how businesses may respond to environmental issues

6.3.1 Environmental Issues – How Businesses May Respond

1. Why Environmental Issues Matter to Business

• Regulatory pressure – Laws and standards (e.g., Pollution Prevention and Control Act) require compliance.
• Consumer demand – Growing preference for eco‑friendly products and services.
• Cost considerations – Waste disposal, energy use and raw‑material costs affect profitability.
• Reputation and brand value – Negative publicity can damage trust and market share.
• Long‑term sustainability – Resource scarcity and climate change threaten future operations.

2. Economic Context (Syllabus 6.1)

Business decisions on the environment are shaped by the wider macro‑economic environment.

2.1 Business Cycle

• Expansion – Rising demand; firms more willing to invest in green projects.
• Peak – Capacity utilisation at maximum; may postpone large capital‑intensive environmental spend.
• Recession – Cash‑flow pressure; “green” investment often cut back.
• Recovery – Opportunity to rebuild with greener technologies.

2.2 Inflation & Cost of Inputs

• Higher energy or raw‑material prices raise the cost of production.
• Energy‑efficiency measures become financially attractive because they reduce variable costs.

2.3 Government Fiscal & Monetary Policy

• Fiscal tools – Tax credits for R&D on low‑carbon tech, reduced corporation tax for green investment.
• Monetary tools – Interest‑rate changes affect the cost of borrowing for capital‑intensive projects.

2.4 Numeric Example (AO3)

Higher tax reduces after‑tax profit, which may discourage investment unless offset by a green‑tax credit.

3. Environmental & Ethical Issues (Syllabus 6.2)

3.1 Externalities

• Negative externality – Costs imposed on third parties (e.g., CO₂ emissions causing health costs).
• Positive externality – Benefits to third parties (e.g., a firm planting trees that improve local air quality).

Case Study 1 – Negative Externality (Factory Emissions)

Students may be asked to calculate the reduction in social cost if emissions fall by 10 %.

Case Study 2 – Positive Externality (Corporate Tree‑Planting)

3.2 Sustainable Development

Brundtland definition: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

• Three pillars: Economic, Environmental, Social.
• Why firms adopt it:
  • Long‑term resource security.
  • Improved stakeholder relations.
  • Access to green financing.

3.3 Legal Controls

• Domestic (UK) – Environmental Protection Act 1990, Pollution Prevention and Control Act.
• European / International – EU Emissions Trading System, REACH, Carbon Border Adjustment Mechanism.
• Non‑UK example – Australia’s Carbon Pricing Mechanism (introduced 2012, a carbon tax on major emitters).
• Standards & certifications – ISO 14001 EMS, B Corp, FSC, Fairtrade.
• Failure to comply can lead to fines, licence revocation, or criminal prosecution.

3.4 Ethical Dilemmas & Stakeholder Conflicts (AO4)

Businesses often balance profit motives against ethical responsibilities.

Stakeholder Map

Illustrative Ethical Dilemma – Palm‑Oil Sourcing

• Cheaper conventional palm oil vs. certified sustainable palm oil (higher price).
• Evaluation points:
  • Short‑term profit vs. long‑term brand reputation.
  • Stakeholder expectations (customers, NGOs, investors).
  • Risk of “green‑washing” accusations if claims are not substantiated.

4. International Economy Influences (Syllabus 6.3)

• Globalisation of supply chains – Emissions from overseas suppliers become part of a firm’s carbon footprint (Scope 3).
• Carbon‑border taxes – Import duties based on the carbon intensity of goods encourage greener production abroad.
• Exchange‑rate impact – A 10 % depreciation of the domestic currency raises the cost of imported solar panels from £5,000 to £5,500 per kW.

Exchange‑Rate Impact Table (AO3)

• Multinational Corporations (MNCs) – Scale enables R&D for low‑carbon technologies and diffusion of best practice across subsidiaries.

5. Drivers for Business Action (Why Firms Respond)

1. Legal compliance – Avoid fines, licence loss, and reputational damage.
2. Market advantage – Attract eco‑conscious consumers and differentiate from competitors.
3. Cost reduction – Energy‑efficiency, waste minimisation and resource optimisation lower operating expenses.
4. Corporate Social Responsibility (CSR) – Meet ethical expectations of stakeholders and improve community relations.
5. Risk management – Anticipate future resource scarcity, regulatory changes and climate‑related disruptions.
6. Access to finance – Green loans, sustainability‑linked bonds and government grants favour environmentally responsible firms.

6. Financial Implications of Environmental Responses (Mini‑module – AO2)

• Cash‑flow impact – Up‑front capital outlay for solar PV (£200,000) offset by annual savings on electricity (£30,000).
• Break‑even analysis – Pay‑back period = Initial investment ÷ Annual net saving = 200,000 ÷ 30,000 ≈ 6.7 years.
• Profitability ratios after an eco‑efficiency project:
  • Return on Capital Employed (ROCE) rises from 12 % to 14 % due to lower operating costs.
  • Operating profit margin improves from 8 % to 10 %.
• Financing options – Green bonds (often carry a lower interest rate), government grant covering up to 30 % of capital cost.

7. Operations Management Considerations

• Location decisions – Proximity to renewable energy sources (e.g., wind farms) or to waste‑recycling facilities can reduce transport emissions and energy costs.
• Production methods – Lean manufacturing reduces material waste; batch production may be replaced by continuous flow to cut energy spikes.
• Quality & sustainability – Eco‑design standards (e.g., Design for Disassembly) support both product quality and end‑of‑life recycling.

8. Ways Businesses Can Respond

• Eco‑efficiency measures – Redesign processes to use less energy/materials (lean manufacturing, heat‑recovery systems).
• Waste reduction & recycling – Separate waste streams, adopt circular‑economy practices, partner with recycling firms.
• Renewable energy adoption – Install solar panels, purchase green electricity, invest in on‑site wind or biomass.
• Green product design – Use biodegradable packaging, design for longer life, create “eco‑labels”.
• Green procurement – Source raw materials from certified sustainable suppliers (FSC timber, Fairtrade cotton).
• Environmental Management Systems (EMS) – Implement ISO 14001 to set targets, monitor performance and demonstrate credibility.
• CSR programmes & green marketing – Publish sustainability reports, run community tree‑planting projects, use “green” branding responsibly.
• Stakeholder engagement – Consult local communities, NGOs and investors; disclose environmental data in annual reports.
• Lobbying & advocacy – Influence policy to support sustainable industry standards (e.g., carbon‑pricing).
• Supply‑chain carbon accounting – Measure Scope 3 emissions and set reduction targets across the value chain.

9. Summary of Business Responses

10. Suggested Diagram (for revision)