Sustainable Value Creation: An Inevitable Challenge to Business and Society (Sustainable Finance) 3031353501, 9783031353505

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Sustainable Finance

Teun Wolters

Sustainable Value Creation An Inevitable Challenge to Business and Society

Sustainable Finance Series Editors Karen Wendt, CEO. Eccos Impact GmbH, President of SwissFinTechLadies, President Sustainable-Finance, Cham, Zug, Switzerland Margarethe Rammerstorfer, Professor for Energy Finance and Investments, Institute for Finance, Banking and Insurance WU Vienna, Vienna, Austria

Sustainable Finance is a concise and authoritative reference series linking research and practice. It provides reliable concepts and research findings in the ever growing field of sustainable investing and finance, SDG economics and Leadership with the declared commitment to present the theories, methods, tools and investment approaches that can fulfil the United Nations Sustainable Development Goals and the Paris Agreement COP 21/22 alongside with de-risking assets and creating triple purpose solutions that ensure the parity of profit, people and planet through choice architecture passion and performance. The series addresses market failure, systemic risk and reinvents portfolio theory, portfolio engineering as well as behavioural finance, financial mediation, product innovation, shared values, community building, business strategy and innovation, exponential tech and creation of social capital. Sustainable Finance and SDG Economics series helps to understand keynotes on international guidelines, guiding accounting and accountability principles, prototyping new developments in triple bottom line investing, cost benefit analysis, integrated financial first plus impact first concepts and impact measurement. Going beyond adjacent fields (like accounting, marketing, strategy, risk management) it integrates the concept of psychology, innovation, exponential tech, choice architecture, alternative economics, blue economy shared values, professions of the future, leadership, human and community development, team culture, impact, quantitative and qualitative measurement, Harvard Negotiation, mediation and complementary currency design using exponential tech and ledger technology. Books in the series contain latest findings from research, concepts for implementation, as well as best practices and case studies for the finance industry.

Teun Wolters

Sustainable Value Creation An Inevitable Challenge to Business and Society

Teun Wolters Wittenborg University of Applied Sciences Apeldoorn, The Netherlands

ISSN 2522-8285 ISSN 2522-8293 (electronic) Sustainable Finance ISBN 978-3-031-35350-5 ISBN 978-3-031-35351-2 (eBook) https://doi.org/10.1007/978-3-031-35351-2 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

This book goes back to an earlier publication of mine with the same main title, Sustainable Value Creation, which came out in 2013. In the writing process, I could draw on my previous experiences as a researcher and consultant in the field of sustainable business. In 2011, I took office as a lecturer and professor at Wittenborg University of Applied Sciences in Apeldoorn, the Netherlands. The school gave me the opportunity to set up an MBA module on corporate sustainability and involve an international audience of students in my lessons in this highly relevant and exciting area. In doing so, that earlier book came in handy. Thanks to my teaching and research experience in the field, I could incorporate new perspectives in this new book. The subtitle now indicates that creating sustainable value at the company level is embedded in a transition to sustainability that is taking place throughout society. Although certain parts of the first book return, much information has been added based on the academic literature. Before you is a book that provides a broad treatment of what it means as a business and as a society to move towards a sustainable future. It requires a level of thinking that we can expect from senior students and professionals. It can also be used at a more elementary level, but then it requires a teacher who can provide sufficient explanation of the basic concepts and engage in conversation with their students about them. The business professional dealing with sustainability issues will not only need to know about sustainable business in a limited subject area. On the contrary, it is important that they have an understanding of what sustainability means for the various components of running a business. Ultimately, it is about sustainability permeating the core of the business and its strategies at various levels. While much is happening in sustainability in all sorts of areas, it must also, unfortunately, be concluded that unsustainable practices still threaten the world. At various points, this book makes it known that half-hearted approaches have no place anymore. Central to this is that economic growth in terms of gross national product can no longer be taken for granted. It must align with broader concepts of prosperity

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Preface

and a willingness to put health and well-being first and share prosperity with those living below the subsistence level. Meeting this will require new forms of responsible entrepreneurship. I hope this book will contribute to this necessary development. Apeldoorn, The Netherlands May 2023

Teun Wolters

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Road Towards Corporate Sustainability . . . . . . . . . . . . . . . . 1.2 The Chapters in a Nutshell . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 The Sequence of the Chapters . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Accessibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . .

1 1 1 4 4

2

Sustainable Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Companies Have a Central Role to Play . . . . . . . . . . . . . . . . . . . . 2.2 The Green Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Scientific and Ethical Approach . . . . . . . . . . . . . . . . . . . . . . 2.4 The Ecological and Social Aspects . . . . . . . . . . . . . . . . . . . . . . . . 2.5 The UN Sustainable Development Goals . . . . . . . . . . . . . . . . . . . 2.6 The Triple Bottom Line (People, Planet, Profit) . . . . . . . . . . . . . . 2.7 Ranking of Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5 9 13 15 16 18 21 23

3

Sustainable Value Creation and Management Responsibilities . . . . 3.1 Sustainable Value Creation: Necessary and Full of Opportunity . . 3.2 Sustainability in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Managers’ Key Role in Sustainable Value Creation . . . . . . . . . . 3.4 CFOs and Sustainable Management . . . . . . . . . . . . . . . . . . . . . . 3.5 The Role of Controllers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . .

25 25 26 27 30 33 36

4

Sustainable Business at the Supply Chain Level . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Sustainable Supply Chain Management . . . . . . . . . . . . . . . . . . . . 4.3 Implementing Sustainable Supply Chain Management . . . . . . . . . . 4.4 Implementing Sustainable Supply Chain Management . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 39 40 41 43 49

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Environmental Management and the Circular Economy . . . . . . . . . . 5.1 Environmental Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 The Circular Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6

Human Resources and Roles in Achieving Corporate Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Globalisation and Human Resources . . . . . . . . . . . . . . . . . . . . . . 6.3 Demand-Led Growth and the Survival of the Planet . . . . . . . . . . . 6.4 Leadership for Corporate Sustainability . . . . . . . . . . . . . . . . . . . . 6.5 The Role of HRM in the Transition Towards a Sustainable Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 A Stakeholder Approach to Sustainable HRM . . . . . . . . . . . . . . . 6.7 Sustainable HRM, Stakeholder Management and Corporate Social Responsibility (CSR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51 51 57 65 67 67 67 71 73 75 78 79 81

7

Corporate Governance and CSR as Vehicles of Corporate Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.1 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 7.2 Stakeholder Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 7.3 Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . 93 7.4 Sustainability Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

8

Sustainability Accounting and Reporting . . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 The Planet Element of Sustainable Business . . . . . . . . . . . . . . . . . 8.3 Eco-Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Total Cost Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Environmental Costs Throughout the Supply Chain . . . . . . . . . . . 8.6 The Sustainable Balanced Scorecard (SBSC) . . . . . . . . . . . . . . . . 8.7 Further Developments in Sustainability Accounting . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103 103 105 106 114 115 117 118 123

9

From Green Growth to Post-growth Approaches . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 The Green Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Ecological Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Social Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 Export of Minerals and the Poorest People . . . . . . . . . . . . . . . . . . 9.6 Food Security and Climate Change . . . . . . . . . . . . . . . . . . . . . . . 9.7 Beyond Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8 Post-growth Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

125 125 128 131 132 136 138 138 140 147

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

About the Author

Teun Wolters (1948) is an economist by training. He obtained his PhD in economics (labour studies) at VU University in Amsterdam (NL). Most of his career was dedicated to research and consultancy in the field of environmental problems, labour issues and corporate sustainability. At the same time, he showed considerable interest in development issues, particularly in improving the livelihoods of small farmers in developing countries. Much of his research work and publications took place in the context of European research projects in the area of environmental accounting, sustainable innovation, the development of ‘new economy’ indicators and ‘green economy’ policies. From 2011 to 2022, the author worked at Wittenborg University of Applied Sciences in Apeldoorn (the Netherlands) as a senior lecturer and professor in corporate sustainability. Today, as an emeritus, he devotes a great deal of his time to research and writing and works as a community volunteer. Through this book, he intends to contribute to promoting and integrating sustainability in business and society.

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List of Boxes

Box 2.1 Box 2.2 Box 2.3 Box 2.4 Box 2.5 Box 2.6 Box 2.7 Box 3.1 Box 3.2 Box 3.3 Box 3.4 Box 3.5 Box 4.1 Box 5.1 Box 5.2 Box 5.3 Box 5.4 Box 6.1 Box 6.2 Box 6.3 Box 7.1 Box 7.2 Box 7.3 Box 7.4 Box 8.1 Box 8.2 Box 8.3 Box 8.4 Box 8.5

Energy and Biodiversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Some Quotations from Our Common Future . . . . . . . . . . . . . . . . . . . . . . . . Inclusive Green Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Conditions for Sustainable Development . . . . . . . . . . . . . . . . . . . . . The Good Life . . . . . .. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . .. . . . The 17 UN Sustainable Development Goals . . . . . . . . . . . . . . . . . . . . . . . . How Will the Sustainable Development Goals Be Implemented and Monitored? . . . .. . . . .. . . .. . . .. . . .. . . . .. . . .. . . .. . . .. . . . .. . . .. . . .. . . .. . Global Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Responsible Management Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The CFO’s Four Faces . .. . . .. . . .. . . . .. . . .. . . .. . . .. . . .. . . .. . . .. . . .. . . .. . ESG Rating Agencies . . . . . . .. . . . . . . .. . . . . . . .. . . . . . . .. . . . . . .. . . . . . . .. . . . The Controller’s Role in Environmental Management Control . . . . On Soft Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ISO 14001:2015 .. . . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . . .. . . . . . . . . . . .. . . . . Complexity in Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Early Contributions to the Circular Economy . . . . . . . . . . . . . . . . . . . . . . . The WBCSD’s Vision for the CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The World Bank and the UN SDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The IMF and the UN’s SDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bridging Social and Financial Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Pillars of Successful Corporate Governance . . . . . . . . . . . . . . . . . . . . Bookkeeping Scandals and Stricter Regulations . . . . . . . . . . . . . . . . . . . . Dieselgate . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . Corporate Governance and CSR Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . Defining Material Sustainability Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU Reducing Greenhouse Gases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eco-Efficiency: Product or Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Environmental Quality Costs Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advancing Sustainable Development through Human Rights . . . . .

6 7 10 12 14 17 18 28 29 31 31 35 42 55 58 59 62 70 71 79 84 90 91 96 104 107 110 113 120

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Box 9.1 Box 9.2 Box 9.3

List of Boxes

Inequality and Well-Being . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 The 5 Ps and the SDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Pattern Groups of Degrowth-Oriented Organisational Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Chapter 1

Introduction

1.1

The Road Towards Corporate Sustainability

This book is dedicated to corporate sustainability in the context of sustainable value creation for society. It goes into what it means to incorporate sustainability into corporate and related strategies and manage the following activities. At the same time, it keeps an eye on the broader societal context in which companies operate. Since the launch of the concept of sustainable development, many policies at various institutional levels have focused on reducing environmental damage and social ills. This book reflects these policies. However, these policies come up against continued economic growth and a growing global population. This is why this book also stresses more radical approaches for a successful transformation towards a sustainable society. Businesses should not be content to wait and see what lies ahead. They need to take ownership of the change process that is needed proactively.

1.2

The Chapters in a Nutshell

The various chapters of this book will lay the groundwork for businesses and professionals to accomplish what must be done. It also guides an understanding of the broader societal context within which transformation is moving towards sustainability. Each chapter ends with a list of key notions and concepts, which makes it possible to get a brief overview of the chapter’s content. The references used appear at the end of each section. Therefore, each chapter can be read and used separately from the other. Chapter 2 discusses the concept of sustainable development launched by the United Nations World Commission on Environment and Development (WCED) in its 1987 report entitled Our Common Future. This report has established the notion of equity and justice within and between generations and the idea of developing a © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_1

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1 Introduction

shared understanding of the long-term goals for human life on earth. In 2008, the United Nations Environment Programme (UNEP) launched the Green Economy Initiative (GEI), a global programme of national-level research and assistance to motivate policymakers to support environmental investments. From a ‘weak sustainability’ perspective, natural resources are consumable as long as valuable human resources replace them. However, this widespread view cannot last as it eventually leads to overstepping critical ecological boundaries. Indeed, the world faces an unprecedented catastrophe as it depletes critical, irreplaceable components of its natural capital base. Therefore, the world needs change based on ‘strong sustainability’. The question remains whether the present sustainability programme will lead the way to a sustainable world. Chapter 3 explains that enterprise-level value creation can harm society as a whole. Consequently, there is a need to transform conventional business into sustainable business. Here, sustainability is not about maintaining competitive advantage or profitability. It means businesses must not harm nature or encroach on the resources that sustain future generations. Nowadays, a strong entrepreneurial spirit presupposes the possibility of combining both types of sustainability. On the one hand, a company has to survive in the present, and on the other hand, it has to avoid doing so to the detriment of future generations. The latter is highly relevant because conventional business, business-as-usual as it is often called, appears to pose a threat to the entire planet. The chapter discusses the CFO and controllers’ roles in making effective decisions in this area. Chapter 4 expands the scope of sustainability into international supply chains that connect many companies around the world. Globalisation has dramatically increased the outsourcing and off-shoring of production activities. In particular, the U.S. and EU countries have shifted the production of many products to Asian countries, not in the least, China. Consequently, many international supply chains and innovation networks are essential to the global economy. Therefore, Supply Chain Management (SCM) is critical to making the global economy sustainable for future generations. It involves saving on and responsibly selecting material inputs and combating social evils. There are all sorts of instruments for developing sustainability in supply chains at the company level, such as material balance sheets, environmental labelling and eco-design. Chapter 5 focuses on the various aspects of environmental management relevant to manufacturing enterprises and service providers such as shops, accounting firms, schools and hospitals. A company can strengthen its environmental management with an Environmental Management System (EMS). ISO 14000 is a well-established environmental management standard. The industrial circular economy (ICE) aims to maintain the value and utility of natural and human-made assets by using, reusing and recycling valuable materials. More adaptive approaches are required for the implementation of ICE in developing countries. Chapter 6 goes into the way human resources can contribute to corporate sustainability. In previous decades, neoliberalism has expanded employers’ power over wage determination, personnel management, work organisation and hiring and firing. The weakening of the position of employees (in particular, the least

1.2

The Chapters in a Nutshell

3

well-paid) has led to increased health inequalities, public health problems and stress. During the 2000s, neoliberal policies led to a reduction of government roles and increased job insecurity. Companies need to understand the quality and importance of the resources they have. Where needed, they must regenerate, develop and renew them. A company’s human resources are part of this. Sustainable Human Resource Management (SHRM) is about the vital role that individuals are to play in achieving corporate sustainability. Strategic HRM occurs when appropriate stakeholder management requires firms to develop internal competencies to communicate with specific stakeholder groups. SHRM and strategic HRM overlap and reinforce each other. Chapter 7 explains the meaning and scope of corporate governance through legislation, codes of conduct and procedures. In recent decades, corporate governance has been far more widely than before. A company must deal with all parties who can influence it and vice versa. These are a company’s stakeholders. This concern is a matter of stakeholder management. Corporate Social Responsibility (CSR) can be regarded as an element of corporate governance. CSR is a company’s commitment to responsibly and transparently managing its operations’ social, environmental and economic impacts. Strategic CSR ensures that CSR is part of the company’s strategy and implementation. MNEs increasingly take responsibility for global governance issues. Many scholars encourage MNEs to collaborate with multiple actors when facing governance gaps. Chapter 8 guides us into the area of accounting. Conventional accounting has established principles and practices that make it unsuitable for accounting for sustainability. As a result, we need new types of accounting and accountability to deal with sustainability challenges. The domains of sustainability accounting go back to the three elements (the three Ps) of sustainable business: People, Planet and Profit. Eco-efficiency is a critical concept; accounting can demonstrate how well an enterprise manages its inputs, which often come from nature. The processing of inputs causes harmful emissions of air and wastewater as well as the generation of solid waste. Eco-efficiency indicates the reduction of inputs and using nature as a ‘sink’ relative to production or value added. However, we need an absolute decoupling of the use of nature from production volumes leading to drastic reductions. Only in this way can a sustainable future be assured. Accountability and transparency have to prove whether this is happening. For that matter, accounting practices must provide relevant, forward-looking information in support of the various business-driven decision-making processes. Chapter 9 provides a realistic assessment of the global situation regarding sustainable development. Despite what has been done to promote sustainability worldwide, the global economy still exceeds ecological limits, and sustainability still needs to be achieved. Various authors have associated economic modernisation with the circular economy to make economic growth less dependent on virgin resources and overcome trade barriers because of limited supply. Many national governments and large corporations shape their strategies using the Sustainable Development Goals (SDGs). However, it remains to be seen whether the goals have any reinforcing effect on achieving sustainability. There is plenty of cherry-

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1 Introduction

picking and greenwashing. The latter practices mean the SDGs and similar programmes require adequate disclosure, verification and direction to overcome the weaknesses in current pursuits of sustainable development and the green economy; the fact is that conventional economic growth is still ongoing but, at most, slightly adjusted. Three theoretical domains can help choose the right direction. These are steady-state economics, eco-development and post-growth economics. Part of the latter is degrowth, achieving an absolute decoupling between economy and ecology based on democratic decision-making and distributive justice.

1.3

The Sequence of the Chapters

Even though the order of the chapters follows a certain logic, studying the chapters separately and in different sequences is possible.

1.4

Accessibility

This book is accessible to business professionals and senior students in business administration and economics. In other cases, the book can be made available to university students as part of an educational program. For example, the book can be a rich source of learning if the chapters are clearly explained in the classroom and used to invite class discussions. In addition, the deepening and actualisation of the book’s concepts can take place through Internet research and literature studies. New developments are likely to occur frequently in many of the areas covered in this publication.

Chapter 2

Sustainable Development

2.1

Companies Have a Central Role to Play

Moving towards a sustainable economy requires the involvement and dedication of all segments of society—governments, companies, citizens and NGOs. They must join a worldwide transformation that will lead to drastic economic change. The global nature of this process has already become apparent through the commitment of various United Nations (UN) organisations, such as the United Nations Environmental Programme (UNEP) and the Food and Agricultural Organization (FAO). However, economic change for sustainability can only occur when companies commit to it. Humanity can mould nature so that it delivers what consumers wish to buy. In this respect, companies and consumers often appear short-sighted: In many cases, they do not consider the planet’s future. Little harm was done as long as human influence on nature was relatively small because of modest population sizes and limited technical means. However, the world’s population has been steadily growing, which has put nature under severe pressure, posing a threat to all life on earth. Sustainable development is not self-evident. While duly recognising our modern globalised economy’s impressive achievements, it has transpired that, at the same time, it is wasteful, socially unacceptable and untenable. As the problems are predominantly in the economic domain, sustainable enterprise and sustainable production are indispensable components of the rescue package. All kinds of movements have emerged to improve things, but until now, the entire intervention package still needs substantial improvement. Much more is needed. When discussing sustainable business (or similar terms), one should realise that it needs entrepreneurs working on real, sustainable solutions. Creativity and risktaking are part of this. Social entrepreneurship can contribute to meeting the basic needs of large groups whose livelihoods are below any acceptable minimum standard.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_2

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Sustainable Development

Sustainability is surrounded by significant uncertainties about the availability of environmental functions and their importance for human welfare, especially in demography, technical development and the carrying capacity of our life-supporting systems. For many resources, there are critical zones. Entering such zones may have irreversible, adverse effects (such as extinct species) (Ekins et al., 2003). Box 2.1 Energy and Biodiversity Another milestone was the Biodiversity Treaty of Rio de Janeiro in 1992. During this UN Conference, the member states agreed to develop new environmental and development policies. This new development framework involving all countries was called ‘Sustainable Development’. In 2002, a large conference—the World Summit on Sustainable Development—was held in Johannesburg, South Africa. Those conferences found it was not self-evident that Western countries’ wealth and economic growth could continue forever. This limit was caused by scarcity of natural resources. We must use our natural resources more efficiently and save on energy and biodiversity. Besides, we have to invest in knowledge and education so that low-input technologies emerge that make it possible for future generations to ensure acceptable prosperity. The concept of sustainable development takes nature into account to the extent as an essential resource to satisfy human wants. Consequently, sustainable development is primarily an economic concept. More radical views consider this not enough; nature has intrinsic value, whether people like it or not. However, one may argue that the concept has, beyond political divisions, motivated many people and organisations to take relevant action. For a long time, people expected, or at least hoped, that their action would be good enough to ‘save the planet’, but now, many experts and others have serious doubts about it. There is a need for a new sense of urgency. What has been the outcome of Our Common Future, and where lie its limitations? The answer may begin with an evaluation of Our Common Future on the occasion of its twentieth anniversary (Hauff, 2007). Our Common Future was a seminal report that marked a time in history when development and the environment enjoyed increasing awareness and attention. However, development and environment did not go along easily. The tension between the two exists. The concept of sustainable development—meeting the needs of the present generation without compromising the ability of future generations to meet their needs—could, in principle, be the key to a durable match between development and the environment. This match was a new perspective in 1987 (the year Our Common Future was published) (see also Box 2.2). It established the notion of equity and justice within and between generations and the idea of developing a shared understanding of the long-term goals for human life on earth. From there, Our Common Future pleaded for new international governance instruments and action programmes. The Rio conferences are a direct

2.1

Companies Have a Central Role to Play

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result of the suggestion of Our Common Future to have an international conference to address remaining issues. Remember that Our Common Future appeared when neo-liberalist thoughts echoed through the chambers of political and economic establishments. This ideological climate explains the call for economic growth within existing mechanisms and frameworks (Hopwood et al., 2005). Amid that, Our Common Future pronounced that international cooperation between North and South could create a system within the biosphere’s capacity that allows for growth, resource efficiency and the eradication of poverty in a socially equitable manner. However, Our Common Future did not sufficiently consider the finite nature of natural resources and nature’s absorptive capacities, and therefore, it disregarded the limitations of economic growth. Moreover, its critical arguments that economic growth is subject to severe conditions (and therefore is limited) have been largely ignored. Environmental policies have served the purpose of buying time to develop really sustainable solutions. However, many feel this time is running out. Thanks to Our Common Future, the obligation to mind future generations has been engrained in national and international policies so that they can be a stepping-stone towards more comprehensive long-term sustainability policies. Recent steps such as the Paris Climate Agreement, the UN Sustainable Development Goals and the EU’s Green Deal are examples of such progress. Box 2.2 Some Quotations from Our Common Future ‘Scientists bring to our attention urgent but complex problems bearing on our very survival: a warming globe, threats to the earth’s ozone layer, deserts consuming agricultural land. We respond by demanding more details and assigning the problems to institutions ill-equipped to deal with them’. ‘What is needed now is a new era of economic growth—growth that is forceful and at the same time socially and environmentally responsible’. ‘Unless we are able to translate our words into a language that can reach the minds and hearts of young and old, we shall not be able to undertake the extensive social changes needed to correct the course of development’. ‘Humanity has the ability to make development sustainable—to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs’. ‘The Earth is one, but the world is not. We all depend on one biosphere for sustaining our lives. Yet each community, each country, strives for survival and prosperity with little regard for its impact on others’. ‘Economics and ecology must be completely integrated in decision-making and law-making processes not just to protect the environment, but also to protect and promote development’. (continued)

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Box 2.2 (continued) ‘In all countries, rich or poor, economic development must take full account in its measurements of growth of the improvement or deterioration in the stock of natural resources’. ‘The case for the conservation of nature should not rest only with development goals. It is part of our moral obligation to other living beings and future generations’. ‘Almost any activity that increases well-being and security lessens people’s desires to have more children than they and national ecosystems can support’. ‘Environmental education should be included in and should run throughout the other disciplines of the formal education curriculum at all levels—to foster a sense of responsibility for the state of the environment and to teach students how to monitor, protect, and improve it’. ‘Non-emergency food aid and low-priced imports also keep down prices received by Third World farmers and reduce the incentive to improve domestic food production’. ‘The true cost of the arms race is the loss of what could have been produced instead with scarce capital, labour skills, and raw materials’. ‘The transition to sustainable development will require a range of public policy choices that are inherently complex and politically difficult’. Source: https: http://www.un-documents.net/ocf-ov.htm Since Our Common Future was published, the world has significantly changed (Hauff, 2007). These changes matter when pondering how to update and reinforce its message. At the end of the eighties of the previous century, the Cold War ended, changing a bipolar political divide into a multipolar world. Since then, several developing countries have entered a remarkable development and economic growth process, leading to a changing international political landscape with China as the most prominent player. Globalisation has resulted in a world economy that has become much more interdependent than before. While economic growth occurred (albeit in waves involving various crises; see below), commensurate environmental care was absent. In general, developing countries have prioritised catching up with the developed countries in terms of GDP (per head) without an urge to avoid the ‘environmental mistakes’ of the latter. Throughout the nineties and beyond, information technology has been a powerful engine of economic growth, creating a world where distance became less critical, firmly resting on various forms of outsourcing and off-shoring. Besides remarkable evidence of economic expansion and reduction in extreme poverty, globalisation gave way to intensified forms of statal and private cybercrime, espionage and aggression. These phenomena absorb resources that could otherwise be used for better causes; moreover, they slow down and fragment international collaboration for a ‘common future’.

2.2

The Green Economy

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The Dramatic Disaster of 9/11 (2001) The September 11 attacks (also called 9/11) were a series of four coordinated terrorist attacks by the Islamic terrorist group al-Qaeda against the USA on Tuesday, September 11, 2001. The attacks claimed 2797 lives, injured more than 25,000 people and caused at least $10 billion in infrastructure and property damage (Source: Wikipedia). The terrorist attacks that followed in different parts of the world created new political and military realities. Finally, they have led to instability and war, particularly in the Middle East, causing widespread devastation and large numbers of victims and refugees. These (and other) crises have also been a catalyst for rethinking corporate responsibility and policies to achieve sustainability without being able to reverse the trend. Crises have called for short-term recovery policies and have therefore shifted the focus away from the long-term of a sustainable future. Part of the recovery funds (loans and subsidies) have been subject to sustainability criteria. Although there have been significant differences between countries in applying these criteria, overall, there remain severe divergences between short-term pressures and long-term imperatives. The September 11 attacks (also called 9/11) were a series of four coordinated terrorist attacks by the Islamic terrorist group al-Qaeda against the USA on Tuesday, September 11, 2001. The attacks claimed 2797 lives, injured more than 25,000 people and caused at least $10 billion in infrastructure and property damage (Source: Wikipedia). The terrorist attacks that followed in different parts of the world created new political and military realities. Finally, they have led to instability and war, particularly in the Middle East, causing widespread devastation and large numbers of victims and refugees. These (and other) crises have also been a catalyst for rethinking corporate responsibility and policies to achieve sustainability without being able to reverse the trend. Crises have called for short-term recovery policies and have shifted the focus away from the long term of a sustainable future. Part of the recovery funds (loans and subsidies) have been subject to sustainability criteria. Although there have been significant differences between countries in applying these criteria, overall, there remain severe divergences between short-term pressures and long-term imperatives.

2.2

The Green Economy

In the first decade of the twenty-first century, concerns about both the economy (recovery from various economic downturns, not in the least the Great Recession of 2007–2009) and the environment (esp. dwindling availability of natural resources and biodiversity, climate change) led to an international call for joint efforts to move towards a green economy. In 2008, the United Nations Environment Programme (UNEP) launched the Green Economy Initiative (GEI), a global research and country-level support programme to motivate policymakers to support environmental investments. Many international organisations and actors from civil society and

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academia have contributed to developing a dossier along these lines. Later, the concept of the green economy was extended to include ‘inclusive’: an inclusive green economy. It was also on the agenda of the UN’s Earth Summit Conference (Rio +20) held in 2012. At the 2015 United Nations General Assembly, UNEP released ‘Finding Paths to an Inclusive Green Economy’ (see for a definition: Box 2.3). Box 2.3 Inclusive Green Economy ‘An Inclusive Green Economy (IGE) has evolved from earlier work on Green Economy. In its simplest expression, such an economy is a low carbon, efficient and clean in production, but also inclusive in consumption and outcomes, based on sharing, circularity, collaboration, solidarity, resilience, opportunity, and interdependence. It is focused on expanding options and choices for national economies, using targeted and appropriate fiscal and social protection policies, and backed up by strong institutions specifically geared to safeguarding social and ecological floors. And it recognizes that there are many and diverse pathways to environmental sustainability’. ‘Our approach speaks to the multiple benefits—economic, health, security, social and environmental—that such an approach can bring to nations, mindful of the different challenges faced by states along the development continuum, be they developed, developing, emerging, or in conflict. It argues for policies that are nuanced, context-dependent, and modulated. An integrated approach can help states understand how to maximize, prioritize, and sequence the different benefits to human well-being that can be derived from a healthy environment. At the end of the day, an inclusive green economy must provide not only for jobs and income, but for our health, our environment, and our future. This is our common challenge: creating the conditions for enhanced prosperity and growing social equity, within the contours of a finite and fragile planet’. Source: https://www.unep.org/explore-topics/green-economy/why-doesgreen-economy-matter/what-inclusive-green-economy (accessed: 22 January 2023). The green economy presents itself as a remake of sustainable development and a concept of global mobilisation. The green economy discusses the theoretical distinction between weak and strong sustainability, which can explain various standpoints and policy choices. Whether it is about energy and CO2, international financial crises or worries about food and public health, however different these issues may be, they have an erroneous allocation for decades in common. In many cases, these misallocations demonstrate a need for long-term orientation, social responsibility and an inability to set the right priorities in practice.

2.2

The Green Economy

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Capital is one of the core concepts of economic theory. In essence, the concept of capital is that it is a stock that gives rise to flows of goods and services. Classical economics has distinguished three types of capital: land, labour and human-made capital. In its presentation of production functions, much of neoclassical economics omitted land and focused solely on labour and human-man capital. Ekins et al. (2003) have disaggregated the capital stock into four different types of capital: manufactured, human, social/organisational and natural (also called ecological or environmental) capital. Each of these stocks produces a flow of ‘services’ as inputs into the production process. Natural capital is a complex category which performs four distinct types of environmental functions: 1. The provision of resources for production (the raw materials that become food, fuels, metals, timber and the like). 2. The absorption of wastes from the production and consumption process (can go well through recycling or fertilisation, but waste is often so processed that it deteriorates the environment). 3. Essential life support functions (such as climate and ecosystem stability). 4. Amenity services (such as the beauty of landscapes and positive health effects). A decline in one of the four capital stocks (or a combination of stocks) indicates unsustainability. This observation raises the question of whether various types of capital can replace each other. If they can, then sustainability is consistent with the decline of one type of capital stock as long as another type of capital increases enough to offset that decline. However, in various ways, natural capital cannot be replaced by human-made capital; they uniquely contribute to welfare (Ekins et al., 2003). Apart from extreme cases, Turner (1993) distinguishes between two conceptual categories: 1. Weak environmental sustainability presupposes well-being does not depend on a specific form of capital and can exist by substituting manufactured capital for natural capital (with some exceptions). 2. Strong environmental sustainability assumes that the replacement of natural capital is severely constrained, particularly by environmental characteristics such as irreversibility and uncertainty. Moreover, natural capital contains critical components that uniquely contribute to well-being. In many cases, those who see natural capital as a supplement to manufactured capital place even more emphasis on natural capital (Daly, 1991b). The underlying assumption of weak sustainability is that there is no critical difference between the various forms of capital or the types of well-being they generate. Of neoclassical inspiration, natural capital has become part of cost-benefit analysis by assigning a monetary value to natural elements. On this basis, the net well-being effects of using and producing forms of capital will become apparent. Strong sustainability keeps natural capital distinct from other kinds of capital;

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whether there are possibilities for substitution remains to be seen; whether it can be done must not be assumed; it needs to be proven (see also, Box 2.4). The world faces acute ecological crises as it depletes critical components of its capital. Ignoring where nature is subject to non-substitutability creates irreversible and significant losses (Ekins et al., 2003). Given the risks and uncertainties surrounding nature’s critical functions in today’s expanding world economy, there is much to say in favour of following approaches to human development based on strong sustainability (Berr, 2017; Nikolaoua et al., 2019). Evaluation of the Green Economy The previous paragraphs help evaluate the green economy as a follow-up on Our Common Future and its way of implementing sustainable development. Bina (2013) conducted a systematic qualitative analysis of 24 documents about the green economy launched at Rio +20 (2012). According to UNEP (2011), the green economy is ‘one that results in improved human well-being and social equity while reducing environmental risks and ecological scarcities’. This definition is as broad as the UN’s vision for sustainable development. Bina (2013) concludes that, although green economy responses vary significantly, greening is about ecological modernisation (esp. through eco-innovation) and transition management (involving multi-actor involvement and sharing visions on the future). However, she concludes, there was a lack of radical approaches to sustainability. This conclusion resonates with weak sustainability, focusing on changing production methods without questioning overall consumption levels. Indeed, the suggested greening policies (let alone the even less far-reaching approaches indicated as ‘almost business-as-usual) did not address the hard choices many scientific and civil society communities have demanded. Box 2.4 Three Conditions for Sustainable Development According to Daly (1991a), a sustainable society must meet three conditions: • The extent to which society uses renewable resources should align with how soon these resources recover. • The use of non-renewable resources should not be higher than the extent to which renewable resources become available. • The extent to which polluting substances get discharged should not exceed the environment’s absorptive capacity. These difficult choices involve recognising and remaining within ecological boundaries and setting the corresponding goals and priorities. In the all-change category, the current state of the world ‘derives from a crisis of ends, not means (although these also have to change)’. The morality of dominant markets needs questioning in light of the interests of future generations. It turns out that the dominant growth paradigm remains largely unchallenged, even though numerous academic publications have contested it.

2.3

The Scientific and Ethical Approach

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Our Common Future After 30 Years Our Common Future has had unprecedented consequences. It has increased ecological awareness; there is international cooperation to fight climate change; there is evidence of corporate responsibility; new technologies open opportunities to reduce waste and pollution and produce a host of greener products. New positive developments are in the news almost daily. Besides manufacturing, new, cleaner technologies are awaiting application in the energy, goods transport, agriculture and tourism sectors. It has become increasingly evident that efficiency gains through cleaner technologies must go together with ‘sufficiency’ gains (that means accepting that ‘enough is enough’ through different lifestyles and priorities). Efficiency often causes so-called rebound effects that mitigate previous wins. For instance, less energy may lead to an income gain with adverse environmental effects if spent on more polluting consumer goods. Continued economic growth (GDP growth) and population growth have led to global degradation. Further consideration of this issue suggests that less conventional production and consumption can improve well-being and natural integrity. Having this post-growth perspective change lifestyle in the coming decades is a formidable political and socio-economic task. Here we touch upon what kind of governance (in public and private organisations) is needed to manage sustainability’s endgame effectively.

2.3

The Scientific and Ethical Approach

It is helpful to realise that the questions about long-term survival and well-being can be answered through the scientific approach and the ethical approach.

The Scientific Approach To be fully adequate, the scientific approach (stressing technical and economical solutions) assumes it has answers to the following three questions: • What is the relevant time horizon for our decisions? • To what extent does the present generation consider future generations’ interests? • How quickly can existing natural resource stocks be consumed so that alternatives do not appear too early or too late? However, answering these questions requires a great deal of information. Moreover, political processes must implement what science indicates is needed to achieve sustainable development, requiring timely decision-making between countries and other parties. The decisions which follow will have far-reaching impacts; for

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instance, they will lead to a substantial overall redistribution of income within and between countries. The uncertainty and complexity of the previous assumptions lead us to the proposition that a strictly scientific approach is too limited. Human knowledge is limited, and not all thinkable solutions are feasible (Faber et al., 1996). This means the scientific approach is necessary but cannot be decisive in all cases. Confident choices have to be made based on moral values.

The Ethical Approach Awareness of the need to work for sustainable development goes hand in hand with the moral duty to act. Duties and responsibilities are part of ethics. Moral duties are meaningful only when they are recognised and practised. They appeal to the morality and responsibility of individuals and society. The central duty of sustainable development is to ensure that posterity is not deprived of essential sources of life support and a decent standard of living. This duty is a matter of justice and a matter of redistribution of wealth in the present timeframe. The ethical guidelines consist of: (1) Taking precautions under uncertainty, (2) being inclusive (including all people concerned and considering problems in their entirety), (3) gaining mutual trust by being transparent in decision-making and allowing people to speak for themselves, (4) avoiding irreversible decisions that are harmful or unfair to particular groups. Technology and ethics are linked; technological choices which show no respect for nature (whether attractive to humans or not) must be avoided. Rather than ignoring the ecological limits to growth, society must choose which types of production are valuable and responsible within these limits. These choices ask for informed political decision-making which set the framework conditions for economic activities and value creation. In different ways, sustainable development relates to human rights. Box 2.5 The Good Life With the earth’s ecological boundaries in mind, it is interesting to go back to the concept of ‘the good life in the community’ as described by Aristotle. Such a good life requires a certain level of material wealth, but it is subject to limitations. He considered it unnatural and unrighteous if one possesses many things but still wants more and more. If such greed occurs on a large scale, society will degenerate.

2.4

2.4

The Ecological and Social Aspects

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The Ecological and Social Aspects

In the past, discussions on sustainability often gave priority to its environmental (ecological) aspects. As people’s physical existence is at stake, focusing on the world’s ecological survival is understandable. Nevertheless, sustainable development’s social aspects are equally important (see Box 2.5). The Brundtland Commission (which had issued Our Common Future) made the case for sustained economic growth by explicitly referring to global poverty. However, poverty results not only from a lack of resources but also from an uneven distribution of those resources. Poverty resulting from severe shortages may justify a targeted form of economic growth. However, where poverty stems from a severe imbalance in how incomes are distributed, a substantial income redistribution cannot be disregarded. Though, this seems hard to achieve. Development assistance can be part of the way forward. However, in some cases, free trade can be more effective in providing opportunities to create prosperity (‘no aid, but trade’), which requires removing various financial and non-financial barriers. In this area, the World Trade Organisation (WTO) and the International Monetary Fund (IMF) have played significant roles, although often without considering the vulnerabilities and developmental needs of developing countries (see, e.g., Stiglitz, 2017). There are developing countries and regions that, once exposed to unfettered trade, find it hard to cope with intensive external competition. They are dependent on international development assistance and cooperation, focusing on basic needs and learning processes that can strengthen the economy. Poor state governance, including corruption, has sparked a debate on whether development should focus on local partners rather than national governments. In any case, enabling people to use democratic processes to make their interests heard and represented should be part of the development efforts aimed at paving the way for inclusive and honest policies. Whether justified or not, many developing countries continue to turn ‘natural resources’ into tradable goods and financial capital (e.g. through mining and deforestation). Here the question arises as to whether the money derived from these economic activities will benefit the people concerned rather than disappear into the pockets of a rich elite. This problematic field is not only an economic game but also, if not most of all, an ethical question for national and international parties. Although poverty deserves ample attention worldwide, social sustainability has a broader scope. Social sustainability is also about the capacity of current and future generations to create healthy and liveable communities. Each society has a ‘stock’ of social and human resources. Economic development can improve or erode them. However, sustainability must strengthen a society’s social and human resources and make them future-proof. This is an issue of distributive justice applied to old and new realities. In the wealthiest countries, social issues still loom large and are highly relevant in the context of social sustainability. Average income and prosperity figures often conceal large differences in income, living conditions, food security, health, job

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security and educational opportunities. Therefore, the inclusion of relevant social issues in defining sustainability strategies is crucial for the cause of sustainable development.

2.5

The UN Sustainable Development Goals

Internationally, the social aspects of sustainability received special attention when (in 2000) the UN launched the Millennium Development Goals, strongly directed at eradicating worldwide poverty and deprivation. Unless otherwise stated, the Millennium Goals contain eight concrete targets, which were to be achieved in 2015. These targets have been partially met (with notable successes in the reduction of extreme poverty). Still, they were counteracted by the worldwide financial crisis of 2008–2010 (The Great Recession), although previously, it had already become clear that rapid world population growth was thwarting good intentions. In 2015, the Millennium Development Goals were succeeded by The United Nation’s Sustainable Development Goals (SDGs) based on the 2030 Agenda for Sustainable Development. The 17 Goals and their associated targets had a universal character addressing the areas of economic growth, social inclusion and environmental protection (see Box 2.6). Realising the Goals was estimated to require $5–7 trillion annually. The private sector received the crucial role of becoming the engine for technological development and innovation behind the development goals. Even though the Goals are not legally binding, they play a more prominent role than the previous Millennium Development Goals (see Box 2.7). The 17 Goals comprise a widely ranged programme. Readers are advised to zoom in on the various Goals by visiting the various websites on the topics to learn more about the details and the achievements. The 17 Development Goals not only require good development projects, but, as UN Secretary-General António Guterres has stated in the UN SDG Report 2020, demand nothing short of a transformation of the financial, economic and political systems that govern our societies today. They require immense political will and ambitious action by all stakeholders. The same report states that the world is not on track to achieve the Goals by 2030: ‘Before the COVID-19 (the coronavirus) outbreak, progress had been uneven, and more focused attention was needed. The pandemic disrupted the implementation towards many SDGs and, in some cases, turned back decades of progress’. The UN SDG Report 2022 goes into the various international and interlinked crises (financial crises, COVID-19, climate change, conflicts) that put the achievement of the SDGs in grave danger.

2.5

The UN Sustainable Development Goals

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Box 2.6 The 17 UN Sustainable Development Goals 1. End poverty in all its forms everywhere. 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture. 3. Ensure healthy lives and promote well-being for all at all ages. 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. 5. Achieve gender equality and empower all women and girls. 6. Ensure availability and sustainable management of water and sanitation for all. 7. Ensure access to affordable, reliable, sustainable and modern energy for all. 8. Promote sustained, inclusive, and sustainable economic growth, full and productive employment and decent work for all. 9. Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation. 10. Reduce inequality within and among countries. 11. Make cities and human settlements inclusive, safe resilient and sustainable. 12. Ensure sustainable consumption and production patterns. 13. Take urgent action to combat climate change and its impacts. 14. Conserve and sustainably use the oceans, sea and marine sources for sustainable development. 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification and halt and reserve land degradation and halt biodiversity loss. 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effect, accountable and inclusive institutions at all levels. 17. Strengthen the means of implementation and revitalise the global partnership for sustainable development.

Here, we touch on complexity when dealing with worldwide phenomena. On the one hand, the UN Development Goals receive much attention. Many countries and organisations, among them companies (Leleux & Van der Kaaij, 2019), try to enrich their sustainability policies by considering what they can do to contribute to reaching the Goals. On the other hand, there are signs of underperformance and disappointment despite the urgency that goes with the Goals (as the UN SDG reports mention).

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Box 2.7 How Will the Sustainable Development Goals Be Implemented and Monitored? A few points from the UN Sustainable Development Agenda: • Implementation and success will rely on countries’ own sustainable development policies, plans and programmes and will be led by countries. • The Sustainable Development Goals (SDGs) will be a compass for aligning countries’ plans with their global commitments. • Nationally owned and country-led sustainable development strategies will require resource mobilisation and financing strategies. • All stakeholders: governments, civil society, the private sector, and others, are expected to contribute to the realisation of the new agenda. • A revitalised global partnership at the global level is needed to support national efforts. This is recognised in the 2030 Agenda. • At the global level, the 17 Sustainable Development Goals (SDGs) and the ensuing 169 targets of the new agenda will be monitored and reviewed using a set of global indicators. • Governments will also develop their own national indicators to assist in monitoring progress made on the goals and targets. • The follow-up and review process will be informed by an annual SDG Progress Report to be prepared by the UN’s Secretary-General. • The annual meetings of the High-level Political Forum on sustainable development will play a central role in reviewing progress towards the SDGs at the global level. Source: https://www.un.org/sustainabledevelopment/development-agenda/ (accessed on 4 March 2023).

2.6

The Triple Bottom Line (People, Planet, Profit)

The business community had to play a primary role in making sustainable development a reality. In other words, business must become sustainable. Elkington (1998) launched the so-called Triple Bottom Line (People, Planet, Profit), which became very influential in publications and policies to offer companies concrete tools. Sustainable business (as well as Corporate Social Responsibility, CSR) implies striking a balance between the social (People), ecological (Planet) and economic (Profit) dimensions of running a company. Rather than exclusively focusing on profits, a company should also build a respectable record in the social and ecological domains. Sustainability may require instant investments; however, their importance for longer-term business and society calls for responsible management and visionary entrepreneurship. Larger companies with financial reserves are challenged to invest in (the development of) new sustainable technologies whose relevance is not yet

2.6

The Triple Bottom Line (People, Planet, Profit)

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apparent. Notwithstanding the risks, if later it appears that these new technologies are in demand, they will pay off. As Elkington put it, the Triple Bottom Line (TBL) refers to ‘a situation where companies harmonise their efforts to be economically viable, environmentally sound and socially responsible’. The three elements of the Triple Bottom Line are as follows:

People How does the company meet the needs of people, and how does it deal with their interests? Here, the people concerned are the company’s personnel, consumers, suppliers and society in general. Frequent subjects under the People dimension are: • • • • • • •

Occupational health and safety Keeping personnel happy and motivated Labour rights, human rights Schooling, internships Labour issues associated with outsourced or purchased services The company’s community involvement Aspects of discrimination, gender equality and diversity

Planet How does an organisation deal with the environmental effects it causes? Many issues under the Planet dimension relate to the impacts of products, processes and services on air, water, soil and biodiversity, but equally to best practices around circularity in production (avoiding waste), CO2 reduction and clean energy policies, sustainable finance and smart mobility.

Profit Corporate responsibility is to take shape in a way that fits the company and its performance management. In this context, performance is a multidimensional concept. In this, profits have a clear time dimension. Large companies have repeatedly been accused of a short-term focus on profits whereby shareholders’ interests took precedence over those of other stakeholders. It is suspected that such a focus tends to go together with squeezing worker interests and postponing necessary investments. Taking on a longer-term vision in which sustainability requires profits emanating from qualitative achievements such

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as certain levels of ambition, trust, commitment, innovation, quality, fairness, attachment and reputation. In different ways, these qualitative achievements are also necessary to produce and sell sustainable products. Relationships Between the Three Ps Although the three Ps (or the social, ecological and economic dimensions) represent independent values and interests, it is possible to establish connections between them. At the corporate level, such connections can be laid under the labels of ecoefficiency, environmental justice and business ethics. Eco-Efficiency The measure of valuable production per unit of environmental input. The concept points to making the best out of scarce environmental goods. The numerator, as well as the denominator, need individual attention, both quantitatively and qualitatively. Numerator: beside market value, other values, such as social acceptability, may play a role. Making progress in these areas may call for radical, new technology. A more critical approach could be called ‘eco-effectiveness’ (here, lifestyles, health and societal priorities come in as evaluative factors). Environmental Justice Often, harmful environmental effects affect the poor more heavily than the wealthier segments of society. For instance, calamities such as flooding caused by deforestation often hit poor people the most. An issue with an outspoken ethical dimension is the measure by which the present generation considers the interests of future generations. What do we pass on to posterity regarding repair costs and irreparable environmental damage? For instance, human-enforced climate change (droughts, floods) has strong damaging effects on small-scale farmers in Africa, whereas the causes (esp. too many CO2 emissions and their equivalents), to no small degree, lie in the affluent Western world. Business Ethics Many morally reprehensible acts are against the law, but this is not always the case. Short-sighted profit-seeking and greed often lie at the bottom of an irresponsible business, even though they are not necessarily illegal. Ethical questions in business may become urgent, for instance, because of moral relaxation (leading to less decency, integrity and trust) or opportunistic behaviour (such as covertly exposing workers to harmful substances, forgery or embezzlement of money). These previous links are interesting stepping stones for developing good governance structures and adequate corporate sustainability strategies. Before defining concrete actions, a company should formulate its mission and vision and define its strategy. The strategic goals set the direction for making the strategy concrete. Where sustainability is in the air, many companies will develop, based on their strategy, sustainability-led business models. By doing this, a company can strike a balance between short-term profitability and the conditions for long-term value creation and continuity. These conditions strongly contribute to a company’s reputation (Strikwerda, 2009).

2.7

2.7

Ranking of Values

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Ranking of Values

A company’s values—for instance, as mentioned in its mission statement—are often placed next to each other. However, in that case, a manager can easily justify his actions by referring to one of these values. Then, it is hard to judge whether a manager sets the right priorities. This arbitrariness can be avoided by indicating a ranking of those values; then, it becomes clear which comes first, and which are next. In that way, one can evaluate a manager’s deeds on whether these comply with the right priorities (Strikwerda, 2009). In today’s business, performance management must be embedded in a company’s mission, values and vision. The mission indicates what the owners and management want the company to be and what they see as their commercial and societal assignment. Values express a company’s responsibility to various stakeholders. A company’s vision is its concrete medium-range view of the market and its broader economic environment. Vision is fundamental to formulating strategic choices. In this way, measurable goals, both financial and non-financial, are embedded in a value system and placed within a specific time horizon. Via a Balanced Scorecard and a subsequent strategy map, the measurable goals can be underpinned in causal terms because then it will be shown how a company’s capacities and views work out in concrete operational processes and customer satisfaction. This approach has the advantage that a company can make clear to its external stakeholders what it undertakes (and does not undertake) is all about. Internally, it enables a company to explain what its mission and ranked values mean and how they relate to the personal achievements of its employees (Strikwerda, 2009). This approach also reduces the risk that managers manipulate internal budgeting processes and the definition of tasks for each department to benefit their private agendas, which might be at odds with the company’s interests. Parameters such as a business unit’s profit, shareholder value or ROI are susceptible to undesirable decisions when separated from corporate values and (possible) social and ecological effects. Potential employees can decide whether a company’s values match theirs. At the same time, shareholders can consider a company’s values and how they are ranked when assessing shares. The same applies to customers and suppliers. Similarly, public opinion can make itself known by expressions of judgement on these values. The results of all these considerations inform the company about its contribution to welfare. Sustainability adds the interests of future generations as a vital element of what responsible business is all about. Key Notions and Concepts • Sustainable business (or similar terms) is about genuine entrepreneurial activity, meaning entrepreneurs working on sustainable solutions based on creativity and a willingness to take economic risks. • Social entrepreneurship focuses on meeting the basic needs of large groups whose livelihoods (in total or specific areas) are below acceptable levels.

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Sustainable Development

• Sustainable development is a development path for the world economy that meets the needs of the present generation without compromising the ability of future generations to meet their own needs (according to the report Our Common Future of the Brundtland Commission, 1987). • Our Common Future (the Brundtland Report) established the notion of equity and justice within and between generations and the idea of developing a shared understanding of the long-term goals for human life on earth. • Sustainable development has to deal with intergenerational justice. It highlights the ethical significance of sustainable development. Later, in international politics, sustainable development was directly linked with energy and biodiversity issues. • Our Common Future was published when neo-liberalist thoughts echoed through the chambers of political and economic establishments. That explains the call for economic growth within existing mechanisms and frameworks. • Globalisation has resulted in a world economy that has become much more interdependent than before. While economic growth occurred (albeit in waves involving various crises), commensurate environmental care was absent. • In general, developing countries have tended to prioritise catching up with the developed countries in terms of GDP (per head) without an urge to avoid the ‘environmental mistakes’ of the latter. • In 2008, UN Environment (UNEP) launched the Green Economy Initiative (GEI), a global research programme and country-level assistance designed to motivate policymakers to support environmental investments. • Weak environmental sustainability assumes that welfare is not usually dependent on a specific form of capital and can go on by substituting manufactured for natural capital (though with exceptions). Strong sustainability poses that substituting manufactured for natural capital is severely limited by irreversibility, uncertainty and the existence of ‘critical’ components in natural capital. • The realisation that working on sustainability is imperative carries with it the moral duty to act. Duties and responsibilities are part of ethics. Moral duties have meaning only if recognised as such and performed. Rather than ignoring absolute ecological limits to growth, society must choose which types of production are valuable and responsible. • When acute poverty goes back to a serious imbalance in the way incomes are distributed, a redistribution of income should take precedence. • On September 25, 2015, the United Nations called governments, businesses, NGOs and citizens worldwide to join forces in achieving the 17 Sustainable Development Goals (SDGs) and its associated targets by 2030. • The financial crisis of 2008 thwarted progress in attaining sustainability goals. In 2020 (and beyond), it was the COVID-19 pandemic that threw a spanner in the works. • As Elkington (1998) put it, the Triple Bottom Line refers to ‘a situation where companies harmonise their efforts in order to be economically viable, environmentally sound and socially responsible’. This definition is also known as the three Ps (People, Planet, Profit).

References

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• Often, harmful environmental effects affect the poor more heavily than the wealthier segments of society. For instance, calamities such as flooding caused by deforestation often hit poor people the most. Here, issues of environmental justice loom large. • Parameters such as a business unit’s profit, shareholder value or ROI are susceptible to undesirable management decisions when separated from corporate values and social and ecological effects.

References Berr, E. (2017). Post Keynesian economics and sustainable development. In C. L. Spash (Ed.), Routledge handbook of ecological economics. Nature and society (pp. 71–72). Routledge. Bina, O. (2013). The green economy and sustainable development: An uneasy balance? Environment and Planning C: Government and Policy, 31, 1023–1047. Daly, H. E. (1991a). Steady-state economics (Second Edition with New Essays ed.). Island Press. Daly, H. E. (1991b). Elements of environmental macroeconomics. In R. Costanza (Ed.), Ecological economics: The science and management of sustainability. The Columbia University Press. Ekins, P., Simon, S., Deutsch, L., Folke, C., & De Groot, R. (2003). A framework for the practical application of the concepts of critical natural capital and strong sustainability. Ecological Economics, 44, 165–185. Elkington, J. (1998). Cannibals with forks. The triple bottom line of 21st century business. New Society Publishers. Faber, M., Manstetten, R., & Proops, J. (1996). Ecological economics. Concepts and methods. Edward Elgar. Hauff, V. (2007). Brundtland report. A 20-year update. Keynote speech European sustainability, Berlin 2007 (ESB07) ‘linking policies, implementation, and civil society action’, Berlin, June 3–5, 2007. Hopwood, B., Mellor, M., & O’Brien, G. (2005). Sustainable development: Mapping different approaches. Sustainable Development, 13(1), 38–52. Leleux, B., & Van der Kaaij, J. (2019). Winning sustainability strategies. Finding purpose, driving innovation and executing change. Palgrave Macmillan. Nikolaoua, I. E., Tsalisa, T. A., & Evangelinos, K. I. (2019). A framework to measure corporate sustainability performance: A strong sustainability-based view of the firm. Sustainable Production and Consumption, 18(April), 1–18. Stiglitz, J. E. (2017). Globalization and its discontents revisited. Penguin Books. Strikwerda, H. (2009). Wat is de opdracht van het bestuur van de onderneming? Holland Management Review, 128, 31–39. Turner, R. K. (Ed.). (1993). Sustainable environmental economics and management. Belhaven Press. UNEP. (2011). Towards a green economy: Pathways to sustainable development and poverty eradication - A synthesis for policymakers. United Nations Environmental Programme. World Commission on Environment and Development. (1987). Our common future. Oxford University Press.

Chapter 3

Sustainable Value Creation and Management Responsibilities

3.1

Sustainable Value Creation: Necessary and Full of Opportunity

Corporations with operating income create economic value that contributes to society’s prosperity. At least, this is how it should be, but business-based value creation can negatively affect society. For instance, it may be harmful to the environment. Although modern modes of operation have boosted production, it has become evident that they have left a deficit in terms of depletion of natural resources and deterioration of ecological systems and have often caused a great deal of pollution. Because of a growing world population and continued economic expansion, the limits of economic growth are in sight. Consequently, the business community must change course and ensure sustainable value creation. Governments have the power to promote sustainability because they can set specific rules that businesses must follow, especially in the areas of environment, health and justice. Corporate sustainability can only be binding to a certain extent, as it depends on internal motivation and social responsibility. This book invites (future) entrepreneurs, managers and controllers to follow the road to creating sustainable value. This means creating value (monetary or otherwise) that is good for business and society in the short and long term. Corporate sustainability (or sustainable business) is the set of ways in which companies can create sustainable value. It requires a new way of thinking and acting: how to create value whilst honouring environmental and social values? In recent years until today, there has been increasing international pressure to take sustainability seriously due to climate change, resource depletion, pollution and persistent poverty in many parts of the world. In particular, climate change and its emerging severe consequences (such as storms, floods, droughts and rising sea levels) have led to international pressure to curtail Green House Gases (GHG), such as CO2 and methane. However, this book emphasises that climate change is only one element of unsustainability. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_3

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Sustainable Value Creation and Management Responsibilities

At the same time, opportunities to introduce sustainable goods and services are increasing. This does not mean that sustainability is easy to achieve; in several ways, it requires innovation. Sustainable innovation with an acceptable risk profile depends on real entrepreneurship and good management. This book also looks at other business functions (such as supply chain management, innovation management and the various ethical and communicative aspects of CSR). It believes the primary production process is at the centre of value creation and essential to a sustainable business.

3.2

Sustainability in Business

In the field of sustainability in business, several commonly used terms cover some of the problems at hand. Through cross-fertilisation, the various terms have received overlapping connotations. In particular, this is true for corporate sustainability, corporate governance and corporate social responsibility (CSR). To understand these concepts well, they must be clarified and highlighted; they can be characterised as follows: • Corporate sustainability (sustainable enterprise, sustainable business): It strongly focuses on the economic, social and ecological sustainability of the primary production process of companies and how to improve it through management and innovation. The main actors are future generations whose prosperity should not be endangered by the current generation’s modes of production and consumption. • Corporate governance: It refers to the rules, processes or laws by which businesses are operated, regulated and controlled. Corporations with operating income create economic value that contributes to society’s prosperity. At least, this is how it should be, but business-based value creation can negatively affect society. For instance, it may be harmful to the environment. Although modern modes of operation have boosted production, it has become evident that they have left a deficit in terms of depletion of natural resources and deterioration of ecological systems and have often caused a great deal of pollution. Initially, the term primarily referred to the management structure designed to ensure the hired management would operate in the shareholders’ interests. Nowadays, it also emphasises the importance of enterprises keeping to accepted ethical standards and best practices in line with other forces such as consumer groups, customers in the supply chain and government regulations. • Corporate Social Responsibility (CSR): It is practised by involving various stakeholders at the strategic and operational level of a business (employees and their organisations, shareholders, neighbours, suppliers, customers and social interest organisations) and by giving due recognition to these groups. As various stakeholders today insist on the importance of sustainability (from different angles), a reasonably direct relationship has emerged between corporate

3.3

Managers’ Key Role in Sustainable Value Creation

27

sustainability and CSR. The concept of ‘creating shared value’ expresses this concern (Porter & Kramer, 2006). By considering stakeholder interests, a company attempts to ensure its continuity. The concept of corporate sustainability stands out because it fully incorporates the sustainability of the primary production process. This observation is significant because, without a sustainable primary production process in sight, other facets of sustainability, such as corporate philanthropy or community-oriented voluntary work undertaken by employees, run the risk of being trivial. Corporate sustainability is an unprecedented dynamic force capable of transforming markets and economies. Sustainability principles are likely widely accepted, even if their translation into sustainable goods and services is openended. What will happen in this field depends on both sociocultural and technological developments. At some point in the dissemination process, early adopters may wish to see legislation accelerated so that competitors do not have any advantage in slowing down. For that to happen, however, there is a need for (strategic) managers who can internalise sustainability so that sustainability can penetrate all economic activities. Companies do not have to wait for that to happen; they can lead the way to a sustainable economy. In addition to considering corporate sustainability in general terms, particular attention is paid to the role of managers and supervisors in implementing sustainability. In recent years, the roles of CFOs and controllers have changed because non-financial aspects have gained importance. This role change is exciting, as non-financial aspects often seem to be stepping stones towards improving corporate sustainability.

3.3

Managers’ Key Role in Sustainable Value Creation

Making a business sustainable requires contributions from the whole organisation, from management to workshop workers. Management, in particular, is responsible for integrating sustainability into an organisation’s strategies. Every aspect of managing a company has links to sustainability. To begin with, the company must opt for appropriate personnel policies, such as recruiting employees interested in sustainability, while its compensation policies should support compliance with sustainability requirements. The various chapters will make this clear. Each company has its unique features and specialities. This premise also applies to sustainability. However, regardless of the specific nature of each sustainability approach, the role of senior management is crucial, especially when it comes to initiating and facilitating sustainability projects. Corporate sustainability calls for leadership that are both competent and sincere. There are personal and professional aspects to a manager’s integrity reflected in their behaviour and functioning. A manager must be authentic and reliable and know how to balance different interests with a positive approach. Managers should know how to encourage employees to do

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a good job. Part of this is knowing how to confide in them. Good managers will avoid situations where co-workers face severe moral dilemmas. They can establish clear ethical rules and prevent co-workers from being exposed to strong temptations. A true manager not only sets clear rules of conduct but can also apply them and resolve the difficulties that may arise in this context. This rule could also be defined as an ethical leadership requirement. The role of an ethical leader is to create an ethical climate conducive to processes such as reducing emissions, fair treatment of employees and carefully dealing with natural resources (Tushar, 2017). Ethical leadership can be viewed as one of a corporation’s intangible assets. In the 1990s, explicit attention was paid to intangibles. Even if these had no place on the balance sheet, these intangibles were at least as necessary to a company’s competitive strength as those shown on the balance sheet, if not more so. In a situation of increasing international competition (globalisation), companies should utilise their unique assets (even if intangible) as a source of competitive advantage (Teece et al., 1997). Indeed, ethical leadership connects with a company’s competitive abilities. However, it equally seeks common ground with the broader society to create the conditions for a sustainable economy. Hopefully, more and more examples of companies succeed in operating along these lines. Box 3.1 Global Compact “Corporate sustainability starts with a company’s value system and a principles-based approach to doing business. This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption. Responsible businesses enact the same values and principles wherever they have a presence and know that good practices in one area do not offset harm in another. By incorporating the Ten Principles of the UN Global Compact into strategies, policies and procedures, and establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and planet but also setting the stage for long-term success.” Source: www.unglobalcompact.org Sectoral or community collaboration can effectively create particular facilities (for instance, in waste management and recycling). This statement is not inconsistent with giving space to individual pioneers to launch new initiatives focusing on creating sustainable value. Once a pioneering approach becomes a best practice, others can adopt it, resulting in cost-effective economies of scale, for example, through shared supply networks. Laasch and Conaway (2015) unite the various aspects of a sustainable economy under the umbrella of ‘responsible management’ by individual managers. Indeed, the individual perspective is essential for bold policy choices and the various forms of entrepreneurship required to make an organisation more sustainable. However, it is also important to realise that sustainability must become part of an organisation’s

3.3

Managers’ Key Role in Sustainable Value Creation

29

culture, leading to collective responsibility for creating and enhancing a business’s sustainability (Bouma & Wolters, 2019). The roles were clear for decades: Companies were in business for profit and had to focus on their short-term interests. The government was there to advance society’s long-term common interests and, as a result, introduced environmental regulations to force companies to adopt cleaner technologies and responsible behaviour. Fortunately, many companies now accept that they cannot leave sustainability to others. Here, ‘responsible management’ is a broad umbrella for sustainable, stakeholderfocused, value-based management, with the responsible manager in a leading role (see Box 3.2). There are historical examples of industrialists taking responsibility for the welfare of their workers and communities, but they were the exception rather than the rule. Box 3.2 Responsible Management Education The Principles for Responsible Management Education (PRME) is a United Nations-supported initiative founded in 2007 as a platform to raise the profile of sustainability in schools around the world and to equip today’s business students with the understanding and ability to deliver change tomorrow. PRME is closely linked to the UN’s Global Compact (see Box 3.1). Moreover, PRME also aims to contribute to the realisation of the UN’s Sustainable Development Goals. Source: https://www.unprme.org See also Laasch and Conaway (2015), which links with PRME. Responsible management aims to make it the rule for large enterprises and SMEs, with the current social and environmental imperatives as a guiding principle. To gain insight into this compelling agenda, learning about the UN’s development goals is very instructive. Climate change and the working environment are essential parts of this program. However, there is a gap between sustainability leaders and average performers. This gap begs the question of whether there are patterns in the strategies and behaviours of these sustainability leaders (Leleux & Van der Kaay, 2019), which could be helpful to those companies that stay behind. There are no simple recipes. However, in several ways, this book aspires to offer basic guidelines and answers to how corporate sustainability can be achieved. Increasingly, domestic and international policies support the way forward for corporate sustainability. For instance, there are UN policies based on international agreements such as the 2000 European Climate Change Programme, the EU 2013 strategy on adaptation to climate change and the 2015 Paris Agreement on Climate Change. The Netherlands is one of seven countries that has a climate law. Under this law, policies must aim to reduce CO2 emissions by 95% by 2050 compared to 1990. In modern knowledge-based economies, the primary source of value creation has shifted from physical resources to intellectual property and knowledge. As a result, social welfare in knowledge-based economies increasingly relies on joint value creation—mutually supportive contributions to value creation from multiple

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stakeholders whose tasks and outcomes are highly interdependent. This situation may also be relevant to projects implementing sustainable processes which require involving the wider society. Interdependence makes it challenging to determine the stakeholders’ individual contributions, making individual payments based on these contributions difficult, if not impossible. Individual and collective interests may not go together, especially when one presupposes the classical market model based on an accurate calculation and allocation of the costs. Economists have called this issue the ‘team production problem’, recognising that it undermines the role of the market in maximising social welfare. However, in theorising about how firms can promote stakeholders’ contributions to joint value creation, the academic literature offers different views than is typical in economic theory. For instance, Bridoux and Stoelhorst (2016) do not assume that all behaviour is exclusively motivated by self-interest. Stakeholder theory has long emphasised the need to go beyond this simplifying assumption. Moreover, the authors do not primarily conceive of economic relationships in terms of transactions governed by market pricing. There is a variety of relational models that translate into economic behaviour. Bridoux and Stoelhorst (2016) theorise that contributions to joint value creation depend on how individual stakeholders frame their relationships with other participants in the value creation process. Market pricing based on direct self-interest is just one of them; rankings based on authority, being peers or openness to communal sharing can shape how stakeholders wish to participate in projects where the results are interdependent. Regardless of their dispositions, all individuals can frame relationships in relational models if situational cues are strong enough. How stakeholders perceive a firm’s behaviour towards them can be a strong situational cue. As managers can influence their firm’s behaviour, they can instil the right cue for stakeholders to adopt a cooperative spirit away from pure market pricing. Again, such a possibility is highly relevant to sustainability projects that involve local communities or beyond.

3.4

CFOs and Sustainable Management

Chief Financial Officers are supposed to be experts in financial analysis and are knowledgeable about financial reporting and monitoring. This role puts a financial brake and contributes positively to a profitable business. However, CFO’s strategic contributions may differ from business to business (Ernst & Young, 2010). Fund managers, institutional investors and shareholders have become increasingly focused on how companies approach their societal impact to manage their risks and opportunities better. On top of the familiar profitability, integrated annual reporting increasingly reviews the company’s position across environmental, social and governance (ESG) factors.

3.4

CFOs and Sustainable Management

31

Box 3.3 The CFO’s Four Faces Today’s CFOs are expected to play four diverse and challenging roles. The traditional roles are being a steward (preserving the organisation’s assets by minimising risk and getting the books right) and an operator (running a tight, efficient, effective finance operation). It is increasingly important for CFOs to be strategists (helping to shape overall strategy and direction), and catalysts (instilling a financial approach and mindset throughout the organisation to help other parts of the business perform better). These varied roles make a CFO’s job more complex than ever. CFOs sit at the strategy planning table and help influence the company’s future direction. They are vital in providing financial leadership and aligning business and finance strategy to grow the business. In addition to M&A and capital market financing strategies, they can play an integral role in supporting other long-term investments of the company. Source: https://www2.deloitte.com/us/en/pages/finance/articles/gx-cforole-responsibilities-organization-steward-operator In essence, redefining value is about the company’s purpose. Why does the company exist? What contribution does it aspire to make to society? These fundamental questions need to be answered before the following more practical questions can be addressed: 1. Does your company evaluate investments beyond profit maximisation, including ESG factors? 2. Does your company have criteria to evaluate and rank those investments to deliver long-term value responsibly and sustainably? 3. Are you aware of ESG ratings, rankings and frameworks, and which are most important to you (see Box 3.4)? 4. Are you communicating your approach to various stakeholders through reporting and engagement?

Box 3.4 ESG Rating Agencies “There has been a significant development of sustainable and responsible investment (SRI) in the last 10 years. Investors, shareholders, governments and firms have benefitted from this since they request accurate information regarding financial performance and environmental, social and governance (ESG) aspects, which has become part of their competitive strategy.” “These factors have given rise to the inevitable appearance of ESG rating agencies. ESG rating agencies scrutinize businesses and assess corporate sustainability performance by using their own research methodologies. This (continued)

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Box 3.4 (continued) expertise has turned ESG rating agencies into a key reference for companies, financial markets and academia in terms of corporate sustainability assessments. Consequently, the sustainability rating market has grown considerably in the last decade—in keeping with their influence—to the point of being studied not only as economic actors but also as social actors, which have an impact on the behaviour of other social actors in society”. “ESG rating agencies have integrated new criteria into their assessment models (mainly environmental and governance criteria) to assess corporate performance in a more robust and accurate way.” “However, a deep analysis of the criteria also shows that ESG rating agencies do not fully integrate sustainability principles into the corporate sustainability assessment process”. “Therefore, further efforts are needed to develop more comprehensive corporate sustainability assessment frameworks which integrate sustainability principles along the whole supply chain”. Source: Escrig-Olmedo et al. (2019) The sustainability side of financial management is strongly focused on the company’s non-financial performance, such as managing the carbon footprint, inventory of waste created by current production processes or assessing social impact. However, these non-financial figures must inform the business’ financial decisions. Of course, that has to do directly with accounting. Finance officers and controllers must include sustainability accounting in their work (see Chap. 8). The call for sustainability is rising in society; therefore, the number of management accountants entrusted with sustainability accounting will increase. Gibassier et al. (2018) suggest that in the various future, companies will have special sustainability CFOs to boost their organisation’s social and environmental performance. Eventually, the authors foresee the emergence of the Chief Value Officer to whom the CFO and the sustainability CFO report.

Not Calculations Alone There can be some tension around numbers and calculations. Senior managers should not simply follow the numbers. They must know how to deal with uncertainties and be capable of weighing varying interests. It is a matter of strategic management. This role also applies to business cases in the area of sustainability. Those who restrict themselves to matters expressed in money terms are likely to fail to make the right strategic choices. Here lies one of the major problems of the sustainability issue. Conventional financial models used by financial analysts, investors and others cannot assess opportunities and threats associated with sustainability

3.5

The Role of Controllers

33

projects. This deficiency does not exclude breakthroughs in favour of sustainability but carries risks of poor judgement (CFO Magazine, Jan. and Feb. 2010). Indeed, a flawed strategic assessment, leading to an unsustainable strategy, can easily shake a company’s foundation. The CFO must be on the alert to prevent such a calamity. In this process, the CFO should bridge the world of those designing sustainability projects with that of the financial analysts. To be credible for financial specialists, a company’s sustainability reporting should contain more than exaggerated positive news; a balanced picture is required. Moreover, sustainability project proposals should address the urgent issues that emanate from a company’s strategy rather than issues of secondary importance. The CFO connects the financial world with the company and therefore is the one who can create a better mutual understanding, leading to productive approaches par excellence.1

Financial Underpinnings The caveat ‘not calculations alone’ needs to be supplemented. Sustainability is part of the company’s values and the strategic direction that the company is to take. For fundamental strategic decisions, calculations are of limited significance. However, quantitative and financial underpinnings are indispensable to working out strategic pathways and related investment trajectories, not in the least to those that bring sustainability closer to reality. For sustainable value creation, business continuity is essential, but uncertainties always remain. Management information (business intelligence, business analytics) relevant to sustainability is likely to depend on sustainability accounting (showing the relevant costs and benefits) and supply chain analyses (showing the appropriate boundaries). Here, conventional calculation schemes and statistical techniques can be helpful.

3.5

The Role of Controllers

Besides a company’s CFO, controllers must play a significant role in sustainability. The following seven developments (already brought forward by Elkington, 1998) will clarify the role of controllers. 1. Markets Markets are showing an increasing interest in sustainability and CSR. This interest leads to general requirements that apply to all goods and services and to emerging new market segments that distinguish themselves by special labels

1

Based on the Dutch CFO Magazine, januari-februari. 2010 (CFO Association).

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2.

3.

4.

5.

6.

7.

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Sustainable Value Creation and Management Responsibilities

(such as Fair-Trade, organic, label for sustainable wood products and sustainable fish). Values Over the years, there have been notable instances of companies that suffered because of their unacceptable social and environmental behaviour. Various bookkeeping scandals have led to the downfall of companies. People from different walks of life have described the recent credit crisis (2008–2010) as a moral crisis. Behavioural codes have become stricter. They have reinforced the call for changes in the moral code of companies. However, these changes should avoid getting stuck in good intentions; they should become visible evidence of concrete performance measurements. Transparency Internationally, both governments and companies are forced to become more transparent about how they create value. They are obliged to disclose the actual state of their economic affairs. External reporting is part of this new broader culture of transparency. The Global Reporting Initiative (GRI)—which started in 2001—symbolises this trend. Chain-Based Responsibilities Companies today are increasingly being asked to explain how they deal with the sustainability aspects of their supply chains. The company’s responsibility is to cover the successive links in their chains from the beginning (commodities, agricultural products) up to and including end products, reuse and waste processing. Through this progressive system, companies are encouraged to pursue consistent chain-based policies. Collaboration There are forms of collaboration between companies and others, such as governments, the media and NGOs, to help develop a responsible business. Unique partnerships may focus on innovative ways of social responsibility via entrepreneurship. However, apart from cooperation, there may also be conflicts of interest. Time Dimension Current developments demonstrate the significance of the short term. Events, wherever they occur, are transformed overnight into news available anywhere on television and social media. Thanks to the Internet, markets have broadened realtime to a worldwide scale. However, sustainability is a long-term issue. The question of how the long-term can be considered has become increasingly important in politics and business. It may require new forms of international governance. The creative approaches that fall within this requirement are receiving increasing attention. Corporate Governance Corporate governance is an area that has grown in importance. There is a need to strengthen management control over corporate values and sustainability by assessing the risks and potential damage to reputation, resulting from a lack of corporate sustainability and social responsibility.

3.5

The Role of Controllers

35

Combination of Roles The controller will have a broader or more specific function depending on the type and size of the enterprise. However, most controllers will deal with reporting, planning, budgeting and monitoring the efficiency and effectiveness of operations (the planning and control cycle). In many cases, controllers will be involved in strategic developments, taking the role of management’s financial and economic conscience (Hoorn et al., 2003). Box 3.5 The Controller’s Role in Environmental Management Control The controller assisted the CEO in his analyses and helped him to make strategic decisions to reduce GHG emissions. He appeared to occupy the role of special advisor as the CEO often specifically drew on the controller’s expertise, ‘I organize a meeting every two weeks with the head of sustainable development and the person who looks after green accounting. I therefore firstly discuss matters with them. Then, after we have analysed the various figures, they are discussed in a second stage during our executive committee meetings’ (CEO, interview). The controller used the tools in place to inform and steer senior management decisions, ‘Our carbon footprint report and carbon budget give us our business priorities. For example, we know that our transport activities have a significant carbon impact, while our carbon impact from waste activities is tiny. . . . We, therefore, decided to tackle the most significant issues, which have the greatest impact, in order to obtain the best solutions as fast as possible’ (CEO, interview). From an operational point of view, the controller helped the managers prepare their carbon budgets and action plans, ‘If you are preparing a purchasing budget, and want to reduce air freight, for example, you see the purchasing division. . . . As they have the expertise, they are the ones who decide, ‘We will do this much by air freight, this much by sea etc.’ . . . And then after that, I went to see each person with a financial budget, and I added a carbon budget’ (EA Head, interview). ‘Over the year, he helped us to put in place corrective actions to reduce our energy consumption and carbon emissions. It was the same for waste recycling and product quality. These are the three most significant issues affecting our in-store activity’ (SM, interview). Source: Renaud (2014). Once, somebody compared controllers with jugglers who must keep different balls in the air at the same time. They occupy a position that requires many professional skills, flexibility and perseverance. Such qualities regarding sustainability and social responsibility will not show up well if the controller’s primary role

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is compliance. Their playing field must be large enough to cope with the above four new challenges that corporate sustainability represents (see Box 3.5). Key Notions and Concepts • Value creation at the corporate level can, on balance, be negative for society at large. For instance, it may be harmful to the environment. • Corporate sustainability demands a new way of thinking and acting: How can we create value while honouring environmental and social values? • Managers are responsible for integrating sustainability into a company’s strategies. • CFOs have a role in formulating a company’s sustainability strategy by informing the CEO on priorities and strategic risks. The CFO should not just play the role of a gatekeeper but also point out the risks of not responding to the need for corporate sustainability. • A company’s ability to incorporate ethical values in its strategy, leading to a good reputation that is also commercially effective, can also be seen as an immaterial (intangible) asset. • A flawed strategic assessment, leading to an unsustainable strategy, can easily shake a firm’s foundation. The CFO must be on the alert to prevent such a calamity. • Corporate sustainability must be connected with a company’s primary process. It has many aspects, especially concerning corporate governance and social responsibility. • Controllers must play a major role in the field of sustainability. How this should be done depends on how their role has been defined. • In many cases, controllers will be involved in strategic developments, taking the role of management’s financial and economic conscience. • In modern knowledge-based economies, the primary source of value creation has shifted from physical resources to intellectual property and knowledge. As a result, social welfare in knowledge-based economies increasingly relies on joint value creation. This is also a relevant observation for sustainable value creation. It requires cooperative stakeholder-based projects.

References Bridoux, F., & Stoelhorst, J. W. (2016). Stakeholder relationships and social welfare: A behavioral theory of contributions to joint value creation. The Academy of Management Review, 41(2), 229–251. Bouma, J. J., & Wolters, T. (2019). Corporate sustainability. The next steps towards a sustainable world. Routledge. Elkington, J. (1998). Cannibals with forks. The triple bottom line of 21st century business. New Society Publishers.

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Ernst & Young. (2010). The DNA of the CFO—A study of what makes a chief financial officer. www.ey.com. Escrig-Olmedo, E., Fernández-Izquierdo, M. Á., Ferrero-Ferrero, I., Rivera-Lirio, J. M., & MuñozTorres, M. J. (2019). Rating the raters: Evaluating how ESG rating agencies integrate sustainability principles. Sustainability, 11, 915. Gibassier, D., Arjaliès, D., & Garnier, C. (2018). Sustainability CFO: The CFO of the future? Institute of Management Accounts (IMA). Hoorn, H. P., Slagter, J., & Swagerman, D. M. (2003, December). Portret van de NoordNederlandse controller. Controller Magazine. Laasch, O., & Conaway, R. N. (2015). Principles of responsible management. Global sustainability, responsibility, and ethics. Cengage Learning. Leleux, B., & Van der Kaay, J. (2019). Winning sustainability strategies. Finding purpose, driving innovation and executing change. Palgrave Macmillan. Porter, M. E., & Kramer, M. R. (2006, December). Strategy & society. The link between competitive advantage and CSR. Harvard Business Review. Renaud, A. (2014). The controller’s role in environmental management control. Comptabilité— Contrôle—Audit, 20(2), 67–94. Teece, D. J., Pisano, G., & D.J. & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533. Tushar, H. (2017). The role of ethical leadership in developing sustainable organisation. Australasian Journal of Law, Ethics, and Governance, 2(2), 83–95.

Chapter 4

Sustainable Business at the Supply Chain Level

4.1

Introduction

Enterprises are encouraged to develop sustainability policies in collaboration with their business partners and other stakeholders. A variety of issues require coordination, regulation and standard procedures. Governments often step in to create a regulatory framework for such developments. An essential element of collaboration in the world of business is the establishment of efficient supply chains. Many businesses have progressed in applying sustainability principles along their supply chains (Feng et al., 2017). It is possible to implement sustainable practices through industry leadership and communication about them with customers and others (Fontanier et al., 2011). However, much remains to be done as the global economy continues reproducing social inequality and environmental degradation. Often, there appears to be a gap between declared policies and what happens in reality (Pisani et al., 2017). Multinational Enterprises (MNEs) have often been exposed as irresponsible and unethical actors. They are accused of benefiting from unduly low labour costs and covering up environmental damage. Over the years, through naming and shaming, protests and consumer strikes, there have been successful attempts to induce MNEs to change their reprehensible policies. However, international supply chains continue to be a source of exploitation in labour relations and environmental damage. In other words, global supply chains are areas where sustainability can be significantly improved. The following section discusses the main characteristics of Supply Chain Management and how it can evolve into Sustainable Supply Chain Management.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_4

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Sustainable Supply Chain Management

Supply Chain Management (SCM) In general, supply chain management (SCM) is about collaboration in the supply chain (from raw materials to end products and beyond), creating additional cost reductions and functional value for the final consumers. First of all, SCM is a matter of managing relationships. This can be difficult because the short-sighted interests of individual parties have to be subordinated to the interests of the supply chain as a whole. First of all, SCM focuses on client satisfaction, like quality management. Moreover, SCM considers not only the subsequent links of a chain but also the associated networks. The purpose is to efficiently and effectively manage the material, information and capital flows associated with procuring, producing and distributing products or services. Success is a matter of meeting stakeholder requirements and improving the organisation’s profitability, competitiveness and resilience over the short and long term (Mc Loughlin et al., 2023). SCM provides all sorts of opportunities to control costs and create customer value. How supply chains are organised involving modern smart technologies is part of supply chain success. This rule is not only a matter of logistics and ICT. SCM can only materialise by developing good relationships and effective communications with the various links of the chain. When there is substantial commodification (uniform products between competitors), trademarks and branding may be less critical. Instead, competitive advantage is better served by additional services and types of merchandising (like delivery, after-sales, financing and technical services; see Christopher, 2016). Sustainability issues have increased corporate awareness of the social and environmental aspects of international commodities and consumer goods. Consequently, supply chain management has further developed by explicitly including social and environmental matters in its planning and decision-making procedures. This development has led to Sustainable Supply Chain Management (SSCM), which arranges the voluntary integration of economic, environmental and social considerations in supply chains supported by key inter-organisational business systems.

Developing Sustainable Supply Chain Management In recent decades, a substantial part of the production of goods has moved from Western economies to emerging economies. The potential cost advantages for global companies outweigh factors such as loss of control, increased turnaround times and inventory issues. To consumers, it means having more affordable products and services. However, there is a serious downside to this development. Current global production and consumption levels make far greater use of natural resources and

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Implementing Sustainable Supply Chain Management

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services than ecosystems can sustain. Moreover, weaker law enforcement and intransparent networks have led to many social, environmental and ethical problems at factories that directly or indirectly supply goods and services to global corporations (Metford, 2011; Lee & Rammohan, 2017). Examples are excessive carbon emissions (which affect the climate and cause air pollution), water pollution, excessive work hours, intellectual property theft, corruption and disregard for security rules and regulations. Governments have raised regulatory levels for buyers and suppliers to address global supply chains’ social, environmental and ethical challenges. Consumers, activists and investors increasingly speak out against abuses within international supply chains. Global firms may use self-regulation, such as supplier codes of conduct, to compensate for weak law enforcement. However, in many industries, these codes of conduct are being neglected, which is a cause for concern (Lee & Rammohan, 2017). Leading a company towards a fully sustainable business cannot escape the tensions between long-term goals and short-term profitability. Not all social and environmental improvements have a short-term positive economic impact. Sustainable Supply Chain Management (SSCM) takes into account the social and environmental implications of the activities carried out in the various links of the supply chain. More than ever, a broader group than customers and end-users must be considered to succeed in this area. The latter include upstream partners in the supply chain, government agents, local communities and NGOs (as centres of knowledge and social influence). In addition, the term ‘Green Supply Chain Management’ (GSCM) is often used. Generally, GCMS emphasises the environmental aspects of the supply chain. From this perspective, GSCM is a part of SSCM.

4.3

Implementing Sustainable Supply Chain Management

Stepping Stones for Sustainability in the Supply Chain Various management practices that many companies have been familiar with for decades can serve as stepping stones for developing sustainable supply chains. Examples are the presence of Total Quality Management (TQM) and environmental management systems that encourage interaction and collaboration with customers and suppliers. Moreover, management systems often require cost calculations that reveal possibilities of preventing costs by eliminating costs at source (Wolters et al., 1997). Responsibility for the supply chain has become an essential element of overall corporate accountability. Indeed, for companies that operate internationally, operating responsibly in their supply chains ought to be part of their Corporate Social Responsibility (CSR) (Andersen & Skjoett-Larsen, 2009).

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The Reach of Sustainable Supply Chain Management (SSCM) How far a company can be held responsible for what happens in its supply chain depends on its power and influence in that supply chain. Chain transparency (openness by companies) is a means to take supply chain responsibility seriously. Companies can make decisions in this area, but all should meet minimum requirements. Such requirements can evolve into various forms of soft law (see Box 4.1). Power in supplier networks affects economic relationships, including trust, conflict levels, collaboration, commitment and satisfaction (Terpend & Ashenbaum, 2012). Power relations in international chains are highly relevant, as many powerful multinationals work with less powerful small companies. However, companies that rely on their power base alone are likely not well equipped to roll out sustainability in their supply chains. When considering the shift from SCM to SSCM, relationshipmanagement strategies may significantly change to accommodate sustainability goals, such as dominant buyers not exploiting the power they have over dependent suppliers but treating them like strategic partners (Touboulic et al., 2014). There are various forms of power imbalance in international supply chains. Power imbalance implies that one party is more dependent on the other party regarding access to resources than the other way around. This imbalance may explain why multinational corporations repeatedly abuse international supply chains in areas such as human rights, working conditions and the environment. In particular, developing countries which entertain trade relations with Western companies are the scene of such wrongdoing. Abuses can take place in all links of a chain. They may be about: • Pollution (e.g. caused by oil winning or mining). • Fatal infringements of natural resources (such as deforestation, desertification and erosion). • Air and water pollution created by industry and solid waste issues (such as the dumping of electronic appliances and the irresponsible wrecking of sea vessels). • In the social domain, abuses may refer to exploitative labour conditions (such as shamefully low wages and dangerous exposures to toxic chemicals), child labour and sweatshops. Box 4.1 On Soft Law Besides legally binding law and regulations, there is also soft law, which consists of legally non-binding regulations in the form of, for instance, resolutions of international conferences, guidelines, policy goals, codes of conduct and recommendations, which over time may get the status of customary law (that court decisions tend to take into account). A significant part of international law consists of soft laws. They play a role in many areas, such as aviation, environment and health but are common procedures in human rights. These rights are often based on the Universal (continued)

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Box 4.1 (continued) Declaration of Human Rights of 1948, which, nota bene, is a non-binding declaration. However, the European Declaration of Human Rights (Council of Europe in 1950) is binding. Source: Elsevierweekblad-buitenland 2020. International standards are difficult to maintain by legal means, particularly concerning human rights, working conditions (as defined by the International Labour Organisation, ILO) and the environment. Nonetheless, there can be positive developments as well. Cox (2007) indicates that power is not static, and buyers and suppliers can use various strategies to alter dependencies and move to interdependence. That would mean that the value created by working together is more equally shared, and the nature of the working relationship is more at arms’ length or collaborative. Moreover, various multinational companies have pledged to work on better human and ecological conditions in their supply chains, for example, within the United Nation’s Global Compact framework.1 Also, the EU is actively strengthening legislation in areas such as CSR and ESG to promote social sustainability. The transition towards renewable energy may combine with income policies to ensure that low-income groups can come along without falling below the poverty line.

4.4

Implementing Sustainable Supply Chain Management

SSCM is grounded in a sustainability value proposition within an integrated business model. It is based on stakeholder engagement, collaboration and a network view that denotes a new orientation in managing supply chains. Key to sustainability processes in the supply chain is corporate governance (such as quality standards and responsible risk management), strategic planning, design (considering stakeholder views), integration (such as integrating CSR practices and sustainability principles), collaboration and performance monitoring and evaluation (Mc Loughlin et al., 2023). A helpful guide to address SSCM is the ‘sense and response’ framework (Haeckel, 1992). This framework can be applied to global supply chain issues, including human trafficking, pollution and intellectual property violations. It can also serve as a tool for managing risks and unforeseeable events in operations. Buying companies can get a sense of supply chain operations and their impacts through:

1

unglobalcompact.org.

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• Traceability: the ability to trace the points of origin of materials used in a product. • Visibility: knowledge of the social, environmental and ethical performance of supplies. • Monitoring: the act of examining supplier performance. Once the buying companies know how their suppliers behave, there are various ways to respond. Common industrial practices include: • Reactions to violations once they have occurred (e.g. root cause analysis, penalties, supplier warning, reducing business, contract termination). • Incentives (e.g. granting preferred supplier status, increasing business, price premium). • Supplier capacity building (e.g. productivity improvement and capability expansion). • Proactive product or process design (e.g. design for the environment). • Shared-value chain strategies (e.g. involving community development). • Cascading responsible practices to the supplier network (e.g. training and motivating the suppliers to improve the sustainability of their supply network). Sustainability-minded multinationals (MNCs) actively care for human rights, working conditions and the environment in their supply chains. More and more of them have committed to working only with suppliers that respect social and environmental standards (Villena & Gioia, 2020). They expect their tier-one suppliers to conform to these standards and encourage them to ask their suppliers to comply. The goal is to create a cascade of sustainable practices across the supply chain. However, the reality is that suppliers—particularly those far downstream—often violate sustainability standards, exposing MNCs to severe financial and social risks (Villena & Gioia, 2020). The failures may be in the area of: • • • • •

Healthy working and living conditions for people Sustainable use of natural resources Human rights and workers’ rights Protection of consumers against products produced unsustainably Animal well-being Implementing sustainability in the chain has all kinds of dynamic effects, such as:

• Parties change their strategic choices after assessing the significance of sustainability. • Product characteristics and properties change due to sustainability requirements (for example, the product must be recyclable, quickly degradable and non-toxic). • Modification of processes in accordance with sustainability requirements (e.g. cleaner processes, ergonomic quality). • The distribution of costs and benefits between parties in the chain can change, requiring a relationship of trust between those who must negotiate a broadly acceptable agreement.

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Sustainability can create new dilemmas that cause companies to reposition themselves in valuing collective interests relative to their short-term interests. Chain-based collaboration and introducing sustainability will lead to specific investments and costs. For example, chain partners must adapt their production processes and pay for the required capital (consider investments in human and physical capacities, including information systems). The collaboration will also result in costs (often referred to as transaction costs). These costs may include consultations, contracting, monitoring, redesigning chain-based processes and resolving conflicts. What can a company do to implement SSCM? The following steps could be made2: Process Step 1: Mapping the Supply Chain This step involves collecting the information available within the company and preparing it for the materiality analysis (prioritisation, see step 2 in the process). An entire impact chain will emerge based on understanding what the chain is all about. Process Step 2: Identifying Significant Sustainability Impacts, Assessing Risks and Determining Action Each of the activities in the supply chain has its specific sustainability aspects. Information is collected on direct and sub-suppliers, their business and related sustainability aspects. Combining all collected information helps identify the actual and potential critical environmental and social impacts. This process step does not require a precise quantitative determination but a rather rough assessment of the main sustainability aspects and effects. Part of this so-called materiality analysis is a look at the sustainability risks for the company and its stakeholders (e.g. liability risks, reputational risks), followed by formulating areas for action. Process Step 3: Analysing Gaps and Defining Measures Based on the results of the materiality analysis, the company should record the objectives, measures and processes that can be used or adapted within the SSCM framework. The aim is to determine the measures the company can use to optimise its supply chain from a sustainability perspective. The nature of the company’s actions depends on its influence on the impact, reduction or avoidance of risks. Process Step 4: Adapting Internal Structures and Processes New and existing business processes within the company are established or adjusted based on the findings of the materiality analysis and inventory performed. Companies should promote internal communication and exchange of information about necessary procedures and responsibilities. It is also necessary to provide the financial, human and technical resources required to enable the organisation to implement the intended measures. New linkages between departments and employees may occur if supply chain management includes sustainability considerations.

2

These process steps are based on Federal Environment Agency (2017).

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Process Step 5: Formulating Supplier Requirements and Making Them Binding During this process step, the company develops a code of conduct. It communicates with direct suppliers about the requirements and requests that they self-assess their implementation capabilities. The results feed into a conventional supplier evaluation. In a supplier relationship, the agreed code of conduct is part of the supplier contract; therefore, it is binding for the direct suppliers and, if applicable, for the sub-suppliers. Process Step 6: Evaluating the Sustainability Performance of Suppliers and Building Competencies To improve the supply chain, in the longer term, it is practical to contribute to enhancing critical supplier capabilities, depending on the influence that one can exert in the supply chain and available resources. The agreements should include suitably tailored sustainability criteria when selecting and contracting suppliers. Evaluation is necessary to ensure suppliers comply with the code of conduct and contractual arrangements. Process Step 7: Reporting Disclose supply chain management information through reporting. Companies can build transparency through their commitment to sustainability in the supply chain. Meaningful metrics need to be selected for reporting, both internal and external. There are various possibilities for companies to enhance their chain transparency: • Indicate in one’s annual report what the company’s social and environmental situation looks like. • Describe the company’s codes of conduct, international CSR standards and monitoring systems and how they work in practice. • Adopt a unique sustainability label so that the consumer knows of the nature of a product’s ascribed sustainability (for instance, the FSC label for wood and paper, the MSC label for fish, Fair-trade labels and the EKO label for organic food).

Aspects of International Chains The following are key to understanding opportunities for developing sustainable international chain management: • Influential companies in consumer markets (such as grocery stores, premium and white goods sellers and DIY stores) have led to chains controlled by retail organisations. Therefore, to a considerable extent, the chain power is there. • In agriculture, chain integration means better coordinated agricultural production, low commodity prices, better demand forecasting, reduced transport costs and coordinated demand stimulation. Supermarkets have a strong position in the food chains and can shift the consequences of low consumer prices onto their suppliers.

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• Chain management often involves negotiations with the government about sufficient facilitation (for instance, sufficient available clean water). • Product traceability throughout the chain is increasingly important because it enables audits and guarantees quality and sustainability. Product stewardship in the chain is a product-based approach that helps conduct successful environmental and social policies. All parts of the chain must take responsibility for this. Producers must reduce their products’ environmental impact, often involving working with retailers, consumers and the environmental sector. This field provides many entrepreneurial opportunities. There are all kinds of instruments to develop SSCM at the corporate level. To these belong integrated economic calculations, material balances, voluntary agreements between governments and companies, environmental labelling and the use of guidelines for eco-design, opting for circularity in production. Examples of chains that confront major social and environmental problems upstream are supply chains for producing computers and mobile phones, chains for tropical vegetables and fruits and chains for producing apparel and clothing (Quak, 2009).

Governments Enhancing Traceability In principle, governments have several tools to improve product traceability and encourage businesses to be transparent. These instruments can be: • Food safety legislation • Government procurement policies that ensure that all purchases made by government organisations meet sustainability requirements (firms must demonstrate that their products meet these requirements) • Publishing benchmarks that assess sustainability reports of larger companies • Providing consumers with information about the nature of the various green labels • Reporting misleading final-product labels to the government’s Consumer Authority National governments can oblige (large) companies to publish an annual sustainability report following particular criteria (such as complying with the guidelines issued by the UN’s Global Reporting Initiative).

Voluntary Chain-Based Action Based on Self-Regulation It is reassuring that chain responsibility has become a significant CSR asset. Governments and companies seldom deny their chain responsibility entirely. Forerunner

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companies enhance the sustainability of their chain to prevent harm to reputation and create additional market value. The company’s policies and (risk) management systems should include CSR characteristics and chain responsibility. In tandem, they generate better overall performance. Several companies have already started to operate as such but in a rather fragmentary way. It is highly recommendable to go for an integrated approach as this promises to lead to better-motivated workers (who stay longer) and establishes a greater trust among clients and business partners. Government organisations can engage in meaningful dialogue with enterprises or sectors. They can suggest ways to deal with abuses and clarify the value of chain accountability. NGOs and other civil society organisations may take a ‘social conscience’ role and create countervailing power against the vested interests of governments and corporations. Chain traceability and accountability are notably alive in the food industry. For example, food security is a major societal and policy challenge. Key Notions and Concepts • Thanks to industry leadership, it is becoming more common to implement and share sustainable practices within international supply chains. • Sustainable Supply Chain Management (SSCM) is about SCM that considers the social and environmental effects of a company’s activities in the various links of the supply chain. • Sustainable Supply Chain Management (SSCM) can only be achieved by developing good relationships and effective communication with the various parties in the chain. • SSCM can be seen as an essential element of the broader social responsibility that companies should have. Indeed, for companies that operate internationally, supply chain responsibility is part of their Corporate Social Responsibility (CSR). • Companies can disclose supply chain management information in their reports. Important metrics need to be selected for reporting, both internal and external. • Governments have several instruments to enhance the traceability of products and to stimulate companies to be chain transparent, such as laws, procurement policies, publishing information on green labels and addressing misleading product labels. • In general, chain management is about collaboration in the supply chain (from raw materials to end products and beyond), creating additional functional value for the final consumers and reducing aggregated costs. • There are all kinds of instruments to develop sustainability in supply chains at the corporate level, such as integrated economic calculations, material balances, voluntary agreements between governments and companies, environmental labelling and the use of guidelines for eco-design. • Examples of chains that confront major social and environmental problems upstream are chains for producing computers and mobile phones, chains for tropical vegetables and fruits and chains for producing apparel and clothing.

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References Andersen, M., & Skjoett-Larsen, T. (2009). Corporate social responsibility in global supply chains. Supply Chain Management, 14(2), 75–86. Christopher, M. (2016). Logistics and supply chain management (5th ed.). Pearson Education. Cox, A. (2007). Transactions, power and contested exchange: Towards a theory of exchange in business relationships. International Journal of Procurement Management, 1(1–2), 38–59. Federal Environment Agency. (2017). Step-by-step guide to sustainable supply chain management. A practical guide for companies. Federal Ministry for Environment, Nature Conservation, Building and Nuclear Safety. Feng, Y., Zhu, Q., & Lai, K. H. (2017). Corporate social responsibility for supply chain management: A literature review and bibliometric analysis. Journal of Cleaner Production, 158, 296–307. Fontanier, F., Kolk, A., & Pinkse, J. (2011). Harmonisation in CSR reporting: MNEs and global CSR standards. Management International Review, 55, 656–696. Haeckel, S. H. (1992). From ‘make and sell’ to ‘sense and respond’. Management Review, 81(10), 3–9. Lee, H. L., & Rammohan, S. V. (2017). Improving social and environmental performance in global supply chains. In Y. Bouchery, C. J. Corbett, J. C. Fransoo, & T. Tan (Eds.), Sustainable supply chains. A research-based textbook on operations and strategy. Springer. Loughlin, M., Lewis, K., Lascelles, D., & Nudurupati, S. (2023). Sustainability in supply chains: Reappraising business process management. Production Planning & Control, 34(1), 19–52. Metford, R. N. (2011). The economic value of a sustainable supply chain. Business and Society, 116(1), 109–143. Pisani, N., Kourula, A., & Kolk, A. (2017). How global is international CSR research? Insights and recommendations from a systematic review. Journal of World Business, 52(5), 591–614. Quak, E. (2009). Het onzichtbare label – Perspectief op duurzaam handelen. KIT Publishers. Terpend, R., & Ashenbaum, B. (2012). The intersection of power, trust and supplier network size: Implications for supplier performance. Journal of Supply Chain Management, 48(3), 52–77. Touboulic, A., Chicksand, D., & Walker, H. (2014). Managing imbalanced supply chain relationships for sustainability: A power perspective. Decision Science, 45(4), 577–619. Villena, V. H., & Gioia, D. A. (2020, March–April). A more sustainable supply chain. Harvard Business Review. Wolters, T., James, P., & Bouman, M. (1997). Stepping-stones for integrated chain management in the Firm. Business Strategy and the Environment, 6, 121–132.

Chapter 5

Environmental Management and the Circular Economy

5.1

Environmental Management

Environmental Management’s Place in the Company Previous chapters discuss the sustainability strategies of companies. However, the implementation of corporate sustainability also needs to be highlighted. For a long time, environmental management has been central to thinking about how companies should deal with sustainability issues. Today, managing the environment is often placed in a broader context of sustainable development and CSR. This movement suggests that environmental management has become less important; however, it remains relevant for companies, especially when they wish to integrate sustainability into their business. Only with proper environmental management can corporate sustainability come out well. Environmental management took place behind the scenes for many years for many companies. Often, companies had environmental coordinators (whether or not combining their work with quality management or workplace safety) who primarily dealt with regulations and local licences. The focus here was on compliance and the removal of expensive liabilities. While this behind-the-scenes approach still applies in many cases, many companies have improved their environmental management by embedding it in various business processes and investment decisions.

The Essence of Environmental Management Environmental management is a company’s approach to: • Understand the environmental impact of the company internally and externally. • Limiting and controlling damage caused by environmental effects and, where possible, preventing it. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_5

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• Maintaining communication on environmental issues both within and outside the company. Environmental management is relevant to manufacturing companies as well as service providers such as shops, accountancy firms, educational institutions and hospitals. As the planet is under significant threat as humankind’s habitat and the home of non-human creatures, companies must minimise their environmental effects to a sustainable level. Here, prevention is the best solution because then the environment is free of the strain caused by productive activities. If prevention takes time, environmental management must initiate a process to decouple environmental impacts from the company’s production activities. Finally, this decoupling must be absolute; in other words, in all circumstances, the environmental effects must decrease, not only as a percentage of production but also as an absolute decrease. It is essential to take a broader view than the company’s existing products and processes to achieve this. This condition calls for developing green products based on investments in clean technologies.1

Searching for Synergy Over the past 20 years, the search for synergy between market and environmental objectives has resulted in the development of various methods and support instruments. Some of these are as follows: • Quality, work and environmental management systems, which companies can implement (for environmental management: ISO 14.000 series and the EU Eco-Management and Audit Scheme, EMAS). • Methods of identifying environmental costs hidden within administrative systems. This work is in the area of environmental (cost) accounting. • Developing technical prevention options that stop or mitigate wastage in productive activities, including methods for the development of environmentally friendly products (eco-design). • Life-cycle analysis (LCA) as a method to identify the environmental effects of a product throughout its life cycle. • Practical insights into how to extend product lives by using residual waste (rather than dumping or burning it) and the reuse and recycling of products. The traditional products column (comparable to the supply chain) is a model of the production stages of a particular product (or group of products), separated by various markets. By extension, the product column may include all environmental effects linked to production and consumption. It is then known as the product life 1

The second part of this chapter will explain how this kind of thinking has led to the Circular Economy and how this concept works out under different circumstances.

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cycle, indicating where the following environmental problems appear in the product column (Mantz-Thijssen & Van der Woerd, 1991): 1. 2. 3. 4. 5. 6.

Depletion of raw materials and energy Pollution of air, water and soil Nuisance caused by noise or stench Wastage Deterioration of landscapes Disaster risks

In many cases, it makes sense to take a holistic approach to environmental problems; this may mean reinventing processes, developing new kinds of relationships with business partners and even considering collaborating with competitors to achieve scale in waste management (Lee, 2011).

Environmental Management and Environmental Performance Although environmental management issues in different organisations can have common features, how environmental management takes shape depends on various factors and circumstances. Inspired by Yan et al. (2020), environmental management is dependent on a company’s: • Economic, social and cultural context (depending on the country or region of residence). Part of this is the extent to which people and companies respect authorities and laws. • Political orientation (the importance of environmental regulations and companies’ relationship with the government; the role of compliance and law enforcement). • Market orientation (outreach to environmentally conscious consumers and other stakeholders in the supply chain). • Industrial competitiveness (existing industrial competition and its dynamics, including environmental innovation). • Environmental performance indicators (including nature of environmental strategy, achievement of pre-established targets, measurement and reporting). Previous discussions have shown that environmental management is more than just a matter of business priorities. Different spatial levels of policymaking, community relations, industry networks and cross-border connections influence how respective companies operate and shape their environmental behaviour.

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Environmental Management and Economic Performance There are many issues involved in environmental management. There will be cost benefits when environmental management saves materials and minimises or avoids waste. Where this requires more costly inputs, intensive inspections and quality leaps, operational costs will increase. To some extent, environmental measures may be inevitable, given regulation and market demand, regardless of whether costs are higher or lower than in the past. Where environmental measures enhance a firm’s competitive advantage, higher costs may be (more than) offset by higher prices or volumes (or both). As a result, establishing a credible link between environmental management and the overall economic performance of an enterprise can take time and effort. To develop a more in-depth insight into the link between environmental management and economic performance, it is helpful to distinguish between the various environmental topics that need attention and the systematic integration of these topics with the activities of various departments (Zhang et al., 2019). Both types of environmental management can contribute to production performance. However, there is a limit to dealing with environmental issues that upgrade the entire production process due to insufficient human resources (capacity) to address all the different subjects (Zhang et al., 2019).

Environmental Management Systems A company can strengthen its environmental management through an environmental management system (EMS). It ensures structural monitoring of emissions, waste streams, used raw materials, energy and other environmental aspects. Because of that, a company’s environmental goals and the actual results can be made concrete and clear. Executives can use this information in support of their management decisions. This information is also relevant to a company’s external stakeholders, including clients, governments, neighbours, financial institutions and NGOs. At the same time, it can also inspire internal services to do the right thing. Many enterprises remain passive or defensive in the field of environmental policy. This attitude may, for instance, lead them to take measures that are just enough to keep their environmental permits and continue in business. Fortunately, in recent years more companies have discovered that implementing an EMS can be instrumental in gaining competitive strength and improving relationships with external parties such as neighbours and government agents (Gerritsen & Van den Berg, 2009). An EMS can help a company meet government requirements by generating evidence of compliance with environmental regulations. It may even lead to less stringent governmental checks when the EMS can instantly demonstrate that the company stays within the limits of its environmental permits. The prerogative relieves the administrative burden and saves time and money.

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ISO 14001 Since 1996, the world family of ISO 9000 quality management standards has been joined by the ISO 14000 family of environmental management standards. In 2004, the ISO 14000 standard came into conformity with the ISO 9000 standard. ISO 14001:2015 contains the basic requirements for an environmental management system. In addition, the ISO 14000 family consists of supports to allow an EMS to work well. The ISO 14001 certificate can be issued by a recognised external verifier. Besides ISO 14001, there is also the EU’s Eco-Management and Audit Scheme (EMAS). The two systems are similar, although EMAS is more stringent and requires external reporting. If implemented, an EMS (in particular one that follows ISO 14001; see Box 5.1) supports the control and improvement of a company’s environmental performance. Such a system monitors a company’s environmental effects in a structured manner with particular attention to two issues: • The company must adhere to current environmental legislation and related regulations. This situation requires a detailed appraisal of procedures and environmental risks. • The company must progressively improve its environmental performance (continuous improvement). Box 5.1 ISO 14001:2015 ‘ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance. ISO 14001:2015 is intended for use by an organization seeking to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability. ISO 14001:2015 helps an organization achieve the intended outcomes of its environmental management system, which provide value for the environment, the organization itself and interested parties. Consistent with the organization’s environmental policy, the intended outcomes of an environmental management system include: • Enhancement of environmental performance • Fulfilment of compliance obligations • Achievement of environmental objectives ISO 14001:2015 applies to any organization, regardless of size, type and nature, and applies to the environmental aspects of its activities, products and services that the organization determines it can either control or influence, considering a life cycle perspective. ISO 14001:2015 does not state specific environmental performance criteria. (continued)

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Box 5.1 (continued) ISO 14001:2015 can, in whole or part, improve environmental management systematically. Claims of conformity to ISO 14001:2015, however, are not acceptable unless all its requirements are incorporated into an organization’s environmental management system and fulfilled without exclusion’. Source: https://www.iso.org/standard/60857.html (accessed 17 December 2022). An EMS offers a coherent set of policy, organisational and administrative measures. There are eight elements that the system needs to incorporate: 1. 2. 3. 4. 5. 6. 7. 8.

An environmental policy statement (goals) An environmental programme Integration of environmental management into the total management structure Measurements and registrations Internal controls Internal information and training Internal and external reporting Auditing of the entire system

Environmental Audits Many companies have employed environmental coordinators (also called environmental managers) to steer their environmental management in the right direction. This coordinating staff member can have a management unit depending on the company’s size. Often, companies combine the areas of quality, working conditions and environment, having a coordinator (or manager) who takes care of them. Also, business controllers may have to deal with environmental management. They can calculate a company’s environmental costs relating to current environmental effects (such as filtering and waste disposal) and their prevention (investments in clean technology). Controllers may also participate in an environmental audit as part of an organisation’s environmental management (for example, they may verify the information collected). The role of controllers and others in environmental management does not diminish the role of the environmental manager. They must provide critical insights into the technical and procedural aspects of environmental hazards and how they can be addressed (McLean, 2011). An environmental audit is an instrument that supports the effective implementation of an enterprise’s environmental management. To summarise, environmental auditing has three broad aims (Ledgerwood et al., 1992): there are different types of audits, depending on the type of business, the reason for the audit, and how detailed the audit must be. These audit types include corporate audits (considering the entire company), site audits, compliance audits (to check that the rules are followed), risk

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audits, production audits (tracing materials and energy) and acquisition/divestiture audits (testing environmental liabilities). Environmental audits can be part of a cyclical auditing programme. Firm specialists or external consultants may carry them out. There are also single audits for a special purpose, which are more likely to be performed by outsiders. An environmental audit, as a process, has three parts: Part one: Observance of the company’s relevant environmental effects. Auditors consider existing policies and the goals they entail, the organisational means to achieve those goals, and the methods and procedures used. Sources of information include external documents (e.g. statistics, sector reports), internal documents, and interviews with various levels of staff. Part two: Assessing the state of affairs by comparing the facts with previously established environmental criteria and Part three: Reporting the findings.

5.2

The Circular Economy

From a Linear Industrial Economy Towards a Circular Industrial Economy2 While the concept of sustainable development has never been exclusively concerned with the environment, environmental management has long been a priority area of research and policy. Environmental issues often appear with social issues like environmental justice, poverty or job opportunities. The triple bottom line—the three ‘Ps’ of ‘people, planet and profit’ (see Chap. 3)—has strongly influenced how businesses view various aspects of sustainability. We have often seen terms starting with ‘environment’ or ‘green’ replaced by ‘sustainable’ (for instance, Sustainable HRM, Sustainable Supply Change Management and sustainability accounting). Although the different elements of company sustainability belong together, from an academic perspective, these elements often belong to different disciplines and research traditions. These specific fields may call for multi-disciplinary (if not interdisciplinary) research. These remarks serve to introduce the Circular Economy (CE), which has become a widely recognised R&D and policy field that focuses on how today’s environmental problems are to be solved. Conventional company-based environmental management had already spotlighted elements of the CE, such as reuse, recycling and waste treatment to minimise fresh material inputs and prevent or reduce the dumping or incineration of residual waste materials.

2

This subsection is based on Stahel (2019).

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In the nineteenth century, the industrial revolution transformed the economy of the time, which followed mainly natural circular principles in a mainly agricultural society, into a monetised industrial economy. Crude oil allowed the use of the combustion engine, and in the mid-1920s, all sorts of fibres and artificial materials became available. Synthetic materials (plastics) have slowly but surely taken the place of wood and metals in manufacturing. For nature, these new materials were unknown; nature’s circularity could not deal with them. Since the 1950s, industrial society has penetrated the earth and its atmosphere with millions of manufactured items. It filled the oceans with countless plastic items without considering how to regain them. In the late 1920s, these problems were compounded by the increasing complexity of materials and industrial processes (see Box 5.2). Box 5.2 Complexity in Production A smartphone today contains 70 elements of the 118 elements of the periodic table, often in minute quantities. The existing end-of-pipe technologies do not allow the recovery of these elements; most of the economic value of these materials get lost after their first use (despite all kinds of recycling activities). Source: Stahel (2019). Stahel (2019) emphasises that the industrial economy is a linear industrial economy, that is, an economy that ‘in a straight line’ takes materials from nature, turns them into products, and, when ending their useful product life, discharges them to nature. These practices have severely damaged nature with excessive use as a source and sink. Environmental management can help contain the problems emanating from these linear processes—and so it does—but, in essence, cannot eradicate them, as they are inherent in the prevailing industrial ideologies and technologies. This is why humanity must change direction and move towards a circular economy. What distinguishes the circular economy from the linear economy? The linear industrial economy (LIE) seeks to create monetary value-added by managing material flows (inputs and outputs) as long as it goes. The industrial circular economy (ICE), however, aims to maintain the value and utility of stocks of assets as much as possible and as long as possible. The ICE seeks to maintain value through optimal stock management and increasing the efficiency of using goods (rather than producing more) (Stahel, 2019). For early forms of circularity, see Box 5.3. There are two overall cycles: renewables and finite materials (such as metals, plastics and fossil fuels). Renewables are a matter of flow management, while finite materials require adequate stock management. Renewables refer to sustainable energy and food production, whereas finite materials are about maintaining stocks of materials for the long term. Both cycles require management in a way that prevents systematic leakage and negative externalities.

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However, reaching an ICE requires a long transition period, whereby the distinction between linear and circular is not always clear. Circular production is often in its early stages but is ramping up, in many cases supported by different levels of government policy (Ashby et al., 2019). In Sustainable Supply Chain Management (SSCP), the concept of ‘Closed-Loop Supply Chains’ (CLSC) emerged, which is in line with the principles of the circular economy. It is about taking back products from customers, recovering valuable materials and minimising disposals in the external environment. It mainly addresses waste and hazardous materials while generating economic value by extending the life of products and reusing and recycling products and materials. Promoting the adoption of closed-loop production patterns aims to increase resource use efficiency with a particular focus on urban and industrial waste management. The lesson learned from successful cases is that CE depends on the engagement of various actors in society and their capacity to create suitable collaboration and exchange strategies (see also Barreiro-Gen & Lozano, 2020). The successes also highlight the importance of an economic return on investment to offer adequate motivation to companies and investors (Ashby et al., 2019). Therefore, it is necessary to build new circular business models that are beneficial to all partners in a circular economy consortium. Such initiatives can be accelerated by special intermediaries, which Cramer (2022) called transition brokers. They can help build up a collaboration between relevant network partners, who must agree on a division of the tasks necessary to be successful in the CE. The earliest author that significantly influenced the circular economy concept was Boulding (1966), with his seminal essay on spaceship Earth. What he called the ‘cowboy economy’ is now called the ‘linear economy’ (reckless, exploitative and violent towards the environment) versus the ‘spaceman economy’, now called ‘the circular economy’ (the solution where humankind must find its place in a cyclical ecological system. Box 5.3 Early Contributions to the Circular Economy The earliest author that significantly influenced the circular economy concept was Boulding (1966), with his seminal essay on spaceship Earth. What he called ‘cowboy economy’ is now called ‘linear economy’ (reckless, exploitative and violent towards the environment) versus the ‘spaceman economy’, now called ‘the circular economy’ (the solution where humankind must find its place in a cyclical ecological system. Stahel (1982) proposed a ‘performance economy’ based on a spiral-loops system that minimises matter, energy flow and environmental deterioration without restricting economic growth or social and technological progress. He also proposed product-life extension activities (such as reuse, repair, reconditioning, upcycle and restore), which are now part of the circular economy’s core activities at the micro-level. (continued)

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Box 5.3 (continued) The concept of industrial ecology goes back to Frosch and Gallopoulos (1989), which focuses on a sustainable balance between economic benefits and environmental needs. They introduced the idea of ‘waste equals food’, where residues of one industrial process can serve as raw materials for another, thereby reducing the industry’s impact on the environment. Industrial ecology is an emergent scientific discipline that integrates technical, environmental and social aspects to show the way towards sustainable development. Other relevant concepts are a. ‘regenerative design’, which replaces the present linear system with cyclical flows, using renewable resources; b. biomimicry (that seeks sustainable solutions to human challenges by imitating nature’s time-tested patterns and strategies), and c. the ‘blue economy’ (which favours local economies, cultures and traditions while it uses available resources whereby the waste of one product becomes the input to producing new products). ‘Natural capitalism’ is an economic system that incentivises profit based on proper care of the environment and assigns an economic value to the stewardship of the planet (Hawken et al., 2000). The journey to natural capitalism involves four major shifts in business practices, all vitally interlinked: (1) Radically increase the productivity of natural resources (so that industry can save on them); (2) Shift to biologically inspired production models and materials; (3) Move to a ‘flow-of-services’ business model (rather than selling the goods that provide the services); (4) Reinvest in natural capital (to improve it, to let it increase). A major contribution to circular economy thinking is ‘Cradle to Cradle’, developed by McDonough & Braungart (2003, 2013). Product design must follow different types of metabolism in an industrial process, biological and technical, to keep the value of materials as high as possible for the next use cycles. Source: Weigend Rodríguez et al. (2020).

The Future of Circular Production The World Business Council for Sustainable Development (WBCSD) presents the CE as a great opportunity for the business world to transform the world for the better (see Box 5.4). Bauwens et al. (2020) introduce four types of CE scenarios based on low or high-tech and centralised or decentralised governance. These scenarios are not sector-specific but outline broad societal trends that may permeate various industrial sectors. These four types are as follows.

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Planned Circularity Under ‘planned circularity’, CE is centrally conducted by the government through solid interventions. Here, central command-and-control measures prevail, such as taxes on raw materials, emissions and waste or setting hard caps on these activities. Hazardous substances and plastics are liable to be banned, involving extensive changes in consumer behaviour and lifestyles.

Bottom-Up Sufficiency The bottom-up sufficiency scenario is about decentralised small-scale production within a self-sufficient local community. Production is centred around local needs rather than trade in remote markets. Agricultural production is less intensive but regenerative and serves the local community. As a result, traffic volumes fall, urban agriculture flourishes and overall resource consumption drops substantially. Sufficiency-driven business models are the dominant business models here. This scenario echoes much of the degrowth literature (see Chap. 9 and, for instance, Paulsen, 2017).

Circular Modernism Under the scenario of ‘circular modernism’, the transition towards a CE relies on a. technological progress and b. a centralised political and economic decisionmaking by governments and a few large enterprises. The envisaged circular transformations focus primarily on supply or production, carried out by large companies, without consumers having to change their consumption habits.

Peer-to-Peer Circularity The ‘peer-to-peer circularity’ scenario presupposes the usage of digitalisation and various enabling technologies, such as platforms, blockchain and 3D printing. It allows a more decentralised organisation of economic activities, with potential sustainability benefits, including a move towards a CE. In such an economic system, individuals embrace services (such as hiring) that give them temporary access to various resources (such as cars, housing, 3D printers, gardens and storage). On the demand side, it includes concepts like the sharing economy and collaborative consumption. On the supply side, it involves production patterns that move away

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from conventional mass production. Such a transformation depends on the kind of industry; it is not always possible. These various scenarios derive from CE activities that are happening today. Different types of CE take place simultaneously. However, which of them will be prominent or prevail in the future is uncertain; this will partly depend on the region, the industry and international developments. Weigend Rodríguez et al. (2020) advocate connecting CE research with ‘future studies’ to build new scenarios (with longer horizons than planning); then, it will be possible to test potential CE strategies and actions that might work in different future circumstances. Box 5.4 The WBCSD’s Vision for the CE The circular economy is a new way of looking at the relationships between markets, customers and natural resources. It is the greatest opportunity to transform production and consumption since the First Industrial Revolution 250 years ago. By unleashing circular innovation, we can boost the global economy’s resilience, support people and communities around the world and help fulfil the Paris Agreement and the UN Sustainable Development Goals. By moving towards the circular economy, businesses can capture significant benefits, including: increased growth; innovation and competitive advantage; cost reduction; reduced energy consumption and CO2 emissions; improved supply chain and resource security. GDP Growth Transitioning to a circular economy can unlock global GDP growth of $4.5 trillion by 2030 and will enhance the resilience of global economies. Moving towards a circular economy can help companies get ahead of upcoming shifts in policy and regulation and anticipate the pricing of externalities and potential changes in taxation models. Companies delivering economic and sustainability benefits through successful circular transformations serve as proof points for policymakers, encouraging them to make new policies that level the playing field. Circular economy measures can help achieve the Paris Climate Agreement and the UN Sustainable Development Goals. Business and societal benefits: • Job creation: through circular principles, up to 500,000 additional jobs were created in France alone. • Reduced energy consumption: circular economy solutions could offer a 37% reduction in energy consumption in the EU. • Reduced greenhouse gas emissions: in India, implementing circular solutions presents the opportunity to reduce emissions by about 40%. • Increased resource security: sustainably managed forests ensure the longterm availability of renewable resources for producing biobased materials. Source: WBCSD’s CEO Guide to the Circular Economy (2017).

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Critical Remarks Undoubtedly, moving from linear to circular modes of production is at least part of the transformation towards sustainability. However, it is still good to be critical and not take certain approaches for granted, even if they have an imaginative name; for instance, 3D printing is prone to high energy consumption and toxicity. Here are a few critical observations on CE solutions emerging today (Bauwens et al., 2020). The CE is often characterised by following one of the four Rs: reuse, repair, remanufacturing and recycling. If we include behavioural change, the Rs could begin with the R of Refuse. ‘Refuse’, however, is not part of most CE solutions. Products that are futile and cause great environmental damage should be unsuitable for production. Whether particular circular solutions are environmentally effective often depends on their rebound effects. These effects mean material efficiency gains or cost reductions because CE solutions create extra purchasing power that people use to buy more products than before. In this way, rebound effects can neutralise positive environmental effects. Therefore, a behavioural no can be required to prevent undesirable outcomes. However, how could such behaviour be effectively encouraged (Font Vivance et al., 2016)? In general, the risk of extra consumptive spending from the saved money or spending by others because of lower prices casts a shadow on the CE if there are no rigid controls. While the benevolent behaviour of consumers is necessary, it is probably not enough to prevent adverse effects. High-tech CE facilities, esp. in recycling, often require large quantities of material and energy resources. For example, ICTs and renewable energy technologies rely on scarce elements, such as rare earth minerals. In other cases, recycling or waste treatment facilities require large quantities of inputs imported from remote locations (involving long distances and more emissions) and can discourage abatement policies. In addition, technologies like 3D Circularity are not always a comprehensive response to resource-intensive consumption. In particular, product life is a significant factor in the possible impact of circular modes of production. There should be a balance between technical lifespan and public appreciation for a particular design style. The energy and material performance of products with a long lifespan is potentially much greater than that of recycled products with a short lifespan. Thus, combining recycling with durability can significantly reduce material and energy consumption (Wolters, 2019). CE is mainly taking place in industrialised countries. For many industrial leaders, the CE is a technology and economy-driven vision of economic growth in a resource-scarce world (see Box 5.3). More adaptive approaches are needed to apply CE to developing countries. These approaches require considering what social and institutional conditions apply so that the CE contributes to an inclusive and righteous development (Ashby et al., 2019).

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CE in Action Over time there will likely be frequent new CE activities that could not be realised before. To ramp up a movement towards a sustainable future, Leleux and van der Kaay (2019) stress the importance of simultaneously launching various creative sustainability initiatives and then targeting appropriate strategic partners (strategic partnering along the value chain). The authors extend this approach to the circular economy, which they see (as discussed in this chapter) as a radical departure from linear thinking. These circular solutions are a matter of available technologies and of developing suitable business models. The authors give several interesting real-life examples to assess the impact of this crucial shift. They mention producing recyclable mattresses, biobased wrappers for candy bars, remanufacturing trucks, repairing and recycling garments and using surplus residual heat to grow sustainable shrimps. There are many other examples and many more to come. Key Notions and Concepts • Although environmental management has various short-term objectives to facilitate and protect ongoing production processes, it is also part of a company’s efforts to ensure its long-term competitive capabilities. • Environmental management is relevant for manufacturing companies and service providers such as stores, accounting firms, schools and hospitals. • Life-cycle analysis (LCA) is a method of detecting the environmental effects of a product throughout the chain. • Environmental management has many aspects. Where environmental management saves materials and reduces or prevents waste, there will be cost advantages. Where it requires more expensive inputs, intensified inspections and quality jumps, the operational costs will increase. This makes it difficult to establish a credible link between environmental management and the overall economic performance of an enterprise. • An enterprise can strengthen its environmental management by means of an environmental management system (EMS). • Since 1996, the worldwide ISO 9000 family of quality management standards has been accompanied by the ISO 14000 family of environmental management standards. • Environmental auditing is an instrument that supports the efficient execution of a company’s environmental management. • From a theoretical point of view, the industrial circular economy (ICE) aims to maintain the value and utility of stocks of assets (both natural and human-made). The conventional economy aims to maintain or increase the economic value of flows of energy and materials, which causes pressures on human and natural capacities. • Bauwens et al. (2020) introduce four types of CE scenarios based on low or hightech and centralised or decentralised governance: planned circularity, bottom-up sufficiency, circular modernism, peer-to-peer circularity.

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• Within Sustainable Supply Chain Management (SSCP), ‘Closed-Loop Supply Chains’ (CLSC) have emerged as a concept matching circular economy principles. It is about taking back products from customers, recovering valuable materials from these products and minimising any flow (disposal) into the external environment. • The CE is often characterised by following one of the four Rs: reuse, repair, remanufacturing and recycling. The Rs could begin with the R of Refuse if we consider behavioural change. ‘Refuse’, however, is not part of most CE solutions. Products that are futile and cause a lot of environmental harm could be considered unsuitable for production, especially if there are cleaner alternatives. • The CE focuses primarily on industrial countries. Many industry leaders see it as a technological and economic vision of economic growth in a resource-scarce world. More adaptive approaches are needed to implement it in developing countries.

References Ashby, A., Callegaro, A. M., Adeyeye, K., & Granados, M. (2019). Chapter 5: The spiral economy: A socially progressive circular economy model? In N. Yakovleva, R. Frei, & S. R. Murthy (Eds.), Sustainable development goals and sustainable supply chains in the post-global economy. Springer Nature Switzerland AG. Barreiro-Gen, M., & Lozano, R. (2020, July). How circular is the circular economy? Analysing the implementation of circular economy in organisations. Business Strategy and the Environment, 29(8), 3484–3494. Bauwens, T., Hekkert, M. P., & Kirchherr, J. (2020). Circular futures: What will they look like? Ecological Economics, 175, 106703. Boulding, K. E. (1966). The economics of the coming spaceship earth. In H. Jarrett (Ed.), (pp. 3–14). Johns Hopkins University Press. Cramer, J. (2022). Building a circular future. Ten takeaways for global changemakers. Amsterdam Economic Board. www.amsterdameconomicboard.com. Font Vivance, D., Kemp, R., & van der Voet, E. (2016). How to deal with the rebound effect? A policy-oriented approach. Energy Policy, 94, 114–125. Frosch, R. A., & Gallopoulos, N. E. (1989). Strategies for manufacturing. Scientific American, 261, 144–152. Gerritsen, R., & van den Berg, O. (2009). KAM-management in de praktijk. Geheel herziene druk. Hawken, P., Lovins, A., & Lovins, H. (2000). Natural capitalism: Creating the next industrial revolution (1st ed.). US Green Building Council. Ledgerwood, G., Street, E., & Therivel, R. (1992). The environmental audit and business strategy. A total quality approach. Pitman Publishing. Lee, H. L. (2011). In Harvard Business Review (Ed.), Don’t tweak your supply chain – Rethink it end to end. Harvard Business Review Press. Leleux, B., & van der Kaay, J. (2019). Winning sustainability strategies. Finding purpose, driving innovation and executing change. Palgrave MacMillan/Springer Nature. Mantz-Thijssen, E. L., & Van der Woerd, K. F. (1991). Milieuzorg in bedrijf. In C. W. A. Evers, E. L. Mantz-Thijssen, & K. F. van der Woerd (Eds.), Milieumanagement in stappen. Kluwer Bedrijfswetenschappen.

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McLean, R. (2011, Winter). Environmental leadership. Environmental Quality Management, 105–112. McDonough, W., & Braungart, M. (2003). Cradle to cradle. Remaking the way we make things. Rodale Press. McDonough, W., & Braungart, M. (2013). The upcycle beyond sustainability – Designing for abundance. North Point Press. Paulsen. (2017). Degrowth: Culture, power and change. Journal of Political Ecology, 24(1), 425–448. Stahel, W. R. (1982). The product life factor. An inquiry into the nature of sustainable societies: The role of the private sector. Houston Area Research Center. Stahel, W. R. (2019). The circular economy: A user’s guide. Routledge. WBCSD. (2017). CEO Guide to the Circular Economy. Weigend Rodríguez, R., Pomponi, F., Webster, K., & D'Amico, B. (2020). The future of the circular economy and the circular economy of the future. Built Environment Project and Asset Management, 10(4). Wolters, T. (2019). Chapter 2: Sustainable value creation. In J. J. Bouma & T. Wolters (Eds.), Corporate sustainability. The next steps towards a sustainable world. Routledge. Yan, J., Xu, L., Farajallah, M., Zhao, S., & Xiong, J. (2020). Overview of environmental management in an emerging market. Strategic Change, 29, 553–560. Zhang, Q., Ma, Y., & Yin, Q. (2019). Environmental management breadth, environmental management depth, and manufacturing performance. International Journal Environment Research and Public Health, 2019(16), 4628.

Chapter 6

Human Resources and Roles in Achieving Corporate Sustainability

6.1

Introduction

This chapter discusses the roles of people in achieving corporate sustainability. First of all, it deals with globalisation and its effects on the economies of both developing and developed countries. It appears that the World Bank and the International Monetary Fund (IMF) supported the expansion of trade globalisation for a long time. As such, they followed strict neoliberal policies supported by the G7, including the USA, that strongly influenced those policies. This chapter examines the implications of these policies for employment and income distribution. Eventually, neoliberalism ‘reached its Waterloo’; alternative insights have emerged but have not yet fully crystallised. These insights go back to Post-Keynesianism, favouring more prominent government roles which are reconcilable with living wages and job security. However, moving towards ecological sustainability requires entirely new conditions and criteria. At the enterprise level, this chapter focuses on sustainable human resources management and how it can support the transition to corporate sustainability. It also includes a view on a stakeholder approach to Sustainable HRM.

6.2

Globalisation and Human Resources

Although globalisation has contributed to a substantial reduction in extreme poverty, especially in China (Donaldson, 2019), a very positive achievement, many developing and developed countries have seen a deterioration in labour income and employment relations. Since the 1980s, the roles of unions and collective bargaining in defending labour rights and quality of employment have declined. In recent decades, encouraged by the doctrine of neoliberalism, many previously stable jobs have become more flexible and less secure. In many cases, companies © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_6

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have maintained a core of good, stable and well-paid jobs but have created a layer of flexible, low-paying jobs around that core. For companies, these policies will be comfortable, at least in the short term, but for many workers, they mean social insecurity, low incomes and limited career opportunities. Neoliberal tendencies have been visible in many developed countries, despite their differences in industrial relations and economic structures. Differences in institutions lead to various ways in which international forces affect national economies. Nonetheless, as Kinderman (2019) states, in many countries, neoliberalism has brought an expansion of employer discretion (power) in the areas of wage determination, personnel management, work organisation and hiring and firing (see also Baccaro & Howell, 2017). The neoliberal transformation has opened up new markets and stimulated international trade, promising benefits for all nations. However, globalisation has had mixed results across nations and within nations, with winners and losers. Free trade has apparently benefited multinationals and privileged groups, but it has also had severe adverse effects. The weakening of the position of (lower paid) employees has led to increased health inequalities, public health problems and management by stress. Labour issues, including layoffs, job insecurity, toxic organisational cultures and long hours, have left many victims. According to Pfeffer (2018), the workplace is the fifth leading cause of death in the USA; in a comment, Pfeffer indicated that this phenomenon translates into a severe lack of social sustainability. Even if a better European-style welfare state and health insurance system has prevented work-related deaths, also in Europe, the stress and adverse health effects of neoliberal globalisation have reduced life expectancy and quality of life (Kinderman, 2019). The people who voted for the populists on the right are deeply concerned about their economic situation. On top of worsened income positions because of globalisation, the growing importance of diversity and gender equality has contributed to a decline in the subjective social status of low-educated white males, which may explain an increase in racial sentiments (Kinderman, 2019). Neoliberalism has also had critical consequences for developing countries. The message to developing countries was that economies that reduce the role of government and rely on the market become part of the global economy. Consequently, their economy will grow, as will employment. Many countries have followed the recipe of lowering trade barriers, deregulating and privatising state-owned enterprises. However, research shows doubtful results as they were biased by what happened in China and India. These countries have opened their borders but have not been economic liberalisation models. Only after two decades of unsatisfactory structural adjustment programmes did the World Bank acknowledge that trade liberalisation can only succeed after creating certain favourable conditions (ul Haque, 2004). The neoliberal perspective means that the benefits of technological change and globalisation will only occur at the national level if governments do not interfere with market forces. Worker rights and employment protection are thus obstacles that should disappear as much as possible. The OECD and the international financial institutions fully embraced this point of view. Countries (not least, European countries) were pressed to abandon their social-market systems and restructure their

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social security programmes. However, as ul Haque (2004) explains, considerable empirical evidence casts doubt on the proposition that unemployment is primarily rooted in labour market rigidities. Inadequate overall demand and employment opportunities were (at least) equally important determinants of unemployment. Stiglitz (2017) argues that the free flow of goods and services across borders—the globalisation of trade—has been mismanaged. Trade agreements resulted in reduced trade tariffs and the removal of non-tariff trade barriers. According to Stiglitz (2017), former U.S. President Trump’s assertion that U.S. trade negotiators were stymied cannot be true, as these negotiators got most of what they wanted. However, from the perspective of the USA as a whole, they wanted the wrong thing; they asked what the American companies wanted: access to cheap labour without environmental and labour protections. US corporations’ threats to move their factories abroad weakened workers’ bargaining power and brought wages down. The trade agreements helped ensure the property rights of investments made in developing countries, which made threats to relocate US-based plants to cheap-labour countries more credible. For Stiglitz (2017), the failures of globalisation were not inevitable. Globalisation could have been managed much better. The adverse effects were predictable. Trade liberalisation would affect unskilled workers in advanced economies, especially without compensatory response measures by governments. Many economists used simplistic models that led them to overestimate the benefits and underestimate the costs. However, the economics literature provided clear warnings. The story of globalisation could have been different. To substantiate this statement, Stiglitz referred to the Scandinavian countries. They have shown that inequalities can be reduced by policies that do not undermine economic progress. In the 1980s, the World Bank and the IMF became advocates of the free-market ideology and pushed it on developing countries, which were often reluctant but badly needed their loans and grants. At that time, the two institutions’ activities became increasingly entwined. In particular, the World Bank’s ‘structural adjustment loans’ could be provided as long as the IMF gave its approval—and with that approval came IMF-imposed conditions. Both institutions went by the demands of a small group of advanced industrial countries (the so-called G-7) at that time. A few East-Asian countries, especially China, have largely bypassed these demands, with positive effects (Stiglitz, 2017). Since the beginning of this century, the tide has changed. During the 2000s, growing resistance against neoliberal policies has become manifest. Today, there is a widespread departure from these policies, albeit that, in many cases, intentions are still to be transformed into action. Not at least because of the 2008 worldwide economic crisis and the Arab Spring uprisings of 2011, the World Bank and the IMF had begun to nuance their hard-boiled neoliberal ‘articles of faith’. Ostry et al. (2016), employed by the IMF, mention two IMF policies that ‘have not delivered’, which means they have not promoted economic growth. One is removing restrictions on the movement of capital across borders. This financial openness seems to have worked out positively in the case of foreign direct investments. However, other capital flows, such as portfolio investment, banking and speculative debt inflows, do not boost growth or help countries share risks with their trading partners. The second

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questionable IMF policy is curbing the size of the state, either by privatising government functions or constraining government spending through limits on fiscal deficits and on the ability of governments to accumulate debt. Governments with ample fiscal space will do better by living with the debt. Austerity policies (cutting budgets and allowing less debt) not only incur substantial welfare costs (fewer social services that most benefit lower-income groups) but also hurt demand and, thus, employment. Therefore, curtailing debt is not a remedy for all countries. Moreover, the economic crisis of 2008 and the pandemic of 2020–2021 (and their aftermath) have demonstrated how crucial governments can be, particularly by rescuing systemic banks from bankruptcy and providing substantial financial support packages to save jobs. Subsequent institutional reform with stronger government roles includes stricter supervision over the banking system and ensuring adequate health care reserves. Ostry et al. (2016) also write about inequality. The free play of finance and austerity have inequality in their wake, while there is strong evidence that inequality can significantly reduce growth, although sustaining growth and stability are primary IMF objectives. The IMF’s narrow interpretation considers education, health spending and social security but does not include long-term poverty reduction, development, job creation and labour force participation policies. Clift and Robles (2020) explore the scale and strength of the IMF’s commitment to revisit its inequality and social protection thinking. There is a disconnect between rhetoric and practice. The IMF’s reorientation on inequality and social protection is limited by its external and fiscal stringency concerns. IMF’s narrow interpretation considers education, health spending and social security but excludes long-term poverty reduction, development, job creation and labour-force participation policies. However, there seem to be further developments in these areas. Both the World Bank1 (see Box 6.1) and the IMF2 (see Box 6.2) are focusing on the UN’s Sustainable Development Goals (UNDGs), which may open new horizons. Box 6.1 The World Bank and the UN SDGs ‘The SDGs, which were formulated with strong participation from the World Bank Group, are fully consistent with the World Bank Group’s own twin goals to end poverty and build shared prosperity in a sustainable manner. Nearly 800 million people now live in extreme poverty—earning $1.90 per day or less. For the first time, the world has set a deadline for ending extreme poverty—by 2030. Among the 17 SDGs, ending extreme poverty is goal number one, and it is the same for the World Bank Group’. Source: see footnote 1 to this chapter.

1 2

See https://www.worldbank.org/en/programs/sdgs-2030-agenda (accessed on 30 February 2023). See https://www.imf.org/en/Topics/SDG (accessed on 30 February 2023).

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Demand-Led Growth and the Survival of the Planet

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In light of the UN SDGs, the IMF has made several statements about its contributions to reducing inequality and other goals; see Box 6.2. The IMF seems to have changed its course and is now playing a benevolent gatekeeper role. This role can be helpful if it is not ‘old wine in new bottles’. It will be a ‘first see and then believe’ for many observers. Box 6.2 The IMF and the UN’s SDGs So, the IMF has been exploring how fiscal policy can be deployed to reduce inequality—through spending on health, education, and social protection and ensuring the progressivity of tax systems. The IMF is also in the process of reassessing its approach to social spending, a vital tool for reducing poverty and making growth more sustainable. For example, social protection is one of the pillars of the Argentinean reform plan supported by the IMF. Strong institutions founded on good governance are the backbone of peaceful and inclusive societies and a foundation for other goals. The IMF is stepping up its work in this area. The SDGs come with a price tag. Achieving them will require a significant increase in public spending in many countries. The IMF is supporting in several ways. On the spending side, it is developing a broad framework for assessing spending needs in support of achieving some big-ticket SDGs— health, education, and infrastructure. By articulating clear objectives for making development more sustainable and inclusive, the SDGs represent the basic requirements of human decency and flourishing for this and future generations. Helping countries navigate this policy roadmap is a top priority—including for the IMF. Source: see footnote 2 to this chapter.

6.3

Demand-Led Growth and the Survival of the Planet

Increased employer discretion (power) over employment relations and wages has engendered a transition from wage-led growth (the Fordist model) to export-led growth (such as in Germany) and debt-led growth (esp. in the USA) (Kinderman, 2019). Export-led growth causes pressure on wages to deal with global competition, whereas debt-related growth causes households to grapple with recurring increases in the costs of lending and housing. The economic growth resulting from these approaches has been very modest (at times, tending towards stagnation). The remedy could be expanding demand to a level commensurate with but not exceeding, the economy’s productive capacities. However, what about sustainability? From a sustainability point of view, low growth could be a blessing in disguise, as conventional economic growth is far from sustainable. The world economy is already

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touching on or overstepping ecological boundaries; therefore, more growth means more depleted resources, impaired nature and harmful emissions and pollution. The dissatisfaction with the supply-side policies based on neoliberalism invites us to go back to the principle of effective demand that plays such a crucial role in Keynesianism, the dominant economic philosophy from 1945 till 1980. The principle of effective demand represents the crux of Keynes’s theory of employment. That theory explains aggregate demand as the main factor determining output and employment, given a nation’s available production capacity. Aggregate demand links to a key doctrine of Keynesianism and Post-Keynesianism: investment determines savings. By showing that investments determine savings, Keynes allows us to reject the social justification of great inequality of wealth (Berr, 2017). Neoliberal economics assumes that savings drive investment; therefore, it favours increasing the (disposable) income of the already rich because they save a greater part of their income than low-income people. In this view, the poor benefit from the subsequent trickle-down effect of economic growth resulting from higher savings. However, historical evidence from the last 50 years has not supported substantial trickle-down effects (Hope & Limberg, 2020). Post-Keynesianism is associated with various interesting concepts that, by extension, could promote sustainability, such as the precautionary principle (non-action because of uncertainty and considering the risks inherent in action). Post-Keynesianism could also make one realise that sustainable development requires the involvement not only of companies in (more or less) free markets but also of governments and civil societies. Post-Keynesianism could converge with sustainable development through a robust sustainable framework for innovation and investment policy (Berr, 2017). According to Sachs (2014), the problem with free-market and Keynesian economics is that they misunderstand the nature of modern investments. Both schools believe that investment is led by the private sector because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model). Today, private-sector investment is tied to public-sector investment. This complementarity defines our time. Unless the public sector makes sound investments, the private sector will continue to hold its funds or give them to shareholders in the form of dividends or redemptions. As Sachs (2014) explains, the key is to reflect on six kinds of capital goods: business capital, infrastructure, human capital, intellectual capital, natural capital and social capital. All of these are productive, but each has a distinctive role. These six forms of capital work in a complementary way. ‘Business investment without infrastructure and human capital cannot be profitable. Nor can financial markets operate in the absence of social capital (such as trust). Without natural capital (including a safe climate, productive soils, available water, and protection against flooding), the other kinds of capital are easily lost. Moreover, without ample public investments in human capital, societies will succumb to extreme income and wealth inequalities’ (Sachs, 2014). Altogether, sustainabledevelopment economics recognises crucial roles for governments, businesses and civil society.

6.4

Leadership for Corporate Sustainability

73

The above is relevant because the corporate world must take responsibility for transitioning to a sustainable economy. In this transition, the role of people as responsible workers and citizens, individually and collectively, is undeniably essential. Previously, it was made clear that existing labour practices in different parts of the world have negatively affected the position of employees, including the adverse consequences of a large number of low-paid, unprotected workers. The latter may form an outer layer of flexible employment. A general drop in labour union membership and collective bargaining can partly explain the weakened position of labour. How this development could be reversed or replaced by other mechanisms is an open question. Nonetheless, after the corona crisis, it is noticeable that, in various countries, trade unions and governments’ roles in recapturing stronger labour positions. Besides retreating from neoliberal thinking (see below), this development is caused by substantial shortages in human resources, especially in critical sectors such as education, advanced technology and healthcare. We have already discussed the changing mindset of the World Bank and the IMF. Today, however, there are clear counterforces across a wide political spectrum that seek to reverse the weakened position of workers and the erosion of the position of middle-class professionals. Recent departures from neoliberal thinking (emphasising austerity and flexible labour) have inspired investments to harness the public sector and promote inclusive well-being. Part of these are investments in public infrastructure, housing, education, health and sustainability (which must be inherent in all investments). In the sphere of employment, in many industrialised countries, the way forward includes better (and payable) education, higher minimum wages, better wages for professionals working for the public good and enhanced employment security.

6.4

Leadership for Corporate Sustainability

Leadership plays a crucial role in achieving a sustainable company. As mentioned before, it is about transformational leadership as it is about transforming the company towards a sustainable organisation. At the same time, to survive, the company has to deal with the current, largely unsustainable conditions. As Ancona et al. (2015) indicate, old bureaucratic forms of organising (with many rules, fixed division of labour and multi-layer hierarchy) give way to another form of organisation. In this area, there are four trends: There is an attenuated distinction between managerial and non-managerial roles (with more flexible job descriptions). Hierarchies have become flatter as organisations move to projects that are often self-managed by teams rather than supervisors. There has been a vast expansion in the use of teams and task forces. Internal and external boundaries have become more porous as cross-functional teams and task forces break through the traditional dividing lines of bureaucracy.

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The organisational context evolving from these four trends markedly differs from the traditional bureaucracy, including ‘command and control’ leadership. The authors depict this change as a transition from traditional bureaucracy to what they call distributed leadership. Distributed leadership is a matter of ‘cultivate and coordinate’. Here, leadership functions are performed by a relatively large group of people throughout the organisation (frequently working in teams). Team members propose goals and tasks and plan projects that gradually receive a formalised status. Leaders are there to guide, support and connect emergent efforts. The two types of leadership are ideal types; in reality, we see mixtures of these leadership styles. Although there is a broad interest in distributed leadership, making it happen often seems complicated. Bureaucratic, top-down ‘command and control’ seems deeply ingrained in many existing operating procedures and mental models and complicates a smooth transformation towards distributed leadership (Ancona et al., 2015). The authors make clear that companies with both types of leadership can adopt green solutions to their unsustainable processes. However, they pinpoint the limitations of the ‘command and control’ organisations when it comes to an ongoing process of sustainable innovation, such as relying on career managers rather than idea champions and on quick performance rather than a learning curve. The distributed leadership model seems in the interest of the transition towards a sustainable economy. Sustainability can only appear if the entire organisation supports it. Where well-trained employees do the (ground) work, hierarchy is of limited significance. Especially the younger generation is better trained and set to achieve corporate sustainability than many senior managers. As a transition towards sustainability is a matter of technological and organisational innovation, innovation economics can add various new aspects. Kleinknecht and Kleinknecht (2015) argue that supply-side deregulation of labour markets harms innovation and, eventually, a company’s competitive position. The neoliberal approach entails flexible, low-paid jobs as a way for a company to be competitive. Flexible, easy-to-lose jobs can have the following adverse effects: • Workers in such flexible jobs may have little allegiance to the company, reducing their inner motivation to share knowledge and do a good job. • The above situation leads to a larger supervisory staff (compared to companies with stronger, long-term ties with their workers) as the average worker is less inclined to observe company discipline, reducing organisational efficiency. • A considerable turnover of workers because of their undervalued contributions can lead to the loss of a substantial amount of tacit knowledge, which can hinder innovation processes. • Low wages may lead to low labour productivity as these take away the management’s incentive to adopt or develop new, more efficient technology. • Managers may not count on critical feedback from their workers (given their low job security). • Autocratic management practices cause myopia, which is detrimental to innovation.

6.5

The Role of HRM in the Transition Towards a Sustainable Economy

75

The above points contain various lessons that can help accelerate the transition to a sustainable economy, with particular attention to income distribution and the position of labour. Furthermore, the following remarks deserve consideration: • For all modes of economic thinking as discussed, it is necessary to convert them to sustainability thinking, respecting the planet’s ecological boundaries and recognising that workers are much more than providers of (cheap) labour. Both arguments have severe ethical implications. • Assumptions in economic theories can be critical; if needed, these must be replaced by other ones. Today we are witnessing a paradigm shift towards economic thinking that does not leave the creation and distribution of economic value to the marketplace. However, how seriously will sustainability be taken when economic growth is on the political agenda? • In this new thinking, there is room for better pay and social security for low-income groups. It also includes more investments in (preventive) health care, education and well-being, as these will pay for themselves. However, certain macroeconomic fiscal ceilings have to be respected, which may mean difficult policy choices cannot be avoided. • Although markets and fighting against market rigidities will be much less prominent than advocated in neoliberal economics, they must not leave the equation. Using the price mechanism to promote sustainability belongs to the sustainability toolbox (e.g., levies on harmful substances or the pricing of CO2 emissions). Nonetheless, the possible adverse influence of taxes and subsidies on markets needs continuous attention, as do forms of market failure in terms of negative externalities. Unsustainability is a complex system issue that cannot be fully tackled by measures based on current preferences (which, after all, are part of the problem) and market incentives. • Governments will play a larger role in economic policies. Governance issues will loom large (e.g., democratic decision-making, human rights and issues such as fraud). It remains to be seen whether populistic voices will slow down rather than ramp up the transition towards a sustainable economy.

6.5

The Role of HRM in the Transition Towards a Sustainable Economy

Corporate sustainability can reach a state of maturity only if there is a multi-level transition in society that includes the institutions of society (such as education, government and innovation networks), individual companies and their customers and the people who carry out the transitional tasks. At different levels, individuals play crucial roles in the transformation. At the corporate level, paying attention to Human Resource Management (HRM) and its

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role in promoting sustainability is highly relevant. This area of research is called Sustainable Human Resource Management (SHRM). The previous chapters have made it clear that to become sustainable, value creation in business must move away from focusing on short-term performance based on the monomaniac exploitation of natural, social and human resources. Porter and Kramer (2011) stated that many companies remain trapped in an outdated approach to value creation that had emerged over recent decades: optimising short-term financial performance while ignoring the broader implications of their business for the future. Ehnert et al. (2014) go one step further: it is not just a focus on short-term performance; many companies fail to engage actively in the renewal, regeneration and reproduction of resources that societies and companies need to survive and prosper, including human resources. Sustaining the human resource base becomes a strategic management task when a company’s and society’s future are considered simultaneously, despite the likely differences in time horizons. Companies need to understand the quality of their resource base and how this base can be regenerated, developed and renewed to have resources for doing business in the future (Ehnert et al., 2014). Part of this consists of a company’s human resources. Neglecting its resource base will jeopardise a company’s survival when it reaches the point where it cannot regenerate its exploited resources and discovers that external parties cannot (sufficiently) supply resources that are critical to a company’s continuity. In terms of human resources, this may, for instance, mean that new well-trained people refuse to be employed by a company because of its controversial production processes and lack of social legitimacy (making for a poor reputation). When contemplating the role of HRM in sustainability, it is helpful to distinguish between (1) how HRM can support a company’s business sustainability and (2) performing HRM sustainably (Cohen et al., 2012). Ad 1. HRM in support of a company’s business sustainability is essential to realise that we deal with strategic HRM here. This kind of HRM explicitly supports a company’s strategy, which focuses on pathways to reach the company’s long-term business objectives. Strategic HRM should contribute to these long-term objectives by using its tools to embed the corporate strategy in a company’s culture and practices. As sustainability becomes part of a company’s strategy, strategic HRM becomes sustainable. That means that the HRM processes—in particular, leadership development, recruitment, training, remuneration, staff retention and personnel assessment—should take sustainability specifically into account to obtain organisational suitability (in terms of required knowledge, skills, collaboration, ethics and attitudes). Sustainable HRM means different things depending on the corporate strategy at play and the role of sustainability in it. Although there are several ways for HRM to promote corporate sustainability, it must operate in line with the company’s sustainability strategy to be effective. Therefore, sustainable HRM has its limitations, given the company’s strategies and priorities. There are distinct categories of strategy, for instance, defensive strategies by which companies attempt to find adequate

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The Role of HRM in the Transition Towards a Sustainable Economy

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responses to external criticism of a company’s policies and operations, including their supply chains (such as forms of child labour and uncontrolled pollution). Other companies are proactive by redesigning their business models to deliver products and services with clear sustainability benefits. Previous chapters have discussed these distinctions in greater detail. Until recently (if not still going on), the literature on corporate sustainability and CSR assumed (in one way or another) that a business takes care of itself in the first place, ensuring a profitable business case and good short-term shareholder value. In the 2020s, considering the frequent alarm bells about the planet’s dire state, more companies are open to the question of what they have to offer to society. Only after clearly defining a broader purpose as a response to the world’s unprecedented ecological and social crises can a company think of its business success. Such an approach drastically affects a company’s strategy and the ensuing HRM policies. Unless HRM follows up closely and vigorously, ambitious (but necessary) purposes risk getting stuck in good intentions. Ad 2. The sustainability of HRM is about how individuals, groups or managers can best contribute to the organisation over the long term. Here, human resources cannot be seen as a production factor like any other production factor, such as raw materials and machinery. The HRM discipline recognises that the human resource is a very special resource which has needs and wants, can respond and act and has its private goals. We also encountered the term ‘human factors’, which derives from ergonomics, a discipline aimed at optimising human well-being in work. It investigates how humans behave physically and psychologically with respect to various work environments, products or services. HRM and ergonomics have different histories but could mutually benefit from some degree of integration (Ehnert et al., 2014). To go one step further: In the critical HRM literature and Sustainable HRM, human resources do not just have to do with organisational goal achievement; that is, human resources as a means to an end. People live a life beyond the organisations they work for. Employee and organisational benefits do not necessarily overlap and are likely to require different HRM practices (Mariappanadar, 2019). What this could mean for a company in practice may be highly dependent on the competitive environment, the legal and cultural imperatives of society and the need for companies to retain their workers. One could say that sustainable HRM is what companies must do in their business environment to have continuous access to skilled human resources (Müller-Christ & Remer, 1999). However, sustainable HRM cannot only be a matter of rationally dealing with the immediate business environment. Such an approach stands in the way of social divisions and unacceptable forms of inequality. There are aspects of ethics involved, such as human rights, decent jobs and distributional justice, on top of rational arguments to develop a workforce loyal to the company. Ethical values and rational economic argumentation must converge when working on a sustainable future for society.

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A Stakeholder Approach to Sustainable HRM

Today, many companies have adopted a stakeholder approach. Companies that follow such an approach recognise that it is not only shareholders but also other parties that have an interest in a company (together, they are a company’s stakeholders). This approach has led to stakeholder management as a new field of management. When companies pursue sustainability and CSR, stakeholders can help shape sustainability strategies and promote their acceptance. The stakeholders of a company are the groups or persons influenced by it or, conversely, who influence the company. It is possible to distinguish different stakeholders, such as internal and external stakeholders, powerful and less powerful stakeholders, transactional (such as suppliers and customers) and non-transactional stakeholders (such as interest groups and NGOs). There are permanent stakeholders that have a stake in the entire company (such as employees or certain government agents) and stakeholders whose interest in a company is just partial and focused on a particular issue. It is important to realise that it may not be sufficient only to consider individual stakeholders; there can be an entire network of (often informal) relationships between various stakeholders. Through these networks, a company’s stakeholders can influence each other; one possible consequence is that specific stakeholders can increase their influence on a company by rallying support from other entities (Ackermann & Eden, 2011). Strategic HRM comes in where adequate stakeholder management requires companies to develop internal resources (see also, Box 6.3). Stakeholder management competencies figure at three levels: a. the rational level (identifying stakeholders and their stakes), b. the process level (various approaches and procedures to gather information on stakeholders) and c. the transactional level (managing the transactions and other agreements on collaborations with stakeholders). A stakeholder culture (involving the beliefs, values and practices for effectively addressing stakeholder relationships and issues). Guerci et al. (2014) suggest taking a stakeholder orientation from a general management perspective. Especially if other management systems follow a multistakeholder approach, HRM systems should do the same to be consistent with what the organisation is doing. This procedure will also make Sustainable HRM more concrete. Various components and specific processes of HRM can be discussed in light of what kind of treatment the various stakeholders need. For instance, recruitment or HR tests for selection can be analysed from a stakeholder point of view. Each job brings linkages with particular stakeholders (such as specific internal departments, suppliers, customers and government agents). Before actual recruitment and training activities, HR staff members could talk with the various stakeholders to determine what competencies and values they think are most important to develop beneficial relationships. The recruiting company, embracing sustainability, should consider the most relevant aspects of sustainability that come into play when dealing with each stakeholder. This process is likely to sharpen the company’s

Sustainable HRM, Stakeholder Management and Corporate. . .

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79

insights into what is needed to be sustainable and what its specific HR contributions could be. Box 6.3 Bridging Social and Financial Concerns Looking at the development of CSR from the perspective of stakeholder theory, two distinct lines of reasoning exist in the integration of financial and social concerns that have appeared in theory and practice. The first is the residual view of CSR, developed in the 1960s and 1970s; business theorists still follow it, particularly in the American context. This view takes CSR as a residual (that is, non-strategic) activity, summarised by the ‘giving back to society’ proposition. Behind this proposition lies the moral obligation and perhaps some good practical reasons (e.g., arousing sympathy for the company in society) to give back to society part of the value that a company has created. In this view, CSR is not part of the critical value-creating activities of the company. In other words, it is a matter of ex-post profit distribution. Here, the processes of profit-making are not under discussion. The second one is the integrated view of CSR. It sees CSR as the integration of social, ethical and environmental concerns into the management criteria for corporate strategy. This view is supported by management and business ethics scholars, according to whom stakeholder theory is to integrate ethics and social issues directly into strategy. It embraces the key ideas of the stakeholder approach; that is, it acknowledges that the management of any economic organisation includes the management of the relationships with its stakeholders based on a set of given values, not on ex-post profit distribution. (This Text box is based on Freeman et al., 2010, Chap. 9).

6.7

Sustainable HRM, Stakeholder Management and Corporate Social Responsibility (CSR)

The academic literature has addressed many corporate sustainability issues within the framework of CSR. Between the two concepts has grown a notable degree of similarity. There has been a lot of discussion in the past about how CSR relates to financial performance. Part of the discussion was the importance of prioritising shareholders’ interests. If a company’s management can square CSR measures with short-term profitability, then there is no conflict. However, if not, CSR requires special leadership skills to make it acceptable among key stakeholders. Within this context, the literature speaks of transformational leadership, which places the company on new paths towards sustainability. This type of responsible leadership relies on two types of justification: 1. CSR (including sustainability) projects are not mere cost items but, most of all, investments in the company’s future (meeting or anticipating future societal requirements) (see also Box 6.3) and

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2. There are moral principles that the company should follow, irrespective of whether these bring costs or benefits—for example, respect for human rights (which may translate into worker rights, community rights or consumer rights).

Key Notions and Concepts • Although globalisation has substantially reduced extreme poverty, especially in China, many developing and developed countries have experienced deteriorating labour incomes and relations. • In many countries, neoliberalism has extended employers’ discretion (power) over wage determination, personnel management, work organisation and hiring and firing. • The weakened position of employees (less well-paid) has led to an increase in health inequalities, public health issues and stress. • From a neoliberal point of view, technological change and globalisation require governments not to interfere with market forces. This view implies eliminating workers’ rights and employment protection as obstacles to the free market. • In the 1980s, the World Bank and the IMF became advocates of the free-market ideology. They imposed a neoliberal ideology on the developing world. • In the 2000s, there was increasing resistance to neoliberal policies. Today, there is going on a notable shift away from these policies, although, frequently, there seems to be a gap between rhetoric and action. • In light of the UN Development Goals, the IMF has shown changes and made several statements about its contributions to reducing inequality and other goals. It seems that the IMF takes a benevolent gatekeeper role. This role may be helpful if it is not ‘old wine in new bottles’. • The world economy is already touching on or overstepping ecological boundaries; therefore, more growth means more depleted resources, impaired nature and harmful emissions and pollution. Conventional growth needs replacement by new development concepts. • The dissatisfaction with the outcome of neoliberal policies invites various scholars to go back to the principle of effective demand that plays such a crucial role in Keynesianism, the dominant economic philosophy from 1945 till 1980. • Post-Keynesianism is associated with various interesting concepts that, by extension, could promote sustainability, such as the precautionary principle. However, it still needs sufficient alignment with sustainability. • Public investments and private investments must go together to be effective. This is a necessary form of complementarity. • Leadership plays an essential role in achieving a sustainable company. Sustainability can materialise if supported by the entire organisation, especially where well-trained employees do the (ground) work and hierarchy is not dominant. Especially the younger generation is better trained and set to achieve corporate sustainability than many senior managers.

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• Large employee turnover due to undervalued contributions means that a substantial amount of tacit knowledge leaves the company, which can frustrate innovation processes. • At various levels, individuals play a vital role in transforming society towards sustainability. At the corporate level, Human Resource Management (HRM) is crucial in promoting and implementing sustainability. This area of research is called Sustainable Human Resource Management (SHRM). • Companies need to understand the quality of their resources and how to regenerate, develop and renew them to do business in the future. A company’s human resources are part of this. • Although there are different ways for HRM to promote corporate sustainability, to be effective, it should function in line with a company’s sustainability strategy. Therefore, sustainable HRM has limitations determined by a company’s strategies and priorities. • A company needs a broader purpose as a response to the world’s unprecedented ecological and social crises, before considering its business success. In this process, HRM must follow up closely and vigorously, lest ambitious (but necessary) purposes risk get stuck in good intentions. • Strategic HRM comes in where adequate stakeholder management requires companies to develop internal competencies to communicate with specific stakeholder groups. • There are moral principles that the company should follow, irrespective of whether these bring costs or benefits, esp. when it comes to respecting human rights (which may translate into worker rights, community rights or consumer rights).

References Ackermann, F., & Eden, C. (2011, June). Strategic Management of Stakeholders: Theory and practice. Long Range Planning, 44, 179–196. Ancona, D., Backman, E., & Isaacs, K. (2015). Chapter 9: Two roads to green. A tale of bureaucratic versus distributed leadership models of change. In R. Henderson, R. Gulati, & M. Tushman (Eds.), Leading sustainable change. An organisational perspective. Oxford University Press. Baccaro, L., & Howell, C. (2017). Trajectories of neoliberal transformation: European industrial relations since the 1970s. Cambridge University Press. Berr, E. (2017). Post Keynesian economics and sustainable development. In C. L. Spash (Ed.), Routledge handbook of ecological economics. Routledge. Clift, B., & Robles, T. (2020). The IMF, tackling inequality and post-neoliberal reglobalisation, the paradoxes of political legitimation within economistic parameters. Globalisations, 18(2), 1–18. Cohen, E., Taylor, S., & Muller-Camen, M. (2012). HRM’s role in corporate social and environmental sustainability (SHRM report). Donaldson, J. (2019). For ye have the poor always with you: Exploring China’s latest war on poverty. In J. Bowie (Ed.). Party watch annual report 2019: Scrambling to achieve a moderately prosperous society (pp. 50–60). Full text available online: https://www.ccpwatch.org/

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single-post/2019/12/11/Party-Watch-Annual-Report-2019-Scramblingto-Achieve-a-Moder ately-Prosperous-Society Ehnert, I., Harry, W., & Zink, K. J. (2014). Sustainability and HRM. An introduction to the field. In I. Ehnert, W. Harry, & K. J. Zink (Eds.), Sustainability and human resource management. Developing sustainable business Organisations. Springer Verlag. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Cambridge University Press. Guerci, M., Shani, A. B., & Solari, L. (2014). A stakeholder perspective for sustainable HRM. Literature review and research agenda. In I. Ehnert, W. Harry, & K. J. Zink (Eds.), Sustainability and human resource management. Developing sustainable business organisations. Springer Verlag. Hope, D., & LImberg, J. (2020). The economic consequences of major tax cuts for the rich (Working Paper 55). The London School of Economics and Political Science. Kinderman, D. (2019). The neoliberal revolution in industrial relations. Journal of Theory and Strategy, 2(4), 106–124. Kleinknecht, A., & Kleinknecht, R. H. (2015). Eroding the made-in-Germany model: What Germans could learn from The Netherlands. In B. Unger (Ed.), The German model: Seen by its neighbours (pp. 303–326). Social Europe Publishing. Mariappanadar, S. (2019). Chapter 1. HRM in the 21st century: Sustainable HRM. In S. Mariappanadar (Ed.), Sustainable human resource management: Strategies, practices and challenges. Red Globe Press. Müller-Christ, G., & Remer, A. (1999). Umweltwirtschaft oder Wirtschaftsökologie? Voorüberlegung zu einer Theorie des Ressourcenmanagements. Springer Verlag. Ostry, J. D., Loungani, P., & Furceri, D. (2016). Neoliberalism: Oversold? Finance & Development, 57(10), 38–41. Pfeffer, J. (2018). Dying for a paycheck: How modern management harms employee health and company performance. HarperCollins. Porter, M., & Kramer, M. (2011). Creating shared value. Harvard Business Review, 89(1–2), 62–77. Sachs, J. D. (2014). Sustainable development economics, project. syndicate.org/commentary/ promote-sustainable-development-economics-by-jeffrey-d-sachs-2014. Stiglitz, J. E. (2017). Globalisation and its discontents revisited. Anti-globalisation in the era of trump. Penguin Random House. ul Haque, I. (2004). Stakeholder theory. The state of the art. Globalisation, neoliberalism and labour (UNCTAD Discussion Papers No. 173).

Chapter 7

Corporate Governance and CSR as Vehicles of Corporate Sustainability

7.1

Corporate Governance

Corporate governance is how an enterprise governs and controls its strategy and business operations. It also defines the roles of internal and external stakeholders of a company (such as the board of directors, supervisory board, shareholders, employees, financial providers, customers and suppliers) and how they interact. This broad range of interests also includes corporate sustainability and how it operates. Corporate sustainability comes in through a company’s strategies, business model and operational policies; moreover, it can be that various external stakeholders will stress the importance of sustainability and suggest or require concrete actions to contribute to it. Corporate governance is defined by legislation and codes of conduct (primarily at a national level but also at an international and industry level) and company-based procedures. Despite regional and business differences, there are pillars of successful corporate governance: accountability, equity, transparency, assurance, leadership and stakeholder management (see Box 7.1). Section 7.2 discusses stakeholder management. Academic literature covers a variety of corporate governance issues, such as the size of the board of directors, external board members and the duality of the CEO and the president. Other topics are internal control mechanisms of corporate governance, audit committees, remuneration and nomination committees, board of directors, gender, ethnicity and age diversity. Corporate sustainability might put these issues in a different light and change the way we look at them. The company’s organisational resources can be used in diverse ways; corporate governance includes how a company decides on such uses and solves the possible conflicts among the various internal and external stakeholders (Daily et al., 2003). This approach differs from decades of governance research focused on controlling managers’ personal interests in situations where organisational ownership and management were separate. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_7

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Looking after a company’s economic, social and ecological interests requires proper corporate management—this responsibility belongs to the concept and practice of corporate governance. Corporate governance involves leading a company within the law and generally accepted ethical principles. A company’s stakeholders can only believe that their interests are in good hands if the company is transparent and reliable. See Box 7.1. Corporate governance is part of a company’s business and society relations. It concerns corporate power, legitimacy and responsibility (e.g. Pettigrew, 2009). There are different ways to assess corporate governance (Pruijm, 2010, Chap. 2). 1. From a business-administrative point of view, there is a need for good management based on well-thought-of strategies, motivating leadership and effective management systems. Economically speaking, the company is to create economic value which can justify its existence. 2. Corporate sustainability implies that value creation has to be sustainable by following the three Ps (People, Planet and Profit); failure to achieve this may slur a company’s corporate governance. 3. From a legal point of view, the board of directors of a company is responsible for what goes on within a company and represents the company as a legal entity. The governors are legally bound to display responsible stewardship over the company’s material and immaterial assets. Historically, the interests of shareholders have had priority, but nowadays, there is a broad consensus that a company should take responsibility for the interests of other stakeholders as well. Good governance needs effective management control, with controllers and CFOs playing a significant role. Box 7.1 The Pillars of Successful Corporate Governance 1. Accountability. Accountability is the obligation to explain, justify, and take responsibility for one’s actions. Accountability cannot exist without proper accounting practices; accounting and good records management facilitate the process of accountability. 2. Fairness. Fairness is the ability to make judgments free from discrimination or dishonesty. In a business, it is essential to make good decisions that serve the needs of the business without unnecessarily harming any stakeholder. 3. Transparency. Being transparent means being honest and open when communicating with stakeholders about matters related to the business. Transparency in business is the basis for trust between a firm and its investors, customers, partners, and employees. 4. Assurance. Assurance refers to the assurance given by auditing professionals concerning the validity and accuracy of reviewed documents and information. Managers and directors provide formal confirmation of the internal control systems’ effectiveness through Assurance Statements. (continued)

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Box 7.1 (continued) 5. Leadership. Corporate governance sets the stage for leadership at the top of the organisation (that is, steering the organization by taking the lead and inducing its members to follow in the same direction). The idea that corporate boards need to demonstrate leadership is becoming a popular highlight in the business press and a current research topic in the scholarly literature (see, e.g., Cikaliuk et al., 2020). 6. Stakeholder management. Stakeholder management is the process by which a company monitors, organises, and keeps its relationships with its stakeholders. It includes naming one’s stakeholders, examining their needs and expectations, and finding out to what extent they depend on the company and vice versa. Based on that process, there follow planning and acting accordingly to engage with them. Sources: Merino and Manzaneque (2016); Google. Pruijm (2010) agrees with the broader view of governance expressed by Strikwerda (2002), which is particularly applicable to medium and large enterprises: • There is systematic planning through a strategic plan and subsequent budgets. • There is a logical organisational structure, which means the total task of a company is divided entirely and unmistakably over departments which have to make achievements which are measurable and open to evaluation. • Department heads have clear tasks which are systematic, normative and measurable. • There are conditions set for self-steering (e.g. by way of management information) so that departments and individuals can establish whether they have performed satisfactorily or improve their processes when needed. • Values and norms are defined and communicated (involving the company’s mission and norms regarding goals and boundaries). • There is communication (which is partly systematic and partly free) to discuss goals, their attainment and possible (causes of) deviations. • There is systematic evaluation, that is, an evaluation of achievements in light of objectives, principles and external developments (including alignment with co-worker assessment and remuneration). In line with these conditions, there are corrective action plans. Once adopted as a prominent issue, corporate sustainability has consequences for each of these eight items.

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Business Continuity It is appropriate to also pay attention to business continuity as a factor in defining rules for corporate governance. Business continuity has long been part of a company’s security procedures and ICT policies. For instance, such programmes and plans prescribe what to do in the case of a fire outbreak. With increased regulation, liability issues have become more prevalent. Business continuity is now primarily focused on non-insurable risks and therefore tends to result in financial and control problems. A business continuity plan minimises damage as a result of a disaster. This approach, in particular, refers to the critical business processes that a calamity could cripple, for example, when critical customer services fail.1 These calamities can be environmental and social. Prevention and Plan-B solutions must be available. Special codes of conduct have been developed in several countries to prevent corporate governance crises. At the same time, however, the new rules themselves may become a new source of non-compliance; they represent new risks as real as the possibility of a fire outbreak. Senior management must prepare action plans to address the ‘new’ calamities. Investing in preventative environmental measures can substantially reduce environmental and related social calamities. The business environment needs continual monitoring, whereby management of the operational environment and risk management must go together. The Board of Directors remains responsible for the entire organisation, even if staff members perform most tasks. Therefore, serious control problems arise; they are of paramount concern to the veritable controller.

Software and Sustainability Corporate governance also requires considerable attention to the application of management software. Of course, this software can never replace the human factor in choosing responsible ways of conducting a business, controlling risks and implementing best practices. However, the software can be of considerable help in achieving them. In particular, it can involve all layers of the organisation in formulating company strategies (including objectives) and linking initiatives and projects to existing strategies.2 Moreover, management software can help compose and operationalise key performance indicators to show whether objectives reach fulfilment. Part of this is noticing changes in the business environment which could alter the company’s risk profile. The software can also contribute to sustainability reporting as well as integrated reporting. 1 2

ZBC.nu, 2010. CFO Magazine, January–February 2010.

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Where sustainability objectives are part of corporate strategy and operations, sustainability can get support from general management-support software. Apart from ERP systems oriented towards integrated solutions, there is software support for energy consumption, waste management and logistics. Equally, software support can facilitate a coherent policy and practice in quality, labour and environment.

Sustainability and Finance Risk management at a strategic level frequently suffers from a lack of communication between sustainability officers and financial specialists. In many sectors, sustainability creates new perspectives, which may lead to a notable change in competitive relationships. It is, of course, critical for businesses to consider this. The situation may get complicated as new perspectives are hard to translate into the financial indicators financial specialists use. However, the CFO is responsible for bridging the gap to prevent arrears in crucial strategic investments. There is an upsurge in ESG finance (ESG: Environmental, Social and Governance), which submits lending, investment or insurance decisions to clear ESG criteria. This submission can take place from a risk-management or strategic-value (purpose) point of view. Levine (2005) indicates how the financial system can facilitate decision-making on the trade-offs between economic, social and environmental goals. The following of his recommendations are relevant to sustainable finance: • Produce information ex-ante about possible investments and allocate capital. • Monitor investments and ensure corporate governance after providing finance. • Facilitate the trading, diversification and management of risk. The allocation of funding to its most productive use is a key role of finance. It is, therefore, well positioned to assist in making strategic decisions on the trade-offs between sustainable goals. While broader considerations guide an organisation’s strategy on sustainability, funding is an inescapable requirement for reaching sustainable goals. Finance plays this role at different levels. In the financial sector, banks, for example, define their lending strategy regarding which sectors and projects are eligible for lending and which are not. Similarly, investment funds set their investment strategy, which directs which assets the fund invests in and which assets they do not. Thus, the financial sector can lead in the transition to a low-carbon and more circular economy. If the financial sector prioritises financing sustainable companies and projects, it can accelerate the transition. The governance role includes balancing the many interests of a company’s stakeholders. Schoenmaker and Schramade (2019) distinguish between three levels of sustainable finance (SF). The first level, SF 1.0, has a conventional orientation, meaning its primary objective is to generate profits and increase shareholder value. Under this regime, financial institutions avoid investing in or lending to the so-called sinful companies: e.g. tobacco, anti-personnel mines and cluster bombs or the exploitation

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of child labour. The environmental field may be about avoiding waste dumping and whale hunting. Recently, coal or fossil fuel investments have increasingly become a no-go because of carbon emissions. NGOs often initiate these steps through the use of social media. A more refined approach to shareholder value emerges when financial institutions and businesses implement systems to measure elements directly linked to sustainability performance. These measures include energy and emissions management, sustainable purchasing, IT, buildings and infrastructure and job diversity. However, the guiding principle remains short-term shareholder value or profit maximisation. Within the second level, SF 2.0, financial institutions explicitly integrate negative social and environmental externalities into their decision-making. In the medium to long term, such externalities may be priced (e.g. a carbon tax), be subject to stricter legal requirements or harm an institution’s reputation. Incorporating the externalities in the business case thus reduces the risk that financial investments become outright disappointments. It helps financial institutions and companies to keep the investors’ trust. However, SF 2.0 may fail when companies only apply the internalisation of externalities to a small part of their product range or production processes while exploiting this limited performance in their marketing. Here, we touch on the wellknown phenomenon of greenwashing. The third level, SF 3.0, moves from risk to opportunity. Rather than avoiding unsustainable companies from a risk perspective, financial institutions invest only in sustainable companies and projects. In this approach, finance is a means to foster sustainable development, for example, by funding health care, green buildings, wind farms, electric car makers and land reuse projects. The starting point of SF 3.0 is a positive selection of investment projects on their potential to generate social and environmental impact. This approach is also called impact investing. Financial viability takes the form of a fair financial return (which, at the minimum, preserves capital), which is a condition for sustainable development, to prevent the collapse of projects. What is a fair financial return? Can it be risk-adjusted market-rate returns or rates close to capital preservation? Are investors (and ultimate beneficiaries, such as current and future pensioners) prepared to forego some financial return in exchange for social and environmental returns? Social preferences play a significant role for investors in socially responsible investment (SRI) funds, while financial motives appear to carry less weight. However, in advance, the ultimate effect of impact investing on financial return is hard to predict. Beforehand, there is no indication that corporate socialenvironmental performance harms corporate financial performance. However, the evidence on SRI—which incorporates ESG criteria—shows mixed short-term results. From a long-term value creation perspective, corporate governance suggests companies have to develop an outside-in perspective by asking how they can effectively and proportionally help solve social and environmental challenges. In line with legitimacy theory, an organisation has to justify its existence through legitimate economic and social actions that do justice to the society in which it operates or the environment (Burlea-Schiopoiu & Popa, 2013).

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Legitimacy theory underpins SF 3.0, which targets long-term value creation for the common good. An outside-in perspective can align a company with what is happening at the macro level. Regarding the environment, this perspective starts with the planetary boundaries or other ecological limits. SF 3.0 respects the natural environment, which, in particular, encourages companies to contribute to the circular economy and join the worldwide energy transition. This orientation is a critical point. Schoenmaker and Schramade (2019) point out that private sustainable business and finance, despite their merits, may fail to align with sustainable development sufficiently. They give two reasons for this shortcoming. First, there is the so-called fallacy of composition: The private sector tends to observe geographic and time horizons for business success which are not wide enough to honour the interests of future generations. Second, a border problem exists: Companies may shift to other sectors or countries to escape regulation.

One and Two-Tier Models European firms typically have a two-tier board of directors. For example, the German Corporate Governance Code demands that companies have two boards: the management board (executive board) and the supervisory board. The supervisory board must supervise, appoint and dismiss management board members, advise and monitor the management board and monitor them (Jungmann, 2006). As explained before, nowadays, corporate governance is much broader than checking on management directors. Unlike most countries in Europe, the United Kingdom has a one-tier board. In the one-tier board model, management and control fall under the board of directors (Hopt & Leyens, 2004; Jungmann, 2006). This board of directors comprises executive directors, employed as managers by the corporation, and non-executive directors, who are not involved in the corporation’s daily activities but have control tasks. In practice, senior managers perform management duties without having to be board members. The differences in tasks between executive managers and non-executives are comparable with those between the Management Board and the Supervisory Board in the two-tier system. Also, the US has a one-tier system. Companies organised as corporations have a ‘board of directors’, while partnerships and sole proprietorships (as legal identities) do not have boards. The corporate charter defines the board’s duties, which, in turn, is structured by state and federal law. Boards have members, usually called ‘directors’, elected by the shareholders. The board typically hires a CEO, president and other officers to run the company’s day-to-day operations under the board’s supervision. It is possible to evaluate corporate governance from different angles (Pruijm, 2010, Chap. 2):

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• From a business-administrative point of view, there is a need for good management based on well-thought-of strategies, motivating leadership and effective management systems. • Economically speaking, the company is to create economic value which can justify its existence. • Corporate sustainability implies that value creation has to be sustainable by following the three Ps (People, Planet and Profit); failure to achieve this may slur a company’s corporate governance. • From a juridical point of view, a company’s board is responsible for what happens in a company; it represents the company as a legal identity. The governors are legally bound to display responsible stewardship over the company’s material and immaterial assets. Once adopted as a prominent issue and integrated with all business processes, corporate sustainability has consequences for each of these eight items.

Bookkeeping Scandals Various bookkeeping scandals around the beginning of the twenty-first century have caused stricter regulations regarding bookkeeping and audits by external accountants. In the USA, these culminated in the Sarbanes-Oxley Law (SOX) of 2002. This law makes strict requirements regarding the independence of external accountants and the independence and knowledgeability of a company’s supervisory directors (see Box 7.2). This law forces senior management to bear greater responsibilities for providing reliable figures (The CEO and CFO in person are held responsible for truthful reporting). At the same time, fraud has become subject to heavy punishment. The year 2015 treated the world to the Volkswagen emissions scandal—also known as ‘dieselgate’—when the US Environmental Protection Agency issued a notice of violation of the Clean Air Act to the Volkswagen Group. The agency found that Volkswagen had intentionally limited emission controls of turbocharged direct injection (TDI) diesel engines to laboratory-only emissions testing. This practice made the vehicles’ NOx (a generic term for nitrogen oxides) output meet US standards. Box 7.2 Bookkeeping Scandals and Stricter Regulations The bookkeeping scandals that took place at the beginning of this century clearly demonstrate that the existing corporate governance structures are not always successful in ensuring ‘good government’. A well-known example is ENRON (and in its wake, accountancy firm Andersen), which, by manipulating its accounts, contrived to make up large profits, on the basis of which the management received huge bonuses. Victims were large numbers of investors (continued)

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Stakeholder Management

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Box 7.2 (continued) who saw the value of their security documents dwindle, while large numbers of employees witnessed the evaporation of their work and pension rights. The situation was characterised by strong pressures on staff to realise short-term profits, efforts to tie up supervising directors and external accountants with financial rewards and persuade politicians to deregulate the energy sector and allow self-regulation of the accountancy sector (see, e.g., Smith & Quirk, 2009, Chap. 10). However, they emitted as much as 40 times more NOx in the real world. This scandal resulted in the payment of hefty fines by the automotive industry (see Box 7.3). Other car makers appeared to be guilty of similar infringements. Box 7.3 Dieselgate As Europe looks to cut down on its emissions footprint to offset the worst effects of climate change, 13 of the continent’s leading automotive manufacturers (guilty of the same fraudulent acts) face a combined fine of €14.5 billion. According to new estimates from PA Consulting, Volkswagen will face the heaviest individual fine, being hit with a €4.5 billion bill after a surge in uptake for its petrol-powered vehicles. While this seemed like a hefty fee at the time, it paled in comparison to the €29 billion in public health damages the actual scandal had resulted in. According to research from the Radboud University Nijmegen in relation to social consequences derived from Volkswagen’s fraudulent activity, considerably more noxious pollutants, particularly nitrogen oxide, were pumped into the air than legally permitted. As a result, the scientists contended that the extra emissions resulted in the loss of 45,000 healthy life years globally, of which 44,000 were based in Europe. Source: https://www.consultancy.uk/news/23463

7.2

Stakeholder Management

Over the last few decades, corporate governance has become much broader than before. The company confronts various parties able to influence it and vice versa. These are called the company’s stakeholders. To them belong the traditional stakeholders (i.e. the capital providers), employees and their organisations, customers and the suppliers of goods and services. In addition, the government is one of the stakeholders, as it has an apparent (and possibly decisive) influence on a company’s performance through taxation, grants, licensing and inspection. Besides these primary stakeholders (who have, by definition, a transactional relationship with the company), there may also be other stakeholders who interfere with the company’s course of action, such as various interest groups, NGOs and the media. A company

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should take account of these social stakeholders and communicate with them. Therefore, there is a direct connection between corporate governance and stakeholder management. The recurring instabilities and complexities of today’s economy complicate companies’ efforts to find a suitable course of action. That is why involving stakeholders in deciding how to operate is significant. After all, they often share the same business climate and are interested in what a company they relate to undertakes.

Stakeholder Management in Steps Stakeholder management means sensibly building relations with stakeholders and communicating with them as effectively as possible. Although it is logical not to be restrictive in identifying its stakeholders, the means available must be used as effectively as possible, which implies prioritisation. Here, the following steps apply (see also Preble, 2005): Identification of stakeholders and setting priorities. Identification of areas of interest showing opportunities for commonly strengthening sustainability. Communication with a selection of stakeholders to upgrade relations and set up forms of communication. Ad 1. Identification and setting priorities. When prioritising stakeholders, one should realise there are different types of them. Mitchell et al. (1997) provide three criteria to discern stakeholders: The stakeholder’s power to influence the company The legitimacy of the stakeholder’s desiderata and requirements in terms of correctness, legal and moral acceptability and fairness The urgency of what the stakeholder wants to achieve: How crucial is it? These three features make it possible to distinguish different types of stakeholders. Latent stakeholders are characterised by just one of the three features and therefore are not very relevant, at least for the time being. Changes may occur; for instance, a stakeholder with a legitimate claim but without power may gain power at a particular moment by starting a court case or obtaining public support through the media. Moreover, if there is a threat of a boycott, then the case becomes urgent. Such dramatic incidences have led companies to broaden and intensify their stakeholder management (such as in the case of Nike and Shell). Ad 2. Identifying opportunities to reinforce sustainability through collaborative action. Stakeholders may sometimes get attention for negative reasons; that is, they could, in one way or another, cause inconvenience to the company. Some stakeholders can be important in implementing a company’s strategy, for instance,

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Corporate Social Responsibility

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innovation and distribution. Then it is crucial to win such stakeholders over to one side and agree on working together. It will depend on the negotiation process whether certain inconsistencies in interests vanish, allowing sufficient cohesion to be successful. Ad 3. Intensifying communication with selected stakeholders and making the collaboration work. After identifying, analysing and prioritising stakeholders, concrete plans for achieving sustainability goals must be made. Such plans involve exchanging relevant information and deciding on the necessary budgets. It should be agreed in advance how costs and benefits will be shared. Ad 4. Monitoring and control. The newly developed stakeholder relations have to be maintained. Based on previously arranged procedures, monitoring and control can play a part in keeping up effective collaboration with stakeholders. These tools follow the well-known business cycle based on the plan-do-check-act template.

7.3

Corporate Social Responsibility

CSR is a company’s commitment to responsibly manage and be transparent about its activities’ social, environmental and economic effects. CSR activities targeting society must be consistent with what the company communicates with shareholders, co-workers and customers (see also Adams et al., 2018). It can be wise to involve various stakeholders in the company’s strategic planning cycle (see also Goodijk, 2009).

Strategic CSR In this context, it is essential to introduce the concept of strategic CSR to ensure that CSR integrates into the company’s strategy and implementation. Strategic CSR moves beyond ‘good corporate citizenship’ and reduces harmful value chain impacts. Although strategic CSR must base itself on a broad practice of responsible business, it also selects a limited set of company-specific initiatives whose social and business benefits are significant and distinctive (Wolters, 2019). Porter and Kramer (2006) introduce the concept of shared value, highlighting what strategic CSR could entail. Strategic CSR unlocks the shared value of investing in social contexts that directly or indirectly strengthen company competitiveness. A symbiotic relationship develops: the success of the company (including its supply chains) and the community’s success reinforce each other. However, such a relationship does not always emerge (Crane et al., 2014). Most of the time, strategic CSR takes shape by adding a social dimension to a company’s value proposition, making social impact part and parcel of corporate strategy.

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Undeniable Corporate Responsibility Both internal and external stakeholders can—and often should—have a say in a company’s CSR policy. However, senior management cannot hide behind the opinions of others. Instead, a company’s responsibility should be assessed against actual environmental impacts, health impacts and other sustainability issues. Beyond the immediate adverse effects, in this context, we once more touch on the essence of sustainability: the interests of future generations. If current stakeholders lack sustainability knowledge or are not interested in future generations, the company must not be led astray by them. The company’s moral responsibility for a sustainable future is at stake in such a situation. Without taking that responsibility, sustainable value creation is not possible. Here, we recognise that corporate governance, CSR and corporate sustainability come together as a coherent set of matters that companies should take to heart.

Coherence in CSR Policies Corporate governance and stakeholder management are major aspects of implementing Corporate Social Responsibility (CSR). CSR consists of various, often heterogeneous, parts. In many cases, before naming it in terms of corporate governance or CSR, many companies had already implemented policies (albeit partially and incompletely) in the various areas of the three Ps, that is, the three issues of People, Planet and Profit that comprise CSR. Such policies may include an environmental policy, a code of conduct for communicating with customers and suppliers and a coherent HRM policy. Available governance rules, explicit administrative frameworks, management systems and forms of stakeholder involvement often support these policies. What else should be done to shape a company’s CSR? The answer is implementing a coherent, explicit and accountable CSR policy. As long as coherence is absent, there may be doubts about the importance that a company attaches to it.

ISO 26000 In 2010 ‘The Guidance on Social Responsibility’ (ISO 26000:2010) was published. It guides all types of organisations, regardless of their size or location, concerning: • • • •

Concepts, terms and definitions related to social responsibility The background, trends and characteristics of social responsibility Principles and practices relating to social responsibility The core subjects and issues of social responsibility

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• Integrating, implementing and promoting socially responsible behaviour throughout the organisation and, through its policies and practices, within its sphere of influence • Identifying and engaging with stakeholders • Communicating commitments, performance and other information related to social responsibility ISO 26000 provides clarity on both the content and the process of CSR. It distinguishes seven general principles of social responsibility, which apply to seven core subjects (worked out into CSR issues): accountability, transparency, ethical behaviour, respect for stakeholder interests, the rule of law, international norms of behaviour and human rights. Moreover, ISO 26000 holds more specific principles, such as environmental principles. However, it is likely that for the individual company, not all CSR issues are equally important. There are specific priorities based on relevance and urgency. Nevertheless, one should wait to drop an issue quickly. The first step is identifying all issues that could be relevant to one’s company; at this stage, each issue deserves attention. During this screening process, one has to involve the company’s stakeholders. After that, one can set priorities: What are the CSR items which a company’s CSR policy must pay attention to? This initial audit is a kind of impact analysis by which one investigates the following: • Which social and ecological effects are inherent in the company’s operations (relevance). • Which stakeholders (also in the supply chains) are affected by them (significance). • What the company can do to influence the business environment (sphere of influence) (Moratis & Cochius, 2010).

7.4

Sustainability Reporting

Communication with the various stakeholders is an essential part of CSR. Mandatory forms of sustainability reporting exist depending on the size and nature of a company. Many companies already have separate environmental and social reports. Long-term targets on emission reductions may be agreed upon between companies and governments. Part of such an agreement is reporting on whether these targets are met. Sustainability reporting encourages companies to be transparent about operating and practising sustainability. Companies which have adopted annual sustainability reporting could consider using it to flag the quality of their operations. Through this, they can distinguish themselves in the market. Sustainability reporting also strengthens internal management so that risks can be better controlled and financial performance improves. Various stakeholder groups may be interested in sustainability reports. For instance:

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• People living close to a plant will take an interest in the health and safety aspects of emissions. • Consumers may be interested in product safety and ethical issues. • Investors are likely to focus on a company’s environmental and social reputation and indicators reflecting its financial strength. The actual accomplishment of sustainability reporting requires careful preparation and planning. A company of some size needs the cooperation of a broad group of employees in this matter. It is also important to consult with the various stakeholders to know what information (indicators) interests them. The actual sustainability reports can appear in different ways: printed, digital or a combination. There are different forms of follow-up, such as interactive communication on the website (such as questions and answers) or special meetings with external groups to discuss the reporting (or specific chapters). Systematic and efficient sustainability reports must directly connect to a company’s information system. It belongs to the responsibility of the CFO.3 See also, Box 7.4. ISO 26000 provides clarity on both the content and the process of CSR. It distinguishes seven general principles of social responsibility, applied to seven core subjects (and worked out into CSR issues). The seven general principles are as follows: accountability, transparency, ethical behaviour, respect for stakeholder interests, respect for the rule of law, respect for international norms of behaviour and respect for human rights. Moreover, ISO 26000 holds more specific principles, such as environmental principles. However, it is likely that for the individual company, not all CSR issues are equally important. There are certain priorities based on relevance and urgency. Box 7.4 Corporate Governance and CSR Reporting In various countries, companies whose shares are traded publicly are obliged to report on their CSR policies as part of their corporate governance. For instance, in the Netherlands, this is the result of the 2008 adapted Code Corporate Governance of the Frijns Commission. Moreover, the Dutch Council for Annual Reporting has issued Guideline 400, which follows the internationally recognised Global Reporting Initiative (GRI). On January 5, 2023, the Corporate Sustainability Reporting Directive (CDRD) entered into force. This new EU directive modernises and strengthens the rules about the social and environmental information that companies have to report. A broader set of large companies and listed SMEs will now be required to report on sustainability—approximately 50,000 companies in total.

3

Ernst & Young Magazine-2-2010.

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Nevertheless, one should not be inclined to drop an issue quickly. The first step is identifying all issues that could be relevant to one’s company; at this stage, each issue deserves attention. During this screening process, one has to involve the company’s stakeholders. After that, one can set priorities: What CSR items should be part of a specific company’s CSR policies? This initial audit is a kind of impact analysis; it investigates the following items (Moratis & Cochius, 2010): • Relevance: Which social and ecological effects are inherent in the company’s operations? • Significance: Which stakeholders (also in the supply chains) are affected by them? • Sphere of influence: How can the company influence its stakeholders? Companies leading in sustainability reporting issue reports that go into finances and sustainability in an integrated manner. It can be expected that this development will continue with stricter verification standards.4

Governance Gaps in Global Value Chains There can be various kinds of governance gaps at different levels. One type of governance gap is a lack of governance in the global value chains of Multinational Enterprises (MNEs). Governance gaps are severe in international supply chains in which suppliers (often from developing countries) have significantly less power than buyers (often from industrial countries) (Gereffi et al., 2005). Examples of such captive chains come from industries such as textile, toys, shoes, coffee and electronics (e.g. meagre wages and horrible labour conditions). These gaps have led to numerous publications on the ethical behaviours of MNEs and their responsibility for social and environmental issues. The ethical conduct of MNEs is of particular interest. Their international scale complicates efforts to answer moral questions because of the plurality of norms, values, cultures and international regulations (Burritt et al., 2020; Scherer & Palazzo, 2007). Therefore, the business ethics literature has moved to questions about MNEs’ responsibility towards governance gaps along their global value chain (van Tulder et al., 2009). There is a drive to go beyond individual cases and establish a framework (such as a behavioural code or an agreement) for continuous better behaviour. MNEs take responsibility for governance gaps, mainly for economic reasons. MNEs may worry about reputational risks created by NGO campaigns or negative media coverage, which may harm their market position. In some instances, sustainability and economic gain go hand in hand (e.g. saving on raw materials also reduces production costs). Also, MNEs may strive to take action to prevent legislation,

4

See, e.g., http://examples.integratedreporting.org/home

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attempting to avoid uniformly imposed measures. Other motives may originate from moral principles that an MNE wishes to apply in its home country and everywhere in its reach. Such ethically motivated policies may result from internal or external pressures. Schrage and Gilbert (2019) introduce the concept of political corporate social responsibility. Interestingly, this concept brings together the concepts of Corporate Governance and CSR. Today, MNEs increasingly take responsibility for global governance issues, called the ‘politicisation’ of the private firm in the business ethics literature. The resulting notion is that of what is called political corporate social responsibility (PCSR). Within PCSR studies, governance is the multilateral process of defining and implementing global rules and providing global public goods through the interplay of governments, civil society and businesses. Many scholars encourage MNEs to collaborate with multiple actors when facing governance gaps (Dentoni et al., 2018). PCSR primarily focuses on shifting regulatory efforts from governments to MNEs in the international arena. However, we also see forms of blending public and private authority, which have different governance implications: support and shadow of hierarchy (Eberlein, 2019). Under support, governments encourage, facilitate or endorse private regulatory initiatives without prescribing or directing them. Shadow of hierarchy means that private governance regimes operate in line with what governments will likely approve. There can also be ‘external shadows’, that is, international organisations or courts with leverage in host countries. PCSR studies often suggest that the role of MNEs in filling governance gaps is relatively neutral. However, this suggestion needs revision as many current governance gaps are related to the exploitative nature of MNEs’ activities in their global value chains. Rather than building trust and long-term relationships, MNCs tend to leverage their power over suppliers by consistently seeking the lowest unit price (Wright, 2016). This inequitable situation goes together with mistrust and imbalances. In the area of labour relations, there are governance gaps because of a lack of unionisation. Trade unions can create a certain balance of power in global chains through strikes and tariff negotiations (Gereffi & Lee, 2016). However, in many countries, workers organise very little into trade unions because of the hostile treatment of governments or companies. Low levels of unionisation are widespread in labour-intensive industries, which employ young, uneducated women and migrant or informal workers with little knowledge of their labour rights. As for NGOs, inactive governance mechanisms could stem from their inability to campaign in autocratic countries where they are prohibited, including China. Most NGOs use governance mechanisms such as petitions and protests. To be effective, these efforts require NGOs to have considerable influence within global value chains to the extent that they might even take over certain trade union functions (Williams et al., 2017). However, NGOs are not always successful in establishing such positions. In developing countries, NGOs often experience pressure from governments to back off, even if they are not entirely prohibited. For instance, because of government interference, their protests and petitions receive no media coverage, so

7.4

Sustainability Reporting

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they cannot influence industrial actors. In addition, inequitable governance mechanisms may reflect an imbalanced representation of NGOs. In developing countries, influential NGOs are often underrepresented in poor and rural areas (Bhattacharjee et al., 2009). There are several cases where the state has lost its role as the dominant regulator, leading to a situation in which firms, industry groups and civil society actors assume regulatory roles. For a long time, especially in large Western countries, governments have declined to play regulatory roles, not because of a lack of power but because of an ideological belief that the world is best served by ‘free’ markets and small governments. Here we touch upon the influential ideology of neoliberalism, as discussed before. This belief has had significant extraterritorial effects on policy standards globally (Eberlein, 2019). However, there are signs that neoliberalism is losing ground. Key Notions and Concepts • Traditionally, corporate governance is characterised by the separation between a company’s capital providers and those who lead the company. • Today, corporate governance is a matter of administering a company within the confines of the law and generally accepted ethical principles. It is shaped by legislation, codes of conduct and company-based procedures. • It is appropriate to also pay attention to business continuity as a factor in defining rules for corporate governance. Business continuity is more than having safety regulations; it also includes recognising financial and control problems in times of crisis. • Special Corporate Governance codes have been developed in various countries to prevent crises in the area of Corporate Governance. The Sarbanes–Oxley Act of 2002 prescribes strict reporting and decision-making rules in the USA. • Corporate governance also requires considerable attention to applying digital information systems (software) to administer a company. • Where sustainability objectives are part of corporate strategy, the implementation of sustainability is within a firm’s corporate governance promoted by general management-support software. • In many sectors, sustainability creates new perspectives, which could imply a drastic change in competitive relationships. • Unlike most countries in Europe, the United Kingdom has a one-tier board. In the one-tier board model, both management and control belong to the board of directors. Also, the USA has a one-tier system. A ‘board of directors’ is associated with companies organised as corporations, while partnerships and sole proprietorships (as). • Over the last few decades, corporate governance has been conceptualised much broader than before. The company has to deal with all parties (stakeholders) who can influence it and vice versa. That is a matter of stakeholder management. • Corporate Social Responsibility (CSR) can be seen as part of a company’s corporate governance. CSR is a company’s commitment to responsibly manage

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its operations’ social, environmental and economic effects and be transparent about it. • Strategic CSR ensures that CSR is integrated into the firm’s strategy and implementation. • Governance gaps are severe in international supply chains where suppliers have significantly less power than buyers. MNEs increasingly take responsibility for global governance issues. Many scholars encourage MNEs to collaborate with multiple actors when facing governance gaps.

References Adams, M., Walker, T. B., & Magnan, G. (2018). How corporate social responsibility can be integrated into corporate sustainability: A theoretical review of their relationship. The International Journal of Sustainable Development and World Ecology, 25(8), 671–681. Bhattacharjee, A., Gupta, S., & Luce, S. (2009). Raising the floor: The movement for a living wage in Asia. New Labor Forum, 18(3), 72–81. Burlea-Schiopoiu, A., & Popa, I. (2013). Legitimacy theory. In S. O. Idowu, N. Capaldi, L. Zu, & A. D. Gupta (Eds.), Encyclopedia of corporate social responsibility. Springer. Burritt, R. I., Christ, K. L., Rammel, H. G., & Schaltegger, S. (2020). Multinational enterprise strategies for addressing sustainability: The need for consolidation. Journal of Business Ethics, 164, 389–410. Cikaliuk, M., Erakovic, L., Jackson, B., Noonan, C., & Watson, S. (2020). Corporate governance and leadership (Chap. 7). Cambridge University Press. Crane, A., Palazzo, G., Spence, L. J., & Matten, D. (2014). Contesting the value of ‘shared value’. California Management Review, 4(4), 130–153. Daily, C. M., Dalton, D., & Canella, A. A. (2003). Introduction to special topic forum corporate governance. Decades of dialogue and data. The Academy of Management Review, 28(3), 371–382. Dentoni, D., Bitzer, V., & Schouten, G. (2018). Harnessing wicked problems in multi-stakeholder partnerships. Journal of Business Ethics, 150, 33–356. Eberlein, B. (2019). Who fills the global governance gap? Rethinking the roles of business and government in global governance. Organization Studies, 40(8), 1125–1145. Gereffi, G., Sturgeon, T., & Humphrey, J. (2005). The governance of global value chains. Review in International Political Economy, 12(1), 78–104. Gereffi, G., & Lee, J. (2016). Economic and social upgrading in global value chains and industrial clusters: Why governance matters. Journal of Business Ethics, 133(1), 25–38. Goodijk, R. (2009). Chapter 3: Ondernemen in interactie met de omgeving. Het belang van stakeholdermanagement. In L. Moratis & M. van der Veen (Eds.), Basisboek MVO. Van Gorcum. Hopt, K. J., & Leyens, P. C. (2004). Board model in Europe - Recent developments in internal corporate governance structures in Germany, the United Kingdom, France, and Italy. European Company and Financial Laws Review, 135–168. Jungmann, C. (2006). The effectiveness of corporate governance in one-tier and two-tier board systems – Evidence from the UK and Germany. European Company and Financial Law Review, 2006, 426–474. Levine, R. (2005). Finance and growth: Theory. Mechanisms and evidence. In P. Aghion & S. N. Durlauf (Eds.), Handbook of economic growth (pp. 865–923). Elsevier.

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Merino, E., & Manzaneque, M. (2016). Board of Directors as a corporate governance mechanism. In E. Klein (Ed.), Corporate governance. Principles, practices and challenges (pp. 1–31). Nova Publishers. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Towards a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22, 853–886. Moratis, L., & Cochius, T. (2010). ISO 26000. Handleiding voor MVO. Van Gorcum. Pettigrew, A. M. (2009). Chapter 3: Corporate responsibility in strategy. In N. C. Smith & G. Lenssen (Eds.), Mainstreaming corporate responsibility. Wiley. Porter, M., & Kramer, M. (2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 79–92. Preble, J. F. (2005). Towards a comprehensive model of stakeholder management. Business and Society Review, 110, 407–431. Pruijm, R. A. M. (2010). Grondslagen van Corporate Governance. Leidraad voor behoorlijk ondernemingsbestuur. Eerste druk. Noordhoff Uitgevers. Scherer, A. G., & Palazzo, G. (2007). Toward a political conception of corporate responsibility: Business and society seen from a Habermasian perspective. Academy of Management Review, 32, 1096–1120. Schoenmaker, D., & Schramade, W. (2019). Principles of sustainable finance. Oxford University Press. Schrage, S., & Gilbert, D. (2019). Global business models and the social responsibility of multinational enterprises: Challenges and solutions. In C. Arnold, S. Keppler, H. Knödler, & M. Reckenfelderbäumer (Eds.), Herausforderungen für das Nachhaltigheitsmanagement. Globalisering-Digitalisierung-Geschäfsmodeltransformation. Springer Nature. Smith, N. C., & Quirk, M. (2009). Chapter 10: From grace to disgrace: The rise and fall of Arthur Andersen. In N. C. Smith & G. Lenssen (Eds.), Mainstreaming corporate responsibility. Wiley. Strikwerda, J. (2002, januari/februari). Wat is ondernemersbestuur? Aanzet voor een toetsingskader. Maandblad voor Accountancy en Bedrijfshuishoudkunde, 54–64. van Tulder, R., van Wijk, J., & Kolk, A. (2009). From chain liability to chain responsibility. Journal of Business Ethics, 85, 83–102. Williams, S., Abbott, B., & Heery, E. (2017). Civil governance in work and employment relations: How civil society organizations contribute to systems of labour governance. Journal of Business Ethics, 144, 103–119. Wright, C. F. (2016). Leveraging reputational risk: Sustainable sourcing campaigns for improving labour standards in production networks. Journal of Business Ethics, 137, 195–2010. Wolters, T. (2019). Chapter 2: Sustainable value creation. In J. J. Bouma & T. Wolters (Eds.), Corporate sustainability. The next steps towards a sustainable world. Routledge.

Chapter 8

Sustainability Accounting and Reporting

8.1

Introduction

Conventional accounting measures, plans and monitors an organisation’s finances. It tends to concentrate on stakeholders (internal and external) with a financial interest in the organisation concerned. Sustainability accounting is broader; it includes the interests of a greater variety of stakeholders than conventional accounting. Conventional accounting relies on generally accepted principles and practices, making it unsuitable to deal with sustainability. For example, the replacement of specific inputs or the subcontracting of specific production processes to reduce costs is likely to look different in sustainability accounting. Environmental impacts or social values may change a company’s whole value proposition. Therefore, we need new types of accounting and accountability to address sustainability challenges. Sustainability accountancy has been around for some time but has yet to take a dominant position. At least part of sustainability accounting (including controls) has become common in large corporations. They use many resources and have significant impacts. However, sustainability accounting is also relevant for other organisations, including NGOs and public sector organisations. Accountability is the need to report on the actions for which one has responsibility (Gray et al., 1996). Corporate accountability is a legal and moral obligation. It becomes concrete within a company’s environmental and social context. Sustainability accounting can be an early warning for developments that threaten the existence of a business calling for strategic change. There is a legal licence to operate and an implicit social licence to operate; the latter is less articulated than the first but can be equally important. Losing one’s social licence to operate can result from negative publicity leading to diminished customer interest, active consumer boycotts, adverse reactions by suppliers or protests via social media. We must ask ourselves which stakeholders and which issues are priorities for accountability. Organisations rely on various stakeholders to reach their goals. Powerful stakeholders deserve attention as they have a say in certain decisions. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_8

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Other stakeholders may have legitimate reasons for being consulted, such as where mutual coordination of certain activities can reduce costs or prevent environmental damage. Urgency means there is a need for prompt consultation with a stakeholder, for example, to minimise the negative impacts of an incident. There are various degrees of stakeholder participation in the company, from being informed to operating as partners. Specific stakeholders (e.g. NGOs promoting sustainability) are not part of a company’s supply chain but are influential because of their media impact. The various types of accountability should shape a company’s sustainability accounting practice. Materiality refers to themes, issues or incidents of significance to an organisation or its stakeholders. Materiality can focus on a company’s impacts on its stakeholders—or vice versa—its dependency on specific stakeholders and the environment. The introduction of sustainability accounting changes the issues of corporate materiality: there is a wide range of issues whose relevance may vary across regions, industries and stakeholder groups. As a result, materiality assessments are contextual and organisation-specific. Materiality assessments are essential to the sustainability accounting process, regardless of whether the organisation uses the information for internal decision-making or reporting to external stakeholders. Such differences also play a role in sustainability reporting. The company cannot report on every aspect of its activities; it must make particular choices. One guiding aspect is that the reporting should be on material issues.1 See also Box 8.1. The Global Reporting Initiative (GRI) standards comprise the most widely used sustainability reporting framework (freely available online). Which stakeholders have priority here is at the company’s discretion. Business leaders must understand that financial materiality differs from social and environmental materiality. Box 8.1 Defining Material Sustainability Issues ‘A sustainability issue is material to Unilever if it meets two conditions. Firstly, if it is considered a principal risk or an element of a principal risk, which could impact our business or performance. And secondly, if it is deemed to be important to our key stakeholders, including our people, consumers, customers (retailers), suppliers & business partners, planet & society (citizens, NGOs, governments) and our employees. We use our sustainability materiality assessment to identify priority sustainability issues across our value chain so that we are able to report on the issues of most interest to our stakeholders. We update our assessment every 2 years to make sure it reflects changes in our business and the external context’. Source: https://www.unilever.com/planet-and-society/sustainabilityreporting-centre/our-material-issues/ (accessed August 2022).

1

See, for instance, KPMG (2014).

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The Planet Element of Sustainable Business

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Table 8.1 Three domains of an environmentally conscious management (Bennett & James, 1998) Financial focus Nonfinancial focus

Own organisation Green financial management Recording of materials used and energy consumption

Supply chains Chain-oriented cost analyses

Society Costs of external effects

Analyses of material cycles and energy consumption in the supply chains

Calculation of environmental impact, both priced and non-priced.

The US-based Sustainability Accounting Standards Board (SASB) is less stakeholder sensitive; its materiality issues are reasonably standard in each industry. SASB concentrates more on the economic significance of sustainability issues, while GRI has a more diverse scope.2

8.2

The Planet Element of Sustainable Business

Sustainable business’s three elements are often referred to as ‘People, Planet and Profit’. This section goes into the Planet element, that is, the ecological environment (also indicated as ‘environment’ and ‘environmental’). To a great extent, a company’s supply chain determines the use of nature in terms of raw materials, equipment, logistics and the kind of technology applied. Supply chains provide numerous opportunities for savings and deployment of alternative materials and energy. Society (the third column of Table 8.1) is central to establishing priorities in light of current government policies and societal pressures. A company’s supply chain manager and senior management have to consider a variety of societal contexts, given that supply chains often cross borders. The society column includes two different types of environmental goals: 1. Environmental goals concerning internalising external effects (externalities) impact a company’s investment plans and value proposition through legal liabilities and reputational damage or gain. 2. Environmental goals deriving from moral values and responsible stewardship; these go beyond short time horizons and can positively impact employees and external relations. Concerning the first type of environmental goals, senior management should identify how to address externalities, mainly if they may result in third-party financial claims or meet future restrictive legislation. Policies in this area are a matter of regular senior management decisions to maximise the company’s long-term value. Some companies may take a defensive stance by involving legal advisers

2

See for different aspects of sustainability accounting: Laine et al. (2022).

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and lobbyists. Other companies are more sympathetic towards such claims, even if their legal basis is uncertain. The second type of environmental goals—inspired by moral considerations— may lead to a conflict with the shareholders. After all, shareholders could interpret such environmental goals as a kind of ‘on-the-job consumption’ reducing the company’s value. According to the international conception of corporate governance (as formulated by the American Law Institute), in certain situations, a corporate board is entitled to spend money on societal and humanitarian goals (Bradley et al., 1999), even if that spending seems incompatible with profit maximisation. These measures are not part of regular investment decisions; they require specific criteria, projects and capital budgets. How much can be spent on this is a matter of subjective judgement. Obtaining the green light for such projects (over and above economic or legal requirements) from the Supervisory Board or the Shareholders’ Meeting may be hard to obtain. It will depend on the management’s persuasiveness combined with the views and verdict criteria of the various company bodies. Humanitarian projects that derive directly from a company’s mission and vision are likely to be accepted and implemented. It is also possible that proactive citizens or change-minded shareholders ask for particular transformative strategies in the environmental or social field. At a certain point, the company may adopt such strategies as inevitable steps. Many companies adopt a passive approach to moral dilemmas; such an attitude implies a possible violation of social norms which condemn the ruthless exploitation of natural resources, child labour and other forms of exploitation. However, these social norms are under constant pressure or may lose strength when competition is fierce or financial gain is the sole objective. Irresponsible inaction may evoke a call for mandatory government policies. The internalisation of societal norms is less of a problem when a company knows its competitors also respect them. However, globalisation makes companies uncertain whether their competitors will stick to moral limits to economic exploitation. New competitors may appear on the market; their actual market behaviour and what is happening in their supply chains may remain hidden for a long time. Thanks to independent research and investigative journalism, one day, the moral record of large companies will come to the surface.

8.3

Eco-Efficiency

Eco-efficiency is an important concept as it shows how well companies deal with their inputs, which often originate from nature (environmental inputs); the processing of the inputs leads to harmful emissions of air and wastewater and the production of solid waste. As nature’s carrying capacity is limited, environmental inputs must be used as efficiently as possible.

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Eco-Efficiency

107

Eco-efficiency measurement occurs at the national, sector level or company level. It is also possible to include the supply chain by relating total sales at the end of the chain to the total CO2 and equivalents emitted. This sum must cover the complete array of input elements to realise the manufacturing and distribution of the final product. The relationship between eco-efficiency to costs can be measured in different ways. Often, analysts use eco-efficiency to benchmark a company’s performance against the sector or national average. Eco-efficiency emerged as a prominent topic when the World Council for Sustainable Development (WBSD) started to pay attention to it (Verfaille & Bidwell, 2000). Goods and services had to deal with fewer inputs and less environmental impact at all life cycle stages. To improve eco-efficiency, the WBSD has laid down the following objectives: • Smaller quantities of materials in goods and services (dematerialisation) • A lower energy intensity of goods and services • Reduced emissions of environmentally harmful substances and fewer (potential) risks associated with products and services concerning health and the environment • Improvement of the recyclability of products • Improvement of the efficient use of renewable resources • A broader application of the concept of eco-efficiency Eco-efficiency is the ratio of one output (the value of a product or service) to the total environmental input concerned. It is also possible to calculate the eco-efficiency of each separate input. Over time, it is possible to determine if the goal of greater environmental efficiency is within reach. It should be kept in mind that, whereas the concept of eco-efficiency is reasonably straightforward (economic value divided by environmental value), the indicators used and their system boundaries (company, sector, supply chain, country) are not fixed in advance. Eco-efficiency may also appear as absolute decoupling (as intended by various governments and the EU; see Box 8.2). This concept means that the environmental effects (inputs or emissions) are reduced in absolute terms, even if the production volume or economic value increases. Eco-efficiency as such does not require this; it will already improve as long as the economic value increases more than the environmental input necessary to produce it (in other words, when there is relative decoupling; see also, Box 8.3). Absolute decoupling is commensurate with the concept of ‘strong sustainability’ (as outlined earlier). It can add to eco-efficiency social requirements (health, poverty reduction, community development, personal development). Box 8.2 EU Reducing Greenhouse Gases EU leaders have agreed on a more ambitious goal for reducing greenhouse gases by 55% by 2030 rather than 40%. (continued)

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Box 8.2 (continued) The new target was reached after difficult all-night talks in Brussels. Poland, heavily reliant on coal, won a pledge of EU funding to help it transition to clean energy. The EU Commission will draw up detailed plans for all 27 member states to contribute to the 55% target, measured against 1990 CO2 emission levels. EU Council President Charles Michel hailed the agreement, tweeting, ‘Europe is the leader in the fight against climate change’. It is part of a global effort to tackle climate change by cutting atmospheric pollution, especially carbon dioxide (CO2) emissions. The Paris climate deal, signed in 2016, aims to keep global temperature rise well under 2 °C, preferably within a maximum rise of 1.5 °C. Environmental campaign groups say the 55% target does not go far enough. And the European Parliament, yet to debate the new target, has called for a 60% cut. Sebastian Mang of Greenpeace said, ‘The evidence shows that this deal is only a small improvement on the emission cuts the EU is already expected to achieve’. Greenpeace is urging a minimum cut of 65% in EU carbon emissions. That figure was also advocated by Johannes Wahl Muller of the Austrian green group Global 2000. Sou rce: https://www.bbc.com/new s/world-europe-55273004 (December 2020). As long as economic growth continues, absolute decoupling is necessary to keep the world economy within certain safe ecological boundaries. Although energy and material intensities have diminished over time, until now, there has yet to appear a clear indication that decoupling will be strong enough to neutralise the effects of continued economic growth. The question is whether global decoupling can be a technically and economically feasible target. Undoubtedly, companies can achieve much when taking sustainability seriously (see Jackson, 2009, Chap. 5). However, sustainability deals with many unwelcome side effects of our present economic system. Fundamental design problems cause a continuous flow of harmful materials into the environment. For instance, although recycling may nominally increase eco-efficiency, many undesirable substances continue to permeate the environment (see Braungart & McDonough, 2002; Chap. 2). It has become evident that a transition towards a fully circular economy and a transition towards non-fossil energy—to be supported by responsible consumer choices—are necessary to reach a truly sustainable economy. For instance, various sectors use excessive amounts of plastic in their products and packaging. Slow improvements are often publicised as significant signs of social responsibility, while one wonders whether these advancements could not have materialised 20 years earlier.

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109

Innovation and New Business Concepts Achieving absolute decoupling leads to radical innovations (in particular, in its design phase) to save the environment. Such breakthroughs are technological and impact business concepts and consumer choices. For instance, it is possible to launch services that replace the sales of material inputs. The service providers remain the owners of the material product; this ensures that the provider is interested in prolonging the product’s lifetime and developing ways of reuse and recycling. They can ensure an efficient and environmentally-friendly manner following the WBCSD’s seven objectives (see above). Other revisions could also include food crops and transportation distances. Why should the same food crops be available throughout the year regardless of the season and the distance it takes to produce them? Sustainability requires new food patterns considering seasonality and proximity and avoiding excessive transport movements.

End-of-Pipe Measures Initially, the generation of environmental data depended heavily on government emissions and waste policies. At that time, so-called ‘end-of-pipe’ measures attracted much attention; these are measures to mitigate the consequences of undesirable environmental effects associated with existing production processes. They do not alter the nature of the dominant production technology. For example, in air and water, filtration and purification prevent pollution from being discharged into the environment. Legislation may prohibit particular emissions; the companies involved must comply (assuming adequate enforcement policies). Other emissions or discharges may not be banned but are subject to certain levies to discourage them. Then, a company should assess which costs are lower: filters and purification equipment on the spot or the cost of investing in preventative technology that precludes emissions or discharges.

Preventative Technology The most sustainable technology is that technology which prevents pollution. Then, there is no need to consider protective and clean-up measures because, from the outset, certain substances cannot enter or leave the company. Whether a company chooses preventative technology depends on various matters, such as costs, government regulations or available subsidies. However, a company’s vision and competencies will also play a part.

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Other

Sustainability Accounting and Reporting

Overhead costs

overheads

Toxic waste

costs

Correct

Overheads costs

Costs

Costs

Product A

(toxic) Product B

Fig. 8.1 Two ways to allocate the costs of toxic waste

Box 8.3 Eco-Efficiency: Product or Company Schaltegger and Burritt (2000) preferably define eco-efficiency as ‘value added divided by added environmental impact’. One could adapt this definition depending on the problem and the availability of information. For instance, take the production of waste. When one considers one particular product, eco-efficiency can be defined as the contribution margin (the difference between the sale price and variable costs) per tonne of waste. In case one wishes to consider the entire company, it would be better to take operating profit per tonne of waste.

Allocation of Environmental Costs One of the first advantages of environmental accounting has been to open one’s eyes to the importance of correctly assigning environmental costs to the various products of the enterprise. Figure 8.1 may clarify this phenomenon based on a company producing two products. It shows overhead item Toxic Waste. The cost allocation may occur in two different ways: 1. The overhead costs of toxic waste go to total overhead costs first. After that, these costs are divided over the two products: a toxic product and a non-toxic one. This

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Eco-Efficiency

111

procedure implies that only a part of the costs relating to producing the toxic product goes to the toxic product. 2. All costs of toxic waste, including overhead, are directly allocated to the toxic product. This allocation is the only way to obtain a correct picture of the toxic product’s high environmental costs. That insight could lead to its replacement by another, much less harmful, product. Even though the second approach seems logical, it may not always be common practice. For instance, managers may continue to limit transparency in cost structures to avoid having to take action. Cost accountants must play a critical role here, as the information they present to the management must not disguise relevant facts.

Organisational Partitions The visibility of costs by a correct allocation is thwarted by poor accounting and organisational compartmentalisation within companies (and governments), which precludes an integrated consideration of costs and revenues. For instance, different profit centres (divisions, business units) can mask an integrated financial perspective. A sustainable product, for instance, could lead to less waste, less energy consumption or less maintenance. These effects may involve notable cost reductions. However, as long as ‘lowest price’ dominates purchase decisions, a company will tend to ignore these cost advantages, especially if accounting practices fail to highlight them (under such circumstances, decisions taken may appear to be ‘penny wise, pound foolish’).

Preventative Technology Environmental accountants have pointed out that ‘residual materials’ eligible for disposal consist of substances which once were bought and involved in logistics and storage. By calculating these costs and explicitly linking them to the residual materials, investing in preventative technologies (instead of paying for waste disposal and purchasing end-of-pipe technologies) could well appear to be very advantageous. After all, the greater the visible costs, the greater the benefits of replacing the production methods that cause them. Because of inadequate cost allocations, potential cost savings remain hidden. This is reflected in Fig. 8.1.

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Diversity in Internal Environmental Costs A firm incurs internal environmental costs to control and reduce the adverse environmental effects of doing business (Hafkamp and Bouma, 1995, p. 169). Environmental costs can be diverse. Therefore, categories must be established that provide a clearer picture of the nature and context of environmental costs. Furthermore, in the case of environmental costs, the well-known cost indications apply: ordinary costs, extraordinary costs (costs relating to incidents), direct costs, indirect costs and also potential costs (costs which are expected to occur in the future). Environmental costs can be split into those associated with inputs and those associated with outputs. Table 8.2 gives an overview of both angles.

Environmental Activities and Environmental Costs Hafkamp and Bouma (1995) provide an alternative way of categorising environmental costs based on a checklist of environmental activities and environmental costs, which indicate what matters in practice. They distinguish various aspects of environmental management activities: prevention, cleaning-up, acquiring environmental permits, juridical procedures and other activities. They also distinguish three conventional categories of costs. One can make cost matrices for various operational areas based on these two angles. Table 8.3 gives an example of the area of soilrelated environmental costs.

Environmental Benefits After paying attention to environmental costs, it is also important to consider environmental benefits. In many cases, environmental benefits in financial terms arise in the form of saved environmental costs (such as less energy, fewer material Table 8.2 Internal environmental costs: associated with inputs and outputs

Ordinary Extraordinary

Input-related environmental costs. Examples Excises, purchase of materials Fines, loss of products

Direct Indirect

Purchase of materials Handling of materials

Potential

Unexpected liabilities

Output-related environmental costs. Examples Purification of wastewater Cleaning up of the consequences of an explosion Product-specific prevention of pollution Administration/records environmental regulation Costs ensuing from possible cleaning of contaminated soil

8.3

Eco-Efficiency

113

Table 8.3 Environmental costs: soil (Hafkamp & Bouma, 1995) Costs of capital

Operational costs

Exceptional costs

Total

Environmental action Prevention Cleaning-up Licensing Legal procedures Other Total

inputs, and less storage). Moreover, direct environmental benefits may be revenues from new products that arise from the application of clean technologies, such as recycled products. The additional turnover, thanks to the environmental improvement, may count as an environmental benefit. Indirectly, environmental benefits can emanate from a better company image or better-motivated workers. Mogezomp et al. (1992) provide the Environmental Quality Costs Model, which gives in its own way insight into the nature of environmental costs and into the possibilities of prevention. See Box 8.4. Box 8.4 The Environmental Quality Costs Model (Mogezomp et al., 1992) 1. Prevention costs: costs of preventing environmental effects as early in the production process as possible. 2. Process-integrated correction costs: costs resulting from adapting and adjusting existing production processes, installations and steering processes aiming at reducing environmental effects. 3. Internal failure costs: Costs resulting from environmental effects that could not be prevented earlier in the production process (such as internal waste collection). 4. External failure costs: Costs resulting from handling the final consequences of environmental effects (which could not be prevented), such as costs of external waste disposal and dealing with complaints filed by other parties relating to environmental effects. The size of each cost category is determined by different types of costs (such as interest, depreciation and raw materials). Which cost is relevant depends on the firm. Dividing environmental costs into prevention, correction and failure costs may be very useful as they prevent an inconsistent consideration of environmental costs over the years. Nonetheless, the model’s division of environmental costs is only an imprecise estimate. Therefore, using the model to compare environmental costs between companies may be rather rough. In general, one may say that the (continued)

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Box 8.4 (continued) determination of the absolute value of environmental costs is far from simple. However, one could use the previously mentioned types of environmental costs to determine the number of relevant ratios, turn them into index numbers and follow them over a number of years. The ratios’ relevance is particularly a matter of whether they are helpful in determining whether a previously formulated policy is actually carried out.

8.4

Total Cost Accounting

The various aspects of environmental accounting discussed before had already emerged in the 1990s within Total Cost Accounting (TCA). Although this costing method broadened the usual scope, it remains limited to the individual company and therefore does not consider, for instance, the supply chain. TCA evolved to increase the chances for corporate environmental investments because the usual present-value calculations (indicating which investments are economically justifiable) appeared to involve just a limited set of direct and indirect costs. The benefits of environmental investments (directed at improving the production process) are primarily a matter of cost savings. As the recognised costs are narrow, so will the cost savings involved. That narrowness curtails environmental investment benefits and makes the present value of contemplated environmental investments unrealistically low or negative. Therefore, these investments fail to compete with other types of investments that a company could make. Within the framework of TCA, to attain a better insight into current costs, the following recommendations are worth considering: • Conventional indirect costs should be allocated to individual products more accurately. This issue has already passed in review (see Fig. 8.1). • Consider various costs hidden in the company’s financial administration (hidden costs); these costs could make a notable difference in some instances. In particular, one could think of management costs such as feasibility studies, training sessions, checks and reports, licencing costs and follow-up costs. • Allow for costs that may arise depending on the situation (contingent costs). Examples are costs associated with incidents and calamities, giving rise to substantial costs, such as cleaning-up costs, fines, legal costs, damage to property and extra costs resulting from a temporary decrease in productivity. One can include these costs by taking into account probabilities. • Accept relational costs, meaning costs to maintain good relations with parties interested in the company’s environmental performance. In cases involving the Net Present Value, it makes sense to question certain routines, such as automatically applied high discount rates, short payback periods and hurdle rates. Certain Interesting environmental investments are possible if they

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are permitted to repay a loan over a longer period than usually considered. If the usual payback period is 5 years and the usual discount rate is 10%, then such an environmental investment may not be selected; other investments will take priority. A company’s business economist and controllers have the (moral) duty to look into these matters and wonder whether the routinely handled values and pre-suppositions are justifiable in light of the company’s sustainability objectives.

8.5

Environmental Costs Throughout the Supply Chain

Hafkamp and Bouma (1995) already referred to the supply chain when defining environmental costs. These are costs to control and reduce environmental impacts from winning of raw materials up to the final discarding and possibly refurbishing and reusing of a product or service. How far one should pursue such cost calculations depends on their purpose. In the 1990s, several new ideas on environmental policies took supply chains explicitly into account. These ideas have led to a great interest in the quantitative side of environmental costs: the amounts of input, emission and waste inherent in a particular supply chain. To take that up, Life Cycle Analysis (LCA) came into existence. Accountants can execute an LCA either in a limited or full-fledged way. A complete LCA requires much research. Therefore, it will apply only in decisions on large investments carrying significant societal interests. Reduced LCAs will mostly focus on differences between alternatives, as in concrete cases, a limited number of cost categories will likely stand out. Often, one uses averages per region or sector. There are databases available which contain such averages.

Sustainable Procurement Sustainable procurement is a prominent aspect of sustainable chain management. As mentioned, purchasing against the lowest price will not necessarily minimise running costs. Other factors are a product’s longevity and how often it is subject to defects and failure. Also, aspects of user-friendliness, volume and costs of disposal are essential. The concept of Total Costs of Ownership (TCO) considers all these aspects. When applying TCO, environmentally friendly products seem to perform better than environmentally unfriendly products. That means, even if an environmentally friendly product is higher priced than other products when purchased, eventually, it can turn out to be the most cost-effective solution when all effects are considered. In other cases, to come to grips with all cost (savings) implications, it may be necessary to take an extra step further down the chain. It may be that, rather than the company buying the environmentally friendly product itself, other downstream companies reap the advantages, for instance, because of a switch in raw materials (this effect is known as Total Value of Ownership).

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Life-Cycle Costing When cost savings throughout the chain matter, adequate calculations and allocation of environmental costs come in a new light. Life-cycle costing may help out, especially in the case of large investments; it opens up the possibility of making the costs of investing, use, control and maintenance mutually comparable. Thanks to that, it is possible to assess and compare the costs of alternative investments. This method applies to all costs involved or to a subset, such as environmental costs. As a complete application of ‘life-cycle costing’ requires a host of data and may be very time-consuming, it is seldom carried out to the full. However, a shortened (even qualitative) version could also be helpful, as it may open one’s eyes to cost implications which previously remained unnoticed.

Society and External Effects Companies do not receive a bill when their external effects are negative or enjoy any material benefit when, they are positive. Various kinds of emissions of harmful substances are cases of negative external environmental effects, such as damage to nature and biodiversity caused by industrial processes and vehicles. In conventional business, these external effects do not appear in companies’ accounts. However, part of them may affect a company’s cost accounts indirectly. For example, its employees may not turn up because of health problems caused by its production process (such as damage to the bronchial tubes from atmospheric pollution). However, such costs will likely remain undisclosed unless special accounting makes them visible. There already is much environmental regulation. Legal measures (rules and levies) may reduce or prevent adverse external effects. Furthermore, actions undertaken by NGOs or more informal protest movements may lead to substantial reputational damage (leading to a reduction in sales). Full-cost accounting (FCA) intends to quantify the negative external effects in cost terms, including forgone revenues, to determine a good’s or service’s full costs. Even though calculating the costs associated with external effects is hard to do accurately, working with a full-cost accounting framework helps raise awareness of what corporate activities may lead to and stimulates investments which take a wider range of effects into account. Beyond all this, FCA could also play a role in realising a company’s ethical calling to close the gap between its private-economic value and its value to society. Company owners must face the possibility that their company’s societal value is negative even though the company manages to continue its business. A company may have to adapt or replace its production processes to close this gap. This transformation may imply altering one’s product range and developing new market segments susceptible to sustainability. Here, FCA will likely clarify the critical issues, even based on a (partly) qualitative appraisal (Antheaume, 2007).

8.6

8.6

The Sustainable Balanced Scorecard (SBSC)

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The Sustainable Balanced Scorecard (SBSC)

Kaplan and Norton (1992, 1996) argue that competitive advantage depends not only on hard facts such as the efficient use of fixed capital. Some intangible assets like intellectual property, customer relations and employee competencies contribute equally to competitive advantage. They must also be measured and managed. Kaplan and Norton developed the Balanced Scorecard (BSC) as a performance measurement tool to integrate financial and non-financial information, which can be either quantitative or qualitative. The BSC holds four perspectives which are made concrete for a particular unit, which can be an entire firm (SME) or business unit. How this is done depends on that unit’s business vision and strategy. The four perspectives are: 1. The financial perspective (market success and profitability, return on capital employed). 2. The customer perspective (value propositions that lead to customer satisfaction and retention). 3. The internal business process perspective (the internal value chain: what is needed to satisfy customers and realise a satisfactory financial performance for stakeholders). 4. The innovation and learning perspective (changing business environments ask for innovation and a learning organisation based on employees, IT systems and organisational quality). The four perspectives are in a kind of hierarchical relationship (with the financial perspective on top). The BSC process begins with a company unit’s vision and strategy, which are translated into each perspective’s objectives, measures, targets and initiatives. In other words, the BSC is an instrument of strategic management. There are leading indicators, which are the main drivers of performance. These are normally based on firm-specific competencies and competitive advantages. Over time, we will know whether or not the objectives were met. This is a matter of having a set of so-called lagging indicators in place that monitor what has happened. Identifying cause-and-effect relationships will make it clear how the activities in one perspective affect the other perspectives higher in the hierarchy. Therefore, all measures taken will have their eventual financial effects, as shown in the financial perspective. Twenty years later, new changes and challenges lie ahead for companies and managers. In brief, the greatest challenge is to realise corporate sustainability as part of a transition towards sustainable societies. One of the possible ways to integrate sustainability into business strategies and operations is developing an augmented BSC. Initially, the BSC was not concerned with sustainability. However, its ability to combine quantitative and qualitative information inspired the development of a Sustainability Balanced Scorecard (SBSC), because this combination is crucial when considering sustainability (Schaltegger & Lüdeke-Freund, 2011).

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The SBSC offers an opportunity to integrate environmental and social interests into the economic fabric that the BSC represents. In other words, the SBSC integrates Corporate Social Responsibility into the BSC. It is important to stress that the actual impact of the SBSC strongly depends on its starting point, namely the company’s vision and strategy. The radical or non-radical nature of an SBSC emanates from them (Hansen & Schaltegger, 2018). There are diverse ways to integrate CSR (environmental and social interests) into the BSC (Chalmeta & Palomero, 2011): 1. Integration of social and environmental indicators within each of the four classical perspectives. 2. Incorporation of social and environmental indicators within the customer perspective. This approach broadens the customer perspective as it becomes the stakeholder perspective. 3. If sustainability (CSR) has become a critical aspect of the company, it can feature new and independent perspective. 4. It is possible to develop a separate balanced scorecard solely devoted to sustainability, particularly if sustainability is a prominent strategic issue. There arises an entire performance measurement framework. By providing information for strategic management and reporting purposes, sustainability accounting is an important link between the SBSC and sustainability reporting. The SBSC defines the information needs that sustainability accounting satisfies and communicates to the outside world through sustainability reporting.

8.7

Further Developments in Sustainability Accounting

Special Issues in Sustainability Accounting Laine et al. (2022) present a compelling set of specific questions that increasingly need sustainability accounting data. Accounting practices have to adapt to these developments and provide relevant, forward-looking information to support the various business-based decision-making processes. The authors discuss this in several chapters: climate accounting, water accounting, biodiversity accounting, human rights accounting and economic inequalities.

Accounting for Climate Change All organisations are suffering from climate change. International organisations, as well as national and local governments, have a role to play in the management of climate initiatives, strategies and policies. For-profit organisations of various sizes are also affected by climate issues. They influence organisational strategies,

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planning, supply chain management and investment appraisal. This influence is both a question of climate adaptation and the expected contributions to mitigating climate change. To reach the aim of limiting global warming to 2 °C, as outlined in the Paris Agreement (COP1), the Intergovernmental Panel on Climate Change (IPCC) stipulates that global emissions must shrink to zero by 2050. Companies are expected to contribute to this goal. Therefore, proper accounting for climate change is essential. Comparable figures are needed to come to widely accepted policies. Market solutions (such as carbon trading) are likely to help but may not be sufficient. Strong phase-out policies appear necessary to meet targets and prevent further climate disasters.

Accounting for Water Water is a shared resource. Action for sustainable water management must be based on collaboration. Water crises are not just a matter of inconvenience. Water shortages have profound implications for food security, public health and economic development. Next to water shortages, excess water can cause severe calamities, such as flooding and rising sea levels. The way organisations relate to water can be about impacts and dependencies. Water foot printing is one possible practice to measure and manage water in organisations. Heavy industrial users of water affect watersheds and groundwater reservoirs. Impacts can be due to water use and releases. The UN-supported common water accounting framework aims to stimulate dialogue between the private and public sector and promote better investment decisions.

Accounting for Biodiversity It is widely understood that the greater the biodiversity of an ecosystem, the more stable and resilient it will be. The threat of biodiversity loss we are experiencing today is mostly human-made. According to experts, we are in the midst of a massive loss of biodiversity with devastating consequences for our planet. Key factors in biodiversity loss include habitat destruction, invasive species, pollution, population growth and overexploitation. Biodiversity and healthy ecosystems, if used within allowable margins, offer valuable ecosystem services that humans can rely on. Preserving biodiversity is therefore essential for sustaining human life on earth. Businesses and other organisations have an impact on biodiversity through their operations. When these impacts are negative, it is crucial to measure them and take steps to mitigate or prevent them. Accounting for biodiversity focuses on the need for companies to actively protect, conserve and improve biodiversity within their sphere of operation. (‘Accounting For Biodiversity PDF Download—readallbook.

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com’). Where companies depend on ecosystem services, it is essential to use them sparingly. Impacts and dependencies require companies to measure their relationship with biodiversity and biodiversity loss in order to change ways of doing things and be committed to effective sustainability policies. Companies and other organisations are accountable to various stakeholders, such as the general public or shareholders; given that the issue of biodiversity affects each of these groups, it follows that organisations have a responsibility to account for it.

Accounting for Human Rights Human rights cover the fundamental rights and freedoms all human beings are entitled to. According to UNICEF, ‘Human rights are indivisible. Whether of a civil, political, economic, social or cultural nature, they are all part of the dignity of every human person. Consequently, they all have equal status as rights. . . . There is no hierarchy of human rights’.3 Human rights abuses happen in all parts of the world, although there are countries where abuses are more upsetting and urgent than others. Examples are the death of workers because of insecure working conditions, exploitation and modern slavery. Human rights concerns underlie many of the UN’s Sustainable Development Goals (SDGs). See also Box 8.5. Global supply chains represent a special concern, especially when the supply chain operations are either located in regions where human rights violations are known to occur or where critical conditions are hidden behind upstream production networks. Accounting for human rights is supported by the UN’s Guiding Principles on Business and Human Rights. Box 8.5 Advancing Sustainable Development through Human Rights Human rights create conditions essential for sustainable development. The 2030 Agenda recognises that inclusive and participative economies, and societies in which government is accountable, achieve better outcomes for all people, leaving no one behind. The Declaration on the Right to Development emphasises the right of all individuals and people to free, active and meaningful participation. And the UN Guiding Principles on Business and Human Rights (UNGPs) set out the duty of states and private companies to ensure that business activities do not abuse people’s rights. Source: UN Human Rights Office of the High Commissioner.

3

https://www.unicef.org/child-rights-convention/what-are-human-rights (accessed 10 September 2022). Internationally, human rights derive from the UN Declaration on Human Rights.

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Accounting for Economic Inequality Inequality is a highly pressing issue in today’s world. In recent decades, international economic policies have focused on flexibility and profitability. This development has led to a large degree of job insecurity and income inequality. In addition, wealth and assets can be indicators of economic inequality. Income inequality is closely related to social mobility, especially in high-income countries. Research also suggests that national income inequality decreases life satisfaction (Lous & Graafland, 2022). As wage-paying entities, companies can have a significant influence on the distribution of income. To maintain high profits, international companies have moved to places where wages were at the lowest possible levels in the global economy. This approach implied that wages everywhere were under pressure. Although increased industrial activity has lifted people out of poverty in certain regions in the world, the ‘race-to-the-bottom’ in the field of labour conditions has taken a heavy toll worldwide. Fortunately, it is increasingly realised that reducing inequality is a significant part of sustainable development. Limited resources must be shared to satisfy the basic needs of as many people as possible; in other words, reducing inequalities is one way to achieve a sustainable economy. For individual companies, accounting for inequality issues is very relevant. Internally, an enterprise should consider inequality insofar as it can affect the internal harmony, productivity and motivation of workers. Externally, companies can be held accountable for decent wages and other labour conditions. Accountability in this area can be a basis for good employment relations and other stakeholder relations. Key Notions and Concepts • Conventional accounting relies on generally accepted principles and practices that make it unsuited to accounting for sustainability. • Therefore, we need new types of accounting and accountability to address sustainability challenges. Sustainability accountancy has been around for some time but has not taken a dominant position. In large corporations, at least part of sustainability accounting (including controls) has become common. • We must ask ourselves which stakeholders and issues are accountability priorities. Organisations rely on diverse stakeholders to reach their goals. • Materiality refers to themes, issues or incidents of significance to an organisation or its stakeholders. Materiality can focus on the impacts of a company to its stakeholders or on its dependency on certain stakeholders and the environment. • Materiality also plays a role in sustainability reporting. The company cannot report on every aspect of its activities; it must make particular choices. • The domains of sustainability accounting are based on the three elements (the three Ps) of sustainable business: People, Planet and Profit. The three domains can help indicate a company’s achievement (or lack of progress) as to the extent it has made use of the possibilities of greening its business. • Many a company will adopt a relatively passive approach when it comes to preventing or mitigating moral dilemmas; such an attitude implies a possible

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violation of widely accepted social norms which condemn the ruthless exploitation of natural resources, child labour and other forms of exploitation. Eco-efficiency is an important concept as it shows how well companies deal with their inputs, which often originate from nature (environmental inputs); the processing of the inputs leads to harmful emissions of air and wastewater, as well as to the production of solid waste. Eco-efficiency is the ratio of one output (the value of a product or service) to the total environmental input concerned. As long as economic growth continues, absolute decoupling is necessary to keep the world economy within certain safe ecological boundaries. The additional quality requirements to reach absolute decoupling led to more emphasis on the importance of radical innovation (in particular, its design phase) that really protects the environment. One of the first advantages of environmental accounting has been to open one’s eyes to the importance of correctly assigning environmental costs of the various products of the enterprise. When collecting data on environmental effects and environmental costs within a company, one has to consider various information sources, such as storage records, the environmental manager’s office and accounting. Already Hafkamp and Bouma (1995) referred to the supply chain when defining environmental costs. These are costs to control and reduce environmental impacts during winning raw materials up to the final act of discarding and possibly refurbishing. When cost savings throughout the chain matter, adequate calculations and allocation of environmental costs come in a new light. Life-cycle costing may help out, especially in the case of large investments; it opens up the possibility of making the costs of investing, use, control and maintenance mutually comparable. It is beyond doubt that corporate costs do not fully express a company’s environmental effects. There are also external effects (externalities), which are effects for which the company that has caused them will not receive a bill if they are negative or any material benefit if, they are positive. Initially, the Balanced Score Card was not concerned with sustainability. However, its ability to combine quantitative and qualitative information inspired the development of a Sustainability Balanced Scorecard (SBSC), because this combination is crucial when considering sustainability. Laine et al. (2022) present a compelling set of specific questions that are increasingly in need of sustainability accounting data. Accounting practices need to adapt to these developments and provide relevant, forward-looking information to support the various business-based decision-making processes. The authors discuss this in several chapters: climate accounting, water accounting, biodiversity accounting, human rights accounting and economic inequalities.

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References Antheaume, N. (2007). Full cost accounting: Adam Smith meets Rachel Carson? In J. Ungermane, J. Bebbington, & B. O’Dwyer (Eds.), Sustainability accounting and accountability. Routledge. Bennett, M., & James, P. (1998). Making environmental management count. Baxter’s international’s environmental financial statement. In M. Bennett & P. James (Eds.), The green bottom line. Environmental accounting for management. Current practice and future trends. Greenleaf/ Routledge. Bradley, M., Schipani, C. A., Sundaram, A. K., & Walsh, J. P. (1999). The purposes and accountability of the corporation in contemporary society: Corporate governance at a crossroads. Law and Contemporary Problems, 62(3), 10–86. Braungart, M., & McDonough, W. (2002). Cradle to cradle: Remaking the way we make things (1st ed.). North Point Press. Chalmeta, R., & Palomero, S. (2011). Methodological proposal for business sustainability management by means of the balanced scorecard. Journal of the Operational Research Society, 62, 1344–1356. Gray, R., Owen, D., & Adams, C. (1996). Accounting and accountability. Prentice Hall. Hafkamp, W., & Bouma, J. J. (1995). Milieukosten. In F. L. M. Braakhuis, M. Gijtenbeek, & W. A. Hafkamp (Eds.), Milieumanagement, van kosten naar baten. Samson Tjeenk Willink, Alphen aan den Rijn. Hansen, E. G., & Schaltegger, S. (2018). Sustainability balanced scorecards and their architectures: Irrelevant or misunderstood? Journal of Business Strategy, 150, 937–952. Jackson, T. (2009). Prosperity without growth. Economics for a finite planet. Earthscan. Kaplan, R., & Norton, D. (1992). The balanced scorecard – Measures that drive performance. Harvard Business Review, 70(1), 71–79. Kaplan, R., & Norton, D. (1996). The balanced scorecard. Translating strategy into action. Harvard Business School Press. KPMG. (2014). The essentials of materiality assessment. KPMG International Cooperative. Laine, M., Tregidga, H., & Unerman, J. (2022). Sustainability accounting and accountability (3rd ed.). Routledge. Lous, B., & Graafland, J. (2022). Who becomes unhappy when income inequality increases? Applied Research in Quality of Life, 17, 299–316. Mogezomp, H. G., Deendayal, M. J., & Leroy, P. (1992). Het milieukwaliteitskostenmodel. Milieu. (VVM). Schaltegger, S., & Burritt, R. L. (2000). Contemporary environmental accounting. Issues, concepts and practice. Greenleaf. Schaltegger, S., & Lüdeke-Freund, F. (2011). The sustainability balanced scorecard. Concept and the case of Hamburg airport. Centre for Sustainability Management (CSM), Leuphana Universität Lüneburg. Verfaille, H. A., & Bidwell, R. (2000). Measuring eco-efficiency. A guide to reporting company performance. World Business Council for Sustainable Development (WBCSD).

Chapter 9

From Green Growth to Post-growth Approaches

9.1

Introduction

The UN publication Our Common Future was a seminal report that marked a time in history when development and the environment enjoyed increasing awareness and attention. Development and environment do not go along with each other quickly. To this day, the tension between the two is still there. The concept of sustainable development—meeting the needs of the present generation without compromising the ability of future generations to meet their needs—was thought to be the key to a durable match between development and the environment. By 1987, it was a new perspective by establishing equity and justice between generations and developing a shared understanding of the long-term goals of human life on earth. From there, Our Common Future pleaded for new international governance instruments and action programmes. There was a need for leadership and mutual trust to reach this goal. The subsequent Rio Conferences are a direct result of the suggestion of Our Common Future to have an international conference to address these issues. Our Common Future has unleashed a highly influential international momentum for Sustainable Development. However, after several decades, a fully sustainable economy is far from being completed. The question arises: What are the limitations of the concept of Sustainable Development? The answer may begin with an evaluation of Our Common Future on the occasion of its twentieth anniversary (Hauff, 2007).

What Has Been Achieved so Far? Despite what has been done to promote sustainability, the world economy is still overstepping ecological boundaries. There is only a common future if this process does end. Furthermore, the distribution of economic wealth and the use of natural © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2_9

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resources remain remarkably uneven, both within and between countries. Command and control policies must be intensified but cannot do it alone. It is necessary to involve civil society and the business community with awareness, social responsibility and dedicated entrepreneurship as leading values.

New Realities Since the appearance of Our Common Future, the world has undergone significant changes (Hauff, 2007). Following the end of the Cold War in the early 1990s, a bipolar political divide became a multipolar world. Since then, several developing countries have gone through a remarkable process of development and economic growth, leading to a changing international political landscape with China, India and Brazil as prominent players. Globalisation has given rise to a global economy which has become much more interdependent than before. Throughout the 1990s and beyond, information technology has been a powerful engine for economic change, deepening global interdependence.

Various Crises The dramatic disaster of 9/11 (2001) has led to new political and military realities. For various parties, the credit crisis of 2008 (followed by the euro crisis) has been a catalyst for a rethink of corporate responsibility and policies to realise sustainability. However, it could not turn the tide. Drastic government measures to rescue big banks and other companies were part of the policy responses. However, neoliberal policies, centred on austerity and small governments, returned as soon as the most critical situations were gone. The Corona pandemic became evident in 2020, leading to lavish government spending to save jobs and companies. In this case, when the Corona pandemic was over its peak, encouraged by a post-neoliberal atmosphere in various countries, there was no return to austerity policies like before to prevent an economic downturn, counterbalance economic inequality and support the ongoing energy transition. The Russian military attack on Ukraine that started in February 2022 (a brutal war still ongoing at the time of writing this chapter) led to severe political and economic turmoil in Europe and other parts of the world. The USA and EU have supported Ukraine in this war by supplying it with modern weapons and imposing heavy economic sanctions on Russia. However, as a significant supplier of gas and oil to various EU countries, Russia restricted the delivery of fossil energy, leading to high energy prices and high inflation rates. In the short and medium term, this energy crisis worked out negatively for sustainable development as it caused, amidst human tragedy, severe urban destruction and postponement of the phasing out of coal and nuclear energy. From

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a longer-term perspective, the Ukraine war and its aftermath could push the energy transition to a higher speed level by strengthening the political and economic forces keen to boost the transition. Nonetheless, in various respects, international economic and political crises can only be a distraction from achieving sustainability. International tensions and violent conflicts will induce a considerable overall increase in armament. Expanded military expenditure is likely to reduce the budget for sustainability.

Issues Insufficiently Addressed The UN’s Earth Summit Conferences have strongly influenced many UN policies. However, despite the various international agreements that initiated important sustainability policies, the issues that Our Common Future presented remained insufficient, although the need for adequate policies has become more urgent. To these issues belong poverty, energy and climate, soil degeneration and erosion, food security and urbanisation (Hauff, 2007). Unsustainable energy (fossil fuels remain dominant, emitting CO2), unsustainable finance (focus on short-term profitability while supporting unsustainable activities), and unsustainable food production refer to differing global crises. Nevertheless, they have in common the misallocation of capital. They demonstrate a lack of long-term vision and testify of deficient social responsibility and wrong priorities. The green economy movement can only add value if it recognises these misallocations and leads to investments that demonstrate a change in direction. Corporate sustainability is part of a broader movement in which people accept responsibility for a sustainable future. At the international level, one way of expressing this broader responsibility is to call for joint efforts to move towards a green economy. In particular, the UNEP (United Nations Environmental Programme); the UN’s overall coordinating environmental organisation) has been playing a prominent role in promoting the green economy. The concept was also on the agenda of the UN’s Earth Summit Conference (Rio +20), held in 2012. According to the UNEP, the green economy is an economy that results in improved human well-being and reduced inequalities over the long run (social equity) while significantly reducing environmental risks and ecological scarcities. It requires public and private investments that reduce carbon emissions and pollution, improve energy and resource efficiency and address biodiversity loss.

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The Green Economy

The various documents on the green economy reveal that this concept is closely related to Sustainable Development (see also Chap. 3). However, the comparison is between Our Common Future as a Platform for Change and the United Nations Green Economy Initiative rather than between sustainable development and green economy concepts. To make the green economy a compelling remake of Our Common Future, the following must be considered: • There should be sufficient linkages between the political and corporate worlds. They must reinforce each other. Policies (at different levels) and company strategies are crucial to the success of sustainable development. • The growing economies of emerging countries call for common approaches to developing and executing sustainability policies. The issue of leapfrogging should be on the agenda to have the booming economies make use of the best available clean technologies and develop better ones. Justifications for ‘growth first and ecology next’ should be counterbalanced by better-informed, long-term visions. Doing so is a matter of international cooperation between governments and corporations. • The dwindling availability of natural resources and loss of biodiversity require the development of new policies that bring out an equitable distribution of natural resources between continents and nations as a basis for a responsible world economy. Market solutions will be satisfactory only if entrenched in an internationally agreed distribution framework and mandatory sustainability policies. • Sustainability has to integrate into international economic competition increasingly. The relevance of international political agreements will increase. However, loopholes in this area cannot serve as an excuse to delay the development and implementation of national sustainability strategies. In particular, large economies such as the USA and China need to take responsibility in addition to the European Union and the United Nations. The following sections seek to understand better what sustainability means for today’s economic policies. Here we distinguish between ecological sustainability and social sustainability. However, what we see in reality does not support this. Brown et al. (2014) illustrate this inconvenient truth, based on two case studies—one in Central America and one in Brazil—and reach significant conclusions: • Green-economy-style projects are highly top-down and rarely participatory. Community-focused approaches to sustainable livelihoods appear hard to realise. • It is assumed that the commodification of environmental services occurs in ways that do not clash with existing elite and corporate interests. In practice, this assumption is not valid. Green-economy initiatives can be ignored, obstructed or co-opted by powerful elite interests in mining, energy, logging, livestock ranching, tourism and the like.

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• Many green-economy initiatives cannot escape existing economic legislation, particularly free-trade agreements. Large enterprises are privileged vis-à-vis developing countries in defence of cases under the aegis of the WTO. • There is the question of whether the green-economy initiatives can tackle significant ecological challenges, given the many socio-economic forces driving deforestation and environmental degradation. Various flawed assumptions have affected green-economy thinking according to which market-based solutions would be inevitable, social inequality would hardly matter, and a community of interest would exist between the rich and the world’s poorest.

Eco-Efficiency Under sustainable development, efficiency mainly involves saving on natural resources, including energy, or, in short, eco-efficiency.1 Eco-efficiency was put on the map in the 1990s by the World Business Council for Sustainable Development (WBCSD) as a key strategic theme for global business (Schmidheiny, 1992). Before this WBCSD initiative, there was the Factor X debate on the importance of technological change in improving environmental performance and lowering the materials intensity of economies. For instance, Factor 10 reflects a tenfold reduction of material flow per service unit over 30 to 50 years (Reijnders, 1998). The factor-X debate ties in with a more extended debate on what population, affluence and technology contribute to an economy’s environmental impact (Dietz & Rosa, 1994). In 1996, BASF introduced an eco-efficiency methodology to assess the economic and environmental impact of chemicals, processes and products in their life cycle. This methodology has since been further developed and follows ISO 14044 standards for life-cycle assessment (LCA) and ISO 14045 for eco-efficiency (WallMarkowski et al., 2005). It can be used at diverse levels, such as the company or national (Ehrenfeld, 2005). Despite its popularity, eco-efficiency has met severe criticism. Firstly, the concept leaves out the social side of sustainability, such as poverty alleviation, human rights observance and the redistribution of economic opportunity (Gladwin et al., 1995). It is a necessary but insufficient prerequisite for sustainable development (Caiado et al., 2017). Furthermore, Hoffrén and Apajalahti (2009) point out that eco-efficiency targets are only relative targets without any quantitative reference to the carrying capacity of the globe. The WBCSD’s definition of eco-efficiency mentions that production output should be kept ‘in line with the Earth’s estimated carrying capacity’; however, it does not indicate how to meet this provision (Ehrenfeld, 2005).

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Recognising that ecological boundaries must be respected, Frye-Levine (2012) argues that, partially or entirely, rebound effects (increased use of a resource due to its reduced marginal costs) easily offset efficiency measures. She suggests that the aggregate effects of many deficient individual decisions can be catastrophic. Such effects may occur repeatedly. As per Ayres et al. (1998), there has been too much emphasis on incremental eco-efficiencies within the logic of neoclassical economics. Instead, as he argues, distributional equity and resilient natural systems must get priority. Both ecological and social resilience requires a lexicographical treatment: they carry priceless but unrelinquishable values. This condition means throughput growth must run against its limits (Frye-Levine, 2012).

Ecological Modernisation At the beginning of the century, ecological modernisation was central in environmental policy analyses in the industrialised North (especially Germany and the Netherlands). The concept included a reconceptualisation of the relationship between the environment and the economy in industrialised democracies (Barry, 2005). Ecological modernisation challenges the idea that improvements in environmental quality or the protection of nature are at the expense of economic welfare (as per the early response to the environmental crisis in the 1960s and 1970s). Ecological modernisation suggests that economic competitiveness and growth can coexist with environmental protection. According to Mol (1995), ecological modernisation can be used as a valid analytical/explanatory model of economy-ecology interactions in Western society or as the best sustainable model Western societies should follow. He argues that in modern states, there is no unfettered capitalism; there is a vital role of the state, which has powerful instruments to regulate, forbid or stimulate economic activity. Moreover, in his view, social pressures will force enterprises to take responsibility and develop technological solutions for environmental problems. Cohen (1998) concludes that ecological modernisation requires a powerful public commitment to science and a strong environmental consciousness. However, since the 1980s, neoliberalism has been a dominant political philosophy that prioritises market forces and unfettered economic growth (Schmidt, 2016); as a result, Cohen’s requirement could not take effect. However, meanwhile, consistent calls for climate change measures and anti-inequality policies have found a broad audience. Economic growth must be sustainable and inclusive to help solve today’s problems and add to human well-being, if at all beneficial. Therefore, a direct focus on health, welfare and human happiness is the way forward, whether or not it leads to conventional economic growth; this post-growth approach is getting more and more attention in science and policymaking (Hardt & O’Neill, 2017). Various actors have associated economic modernisation with the circular economy to make economic growth less dependent on virgin resources and overcome

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market barriers (Leipold, 2021). However, as the latter author states, the circular economy can only contribute to ecological sustainability if it goes together with changing consumption patterns and post-growth policies.

9.3

Ecological Sustainability

Popular Belief One issue looms on the horizon: sustainable economic growth. How can it be realised? In the wake of the economic crisis of the early 1980s, Our Common Future advocated for economic growth. It even mentioned growth percentages for the different continents, considering low consumption levels among many low-income groups and population growth. Of course, Our Common Future did indicate that economic growth should be in the interest of the poor while, at the same time, ecological boundaries had to be respected. Despite these strict conditions, ‘Sustainable development’ in the public’s eye seemed to allow economic growth to come first. From there, as it seems, sustainability could come in as a modifying element. Although sustainable development does not question the importance of economic growth, developing and emerging economies were inclined to regard it as a way of curtailing their economic development. The Green Economy Initiative aspires to overcome this controversy by focusing on investments and creating jobs. Economic and job growth could go together with saving the planet by basing investments on the green economy agenda.

New Scarcities and Market Forces Market forces play an undeniable role in reaching a sustainable economy. However, they are also inclined to use the ‘loopholes’ in the current economic systems that still tolerate many unsustainable practices. Therefore—as previously stated—market forces should be embedded in broader policy frameworks focusing on sustainability. Part of them is transparency. According to economic theory, market transparency is good for optimal welfare. Besides prices, it should apply to the ecological impacts of industry and commerce. Then, clients and consumers can compare products and services based on their ecological impact. Supply-chain-tracking software makes companies understand where their largest negative impacts are and how to find sustainable alternatives. Ideally, companies should build open-source databases, which will build an information commons so that the costs of having access to the entire field of product information will tend to be low (Goleman, 2010). Such a procedure will provide high transparency against low transaction costs; it will be conducive to efficient markets and, as well, sustainable markets, so Cohen’s requirement could not take effect.

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Recent urgent calls for climate change measures and anti-inequality policies may be the beginning of a change. Economic growth must be sustainable and inclusive to help solve today’s problems and add to human well-being, if at all beneficial. A direct focus on health, welfare, and human happiness seems to be the way forward, whether or not it leads to economic growth; this post-growth approach is getting more and more attention in science and policymaking. Various actors have associated economic modernisation with the circular economy to make economic growth less dependent on virgin resources and overcome market barriers (Leipold, 2021). However, as the latter author states, the circular economy can only contribute to ecological sustainability if it goes together with changing consumption patterns and post-growth policies. Current circular business models are still primarily driven by a vision of continued economic growth. For instance, even the ambitious policy initiatives from the EU so far (beginning in 2023) have been technocratic and focused on promoting growth rather than downscaling the linear economy. Therefore, this will not change until more stringent legislation and regulation are introduced (Wiedman et al., 2015).2 Energy and material consumption are so tightly linked to economic activity (Wiedman et al., 2015) that, in its current form, no circularity can fully decouple this link.

9.4

Social Sustainability

Social sustainability occurs when the formal and informal processes, systems, structures and relationships actively support the capacity of current and future generations to create healthy and liveable communities (McKenzie, 2004). Each society has a ‘stock’ of social and human resources. Economic development can either contribute to or deplete those resources. Severe inequality reduces general welfare or may give an extra push to using natural resources to fill the gap in meeting the basic needs of those at the bottom (see Box 9.1). Box 9.1 Inequality and Well-Being Inequalities in income and wealth cause economic instability and a range of health and social problems and create a roadblock to the adoption of pro-environment strategies and behaviour. Social and economic inequalities tear the social fabric, undermine social cohesion and prevent nations, communities and individuals from flourishing. . .. Although in wealthy, developed countries, income inequality is related to health and social well-being indicators, levels of average income (GDP per (continued) 2

https://acehub.org.au/news/degrowth-critiques-of-the-circular-economy [accessed 30 April 2023].

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Box 9.1 (continued) capita) are not. Reducing inequality is the most crucial step these countries can take to increase population well-being. In developing and emerging economies, both greater equality and improvements in standards of living are needed for populations to flourish. Source: K. Pickett in socialeurope.eu/inequality-essential-wellbeing (24 January 2014). Social sustainability has various dimensions; how these are considered and handled depends on economic development levels, political beliefs and existing power structures. Ideally, social sustainability conforms with universal human rights embraced by the UN. However, there are notable differences between countries in practice. In wealthy liberal democracies with distinctive welfare roles for the government, the following dimensions of social sustainability are to play a role in actual policies: • It meets basic needs for food, shelter, energy, education, work, income and safe living. • It ensures equitable working and income conditions so that development benefits spread fairly across society. • It enhances the population’s physical, mental and social well-being and ensures everyone’s affordable health care. • It promotes education, creativity and the development of human potential in an inclusive manner. • Disadvantaged population groups receive special arrangements to uplift themselves. • It preserves the country’s cultural and biological heritage, thus strengthening a sense of connectedness to people’s history and environment. • It promotes conviviality, with people living together harmoniously; it rejects discrimination of any kind. • It promotes citizen participation and involvement; it recognises the importance of diversity and gender equality. • It is about liveable cities and villages in terms of attractive built environments and the good life in an emotional sense. In all types of societies, the above dimensions need monitoring and, where needed, reinforcement. In low-income or autocratic countries, these dimensions are far from self-evident and may be subdued or negated by those in power. There are two types or levels of community resources available to build social sustainability (and other forms of sustainability): (1) individual human capacity and (2) social or community capacity. For many, social sustainability is primarily a matter of poverty reduction and ensuring a decent livelihood. Average figures on income and prosperity often hide substantial differences in living conditions, food security, health, job security and

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educational opportunities. This situation refers to the ‘bottom billion’ of poor people in the first place. However, social issues are also highly relevant in the wealthier countries. Competitive labour markets must combine with good education and training opportunities for many people. Those who cannot cope because of inability or age should benefit from adequate social security measures and retirement provisions. The rights of people at work have been an international theme for a long time. There are eight ILO Conventions that the ILO’s Governing Body has identified as being fundamental to the rights of people at work, irrespective of the levels of development of individual member states.

The Poor and Universal Sustainability Goals Internationally, sustainability received special attention when, in 2000, the UN launched the Millennium Development Goals (MDGs), strongly directed at eradicating worldwide poverty and deprivation, and much less at environmental issues. The MDGs included eight goals; most had 2015 as a deadline. These goals were partially reached, with notable but varying achievements in reducing mortality, infectious diseases, undernourishment and poverty; there was a notable acceleration in primary school completion and gender parity in primary education (McArthur & Rasmussen, 2018). The worldwide economic crisis of 2008 and its aftermath and rapid world population growth acted as opposing forces (Mayhew & Colbourn, 2015). Nonetheless, there was a widespread feeling among policymakers and civil society that the progress made in the battle against poverty, hunger and disease was substantial (Sachs, 2012). The clearest shortcomings during the period of the MDGs were in the field of environmental sustainability (McArthur & Rasmussen, 2018). As the U.N. Millennium Development Goals Report 2015 (United Nations, 2015) states, environmental sustainability must be a core pillar of the post-2015 agenda and a prerequisite for ongoing socio-economic development and poverty eradication. Healthy ecosystems were crucial in mitigating future environmental challenges and improving livelihoods everywhere. Therefore, the development agenda for the future had to reflect the links between socio-economic and environmental sustainability (United Nations, 2015). Whereas the MDGs primarily focused on developing countries, the post-2015 agenda was to set goals and meet challenges for all countries. Moreover, it was not only what the rich should do for the poor but what all countries should do together for the well-being of the present and future generations, which included a crucial leadership role for middle-income countries such as Brazil, China and India (Sachs, 2012).

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The Launch of the U.N. Sustainable Development Goals Accordingly, in 2015, the MDGs were succeeded by The United Nation’s Sustainable Development Goals (SDGs), based on the 2030 Agenda for Sustainable Development. The goals have a universal character, addressing the areas of economic growth, social inclusion and environmental protection (see also Chap. 2 on the SDGs). On September 25, 2015, the United Nations summoned governments, businesses, NGOs, and citizens worldwide to join forces in achieving the presented 17 SDGs and the associated targets by 2030. The SDGs aim to end poverty, protect the planet and ensure prosperity for all (UNEP, 2009). In the process of defining the goals, the private sector was coordinating the interactions between the UN, civil society and business (Pedersen, 2018). The 17 SDGs provide a framework for policymaking in member states for 15 years. However, this framework itself does not reflect the (possible) linkages between a variety of goals; various targets may contribute to different goals, and certain goals seem to conflict (ICSU, 2015). The UN grouped the SDGs into five areas of ‘critical importance for humanity and the planet’ (United Nations, 2015); these were the 5 Ps; see also Box 9.2. Quantitative research plays a role in identifying the systemic interactions inherent in the 2030 Agenda. For instance, Pham-Truffert et al. (2020) present a sub-network of significant positive and negative interlinkages at the target level, which produce insights into various positive and negative multiplier effects of investing in a particular goal. Such insights show that the SDGs can only be reached by considering their connections. As Pham-Truffert et al. (2020) explain, more than focusing on a few individual SDGs is required. If applied, selectivity should be based on where direct and indirect effects have the best (cumulative, net) positive results. The SDGs have received wide recognition and acceptance. There are regular country reports3 to keep a healthy pressure on implementation. Many national governments and corporations use the SDGs to define their strategies (Pedersen, 2018). However, national governments and corporations have a pattern of prioritisation that does not consider the best possible positive multiplier effects. As for national governments, Forestier and Kim (2020) indicate forms of ‘cherrypicking of the SDGs’ based on pre-existing national development policies, implying a limited steering capacity of the SDG framework. They also discern a pattern whereby SDG1 (ending poverty) and SDG8 (sustainable economic growth) are most widely prioritised, especially by high-income developed countries. Interestingly, according to Forestier and Kim (2020), this pattern relates to a neoliberal development paradigm, which stresses economic growth as an essential means to combat poverty.

3

https://dashboards.sdgindex.org

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Box 9.2 The 5 Ps and the SDGs The 5 Ps People Planet Prosperity Peace Partnership

Unsustainable Development Goals 1, 2, 3, 4, 5 6, 12, 13, 14, 15 7, 8, 9, 10, 11 16 17

There emerges an image of governments and companies which selectively manage the SDGs in a way that precludes balanced attention to all 17 SDGs. In refining their materiality matrices, many companies consider the SDGs to find out which fit their business strategies; the most successful companies focus on a few of them as areas of excellence (Leleux & Van der Kaaij, 2019). Schramade (2017) points out that companies that contribute to the SDGs will be better positioned for future changes in both competitive and regulatory environments but recognises that certain SDGs are more suitable for competitive business than others. This bias presents a severe risk, especially if conventional growth concepts remain dominant (Wennersten & Qie, 2017). Jain and Jain (2020) reinforce this critical voice; they discover that various countries with high SDG scores have extremely high ecological footprints. Economic growth under conventional conditions enlarges ecological footprints, which lower SDG achievements. However, the economic activities involved will likely increase specific SDG scores relating to human well-being. Jain and Jain (2020) conclude that the United Nations must rethink its SDG policies to reach sustainability in the truest sense. Hickel (2019) argues accordingly by focusing on the required limits on economic growth and therefore criticises SDG8 (Economic growth), not in the least because it contradicts SDG13 (Combating climate change). This author poses that the rich nations need to make drastic reductions in material throughput, leading in the direction of post-growth strategies.

9.5

Export of Minerals and the Poorest People

For the ‘bottom billion’ (the poorest people in developing regions of the world), immense economic opportunities lie in the growing extraction of natural resources from their territories, particularly minerals. However, this will pose considerable challenges to economic governance (Collier, 2010a). It is crucial to ensure that the received monetary returns from the exported resources finance projects that contribute to long-term prosperity (such as road infrastructure, education and food security). In this arena, major players are the governments of the developing countries concerned, the resource extraction companies, financial institutions, governments of

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the wealthy buying countries and international organisations. Also, China is playing a significant role in the economic affairs of Africa and Latin America, driven by its continuing hunger for natural resources (Change, 2010). Here, transparency is also necessary to realise fairer and more sustainable deals. To accomplish this is a multi-faceted problem (Collier, 2010b): 1. Will the developing countries receive a reasonable price for the resources they sell? International action could provide a database containing good geological information on minerals and relevant market information (prices). This database will enhance market transparency and strengthen the supplying countries’ bargaining power vis-à-vis the resource extraction companies. 2. Do developing countries have a fair chance to export their products to rich countries? The least-developed countries have access to most OECD markets, but further improvements are possible and wanted. 3. Will the governments that collect the revenues from resource exports truly invest the money sustainably for the common good, or will they primarily use them to fill private pockets? Also, here transparency may be helpful. Various forms of law and charters are worthy of consideration: from laws requiring Western banks to report deposits by ‘kleptocrats’ and charters to regulate the exploitation of natural resources to upholding media freedom and preventing fiscal fraud. ‘It may be hard to force corrupt governments to sign such conventions. But they give reformers some extra leverage’. Collier (2010b) further suggests that the emergence of prominent resource extraction companies outside the developed countries (being OECD members) has made the World Trade Organization (WTO) the more appropriate institution for international cooperation on this issue. The poorest nations need standards that match their situation, such as the Extractive Industries Transparency Initiative (EITI) and the Natural Resource Charter. Will developing countries move towards positions that enable and empower them to increasingly partake in manufacturing (exportable) products? This is a crucial question, as industrial growth often significantly reduces poverty (UNIDO, 2009). Moreover, manufacturing is generally less susceptible to climate change effects than agriculture. Due to the growth of manufacturing trade, production has shifted from developed to developing countries. However, this relocation has predominantly taken place in Asia. Many middle-income countries and most African countries stay behind. Not only are manufactured products traded, but the production process is increasingly broken down into tasks that are themselves traded (unbundling). Trade in tasks is a lifeline for countries yet to industrialise because it simplifies the start process (UNIDO, 2009). International policies are necessary to support developing countries in having their shares in manufacturing whilst being safeguarded from opportunistic short-term foreign investments that target the lowest labour costs.

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Food Security and Climate Change

Ecological and Social Food security is a topic that directly touches upon the main ecological and social sustainability issues. Agriculture remained underexposed in the discussion on climate change for a long time. Estimates suggest that agriculture and forestry combined contribute almost a third to the production of global greenhouse gases. However, agriculture can also be part of the solution. It can both be an engine of rural development that is helpful to the poor and play a crucial role in containing climate change and its damaging effects. This perspective links up with that of food security, which in its own right prescribes that agricultural production in developing countries has to undergo significant changes. Food production must increase significantly to meet demand by 2050. Climate change is likely to reduce agricultural productivity, production stability and incomes. Therefore, developing climate-smart agriculture is crucial to food security and climate change goals. Modern advances in agriculture, such as inorganic fertilisers, pesticides, high-yielding varieties, land management and irrigation techniques, have considerably increased food production. However, this apparent advance has also contributed to ecological damage, degradation of soils, unsustainable use of resources and health problems for animals and people. Effective climate-friendly practices already exist and can be further applied in developing countries. Adopting an ecosystem approach, working at a landscape scale and implementing intersectoral coordination and cooperation are necessary for such a development. This process involves considerable investments in filling knowledge gaps using R&D in technologies, methodologies and new varieties (FAO, 2010). Transformations are needed in both large-scale and small-scale commercial agriculture as well as subsistence agriculture. In large-scale agriculture, emissions reduction and abandonment of unsustainable practices are the primary concerns. In countries where smallholders comprise a significant part of the economy, improving the productivity of smallholder farming systems is essential for food security and poverty reduction (FAO, 2010). Improvement lies in water harvesting and irrigation, pest and disease control, ecosystem management, biodiversity, seed production systems and post-harvest controls. Forms of circular and regenerative agriculture exist in many countries, but these have to rapidly replace the conventional, unsustainable modes of food production (McGreevy et al., 2022; Wolters, 2020).

9.7

Beyond Climate Change

Climate change is a central issue in today’s discussions and newly drafted policies on sustainability. Despite the promises that most countries made under the Paris Agreement of 2015, it remains to be seen whether the goal (no more than 2% global

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warming) will become a reality. This agreement strongly focuses on CO2 emissions and their equivalents, such as methane and nitrous oxide emissions. Suppose the reduction of emissions is less than necessary to keep global warming below 2%. In that case, severe societal consequences will transpire, including a rise in climate refugees (IPPC, 2022). However, various scholars have pointed out that other pollutants also severely threaten the world. For example, Schmidt-Bleek (2008) is highly critical of the fact that many efforts to reduce CO2 emissions are far from a systematic strategy to protect all natural services from so many other pollutants. Braungart and McDonough (2002) illustrate this point. They discuss the many substances released into the atmosphere, waters and soils and recognise the wastage of valuable materials that could be input for production or, in an earlier stage, be replaced by eco-friendly materials that meet the biological cycle’s requirements. Besides, there is the technosphere with its features. Mixing the biosphere and the technosphere thwarts many options for recycling. Analysis of a TV set showed the presence of 4360 chemicals whose location after disposal is uncertain. This is just one illustration of the uncontrolled presence of so many chemicals. The unscrupulous overuse of the earth’s sink function is not less harmful to its survival than its overburdened source function.

Transition to a Sustainable Economy As discussed, the previous century already witnessed severe warnings about the limits to economic growth. Distorted prices were one of the economic evils (as they did not sufficiently reflect all costs). The previously discussed Factor 4 and Factor 10 have primarily focused on technology that, if implemented, would engender drastic increases in resource productivity to prevent the wasteful effects of ongoing economic growth. Ultimately, a narrow focus on economic growth will be counterproductive and seriously threaten human values. In the beginning, considerable public spending to restore production and consumption levels could boost the recovery from the credit crisis (which started in 2008). By making this recovery ‘green’, the green economy could become closer to realisation. Only a little of this happened in practice (Jackson, 2009, Chap. 8). Out of a total commitment of almost $2.8 trillion towards recovery plans, $436 billion (15.6%) appeared as a green stimulus (HSBC, 2009). General recovery spending is likely a threat to sustainability. This danger can only be overcome if green investment and green jobs dominate economic stimulus programmes (Jackson, 2009, Chap. 8). The Corona pandemic began in 2020 and has altered the overall economic and social atmosphere during that time. Lockdowns and severe economic and social disruptions dominated human life. There was big government spending in the USA and the EU to support families and companies. Many people have lost their lives on every continent because of this vicious Covid virus. Thanks to (partially successful) healthcare and vaccination programmes, combined with limited social interactions and staying at home, the pandemic could

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be controlled so that everyday life returned to normal, even though infections have continued. China had the most extended mandatory lockdown. The pandemic triggered discussions on the risks associated with how people deal with animals used for food and how the global economy, with its free movement of goods, services and people, could amplify such risks. The pandemic cannot be separated from how humans are increasingly pushing back free nature. Besides the danger of reduced biodiversity, there is also the danger of outbreaks of epidemics among humans of a zoonotic origin (Tounta et al., 2022).

An Irreversible Process Without putting economic growth at the forefront (it may happen or not), there is a need for a circular economy in all industries based on beneficial, profitable investments in sectors critical to sustainability. Examples of these sectors are the renovation of buildings through energy and carbon conservation measures, renewable energy technologies, redesign of public service networks, environmentally friendly public transport and protecting and sustaining ecosystems. All the necessary industrial measures should go hand in hand with financial market reform in order to prohibit destabilising practices. Nowadays, these approaches are supported by increasingly valuable sources of information. Today, national accounts reflect the loss of natural resources and the impact of environmental degradation on well-being. Numerous efforts are being made in research, planning, policy and market-driven activities to bring a sustainable economy and society closer to reality. Despite opposition and late adaptors, this movement has become an irreversible process. The key question is whether this process is going fast enough to outpace and turn around the destructive direction of the still dominant conventional economy.

9.8

Post-growth Perspectives

A Historical Puzzle The seminal UN report Our Common Future, published in 1987, and the green economy concept presuppose that sustainable development does not require fundamental changes to society, its growth orientation and power relations (Hopwood et al., 2005). This belief follows a long history that discerns the rise of industrialised and capitalist societies and their constant desire to produce and earn more as an end in itself.

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Conceptual Barriers However, in line with early warnings made by various scholars, continuous economic growth burdens the planet. The ‘green economy’ and ‘green growth’ cannot prevent this inescapable truth, as they also expand the use of natural resources, even when they do that more efficiently than before (Washington, 2021). Therefore, the often-embraced concept of weak sustainability, which allows human-made capital to replace natural capital, must give way to solid sustainability, keeping fragile natural resources intact, even if this means forgoing profitable deals. The whole economy must work with and not against nature. Relative saving on natural resources—i.e. eco-efficiency—is procrastination unless it is part of a planned transition to sustainable development. An example is energy saving within a policy-supported transition towards renewable energy; efficiency is highly significant in that context. To understand how sustainable innovations emerge, one must realise that not only individual firms manage innovation; social expectations, political regulation and lengthy technological transitions can be highly decisive (Berkhout, 2014). The circular economy is a case in point; it will take a long time to reach a circular economy at the system level involving the entire economy (Jonker et al., 2017). Moreover, on the way, different scenarios may compete for priority, including those aligned with conventional growth and those following a degrowth path honouring the principles of strong sustainability (Bauwens et al., 2020). Previous sections have highlighted various conceptual barriers to sustainable development. More needs to be done than abandoning inadequate concepts. A fully-fledged discussion of such a path is beyond this chapter. However, the three theoretical domains below defy economic growth and help choose the right direction. These are steady-state economics, eco-development and post-growth economics (Wolters, 2022).

Steady-State Economics Steady-state economics goes back to John Stuart Mill (nineteenth century), who recognised that wealth could not increase indefinitely. Preventing the end of progress was possible by curbing population growth and redistributing wealth. After the Second World War, industrialised countries focused on economic growth. Technological change and resource substitution were powerful means of avoiding resource shortages (Anderson, 2012). Nonetheless, there were dissenting voices proclaiming limits to growth, in particular, Georgescu-Roegen (1975). Advocates of the steadystate economy argue for a paradigm shift in economics, recognising that (Anderson, 2012): • There are biophysical constraints on the economy such that economic growth, as reflected in material throughput, cannot continue forever.

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• That distributional questions cannot be ignored by advocating for more growth. • Human well-being is more than a function of monetary income. • Not all values can be captured by the individual willingness to pay for goods or services.

Eco-Development In the 1970s, eco-development was a fundamental reference for UNEP, but in the 1980s, it was replaced by the concept of sustainable development. According to Berr (2015), eco-development was a radical project unacceptable to Western elites. As Sachs (1980) theorises in support of eco-development, inequality in the world leads to waste because of the production of superfluous goods rather than focusing on the efficient production of essential goods and services. Sachs (1980) stipulates that under eco-development, countries must not follow the same Western development pattern but must be self-reliant, considering their historical, cultural and ecological context. Such development must generate more than a minimal survival package; it was to include harmony with nature. In line with eco-development, Berr (2015) notes that the state must have a say in ensuring meaningful employment; it must be able to prevent excessive pressures on the environment and avoid perverse growth driven by nonessential goods.

Post-growth Economics Three post-growth economics types will be reviewed here: (1) The new economics of prosperity, (2) Ecological macroeconomics and (3) The concept of degrowth. Ad 1. The new economics of prosperity. Jackson (2009) states that the capitalist model has no easy path to a steady-state position. He explains that growth is unsustainable (at least in its current form) due to increased resource use and environmental costs. However, economic contraction is unstable (at least in current circumstances) as it increases unemployment, reduces competitiveness and leads to recession. This dilemma seems almost impossible to handle. However, we must face it and take it seriously. Meanwhile, extensive literature has explored the limitations of GDP and the development of alternative measures of prosperity, such as multiple indicators (or dashboards), aggregate non-monetary indices, aggregated or adjusted monetary indices and subjective well-being measures (Walker & Jackson, 2019). Jackson (2020) recommends the following for the UK: • Develop new measures of societal well-being and sustainable prosperity. • Integrate these measures into the decision-making of central and local government.

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• Align regulatory, fiscal and monetary policies to achieve a sustainable and inclusive well-being economy. • Establish a formal inquiry into how the UK can become less dependent on economic growth. • Develop a long-term, precautionary ‘post-growth’ strategy for the UK. Jackson (2020) points to well-being as a pragmatic framing for decision-making. Early evidence of working with this concept is the Well-being Economy Alliance (WAEL), a global collaboration of organisations, alliances, movements and individuals working to change the economic system to deliver human and ecological wellbeing. Furthermore, the OECD defines the ‘economy of well-being’ as improving people’s lives (climbing the social ladder) along the dimensions that matter most to them (OECD, 2019). Ad 2. Ecological macroeconomics. Developing new macroeconomic models or adapting existing ones is necessary to examine potential post-growth futures. Hardt and O’Neill (2017) find three themes in the literature: 1. There is a need to manage an economy without growth. Daly and Jackson already called for it. Victor and Rosenbluth (2007) represent early work in the field. Ecological macroeconomics can help address environmental problems, largescale inequality, global security concerns and financial instability (Röpke, 2016). 2. There is a plea for developing new analytical methods and models that reflect the macroeconomic dependence on the natural environment. 3. New ecological macroeconomics often combines post-Keynesian and ecological economics approaches. In general, authors in ecological macroeconomics reject the orthodox growth models because they consider the latter’s underlying assumptions as fundamentally flawed (such as assuming that rational, utilitymaximising and profit-maximising behaviour in markets would lead to an optimal, equilibrium growth path). Significant developments are studies on (1) the connection between income distribution and economic growth and (2) financial markets and their role in the non-financial sectors (Rezai & Stagl, 2016). Challenges remain, but keeping material and energy use within ecological limits must be one of the central concerns of ecological macroeconomics if it should be in the realm of strong sustainability (Saes & Romeiro, 2019; they give an interesting methodological review). Ad 3. The concept of degrowth. Another important chapter of post-growth economics is the concept of degrowth, which presents a critical view of how modern societies must reduce their material and energy usage to sustainable levels while reaching a high quality of life. According to Kallis et al. (2012), sustainable degrowth includes a downscaling of production and consumption to increase human well-being and enhance ecological conditions and equity on the planet. It calls for a future where societies live within their ecological means, with open, localised economies and resources more equally distributed through new democratic institutions (Kallis et al., 2012).

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Recommended democratic arrangements under degrowth conditions range from radically localist visions of autonomous democratic communities to reformist ideas of deliberative processes embedded in existing representative structures (Hausknost, 2017). Considering workable solutions for the near future, only those that could go together with present democratic structures seem to have a chance of being implemented. Even then, there are significant challenges. For representative democracies in growth societies, the existing representative framework needs enhancement with elements of localised participatory democracy that decide on cuts in intermediate consumption such as transport, energy and packaging (Hausknost, 2017; Asara et al., 2013). Demaria et al. (2013) characterise degrowth as follows: • It can achieve an absolute decoupling between economy and ecology based on simplicity and resource sharing, far from emphasising individual consumption. • Although modern technologies such as solar energy are essential, degrowth is critical to ecological modernisation with its one-sided focus on technological solutions. • Degrowth supports a democratic debate about economic growth, away from uncritical acceptance; a lack of such a debate has led to the degrowth movement. • Distributive justice is another degrowth item; it focuses on developing strategies to reduce inequalities in the social system. D’Alisa and Kallis (2020) discern a lack of theory within degrowth thinking about how, why and under what conditions the intended change could occur and what role the state would play in it (see also Natale et al., 2016; Zhang et al., 2018; Trainer, 2020). A theory of ecological-economic political change must deal with the state as a major force in social change. How could change in a post-growth direction come about? D’Alisa and Kallis (2020) develop a Gramscian theory of the state. For Gramsci, the state encompasses civil and political society and falls within coercion and consent. The state changes as social groups struggle for new institutions that embody, facilitate and enforce new common senses. A transition beyond growth would end growth’s ideological and institutional hegemony—the abolition of growth institutions and the demise of taken-for-granted growth values. At different institutional levels (government, economy and business), prevailing conceptions of value and value creation are crucial to society’s continuous and dynamic (re)production. There are inherent tensions between the conventional forms of value creation, oriented towards economic efficiency, accumulation and growth on the one hand, and degrowth-oriented value creation, meant for equality, participation and ecological sustainability, on the other hand. The profound socio-economic transformations that degrowth implies relate to how organisations understand and practice value creation. However, how this can or must be done is still relatively unclear. Froese et al. (2023) add to this discussion by considering three values as pivotal to the political-economic activity of degrowthoriented organisations: (1) ecological sustainability, (2) local and global equality and (3) conviviality and participation. At the organisational level Froese et al. (2023), basing themselves on 39 case studies from the literature, distinguish seven pattern

9.8

Post-growth Perspectives

145

groups of degrowth-oriented organisational value creation and derive one theoretical proposition per group (see Box 9.3). By doing so, the practical implications of degrowth at the organisational level are becoming visible. Box 9.3 Pattern Groups of Degrowth-Oriented Organisational Value Creation Patterns 1 Overcoming economic growth dynamics

2

Engaging consumers in sufficiency-oriented prosumption

3

Joining forces in rewarding and mutual collaboration

4

Equalising inequalities

5

Open and decentral productivity

6

Shrinking, slowing, and extending resource cycles

Source: Froese et al. (2023).

Proposition Degrowth-oriented value creation means organisations prevent undesirable commodification and growth drivers but help to identify and serve stakeholders’ needs within social and ecological limits. Degrowth-oriented value creation means that the provision of products and services and communication activities actively involve consumers, thereby conveying a sufficiency-oriented appreciation for social and material processes. Degrowth-oriented value creation means that actors join forces in rewarding and mutual cooperation and (re)distribute resources to create protected spaces and infrastructures that enable solving social and environmental problems beyond core business and individual economic interests. Degrowth-oriented value creation means that organisations channel resources and support from public institutions or affluent populations to disadvantageous populations for a more equitable distribution of wealth, power and access to needed products and services. Degrowth-oriented value creation means that organisations make social and material technologies accessible via platforms and advance them through open provision and development of resources to engage in collective creativity. It is about focusing on conviviality and participation. Degrowth-oriented value creation means that organisations develop, resource, (re)create, and offer products and services that help to reduce, in absolute terms, product volumes and waste generation as well as energy and material consumption and enable more resource-effective and sufficiency-oriented lifestyles.

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Key Notions and Concepts • The UN publication Our Common Future was a seminal report that marked a time in history when development and the environment enjoyed increasing awareness and attention. Development and environment do not go along with each other quickly. • Despite what has been done to promote sustainability, the world economy is still overstepping ecological boundaries. There is no common future unless that process stops. • Three crises have led to new government roles to keep society in balance: the financial crisis of 2008, the Corona pandemic that started in 2020 and Russia invading Ukraine in 2022. These crises have moved attention and means away from working for a sustainable world. • The correct comparison is between Our Common Future as a change programme and the UN’s Green Economy. • It cannot be denied that the world economy is still evolving in a way that oversteps ecological boundaries. • The dwindling availability of natural resources and loss of biodiversity require the development of new policies that bring out an equitable distribution of natural resources between continents and nations as a basis for a responsible world economy. • Eco-efficiency targets are only relative targets without any quantitative reference to the carrying capacity of the globe. • Interestingly, various actors have associated economic modernisation with the circular economy to make economic growth less dependent on virgin resources and overcome market barriers. However, the circular economy can only fundamentally contribute to ecological sustainability if it goes together with changing consumption patterns and post-growth policies. • Reducing inequality is the most important step countries can take to increase population well-being. In developing and emerging economies, both greater equality and improvements in standards of living are needed for populations to flourish. • Many national governments and corporations use the SDGs to define their strategies. However, they tend to prioritise them in a way that does not consider the best possible positive multiplier effects. There is plenty of ‘cherry-picking’. • For the ‘bottom billion’ (the poorest people in developing regions of the world), immense economic opportunities lie in the growing extraction of natural resources from their territories, particularly minerals. It is crucial to ensure that the received monetary returns from the exported resources will finance projects that contribute to long-term prosperity. • For a long time, agriculture remained underexposed in the discussion on climate change. Estimates suggest that agriculture and forestry combined contribute almost a third to the production of global greenhouse gases. However, agriculture can also be part of the solution. It can both be an engine of rural development that

References

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• •

• •

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is helpful to the poor and play a crucial role in containing climate change and its damaging effects. Suppose the reduction of emissions is less than needed to keep climate change below 2% warm-up. In that case, severe societal consequences will transpire, including a rise in climate refugees. Without putting economic growth at the forefront (it may happen or not), there is a need for a circular economy in all industries based on beneficial, profitable investments in sectors critical to sustainability. The seminal UN report Our Common Future, published in 1987, and the green economy concept presuppose that sustainable development does not require fundamental changes to society, its growth orientation and power relations. However, in line with early warnings made by various scholars, continuous economic growth burdens the planet. The ‘green economy’ and ‘green growth’ cannot prevent this inescapable truth, as they also expand the use of natural resources, even when they do that more efficiently than before. Three theoretical domains help choose the right direction. These are steady-state economics, eco-development and post-growth economics. Steady-state economics goes back to John Stuart Mill (nineteenth century), who recognised that wealth could not increase indefinitely; preventing the end of progress was possible by a brake on population growth and a redistribution of wealth. According to eco-development, inequality in the world leads to waste because of the production of superfluous goods and not sufficiently using the available resources to produce essential goods and services. Degrowth is about achieving an absolute decoupling between economy and ecology based on democratic decision-making and distributive justice.

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Index

A Accountability, 3, 41, 48, 83, 84, 95, 96, 103, 104, 121 Accounting practices, 3, 84, 104, 111, 118, 122 Aggregate demand, 72 Austerity, 70, 73, 126

B Balanced scorecard (BSC), 21, 117, 118, 122 Banking, 69, 70 Biodiversity, 6, 9, 17, 19, 22, 116, 118–120, 122, 127, 128, 138, 140, 146 Board of directors, 83, 84, 86, 89, 99 Bottom billion, 134, 136, 146 Bottom-up sufficiency, 61, 64 Business continuity, 33, 86, 99 Business ethics, 20, 79, 97, 98

C Central Executive Officer (CEO), 35, 36, 62, 83, 89, 90 Central Financial Officer (CFO), 2, 30–33, 36, 86, 87, 90, 96 Chief Value Officer, 32 Circular economy (CE), 51–65, 87, 89, 108, 130–132, 140, 141, 146, 147 Circular modernism, 61, 64 Civil society, 9, 12, 18, 48, 72, 98, 99, 126, 134, 135 Controller, 2, 25, 27, 32–36, 56, 84, 86, 115 Conventional financial models, 32 Corona pandemic, 126, 139, 146

Corporate governance, 3, 26, 34, 36, 43, 83–100, 106 Corporate social responsibility (CSR), 3, 18, 26, 27, 33, 41, 43, 46–48, 51, 77–79, 83–100, 118 Corporate sustainability, 1–3, 20, 25–29, 31, 32, 34, 36, 51, 67–81, 83–100, 117, 127 Credit crisis, 34, 126, 139

D Decoupling, 3, 4, 52, 107–109, 122, 144, 147 Degrowth, 4, 61, 141–145, 147 Desertification, 17, 42

E Earth Summit, 10, 127 Eco-efficiency, 3, 20, 106–108, 110, 122, 129–130, 141, 146 Ecological boundaries, 2, 12, 14, 72, 75, 80, 108, 122, 125, 130, 131, 146 Ecological modernisation, 12, 130–131, 144 Ecological sustainability, 26, 67, 128, 131–132, 144, 146 Economic growth, 1, 3, 4, 6–8, 13, 15–17, 22, 25, 59, 63, 65, 69, 71, 72, 75, 108, 122, 126, 130–132, 135, 136, 139–141, 143–147 Emerging economies, 40, 131, 133, 146 End-of-pipe, 58, 109, 111 Energy, 6, 10, 13, 17, 19, 22, 35, 43, 53, 54, 57–59, 62–64, 87, 88, 91, 105, 107, 108, 111, 112, 126–129, 132, 133, 140, 141, 143–145

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 T. Wolters, Sustainable Value Creation, Sustainable Finance, https://doi.org/10.1007/978-3-031-35351-2

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152 Energy transition, 89, 126, 127 Environmental accounting, 110, 114, 122 Environmental auditing, 56, 64 Environmental costs, 52, 56, 110–113, 115–116, 122, 142 Environmental goals, 54, 87, 105, 106 Environmental justice, 20, 23, 57 Environmentally conscious management, 105 Environmental management system (EMS), 2, 54–56, 64 Environmental Quality Costs Model, 113 ESG finance, 87 ESG rating agencies, 31, 32 EU Eco-Management and Audit Scheme (EMAS), 52, 55 External effects, 105, 116, 122 Externalities, 58, 62, 75, 88, 105, 122

F Fair-trade, 34, 46 Financial markets, 32, 72, 140, 143 Food security, 15, 17, 48, 119, 127, 133, 136, 138

G Global Compact, 28, 29, 43 Global value chains, 97–100 Governance gaps, 3, 97–100 Green economy, 4, 9–13, 127–129, 131, 139–141, 146, 147 Green economy initiative (GEI), 2, 9, 22, 128, 131 Green growth, 125–147 Greenhouse gases (GHG), 62, 107, 138, 146

H Human resources (HR), 2, 3, 15, 54, 67–81, 132 Human rights, 14, 19, 28, 42–44, 75, 77, 80, 81, 95, 96, 118, 120, 122, 129, 133

I Industrial economy, 57–58 Inequality, 17, 39, 68–72, 77, 80, 118, 121, 122, 126, 127, 129, 132, 133, 142–147 Innovation, 2, 16, 17, 20, 26, 53, 62, 72, 74, 75, 81, 92, 109, 117, 122, 141 International Monetary Fund (IMF), 15, 67, 69–71, 73, 80

Index Investments, 2, 9, 18, 19, 22, 31, 33, 45, 51, 52, 56, 59, 69, 72, 73, 75, 79, 80, 87, 88, 105, 106, 114–116, 119, 122, 127, 131, 137–140, 147 ISO 14000, 2, 55, 64 ISO 14001, 55, 56 ISO 26000, 94–96

J Joint value creation, 29, 30, 36

L Labour market, 69, 74, 134 Leadership, 27, 28, 31, 39, 48, 73–76, 79, 80, 83–85, 90, 125, 134 Lifecycle analysis (LCA), 52, 64, 115 Life-cycle costing, 116, 122

M Millennium Development Goals (MDGs), 16, 134, 135

N Natural resources, 2, 6–9, 13, 15, 25, 26, 28, 40, 42, 44, 60, 62, 106, 122, 125, 128, 129, 132, 136, 137, 140, 141, 146, 147 Neoliberalism, 2, 67, 68, 72, 80, 99, 130

O Organic, 34, 46 Our Common Future, 1, 6–8, 12, 13, 15, 22, 125–128, 131, 140, 146, 147

P Paris Agreement, 29, 62, 119, 138 Peer-to-peer circularity, 61, 64 Performance management, 19, 21 Planned circularity, 61, 64 Political corporate social responsibility (PCSR), 98 Post-growth, 4, 13, 130–132, 136, 141–144, 146, 147 Post Keynesianism, 67, 72, 80 Poverty, 7, 8, 15–17, 22, 25, 43, 57, 67, 70, 71, 80, 107, 121, 127, 129, 133–135, 137, 138 Preventative technology, 109, 111

Index R Rebound effects, 13, 63, 130 Renewables, 12, 58, 60, 62, 63, 107, 140, 141

S Shareholder value, 21, 23, 77, 87, 88 Social sustainability, 15, 43, 68, 128, 132–136, 138 Stakeholder approach, 67, 78–79 Stakeholder management, 3, 78–81, 83, 85, 91–94, 99 Strategic CSR, 3, 93, 100 Supply chain management (SCM), 2, 26, 39–42, 45, 46, 48, 119 Sustainability accounting, 3, 32, 33, 57, 103–122 Sustainability reporting, 33, 86, 95–97, 103–122 Sustainable business, 2, 3, 5, 18, 21, 25, 26, 39–48, 89, 105–106, 121 Sustainable development, 1, 3–23, 29, 35, 51, 57, 60, 70, 72, 88, 89, 107, 120, 121, 125, 126, 128, 129, 131, 135, 140–142, 147 Sustainable Development Goals (SDGs), 3, 7, 16–18, 22, 62, 70, 71, 120, 135, 136, 146 Sustainable economy, 5, 27, 28, 73–77, 108, 121, 125, 131, 139–140

153 Sustainable innovation, 26, 74, 141 Sustainable Procurement, 115 Sustainable Supply Chain Management (SSCM), 39–48, 59, 65

T Total Cost Accounting (TCA), 114–115 Trade liberalisation, 68, 69 Trade unions, 73, 98 Transition brokers, 59 Transparency, 3, 34, 42, 46, 83, 84, 95, 96, 111, 131, 137 Triple bottom line (TBL), 18–20, 22, 57

V Values, 1–3, 6, 11, 14, 20, 21, 23, 25–36, 40, 43, 48, 55, 58–60, 64, 75–79, 84, 85, 88–91, 93, 94, 97, 103–107, 110, 114–117, 122, 126, 127, 130, 139, 142, 144, 145

W World Bank, 67–70, 73, 80 World Business Council for Sustainable Development (WBCSD), 60, 62, 109, 129