CHAPTER 2

What Is Meant By Sustainability and Who Defines It?

The previous chapter briefly introduced the concept of sustainability and the paradigm of systems thinking. Distinguishing the systems mindset from other mental frameworks, Chapter 1 offered it as an enhancement to the current mindset that has been predominant and unquestioned until relatively recently. A variety of examples were used to explain what is meant by a systems paradigm and illustrated how such thinking is more comprehensive and sufficient in explaining and addressing the challenges of this complex world, and in business concerns more specifically. This chapter expands on the concept of sustainability and how it bears on business practices, incorporating the systemic mindset. Triple bottom line (TBL), CSR, stakeholders, and other often used terms are explained within the context of systems and sustainability.

Sustainability Jargon 101: TBL, 3P, EEE

It wasn’t until 1987 that the word sustainability, as used in business, meant anything more than the continued survival of a commercial enterprise, operating with sufficient financial health to avoid bankruptcy or outright demise. That year the United Nations World Commission on Environmental and Development issued a report that would become the foundation for the ongoing discussion about sustainability. Known as The Brundtland Report, it addressed, and defined, sustainable development as “the ability to...ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.”¹

Although the report was extensive in explaining the causes of environmental degradation, particularly poverty and increasing social inequity, the above-quoted sentence about intergenerational responsibility became the baseline for the concept of sustainability. Unfortunately, like most quotes intended to simplify a term, it was taken out of context, leaving out many of the crucial components of sustainability (and sustainable development) discussed in the report.

While focusing on parity between generations, this definition does not address equity within generations. Three pages earlier, the report cites the gap between developed nations and developing nations, with the former effectively making the rules and using the majority of the ecological capital, and states, “This inequality is the planet’s main ‘environmental’ problem; it is also its main ‘development’ problem.”² Reinforcing this contention, it later states, “It could be argued that the distribution of power and influence within society lies at the heart of most environmental and development challenges.”³ The report was written by scientists and development experts. Its purpose was to address the current and future concerns of all humanity. It pointed out that a minority of humanity lives in industrialized nations, and the comparative percentage of that minority was dropping.

This social equity aspect is one expression of the systemic nature of the concept of sustainability. In a broader sense, sustainability indicates the interrelationships between pretty much everything: economics, industry, people, resources, ecosystems, culture, policy, government, science, technology, management, ethics, and more.

The Brundtland Report’s analysis notes six sustainability concerns: population and human resources, food security, species and ecosystems, energy, industry, and urban challenges. Human population growth is forecast to continue through the middle of the 21st century. Using population in relation to food security offers a starting point to illustrate the systemic nature of sustainability. Over 900 million people around the world do not have sufficient nourishment, and this problem is projected to grow as population increases.⁴

A host of factors influence the ability to address this set of current and predicted future problems. Agricultural output is a technological issue, but is also increasingly recognized as an ethical and biological one if genetically modified seeds, plants, or animals are used. It is a cultural (and often technological) issue if local knowledge and skills are not respected and utilized. It is a social equity issue if segments of populations are pushed to marginally productive land by government or agricultural and development industry lobbying influence on government.

Agricultural output is also an environmental issue if crop production results in soil erosion. Water and soil pollution are caused by chemical runoff from fertilization and pesticide and herbicide applications. The production of methane in animal husbandry contributes to climate change. An additional systems impact is the loss of species biodiversity, a rich array of potential materials and solutions to existing problems, through the clearing of sensitive habitat for agricultural purposes results.

Beyond this, it is also a policy and economic issue in terms of agricultural subsidies for either locally produced or imported foodstuffs, land use reforms, distribution logistics, and other types of government policy and support for farmers and the agricultural and food production industry. To some extent it is also an energy issue, and an industrial one, through the production, transport, and use of equipment, fertilizer, and other chemical applications in the growing of crops and livestock, and the processing, packaging, transport, and protection of foods from spoilage.

Climate change provides another systemic illustration of a seemingly environmental problem that is broadly embedded in many human systems and processes. Although there are some naysayers,⁵ the consensus is that the phenomenon is human-generated.^6,7 It is caused largely by commercial and personal transportation and industrial and domestic energy use, as well as some agricultural practices, and so has its origins in energy production and use and industrial agricultural processes.^8,9 The cutting down of forests for agricultural production and cattle grazing reduces the available tree mass that absorbs carbon dioxide, one of the gases responsible for warming.

Resolving these problems, then, requires examining their systemic impacts from a multidisciplinary approach, as the problems are generated from embedded issues in intertwined subsystems of the larger biosphere.

A philosophical or moral inclination toward social equity is actually beside the point. Even as the middle class in developing nations such as China and India rapidly expands, a growing percentage of the world’s population is becoming increasingly marginalized. The wealth gap has been widening between the least developed and other countries, and is forecast to continue to grow.¹⁰ The ensuing social unrest and political upheaval make global trade more difficult and risky.

Developing nations are not alone in experiencing such pressures, and the Occupy Movement may be an indication of this trend. In 2011, the Organization for Economic Co-operation and Development (OECD) reported that income inequality has been rising in OECD countries (industrialized nations) since the late 1970s. That gap continues to widen in most of those countries, with the income of the wealthiest 10% increasing more rapidly than the poorest 10%.¹¹ The pace is widening more rapidly in the United States than in most other countries, caused by factors including technology, globalization, and government inattention.¹²

Is Sustainability an Outdated Concept?

As a term to describe the continuous march of civilization while avoiding catastrophic environmental destabilization, massive social upheaval, or severe economic devastation, and at the same time also addressing the life-threatening unmet needs of at least one seventh of humankind, sustainability has been serving for several decades. As thought and research on the subject has progressed, there are several streams of criticism to be aware of.

Among the louder set of critical voices are those who believe that the term has been co-opted by marketers and firms that skim off the benefits of its use while ignoring or brushing aside anything but its most superficial applications. Sustainability is seen as a fashionable idea of the moment rather than as a complex set of interconnections with lasting and deep value.

These critics have a salient point. Not to denigrate small incremental changes or those that immediately and clearly benefit an organization, but the term has certainly been used as a ploy to gain advantages while firms are simply conducting business as usual, or worse, deceptive tactics to look responsible or claim to adhere to certain standards while doing otherwise. Even well-intentioned firms make commitments but often fail to follow through, according to recent research.¹³ This is also a complaint about sustainability reporting: to report without setting goals, to fail to report on progress toward previously set goals, to simply gather data without creating an action plan for change, or to check off indicators without transparency or accountability is to engage in a form of greenwashing.

The original term from the Brundtland Report, “sustainable development” has been faulted as an oxymoron, and as a misguided attempt to turn the developing world into a copy of the consumer model economy of the developed nations. Indeed, the “sustainable consumer” shares this contradiction of extending the problem rather than correcting it.

Another set of objections, which apply to both the concept of sustainability and the term, faults the word for being past its usefulness, partly for the reasons above, but also because it is overused, too vague and elusive, doesn’t inspire, and evokes a sense of fatigue. Newer terms meant to prompt a more enlivening and paradigm-shifting sensibility include “flourishing,”¹⁴ “thriving,”¹⁵ and “abundance.”¹⁶ Even while sustainability may be a concept that has arisen as a result of a new skepticism toward the notion of progress and as a dawning question as to whether the world is one of scarcity or abundance,¹⁷ the backlash centering on the term is not about whether or not there is an urgent set of issues to address but rather how to address them.

The Three-Legged Stool

For the purposes of business interests, though, the concept of sustainability has often, and thankfully, been distilled into a simple three-legged stool. The TBL or 3BL, an accounting framework designed to integrate ecological and social performance into financial reporting, is a means for companies to incorporate consideration for people, planet, and profit, or 3P. Alternatively expressed as 3E, for equity, ecology, and economy, it’s a notion intended to include natural and human capital to measure organizational success. It is not a fully accepted path to value creation, but the premises underlying TBL (and the other concepts that follow in this section) are increasingly used not only in business settings but also in governments, regional development initiatives, and non-profits. While Andrew Savitz and Karl Weber brought the concept into the business market by associating it with improved profitability,¹⁸ John Elkington, author of the book Cannibals with Forks (1997), popularized the concept, insisting that the drive toward sustainability provides an unprecedented opportunity for commercial gain and competitive advantage.

Elkington explores what he calls “paradigm shift revolutions” between the existing capitalist mindset and that informed by TBL. Values will move from a preeminently hard, quantitative, sharply economic standpoint to grow more inclusive, where softer qualitative values such as stakeholder relationships, cultural diversity, quality of life, and a stronger consideration for the future are incorporated. Transparency, which has traditionally been closed, will become more open in what he called the “X-ray environment” as businesses and government find that keeping secrets becomes both more difficult and more costly, with whistleblowers and WikiLeaks-type organizations becoming more common. Lifecycle technology is being recalibrated from a focus on only the product to the entire cradle-to-cradle value chain, where production processes are identified and examined for the impacts they cause in heretofore seemingly unrelated outcomes (tobacco and lung cancer, hydraulic fracking and ground-water contamination, carbon dioxide and climate change).

Partnerships between organizations, whether intra- or inter-industry, or between business and government and non-governmental organizations will transition from subversion, a highly competitive state, to a more cooperative, symbiotic one, which Elkington labels “co-opetition,” in which loyalty and trust are built and maintained. Time horizons will switch from a wide view of current circumstances as informing knowledge to a longer perspective that uses the past as a lesson and the state of the future, generations ahead, as one of the most important considerations in current decision making. Where the old paradigm of governance has been exclusive, a shift toward the inclusion of multiple stakeholders and greater diversity of backgrounds on boards is another of the revolutions in mindset he sees as both desirable and inevitable.

One of the issues cited as a problem with TBL accounting is that the three components do not share a metric. Profit is measured in monetary terms, but there are not yet valid ways to quantify and compare the loss of critical ecosystems, clean air, or healthy communities. Another problem is adjusting for industry sector operational differences. Even if an index were to be created, there is the problem of how much weight to give to each component.

Yet, these issues do not negate the value of TBL. While there are currently no universal means of measuring TBL, each of these criticisms can be addressed by businesses through stakeholder engagement (see the section on stakeholders later in this chapter). Participation from stakeholders and subject matter experts can help a business determine the set of measures to be used. For example, environmental impacts that are quantifiable include consumption of resources, such as energy and water, and pollutants emitted. Quantifiable social impacts include worker safety, diversity, employee training and development, fair dealing, anti-corruption, and community investment.

A growing industry of sustainability consulting firms assists businesses in creating systems for measuring, tracking, and reporting these metrics for businesses at the start of the learning curve. Reporting may be accomplished in a variety of ways. Some firms incorporate TBL information into their annual financial report, others issue an environmental or social report (or both combined); still others issue a full sustainability report.

Prior to deciding about whether and how to begin TBL measurement and reporting, planning is strongly recommended (see Chapter 7 for more detailed information). Planning and some research are necessary as there may be national and international reporting trends and standards within your industry. Any kind of sustainability planning and reporting will require resources and budgetary considerations, and board and C-level support, which is usually gained by establishing the case and setting high level objectives aligned with the organization’s values and mission. A reporting strategy and direction will need to be established, and the engagement of stakeholders will help the firm prioritize concerns and identify appropriate performance indicators. As always, there are legal implications to review. Gaps and barriers between current and desired reporting should be determined, as well as the content and structure of the report, specific data to be collected, and methods for data collection and analysis. The Group of 100, an association of senior finance executives in Australian firms, offers a useful guide to TBL reporting.¹⁹

The Global Reporting Initiative (GRI), an organization that has developed a sustainability reporting framework, is among the more commonly used methods of documenting TBL impacts, which will be discussed in Chapters 6 and 7.

Another aspect of reporting is verification by a third-party auditor to assure the report’s credibility and reliability. Some metrics and reporting standards require third-party verification while for others, like GRI, it is voluntary.

A host of terms and acronyms have evolved to capture corporate interpretations for instituting efforts and reporting on results, although there are differences among them. (Refer to the glossary at the beginning of this book for a list of terms and acronyms.)

CSR and Sustainability

Corporate Social Responsibility (CSR) is among the most popular of terms to describe how businesses address ESG issues. There are some federal, state, and local laws regulating how industry conducts itself in regard to impacts like air and water pollution, fisheries management, and pesticide use, employment policies, working conditions, and other aspects of commercial conduct. Yet, there are no regulations regarding what is or is not included in CSR activities or reporting.

It is, at least at this time, a legally voluntary set of practices, and firms are at liberty to employ the term however they choose. One definition of CSR is “the way in which business consistently creates shared value in society through economic development, good governance, stakeholder responsiveness, and environmental improvement.”²⁰

As a result practices that are labeled CSR run the spectrum from marginal to groundbreaking. Some firms believe that they are “doing” CSR by such minimal initiatives as allowing employees to take a day off to volunteer or funneling some charitable donations into their local community. Others restructure their firm’s mission, vision, and processes to incorporate social, environmental awareness, or both, and deliverables into all aspects of their operations.

However, it must be understood that CSR efforts are not the same as sustainability. For one thing, sustainability is a hoped-for state rather than a current fact. While scientific research tells us that current resource use is unsustainable, it is less clear as to exactly what it will take to reach a sustainable state of dynamic equilibrium. Aiming toward net zero resource use, which means bringing the overall consumption of resources down to an effective rate of zero, is one way to address the environmental side of sustainability.

Social sustainability, the notion that all individuals in current and future generations should have access to social resources that allow them to develop their capabilities, encompasses human rights, labor rights, and corporate governance. From a policy standpoint, the aims of social sustainability include basic infrastructure and services, education, employment, freedom, justice, equitable distribution of power and resources, and access to decision making. The extent of government involvement in the provision of these ends is a contentious issue, but industry’s contribution is even more controversial. Even so, companies can and do make efforts to minimize harm to their employees, the communities and supply chains within which they operate, and consumers of their products or services.

Secondly, and perhaps more importantly, sustainability requires a focus on all three legs of its stool without prioritizing one or two over the other(s) to the point at which, figuratively, the stool is unstable. The metaphor portrays the need for balance between economics, environment, and social equity. As global trade has emphasized economic growth above all other considerations, this imbalance has manifested itself in costs to the global biophysical resource base and social well-being to the extent that one or more of the subsystems may well deteriorate beyond the capacity to recover. As much as people may muck it up, the planet will eventually regain its dynamic equilibrium. The “anthropogenic” (man-made) influence, however, may create conditions that make survival for humans and much of other life, including the plants and animals that society relies on for nutrition and stable water resources, much more difficult than it is currently.

Environmental and social doomsaying is both annoying and depressing. Civilization cannot afford, though, to ignore ever accumulating research indicating deterioration to air, oceans, biodiversity, soil levels, potable water supplies, climate stability, political equilibrium, and the security threats each of these provokes. As Ray Anderson, the now deceased CEO of sustainability innovator Interface, asked, “What is the business case for ending life on earth?”²¹ In addition to the media and the public, insurance companies and investors have begun to believe the answer to this question is a firm “There isn’t one!”

CR, CSR, Green, Sustainable—To What Degree?

Some large public firms saw this impending trend and became leaders and innovators at implementing practices.²² Regularly appearing since 2005 on the annual Global 100, a list of large cap firms with the strongest performance using 12 key performance indicators, is Intel. Their multipronged approach includes intra- and inter-organizational strategies, as well as creating industry level initiatives and partnering with governments. One strategy that improves buy-in across the organization is tying the variable compensation portion of all employees’ pay to the achievement of their sustainability metrics. Intel is working with a number of organizations in the computer industry to develop and market more energy efficient computing devices through the Climate Savers Computing Initiative, and on better social and environmental extractive practices through the Electronics Industry Citizen Coalition. The corporation also worked with governments to develop environmental and social impact standards.

Simply being listed does not, of course, guarantee that a firm is free of risks. Some of the corporations appearing on these lists have simultaneously been involved in fraud or corruption scandals. Some have engaged in highly public dubious environmental and social practices. Sustainability performer listings are subjectively designed and can be susceptible to influence. Some firms may pursue these listings as a tactic to allay public scrutiny and outrage.

CSR is not the only way organizations characterize their efforts. Corporate responsibility (CR), corporate citizenship, green practices, and corporate accountability are other frequently used terms. Accountability and transparency are relatively new to the business world, so the use of terms is still developing and is in a state of flux. Some companies interpret corporate citizenship as solely addressing governance issues. Other firms consider charitable giving as the appropriate totality of their CR efforts. Green practices are likely to refer to a focus on environmental efforts, with little attention paid to the social and governance components of sustainability. At this stage, these terms are used somewhat interchangeably amongst firms for any programs beyond traditional short-term economic concerns. While individual firms might have more specific and limited definitions of them, this book defines sustainability, in the business context, as encompassing a comprehensive set of governance, economic, social, and environmental factors.

Sustainability and Stakeholders

Corporate performance has typically predominantly been measured by financial return to shareholders, as corporations have a legal responsibility to increase shareholder value. In the last quarter of the 20th century, an influential article in The Journal of Financial Economics pushed this motivation to the forefront of corporate attention.²³ According to the authors of the article, because executive pay was not tied to shareholder value, the executives had more incentive to attend to their own pay instead. Consequently, not only was shareholder value diminished, the entire economy was not getting adequate value from a stronger focus on increasing company value. This realization was soon followed by a practice of tying executive pay to stock value, in the form of stock as compensation.

Unfortunately, this scheme was designed in a way that encompasses only short-term moves in stock rather than longer-term shareholder value. Executives do not have as much control over long-range results as they do over the next couple of quarters. As Roger Martin cites in a 2011 Harvard Business Review article, the data indicates that three decades of maximizing shareholder value resulted in lower annual real returns than were experienced in the period 40 years earlier.²⁴

The positing of shareholder maximization as the desired end result of corporate function serves as a useful application of systems concepts. Remember that the purpose of a system determines its behavior. Most corporate mission statements don’t prioritize, or even mention, maximizing shareholder value, yet most firms operate as if their purpose is exactly that. Mission statements, often also called “statements of purpose,” have firms dedicating their efforts to being the best in their industry, excelling at customer satisfaction, or creating and inspiring progress. When the purpose-in-use is to maximize shareholder value, product quality and customer service may suffer, although operations based on mission statement purpose do not necessarily mean that profits and share price will decline.

That is only the first systems lesson here, though. Shareholders and customers are only two groups among many upon whom an organization’s purpose will have an impact. Just ask the employees of General Electric (GE) between 1981 and 2001 when Jack Welch was the CEO, or Gulf coast residents and businesses after the BP Deepwater Horizon oil spill in 2010.

Over the last few decades a steady succession of corporate disasters, such as Love Canal, the Union Carbide disaster in Bhopal, the Exxon Valdez oil spill, the WorldCom and Enron accounting scandals, and Nike’s sweatshop practices, have highlighted that businesses do not exist in a vacuum. These incidents drew significant media attention, followed by public outrage, and sometimes, by legislative action. Calls for greater accountability and transparency to non-shareholder stakeholders became widespread.

Shareholders and Stakeholders

The term stakeholder originated at Stanford Research Institute in the 1960s, but was taken up and popularized in R. Edward Freeman’s 1984 book Strategic Management: A Stakeholder Approach. Defined as individuals and groups who either benefit or are harmed, or whose rights are respected or violated by the firm, Freeman included stockholders, employees, managers, customers, suppliers, and the local community. His question, “For whose benefit and at whose expense should the firm be managed?” implicitly referenced a systemic view of the corporation. Value creation is still the purpose of the business, yet that value should not be created at the expense of a subsystem.²⁵

Later discussion about stakeholders by some management experts expanded the stakeholder groups to include future generations and the natural environment, thereby widening not only the breadth of the system but also its time frame. The consensus of scientists has concluded that, as a species, humans are benefitting at the expense of both of these stakeholders. There is little point in organizational longevity if the survival of future generations, who make up employees, customers, and vendors, was imperiled because the current living generations did not take decisive and effective action.

Even if you do not agree with a moral obligation toward future generations, including your own descendants, consider your dependency upon natural capital for basic survival. The era of abundant potable water, ample arable soil, and taken-for-granted clean air is behind us.²⁶

Beyond existing generations, there are reasons to take decisive and substantive action, though. Climate scientists suggest that even if greenhouse gas (GHG) emissions were to not increase beyond 2007 levels, the earth will continue to warm.²⁷ Studies project that climate change is likely to lead to more extreme temperatures at both ends of the spectrum, disruptions in the food supply, drought, and higher incidence of infectious disease by the end of this century.

Critics of stakeholder theory assert that it is impossible to maximize value to more than one stakeholder group simultaneously, and that value creation is more of a scorecard than a purpose. Indeed, a number of scholars who support the general idea of stakeholders believe the theory inadequate in explaining how to weigh and prioritize stakeholder interests. In spite of these suggested flaws, many companies have engaged in stakeholder management, balancing shareholder value maximization with value creation for other stakeholders.

Stakeholder Inclusion Examples

The term “stakeholder inclusion” is often seen in the context of governmental agency and intergovernmental development projects, as a strategy for improving the success of an initiative, but can just as effectively be applied in a business context. Engaging stakeholders by informing them through communications channels and by soliciting their feedback about processes, programs, products, and plans is a systemic business strategy. It serves as an early warning mechanism to avoid problems and concerns, and it increases stakeholder buy-in while polishing a firm’s reputation, enhancing brand loyalty, and bringing diverse perspectives together for innovation and creativity.

Like it or not, stakeholder activism is driving corporate change. In April 2012, Coca-Cola withdrew its funding from the American Legislative Exchange Council (ALEC), on the heels of social-media-generated negative publicity about ALEC’s promotion of voter ID legislation. Critics of ALEC, including stakeholder groups such as customers, NGOs, and communities, asserted that this legislation was a way of suppressing votes, particularly among minority populations, that ALEC promoted other legislation that would disenfranchise minorities, and that they promoted climate change denial legislation.²⁸

Firms are finding higher levels of consumer distrust as well as higher expectations. Recent research found that only 44% of Americans trust companies’ green claims, and that 77% would be willing to boycott a firm if they believe the firm had misled them. Close to 90% expect firms to understand and address the environmental lifecycle impact of their products, including manufacture, use, and disposal, and they want more easily accessible information for making decisions.²⁹ A study of executives and managers in 113 countries indicated that greater levels of stakeholder inclusion, even including collaboration with competitors, were practiced by firms that were profiting from their sustainability practices than those firms that were not.³⁰

Coca-Cola’s stakeholder inclusion efforts go beyond the usual customer complaint line and employee feedback surveys. They proactively and regularly meet with trade and labor unions, host annual industry conferences on human rights, convene expert panels to address child labor issues, and have been active in forming an industry association to promote responsible supply chain sourcing.³¹

As one of Starbucks’ sustainability efforts, a program to reduce post-consumption coffee cup waste, the firm has had annual “Cup Summit” events. Initial actions to address this waste by creating recyclable cups met with challenges due to variances in local recycling capabilities where the stores were located. The step Starbucks took to resolve the problem was to invite a wide range of stakeholders, including recyclers, municipalities, cup manufacturers, raw material suppliers, NGOs, academics, and retail and beverage businesses to come together to develop solutions.³²

Why Sustainability Is More Than a Trendy Concept

A Massachusetts Institute of Technology (MIT) Sloan Management research study released in December 2011 concluded, “Sustainability Nears a Tipping Point.”³³ Two-thirds of the nearly 2900 managers and executives who responded to their survey agreed that sustainability was a critically important competitive issue in today’s marketplace. While only about a third of responding companies were currently profiting from their sustainability practices, an increasing percentage of firms were investing in such practices. A critical mass is building, and the question is shifting from whether to incorporate sustainability to how to do it.

The study cites both external and internal pressures as driving the trend toward sustainability. Consumer demand, media, social networking, government regulation, higher expectations from institutional investors and insurers, and CSR rankings are some of the external drivers. Firms that profit from their practices also usually are internally motivated through board directives, executive compensation tied to sustainability metrics, employee activism, clear metrics, and organizational support for innovation in not only practices, but also business models.

These drivers have created the push toward sustainability in business, but the MIT Sloan study found convincing evidence that both opportunity and necessity are compelling companies to do more than consider sustainability initiatives as an add-on. Instead, sustainability is progressively driven deeper into all the units, processes, and practices within a firm, and a systems perspective is the common thread that unites them.

A number of business management experts are coming to the conclusion that reporting on ESG practices, in addition to the required public financial disclosure, will soon be mandated. Harvard Business School’s Robert Eccles believes that integrated reporting will not only be mandatory, but will also be standardized and enforced.³⁴

Integrated reporting means that the firm uses that process as a mechanism, even a discipline, in positioning the ESG aspects to broaden their overall value creation strategy, rather than as an add-on. The adoption of integrated forms of reporting is gaining momentum. The European Union and South Africa are have mandates on the books or pending, and many multinational firms are adopting the practice, in the process pushing their industries, vendors, and suppliers in that direction as well. Sooner or later, Eccles believes, legislation in the United States will follow.

There is also pressure for integrated reporting from investors, who increasingly perceive non-financial information as material to firm longevity and profitability. Governments and NGOs are also more often and consistently pushing companies to be transparent about their ESG practices, according to a 2012 article from Bloomberg Businessweek.³⁵ Despite the fact that such reporting isn’t yet mandatory in the United States, every year more firms have made these disclosures, seeing them as a long-term profitability strategy.

Consumer activism and non-governmental groups are another set of drivers. For example, in August 2012 consumer products giant Johnson & Johnson announced a web-based ingredient transparency initiative and the removal of certain ingredients from their products, citing consumer concerns about potentially toxic ingredients.³⁶ Although currently considered safe by regulatory agencies, parabens and ingredients that release formaldehyde were of particular focus by the Campaign for Safe Cosmetics, a coalition of NGOs including the Environmental Working Group.³⁷

Over the last few years, fast food company McDonalds has bowed to consumer and activist group pressure on a number of practices. They discontinued selling chicken fed on soya from plots of deforested Amazon rainforest, made their Happy Meals healthier, halted the use of genetically engineered potatoes, replaced foam cups with paper ones, required their pork suppliers to stop using gestation crates, and ceased using “pink slime” in their ground beef.³⁸

Campbell’s is phasing out its use of bisphenol-A in their can linings over consumer fears about the substance.³⁹ After a consumer firestorm, Bank of America dropped a proposed $5 debit card transaction fee.⁴⁰ Starbucks began selling fair trade certified coffee.⁴¹ Public demand shapes decision making in business, and as the public perception of acceptable business practices shifts, so does the corporate incentive to change.

Insurance regulation is in the process of becoming another force impelling firms to address their operations. State insurance commissioners in California, New York, and Washington State now require insurers to switch from a backward-looking risk assessment model to one that anticipates how they will respond to predicted climate change impacts, such as increased wildfires, rising sea levels, and more frequent and severe storms.⁴² It is inevitable that these insurers will require their policyholders to address these risks in turn or face substantially higher premiums.

Built-in Sustainability Benefits to Firms

A number of built-in benefits to integrating sustainability programs have already been discussed, yet cost savings, improved image, enhanced employee attraction, retention, and engagement, and new markets and revenue sources are only some of the potential wins. Another bonus is that measurement activities required to collect data for reporting can, and often do, lead to product, service, and operational innovations and improvements and more effective business processes.

Incorporating sustainable practices often strengthens compliance with legislative and policy mandates, and reduces exposure to tax issues. Sector leaders have the opportunity to be influential in the creation of government policy, which then provides them with a competitive advantage. Addressing sustainability risks often leads to improved access to investment capital. Enhanced goodwill can also increase speed to market by reducing opposition.

Seeking solutions to sustainability problems drives innovation, which then usually drives value creation. Sustainability is, in essence, basic business pragmatism. Reducing dependence on foreign oil is not only a national security issue, but reduces operational risks and energy price uncertainty for industry. Ensuring the protection of not only the viability of critical domestic ecosystems and future prosperity for the current generation’s children and grandchildren, a focus on sustainability in business practices elevates a nation’s economic standing among other nations.

As if these reasons weren’t compelling enough, from a business case perspective, there is research documenting the superior economic performance of companies that have integrated ESG or sustainability strategies.^43–45 In one study, firms considered sustainability leaders in six different sectors outperformed the general stock market by 25%, with 72% outperforming their peers.⁴⁶ Firm value has been shown to be higher in companies with CSR strategies that also have high consumer awareness.⁴⁷ A 2011 study by researchers at Notre Dame and Georgetown found an association between firm value and carbon emission levels, where heavier emitters had lower value. It wasn’t a small hit, either: for every additional thousand metric tons of carbon emissions for the sample of S&P 500 firms, firm value decreased by an average of $202,000.⁴⁸

Large cap firms aren’t the only beneficiaries, or practitioners, of sustainability practices. Small and medium-sized firms are paying attention, and are also realizing bottom-line benefits. A survey of over 1300 small to medium enterprises from the United States, United Kingdom, and Canada found that the majority of these firms were defining and developing sustainability strategies.⁴⁹ The reasons were little different from those of larger firms.

The definition of sustainability and application of its underlying principles to business models, processes, and practices certainly vary from business to business. Those firms recognizing themselves as an interdependent entity, a system with interlocking subsystems operating in a set of wider enveloping systems, are more effective and successful in their sustainability efforts. They are leading the way, setting the standards for transparency, accountability, metrics, and depth of reporting, selecting frameworks and developing best practices that laggards will be expected to follow.

The next chapter delves deeper into these components of sustainability and how they interact in the larger global system. It starts by examining how certain taken-for-granted assumptions lead to erroneous thinking and less-than-optimal outcomes.

Chapter Summary: Key Takeaways

While the concept of and practice toward sustainability are contested, most experts agree that any definition and application require attending to a balance of economic, social, and environmental concerns, in both present and future contexts. This triad of components underlies the foundation of TBL thinking and accounting practices, as well as most sustainability frameworks. Sustainability is a systemic concept with an expanded time frame, incorporating an understanding of how civilization has reached this point and endeavoring to create parity for the current as well as future inhabitants of the planet.

CSR and sustainability efforts are currently voluntary from a legal perspective, but are becoming part of a social expectation. As impacts and issues vary between industries and firms, there is no single best way to “do sustainability.” Programs and initiatives run from the substantive, wide-ranging, and deeply integrated to shallow greenwashing. A systemic approach requires awareness of and interaction with stakeholders, those parties impacted by the firm, positively, negatively, or both, such as employees, vendors, NGOs, local communities, government, customers, and distributors.

A number of pressure points are driving responsible business practices, including public sentiment, media exposure, activist campaigns, government regulation, institutional investors, and insurers. The good news is that there is a solid business case supporting those practices: cost savings, managed risks, reputational enhancement, customer loyalty, employee engagement, and new revenue streams and markets are a few of the payoffs.