The Socio-environmental Externalities and Corporate Sustainability

Written by on January 7, 2014 in CSR - No comments

225px-Bhopal-Union_Carbide_1_crop_memorialIn developing countries, businesses and industries seem to work in isolation and relatively disengaged with secondary and tertiary stakeholders including the government and the society. This lack of trust on the government agencies and absence of the sense of responsibility for the communities and employees stem from the insecurity, volatility, uncertainty and corruption that generally prevail in the business environment. However, changes are coming, though a bit slowly, in response to the toughening competition, interaction with international supply chain, legal and market requirements and with the growing perception that the corporate sector has to ‘do more’ where state machinery is dysfunctional and lacks the institutional capacity and human and financial resources to finance the socio-environmental externalities of the business and to finance the social welfare programs.

The rate of change in corporate behavior to internalize the environmental and social costs in addition to financial costs and to operate in an integrated sustainability framework varies in different countries, sectors and business entities. This is because, businesses work in a highly dynamic local and global markets now-a-days and have varying degrees of capacity to respond and adapt to new challenges. In the comparatively healthier developing economies, the response is quicker and better like that in India, Brazil and China whereas, it is slower or is absent in case of many African and South Asian countries. The response or the capacity to respond depends on a number of factors. Some of them are discussed here.

The primary concern of small and medium business is to survive and of the big business is to thrive financially. Larger businesses especially those have developed their brands or which act as suppliers to brands have to go extra miles to obtain, retain and maintain their customers’ loyalty. In developing countries where very few businesses and industries have well established and known brands, image is not much cared about. Cost and not the value determine the demand for a product or even a service. In such a situation, socio-environmental externalities don’t much affect the financial viability of the firms unless the public catches a serious malfunctioning or unethical practice on their behalf. If such incidents are highlighted on the increasingly assertive media, then the company may suffer irreparable loss or even permanent closure. For example, in 2009, “Lays” had to initiate a campaign to offset the damage done to the demand of its products due to the negative advertising against it. The rumor was common in some Muslim countries that the code E631 printed on the wrapper of Lay’s potato chips showed the use of religiously forbidden food ingredients.

When casualties of life and property happen, the previously unnoticed violation of socio-environmental parameters comes to limelight and costs heavily to the companies responsible for damage especially the multinationals. In such a situation, their license to operate in local communities comes under a question and they have to expend heavily and strategically to regain acceptance of their products and also to face legal and mitigation actions. For example, Union Carbide Corporation (UCC) had to sell its ownership shares in India and compensate the victims after the gas leakage tragedy in Bhopal in 1984 besides facing many legal and social issues and criticism. The company had to give $2 million into the Indian Prime Minister’s immediate disaster relief fund, raise $5 million for the Employees’ Bhopal Relief Fund, pour an additional $4.6 million in humanitarian interim relief, sell its stocks to give $100 million to the hospital for the treatment of the affected, provide $2.2 million grant to Arizona State University to establish a vocational-technical center in Bhopal and donate $5 million to the Indian Red Cross[1]. A more recent example is British Petroleum that has agreed to pay more than 2 billion dollars against compensation claims after oil spill in the Gulf of Mexico[2].

Again, if the damage is done to a very small faction of society and not the common user, even the highlighted malpractice does not much move the responsible company to take strategic remedial actions. The carcinogenic and harmful effluents of about 200 Kasur Tanneries in Pakistan have many a times been highlighted by civil society organizations, media and other stakeholders in India and Pakistan. The toxic substances include mercury, lead and chromium into the Sutlej waterway which zigzags between India and Pakistan. This water is used, untreated, for irrigation of crops and enters the ground water and food chain and causes different diseases including malformation of organs among the children.

A 2005 report published in Kasur Nama, a newsletter by Kasur’s Civil Society Network (CSN), said that Kasur’s hospitals and clinics were full of patients suffering from diseases like typhoid, hepatitis and other gastric diseases. It said that around 10 percent of Kasur’s population was infected with hepatitis, 20 percent of the town’s children had diarrhea, and 70 percent of diseases were caused by contaminated water[3]. But the story has hardly raised eyebrows in mainstream media and society because the most of the products of these tanneries are not consumed locally and the common man is not concerned about the unsustainable practices though Kasur is the major provider of milk, vegetables and Rahu fish to Lahore on daily basis.

Socio-environmental externalities matter a lot if the legal framework incorporates or at least values the preferred social and environmental practices and behaviors. This happens when the civil society, political system and other institutions are reasonably functional, in the evolutionary process and impacting positively on the legal framework and also when the overall governance of media, judiciary, corporate associations and workers’ rights organizations etc is reasonably good and the economy is at least in the take-off position. In such situations, corporations have to internalize the socio-environmental costs just as they bear the financial costs to remain sustainable and healthy. Otherwise, the socio-environmental considerations remain in the periphery and don’t make the part of annual balance sheet.

The educational level and economic profile of the buyers of the products and services offered by corporate sector is another important determinant. The sensitization of buyers on environmental and social issues is a great motivating force to develop a sustainable framework of operations for local, bilateral or multinational businesses. In this case, social and environmental costs are included in the production costs. The buyers and consumers of the famous international brands like Nike, Walmart, C&A in many Western companies have pushed them to implement sustainable, organic or green practices and also to abolish child labor and other social malpractices in supplier countries of Asia, Africa and Latin America. If we talk in terms of Maslow’s Need hierarchy, a thriving middle class falling in the third and fourth ladders on the pyramid is likely to demand social and environmental care from the producers of commodities and providers of services.

The environmental and social care becomes part of the organizational strategy if the firm is going for continual improvement and has the vision to invest in intangible assets along with financial progress. However, a firm in financial straits cannot positively be expected to adopt triple bottom line of sustainability. Therefore, the NGOs and development agencies should focus on the financially viable organizations and firms producing quality goods and services in their transition to integrated sustainability because their stakes with the skilled labor, satisfied community and improved environmental conditions are higher. They should not waste time and resources on budding or entrepreneurial businesses which have not yet developed a large customer base, quality products, proper brand value and above all a corporate culture. At the same time, they can also help the firms with economic problems to attain financial sustainability before moving on to the next steps.

This is equally true at macro level and financial hardships result in slashing of developmental and philanthropic expenditure. For example, the effects of the current international economic downturn on business expenditure on social welfare, CSR and poverty alleviation have been felt all across the world because businesses have engaged in short-termism in trying to calm shareholders; they are cutting corporate social responsibility and are looking for government handouts and subsidies in return for some employment and performance related guarantees. At the same time, philanthropic foundations have seen drops in asset values of scales not seen in decades, and continue to expect more losses, especially in the book value of stocks; they anticipate reductions in grant payouts, amidst concerns about the sustainability of current programmes and commitments, and put growing emphasis on asset protection[4].

The empirical evidence that a firm’s financial health has a direct relationship with its performance on social and environmental indicators is perhaps the strongest driver for firms to achieve integrated sustainability. The positive advertising, brand loyalty and customer satisfaction are some of the benefits that every firm would love to secure in the long run but few companies are able to reserve enough funds to generate initial social and environmental investments unless the benefits and losses are determined in quantitative terms. This implies that firms should be helped in calculating financial paybacks of environment friendly or socially compatible interventions, sustainable corporate behavior and damages of non compliance. Likewise, the communication to firms should also be based on messages highlighting the tangible financial benefits than on the rhetoric of voluntary environmental and social responsibilities.  This would encourage reluctant businesses move on to fully sustainable operations.

Last but not the least; the ethical, moral and legal conditions of a society are some of the other determinants which help shape the behavior of business towards environmental and social value addition to their products and operations. Less open societies, patriarchies and insecure cultures due to their non-transparent fabric are also likely to promote evasions from socio-environmental responsibilities. Therefore, multinational businesses have different CSR and operational policies and legal compliance levels in different countries though they offer standardized products and services across the globe.

 


[1] Bhopal Information Center, UCC, http://www.bhopal.com/ucs.htm,  www.bhopal.com./faq.htm

[4] Helmut K Anheier, The Global Economic Downturn, Philanthropy and Nonprofits: Reflections on what it means, and what to do , Centre for Social Investment, University of Heidelberg & Center for Civil Society, UCLA, January 2009