Environment: The unaccounted cost of doing business

HEIDIE LONGBOY-PAGUIRIGAN, MBA

 ABSTRACT This paper argues that capitalists are often motivated by their self-interest and they mainly focus on the profits they may acquire from their business. With their avarice to maximize their profit or wealth, they tend to overlook the real costs and externalities caused by their economic activities. These unaccounted costs are attributed to the environment. The advent of growth and development made even worst the state of our life support system. Manufacturing companies, industries and other businesses are all contributors to excessive pollution in land, water and air due to their indiscriminate disposal of wastes, illegal discharge of untreated wastewaters, irresponsible release of greenhouse gases to the atmosphere and others. These capitalists ought to take into account these cost of pollution attributed to the course of their business. The moral obligation of the firm to third parties should be taken into great consideration especially if the action or decision will pose imminent peril to the general public. 

Keywords: Environment, Externalities, Social Cost

INTRODUCTION

The environment is everything we depend on. Whether it be the trees that give us oxygen, the land we live upon and the rivers that provide us with water. The environment is crucial for the society and businesses together. We all have a responsibility to conserve and protect the environment. And whether it be governments, businesses, consumers, workers or other members of society, each must contribute to stop the environment from polluting further (https://www.toppr.com/guides/business-studies/social-responsibilities-of-business/business-ethics-and-environment-protection/).

According to Gromko, G. (2013), businesses contributed $7.3 trillion - 13% of global GDP - in damages to the world's "natural capital" in 2009. That's the headline finding from the new The Economics of Ecosystems and Biodiversity (TEEB) for Business report on the unaccounted for costs of doing business. This figure is so high because of the value that ecosystems provide to human well-being.

When a business purchases a building or hires workers, these costs are privatized - only the business pays. However, when the costs of production are not paid for by the business (or government or community or individual), the costs are socialized. These "externalities" are what TEEB is measuring. Socialized costs don't have to be environmental, but that is what TEEB is focusing on. An easy example is a coal plant. The owner of the plant buys the coal, the plant itself, the machinery needed to operate the plant, and hires the people needed to run the plant. What the owner doesn't pay for is the damages done by production to society. These costs can be local - if particulate emissions from the plant damage nearby communities' health. Or they can be global - the CO2 emitted by the plant contribute to climate change and the associated costs (http://naturalcapital1.blogspot.com/2013/04/unaccounted-for-costs-of-doing-business.html).

As businesses are evidently the major contributor of pollution due to the operation of their economic activities, it is right and just for them to help in the repair of the environment; and heed their obligation to third parties particularly stakeholders living in that certain community.

It is significant to note that one renowned firm i.e., PUMA got a head start by being the first company to implement the Environmental Profit and Loss Account – the EP&L since 2011. With this, they treat the environment as an equal partner who bills them for providing clean water and air, restoring soils and the atmosphere, and decompose waste (https://about.puma.com/en/sustainability/environment).

This good practice should be replicated by all establishments particularly those which operations have direct impact to the environment. Climate change as we know has been a universal plight that strikes all walks of life on earth, thus, it is just but fitting that the national government shall order the enactment of laws that mandates business establishments to be equally responsible to the society and environment as a whole by paying the pollution they create or contribute that worsen the quality of our environment.

Social costs and the Environment

Business activity has an impact on the natural environment to include resources such as timber, oil and metals which are being used to manufacture goods; manufacturing can have unintended spillover effects on others in the form of noise and pollution; and land is lost to future generations when new houses or roads are built on greenfield sites. The unintended negative effects of business activity on people and places are called social costs (https://www.bbc.co.uk/bitesize/guides/zkc9jxs/revision/1).

Social cost is the cost related to the working of the firm but is not explicitly borne by the firm instead it is the cost to the society due to the production of a commodity. The social cost is used in the social cost-benefit analysis of the overall impact of the operations of the business on the society as a whole and do not normally figure in the business decisions.

It is assumed that the disutility created through pollution is equal to the total private and public expenditure incurred by the firm to safeguard the public from the health hazards and social tension created by the production process. But however, these indicators, total cost, and public expenditure, does not give a true measure of the public disutility or the social cost (https://businessjargons.com/social-cost.html).

Ethical businesses are and should be careful to minimize the impact of their behavior on the environment. Further, government laws are used to protect the environment. For example, firms must apply for planning permission before building factories or offices on greenfield sites. Grants are available to encourage firms to locate on brownfield sites, run down areas in need of regeneration (https://www.bbc.co.uk/bitesize/guides/zkc9jxs/revision/1).

The moral obligations of business to third parties

Historically, the relationship between business interests and the community has been awkward. Connecting with community has often been viewed as a charitable thing to do and not necessarily core to ‘real’ business. There is a natural tension between the profit motive and social impact. However, when we consider that companies sit within the broader community and that the relationship is one of inter-dependence rather than independence, then there is a strong case for putting social strategies high on the corporate agenda. The real question is: how can it be done in a way that aligns the objectives of shareholders with the needs of community?

Milton Friedman, the 1976 Nobel Prize-winning economist, took a stance against the idea that companies had social responsibility, arguing that they should focus on maximizing profit within the ‘rules of the game’. Two decades later, Peter F Drucker, affirmed that profit was the primary motive for business, but not the only motive. He asserted that business has responsibilities to the communities it touches in the same way that a school has responsibilities that go beyond the primary goal of educational performance (https://www.theaustralian.com.au/business/business-spectator/news-story/the-moral-obligations-of-business/cb99ed9848c689bca65cbbe0655caf88).

Social responsibility is an ethical theory, in which individuals are accountable for fulfilling their civic duty; the actions of an individual must benefit the whole of society. In this way, there must be a balance between economic growth and the welfare of society and the environment. If this equilibrium is maintained, then social responsibility is accomplished (https://www.pachamama.org/social-justice/social-responsibility-and-ethics).

Why should business care about climate change?

Every year since 2011, the World Economic Forum’s Global Risks Report has identified climate-related risks as a top threat to business. In 2018, failure of climate change mitigation and adaptation was ranked within the top 10 global risks, alongside extreme weather events and natural disasters. Climate-related risks are wide-ranging, persist throughout value chains, and can be expected to pose severe financial threats to companies worldwide (https://www.bsr.org/en/our-insights/blog-view/climate-change-health-impacts-why-business-should-care-and-how-to-act).

As climate change progresses, it will continue to trigger more intense storms, drought, wildfires, sea-level rise, species extinction, and crop failure. While these devastating environmental changes come to mind first when discussing climate change, there’ll also be potentially disastrous downstream effects on businesses—and they don’t seem to be taking the threat seriously.

Most companies have a conservative view of the risks caused by climate change—companies’ predictions only scratched the surface of what experts predict might happen in global markets. For instance, while many companies included in their public disclosures that climate change might affect their supply chains, they rarely accounted for predictions that climate change will decrease average incomes and consumption, which would likely lead to decreased demand for products.

Polluter Pays Principle

Political pressure is mounting to make businesses pay for the damage they cause to the environment, and the latest UN study assessing the impact of the world's biggest companies is almost certainly the first stage in a concerted campaign to calculate how much damage is caused, what it is worth and ultimately how it can be stopped (Jowit, 2010).

The Polluter Pays Principle aims to deter and reduce greenhouse gas emissions by taxing the industries responsible for the emissions. The Polluter Pays Principle has received strong support from many member countries of both the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD). The reasoning behind the principle is that those responsible for the pollution, either industry or person, should bear the cost of dealing with that pollution, removing the burden from the government, and in turn the taxpayers (https://www.worldatlas.com/articles/what-is-the-polluter-pays-principle.html).

However, Bergevin (2018) also cited that one of the issues surrounding the Polluter Pays Principle is the limited ability of the government in forcing those responsible to cover the costs of both preventative and remedial action. Although many countries around the world have enacted the Polluter Pays Principle into law, in reality, there are limited mechanisms in place to ensure those responsible fully engage in appropriate action in regards to environmental damage.

CONCLUSION

Venturing into business must always be coupled with moral responsibilities, not only to your employees, to your customers but above all should be to the environment. The latter has been the prime source of all amenities and raw materials needed by a certain business; ironically, it is also one of the most neglected assets because it is significantly undervalued by most of us.

Morality demands our deep concern to our stakeholders particularly our life support system – the environment, which will be directly or indirectly be affected by our decisions in our business operations. Considering the business’ primordial concern of profit maximization, it should also consider an ecologically-balanced environment, hence, pay the costs or damages it conveys to the society due to the production and operation of the business.

It is a given fact that a person’s self-interest benefits the society thru the job opportunities it gives to the people, the income it indirectly provides to the worker’s family and its contribution to economic prosperity in a certain community. However, a single business cannot stand alone without the existence of groups, organizations and individuals in the society; tantamount to saying that it will not prosper without the involvement and cooperation of third parties. This can be reflected to Pope Francis’ Encyclical Letter (2015) “Laudatu Si’, mi Signore” – Praise be to you, my Lord”, thus, “Because all creatures are connected. Each must be cherished with love and respect for all of us as living creatures are dependent on one another”. Further, given the opportunity to establish a business in a certain community, it is just and fair for us to return the favor to the society where we belong noting the fact that we are the stewards of God’s Creation.

REFERENCES

WEB ARTICLE

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