Environmental and Ethical Issues

Business’ Impact on the Environment

Social responsibility is when a business decision benefits stakeholders other than

shareholders i.e. workers, community, suppliers, banks etc.
This is very important when coming to environmental issues. Businesses can pollute the air
by releasing smoke and poisonous gases, pollute water bodies around it by releasing waste
and chemicals into them, and damage the natural beauty of a place and so on.

WHY BUSINESSES DO NOT

WHY BUSINESSES WANT TO BE WANT TO BE ENVIRONMENT-
ENVIRONMENT- FRIENDLY FRIENDLY

It is expensive to reduce and recycle

Sense of social responsibility that waste for the business. It means that
comes from the fact that their expensive machinery and skilled
activities are contributing to global labour will be required by the
warming and pollution business – reducing profits.

Using up scarce non-renewable Firms will have to increase prices to

resources (such as rainforest wood compensate for the expensive
and coal) will raise their prices in the environment-friendly methods used
future, so businesses won’t use them in production- higher prices mean
now lower demand.

Consumers are becoming socially- High prices can make firms less
aware and are willing to buy only competitive in the market and they
environment friendly products. could lose sales

Governments, environmental
organisations, even the community
could take action against the business
if they do serious damage to the
environment
Businesses claim that it is the
government’s duty to clean up
pollution

Externalities

A business’ decisions and actions can have significant effects on its stakeholders. These
effects are termed ‘externalities’. Externalities can be categorized into six groups given below
and we’ll take examples from a scenario where a business builds a new production factory.

Private Costs: costs paid for by the business for an activity.

Examples: costs of building the factory, hiring extra employees, purchasing new machinery,
running a production unit etc.
Private Benefits: gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs: costs paid for by the rest of the society (other than the business) as a result
of the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near residents,
loss of land (it could have been a farm land before) etc.
External Benefits: gains enjoyed by the rest of the society as a result of a business activity.
Example: new jobs created for residents, government will get more tax from the business,
other firms may move into the area to support the firm-helping develop the region, new roads
might be built that can be enjoyed by residents etc.
Social Costs = Private Costs + External Costs
Social Benefits = Private Benefits + External Benefits
Governments use the cost-benefit-analysis (CBA) to decide whether to proceed with a
scheme or not and businesses have also adopted it. In CBA, the government weighs up all the
social costs and benefits that will arise if the scheme is put into effect and give them all
monetary values (this is not easy- what is the value of losing natural beauty?). They will only
allow the scheme to proceed if the social benefits exceed the social costs, if the costs exceed
the benefits, it is not allowed to proceed.

Sustainable Development

Sustainable development is development that does not put at risk the living standards of
future generations. It means trying to achieve economic growth in a way that does not harm
future generations. Few examples of a sustainable development are:
 using renewable energy- so that resources are conserved for the future
 recycle waste
 use fewer resources
 develop new environment-friendly products and processes- reduce health and climatic
problems for future generations

Environmental Pressures

Pressure groups are organisations/groups of people who change business (and

government) decisions. If a business is seen to behave in a socially irresponsible way, they
can conduct consumer boycotts (encourage consumers to stop buying their products) and take
other actions. They are often very powerful because they have public support and media
coverage and are well-financed and equipped by the public. If a pressure group is powerful it
can result in a bad reputation for the business that can affect it in future endeavours, so the
business will give in to the pressure groups’ demands. Example: Greenpeace
The government can also pass laws that can restrict business decisions such as not
permitting factories to locate in places of natural beauty.
There can also be penalties set in place that will penalize firms that excessively
pollute. Pollution permits are licenses to pollute up to a certain limit. These are very
expensive to acquire, so firms will try to avoid buying the pollution permit and will have to
reduce pollution levels to do so. Firms that pollute less can sell their pollution permits to
more polluting firms to earn money. Taxes can also be levied on polluting goods and
services.
Ethical Decisions

Ethical decisions are based on a moral code. It means ‘doing the right thing’. Businesses
could be faced with decisions regarding, for example, employment of children, taking or
offering bribes, associate with people/organisations with a bad reputation etc. In these cases,
even if they are legal, they need to take a decision that they feel is right.
Taking ethical/’right’ decisions can make the business’ products popular among customers,
encourage the government to favour them in any future disputes/demands and avoid pressure
group threats. However, these can end up being expensive as the business will lose out on
using cheaper unethical opportunities.