Responding to the environmental challenge - Business and the Environment

Business Horizons, March-April, 1992 by Pieter Winsemius, Ulrich Guntram

In April 1990, Sony President Akio Morita boldly spoke of the environmental challenge as one of "the central issues of the 21st century." In a McKinsey survey of more than 400 senior executives of major companies worldwide that was conducted one year later (1991), only seven disagreed with him. When Jack Welch, CEO of General Electric, asserted that "only a total commitment of everyone in the company can provide the level of responsibility that will be acceptable to government, employees and customers," more than 80 percent of his peers concurred.

Senior managers expect environmental expenditures to increase from the current average of 2.4 percent of sales to 4.3 percent by the year 2000. Because public awareness and sensitivity are growing rapidly, the environment ranks first on the political priority list in many industrialized countries. Value changes among people, both young and old, have added to an increasing unwillingness to accept mishaps. Names such as Seveso, Bhopal, Basel, Valdez, Minimata, and Love Canal still send shivers through various company headquarters.

Business leader recognize that increased societal awareness of environmental problem is exerting pressure on all sectors of industry from four directions (see Figure 1). With some notable exceptions (the energy industry and Japan), a majority of all respondents to the McKinsey survey feel that government regulation aimed at reducing environment related targets by 50 percent, for product and/or process standards that are critical to their industries, is likely by the year 2000. Most executives also agree that consumers will be increasingly critical of a company's behavior vis-a-vis the environment, and that a negative environmental record represents a definite handicap in attracting and retaining top talent. Finally, environmental legislation that differs among countries has become a decisive factor in plant location and thus can put specific competitors in a favorable position.

Faced with such increasing pressures, many companies have takne positive initiatives. However, new thinking is still needed for society to develop solutions that simultaneously satisfy three criteria: effectiveness (contributing to improving the environment); efficiency (improving the environment at the minimum cost); and equity (showing fairness in the burden sharing among players). To achieve these three criteria, the divisions that currently separate the players in the environmental policy-making arena must be bridged.

This article will first examine the inadequacy of current approaches in meeting these challenges. It will then outline some frameworks for understanding how and why companies and governments have responded so far that can provide some pointers for future developments. Finally, we will look at some success stories and the barriers companies must overcome in responding to the environmental challenge.

CURRENT APPROAHCES ARE INADEQUATE

The state of the environment worldwide is deteriorating. A new generation of environmental issues has surfaced with characteristics more threatening than any faced before. The traditionally local pollution problems of water ("burning" rivers in heavily industrialized cities) and air (smog) have become regional (acid rain) or global (ozone depletion and global warming). Seas, no longer just rivers and lakes, are now subject to eutrophication due to the excessive spread of fertilizers. Single-substance/ single-media issues (such as mercury in water) have been succeeded by multi-substance/multi-media issues (such as the acidification of the air, the soil, the waters, and even our buildings due to an excess of [SO.sub.2], [NO.sub.x] and ammonia), frequently involving a complex string of more than 10 chemical reactions. Most important, some of the "new wave" of environmental issues might cause wide-spread, irreversible damage. Thus, Laurens-Jan Brinkhorst, Director General of Environment & Nuclear Safety of the European Communities, stated that "we are the first generation that can destroy its very existence."

Faced with this responsibility, we must recognize that current approaches are inadequate for battling pollution. No government policy, whether based on regulation or economic instruments, can cover the exact situations of all companies that have to change their behavior to the benefit of the environment. Regulation tends to be rigid and inflexible, and the essential international harmonization is often sadly lacking. Most important, however, government policy is generally formulated in reaction to a problem and therefore is, per definition, late. Thus, official policies simply cannot be expected to pass the 3E-test of effectiveness, efficiency, and equity.

As critical regulations are tightened, this test will become all the more relevant. Almost half of the respondents in the McKinsey survey feel that achieving 50 percent tighter standards by the year 2000 is a realistic goal for their companies, but many are wary of the impact (in terms of efficiency and equity) of the necessary actions. Specifically,] many executives have expressed serious concerns about their ability to pass on the associated cost increases to the market (see Figure 2).