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EAP Publication - 37

COMPETING "GREEN"

Long-term competitiveness and sustainable development are not mutually exclusive concepts for businesses wishing to succeed in a global economy

Stuart B. Hill, John C. Henning

Until fairly recently, the environment was treated as a "free good"--rather than as an "economic good" with both value and market price. The consequences of this attitude have now caught up with us and, in future, we will be increasingly compelled to consider the environmental impact of all policies, programs and actions.

At first glance, it might seem that if businesses take measures to protect the environment, they will find themselves hampered in the race to become increasingly competitive in a globalized economy. However, by reframing our point of view: it may be possible to achieve both goals. In particular, we need to take a long-term view of competitiveness: one that accounts for the needs of future generations as well as for the health of the planet.

COMPETITION AND THE ENVIRONMENT

Current public policy discussion on competitiveness has been greatly influenced by the work of Harvard professor Michael Porter. Porter claims our goal should be a high and growing standard of living achieved through competition, as measured by a firm's ability to export a significant share of its output. The key to long-term competitiveness is increasing productivity; productivity is limited only by the size of our investment, research and development, and stable resource base inputs.

However, in Porter's model of a competitive economy: economic growth depends upon the increased use of materials and energy; the environment's role is merely as a source of raw materials. Based on this widely accepted model, some businesses question how the economy can continue to grow if the environment must be protected. In answer, many individuals and groups argue that the economy cannot continue to grow if we don't protect the environment.

The environment is a complex collection of interrelated systems that, when ''healthy,'' provides an ideal habitat for our own species. Under natural conditions, these systems maintain and repair themselves. They are not static, but are usually evolving toward more stable conditions.

Unfortunately, as businesses strive to compete and grow: their activities interfere with the environment's ability to sustain itself. This undermines the environment's productivity and, consequently, society's as well.

To avoid these problems we must know and respect the environment's natural limits in terms of the amount of resources that can be harvested, and how much interference can be tolerated, as well as the amount of wastes that can be reassimilated.

STANDARD OF LIVING VERSUS QUALITY OF LIFE

Some critics of Porter's competitiveness model have argued that "standard of living," even if it can be increased, is inappropriate as a central strategic goal; hence, fuelling a higher standard of living through increased competitiveness is equally inappropriate.

The term ''standard of living" tends to be associated with affluence, material comforts, power and quantitative priorities. It is predominantly measured through a single indicator--gross domestic product (GDP). Although this is a useful measure of activity for those parts of the economy involving currency transactions, it does not reflect areas that are considered external to the market. Hence, it is a poor measure of the well-being of citizens living in that economy. This fact is seldom appreciated by decision-makers; as a result, decisions meant to benefit a society sometimes have unintended and perverse effects. For example, it is indeed a paradox that every tropical rain forest destroyed increases current GDP

A better standard for decision-making is "quality of life." This broader concept has a variety of indicators, ranging from the health and literacy of the general population to the level of unemployment--and also the health of the environment. Thus, when Allan Randall warns that increasingly scarce resources and the loss of environmental amenities will reduce the quality of life, he is talking about more than the size of a pay-cheque.'

Van Duren et al. cite several market researchers whose findings show that people are shifting their values and priorities toward an improved quality of life. One measure of this shift in values is the increase in consumer demand for "green products." As people become more sensitive to the issues, they will increasingly reward environmental responsibility in the marketplace and boycott companies that they perceive as irresponsible. Successful firms will be those that respond to this trend; in so doing, they may also carve themselves a niche that will put them in a better position to compete internationally

REGULATION

Although most governments have failed to adequately protect the environment, some are beginning to make regulatory changes that will motivate firms to behave more responsibly Lately, more of these regulations have incorporated the "polluter pays" principle (partly in response to governmental fiscal problems), increasing the risks to non-compliant firms

Examples of regulations that are resulting in lively discussion are those concerning environmental liability In the future, securing insurance and credit will be much more difficult for firms, unless they demonstrate due concerti for environmental risks. For example, the Ontario Environmental Protection Act may make bank lenders liable for the environmental problems created by their borrowers. If a borrower goes bankrupt, say, as the result of a chemical spill, the lender could be held responsible for hundreds of millions of dollars in cleanup costs.

These and other developments prompted the Canadian Bankers Association to publish a discussion paper expressing its concerns that such legislation will interfere with Canadian capital markets. Although this reaction is not surprising, the new legislation underscores the fact that environmental liability must be taken as seriously as any other liability that a lender would routinely consider when offering financing to a firm.

In another regulatory development, company directors and officers have recently been held personally responsible for environmental mismanagement. For example, in February 1992, Bata Industries Ltd. and two of its directors were fined after being convicted under the Ontario Water Resources Act.

Such developments are positive, since they force the market to internalize environmental risks or invest the resources required to prevent them--a far more efficient system\ that\ relying on government and tax dollars to clean up a problem after it occurs.

TRANSITION TO A SUSTAINABLE ECONOMY

We can have an economy that "develops" by improving the quality of life without requiring ever-increasing inputs of natural resources and energy. But this involves finding an optimal scale for economic growth--one that is compatible with the need for ecosystems to continue to sustain themselves.

We are still at the early stages of a necessary transition that will require us to redefine competitiveness and productive economic activity, taking the environment into account. This transition is taking place gradually, and reflects an ongoing evolution in the way that humans value the environment. As mentioned earlier, these changing values are being reflected in the marketplace, so companies must also take part A\ the transition.

Most firms would find an immediate switch to totally sound environmental practices ill-advised. The best approach is to develop a strategic plan for gradually making the transition. The Efficiency-Substitution-Redesign frameworks is a useful model for developing such a plan. Through it, a firm gradually evolves from making minor "efficiency" changes to substituting activities, then to totally rethinking and redesigning its processes and procedures.

Efficiency strategies involve making minor changes to current practices to increase output and reduce waste per unit of input. Although they tend to be the easiest anti fastest strategies to implement, they can result in significant cost savings and--more savings and--more importantly--also help to create a corporate environment conducive to more radical change. As an example of an efficiency strategy, some producers of liquid detergents and fabric softeners have started marketing their products in concentrated or dry forms, reducing the amount of packaging material and storage space required.

A substitution strategy replaces an environmentally stressful product, practice or process with a more benign one. For example, non-renewable raw materials might be replaced by renewable and recycled materials. Some of the most exciting recent developments are substitution strategies-- many use biotechnology to convert a waste disposal problem into a new product-producing process.

For example, Canada's 140 paper mills discharge 2.7 billion litres of polluted effluent per year. Seeing this as an opportunity, a Calgary firm, Epicore Networks Inc., is breeding bacterial cultures to digest organic pulp and paper waste products in sludge pools. Using another substitution strategy Tembec Inc. is producing approximately 15 million litres of industrial ethanol per year from sulphite liquor waste at its mill in Temiscaming.

There is also growing interest in the potential for using agricultural raw materials in various industry processes-- at a price competitive with nonrenewable raw materials. Examples include using grasses to produce newsprint, vegetable fibre for reinforcing composites and construction materials, and vegetable oils in lubricating greases and printing ink.

REDESIGN

The last stage in ESR--redesign--is more holistic in its approach. Its goal is to prevent environmental problems through the design and management of heartily systems based on ecological and social principles. Redesign strategies take longer to implement than efficiency or substitution strategies, and often demand fundamental changes in corporate values. To be truly effective, a redesign strategy must he supported not only by all levels of the company's staff, but by its stakeholders as well

Redesign is seldom achieved until the limitations of efficiency and substitution strategies have been recognized and a culture has developed in the firm that supports "going further." It often results from changed perceptions on the part of those involved. When first confronted with an environmental problem, we tend to either deny that it exists or to find simplistic solutions that quickly prove to he inadequate. On further consideration, we frequently become overwhelmed by the problem as its complexity is fully appreciated. After more analysis, the roots of the problem are uncovered, and we finally see that a simple, but fundamental, change is needed. It is at this stage that true redesign can occur, as opposed to "cures" that merely mask the real causes of the problem.

A relatively simple redesign strategy would be to retain the services of an environmental management firm with the mandate to present a problem through system maintenance. Many companies are already doing this; in fact, the environmental protection sector in Ontario had sales of 52.5 billion in 1990 and employed 30,000 people, putting it on the same scale as the automotive assembly industry. A report recently published by Ernst & Young suggests that in the years ahead, environmental companies will experience one of the fastest growth rates of any commercial sector.

With tougher regulations potentially causing a "credit and insurance chill," some companies are responding by developing a formal environmental management program. This involves implementing clear company-wide policies on environmental issues, operating procedures, regular testing based on environmentally sound performance standards, and systematic reporting and review. A related strategy, stakeholder analysis, has been advocated by the international Institute for Sustainable Developments This process identifies the interests of all parties who are affected by the firm's operations, to hopefully eliminate conflicts before they happen.

A comprehensive program to recycle and reuse is a good example of a redesign strategy with efficiency and substitution elements. Effective redesign strategies can grow from a firm's decision to accept comprehensive recycling as inevitable, and then move on to design new products and redesign old ones to fit the recycling philosophy.

As most people realize, the process of producing and consuming food products generates large volumes of organic wastes that are typically landfilled. On the island of Montreal for example, about 6,000 tonnes of organic waste are produced weekly, and many companies are forced to pay up to $60 per tonne to dispose of their share--and the cost is rising.

Researchers at the Macdonald Campus of McGill University are working with industry to investigate the possibilities of recycling food wastes into animal feed or compost. Over 200 sources of waste in 300 categories have already been catalogued; these account for nearly 600 tonnes of waste per week. Two companies that are supplying food waste materials to the project are the food service arm of Delta Air Lines and Rougemont, an apple processor.

Once a firm builds the environmental ethic into its products, it must develop an effective communication program to inform consumers and differentiate its product from others in the market. The experience of Mohawk Oil inc. illustrates the importance of communication. For over a decade, Mohawk has been the only retailer of ethanol-blended gasolines in Canada, and these are marketed using Environment Canada's Ecologo. One would expect that sales would be high by now; however, a 1991 survey showed that consumers had little appreciation for what Mohawk was doing. In response, the company started a new advertising campaign highlighting the environmental benefits offered by their products. After several months, another survey put Mohawk in first place among oil companies that were perceived to be doing something for the environment, and ethanol-blended gasoline had risen to 48% of sales.

TOWARD SUSTAINABLE DEVELOPMENT

Sustainable development is a term frequently heard these days. "Sustainable" refers to the maintenance of our natural and cultural environments; "development," to equitable access to the resources needed for achieving optimal physical. mental, emotional and spiritual development--for both present and future generations.

What does this mean to business? Sustainable business practices strive to maintain the environment and support human development--they do not depend on accelerated consumption of finite resources and degrade the environment. Examples include ecological farming, forestry and aquaculture, renewable resource and solar-based systems, and conservation and recycling.

Consumers are becoming more demanding--they want more information and are showing a willingness to pay for environmentally sound products. A competitive firm must respond to this awareness--it must spend more time finding out what consumers want. As van Duren et al. point out, sustained competitive advantage is based on going beyond the preoccupation with current niches to determining what your customer may want in the future.

As society continues to become more environmentally aware, we can expect a shift in purchasing patterns-- away from products whose production wastes resources and negatively impacts on the environment and society and toward ones that contribute to the sustainable development of both people and the planet. The firms that will be competitive in the long term will be those that support this transition.

This article is based on a paper presented by the authors at " Accounting for the Environment: The Disappearing Resource" a conference that was held of the University of Concordia in September 1992.

Copyright 1992 Ecological Agriculture Projects


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