Framework for thinking about the Natural Environment

Given the pervasiveness of environmental impacts on organizations, we need some kind of framework for evaluating action in response to environmental concerns.

The Cost Benefit Framework: Organizations take raw materials and produce products and services. If the cost of producing the output is greater than the price customers are willing to pay, then the organization cannot make enough profit to stay in business for very long. Organizations sustain themselves by creating value over and above the costs of the inputs. If the benefits to those willing to pay outweigh the costs, then the organization creates a surplus and can continue to produce its goods and services. Such cost benefit thinking has ruled the business world from early times.

The cost benefit model has been the dominant mode of thinking about environmental solutions for the last 30 years especially in the minds of environmental regulators. Simply put, if the benefits of a proposed environmental regulation outweigh its costs, then the regulation should be implemented. But if the costs of a particular environmental rule outweigh its perceived benefits, then the rule should not be enforced.

For example, if good refrigerators without CFCs can be produced for a price that’s not too much more than before, then the benefit not contributing to ozone depletion is greater than the increased cost. Alternatively, if these new products do not function as well as the old type, or if they are prohibitively expensive then the costs may be seen as greater than the benefits.

The problem with cost benefit thinking is that not all benefits and costs are easily quantifiable. For example, what is the benefit to our children of the ozone layer not being destroyed? Such a benefit is difficult to measure. Because we have ignored the natural environment for so long, it is now difficult to simply add environmental costs to the normal business equations. For some site specific and local environmental issues this thinking can help guide us towards solutions that make sense but applying it on a global basis simply doesn’t work very well. We have too little understanding of the real, long term costs and benefits of environmental action and inaction.

The Sustainable Development Framework: Moving beyond cost benefit thinking and talking into account the fact that many environmental costs and benefits accrue over a long period of time, a number of thinkers have begun to develop a new framework based on the concept of sustainable development. The logic of this framework is very simple: engage in those organizational activities that can be sustained for a long period of time or they renew themselves automatically. Economic development that destroys resources such as old growth forests, or rainforests, cannot be sustained, for if such development continues, the very process of life itself may be threatened.

The concept of sustainable development has long been a source of concern and was emphasized in the Bruntland Commission Report to the United Nations, which called for a radically new way of encouraging economic development to preserve the environment. It was defined as development which meets the needs of the present without compromising the ability of future generations to meet their own needs. In 1990, Maurice Strong, Secretary General of the United Nations Conference on Environment and Development, sponsored the formation of the Business Council for Sustainable Development (BCSD) to work out how businesses could adopt sustainable development as a standard operating procedure.

Again, let us look at the example of CFCs and the destruction of the ozone layer. Sustainable development thinking would tell us that if we continue to produce CFCs, then we will compromise the ability of future generations since the destruction of the ozone will lead at least to more skin cancers, and possibly to even worse effects. Sustainable development tells us to coordinate our actions across companies, geographies, and political entities such as national governments to adopt a treaty such as the Montreal Protocol, which banned the production of CFCs after a certain date.