of greenness. The long-lasting nature of the economic and financial crisis (including the euro crisis) have led to substantial austerity programmes (rather than extra expenditure), especially in many countries in the euro zone. Jackson (2009) presents a transition to a sustainable economy that can be characterised by a new economic framework which establishes clear limits to resources and other environmental limits (implying a critical review of present consumption patterns). From there, there is a prominent place for beneficial, profitable investments in areas such as retrofitting buildings with energy- and carbon-saving measures; renewable energy technologies, redesigning utility networks, better public transport, public spaces and - last but not least - ecosystem protection and maintenance. All these measures should go together with a reforming of financial markets, so that destabilising practices are outlawed. National Accounts have to be further developed so as to reflect the losses of natural resources and the welfare consequences of environmental degradation. Special frameworks could be used to measure the welfare losses caused by an unequal distribution of income. Many economically emerging countries have created their economic wealth at the expense of natural resources and biodiversity while also the social burden of economic development has been unequally distributed. The destruction of natural and social capital that goes together with economic development has somehow to be stopped. This is a harsh message, but the positive thing is: it can be done in combination with creating prosperity for the many. However, the path towards the green economy may have many twists and turns which require strong leadership roles by the largest economies in the world. In the final analysis, to a large extent, it is companies which have to transform the economy through steps of sustainable value creation. This is a real challenge for managers and controllers who are aware of their social responsibility.

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KEY NOTIONS AND CONCEPTS • According to the UNEP, the green economy is an economy that results in improved human well-being and reduced inequalities in the long run (social equity), while significantly reducing environmental risks and ecological scarcities. • The green economy is closely related to the concept of Sustainable Development as launched by the UN’s World Commission on Environment and Change (the Brundtland Commission) in 1987 in its report "Our Common Future". • It cannot be denied that the world economy is still evolving in a way which gives a clear warning that ecological boundaries will be overstepped. • Since the appearance of ‘Our Common Future’, the world has undergone significant changes. These have to be taken into account when pondering on how to update and reinforce its message. • The energy crisis, financial crisis and food crisis are quite different phenomena, but they have in common that capitals have been wrongly allocated. They demonstrate a lack of long-term vision, social responsibility and setting the right priorities. • The issue of ‘leapfrogging’ should be on the world’s agenda with a view to encouraging the booming nations to make use of the best available clean technologies and proceed to develop better ones for the future. • The dwindling availability of natural resources (including biodiversity) requires the urgent development of new policies. If not given timely attention, their distribution between continents and nations could become a source of serious conflict. • Social sustainability occurs when formal and informal processes, systems, structures and relationships actively support the capacity of current and future generations to create healthy and liveable communities. • For many communities in the world social sustainability is primarily a matter of poverty reduction and ensuring a basic livelihood. Although this statement refers to the ‘bottom billion’ of poor people in the first place, social issues are also extremely relevant in the more wealthy countries. • Market forces, while being important in reaching a green economy (in particular, green innovations need to be profitable), are also inclined to make use of the ‘loopholes’ emerging in the current economic systems, that still tolerate or at times even encourage many

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unsustainable practices. Therefore, market forces should be embedded in wider policy frameworks focusing on sustainability. • Will the poorer countries evolve towards positions that enable them to undertake the manufacturing of (exportable) products? This a relevant question as industrial growth normally leads to a significant reduction in poverty. • Food production must increase by at least 70 per cent to meet demand by 2050. Climate change may reduce agricultural productivity. Adopting an ecosystem approach, working at landscape scale and implementing intersectoral coordination and cooperation are necessary requirements for achieving this increase. • Climate change is the undeniably central issue in today’s discussions and policies on sustainability. This has led to a strong focus on CO2 emissions for which ‘decoupling’ has not (yet) succeeded. However, various scientists have pointed to the fact that the world is equally (or more) threatened by other pollutants. • More recently, there has been a renewed discussion on economic growth itself, especially in the rich countries where income has reached a level from which further income growth will not contribute to well-being anymore, especially when it ‘makes the rich richer and the poor poorer’.

STUDY QUESTIONS 1. In what ways do you think the green economy differs from sustainable development? 2. What do the energy crisis, the financial crisis and the food crisis have in common? Explain. 3. How would you define sustainable economic growth? Do you think it is a feasible option? Explain. 4. Describe the concept of ‘ecological footprint’. 5. How do you think it is possible to strengthen social sustainability? 6. Why are markets important in reaching sustainability? 7. Explain why climate change causes great costs if proper measures are not taken. 8. Increasing extraction and sales of minerals in developing countries poses huge future challenges of economic governance. Explain why that will be the case.

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9. Agriculture can both be an engine of rural development that is helpful to the poor and play a crucial role in containing climate change. Explain how this could happen. 10. The unscrupulous overuse of the earth’s sink function is not less harmful to its survival than its overburdened source function. Explain this statement. 11. How far do you think your own country and its government is responding in a positive and responsible way to the important issues we have raised in this chapter?

References Ayres, R.U., J.C.J.M. van den Bergh and J.M. Gowdy (1998), “Viewpoint: weak versus strong sustainability”, Discussion Papers, No. 98-103/2, Tinbergen Institute. Brander, J.A. (2007) “Viewpoint: Sustainability: Malthus revisited?”, Canadian Journal of Economics, Vol. 40, No. 1 February, 2007. Braungart M. & W. McDonough (2002), “Cradle to Cradle: Remaking the way we make things”, 1st edition, North Point Press, San Francisco, Cal. Change, G. (2010), “China and the Credit Crisis. The Emergence of a New World Order”, John Wiley and Sons (Asia) Pte. Ltd, Singapore. Collier, P. (2010a), “Opportunities and Challenges for the inclusion of the ‘Bottom Billion’”, Keynote Lecture, Conference ‘Our Common Future’, Hannover, 3 November, 2010. Collier, P. (2010b), “The Plundered Planet: How to Reconcile Prosperity with Nature”, Penquin, London. Dasgupta P., Karl-Göran Mäler K-G. and Scott Barrett (2000). “Intergenerational Equity, Social Discount Rates and Global Warming”. Paper. FAO (2010), “Climate-Smart Agriculture. Policies, Practices and Finances for Food Security, Adaptation and Mitigation”. Goleman, D. (2010), “How Market Forces Can Build a Greener World”, www.danielgoleman.info (20 August, 2010). Hauff V. (2007), “Brundtland Report. A 20 Years Update”. Key note speech European Sustainability, Berlin 2007 (ESB07) ‘Linking Policies, Implementation, and Civil Society Action’, Berlin, June 3rd - 5th, 2007.

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HSBC (2009). “A Climate for Recovery – The colour of stimulus goes green”. Available at: http:// www.sefalliance.org/fileadmin/media/sefalliance/docs/Resources/Green_Economy/HSBC_A_ Climate_for_Recovery_Feb_09.pdf. Jackson, T. (2009), “Prosperity without Growth”, Earthscan, London. McKenzie, S. (2004). “Social sustainability: Towards some definitions”. Working paper series No. 27. Magill, Australia: University of South Australia, Hawke Research Institute. Mercer (2011), “Climate Change Scenarios. Implications for Strategic Assets Allocation”, Public Report. Porter, M. E., & Kramer, M. R. (2006), “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review, December, 1-15. Stern, N. (2006), “What is the Economics of Climate Change?”, World Economics, 7 (2), 2-10. Schmidt-Bleek (2008), “Future – Beyond Climatic Change”,Position Paper 08/01, Factor 10 Institute, France. UNEP (2009), “Global Green New Deal. An Update for the Pittsburgh Summit”. UNIDO (2009), “Breaking In and Moving Up: New Industrial Challenges for the Bottom Billion and the Middle Income Countries”, Vienna.

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ANNEX 1 Sources of information for corporate environmental management Source of information

Nature of the data/information

Purchase storeroom

- Flow of purchased goods - Weight of the materials (optional) - Types and quantities of packaging materials of purchased goods

Interim storage, goods for sale storage, internal logistics

- Use of raw materials and auxiliary materials, materials and semi-products per department, establishment, machine and production process (via material application forms). - Annual stock taking figures - Quantity and weight of produced semi and final products - Types and quantity of packaging materials of sold products

Department head, team manager, machine supervisor

- Use of raw materials and auxiliary materials, materials and semi-products - Data on energy and water consumption - Cost information - Types and quantities of waste, waste water

Environmental manager

- Use of raw materials and auxiliary materials, materials and semi-products - Data on energy and water consumption - Cost information - Types and quantities of waste, waste water - Data on air emissions

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Source of information

Nature of the data/information

Waste and hazardous materials specialist

- Quantities and types of waste - Subdivision of types of waste - Types of materials and hazardous materials - Storage (places) and handling of hazardous materials - Data on recycling, separation and purification of hazardous materials - Data on types and volumes of air emissions

Accounting, administration

- Quantity and costs of semi-products, raw and auxiliary materials, other materials via purchasing accounts - Quantity and cost of energy and water consumption via monthly and annual bills from suppliers/processors - Data on quantities of waste, discharge arrangements via bills from the processor - Expenses on the reduction of emission (e.g. filters)

Cost calculation, finance and control departments

- Costs per unit (e.g. material use per process or machine) - Overhead costs (often auxiliary materials, administration, lighting and the like) - Historical cost figures and longer term prognoses - Cost developments per cost type

(Source: VNO en MVO Nederland, Handboek Efficiënt ondernemen, 2006; translation TW)

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COLOPHON © Teun Wolters 2013 ISBN 978-90-816996-9-3

Published by • Wittenborg University Press Laan van de Mensenrechten 500 7331 VZ Apeldoorn The Netherlands www.wittenborg.eu

in cooperation with: • Uitgeverij Gelderland Hoofdstraat 143 8162 AE Epe The Netherlands www.uitgeverijgelderland.nl • Design: Studio Paf Oldenzaal, The Netherlands This work is subject to copyright. All rights are reserved, whether the whole of part of the material is concerned, specifically the rights of translation, reprinting, re-use of illustration, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data bases. For any kind of use, permission of the copyright owner must be obtained.

This book is printed on environmentally friendly FSC-certified paper, which is harvested from responsibly managed forests.

SUSTAIN SUSTAINABLE ABLE VA VALUE LUE CRE CREATION AT I O N As a Challenge to Managers and Controllers

SUSTAINABLE VALUE CREATION

Sustainable Value Creation as a Challenge to Controllers and Managers There is no longer any serious doubt that the limit to economic growth by small or large companies following traditional, time-honoured, business-as-usual production and trading methods is clearly in sight. The international business community is facing some of the most urgent and serious challenges of our age. It is time for urgent culture change to ensure survival. This most informative and useful book, written by a university lecturer with wide experience of the business world, provides clear explanations regarding some of the key issues, including: Strategies to achieve Sustainable Value; Corporate Governance and Corporate Social Responsibility; Environmental Management & Accounting; Sustainable Supply Chains and The Green Economy. Dr Teun Wolters challenges the status-quo, explains the problems and the need for entrepreneurship and innovation to integrate sustainability into the principal business processes. As Applied Research Professor and lecturer at Wittenborg University of Applied Sciences, located at Apeldoorn in The Netherlands, Dr Wolters is well-known to his students, who come from many different countries.They all share ambitions to enter the world of international business and management. For them this book provides a valuable source of knowledge and information. For people already in the ‘real world of work’ where the issues Teun Wolters describes are part of the daily agenda, this academic overview with a plea to take seriously the whole subject of sustainability will give comfort and support!

Teun Wolters

wittenborg.eu

Teun Wolters Wittenborg University Press

Business School

Business School