Natural Capitalism - the 5th Industrial Revolution

Global Sustainable Corporate Strategy

Natural Capitalism – the 5^th Industrial Revolution

Introduction

Since 1760s, our world has experienced four difference industrial revolutions which have greatly facilitated morden capitalism and expanded the possibilities of material development for all humankind, they continue to do so until today, but any economical behavior has its externalities (Goodstein and Polasky, 1999),  while people are enjoying the industrial prosperity and wealth in life, natrual resources, on which our morden society is depending to create economic outcomes, is declining in a unprecedented way since the mid-18^th century. And what ironical is – traditional economists believed that  the loss in natural resources is positively related to gains in material well-being (Hunter et al, 1999).

Natural resources include every basic element in human life – water, air, soil, tree and animals,

it also involves living systems – oceans, grasslands rainforests and wetlands, these living systems have made life possible for all kinds of creatures on earth. However, in the business world today, most companies only focus on creating economic value – they care about how big the scale they can be and how much profit they can generate, but few of them notice the stripped rainforests, the polluted rivers and the impoverished villages – most of their externalities are not calculated in the cost of production (Hunter et al, 1999).

Since individuals and businesses are placing greater pressures on the nature, the decisive factor of a business’s servivability in the market is gradually shifting from its industrial prowess to its ability to utilize natural resources in a sustainable manner – in other words, only a company who has effective sustainable strategies can achieve long-term success. Nevertheless, the traditional capitalism is not suitable for developing sustainabile corporate strategies since it does not recognize that some essential resources like water and air have additional value beyond their market value. In this essay, I would argue that Natural Capitalism can better help a company to develop sustainable strategies because it fully values all sorts of capital which including human and natural capital. Also, the natural capitalism, which adopts new accounting method, may provide a new mindset to our economy and society, thus offering tons of opportunities for environmentally unfriendly corporations to transform, the impact of it may make it deserve to be called ‘the 5^th industrial revolution’.

Supporting Idea 1 – Natural Capitalism adopts sustainability accounting principles which can help a company to increase its financial performance while protecting the environment.

The persuit of being sustainable in business operations is highly related to the integrated assessment of a company’s environmental, economic and social performances. However, in the accounting principles associated with traditional capitalism, the ultimate criterias for evaluating a company’s performance are still its profitability and market value. Recently, with very few exceptions, most research papers have demostrated a strong positive relationship between a company’s environmental performance and its long-term market value and financial position (Carnevale and Mazzuca, 2014), this section aims to illustrate how the traditional accounting principles discourage the implementation of plans which target on improving the company’s environmental performance and how sustainabilty accounting measures help in the same area.

Although the traditional accouting principles produce a negative corelationship between a firm’s environmental performance and economic performance by its definition, many empirical reseaches showed that financial performance is positively influenced by convincing environmental performance (King and Lenox, 2001). Increasing revenue and reducing cost are two main pathways that a company’s environmental governance influences its financial performance – on one hand, a study shows a trend that customers increasingly prefer the products from environmentally orientated companies which allows such companies to differentiate them from their peers, gain competitor advantage and price premiums; on another hand, the sustainability accounting methods that adopted by natural capitalism can help a firm to increase its effeciency and hence reduce its cost and avoid potential liabilities (Schaltegger et al, 2006). Besides, the market is spontaneously and constantly assessing all internal and external information of a firm which related to its environmental performance, thus, the market value of a company, especially a listed company, is largely influenced by its current and expected environmental performance.  Unlike positive news, environmental related scandals tend to have follow-up publicity which may result in a tremendous and negative change in the company’s market value (Schaltegger et al, 2006), even sometimes the financial loss is covered by insurance, the damage on the company’s goodwill and public image is unrecoverable and will eventually affect its profitability. An observasion on companies’ systematic risks index shows that the increase in a firm’s market value is not always accompanied by a bigger risk, environmental management is related to both functional and corporate strategies, by increasing profit and saving cost, it affects a company’s financial position, when comes to public, what a company has done can be directly reflected on its stock price, which represents the actual benefits for an environmentally conscious company (Klassen and McLaughlin, 1996).

As environmentally friendly and proactive corporations can benefit in terms of financial position and market value, then why don’t managers and executives seize these relevant opportunities? If these managers realized that the sustainability accounting principles which adopted by natural capitalism can help them further improve their company’s profitability and market value while protecting the environment, they would be motivated to address more on developing sustainble corporate strategies.

Supporting Idea 2 – Natural Capitalism helps a company to reduce waste and increase productivity per unit of resource.

Waste is a symbol of success in traditional capitalism concepts, more waste promotes more productions, and more productions further add back to more waste, people are constantly throwing away old products and buying new ones, contributing to companies’ profits. Because of the current business and indistrial processes, the traditional capitalism is damaging our nature – companies are abusing natural resources to produce useless or inefficient products and services, and disposing the waste which generated in the production process randomly on the earth, imposing severe costs. Although the traditional economic theories are trying to persuade us that they are not big problems, more evidences are showing that the cost of waste have started being apparent and undeniable (Verenich et al, 2016). The purpose of this section is to explain how natural capitalism can help in developing corporate sustainable strategies by improving productivity of natural resources and reduce waste in designing, producing processes and business models.

In the past, corporations believed that protecting environment is a kind of public benefit activity, althought it benefits human beings, it is still a burden which doesn’t bring any economic benefit to themselves. However, natural capitalists believe, as long as some designs are slightly modified, companies can be generating economic benefits while protecting the nature. Lovins (Lovins et al, 1999) has suggested two ways in the designing process to achieve this goal – Firstly, companies can adopt a new design concept which considers all industrial systems as a whole, instead of part by part. In the past, the managers and excutives of companies had a consensus called ‘diminishing returns’, which indicates that the marginal cost of saving resources increases as the more amount of resources are saved, however, the natural capitalism theory system believes that bigger savings cost less – saving a large amount of resources actually has a lesser marginal cost than saving a small amount of resources. An example would be lean manufacturing, products and services are designed from customers’ perspective who consume them, it considers the value of a product or service is the amount customers are willing to pay (Shah and Ward, 2003), it has helped many firms reduce different forms of waste like defect rates, lead times and inventory – the more natrual resources are saved, the more it economically benefits a company.  Secondly, companies can adopt new industrial technologies, especially those based on natural materials and natural processes, to replace the outdated technologies. An example would be the rising market of hybrid energy vehicles, these vehicles can reduce the emissions that associated to the climate change, ecological damage and traditional energy usage (Cao and Emadi, 2012). By adding hybrid energy vehicle technologies to the production lines, automakers can indirectly reduce the environment damage while expanding their profit channels. Either through adopting better designs or new technologies, reducing waste in the designing process embodies great opportunities, which can help a company to better develop its sustainable strategies.

In addition to the designing process, natural capitalism also helps companies to reduce waste and increase productivity in producing processes and business models. In the producing process, natural capitalists advocate closed-loop recycling model, that means manufacturing companies have to collect post-consumer waste and use it to make new products (Savaskan et al, 2004). For instance, recycling construction and demolition wastes can tremendously contribute to the saving of natural resources, in Germany, almost all the mineral waste from structural engineering was used in civil engineering (e.g. road construction sector), but, in the recycling process, a large amount of waste could not be effectively utilized, recently, because of stricter limitations on the protection of water and soil, the old recycling approach was abandoned. According to new government standards and guidelines, recycled waste from structural engineering will also be used in the same sector for concrete production, thus, waste from that sector can be remained in a closed-loop, and hence reduced impairment to the environment and increased natural resources efficiency (Weil et al, 2006). When it comes to business models, the success of business model which based on traditional capitalism is depending on the sale of goods, however, natural capitalists (Lovins et al, 1999) proposed a Sustainable Business Model (SBM) which enables businesses to operate in more environmentally friendly ways, in the new model, value is not delievered only through the product itself, but also through after-sales service. The SBM covers business approaches that align with triple bottom line which considers a wider range of stakeholders’ interests, including economic, environment and society. This new model is crucial in driving and implementing corporate sustainable strategies, which can help a company to embed sustainability into its operation, and hence become a key driver of its competitive advantage (Bocken et al, 2014).

Supporting Idea 3 – Natural Capitalism aligns with Sustainable Development Goals (SDGs)

In 2015, the United Nation has adopted ‘The 2030 Agenda for Sustainable Development’, which provided a plan for prosperity and peace for all human beings and the planet, the core of the plan are the 17 Sustainable development goals, these goals were holistically designed by focusing on the economic, environmental and social aspects on sustainable development, which one must go hand-in-hand with the others (United Nations 2018). Among them, the protection of the environment is the basis of all other sustainable development goals,

Picture 1. The 17 sustainable Development Goals

References

• Klassen, Robert D., and Curtis P. McLaughlin. “The impact of environmental management on firm performance.” Management science 42, no. 8 (1996): 1199-1214.
• Goodstein, Eban S., and Stephen Polasky. Economics and the Environment. Upper Saddle River, NJ: Prentice Hall, 1999.
• HUNTER LOVINS, L., Amory Lovins, and Paul HAWKEN. “Natural capitalism: creating the next industrial revolution.” (1999).
• Carnevale, Concetta, and Maria Mazzuca. “Sustainability reporting and varieties of capitalism.” Sustainable Development 22, no. 6 (2014): 361-376.
• King, Andrew A., and Michael J. Lenox. “Does it really pay to be green? An empirical study of firm environmental and financial performance: An empirical study of firm environmental and financial performance.” Journal of Industrial Ecology 5, no. 1 (2001): 105-116.
• Schaltegger, Stefan, Martin Bennett, and Roger Burritt, eds. Sustainability accounting and reporting. Vol. 21. Springer Science & Business Media, 2006.
• Lovins, Amory B., L. Hunter Lovins, and Paul Hawken. “A road map for natural capitalism.” Harvard business review 77 (1999): 145-161.
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• Cao, Jian, and Ali Emadi. “A new battery/ultracapacitor hybrid energy storage system for electric, hybrid, and plug-in hybrid electric vehicles.” IEEE Transactions on power electronics 27, no. 1 (2012): 122-132.
• Savaskan, R. Canan, Shantanu Bhattacharya, and Luk N. Van Wassenhove. “Closed-loop supply chain models with product remanufacturing.” Management science 50, no. 2 (2004): 239-252.
• Weil, Marcel, Udo Jeske, and Liselotte Schebek. “Closed-loop recycling of construction and demolition waste in Germany in view of stricter environmental threshold values.” Waste Management & Research 24, no. 3 (2006): 197-206.
• Bocken, Nancy MP, Samuel W. Short, Padmakshi Rana, and Steve Evans. “A literature and practice review to develop sustainable business model archetypes.” Journal of cleaner production 65 (2014): 42-56.
• United Nations. 2018. “Sustainable Development Goals.” United Nations.  https://sustainabledevelopment.un.org/post2015/transformingourworld.