The Thinking Executives Guide to Sustainability

The Thinking Executives Guide to Sustainability

Kerul Kassel

The Thinking Executives Guide to Sustainability Copyright Business Expert Press, LLC, 2014. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any meanselectronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher. First published in 2014 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com ISBN-13: 978-1-60649-419-6 (paperback) ISBN-13: 978-1-60649-420-2 (e-book) Business Expert Press Environmental and Social Sustainability for Business Advantage Collection Collection ISSN: 2327-333X (print) Collection ISSN: 2327-3348 (electronic) Cover and interior design by Exeter Premedia Services Private Ltd., Chennai, India First edition: 2014 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

Abstract
We live in an increasingly global economy in which the effects of shrunken economies, broadened communication, and widespread meteorological incidents associated with climate change are leaving virtually no one untouched. As a result, a working knowledge of concepts such as the triple bottom line and sustainability have become mandatory. Systems thinking, foundational for grasping these concepts, is based on transdisciplinary theories, deriving in part from biology, physics, economics, philosophy, computer science, engineering, geography, and other sciences. Specifically it is the study of systems, including all life-forms, climate phenomena, and even in human learning and organizational processes, that regulate themselves through feedback. The media and the public have become savvy to corporate greenwashing, and government regulation, already pervasive in Europe, is imminent in the United States of America. Business practices are a subsystem of human activity, which is itself a subsystem of the biosphere we all depend upon for services, such as clean air and water, sufficient soils to produce food, and moderate weather. Corporate sustainability practices are in the midst of becoming a required aspect of the social license to conduct business, and the use of a systems framework provides a coherent and eminently sensible way to comprehend the structure and logic that underlies this transition. Green business efforts and stakeholder initiatives undertaken by those without the requisite understanding of sustainability and the trends related to it in the world of commerce risk adverse press, activist pressure, regulatory constraint, added expense, reduced revenue, and lowered valuation. This book offers a practical, relevant, and easily grasped overview of sustainability issues and the systems logic that informs them, supported by empirical research and applied to corporate rationales, decision making, and business processes. Intended for business professionals seeking concise, reliable, and current knowledge and trends, it will support them in leading their organizations corporate sustainability, social responsibility, and citizenship efforts so that they can remain competitive and successful.

Keywords
corporate sustainability, corporate social responsibility, corporate citizenship, stakeholder management, sustainable business, green business practices, metrics options

Contents
What Readers Say About........................................................................ ix Introduction.......................................................................................... xi Acknowledgments................................................................................. xiii Quick Reference Glossary and Acronyms................................................. xv Chapter Synopses................................................................................ xvii Chapter 1 Systems Simplified..............................................................1 Chapter 2 What Is Meant By Sustainability and Who Defines It.......23 Chapter 3 Systems and Sustainability................................................43 Chapter 4 Commerce as a System.....................................................61 Chapter 5 Why Industry Is Crucial to Sustainability.........................81 Chapter 6 Corporate Sustainability Frameworks, Metrics, and Indices.......................................................................97 Chapter 7 Where to Start in Your Business......................................123 Notes.................................................................................................149 References...........................................................................................157 Index.................................................................................................171

What Readers Say About

The Thinking Executives Guide to Sustainability
This work touches on a number of concerns that many firms are still searching for answers on. Its a great read to get senior managers and corporate governance folks thinkingas they ultimately hold responsibility for the true long-term impact of their business practices on society. Brock Nicholas, MBA, Senior Vice President, Harmony Development Company Kerul and her co-authors are very broad, and at the same time focused thinkers. They challenge assumptions that make you think differently and better (see Chapter 3 where she challenges different myths). Any business professional can use and benefit from the clarity, directness, and relatedness of this books important and timely content. Jon London, President, The Improved Performance Group A brilliant piece of work by Kassel and her co-authors. If you care about the future of our worldnow is the time for us to stand and take action. It is incumbent upon each of us to understand the critical issues we face. Kassel and her colleagues explain the social and economic consequences of our continued ignorance while showing us the path to a brighter future. Take heed! Bernadette T. Vadurro, Author, Business Speaker, and President, Speakers Live, Inc. This book provides companies with new ways to improve sustainability in small and large ways, and how to measure these impacts and their resulting financial benefits. Its a must read for any company looking to positively impact the environment, the communities it touches, and its own bottom line. Beth Maxim, Manager, Global Learning Operations, Tyco International

WHaT ReaDers Say AbOuT

Readers will just sail through this well-written, timely, easy-to-understand book on a complex and important subject. Ruth Ann Harnisch, President, The Harnisch Foundation This book is a wonderful example of advocating without preaching. Kassel and her colleagues provide succinct and powerful evidence that companies need to seriously consider changing their thinking on sustainability, not just because it would be doing good but also because it would be best for their organizations bottom line. It is extremely well written and respects the fact that its intended audience has very little disposable time. Although each chapter builds nicely upon the one before, this book could and should serve as a resource for executive decision makers in companies large and small. I predict that when leaders begin to read this work they will want to keep going and will want to share its ideas with those they lead. I would urge anyone who is serious about doing well and doing good to pick up this book. It is a somewhat rare example of a work that is at once packed with important information and is also a pleasure to read. Chuck Berke, Executive Coach/Principal, Berke Associates, LLC A surprisingly comfortable read for a scholarly text that engages such a vital and complex topic, the author offers business professionals at all levels a conceptual as well as a practical blueprint for how to think and act in ways that just might make future environmental activists unnecessary! Four Arrows, aka Don Trent Jacobs, PhD, EdD, Fielding Graduate University faculty and author of Unlearning the Language of Conquest, Differing Worldviews, and Teaching Truly The sustainability theme makes sense as to why we have specific sustainability programs in place within corporate America. Having an ecologically minded society cannot end with individuals. We need our various public, private, and government sectors involved with sustainability programs as an investment into our future. This is a great book for our corporate citizens to start understanding the sustainability concept and its applicability. Carl G. Fsadni, CEO - Director, Oak Ridge Group LLC and MALTA.net

Introduction
Dont be put off by the inclusion of systems thinking in the description of this book. Systems thinking isnt some complex, intangible notion that involves a lot of science and math. It is a way of better understanding the world based on tangible, observable facts that we live amongst every single day, at work, at home, within our own bodies, and scaling back out to our communities, nations, and economic and industrial systems. The aim of this book is to introduce people in business, at any level and in any industry, who have repeatedly heard the terms sustainability, triple bottom line, or corporate social responsibility in a business context but want to learn what it means, as well as whether and how to do it. For those already familiar and conversant with the terms, but not with systems thinking, it will add an understanding of how to pursue sustainable processes and practices. This book offers a succinct and easy-toassimilate overview of these topics and uses the most recent information in making the business case for integrating such processes and practices into any firm, and for doing it more deeply. This may be a book to offer to colleagues who dont yet understand growing opportunities and pressures, to plan for and address issues related to incorporating the planet and people to secure and enhance the prosperity orientation of commerce. Financial success is judged on a short-term time frame. Quarterly performance, annual gains, and exponential growth are rewarded but, as will be discussed in pages that follow, emphasis on rapid and explosive growth in the near future frequently has had a negative impact when viewed over an extended span of time. If businesses wish to remain competitive and serve their shareholders, they will be required to contribute to social wellbeing in the long term. As incentives shape behavior, structuring them to make an impact offers more leverage than continual focus on the back end. The seven chapters that follow are designed as a logical and easyto-follow flow of information, supported by a host of documented and up-to-date facts. Each chapter dives progressively and gradually deeper into the concepts and ideas, and each is concluded with a brief summary.

xii InTrODucTiOn

There is, hopefully, a balance of enough repetition in each chapter so that each of them stands on its own yet in total brings home the most important points without being annoyingly redundant. A number of additional resources are offered in the endnotes for those who want to delve further into some of the areas covered. The authors hope is that readers find the information in this book useful, illuminating, and compelling, so that it serves as a springboard for further efforts for organizations to better themselves, finding ever more effective ways of innovating into the evolving 21st century model of business.

Acknowledgments
Thanks, first, to David Parker, for suggesting this book project to me, and to Cindy Durand and Destiny Hadley for helping to herd it through the production pro cess, all of Business Expert Press. Gratitude goes out to my colleagues and reviewers, who are too many to name, but particularly to Nettie Bartel, Beth Maxim, Brock Nicholas, Chuck Berke, Romi Goldsmith, Charlene Hamiwka, Pam Rowe, and Karen Bogart. Their warm encour agement and stronger shoulders (leaned on heavily and often), as well as their gracious and honest feedback, helped shape this work. I would especially like to thank my contributing authors, Kim Hedberg and William Paddock, for all of their hard work and diligence. Kim, a business consultant working with companies on sustainability issues, professional development, business plan writing, and financial analysis, helped with the chapter on the phases of commerce, a number of informative diagrams, and the initial editing process. With advanced degrees in both Hydrology and Business, a B.A. in economics, and her skills in teaching, environmental consulting, and business consulting, she has a sharp ear for an effective and persuasive approach. William is the founder and managing director of WAP Sustainability Consulting, a Nashville based sustainability-consulting firm to Fortune 500 companies and leading manufacturers. His experience establishing, building, and leading sustainability at the enterprise level span more than a decade. Williams expertise in the nuts and bolts of sustainability m etrics contributed to significant parts of the last three chapters. The assistance and input of these deeply knowledgable contributing authors was invaluable. Apprecia tion goes to the International Society of Sustainability Professionals, who made possible a connection to be forged between Kim and me, and to Toby Thaler for his thoughtful referral of William.

Quick Reference Glossary and Acronyms

Anthropogenic: effects that are caused by the activities of humankind. CDPCarbon Disclosure Project: the original name of a non-profit organization, now known as CDP, offering a system for companies and cities to measure, disclose, manage, and share vital environmental information. CSRCorporate social responsibility: the creation of shared value through environmental restoration, stakeholder engagement, appropriate governance, and economic prosperity. ESGenvironmental, social, and governance issues. GHGa gas emitted into the earths atmosphere that contributes to global climatic change, known as the greenhouse effect, by absorbing infrared radiation. The gases primarily responsible include carbon dioxide, methane, nitrous oxide, and ozone. GRIGlobal Reporting Initiative: a non-profit organization that promotes sustainability through a framework designed to assess and report sustainable organizational practices. LCALifecycle assessment: a study that compiles and evaluates all of the inputs, outputs, and the potential environmental impacts of a product throughout its lifecycle, from extraction, refining, and manufacturing through distribution, use, and disposal. System: a set of parts, people, atoms, or anything interconnected in a way so as to produce its own set of internal relationships, patterns, and other dynamics. A system is generated, driven, constrained, or pressured by inside and outside influences to which it responds in its own characteristic way.

xvi

QuicK Reference GlOssary anD AcrOnyMs

Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs. TBLTriple bottom line: an accounting framework designed to integrate ecological and social performance into financial reporting, and intended to include natural and human capital to measure organizational success.

Chapter Synopses
Chapter 1
The business world, as well as society, has reached a tipping point: economic, social, and environmental incidents have forced industry to begin to address how they conduct business, as evidenced by the tremendous growth in sustainability practices and reporting by businesses of all sizes. Research on the cause of the problems now being faced reveals the need to develop an updated worldview, one that is more adequate in explaining the reason behind those problems. Studies have shown that this revised paradigm, based on a principle of interdependency between systems, has gained traction, not only in science, but also in many disciplines, and in commerce. In the broader view, sustainability is the ability for economic, social, and natural environmental systems to coexist in a dynamic equilibrium far into the future, the capacity to meet current needs while ensuring the ability to meet the needs of future generations. Technical solutions developed using an outmoded perspective will necessarily fail, as they will continue to result in the same kind of issues that currently exist. A system is a self-organizing entity that generates inflows and outflows. Within the system are hierarchical, differentiated subsystems which act in interdependent relationship. Central control is balanced with subsystem control, providing resilience. Subsystems that are misaligned with the purposes of the overarching system create imbalances, resulting in destabilization and collapse. Increasing size creates increasing delay in observable change.

xviii CHapTer SynOpses

These systemic qualities are present in all business and industry, just as they are in all biological systems. As business has evolved from highly local tribal bartering to immense and widely distributed transnational commerce, human thinking is in the process of evolving from a mechanistic and reductive worldview to one informed by these principles. The ability to think in terms of patterns and relationships rather than simply causes and parts in isolation, is becoming a critical business skill.

Chapter 2
Most experts agree that any definition and application of sustainability requires attending to a balance of economic, social, and environmental concerns, in both present and future contexts. This triad of components underlies the foundation of triple bottom line thinking and accounting practices, as well as most sustainability frameworks. Sustainability is a systemic concept with an expanded time frame, incorporating an understanding of how civilization has reached this point and endeavoring to create parity for the current as well as future inhabitants of the planet. Corporate social responsibility and sustainability efforts are currently voluntary from a legal perspective, but are becoming part of a social expectation. As impacts and issues vary between industries and firms, there is no single best way to do sustainability. Programs and initiatives run from the substantive, wide-ranging, and deeply integrated to shallow greenwashing. A systemic approach requires awareness of and interaction with stakeholders, those parties impacted by the firm, positively, negatively, or both, such as employees, vendors, nongovernmental organizations, local communities, government, customers, and distributors.

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xix

A number of pressure points are driving responsible business practices, including public sentiment, media exposure, activist campaigns, government regulation, institutional investors, and insurers. The good news is that there is a solid business case supporting those practices: cost savings, managed risks, reputational enhancement, customer loyalty, employee engagement, and new revenue streams and markets are a few of the payoffs.

Chapter 3
A number of current economic assumptions are flawed, such as that growth benefits everyone; that people make decisions rationally and only for their own benefit; that infinitely continual growth is possible; that costs for business impacts not directly incurred by a firm are outside its responsibility. Research has found that growth benefits few, and that it fuels growing income inequity; emotion drives decision making as much or more than logic; cooperation is as potent a force as competition; constrained resources are forcing disruptive innovation in business; commercial interests can no longer externalize their impacts on society and the natural environment. Commonly held assumptions about corporate social responsibility and sustainability in the business context are that its too expensive; too intangible; not important enough to pursue. Instead, sustainability efforts can and often do lower expenses; are tied to solid metrics; will boost any short- and long-term strategic plans.
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xx

CHapTer SynOpses

Industry is among the most significant drivers of the degradation of air, water, soil, oceans, climate, and biodiversity, all vital natural capital at considerable risk of becoming ever more scarce, expensive, and insecure. These problems offer solutions for enterprises to address. A systemic examination of the social side of sustainability reveals that economic and environmental issues are related to issues of poverty. Access to clean water, food, energy, education, healthcare, and livelihoods are all areas around which enterprises can build new businesses and models.

Chapter 4
There is significant overlap between extraction, production, distribution, consumption, and disposal. Sustainable products include those that utilize fewer resources both in their manufacture and use, that last longer, that offer improved performance, and that are designed to be recycled or reused instead of landfilled where further impacts (air, water, soil pollution, and the emission of methane gas) can occur. Sustainability in commerce includes integrating such considerations into the design, sourcing, manufacturing, and distribution processes along with practices that reduce negative impacts, enhance positive social, environmental, and economic impacts, or both. Systemic examination throughout the entire process of commerce reveals opportunities to make more with less. The systems perspective requires that consequences and impacts are determined at each phaseincluding environmental (air, water, land, and species impacts), social (worker, community, and stakeholder interests), and economic. Tools such as industry process maps have been developed. Simple systems maps can help guide the management team to analyze all impacts, both positive and negative, for each step

CHapTer SynOpses

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in the development and delivery of a consumable product or service. Process and system mapping can be accomplished in-house or developed through consultants.

Chapter 5
Industrialization, made possible by scientific discovery and the use of fossil fuels, made rapid population growth possible, stimulating further industrialization and resource use. Slowly, beginning a century and a half ago, and much more rapidly in the last four decades, has come a realization that industrialization, population, and technology are destabilizing forces on the biosphere. Responsibility to restore the planets dynamic equilibrium is shared among 7 billion individual humans (with those in emerging nations using a fraction of the resources of those in advanced nations), non-profits, government, and for-profit business. Industry, however, is both the biggest driver of destabilization and the most capable player in taking the lead. It is the sector with the speed, knowledge, expertise, influence, incentive, innovation, result orientation, access to capital, and collaboration potential flexibility, and innovation to solve the big problems facing humankind. The benefits to industry for doing so are many, including conservation of and better access to capital, long-term growth, expense reduction, employee engagement, brand recognition, and customer loyalty, to name a few. With the advent of hybrid and B corporations, enterprises may be adjusting to the need to balance profit primacy with environmental health and social well-being.

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CHapTer SynOpses

Chapter 6
The pursuit of sustainability is not a one-size-fits-all proposition; it must be tailored to each organization according to its size, industry, values, and capacities. Some of the more common resources for measuring and implementing environmental impact and change strategies include inventorying greenhouse gases, conducting lifecycle analyses, or utilizing a standard reporting framework such as that offered through the International Organization for Standardization and CDPs programs. Greenhouse gas inventorying is a form of accounting that measures direct and indirect emissions, and can identify areas for improving efficiency and reducing impacts. Lifecycle assessments follow a product from cradle to grave from the extraction of raw materials through refinement, product manufacture, transport, consumption, and disposal. There are both environmental and social lifecycle assessment tools. CDP offers programs for measuring, managing, disclosing, and sharing an organizations risks related to the environment, particularly climate, water, and forest-related issues. The Global Reporting Initiative offers a framework that integrates not only environmental issues, but also social, economic, and governance components as well. While full use of these tools, standards, and frameworks are the province of larger organizations, they offer smaller and mid-sized firms plenty of guidance to get started with metrics. The use of any of these frameworks and tools refocuses measurement to align with a more systemic understanding of the interface of industry with the larger systems of society and environment in which it operates.

CHapTer SynOpses xxiii

Chapter 7
Resources needed to begin working sustainable practices into an organization include familiarity with and an ability to discuss the business case for it and how it is aligned with an organizations strategic plan. Support from top leadership, including championing efforts and supporting with human and financial resources are key, as are mental toughness, persistence, and patience. Sustainability efforts occur in a cycle of planning, baselining, goal setting, measuring and monitoring, reporting to stakeholders, and starting another cycle by reviewing and updating goals. Some leverage points have more power than others. Changing mindset is the most potent, followed by changing the objectives of the organization, changing the rules and incentives of the organization, and improving access to information. Any plan will need to address resistance, which takes many forms, including aversion to change, short-term thinking, mental and strategic shortcuts, ignoring empirical facts, and conflating wants into needs. A focus on only low-hanging fruit is likely to result in minimal ad hoc projects that dont address an organizations material impacts. Measurement can have a number of components and should address elements of governance, environmental, and social indicators. There are a number of principals associated with these indicators, such as relevance, completeness, consistency, transparency, accuracy, quality, balance, clarity, reliability, and boundary that guide reporting. The longer society delays on addressing environmental, social, and governance issues, the more severe will be the consequences. The future of industry, and of society, may be constrained by necessity. It will take the concerted and combined attention of individuals, communities, development and research organizations, universities, governments, and enterprises of all kinds in pursuing a sustainable future.

CHAPTER 1

Systems Simplied
A Tipping Point?
Business trends provide essential information that business leaders ignore at their firms peril. One such trend is the integration of environmental, social, and governance (ESG) issues into firm operations. A visible example of this trend is sustainability reporting, which has been growing for decades and continues to expand in spite of years of global recession. While reporting is no longer a new practice for many firms, a joint study released in 2013 indicated that calls for transparency and reporting were resulting in increasing mandatory government or market regulation in a number of countries, prompting firms to sharpen or extend their efforts, and their reports.1 Now that reporting, and the initiatives that accompany them, have become expected, firms are seeking and finding means to turn the application of sustainable practices toward tangible and intangible value creation, as well as competitive advantage, and not a little risk management. Firms have only more recently begun to develop a full understanding of the benefits, and of the risk components. A 2013 survey by Ernst & Young noted that most firms were not addressing material sustainabilityrelated financial risks.2 As business trends go, sustainability has ramped up in the past few years. A survey of senior business executives by KPMG conducted back in 2010 found that 62% of the firms responding had a sustainability strategy in place, representing a 25% increase from 2 years earlier.3 More than half of these public and private companies had either already issued a public report or were planning to do so in the near future. Executives participating in the survey cited potential cost reductions as a key driver, with risk management, brand enhancement, and regulatory requirements as

THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

additional rationales. A follow-up report, KPMGs International Survey of Corporate Responsibility (CR) Reporting, stated, CR reporting has become the de facto law for business4 and that of the 250 largest global companies, fully 95% now report on their CR activities.5 According to the surveys, sustainability is increasingly viewed as a strategic focus for both new business opportunities and innovation in processes, practices, and systems. This sentiment was similarly expressed by the respondents of a survey published in 2012 by a joint effort of Ernst & Young and GreenBiz Group.6 On the minds of the leaders of these publicly traded organizations were entry into prestigious sustainability stock indices and high-profile rankings. Such ratings and rankings benefit a firm, making it worthwhile to disclose their practices, as the call for accountability grows through the media, non-governmental organizations (NGOs), shareholder activists, and customers. Fully twothirds of firms responding to this survey reported an increase in inquiries from shareholders and investors about sustainability-related issues. A June 2012 article on Forbes.com suggested that sustainability reporting is hitting a tipping point, as investors, governments and even many influential corporations come to see such disclosure as a key mechanism for strengthening markets and essential to building a sustainable economy.7 That is not to say that such reporting is not without its challenges. There are some direct costs associated with baselining, implementing programs and monitoring them, ongoing measurement, and reporting. Uncertainty about trends in the regulatory environment adds risks, as does customer sentiment and willingness to pay for added costs associated with sustainability efforts. There is no guarantee as to whether those efforts will be well received by consumers, the media, and shareholders, as well. The growing practice of reporting, though, is evidence that it pays to make the effort, in spite of the risk. The business world is on the brink of understanding itself as a system that exists in relation to and is interdependent upon other systems: the economy, the government, the public, and the natural world. A development in the insurance industry offers another example that illustrates the point. In the Market Trends section of their website, the International Insurance Society reported on a United Nations initiative called Principles of Sustainable Insurance, which the insurance trade group

SysteMs SiMPliFied 3

launched in June 2012 at their annual meeting. The International Insurance Society describes the commission responsible for these principles as a group of leading insurance industry institutions committed to embedding in industry decision-making environmental, social and governance (ESG) issues relevant to the insurance business, and, more broadly, to sustainable development, through implementation of these principles.8 The effort is intended to require that institutional investors account for ESG issues as part of their fiduciary obligations to invest in the best interests of their beneficiaries. Taking stock of the losses incurred through management mistakes and misdeeds, public relations crises, and environmental disasters, the insurance industry has started to recognize the complexity of interactions among the players, or subsystems, that increase their exposure. Boards of directors are waking up to the recognition that their fiduciary responsibilities of making organizational decisions and guiding management behavior include generating and maintaining the trust of the public. Increasingly, the public requires transparency as a requirement to elicit that trust. Systems and Sustainability: What This Book is About There is certainly a trend afoot, one that appears not to be a fad, but has been building up over the last few decades. Most people have heard of the term green, and while some in management may consider it a flavor of the month, the developments described above are evidence of not only the staying power of the trend, but its increasing reach and depth in business practices. This book offers an overview of these developments, an explanation of why they have built such steam, and a way of incorporating the forces behind that explanation into an enhanced business model that offers better results. There is a growing argument that business as usual isnt cutting it anymore. Examining that system and seeking to understand how and why the system has been working (or breaking) allows firms to apply more than just a band-aid. The aim of this book is to give readers a more robust grasp of the forces that influence their firm, industry, economy, society, and beyond, for better and for worse, so that they can make decisions that offer many competitive advantages.

THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

There are underlying assumptions embedded in the perspective offered in the next seven chapters. One of them is that the authors accept established scientific theory, including evolution. An extension of this is that all human activity, including the business world, is influenced by the same forces that created the natural world with all its life-forms, including homo sapiens. A second assumption is that a systemic mindset, or paradigm, is an extremely helpful add-on to the current dominant mindset. The latter mindset might be called mechanistic, meaning that the thought process used to explain the world is compared to how parts of a machine work together. Another characteristic of the current dominant mindset is its reductionist aspect, meaning an approach to understanding complex things by reducing them to their parts, the whole being not more than the sum of those parts. Systems thinking, while incorporating some aspects of the mechanistic and reductionist models, goes beyond to offer a more realistic, logical, and sufficient explanation of the how things work. See Table 1.1 for some distinctions between mental models. That is not to suggest that a systems paradigm explains everything and that it is the ultimate mental paradigm, but rather that it is the next evolution in the understanding of the world. Human thinking evolves. One
Table 1.1. Comparison of Mental Models Current dominant mindset focus
Unrelated parts: parts as separate from and independent of the whole or larger system. Structure: the organization of the parts, and their traits. The map. Contents: ingredients, parts, boundaries, factors, variables. Symptoms.

Systems mindset focus

Relationships: interaction and interdependency of parts between themselves and the whole. Process: how the parts, inputs and outputs, and internal and external forces create change. The territory. Patterns: changes in quality and quantity, inuenced at leverage points. The source of symptoms.

The parts: focus on the parts individually, The whole: focus on the whole, and how comprising a total that is no more than the the parts relate to each other and synergissum of the parts. tically combine to create a whole that is more than the sum of its parts. Linear movement: one way, one direction. Cause and effect. Multidirectional movement: many ways, many directions. Complexity.

SysteMs SiMPliFied 5

example is the transition from a belief that the world was flat and the sun revolved around it to viewing the earth as round, revolving around the sun, and beyond, to the capability of landing vehicles on other planets. Humankind is in the process of shifting their paradigm from viewing the aspects of the world as separate parts to seeing them as intertwined in relationship with each other. As a simple example, non-compliance with company policy may appear to be a problem originating with poor supervision, so compliance targets are set, to which incentives are attached. Yet the problem may have its source in insufficient training, a discrepancy between firm culture and policy, a prioritization of key performance indicators that conflict with compliance, inadequate communication between departments, or other sources elsewhere within, or outside, the organization. The first three chapters of this book provide a simple, clear explanation of the systems framework. This framework, informed by business news, scientific research, and other developments, necessarily leads to concerns about sustainability. These chapters set the stage for applying the systems framework to the world of commerce and management decision making covered in Chapters 4 through 6. Chapter 7 offers a brief overview of ideas with which to get started in your business and a discussion of where these developments may be headed next, with examples of emerging business and economic models, in preparation for the next wave of change. Each chapter goes successively deeper into thinking systemically and applying that thinking toward sustainable business solutions.

What Is Sustainability?
The concept of systems has been introduced, but what is meant by sustainability? Is it the same thing as corporate social responsibility (CSR), or corporate citizenship? Does environmental health and safety cover it? Is green the same thing? The answer to these last three questions is no. Sustainability is an overarching term, a concept that is contested (see Chapter 2), misunderstood, misused, and abused, but at the core it simply means the ability for economic, social, and natural environmental systems to coexist in a dynamic equilibrium far into the future. The concept of sustainability inherently takes a long-term view. Human

THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

impacts upon the planet, or biosphere, should not cause scarcity in key resources such as drinkable water, breathable air, sufficient fertile soil, and stable, productive oceans. Sustainability also incorporates overall human well-being, including economic systems, in that they must be adequate to avoid widespread social suffering and upheaval. While social aspects of sustainability must be attended to as intentionally as environmental, the state of natural systems may suggest more urgency. Increasingly, scientists of all disciplines are reporting that our behavior is pushing the planets dynamic equilibrium to the brink, with growing damage to natural systems, and leading to social impacts. Massive losses of arable soil due to over-tilling and erosion, fresh water use far outpacing the ability of aquifers to replenish it, overfished oceans that are becoming more acidic and salinized, and air quality increasingly imperiled in many locations are some of the environmental impacts. Nature can take care of itself to a point but it is likely to take thousands, if not tens or hundreds of thousands of years, particularly in regard to biodiversity, to recover only some of the losses the biosphere has incurred in the last couple of centuries. Much of the damage has occurred only in the last 50 years. If the previous decade is any indication, natures rebalancing efforts may continue to wreak havoc in the meantime. Climatologists predict increased extreme weather patterns, including record-setting heat, higher incidence of wildfires, drought in some widespread areas and floods in others, and extensive loss of crops due to these and related other problems.9 For those who tend to believe that technology is the answer, while society can hope to find viable technical solutions, it would be a mistake to implement fixes that resolve one problem while causing another. There is no lack of double-edged swords that have provided short-term solutions while inflicting inherent long-term costs. The Green Revolution increased agricultural production in part by using dichloro-diphenyltrichloroethane (DDT), a pesticide from which ecosystems are still recovering. Shifting agricultural production to bio-fuels has altered agricultural production and increased food prices around the world. Hydrofracking (also known as fracking), while shifting away from problematic oil drilling to cleaner natural gas, is increasingly being shown to endanger water supplies.10 Carbon sequestration may be less effective and more dangerous

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than anticipated, with leaks to the surface and possible induced seismic activity.11 Insect and herbicide resistant crops are beginning to backfire, leading to herbicide resistant superweeds and contamination of conventional and organic crops.12 The use of aerosols in refrigerants and propellants resulted in a significant gap in the protective atmospheric layer, and the pervasive use of fossil fuels is altering our planet in a number of harmful ways, threatening not only ecosystems, but also our own species. While any remedy has its downside, shortsightedness will only be more expensive and harder to fix later. You may be inspired by the potential opportunities, or perhaps you see the writing on the wall, that customers, employees, the media, and government regulation are shifting the ground beneath the feet of industry. If you want to know how commerce can contribute toward sustainability, continue reading. There are many books that discuss sustainability initiatives in business, and this book stands on the shoulders of some giants in this field, notably Peter Senge,13,14 Paul Hawken,15 Amory and Hunter Lovins,16 Donella Meadows,17 Peter Checkland,18 and Russell Ackoff19as well as Wayne Vissers excellent set of summaries in The Top 50 Sustainability Books.20 While these notable authors and others have detailed a systemic approach to sustainability in a business context, there are few books that offer a concise and very accessible overview that incorporates both the thinking that underlies the premise of sustainability and its application to business practices. Without the systemic foundation, almost all efforts at creating sustainability will fall short. The momentum toward sustainability in business practices continues to gear up, to which the documentation of many recent developments and events included in the following chapters attests. It is inevitable and irrevocable, and those leaders who are not equipped with the knowledge, competencies, and tools to help them navigate through this uncharted territory will lose advantage and opportunity. In a brief format, this book is an easy-to-use guide that boils down the big picture sweep of a complex topic, supported with up-todate documented facts. The following chapters are an overview of sustainability in commerce from a simple systems perspective. It is not primarily about the organizational dynamics and values that drive firm activities and policies, but

THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

which are still necessary for successful commercial initiatives grounded in a sustainable sensibility, although we touch on this subject in Chapter 7. The focus of this book is to offer a different, more comprehensive, way to understand the changing forces that are making business so complex today, and how to harness these forces toward successful business results. Leaders may sometimes find it hard to reconcile these pressures, and feel pulled in different directions in serving the interests of shareholders, employees, vendors, customers, the media, financial analysts, the government, local communities, and the environment. While it may not appear to be so, these groups and their concerns are moving in the same direction, though not at the same rate and not necessarily in a linear path. The goal of this book is to help you become adept at identifying the existing patterns in the system, to identify leverage points at which to exert pressure to create the desired change. Business Practices Viewed from a Systems Perspective In case you are not yet convinced that a systems mindset applies to business concerns, that they are qualitatively different than the natural world because they are a human construct or for some other reason, consider the following points. From an evolutionary perspective, the structure of a commercial enterprise replicates natural systems on a number of levels: on an individual business level as a social unit, and as an entity, and on a bigger scale as a component in a trade system, and the trade system as a component of not only the human system, but of the global biospheric system (see Figure 1.1). As an entity, even if it is a conceptual one, a business starts its life as self-organizing, comprising a few individuals with an idea for a product or service. These few people perform the different tasks necessary to g enerate inflows and outflows of stock (materials, parts, products, services, and money being the more obvious flows). As the business expands it becomes more complex and hierarchical, and departments (differentiated subsystems) evolve and then grow, not only in size but also in the depth and breadth needed to handle an increased and wider set of functions more efficiently.

 Economic viability
Risk management-reputation market share-regulation technological innovation-profit asset management-fair trade

SysteMs SiMPliFied 9 Social equity

Health safety/security-human rights social justice-well- being-choice cultural diversity and preservation

Environmental health
Biodiversity-climate change air quality-water quality/supply habital preservation-soil viability consumption of natural resources

S Y S T E M S

L O N G R A N G E

Biosphere Future generations Developing world Developed world Industry

B I O C E N T R I C A N T H R O C E N T R I C

R E D U C T I O N I S T

Organization S H O R T R A N G E

Individual

Figure 1.1. Simplied sustainability framework illustrating systemic interconnections.

These departments are in interdependent relationship with each other, in which central control is balanced with departmental control. This gives the business greater resilience to withstand negative impacts to any department. Relationships are stronger within these departments than the relationships the departments have with each other. Feedback loops, such as slow sales, returns, parts availability, and distribution issues, are the information mechanism by which business determines a need to change behavior. The behavior change results in a dynamic equilibrium where the business regulates itself to adjust to constraints, delays, and surprises. With increasing size comes increasing delay for the organization to recognize problems and act, and for the actions to have an effect.

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

Interdependence exists not only within the organization, but also with vendors, customers, investors, and industry trade groups. The term stakeholder, explained in more depth in Chapter 2, has its roots in systemic thinking. The interdependence continues beyond the human realm to the available physical resources and energy needed to house the organization and produce its goods and services. The links are beyond such immediate and direct ones as computers, telephone, and paper, but extend further to software makers, raw materials for ink, suppliers for all the bits and pieces of computers, servers, and peripherals, cross-national telephone networks and switching systems, energy and electricity for manufacturing, not to mention the facilities for each of these supplies and the land they occupy, and their supply chains. The interconnectedness continues farther, as none of these products and services are possible without all the people working to mine, refine, manufacture, administer, deliver, and service these further links. These people must be included, as well as the transport that gets them to work, the food they eat to provide energy to work, and the communities and families that they depend upon. And none of those would be viable without secure, safe, and affordable energy, clean air and water, fertile soil, and predictable weather patterns.

Why Understanding the Systems Framework Is Essential for Understanding Sustainability

The social world is increasingly interconnected, not simply through social networking but in terms of resource extraction, supply chains, labor, and markets. The globalizing human community of commerce is a reflection of the physical planet that all human activity depends upon for countless needs. Understanding how industries, and the biosphere, are systemically (not just systematically) coupled provides insight into trends and opportunities, as well as risks and exposures. Such an awareness has become necessary, not only to conduct legal, profitable business, but also to maintain a social license, meaning the legitimacy in the eyes of the public, media, and the government, to do business in the 21st century. The Limits To Growth first popularized the concept of systems as a model for understanding the world.21 One of the authors, Donella Meadows, went on to write a primer on the systems model, defining a system as A set of elements or parts that is coherently organized and

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nterconnected in a pattern or structure that produces a characteristic set i of behaviors, often classified as its function or purpose.22 As a supply chain, a manufacturing scheme, a set of distribution channels, or an organizations information technology is a system, so is the organization, its departments, and each of the individuals within it. A system has identifiable parts, some tangible, some intangible, that are interdependent and interconnected, and together act differently than the parts do alone. Systems have the capacity to regulate themselves based on feedback or signals. In an organization, as widget sales increase, widget inventory is reduced, which signals the production department to create more inventory, and the purchasing department to order more widget parts. There are flows of both physical parts and information. To develop more of a systemic thinking model, lets explore an example of a (sub)system, a jet airplane (see Figure 1.2).

Extracted resources

Jet fuel/fluids industry Jet fuel $

Airline industry Communication AIRLINE

Aircraft&parts manufacturers $ Airplanes parts

Extracted resources

In-house flight services Service Wastes Waste exhaust etc. Operation

Flight crew Service

Administration Communication

Flight services (catering/ cleaning) $ Service/ products Service

Communication Ticketing scheduling $ Provisioning infrastructure

$ Passengers

Maintenance

Land/water resources

Airports

Approval infrastructure maintenance $

Local Governments

Figure 1.2. Simple systems diagram of using an airplane for illustration. Arrows are ows, and stocks are what ow along the arrows.

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

Elements A jet airplane is a system of elements or parts, such as engines, a cockpit with instrument panels, control yokes for steering, a body with wings, rudders, wheels, tires, and a flight cabin, all interconnected in a structure for the purpose of moving people from one location to another. The airplane itself contains a number of subsystems that specifically support its purpose: a system for acceleration, another for braking, a third for electrical, another for steering, and so on. These subsystems often influence each other through flows of stock: air provides lift, the oil lubricates the engine, batteries provide power to start the engine, and the engine provides the power to recharge the battery, while jet fuel powers the engine. Stocks, as will later be explained, can be material, energy, or information. The airplane is made up of a number of materials, including various types of metals, plastics, resins, rubber, and glass; you could substitute some elements for others of similar type, without too much impact on the functionality of the vehicle. Leather or a synthetic could replace fabric for seats; newer, lighter metal alloys and high impact plastics have replaced prior technologies, for example. Take away some parts, however, like the engines or the wings, and the airplane ceases to perform its function. At that point it is no longer a system and it ceases to function as designed, just as a business could not operate without products, services, or customers, or an animal could not function without a heart or a brain. Interconnectedness A jet airplane is commonly understood to be a single object with unambiguous boundaries. There is more to it, of course, and without consideration for these aspects, the airplane will not be able to serve its purpose. Looking at the airplane from the systems perspective allows us to consider it within a bigger picture, the dynamics of how the airplane influences and is influenced by other objects, materials, factors, and forces (which are actually elements and systems). The focus is on the relationships between them. The most obvious way the airplane is a subsystem, part of a larger system upon which it is interdependent, is that it needs jet fuel, with its own industry of extraction, refining, distribution, and sales. In order to

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fulfill its function it also needs passengers, for whom the airplane must be safe, affordable, and convenient enough to use. The route the airplane travels, therefore, is dependent on where those passengers need to go. For now, the need to understand the demographics of the passengers will be skipped, but suffice it to say that without people for whom the airplane is the transport of choice, it would not serve its purpose. Another component of the larger system within which the airplane operates is the airports to which it travels and that must be regularly maintained. The airplane also requires a labor force to keep the vehicle fueled and maintained (another set of industries for parts and mechanic training), as well as driven and paid for. Furthermore, it is usually one of a number of jets in the fleet of a privately funded enterprise, the administration and operation of which may be partially funded by and negotiated with government agencies, themselves funded by some means of public taxation. The operation of the airplane also requires runways, signage and land allotted for these, as well as real estate for fleet parking, maintenance, and administrative operations. Anyone who has been in an airplane knows that weather and air traffic are likely to impact travel scheduled. Jets impact noise levels, influencing health and quality of life issues. Not as obviously, the airplane also affects ground water quality through its exhaust, tire wear, and any fluids that may leak or drip. These outputs contribute to (or detract from) the health of the ecosystems throughout its route, too. Behavior and Function Returning to the qualities of a system, the purpose of any system is influenced by its function and its behavior. Its structure gives rise to that behavior. The structure of a jet airplane, with its large capacity, is aligned with its purpose of transporting hundreds of people, but remove the turbine or spark plugs and youre left with a large storage locker or perhaps a classroom or greenhouse. With its traditionally streamlined silhouette, extensive control panel, and cramped economy cabin, its clear that aviation engineers designed it for the purposes of speed, safety, and efficient use of space. When examining human systems, with their biological needs, psychological impulses, and cultural values, new layers of complexity emerge.

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

The purpose of a firms accounting department is primarily to record and review the organizations financial condition, in this way serving the organizations mission to continue to function by having more than sufficient revenues to cover expenses. The departments sub-units for payables and receivables, payroll, inventory, and other assets and liability, are designed with the overall departments purposes in mind. Poor math skills, inadequate knowledge of accounting practices, a desire to present the company in the best possible light in spite of evidence to the contrary, and self-enrichment at the firms expense are all behaviors that hijack the departments purpose (see more about goal mismatch later in this chapter). Self-Regulation, Feedback, and Delays The illustrative airplane is equipped with a set of self-regulatory subsystems. The carburetor regulates the amount of air to mix with the fuel vapor to power the engine. Engine lubrication systems prevent seizing up. The airplane is equipped with feedback mechanisms, too: the instrument panels lights alert the pilots to take action when necessary, the altimeter helps the pilot adjust the vehicles altitude, and the radio permits communication about takeoff, route, weather, landing, and other necessary information. But delays are inherent in systems; in this case, an indicator light illuminates before the pilot sees it, and the thrust control speeds up or slows the vehicle down only gradually. The larger the system, the longer the delays. If more passengers want to take a particular route or flight than there is capacity for them, it may take days for the feedback to get from the ticketing department to the airlines customer service, and weeks to get through to the scheduling system to adjust the airplane size, schedule, or route. If feedback requires a review of policy and procedures or a re-evaluation of assets or services, the delay for changes to expand capacity for new passengers may be even longer. Self-regulation in organizations is often beset with feedback and delay problems. The small start-up firm is quick and agile, like a speedboat, but the multinational conglomerate resembles more of a huge cruise ship in its ability to process feedback and adjust course. Critical information may get trapped in silos due to departmental barriers, competition, favoritism,

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or even incompetence. Decisions get bogged down in intra-organizational politics, tabled for further research, or delayed or dismissed due to other priorities. Action on decisions may have to go through committee rounds, wait for assignment or scheduling, or may fall through the cracks entirely.

The Systems Paradigm: A New Point of View

Mindset, or how a thing or a person is viewed, determines how it is valued and treated. In a sense, mindset influences perspective, and perspective creates a version of reality. As mindset itself influences perception, it therefore influences decision making. For example, an investor might be delighted that a recent stock investment has risen 50% in value in a matter of a month or two, until discovery that another stock that had been considered has increased by 200% in the same period of time. Conversely, employees might be upset that salaries have been frozen and benefits curtailed in their company, yet their sense of fortune might change when valued colleagues are laid off. Mindset is inherently relative, a mental model that is built on particular assumptions. Such frameworks are necessary to understand how the world works, and to solve problems. They help in determining what is true and what is false, how to act, what to pursue, and what to avoid. In the developed nations, the current dominant mindset reduces a phenomenon to a study of isolated parts, is usually explained by a causality that is overly simplified, and assumes that the sum is equal to the parts. Stemming from confidence in mechanics, technology, and hard sciences, many business people rely largely on a mindset that utilizes mechanics, which abridges the relationship between cause and effect. Here is an example: bacteria reproduce until they cause an infection, thereby causing illness, so killing the bacteria through antibiotics will alleviate the illness. Recently, research has shown that some bacteria, as well as viruses, are essential for health.23 The emergence and spread of the use of antibacterial products and routine antibiotics applications for non-bacterial illness and in livestock have resulted in deadly antibioticresistant bacterial strains. The World Health Organization (WHO) now recommends reform in the use of antibiotics due to increased resistance caused by their prior overuse.24 Benevolent bacteria are being recognized

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

for their value in medical treatments, as well.25 Reliance on an overly simple explanation about the parts, rather than the processes and relationships, skewed the perception of value. Not all phenomena can, or even should, be quantified and reduced, as this denies or ignores substantial spheres of experience and phenomena as well as systemic wholes and interconnections. It also leads to bad theory and policy: Pretending that something doesnt exist if its hard to quantify leads to faulty models...No one can define or measure justice, democracy, security, freedom, truth, or love.26 Spirituality and belief in a universal entity and a unity of all things, whether in connection to nature or not, is not empirically founded, yet many people experience it strongly. Should it be discounted as a misguided human cognitive foible, or allowed for the validity of an as yet unproven or, more likely, unprovable entity? Viewpoints regarding technology, economics, policy, and more, in relation to sustainability, depend on the answers to such questions. Technology has great potential for addressing environmental, social, and economic issues. Yet, as discussed earlier, technocentrism, the belief that all problems can be solved by technological breakthroughs, is risky. Although humans are a highly inventive species and it is possible that innovations in energy production, emission controls, agriculture, building materials, and water use may alleviate some burdens, the urgency of the situation requires caution. Our current dominant perspective certainly has value in a number of ways. It has led to an understanding of how parts work, and to theories that are grounded in proof, as well as untold applications used in daily life that most people are barely, if at all, aware of. Yet, it is being demonstrated to be insufficient in adequately explaining or resolving complexity, in science, in nature, in business, and particularly in relation to human behavior. A systems perspective might be thought of as an upgrade to this way of thinking. It is able to describe observable facts more fully and satisfactorily. For example, it recognizes that everything that is studied is both a system, potentially containing other systems within it, and is a part of a larger, overarching system. A systems paradigm also posits the emergence of capacities and properties within systems and subsystems as they evolve. Broad examples are the emergence of life from the proverbial primordial

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soup, the development of written language among humans, or the rise of the transnational corporation from ancient bartering practices. When addressing a problem or question, rather than isolate various parts to identify the source of a specific symptom or occurrence of the problem, the systems mental model examines the system as a whole to identify relationships that might be responsible for generating the observed conditions. Patterns, rather than symptoms, are sought out. If a firms sales are decreasing, the usual approach might prompt a look at the sales department to troubleshoot the problem. Looking at the bigger picture of the organization, though, there are many possible relationships that influence sales: issues with inventory, distribution, marketing, slow response to market changes, and insufficient interaction between purchasing and production, or something common to all of these. For example, one behavioral pattern among these individual fault lines points to deficient or withheld communication. The systems thinker does not look to place blame, but to understand how the structure, in this case the information flow within the organization, and between the organization and its market, industry, and society might be creating or contributing to the problem. This points to an enhancement that a systems perspective brings to thinking about boundaries. Instead of assuming a closed system, one that is isolated, with distinct separation between parts, it assumes an open one. As a result, a systemic paradigm looks at relationships within the system, the relationship of the system with other systems in a larger entity, and the relationship of the entity itself to the overarching whole, rather than just at the qualities of the parts themselves. The current dominant mental model informs us about the qualities of subsystems. Rather than replacing it, systems thinking includes it and enhances it. The added lens of a systemic approach gives a more thorough explanation the world, whether natural, human, conceptual, scientific, or even engineered. Studying the interconnectedness between these topics is one way of recognizing those relationships and an avenue into the systems mindset. All systems seek some kind of goal, and their parts contribute to the pursuit of that goal. In any living organism the primary goal is survival, with secondary goals of comfort, reproduction, and, in more complex

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

life-forms, resource acquisition. Much the same could be said of most business organizations! In humans and other social animals, this can be understood as status, or position in a hierarchy.27, 28 For instance, biologically, our circulatory, pulmonary, digestive, muscular, and other systems all support our bodies continual survival, just as the human resources, production, accounts, and purchasing departments are designed to do the same for an organization. Actions to reduce fat and increase fitness and attractiveness are comparable to a manager who seeks to root out inefficiencies, reduce expenses, boost productivity, and grab the attention of his superiors by doing more with less. Just as a too stringent diet and overly rigorous exercise program can lead to problems, when goals are pursued without staying attuned to the subsystems function in serving its super-systems needs, problems develop. Goal Mismatch: How Assumptions of a Paradigm Guide Behavior In a business organization, goals of survival and further prosperity guide decision making. There are a number of pathways toward this goal, but the common approach, one with some legal basis, is to improve shareholder value, meaning monetary gain. Related common approaches targeted at improving shareholder value include increasing sales and the value of assets, and decreasing costs, liabilities, and risks. When these secondary or tertiary goals are unexamined in relation to the primary goals, problems arise. The pressure to increase sales sometimes results in unstable finances because of a need to increase parts inventory coupled with a lag in receivables, decreased organizational productivity due to overworked, unengaged, employees, or an insufficient distribution network. Additional results include bad press because of inaccurate or exaggerated marketing claims and lawsuits arising from the suppression of information that could be detrimental to users/consumers of products or services. A drive to reduce costs may result in staffing levels or morale that lower productivity, lower-cost parts that break or malfunction more easily resulting in reduced sales or increased returns. Such problems generate internal organizational costs; but these are not the only costs incurred. These are systems issues because the perceived problem that results in the

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cost reduction goal is very rarely considered within the broader system context of the organization, to say nothing of the industry, the economy, the society, and the planetary systems. Problems construed as stemming from the subsystem generate goals that cause unforeseen consequences, not only within the subsystem, but also in related subsystems and the super-system. Too often, sustainability practices have solely emphasized short-term and direct economic utility, for which a value is computed in monetary terms. It is only recently that a growing number of economists are realizing there are costs not traditionally considered or included. In Triple bottom line (TBL) accounting practices, externalized costs are integrated for impacts from which an organization does not experience a direct expense, but costs are realized in some other system or subsystem.29 There are costs of clear-cutting forests, for example, such as the loss of biodiversity, soil erosion and the resultant flooding of downstream land and residences, reduction in the purity of water sources downstream of clear-cut lands, and the loss of wilderness. Yet, the organization doing the clear-cutting does not hold those costs in their balance sheet. Mineral mining done in the developing world, while it provides income for workers, often entails large costs in the localities from which they are extracted, such as environmental damage, pollution, worker health, and disruption of family structure.30 Again, these costs are usually not accounted for or addressed by the company profiting from the minerals. Some of these externalized costs are quantifiable, but many costs are cumulative and more regional or global in nature. There is not yet an accepted method to calculate the value of clean air, potable water, sufficient soil, or adequately alkaline oceans. Typically, assets are valued by their market price, but natural assets such as these are not owned or marketed, and there is thereby no framework or formula for calculating values and costs. Alternatively, there are no accepted calculations to compute the costs of widespread and growing poverty, an increasing wealth gap, and the predicted effects of climate change. (Chapter 3 goes into more depth on the economic foundations, social aspects, and environmental qualities of sustainability, as well as an exploration of wealth.) It could be argued that such costs are not within the control or responsibility of business firms, that they should rightly be externalized

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THE THINKING EXECUTIVES GUIDE TO SUSTAINABILITY

and addressed by governments, but this is likely to result only in increased regulation or taxation, which most businesses reject. (Chapter 5 will address why industry is crucial to sustainability.) There are solid reasons, entirely aside from any moral motivation, to account for externalized costs. Recent events, such as the Arab Spring in the Middle East and the Occupy Movement in the United States and abroad, create reverberating political and economic waves that impact companies. Firms are being targeted either directly by activists, media, and the government, or indirectly through market and social conditions. A social license, the tacit approval of the public, government, and the media to conduct business, is necessary for a firm or industry to exist. The criteria for that social license are becoming more stringent. Regulation is essentially a form of restricting an industrys or commercial interests social license to operate. Calls for greater transparency and accountability are now more widespread. Insurance companies have begun to require that policyholders have plans to address environmental and social risks, with institutional investors not far behind. Viewed from the narrower lens of shareholder value alone, corporate sustainability efforts are no longer optional. Examining issues through a short-term time frame is characteristic of the current dominant mindset. Financial success is judged on quarterly performance and annual gains. Exponential growth is rewarded but, as will be discussed in the next chapter, emphasis on rapid and explosive growth in the near future frequently has had a negative impact when viewed over an extended span of time. If businesses wish to remain competitive and serve their shareholders, they will be required to contribute to social well-being in the long-term.

Chapter Summary: Key Takeaways

The business world, as well as society, has reached a tipping point: gone are the days when security and the promise of prosperity were taken for granted. A host of economic, social, and environmental incidents have forced industry to begin to address how they conduct business, and the impacts of their practices and policies on society and the planet. The evidence of this trend is the tremendous growth in sustainability practices and reporting by businesses of all sizes.

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Research on the cause of the problems now being faced reveals the need to develop an updated worldview, one that is more adequate in explaining the reason behind those problems. Studies have shown that this revised paradigm, based on a principle of interdependency between systems, has gained traction, not only in science, but also in many disciplines, and in commerce. In the broader view, sustainability is the ability for economic, social, and natural environmental systems to coexist in a dynamic equilibrium far into the future, the capacity to meet current needs while ensuring the ability of future generations to meet their needs. Technical solutions developed using an outmoded perspective will necessarily fail, as they will continue to result in the same kind of issues that currently exist. A system is a self-organizing entity that generates inflows and outflows. Within the system are hierarchical, differentiated subsystems which act in interdependent relationship. Central control is balanced with subsystem control, providing resilience. Subsystems that are misaligned with the purposes of the overarching system create imbalances, resulting in destabilizing feedback loops, mechanisms by which the system determines a need to change behavior in order to maintain a dynamic equilibrium. Increasing size creates increasing delay in observable change. Each of these systemic qualities is present in any business and industry, as they are in all biological systems. Just as business has evolved from highly local tribal bartering to immense and widely distributed transnational commerce, human thinking is in the process of evolving from a mechanistic and reductive worldview to one informed by these principles. The ability to think in terms of patterns and relationships, rather than simply causes and parts in isolation, is becoming a critical business skill.