Comparing Strategies in Corporate Sustainability
A recent article in The Engineering News Online summarized market trends dating back to 2005 to determine the “competitiveness” of companies with environmental sustainability initiatives and disclosures. Citing higher average total rates of return in both the carbon disclosure and carbon performance leadership indexes, the authors conclude that companies with environmental impact reduction initiatives are growing faster than those without 1. Another recent article in the Harvard Business Review concluded that the best performing companies place an equal emphasis on “social purpose” (a.k.a. social sustainability) as they do on economic profitability 2. Since both approaches deliver profitability improvements, the question remains: which strategy yields the best long-term competitive advantage? The following is an attempt to shed some light on the issue.
Environmental impact reduction, a.k.a. eco-efficiency and resource productivity, is an approach that has long been recognized as a way to increase profitability. In 1995 strategy guru Michael Porter concluded that resource productivity initiatives drove innovation, and thus, contributed to a corporation’s competitive advantage 3. If a product’s value remains constant while material inputs decrease, the result should be an increase in profitability. The straight-forward logic of this concept has contributed to its acceptance by the international business community. A recent IBM survey of 1,600 participants concluded that “eco-efficiency is poised to become the biggest economic game-changer for organizations in the next 20 years” 4.
Social purpose maximization, a.k.a. social sustainability, can be understood as a rejection of the traditional view of business where profit is the sole justification for a firm’s existence. Firms advocating a societal purpose view profits as the means by which they will continue to provide societal services. Put another way, “they undertake actions that produce societal value – whether or not those actions are tied to the core functions of making and selling goods and services” 2. These actions include, but are not limited to: stakeholder engagement, providing jobs with adequate salaries, programs for enhancing workers’ quality of life, philanthropy, awareness raising campaigns, government lobbying, funding R&D, environmental management programs, etc.
The critical difference between social purpose maximization and environmental impact reduction is that the later can be instituted for purely economic reasons. Firms with purely monetary goals concentrate their efforts on sales performance improvements. This limits the scope of R&D, funnels financial resources towards reinforcement of core competencies, and creates a sales & growth oriented corporate culture. Firms with a social purpose are more likely to orient culture towards the fulfillment of a functional unit, i.e. apple’s goal is “to make a contribution to the world by making tools for the mind that advance humankind” 6. This approach provides room for creativity, innovation, and cannibalization of existing products 7.
Social purpose is also a more effective motivator of employees than profit. Evidence of this can be seen in employee recruitment. Individuals may accept lower compensation rates to work for organizations that “share” their ideological beliefs. In the case of the not-for-profit sector, volunteers regularly forgo payment in order to benefit the causes and issues they identify with on a personal level. The reason for this behavior is attributable to the intrinsic rewards which we derive from benevolence (“the disposition to do good”). These rewards include feelings of competency, a sense of accomplishment, personal development and improved self-esteem. These factors are all recognized as important motivating forces.