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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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JUST ADDED: The Elephant in the Room: Core Stumbling Blocks to Operationalize Sustainability
Sissel Waage and Charles Francis
"…[W]e have become increasingly aware of an inescapable and disturbing fact: We will not be able to
sustain our businesses over the long haul because they are based on two assumptions that no longer
hold. One is that cheap, unlimited supplies of hydrocarbons and other non-renewable resources will
always be available. The other is that the earth's ecosystems will indefinitely absorb the waste
and emissions of our production and consumption."
- Chad Holliday, CEO, DuPont
Businesses depend on both reliable flows of materials and labor. Yet, ironically, many firms are
undercutting these very pillars of support. Even companies engaged in eco-efficiency and corporate
social responsibility (CSR) programs are still acting in ways that fundamentally diminish future
profits and prosperity.
The core of these issues is not simply about reliance on
non-renewable energy sources or dependence on non-living-wage workers-though these and many related
concerns are essential components. An even bigger elephant is in the room. Everyone sees it, but
few people will name it.
Key elements of modern business practices are at odds with the
intended goals of "greening" and integrating social and ecological sustainability concepts into
actions-specifically, externalizing, tightly accounting for costs, and consolidating resources.
EXTERNALIZING:
Internal vs. External?
Business decision makers tend to
narrowly focus their domains of concern. For example, the issues for which retailers have
traditionally been willing to accept full responsibility includes the span from distribution
warehouses to stores. This domain perfectly overlaps with the portion of their supply chain over
which full control can be maintained. Any other issues-from factories through disposal
contexts-are often considered "outside" of the boundaries of concern. The costs and impacts that
are dispersed across time and space-or that fall within other enterprises in the supply chain-are
labeled as "externalities." Companies' efforts to externalize as many costs as possible are common
strategies to maximize returns.
Externalities, however, are not simply actual dollar
amounts (such as medical care costs) that can be shifted to another institution (such as the
government). Externalities can refer to factors far larger than any one entity can produce, such
as clean air. Yet, air and water pollution-caused by emissions and contaminants-are business
externalities. Sadly, as childhood asthma rates rise and access to clean drinking water is
threatened in urban areas globally, it becomes clear that these "externalities" are being literally
internalized within human bodies. As ecologists say, there is no 'away' to throw things.
Similarly, there is no 'external' for businesses-as we are all 'internal' within a global social
and ecological set of systems.
One example of these problematic dynamics emerges from the
food and agriculture sector and the all-too-frequent externalized cost of soil erosion. Whenever
the amount of soil loss is greater than five tons per acre per year, with some variation due to
soil type and location, it exceeds the capacity of the system to generate more soil from the parent
material below. The only internal cost for farmers is the money spent for fertilizer to mask the
effects of topsoil loss and declining long-term productivity. The real costs are passed on to
future owners and subsequent generations. Although there have been attempts to put a value on this
lost soil, these amounts are usually insignificant when measured in terms of fertilizer costs and
the difficult to quantify loss in productivity for future generations.
Overall,
environmental and social impacts-such as pollution, poverty, and inadequate access to clean water
and clean air-are far more costly than their current lack of a monetary value implies. The net
effect is that if companies are to be sustainable, externalities must be internalized.
In response to this need, there are a growing number of sustainability consultants who provide
integrated ecological and social systems-based assessments, prioritization approaches, and
strategic implementation advice to companies. These specialists assist firms in understanding the
full range of their impacts, as a first step to considering what they are externalizing. For
example, "sustainability assessments" analyze companies' impacts, flows, market position and brand
opportunities from ecological and social systems perspectives. These assessments consider all
impacts from resource extraction through manufacturing, processing, distribution, use and disposal.
Through the process, companies gain a full overview of: (1) what has been externalized, (2) what
activists, regulators, and consumers are beginning to demand be internalized, and (3) what pathways
forward exist.
Illustrating the power of the sustainability assessment perspective is
work that has been conducted on fast food companies' operations. A wide range of issues have been
highlighted within these analyses, spanning from farm impacts to human health, which include the
far "downstream" and "upstream" ends of the business spectrum. Underscoring the relevance of these
assessments is the fact that these issue areas are increasingly in the press, through coverage of
farm run-off (e.g., the "dead zone" in the Gulf of Mexico from fertilizer use throughout the
Mississippi Basin), healthy eating habits, and obesity trends. A vividly illustration of the
corporate brand value implications of one these areas of concern was the Fortune magazine's cover
story on February 3, 2003 which featured a french fry in an ashtray with the headline "Is Fat the
Next Tobacco?" For companies, the pathway forward is in linking up the core of sustainability
concerns with changes to the current strategy and operations.
ACCOUNTING:
Short -Term
vs. Blended Value Returns?
For many businesses, the focus is short time frames and
quarterly financial returns. Yet, among a growing number of consumers and citizens
internationally, questions are being asked about longer time horizons and the full kaleidoscope of
business effects, including:
" financial (e.g., Return on Investment (ROI) and
pension security),
" ecological (e.g., raw material supply and oil spills,
deforestation, etc.), and
" social (e.g., available skilled workers and labor rights, public
health of communities around production facilities, CEO salaries and benefits, etc.).
These voices have become louder in the wake of Enron and WorldCom and are heard in the streets
during WTO meetings as well as in the halls of public agencies following disasters such as Bhopal.
Broader accounting, corporate accountability, and personal responsibility all take on new meanings
within this shifting context.
In perceiving of these voices and concerns as anomalous or
exclusively focused on a narrow set of special interests, corporate officials are missing a tidal
change that is underway. These issues are all elements of a complex process that is fundamentally
altering how people think about businesses and benefits as well as its responsibilities.
Corporate concerns can no longer be limited to securing a work force, sourcing materials and
products, marketing, distributing, and ensuring financial results for quarterly or annual returns.
Increasingly, firms are being asked to account for a far broader set of factors, such as the life-
cycle impacts of products, the social effects of a company on its employees and surrounding
communities, and the long-term legacy in both the areas within which the firm operates as well as
the global ecological and societal systems.
To make any rational assessment of costs and
returns within this new space, there needs to be some type of accounting for ecological and social
well-being that operates in parallel with the current financial accounting system. That is, it is
essential to have a well-established and widely recognized system to keep track of financial
aspects of transactions and exchanges of goods and services. In addition, however, environmental,
human rights, and sustainability organizations are pointing out that this system should be tied to
rational measures of ecological and social capital. In sum, we need application of ecological and
social accounting concurrent with application of existing financial accounting methods (Daly and
Farley, 2003).
A current agricultural example of the importance of applying these
additional accounting methods is evident in area of pesticide use on major commodity crops.
Although the testing process for these substances is far more rigorous than in the past, we still
have only short-term data on the impacts of pesticide exposure on humans and in the rest of the
ecosystem. Yet, persistent, toxic, and bioaccumulative chemicals remain widely in use. In
addition, pesticides that are banned in the U.S. are still exported to other countries where rules
are less stringent. (These practices can affect us, as residues may come back into the U.S. on
imported food.)
This usage of pesticides is directly related to short-term accounting in
our industrial agriculture model. Our desire for immediate and visible results compels most
farmers to apply chemicals, rather than design production systems that will reduce the incidence of
pests through crop rotations, residue management, spatially-diverse planting systems, and genetic
resistance.
The great irony of the current (financial only) accounting system is that in
spite of continued extensive use of pesticides, the crop losses are similar to what they were
before the era of synthetic chemical pesticides. If there had been concurrent application of
financial, ecological, and social accounting methods, it would be crystal clear to decision-makers
that despite increased inputs, significant pest problems remain and new ecological and human health
issues have emerged.
The net effect of short-term, tightly focused financial accounting
is that this dangerous trade-off-between costs (financial, ecological, and social/human related)
and short-term productivity-is invisible. The broader set of costs are not captured because they
falls outside the current set of variables that we measure. To even understand that adverse ripple
effects are being realized by the agricultural and food businesses, an alternative form of
accounting is essential.
Such an alternative concurrently applied set of ecological and
social accounting systems would consider the loss of biodiversity as a result of pesticide
application, the human health and safety costs of current practices, the retail costs, and
perceived farmer benefits. In addition, opportunity costs exist in the form of concentrated
research on chemical pesticide solutions to pest problems, and under-funded organic farming and
agro-ecology system redesign research that would, partially or even entirely, avoid the use of
pesticides.
Without such an expansion of the accounting system, we are likely to continue
damaging our ecological capital and human habitat in ways that in the long term undercuts
businesses, human health, and ecosystem function and resilience. The current system deals with the
natural and the agroecosystem environment following the flawed assumption that most natural
resources or ecosystem services are unlimited, and that the overall system will survive intact
despite our attempts to alter many of its processes (Daily, 1997).
In sum, significant
shifts in accounting are fundamental to ensuring that a business will remain viable, through a flow
of materials and (healthy) labor, over the long term. These changes are a key element in full
application, and integration, of sustainability concepts within business. Some models of
alternative accounting approaches already exist in the fields of environmental economics (Daly
2003, Prugh et al. 1995) and the emerging area of quantifying social returns on investment (for
example see, Emerson 2003). If corporations are taking a long-term view of success through
maintaining market share in an increasingly complex business environment-in which transparency and
overall benefits to society come to the fore-they will find creative ways to educate their
investors on the importance of adopting concurrent accounting systems for financial, ecological and
social capital.
CONSOLIDATING:
Company vs. Society?
Finally, a third
essential element for companies to re-visit within "greening" and sustainability efforts relates to
consolidation. What are the effects of businesses on ownership of land or access to all resources
(e.g., financial, natural, informational, educational, transport)? Increasingly, across all of
these issue areas, the core dynamic is one of consolidation.
Consolidation as a result
of trade and business transactions is not new. From the spice trade through the oil trade, ripple
effects have included concentration of wealth, power, land, and influence. While many positive
effects have been realized from this trade, adverse social dynamics have also spread-like circles
after a pebble is thrown in a pond-including poverty, epidemics, and less resilient ecological
systems.
Today's global food systems offer a contemporary vantage point on the dangers
of these dynamics of consolidation. Our food system brings a multiplicity of products from all
parts of the world to the supermarkets of northern hemisphere nations at a relatively cheap cost to
the consumer. Although the system supports jobs in production and processing, those who benefit the
most are the multinational corporations that control the supply and marketing chains. These
lopsided benefits are evident in the swelling size of businesses. Five multinational grain
companies now handle 80% of globally-traded basic grain commodities, and three companies in the
U.S. account for nearly 20% of all food expenditures in 1997 (Nestle, 2002). Between 1999 and 2001
WalMart's international sales jumped from $12.2 to $32.1 billion. In 2001, WalMart was fourth in
the U.S. in food sales (Kaufman, 2003). Through acquisitions over the past two years the company
is now the largest in food marketing in the U.S. and controls 45% of the retail food market in
Mexico.
Consolidation can also be documented in terms of land ownership. The number of
independent family-owned farmlands has been on the decline for decades in the U.S. This
continuation of a long-term trend is rationalized by describing how a farm family must acquire more
land in order to support an adequate life style with the slim profit margins in major commodity
crops such as corn and soybeans. In Nebraska, a rough estimate is that each family needs at least
1,000 acres to survive when producing conventional commodity crops. The net effect is that over
5,000 farm families have had to leave farming between 1997 and 2002.
One result of this
increasingly consolidated food system is "brittleness" and homogeneity. Brittleness is the direct
outcome of any one potential glitch in the system. For example, bacteria and infection can be
distributed throughout the system very quickly, often before the problem is even detected or
understood. The recent BSE discovery in both the U.K. and U.S. offers a case in point.
Homogeneity reinforces brittleness and introduces complex social and cultural reverberations, as is
exemplified by McDonalds and Starbucks getting regularly sacked at international anti-globalization
demonstrations.
Consolidation can also be observed from a genetic perspective by
considering genetically modified organisms (GMOs). Patenting genetic material and GMOs is a
logical step in establishing ownership of new varieties. However, these legal maneuvers have not
only potential ecological effects-in interacting with ecological communities-but also economic
effects on farmers who must now buy, rather than save, seeds annually. All of a sudden that which
used to be free, and adapted to a particular site, requires the flow of funds, and thus tends to
aid and abet with concentration of informational and financial resources.
Finally,
consolidation can be considered in terms of wealth. Some countries-such as Japan and Sweden-have
explicit guidelines that dictate CEO salaries not exceed those of the lowest-paid laborers by more
than 8 to 10 times. A labor organization web site (AFLCIO, 2003) reports that average CEO
compensation in 2002 was $10.8 million, or over 500 times that of the lowest paid people in
companies. This figure has increased from "only" 200 times greater CEO compensation relative to
the lowest paid employee, a short two decades ago. These statistics reveal the growing gap between
"haves" and "have nots" in the U.S. One result of this situation is a fundamental undercutting of
social stability, as well as the likelihood of an increase in public health threats as the poor are
unable to address their basic human needs.
Companies' unwillingness to perceive of and
act on these issues only undercuts their own future ability to locate healthy workers and solvent
customers. Failing to address issues of consolidation-of wealth, land ownership, information
access, etc.-is a core stumbling block to moving realistically toward long-term social stability
and sustainability.
Alternatives to this current state of affairs have been springing up
in the food and agriculture sector. These models key off of distinct business structures that seek
to strengthen locally- and regionally-based markets, while recognizing the uniqueness of place.
Small and medium-sized enterprises are forming partnerships with larger companies to reach
appropriate economies of scale while still distributing benefits among the people involved. These
enterprises are knitted together with sustainability-focused contracts to produce in ways that
consider the land, people, and the flow of benefits. Overall, this approach is hinged on fostering
innovation, biological and social resilience, flexibility and strength through diversification.
In the U.S. Midwest, the Niman Ranch processing and marketing system for swine offers an
example. Within this business, farmers follow specific rules in producing antibiotic-free pigs.
The animals are slaughtered, distributed, and marketed in a unique chain of steps that assures
product identity with the farm as well as common quality assurance for the Niman Ranch brand.
Participating farmers are paid a premium over market price as well as a guaranteed minimum price.
The model is one of cooperative production and marketing that occurs under private ownership along
each step in the process. Such a supply-chain diversification and partnership may be essential for
a socially stable future.
CONCLUSIONS
To ignore these overall concerns is to
assume that fine-tuning the current system will lead to sustainability. We argue instead that
issues related to externalizing, accounting, and consolidating must be taken into consideration as
corporations seek to re-invent their organizations, priorities, and activities in the 21st Century.
In short, addressing practices related to externalizing, accounting, and consolidating
are essential elements to consider in true "greening" and sustainability efforts within
corporations. Such shifts would necessitate facing the highly skewed current flow of benefits and
costs, with the majority of benefits from the labor in the southern hemisphere going to the
corporations in the northern hemisphere. These linked issues must be considered in any serious
change toward a more "green" or "sustainable" industry that is seeking to be more than image-making
or "green washing." The first step is to name externalizing, accounting, and consolidating as key
characteristics of the elephant in the room.
REFERENCES
AFLCIO. 2003.
Executive pay watch. AFLCIO Web Site:
http://www.aflcio.org/corporateamerica/paywatch/
Carson, Rachel. 1962. Silent Spring. Houghton Mifflin, Boston.
Cassman, Kenneth G.,
Achim Dobermann, Daniel T. Walters, and Haishun Yang. 2003. "Meeting cereal demand while protecting
natural resources and improving environmental quality." Annual Review Environmental Resources. 28:
315-358.
Daily, Gretchen C., editor. 1997. Nature's services: societal dependence on
natural ecosystems. Island Press, Covelo, California.
Daly, Herman, and Joshua Farmey.
2003. Ecological economics: principles and applications. Island Press, Covelo, California.
Emerson, Jed. 2003. "The Blended Value Map: Tracking the Intersects and Opportunities of
Economic, Social and Environmental Value Creation." Menlo Park, California: Hewlett Foundation
(http://www.hewlett.org/NR/rdonlyres/B0D3738F-DC05-436E-8F9A-22825703C02D/0/Blend...
f)
Francis, Charles. 2004. "Greening of industry for long-term sustainability." Submitted
to the Agronomy Journal (currently in review).
Kaufman, Phil R. 2003. Food retailing. USDA
Web Site: http://www.ers.usda.gov/publications/aer811/aer811e.pdf
Prugh, Tom, R. Costanza,
J.H. Cumberland, H. Daly, R. Goodland, and Richard Norgaard. 1995. Natural Capital and Human
Economic Survival. Solomons, Maryland: International Society for Ecological Economics Press.
About the authors:
Sissel Waage, The Natural Step, 116 New Montgomery
Street, Suite 800, San Francisco, CA 94105
Charles Francis, Department of Agronomy and
Horticulture, University Nebraska, Lincoln, NE 68583-0915
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