This post is part of our year-end “year in review” sustainable business writing contest. We’ve asked 3p readers to submit their own thoughts about the state of sustainable business in 2010. More information about the contest is available here. All submitted articles will be available on this page. Voting will happen in January!
by Nad Kutz
The below essay tries to gather some of the main economic obstacles for implementing sustainability in business.
Let’s first recall important economic terms and schemes. The main idea of a free market is – if one allows for a strong simplification – that goods/services are in free competition in order to ensure that the best good/service is offered for the best price. This argument is used to make the free market idea attractive to customers. On the entrepreneurs side a free market means that profits may be adjusted and optimized given the circumstances.
The stronger the market competition the more optimization with respect to profits has to be made. That is if the competition is less strong then absolutely seen more profit can be made than in a strong competition. In particular in a monopoly situation a lot of profit can be made with a rather small effort. Monopoly situations can arise in an unmoderated market, the mechanisms why they arise are somewhat similar to examples in physical systems like in maelstroms. For that reason the market place itself is often moderated by a “political” instance, like for the case of monopolys e.g. in form of competition laws. Broadly simplifying one can say that most current economic systems are a mixture of an unmoderated market together with some form of “political” moderation, often in from of regulations. Let’s call this mixture a moderated market. Moreover “political” moderation shall here include vastly different schemes like competition laws, subsidies, wellfare, moral obligations, trade control, cap-and-trade, etc.
self-service harvesting, knives on an unguarded cash box in Munich, Germany
If market competition is strong then since the possible profits are usually rather small there is not much navigation space for the use of profits. Often all profit has to be reinvested immediately in order to ensure the survival of the business. In particular a maximization of profits in balance with optimizing the commodity has to be made in order to ensure survival. Here “optimizing the commodity” means to make the commodity more attractive to customers in relation to the market competition.
However if in addition capital markets are being used for financial backing then shareholders, financiers etc. may ask for maximization of profits regardless of the given market situation (strong or less strong competition). It should also be noted that capital markets influence “normal business” markets, like markets for goods etc. e.g by speculation. Thus capital markets influence not only the profit navigation space in businesses but also business competition itself.
What can be concluded from the above is that the above described free market mechanisms do not encourage ventures which lower profits. That is in a strong competition profits have to be maximized – making less profit is here usually a question of survival or not. If on the other hand there is less competition then the range for profit is more variable and a reduction of profits up to full patronage is apriori possible. However there is no automated market mechanism which encourages such a reduction of profits! In particular if capital markets are involved such a reduction will in general be not possible. Sometimes however, there exist again an instrument of political moderation like a cap on rent, which may enforce a reduction of profits.
For sustainable businesses it is important to keep that general (moderated) market scheme in mind, since this scheme enforces certain limitations in sustainable businesses.
In particular sustainability often includes aspects which may make a commodity less profitable and thus sustainable business may often be in conflict with the above outlined general free market mechanisms.
Note that the fact that sustainability often needs the aspect of being less profitable does not imply that sustainability automatically means to bring less profits!
On the contrary – in particular when comparing long-term and short-term profits a sustainable investment may be very profitable. Thus for example insulating a production facility may proove to be very profitable in a long-term perspective.
However sustainability may eventually ask for efforts which are less profitable for the entrepreneur – even on long-term perspectives.
The component of being sustainable can be incorporated in a more sustainable production process and/or incorporated in a solution where being more sustainable is of benefit to the expected target market. Insulating a production facility makes the production process more sustainable. Providing social benefits for workers may increase health and productivity and may equally make the production process more sustainable and eventually even more profitable on a long-term level. On a short-term and on a long-term level it may however be eventually much more profitable to replace workers frequently, especially if labour force is abundant. Likewise if a business has to move frequently due to changing markets then insulating a production facility may be less profitable. Using environmentally friendly components may make a product more attractive and sustainable to customers, however if the respective target customers have no awareness of e.g. chemical hazards in products and/or no extra money for higher prices then the business becomes eventually equally less profitable.
As pointed out above, if market competition is less strong and no capital markets are involved, then businesses can apriori buffer the fact of making less profits. This holds especially true if businesses have accumulated enough capital. There exists however no market mechanism which encourages such a possibly beneficiary behaviour.
This shows the following:
– If the market competition is too strong then political moderation may be needed in order to make the inclusion of sustainability aspects possible (like e.g. in reducing shipsizes in fishery). However these may not necessarily encourage sustainable behaviour!
– The notion of a “profitable” sustainable business may be limited to rather special aspects of sustainability. There may be important aspects of sustainability which can’t be made very profitable and this should be made clear.
Concluding: to focus only on the profitable parts of sustainable business can’t be called greenwashing, since apriori sustainable goals are still being achieved. But since important sustainable needs are eventually going to be neglected in such a practice one should call such narrow focus may be greencherry-picking.