Social and Environmental Sustainability vs Financial Sustainability - Essay Example

SOCIAL AND ENVIRONMENTAL SUSTAINABILITY vs. FINANCIAL SUSTAINABILITY al Affiliation) Social and environmental sustainability have various differences as compared to financial sustainability. Sustainability refers to the possibility of either a business or a natural occurrence to continue being in existence for the foreseeable future (White, 2009). The population of the world is inversely proportional to the existing resources, both finite and renewable. This means that the rate of depletion of the resources is high due to the increase in the world’s population. In other words, the world has limited resources. Moreover, the increase in population leads to an increase in the rate of pollution, which affects environmental and social sustainability negatively. On the other hand, financial sustainability refers to the ability of a business to remain a going concern (Gillan, 2005). This entails the production of goods and services both effectively and efficiently. In explanation, businesses should strive to produce goods and services at the lowest cost possible, in order to maximize on their profits. Furthermore, the definition financial sustainability proposes that a business needs to satisfy both its needs and the stakeholders needs. The stakeholders include lenders, employees, customers, shareholders, the society, and other organizations. However, most organizations prefer to engage in social and environmental sustainability as compared to financial sustainability because the businesses depend wholly on human and natural resources. Most businesses have realized that whenever there is an economic growth, an alternate negative effect is realized towards the environment and the society. For this reasons, firms pursue and create opportunities for suppliers who advocate for environmentally safer products, meaning that the firms invest in eco-efficiency (Young, 2013). The business firms that engage in environmental friendly products and are considerate on the social-well being of the community gain a competitive advantage over other firms. This gives the business firms, social and environmental sustainability, in addition to financial sustainability. The differences between the social and environmental sustainability and financial sustainability have various implications to the ways in which businesses operate, in addition to the ways in which they report on their activities (Zu, 2009). For instance, the Centre of Excellence in Accounting and reporting for Co-operatives was created based on the need to educate co-operative managers on various business models that serve the business purpose. For social and environmental sustainability, co-operatives are based on the values of corporate social responsibility, which means the provision of care to the society (Gunatilake, Perera, & Carangal-San Jose, 2008). Through the concern for the community, co-operatives focus on the sustainable development of the members of the community, in which they operate, by the development of effective policies. The differences between social and environmental sustainability and financial sustainability affect the ways in which co-operatives report on their activities. The co-operatives are required from time to time to hold meeting and table their financial performance to various stakeholders. This involves the need for participation by every member of the co-operatives in actively setting their policies and being involved in the decision making process in a democratic manner for sustainability. It is important for businesses to focus on stakeholder value maximization, which implies that Corporate Social Responsibility activities affect the shareholder wealth positively. This is because focusing on the stakeholders’ interests raises their willingness to provide support for the operations of a firm (Gray, Coates, & Hetherington, 2013). This view is in agreement with the theory of the firm in addition to the contract theory. However, there is a challenge to stakeholder value maximization, where some firms focus on the stakeholders’ interests at the expense of Corporate Social Responsibility. For instance, a firm could avoid the adoption of pollution control standards because they fear gaining competitive disadvantage due to the high expenditure involved, in order to maintain or increase their profitability and as a result increasing the shareholder wealth. In addition, other firms could adopt green washing, which is a form of cheating because the firm advocate for more environmental friendly products, than they actually deliver. This compromises the financial reporting system as well as the auditing core principle of reporting that advocates for the true and fair view of the financial status of business firms. Figure 1. A figure showing the expenditure of firms on CSR (Bansal, & Rai, 2014). The differences between social and environmental sustainability and financial sustainability can be reconciled through the creation of shared value. This concept entails the recognition of societal needs in the course of doing business, and not just the recognition of economic needs as the sole purpose of doing business (Libby, R., Libby, P. & Short, 2007). It also seeks to address and convince business owners and managers that social responsibility does not necessarily raise the costs of doing business, but it is rather necessary for the success of the business. The concept of creating shared value involves three ways of reconciling the differences between social and environmental sustainability and financial sustainability. The three ways include, Reconceiving Products and Markets, Redefining Productivity in the Value Chain, and Cluster Development (Schaltegger, Bennett, & Burritt, 2006). Reconceiving Products and Markets considers the fact that the society has huge needs. The needs range form, better housing, better healthcare, improved nutrition, achievement of financial stability, and less damage to the environment (Phillips & Freeman, 2010). Businesses have spent many resources in the manufacture and production of goods and services, in order to meet the demand of its customers, while forgetting the protection of the environment. The human needs have led to the betterment of products and services by companies. Such companies include Intel and IBM that have developed devices that harness digital intelligence in order to conserve power. In addition, food companies such as the McDonalds have started focusing on better nutrition, rather than the taste of food. The products and markets for such companies are being reconceived through innovation and eventually lead to the creation of shared value (Schroeck, 2002). In addition, companies can reconcile the differences between social and environmental sustainability and financial sustainability through Redefining Productivity in their Value Chain. The value chain of any company is affected by societal problems. Such problems revolve around natural resources such as water, health concerns, equality in the workplace, and the need for a good working condition. Due to the creation of shared value opportunities by various companies, societal problems subsequently increase, which can eventually become costly to business firms. For instance, various firms used to engage in over packaging of their products, which were harmful to the environment in the long-term (Ekins, 2000). The implementation of strategies that focus on the reduction of plastic used for packaging saves a lot of money, especially if the cost of delivery of such products is also reduced. Cluster development can also be used in the elimination of the differences between social and environmental sustainability and financial sustainability. The concept relies on the principles that no entity is self-sufficient. This means that the success of any company relies heavily on the support it gets from other stakeholders and through the efficiency provided by the infrastructure around it. The geographical concentration of firms form the cluster development due to the increase in competition among the business firms. This leads to the production of quality goods to the advantage of the consumers. In addition, the cluster of businesses also leads to innovation, which benefits the consumers, because they are able to choose from a range of quality products and services for consumption (Freedman & Jaggi, 2010). Clustering also involves other institutions such as academic programs, organizations that ensure standardization, and trade associations that protect the right of businesses to trade. The incorporation of collaboration with such institutions leads to the formulation and implementation of strategies that cater for the differences existing between social and environmental sustainability and financial sustainability. The Nestle Company for instance is one of the most successful companies in Nutrition, Health, and Wellness. This is because it has embraced the Creation of Shared Value and incorporated it within its management style across all is businesses globally. The focus of Nestle is the protection of natural resources, which are scarce, for use in the future. Nestle also finds ways of cluster development through collaborating with other institutions, in order to develop a secure collection action, in addressing its Corporate Social Responsibility. There are various obstacles to reconciling the differences existing between social and environmental sustainability and financial sustainability. One of the obstacles is that firms do not value improved environmental sustainability in the decisions made in internal capital allocation. The second obstacle is that the vision of social and environmental sustainability and financial sustainability are in consistency (Taticchi, Carbone, & Albino, 2013). The two have divergent priorities and do not often involve each other effectively. The third obstacle is that companies lack metrics or methodologies to effectively account for environmental costs. For instance, business firms could have a problem in accounting for the economic risk associated with climate change within a given society (Thiele, 2013). Therefore, it becomes hard to reconcile the differences between environmental and financial sustainability, as it becomes difficult to classify the environmental costs as either real costs or costs associated with the risks (Chew & Gillan, 2009). Finally, the fourth obstacle is based on environmental factors not being wholly integrated in formulation of long-term strategies of business firms. This results to the reduction of opportunities that could lead to improvements in financial performance, created through environmental improvements in the creation of services and products. There are various implications of for the future of business due to the reconciliation of the differences between environmental and financial sustainability. In the future, business firms will be able to enhance life opportunities for the members of the society. However, it is important to note that the achievement of environmental sustainability would reduce the need for financial sustainability in the future (Furtado & Belt, 2000). Another implication relates to the satisfaction of consumers’ needs, as most companies will focus on the production of goods and services that have a positive contribution to the society. It is possible to have a sustainable future if all the institutions are based on policies that consider social and environmental sustainability. Moreover, the reconciliation could lead to economic growth and enhanced financial reporting provided there is the consideration of social goals for development and sustainability. On the other hand, there are implications of not reconciling the differences existing between environmental and social sustainability and financial sustainability. The rate of depletion of the natural resources could increase, which could lead to a stress in the existing resources necessary for financial sustainability (Crane, 2008). This could lead to a decline the standards of living globally, and the patter could continue for the foreseeable future. Various businesses could over utilize the natural resources that could cause a decrease in the availability for raw materials necessary for production. In addition, businesses could have problems in reporting since it will a situation of survival for the fittest and selfishness among the stakeholders within businesses could lead to their liquidation. Moreover, the adoption of sustainability governance oversees the performance of a company in human, environmental, and financial sustainability. For instance, PepsiCo has embraced sustainability governance that aids in its commitment to the stakeholders as well as its Corporate Social Responsibility. In addition, it incorporates Cluster Development with companies like Ceres, in order to find support in the achievement of reporting and sustainability goals. These measures have aided PepsiCo to advance in its goals for social and environmental sustainability as well as financial sustainability. In the establishment of a business, it is important to consider and employ various business models that could aid in the creation of value and design in both environmental and financial sustainability. For instance, the economic theory defines the manner, through which an enterprise could manoeuvre, in order to deliver quality to its customers and ensure the maximization of profits (Epstein, 2008). Moreover, it is important for entities to consider their Corporate Social Responsibility to ensure the environment is protected for the mutual benefit of both businesses and the society. Business models are more comprehensive as compared to business strategies, and if they are implemented, they could lead to a competitive advantage. Financial sustainability is essential for any company to thrive, but if environmental and social sustainability is considered, then the success to be greater. References Bansal, S. and Rai, S. 2014. An Analysis of Corporate Social Responsibility Expenditure in India. Economic and Political Weekly. [online] Available at: http://www.epw.in/web-exclusives/analysis-corporate-social-responsibility-expenditure-india.html [Accessed 4 May 2015]. Chew, D. and Gillan, S. 2009. U.S. corporate governance. New York, N.Y.: Columbia University Press. Crane, A. 2008. The Oxford handbook of corporate social responsibility. Oxford: Oxford University Press. Ekins, P. 2000. Economic growth and environmental sustainability. London: Routledge. Epstein, M. 2008. Making sustainability work. Sheffield, UK: Greenleaf Pub. Freedman, M. and Jaggi, B. 2010. Sustainability, environmental performance and disclosures. Bingley: Emerald. Furtado, J. and Belt, T. 2000. Economic development and environmental sustainability. Washington, D.C.: World Bank. Gillan, S. 2005. Corporate governance at the crossroads. Boston, Mass.: McGraw-Hill. Gray, M., Coates, J. and Hetherington, T. 2013. Environmental social work. Milton Park, Abingdon, Oxon: Routledge. Gunatilake, H., Perera, P. and Carangal-San Jose, M. 2008. Utility tariff setting for economic efficiency and financial sustainability. Manila: Asian Development Bank. Haerens, M. and Zott, L. n.d.. Corporate social responsibility. Libby, R., Libby, P. and Short, D. 2007. Financial accounting. Boston, Mass.: McGraw-Hill/Irwin. Phillips, R. and Freeman, R. 2010. Stakeholders. Cheltenham: Edward Elgar. Schaltegger, S., Bennett, M. and Burritt, R. 2006. Sustainability accounting and reporting. Dordrecht: Springer. Schroeck, G. 2002. Risk management and value creation in financial institutions. Hoboken, N.J.: John Wiley. Taticchi, P., Carbone, P. and Albino, V. 2013. Corporate sustainability. Berlin: Springer. Thiele, L. 2013. Sustainability. Cambridge: Polity. White, G. 2009. Sustainability reporting. [New York, N.Y.] 222 East 46th Street, New York, NY 10017: Business Expert Press. Young, O. 2013. On environmental governance. Boulder: Paradigm Publishers. Zu, L. 2009. Corporate social responsibility, corporate restructuring and firms performance. Berlin: Springer. Appendices Qodino.hostme43.com, (2015). Environmental sustainability jobs - stock 69 chevelle stats. [online] Available at: http://qodino.hostme43.com/?c=a-simple-motors-ork&p=165 [Accessed 4 May 2015]. The figure above shows the sustainability balance between social and environmental sustainability and financial sustainability in business. CSR-Corporate Social Responsibility Read More