ExpertEnvironmental and sustainability factors
Learning outcomes
- List ways in which the business can affect or be affected by its physical environment.
- Describe ways in which businesses can operate more sustainably.
- Identify the benefits of economic sustainability to stakeholders.
Objective A: List ways in which the business can affect or be affected by its physical environment.
The relationship between a business and its physical (ecological) environment is reciprocal: the business impacts the environment, and the environment impacts the business. Businesses affect the environment primarily through resource depletion and pollution. Manufacturing firms extract raw materials (timber, minerals, water), often faster than they can be replenished. They also generate negative externalities—pollution. This includes greenhouse gas emissions (contributing to climate change), chemical runoff into rivers, and the generation of non-biodegradable solid waste (like single-use plastics).
Conversely, the physical environment severely affects business operations. Climate change leads to an increase in extreme weather events. A severe hurricane can destroy a company's coastal factory, disrupting the supply chain. Prolonged droughts can devastate agricultural businesses, driving up the cost of food inputs for restaurants and supermarkets. Furthermore, environmental degradation leads to stricter government regulations (e.g., carbon taxes) and shifts in consumer behavior (boycotting polluting brands), which directly impact a firm's profitability.
Consider 'AquaFarms', a large-scale salmon aquaculture business. AquaFarms affects the environment by releasing fish waste and antibiotics into the surrounding ocean, damaging local coral reefs. However, AquaFarms is also highly vulnerable to the environment. If global warming causes ocean temperatures to rise by just 2 degrees, the salmon become stressed, disease spreads rapidly, and the entire harvest could fail. Thus, ignoring the physical environment is an existential risk to the business itself.
Negative Externality
A cost that is suffered by a third party as a result of an economic transaction. For example, a factory produces cheap goods (benefiting the buyer and seller) but pollutes the local air (harming the local community).
- 1
Step 1: Business Impacting the Environment
To maximize profits, AquaFarms overstocks its sea pens. The concentrated fish waste creates an 'ocean dead zone' beneath the pens, killing local marine plant life and polluting the water.
- 2
Step 2: The Environmental Backlash
An unusually hot summer, exacerbated by broader climate change, raises the sea temperature. The already polluted, oxygen-deprived water in the sea pens becomes toxic.
- 3
Step 3: Environment Impacting the Business
A massive die-off occurs. AquaFarms loses 40% of its stock. The environmental damage they contributed to, combined with macro-environmental shifts, directly destroys their financial bottom line.
Environmental damage is not just a moral issue; it is a direct operational and financial risk to the business.
Which of the following is an example of the physical environment directly affecting a business's operations?
What is meant by the term 'negative externality' in an environmental context?
How might a business in the agricultural sector be negatively affected by long-term climate change?
Objective B: Describe ways in which businesses can operate more sustainably to limit damage to the environment.
Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs. Businesses can adopt numerous strategies to operate sustainably and limit environmental damage. A primary method is adopting the Circular Economy model. Instead of the traditional linear model (take, make, dispose), a circular economy focuses on designing products for durability, reuse, repair, and recycling. This minimizes waste and reduces the need to extract new raw materials.
Businesses can also improve Energy Efficiency and transition to Renewable Energy. This involves upgrading factories with energy-efficient machinery, optimizing logistics to reduce fuel consumption, and installing solar panels or purchasing wind energy to reduce their carbon footprint. Furthermore, businesses can implement Sustainable Procurement policies. This means auditing their supply chains to ensure they only buy from suppliers who also adhere to strict environmental standards (e.g., buying only FSC-certified sustainable timber).
Consider 'ThreadLoop', a fictional clothing manufacturer. Historically, they used cheap synthetic fibers and encouraged 'fast fashion' (linear model). To become sustainable, ThreadLoop changes its entire model. They start using 100% organic cotton (sustainable procurement). They power their sewing factories with solar energy (renewable energy). Finally, they launch a 'take-back' program where customers can return old clothes, which ThreadLoop shreds and spins into new yarn (circular economy). These actions drastically limit their environmental damage while appealing to eco-conscious consumers.
The Circular Economy
Examiners love the concept of the Circular Economy. Remember the key difference: Linear = Take -> Make -> Dump. Circular = Make -> Use -> Return -> Recycle -> Make.
- 1
Step 1: Sustainable Sourcing
ThreadLoop stops buying cotton from farms that use heavy pesticides and deplete local water tables. They switch to certified organic farms that use rainwater harvesting, ensuring their raw material extraction is sustainable.
- 2
Step 2: Operational Efficiency
They audit their manufacturing process and discover their dyeing machines waste thousands of gallons of hot water. They invest in new closed-loop dyeing technology that filters and reuses the same water, drastically cutting energy and water use.
- 3
Step 3: Closing the Loop
Instead of their clothes ending up in a landfill, ThreadLoop designs them to be easily disassembled. They offer customers a 10% discount on new items if they return old ones, which are then recycled into new garments.
Operating sustainably requires a holistic approach, changing how materials are sourced, processed, and ultimately disposed of.
Which of the following best describes the concept of a 'circular economy'?
A furniture company decides to only purchase wood from forests that are certified by the Forest Stewardship Council (FSC), ensuring trees are replanted as they are cut down. What sustainable practice is this an example of?
How can a logistics and delivery company most effectively reduce its direct environmental impact?
Objective C: Identify the benefits of economic sustainability to stakeholders.
While environmental sustainability focuses on the planet, economic sustainability focuses on the long-term financial survival and resilience of the business itself. It means generating profit in a way that does not exhaust the resources (human, natural, or financial) required to generate future profit. Operating with economic sustainability provides massive benefits to all stakeholder groups.
For Shareholders, economic sustainability reduces risk. A company that relies on cheap, highly polluting energy might face catastrophic carbon taxes in the future. A sustainable company avoids these regulatory risks, ensuring stable, long-term dividend payouts and share price growth. For Employees, a sustainable business offers job security. A company that plans for the long term is less likely to go bankrupt or engage in sudden, massive downsizing. Furthermore, sustainable companies often have better corporate reputations, making employees proud to work there.
For Customers, economic sustainability ensures a reliable, long-term supply of goods and services. They do not have to worry about their supplier suddenly going out of business. For the Local Community and Government, a sustainable business provides a stable tax base and consistent local employment over decades, rather than a 'boom and bust' operation that extracts local wealth and then collapses. Consider 'EverGreen Energy', a wind farm operator. Because wind is infinite (unlike a coal mine that eventually runs empty), EverGreen's business model is economically sustainable. Shareholders get guaranteed 20-year returns, employees have lifelong careers, and the community gets a permanent, clean power source.
The Triple Bottom Line
Economic sustainability is one pillar of the 'Triple Bottom Line' (Profit, People, Planet). A business cannot help people or the planet if it goes bankrupt. Economic survival is the prerequisite for social and environmental good.
- 1
Step 1: Shareholder Benefit
EverGreen secures a 25-year contract to supply the national grid at a fixed price. Because their 'fuel' (wind) is free and infinite, their costs are highly predictable. Shareholders benefit from low-risk, guaranteed long-term returns.
- 2
Step 2: Employee Benefit
Unlike a local coal mine that will close when the seam is exhausted in 5 years, EverGreen's turbines will operate indefinitely. The engineers hired to maintain them benefit from lifelong job security.
- 3
Step 3: Community Benefit
The local town council relies on corporate taxes to fund schools. Because EverGreen is economically sustainable and won't suddenly go bankrupt, the council can confidently plan 10-year school building projects based on reliable tax revenues.
Economic sustainability shifts the corporate focus from short-term quarterly profits to long-term value creation for all stakeholders.
What is the primary benefit of a company's economic sustainability to its employees?
How does operating with economic sustainability primarily benefit a company's shareholders?
Which of the following best defines 'economic sustainability' for a business?