how businesses may respond to ethical issues

6.4.1 Ethical Issues and Environmental Concerns

Learning objective

Understand how businesses may respond to ethical and environmental issues, the legal controls that apply, the opportunities and constraints these issues create, and the impact of those responses on different stakeholder groups.

1. What is business ethics?

Business ethics are the moral principles and standards that guide the behaviour of individuals and organisations in the world of business. They involve distinguishing right from wrong and acting in a way that is fair, responsible and sustainable.

2. Linking ethical issues to the environment

• Environmental impact as an ethical issue – Decisions about waste disposal, energy use or emissions affect community health, the company’s reputation and compliance with pollution legislation.
• Externalities – Costs or benefits that affect parties who are not directly involved in a transaction.
  • Negative externality: A factory releases carbon dioxide, contributing to global warming and harming local residents.
  • Positive externality: A firm funds a community school, improving education levels and future labour quality.

Implications of externalities for business objectives

• Negative externalities can lead to fines, clean‑up costs or loss of market share, reducing profitability.
• Positive externalities can enhance brand reputation, attract customers and improve employee morale, supporting growth and market‑share objectives.
• Managing externalities (e.g., through CSR or greener processes) can turn a potential cost into a competitive advantage.

3. Sustainable development

Definition (Cambridge syllabus): Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

It is measured by the triple‑bottom‑line:

• Economic: profit, productivity, market share.
• Social: community welfare, employee wellbeing, labour standards.
• Environmental: carbon‑footprint, waste reduction, resource efficiency.

Typical indicators used by businesses include:

• Carbon emissions (CO₂e tonnes)
• Energy consumption (kWh per unit of output)
• Water usage (litres per product)
• Waste sent to landfill (% of total waste)
• Number of employees covered by health‑and‑safety training

4. Legal controls that shape ethical behaviour

• Health‑and‑safety legislation (e.g., Workplace (Health, Safety and Welfare) Regulations)
• Environmental regulations (e.g., Pollution Prevention and Control Act, Waste Management Regulations)
• Employment law (e.g., minimum wage, child‑labour prohibitions)
• Data‑protection laws (e.g., GDPR)
• Consumer protection legislation (e.g., Consumer Rights Act)

5. Opportunities vs. Constraints

Ethical and environmental issues can act as both constraints and opportunities for a business.

• Constraints
  • Compliance costs – investing in cleaner technology or meeting new health‑and‑safety standards can increase short‑term expenses.
  • Reputational risk – failure to address unethical practices may lead to boycotts, loss of customers and lower sales.
• Opportunities
  • Green‑product premium – consumers are often willing to pay more for environmentally friendly or ethically produced goods, increasing profit margins.
  • Talent attraction – a strong CSR or sustainability record can attract and retain motivated employees, reducing recruitment costs.

Each point links to a stakeholder group: investors and shareholders (costs), customers and local community (reputational risk), environmentally‑conscious consumers (green‑product premium), and employees (talent attraction).

6. Why ethics and environmental responsibility matter

1. Protects the reputation and brand image of the business.
2. Builds trust with customers, suppliers, investors and the local community.
3. Reduces the risk of legal action, fines and sanctions.
4. Improves employee morale, motivation and retention.
5. Creates long‑term profitability through sustainable practices and “green” market opportunities.

7. How businesses can respond to ethical and environmental pressures

Each response method is linked to the primary stakeholder groups that benefit or are affected.

• Develop a Code of Conduct – Sets out expected standards of behaviour for all staff.
  Stakeholders: Employees, customers, regulators.
• Provide ethics and sustainability training – Workshops or e‑learning on anti‑bribery, health‑and‑safety, carbon‑footprint reduction.
  Stakeholders: Employees, suppliers.
• Implement whistle‑blowing procedures – Confidential hotlines or online portals for reporting misconduct.
  Stakeholders: Employees, shareholders.
• Conduct ethical and environmental audits – Independent checks of supply‑chain labour standards and waste‑management practices.
  Stakeholders: Investors, NGOs, local community.
• Engage stakeholders – Regular consultation with customers, NGOs, local authorities and trade unions.
  Stakeholders: All groups; improves transparency.
• Adopt Corporate Social Responsibility (CSR) initiatives – Projects such as community education programmes, charitable donations or disaster relief.
  Stakeholders: Local community, customers, employees.
• Introduce sustainable practices – Reduce waste, use renewable energy, source responsibly.
  Stakeholders: Environment, investors, customers.
• Enforce ethical supplier policies – Require suppliers to meet defined labour, health‑and‑safety and environmental standards.
  Stakeholders: Suppliers, consumers, regulators.
• Transparent reporting – Publish annual sustainability or ethics reports with performance data and future targets.
  Stakeholders: Shareholders, customers, NGOs.
• Establish an ethics committee – Senior managers who oversee ethical issues and advise on policy development.
  Stakeholders: Board of directors, employees.

8. Summary table of response methods

9. Evaluation prompts (AO4)

• Which response method is most cost‑effective for a small‑scale retailer compared with a multinational corporation?
• How might a strong CSR programme create a competitive advantage, and what are the possible drawbacks?
• To what extent does implementing a whistle‑blowing system improve employee morale versus increasing administrative costs?
• Analyse the trade‑off between strict supplier‑policy enforcement and maintaining low product prices.
• Discuss how managing negative externalities can turn a constraint into an opportunity for market‑share growth.

10. Case‑study vignette (AO2 – Application)

Company: GreenLeaf Outfitters – a mid‑size UK retailer of outdoor clothing.

Issue: A supplier in Southeast Asia was found to use under‑aged workers in its garment factory. Media coverage threatened GreenLeaf’s “eco‑friendly” brand image.

Response:

1. Activated its whistle‑blowing hotline to confirm the allegation.
2. Commissioned an independent ethical audit of the supplier’s factories.
3. Temporarily suspended orders from the supplier while the audit was underway.
4. Introduced a revised supplier code of conduct with a mandatory age‑verification clause.
5. Published a transparent report outlining the breach, actions taken and new monitoring procedures.
6. Launched a CSR initiative that funds a local education programme in the supplier’s region.

Impact on stakeholders:

• Customers – regained confidence in the brand’s ethical stance.
• Suppliers – motivated to improve labour standards to retain business.
• Investors – saw reduced reputational risk, supporting share‑price stability.
• Local community – benefited from the education programme.
• Employees – felt proud to work for a company that takes ethical action.

11. Glossary (key syllabus terms)

Externalities

Costs or benefits of a business activity that affect third parties who are not part of the transaction (e.g., pollution, community education).

Sustainable development

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs; measured by the triple‑bottom‑line (economic, social, environmental).

Legal controls

Statutory regulations that govern business behaviour, such as health‑and‑safety, environmental, employment and data‑protection laws.

Corporate Social Responsibility (CSR)

Voluntary actions by a business that contribute to societal goals, beyond what is required by law.

Whistle‑blowing

The act of reporting wrongdoing or unethical behaviour within an organisation, usually via a confidential channel.

Ethical audit

An independent review of a company’s policies, procedures and practices to assess compliance with ethical standards.

Triple‑bottom‑line

The three pillars of sustainable development: economic performance, social responsibility and environmental stewardship.