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How Sustainability Works
Accordingly, sustainable policies emphasize the future effect of any given policy or business practice on humans, ecosystems, and the wider economy. The concept often corresponds to the belief that without major changes to the way the planet is run, it will suffer irreparable damage.
As concerns about anthropogenic climate change, biodiversity loss, and pollution have become more widespread, the world has shifted to embrace sustainable practices and policies, primarily through the implementation of sustainable business practices and increased investments in green technology.
3 Pillars of Sustainability
The idea of sustainability is often broken down into three pillars: economic, environmental, and social—also known informally as profits, planet, and people.
In that breakdown, the concept of "economic sustainability" focuses on conserving the natural resources that provide physical inputs for economic production, including both renewable and exhaustible inputs.
The concept of "environmental sustainability" adds greater emphasis on the life support systems, such as the atmosphere or soil, that must be maintained for economic production or human life to even occur. In contrast, social sustainability focuses on the human effects of economic systems, and the category includes attempts to eradicate poverty and hunger, as well as to combat inequality.
In 1983, the United Nations created the World Commission on Environment and Development to study the connection between ecological health, economic development, and social equity. The commission, then run by former Norwegian prime minister Gro Harlem Brundtland, published a report in 1987 that has become the standard in defining sustainable development.
That report describes sustainable development, or the blueprint for attaining sustainability, as "meeting the needs of the present without compromising the ability of future generations to meet their own needs."12
Corporate Sustainability
In business contexts, sustainability refers to more than just environmentalism. Harvard Business School lists two ways to measure sustainable business practices: the effect a business has on the environment, and the effect a business has on society, with the goal of sustainable practice being to have a positive impact on at least one of those areas.3
Corporate sustainability emerged as a component of corporate ethics in response to public concerns of long-term damage caused by a focus on short-term profits.
This view of responsibility encourages businesses to balance long-term benefits with immediate returns, and the goal of pursuing inclusive and environmentally sound objectives. This covers a broad array of possible practices. Cutting emissions, lowering energy usage, sourcing products from fair-trade organizations, and ensuring their physical waste is disposed of properly and with a smaller carbon footprint would qualify as moves toward sustainability.
Companies have also set sustainability goals such as a commitment to zero-waste packaging by a certain year, or to reduce overall emissions by a certain percentage.
Many corporations have made such sustainability promises in recent years. For example, Walmart Stores, Inc. (WMT) has pledged to reach zero emissions by 2040.4 Morgan Stanley has pledged net-zero "financed emissions" by 2050.5 Google has pledged to operate carbon-free by 2030.6
The push for sustainability is evident in areas such as energy generation as well, where the focus has been on finding new deposits to outpace the drawdown on existing reserves. Some electricity companies, for example, now publicly state goals for energy generation from sustainable sources such as wind, hydropower, and solar.
Because these policies tend to generate public goodwill, some companies have been accused of "greenwashing," the practice of providing a false impression that makes a business seem more environmentally friendly than it is.
Cost Cutting
Moreover, many companies have been criticized for cost-cutting measures that make it harder to evaluate their sustainability. For example, many companies might move some parts of their business to less-regulated markets, such as by offshoring production to obtain cheaper labor. This can make it harder to assess the costs of production on workers and the environment.7
Sustainability practices "significantly affect" the offshoring activities of multinational corporations, according to an examination of data from 1,080 multinational corporations.8
Challenges Surrounding Business Sustainability
The switch to sustainability can be difficult. The Santa Fe Institute outlines three major impediments for firms seeking to improve their environmental impacts: First, it is hard to actually understand the impact of any individual firm. Second, it is difficult to rank the environmental impact of some activities, and finally, it is difficult to predict how economic agents respond to changing incentives.9
Sustainable investing surveys over the past couple of years have suggested that half (or in some cases, more than half) of investors say that sustainability is "fundamental" to investing strategy.10
Not everyone concerned with investments shares the enthusiasm. In July 2021, for instance, Securities and Exchange Commission (SEC) Commissioner Hester Peirce argued that not only would environmental, social, and governance (ESG) disclosure mandates violate the agency's authority, but it may also "undermine financial and economic stability."
According to Peirce, the "inherently political" sustainability metrics were "unabashedly" created to direct capital toward certain businesses. In response to public comments and regulatory pressure to look into such mandates, Peirce said that it would be a violation of the SEC's "historically agnostic approach" to regulations.11
Eiji Hirano, a former chairman of the board of visitors for Japan’s Government Pension Investment Fund, has said that there's a bubble in ESG investing and that the fund needs to rethink its ESG investments, according to interviews with Bloomberg News.12
Benefits of Business Sustainability
In addition to the social benefits of improving the environment and elevating human needs, there are also financial benefits for companies that successfully implement sustainability strategies. Using resources sustainability can improve the long-term viability of a business concern, just as cutting waste and pollution can also help a company save money.
For example, using more efficient lighting and plumbing fixtures can help a company save on utility bills, as well as improve its public image. There may also be government tax incentives for companies that adopt certain sustainability practices.
Sustainability can also make a company more attractive to investors. A 2019 HEC Paris Research paper showed that shareholders value the ethical dimensions of a firm so much that they are willing to pay $.70 more to purchase a share in a firm that gives a dollar or more per share to charities. The study also revealed a loss in valuation for firms perceived as exercising a negative social impact.13
Based on interviews with senior executives across 43 global investing firms, Harvard Business Review has argued that the perception among some business leaders that environmental, social, and governance issues are not mainstream in the investment community is outdated.14
The "sea change" in investor attitudes described by Harvard Business Review draws on the increased commitments of investors. The Principles for Responsible Investment, a United Nations-supported effort to bring these issues into investing, had 63 investment companies with $6.5 trillion in assets under management that committed when it launched in 2006. In 2018, it had 1,715 companies with $81.7 trillion in assets.15