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Good for the environment can be good for business
Volschenk, Jako
11/1/2010
​Milton Friedman's now infamous article The social responsibility of business is to increase its profits was published in The New York Times some 40 years ago. However, the responsibility of business and its own interest are not as separate as Friedman implied, writes the USB's Jako Volschenk.
 
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The issue of environmental responsibility, and specifically the phenomenon of climate change, is closely affiliated to the interests of business. It is imperative that all companies implement measures to reduce their impact on the global climate.

Climate change implies a number of risks for business and there are currently a number of organisations that are taking environmental concerns seriously. 

Business risks, such as the physical impact of climate change, can affect a whole industry. The agriculture and forestry industries are cases in point. These industries feel climate change through two compounding factors, namely increasing temperatures and increasing water scarcity. It is not hard to see that the actions taken by these industries in terms of climate change serve their own interests. Companies such as Pioneer Foods, SAB and SAPPI operate in these industries or are highly reliant on these industries for survival. 

One may argue that the mining industry is not exposed in the same manner. Mines often need lots of water, but proper recycling can address this problem. However, mining companies in South Africa are all too aware that they operate because of a social licence. This licence to operate can be translated into 'the trust of society', and losing such a licence can be devastating. 

An international example of this is the Deepwater Horizon oil spill which caused BP to lose 47% of its market value. But further to this the oil industry lost some of its licence to operate, which means the industry will now face stricter regulations. In future, mining companies will increasingly be held responsible for the way their activities damage the global climate.

In a recent report, BHP Billiton declares that litigation risk is the biggest risk it faces with regard to climate change. A number of environmental law suits indicate that companies can be held responsible for their actions in prior decades.

Whereas litigation risk is mostly a risk at individual company level, regulatory risk (orstroke-of-the-pen risk) is considered a risk at industry level. Carbon tax is one example of a regulatory instrument that would have immediate impact on industries with large carbon footprints. Yet such legislation may not have equal impact on all businesses. 

The extent to which individual companies prepare themselves for a carbon-constrained future will determine the impact of regulatory issues on the competitiveness of the entity.

For instance, American car companies are vulnerable to a high price on carbon emissions in contrast to Japanese manufacturers such as Honda and Toyota. In response to this aspect of environmental risk, SABMiller implemented a number of energy and water efficiency measures in its Cape Town brewery. Not only did these measures save the company costs, but they also make the company less vulnerable to the future risk of water or emission constraints.

But only considering risk as a driver of pro-environmental behaviour is ignoring most of the opportunity. In many cases, opportunity is the flipside of risk. For instance, proactive businesses can place considerable pressure on peer companies if they are ahead on the environmental action curve. Michelin is known for its lobbying for stricter regulation of rolling resistance in car tyres. Success in this regard would mean a considerable competitive advantage for Michelin. 

Broadly speaking, companies can only sustain a competitive advantage if that advantage is based on the ability to sell higher volumes, sell at a higher price or produce at a lower cost. 

Doing good for the environment can be very good for business. However, we should steer clear of asking whether it pays to be green and realise that a more appropriate question would focus on when it pays to be green, i.e. the conditions for green to create shareholder value.

Many businesses would claim that they initiate environmental action because 'it is the right thing to do'. This may indeed be the most important reason for acting on environmental concerns but the bottom line still really drives the agenda in the boardroom.

From a moral perspective there is no doubt that all companies should be environmentally responsible. But in reality we have to face the fact that this will happen faster if it makes financial sense to act responsibly. Here, financial sense means avoiding potential liabilities or pursuing new opportunities. In both cases Friedman would be satisfied that there is alignment between the interests of companies and that of the environment.

 

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