Profitability versus sustainability – are these mutually exclusive? I hardly need to motivate why this is such an important question. Humankind stands at the precipice.
We are using one- and-a-half times worth the resources the earth is able to produce. We are living off the earth’s capital and no longer only on its interest. The prospects down the line are sobering, if not downright terrifying.
Business is regarded by many as a greedy devourer of scarce natural resources at the expense of society and future generations. Aristotle’s view that trading for profit was devoid of virtue and engaged in only by parasites ironically rings true today. Still, the indispensable contribution that business makes is undeniable.
We are confronted with two seemingly conflicting demands: the insistence on profit on the one hand and the urge for sustainability on the other.
There are three potential responses to address this dilemma.
The first is to simply acknowledge the benefits that trickle down from business.
In 1970, Milton Friedman, a Nobel prize-winning economist, wrote an article for The New York Times headlined “The social responsibility of business is to increase its profits” – a view that dominated in the ’70s and ’80s.
Friedman is now vilified by many, but the argument that supports this contention is not unreasonable: profitable businesses create shareholder wealth, employment opportunities and efficiencies. They develop human capital and pay taxes – all of which is to the benefit of society. In these various ways, so the reasoning goes, the benefits of business trickle down to society as a matter of course and therefore society needs to accept the bad with the good. The trickle-down effect may have been a soothing response decades ago, before the impact of companies threatened the existence of the planet and all that depend on it.
Trade-off has been constructed as a second response to deal with the dilemma of reconciling profit and sustainability. It recognises that profits do not legitimise those costs that companies create through business operations that they do not bear themselves but pass on to society.
Fairness demands that the harm stemming from business activities is counterbalanced by philanthropy, corporate social investment or off-set, which is employed to counter environmental damage by making a contribution of similar value. Unfortunately, trade-off raises the cost of doing business and the seemingly inevitable conclusion is that sustainability comes at the detriment of profitability. The selling point is that it is good for brand building and so constitutes good business investment.
Charitable giving, corporate social investment and the like are necessary but inadequate. We need a fundamental shift .
Consider the mindset exposed by the question that sustainability advocates are often confronted with: what is the business case for sustainability? Phrasing the question that way implies that business is at the centre of the question .
Society depends on business for prosperity, but business is dependent on the very resources that are being depleted. It relies on the community to provide a vibrant customer base and produce talent. As the World Business Council for Sustainable Development stated : Business cannot succeed over the longer term in a society that fails. T he relationship between business and society is symbiotic and interdependent in nature.
The third response should ideally offer a juncture where business and societal interests reinforce one another. Creating shared value is proposed by some as presenting such an opportunity. In the words of Kramer and Porter: “Shared value involves creating economic value in a way that also creates value for society by addressing its needs and challenges.”
Shared value allows business to take control of its future by shaping and investing in the fundamentals of its long-term prosperity. As someone told me once: Business needs to fertilise the fields that it harvests from.
Ramalho is the project leader for the Institute of Directors on the King IV Project