LCA is the answer, but who bears responsibility?

Lately there have been some interesting headlines. “Hybrids less sustainable than Hummers” was the general gist of a CNW report analyzing so-called ‘dust to dust’ emissions impacts from manufacture and use, a full life-cycle analysis (LCA) if you will. Are there some tenuous assumptions at the root of this? Probably. Is there any truth to it? Yes. This is a prime example of why life-cycle analysis is important- buying a car because it is more efficient to use ignores the environmental costs that the consumer doesn’t see- when there is no requirement for companies to build these costs into the products, there is no incentive to avoid them. In the end, auto makers care more about selling cars, while the market must demand efficiency. However, the use of LCA to justify the ‘green superiority’ of current technology over emerging technology is misleading. The truth is, nobody who buys a hummer or a hybrid is doing the environment a favour- both require enormous energy and raw materials to produce, and require fossil fuels to operate. However, whereas hybrids can reduce ongoing fuel use, especially as energy for production can increasingly be sourced from cleaner alternatives (such as renewables), conventional gas-guzzler technology marries consumers to a future of increased fossil fuel dependence. Hybrid technology is at the beginning of its cycle- meaning it is more costly to produce (financially and environmentally) at this point in time, but as adoption grows and efficiencies from scale can be acheived, these costs will be expected to decrease. Choosing a hybrid therefore means being part of the vanguard of market transformation, as opposed to being part of the resistance to it.

The same analysis applies to the debate on local vs. imported foods. Fuel use in transportation is not the only environmental impact of food production, and evaluating food with this metric alone ignores the fact that some places are simply better for growing more food at a lower cost (both financial and environmental). Agriculture and specialization are social advances that allowed us to produce more, using less energy than our hunter-gatherer ancestors. That being said, a lack of inclusion of environmental costs throughout food production and supply chains means that consumers are once again left without any clear indication of what is the more ’sustainable’ choice.

It turns out a big reason for CNW’s low scoring of hybrids in terms of environmental impact stems from the quantities of nickel used in their batteries. Much of this comes from our very own Sudbury, Ontario, and the operations there have not had a stellar record in terms of the environment (though they are improving). So how can Toyota minimize the impacts of the nickel that goes into their batteries? The choices, including buying nickel somewhere else, or switching technologies (future hybrids will almost certainly use lithium batteries, for capacity reasons) may not make economic sense- and we can’t expect companies to operate against prevailing economics. If Inco or Falconbridge on the other hand had to factor environmental costs into their prices, then there would be an economic incentive both for them, and their customers, to seek less polluting alternatives. Unfortunately, leveraging a local tax or fee against a commodity will necessarily harm export revenues- few governments would be willing to take this on as a policy project.

On the other side of the coin, would increasing the costs of such commodities mean that technologies such as hybrids wouldn’t get developed? Well, let’s not forget that steel, petroleum and other more conventional raw materials all have associated costs too- a comprehensive integration of environmental impacts into all raw materials would drive us to use less of everything- maybe we’d forget about the hybrids vs. hummers debate and be riding bicycles more.

LCA is important in evaluating the overall impacts of the products we buy and use, but asking consumers to make choices where the economic realities don’t reflect the environmental realities doesn’t make sense. It all comes down to creating economic instruments that reflect the existing externalities associated with industrial activity. While there is opportunity for voluntary action by companies, what consumers need are standards and assurances of transparency, without having to do all their homework themselves. We clearly need policies to put this in place- unfortunately this will probably degenerate into finger pointing over who bears the responsibility for what costs, and how much each industry and sector must pay.

Governments have to start thinking strategically- like some of the best-in-class companies who are taking the lead on environmental issues, and creating the infrastructure needed to transform themselves. Think of BP, DuPont or Shell as companies that have taken on the responsibility to transform themselves towards sustainability. This requires the destruction of traditional sources of value, but in the end will enable the creation of new ones which are better positioned for the future. In particular, Canada cannot let itself become complacent in an environment of rising commodity prices. The resource sector is booming, but we are already seeing a rapid erosion of domestic ownership in resource companies. While our natural endowment in resources is largely responsible for our strong economic position now, if we don’t invest in innovative sectors such as clean technology, we risk compromising future competitiveness.

Tata & The Constructed Limits of Social Enterprise

Tata has been in the news recently with its announced acquisition of Corus steel, making it a major global player in the industry. For anyone interested in social enterprise and social responsibility you should definitely take a look at this company. Also, for those who have the time, here is a reflection piece I wrote for a class a week ago.

The Constructed Limits of Social Enterprise

By David Anders

“If the doors of perception were cleansed everything would appear to man as it is, infinite. For man has closed himself up, till he sees all things thru chinks of his cavern.”

- William Blake

The emergence of the concept of “social enterprise” in the curriculum of management studies and in business literature has been perceived as a relatively recent event by much of the business community. However the social utility of business and trade is an essential element of the earliest arguments for market liberalization. In the present dialogue on the social role of business, two different philosophies prevail. One argument, popularly stated by Milton Freidman in 1970, stresses that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”[1]. This statement is more or less aligned with the prevailing view of traditional western businesses and free-market economists. An alternative view, less celebrated in most business circles, is that all businesses should exist to provide a form of social benefit, and are reliant on an implicit social license to operate. Predominantly associated with NGOs, social activists, and grassroots social enterprises, this argument was criticized by Friedman as “pure and unadulterated socialism”. Groups at different ends of the political spectrum have traditionally been quite divergent on this issue, and as a result, most debates on economic policy and the role of business in society cannot escape political associations. More recently, some convergence between the two camps can be seen to be emerging. Entrepreneurial corporations are recognizing the potential for socially minded enterprises formed at a grassroots level, often in a way that emphasizes cooperation and partnerships, bringing NGOs into the fold as business support structures. NGOs and grassroots organizations are recognizing the potential for profit-based models instead of relying on traditional practices of philanthropy. Nevertheless, few would claim that the interests of today’s powerful corporate entities are fully reconciled with the objective of social enterprise to “maintain or improve social conditions in a way that goes beyond financial benefits”[2]. There exists profound skepticism among business leaders and economists about the potential for the impact of social enterprise carried out by traditional businesses, as well as from the point of view of social activists, who perceive the business models of large companies as remaining fundamentally exploitative.

The Tata Group stands alone as a conglomerate founded on the principle of social enterprise, and as a leader in the development of social responsibility practices. This example appears to offer evidence that a seemingly western business model can create sustainable social value. However, the success of Tata goes beyond developing and institutionalizing social metrics such as the human development index (HDI). Tata’s social conscience exists as an inherent part of its strategy, and is seen not only as a footnote in their annual report (as is the case for many traditional companies), but throughout their operations and their culture. The culture of giving and volunteerism in Tata’s organization has roots that are deeper than visionary leadership and innovative policies. Western companies may argue that Tata’s success is attributable to its business model being uniquely suited to its environment. The surplus of labour, lack of social services, high degrees of corruption and income disparity in India may explain the relative need for social enterprise, but these factors do not adequately explain Tata’s success in both the social and economic arenas. Rather, this has much more to do with the cultural perception, an element perennially overlooked by economists. The culture of Tata as an organization, and its constituencies stems from both the history, and endemic conditions, of India. A unique example is the culture formed around the concept of social enterprise, in the form of the Swadeshi movement, which was a direct response to the economic exploitation of India under colonial rule. The colonial conditions in India were intimately related to the political and economic objectives of not only Britain, but of the British East India Company, which controlled most of Britain’s colonial interests[3]. The establishment and fortification of domestic industry, catalyzed by the Swadeshi movement, allowed India to challenge both the economic influence of the EIC, and the political power of Britain. The Swadeshi movement did more than create an impetus for domestic economic development. It enabled a shift in perception and values that aligned all aspects of economic activity on the basis of nationalistic and humanitarian interests. The emphasis on serving the domestic needs through domestic productivity has a great deal in common with political and philosophical views that predominated in the east. In many western corporations, however, the colonial model of expansion and exploitation of resources is still alive and well.

The business ventures that emerged from Jamsetji Tata’s vision of social enterprise were supplied with legitimacy in their social utility, something that western businesses today have come to lack. They faced the predominant view, still held today that this model would not be economically viable given its environment. 170 years after the creation of Tata, we can see that this perception was flawed. The spirit of the company’s beginnings appears to be very much present in the present day initiatives of Tata, but the company’s position as a growing multinational threatens to blur the positioning of this organization between an inwards-facing eastern philosophy, and an outwards-facing western one. The question of how the company, with values that are distinct from many of the more traditional western counterparts will adapt to growth is the same question facing western multinationals on the road to sustainability. In both cases, there is a required shift in cultural perception not only within business leaders and employees, but in the minds of customers and other stakeholders. Without this, social performance and growth will remain a tradeoff, serving two separate and irreconcilable ideologies. A unified ideology must combine western ideas such as the creation of economic efficiency through competition and open markets as an essential condition for social wellbeing, and eastern imperatives such as social wellbeing as a basis for business strategy, not simply a result of it. It can be argued that Tata’s success this far is in realizing this balance.

The question, as it relates to the western business world is whether today’s multinational companies can be supported by a business model that creates sustainable social value, or is consolidation of global economic power in such companies irreconcilable with the need to address fundamental social issues such as income and resource disparity on a global level? The need to resolve this question can be seen if we consider the ramifications of social objectives in business, and the global economic trends that will shape the next century if international enterprise. The momentum of economic growth in regions such as India and China imply a future position of increased economic leverage in international trade. This realization has already caused significant consternation among western industries and has in some cases, produced a resurgence in economic nationalism. Those who are more sympathetic to the plight of developing nations see the role of international development as one of elevating the standards of living in poorer nations. However, the reality that a global civilization enjoying a western standard of consumption is beyond the carrying capacity of our environment is naively forgotten, or conveniently dismissed. Most people see no conflict in wanting to eradicate poverty, and wanting to better themselves in the process. This echoes the often expressed objective of sustainable business as it is conventionally considered in the west, even by the more progressive standards. Therefore, there is also no connection between the patterns of consumption that feed most established western businesses, and the underlying social problems that social enterprise initiatives attempt to address. So long as companies are measured on a financial bottom line, there is no incentive for them to change this. The shift of western priorities away from individualism and financial agglomeration towards a system of values that promotes the importance of community and the intrinsic rewards of giving back requires a revolution in culture. The implication is inevitable dramatic change in the western way of life, whether it is accepted voluntarily, or involuntarily.

Tata provides a hopeful model of how other companies might reinvent themselves, but the viability of this model is dependent on the acceptance of social betterment as a legitimate purpose for business. A particular system of values allows Tata to succeed economically as a social enterprise, and this system is not so easy to replicate. The stakeholders of business must also reinvent their system of values if sustainable models are to proliferate. However, these values are firmly entrenched in western assumptions and cultural traditions. Despite the ‘export’ of western economics to the developing world, there has been little importing of the supportive values that make social enterprise successful in these areas. In seeking a healthy and sustainable society, western nations share with the developing nations of the world the fact that we still have a long way to go.

 

 

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[1] Friedman, Milton, “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970.

[2] Dees, Gregory J. and Backman, Elaine, Social Enterprise: Private Initiatives for the Common Good, Harvard Business School, November 30, 1994.

[3] Sachs, Jeffrey D., The End of Poverty: Economic Possibilities for our Time, Penguin Press, 2005.

Article of the Week

This is a little old, but I just came across it today. If you’re like me and love a good CSR dust-up, you should check this article out on Reason Online – CEO’s of Whole Foods and Cypress Semiconducter square off with each other and Milton Friedman.

My Scoring of the bout:

Mackey: 2

Friedman: 1

Rodgers: 0