Environmental and sustainability issues
Organisations have a difficult balancing act to fulfil. They have a duty to act in the best interests of their stakeholders, not simply to earn returns for shareholders, but they also have a duty towards other stakeholders.
Satisfying these other stakeholders will have a positive effect on company earnings and shareholder returns. This is not a new concept, it was first published in 1984 by Edward Freeman, but it is hugely relevant today, with regards to an organisation’s approach towards environmental and sustainability issues.
Environmental and sustainability issues have become extremely important across many diverse industries and organisations worldwide, irrespective of the size and strategies of those organisations. Organisations that take positive actions and publicise these can achieve competitive advantage as a result. Organisations that are found to be lacking in this area can be at a disadvantage, leading to loss of market share and investor faith.
The risks arising in relation to environmental and sustainability issues can be substantial, including:
- Business risk – Environmental issues are changing industries, and those failing to predict the changes or act upon them, could find their business strategies become obsolete.
- Regulatory risk – whilst the ISO14000 family of standards is not mandatory, it can help organisations meet the minimum legal standards in their countries/industries. Meeting the standards can provide competitive advantage, and in some industries, failing to do so can be a disadvantage and cause reputation risk. Countries are also imposing their own regulations on specific industries, and these must be complied with if an organisation is to survive.
- Reputation risk – This can be caused by falling short of the expectations of stakeholders with regards to environmental issues. Organisations which appear to be acting sustainably but are found to overplay their actions towards the environment (such as ‘greenwashing’ in the fashion industry, explained later in this article), can damage their reputation. To avoid this, joining the EU Eco-Management and Audit Scheme (EMAS), applicable worldwide, supports organisations in strengthening their credibility through third-party verification processes. Transparency of accurate and credible information is key to minimising reputation risk and Integrated Reporting <IR> can play a major role in this.
- Operational risk – disruption to operations as a result of environmental effects. An example of this is the effect of severe droughts in Taiwan reducing the availability of computer chips, which require huge amounts of water in production.
- Financial risk – the cost of rectifying environmental issues caused by the actions of the organisation, or the loss of revenue as a result of the reputation risk.
But there are also opportunities for organisations to overcome these risks by taking a strong environmental stance and adapting their strategies and operations accordingly. Some industries have been in the spotlight for their impacts on the environment and the actions being taken to avoid this.
The fashion industry – changing the approach
Within the fashion industry, many ‘fast fashion’ organisations have received negative press because of how they operate, and their supply chain practices. ‘Fast fashion’ relates to cheap, disposable clothing that meets current trend requirements; the ‘fast’ refers to how quickly designs can reach the shops at a low price to customers.
Historically, ‘fast fashion’ companies have been accused of damaging the environment through the volume of clothing they produce, much of which is discarded after a short period. There is a waste of resources used in the production of that clothing. Many organisations in the ‘fast fashion’ industry are large, global conglomerates, owning many different fashion labels. If these organisations all sell fashion which is expected to be worn for one season or occasion only, this has a significant environmental impact. This impact includes manufacturing pollution, inefficient use of raw materials and waste in production, and associated waste disposal issues, such as excessive landfill.
The extent of dissatisfaction of many stakeholders towards ‘fast fashion’ has led to organisations such as Greenpeace taking a stance against the industry, as well as a United Nations initiative, the UN Alliance for Sustainable Fashion.
In the past, it could have been argued that if customers continue to buy, and profits continue to be made for the shareholders, these ‘fast fashion’ companies do not need to take note of the environmental and sustainability issues surrounding them. But many of these organisations have received negative press coverage due to their environmental and sustainability impact and they are now going to great lengths to undertake, and advertise, their actions towards sustainable business. Research has shown (eg Roozen and Raedts1, 2020) that negative press can have a significant negative impact on organisations within the ‘fast fashion’ industry, and that the power of negative press is greater than positive press. Therefore, it is essential that organisations take action to deal with the sustainability issues surrounding ‘fast fashion’.
Several ‘fast fashion’ brands have introduced recycling schemes, where customers return unwanted clothing to recycling locations such as labelled bins in stores. Often these garments can then be sorted into three types; those which can be sold second hand, those which can be turned into other items, such as cleaning cloths, and the remainder transformed into textile fibres for insulating materials. Other practices include the use of more sustainable materials, such as bamboo, in the manufacture of clothing, the design of buildings to limit the impact on the environment and attempts to offset the carbon footprint of their manufacturing processes through the planting of trees.
A key tool in communicating the actions organisation take to improve sustainability is the use of integrated reporting <IR> to advertise to stakeholders what the issues are and the actions being taken. The major fashion labels issue sustainability reports or include environmental and sustainability issues within their published annual reports. These often include targets, making them accountable to stakeholders for achieving these targets.
There are still issues around greenwashing. Greewashing is the term used to describe when a company promotes itself as environmentally friendly to gain support from stakeholders but puts more effort into marketing this than actually taking positive actions. However, these organisations continue to face heavy criticism from pressure groups and may eventually be forced to take stronger, more credible, actions if they wish to continue with their current business successes.
Governments are supporting ethical fashion initiatives. In 2019, France launched a 'Paris Good Fashion' initiative which aims to help make the fashion industry greener. Chinese and Indian governments, amongst others, have undertaken similar initiatives. It would seem that failure to act on sustainability issues is likely to lead to the erosion of the large market shares achieved by the large fashion brands existing today. This is due to pressure from government, competitors, consumers as well as from institutional investors and shareholders, worried about future returns and negative press.
The motor industry – changing technologies
The motor industry faces challenges due to stakeholder concern for the environment, the sustainability of raw materials and political ultimatums. Organisations have no choice but to change if they wish to remain in this industry. The major threat could be perceived to be political. The European Green Deal, for example, forces the industry to consider greener solutions, and the UK, for instance, has banned the sale of new petrol and diesel cars from 2030.
Whilst the public sees the changes, through the release of hybrid and electric cars into the market, what is not obvious from the outside are the changes in production processes, supply chains and the workforce skills needed to develop more sustainable methods of manufacture.
Like the fashion industry, the focus on sustainability is prevalent, including, for example, the ability to recycle batteries.
Motor manufacturers have also increased their sustainability reporting and <IR>. Some go even further and have a sustainability management committee and integrated report meetings.
Changing the nature of industries
Threat of new entrants
We know from Porter’s Five-Forces model, that barriers to entry that reduce the threat of new entrants have a significant influence on both the market share and the profitability of organisations existing within an industry. The increasing importance of sustainability has broken down some of these barriers in many industries, including those mentioned in this article.
The focus on sustainability in the fashion industry has opened the door for many smaller companies to enter the market and be successful. In the past, there were high barriers to entry in the form of customer loyalty and existing operators in the industry benefitted from economies of scale. But now ‘slow fashion’ firms are successfully entering the industry and are seeing an unprecedented rise in their success. ‘Slow fashion’ firms are generally much smaller and focus on responsible sourcing of quality raw materials, environmentally friendly manufacturing methods, and longevity of product life. Garments are often more expensive but ‘classic’ in that they can be worn for longer, rather than follow the season or fast changing fashion trends. ’Slow fashion’ firms can charge a higher price per product and gain customer loyalty.
In the motor industry, which has traditionally had extremely high barriers to entry, new technologies provide opportunities for new players. For example, new entrants have successfully entered the market with a mission to accelerate the world's transition to sustainable energy. Added to this threat are the companies developing self-driving cars and there are likely to be further new entrants from outside the industry, who have developed sustainable and digital technologies and see an opportunity to use them in the motor industry.
Threat of substitutes
It is not only large multi-national organisations that are affected. The trend towards sustainability has created new, substitute industries, predominantly occupied by smaller organisations. Many of these organisations only exist because of their environmental or sustainable credentials.
Examples of these smaller organisations include those which offer refill products; packaging-free or loose products where the customer provides their own container. Many such organisations also offer locally made products and products with environmentally friendly credentials. Such organisations, often restricted to a single local store, are unlikely to have institutional investors to satisfy, but rely entirely on customers recognising their ethical and sustainable standards. The attraction to customers comes from the products offered and the way in which they are sold. Being associated with just one negative product or action could lead to the total failure of the company.
Whilst not an entirely new industry, the travel mug and drinks bottle markets are growing exponentially. Whilst there may be several drivers for this, we cannot underestimate the demand from consumers to reduce wasteful production of disposable cups, or the sale of plastic bottles of water. Some of the smaller organisations operating within the industry have flourished as a result of changes in industry demands, and the application of strong ethical and sustainable practices.
Industries and organisations are under increasing pressure from stakeholders to act in a sustainable manner, facing a great deal of risk if they fail to do so. Recognising the threats and associated opportunities and acting upon them can bring great benefits to organisations. However, for companies to benefit from their actions, it is not enough to act, it is equally important to report on those actions, through integrated and sustainability reporting, and through credible marketing messages.
(1). Roozen, I and Raedts, M, 2020. The power of negative publicity on the fast fashion industry. Journal of Global Fashion Marketing, 11(4), pp380–396.
Written by a member of the Strategic Business Leader examining team