header image

Is it possible to have a successful sustainable business without green demand? by Rodrigo Velarde

Posted by: | April 25, 2011 Comments Off on Is it possible to have a successful sustainable business without green demand? by Rodrigo Velarde |

A sustainable business is one that operates in an environmentally responsible way. It is one whose products and processes do not result in a negative environmental impact.[1] A sustainable businesses demand an extra attention to some aspects besides profitability.

In certain cities, there is a demand for goods produced by sustainable business. That means that there are people willing to pay some extra money for products that are made by sustainable businesses. These people know that they are paying for something else besides just a good product. That is the reason why markets like New Seasons can afford to sell similar products at a higher price and still be in business.

Starting a sustainable business in a city like Portland might not be too hard because there are lots of people who like green products and are willing to pay the extra cost to buy them. These people are a green demand. If there is green demand, then green products are more likely to be sold.

The question is what would happen in another city. What would happen if there were no a green demand? What would happen if there were no consumers willing to pay more for a green product? What would happen with New Seasons if there were not environment friendly consumers? Is it possible to have a successful sustainable business without a green demand?

In places where there is not a green demand, there might be a way to balance out the disadvantages of not having a green demand with the fact that going green might be less expensive. For example, to grow organic produces in developed countries might be more expensive than in developing countries because there are some external costs like Certification[2], or because labor is so inexpensive that the longer growing time required by organic produces don’t make much of a difference, or because the lack of access to new technology makes it rather expensive to buy chemical pesticides. After all, what is cheap in some places is expensive in others. The key is to find out whether sustainable businesses could be cheaper somewhere else.

For any sustainable business to maintain a competitive advantage, it must focus and excel in the following 3 areas: People (it must treat well their employees); planet (it must operate in an environmentally sound manner); and profits (it must achieve an acceptable return on investment).[3] For a business to be a sustainable then, there is an extra effort to put down. Treating better your people[4], protecting the environment, and still being profitable have some costs that other business might not necessarily have to face. As a result, having a sustainable business seems more expensive than having an unsustainable business if other factors are not taken into consideration. 

On the other hand, being sustainable is just not enough for being successful. Businesses must focus on being competitive first because even the most loyal consumer to green products is going to go away if the product is not good. The product (sustainable or not) needs to be of a high quality to survive.

Once there is a good product to sell, the ideal scenario would be to make sustainable businesses more profitable than unsustainable ones so there is an incentive for other businesses to go green too. Is it possible for a sustainable business to compete with unsustainable businesses?

To answer that question, it is valuable to take a look on the example of organic food versus non-organic food. Why is organic food more expensive?

One reason is that tax money heavily subsidizes agro­chemical agriculture (non-organic), whereas organic farming receives no subsidies. Another crucial reason is that agro­chemicals are designed to make lower quality food cheaper to produce[5]. A consumer is really paying three times when they buy intensively farmed food. First, they pay at the store, then they pay with their taxes (subsidies for farming) and third they pay to clean up the damage to the environment caused when raising that food.[6] So organic food should not really be more expensive. It only is because of the subsidies and because the environmental externalities are not internalize for the ones who cause the harm.

Also, certified organic products are more expensive for other reasons: Organic food supply is limited; production costs are typically higher because of greater labor inputs and because greater diversity of enterprises means that economies of scale[7] cannot be achieved. Post-harvest produces results in higher costs because of the mandatory segregation of organic and conventional produce, especially for processing and transportation; the marketing and distribution chain are relatively inefficient and costs are higher because of relatively small volumes.

Finally, prices of organic foods include not only the price of production that non-organic farmers pay, they also include environmental enhancement and protection; higher standards for animal welfare[8]; avoidance of health risks to farmers; rural development by assuring a fair and sufficient income to producers[9]. These extra costs are most of them positive externalities[10].

A positive externality happen when somebody makes a decision that has a positive impact and does not receive the full benefit of that decision. A negative externality is when a decision made by someone has a negative impact, but the actor does not pay for it. In the former scenario, the good ends up being more expensive than a product made under the latter scenario. That would be case of companies who pollute but don’t pay for their affectation on third parties.[11]

Positive externalities bring some benefit to third parties without getting any credit for it. For example, if a person spends some extra money making sure his product is made respecting the environment, then the whole world gets the benefit of those actions while he does not receive credit for it.

Therefore, if organic food would get the same subsidies than non-organic food, and the externalities were internalized, the result would be organic food being more inexpensive. Also, if organic producers did not have to label their products as organic[12], then organic food would be much more inexpensive.

We can apply the same argument to sustainable businesses. If there was a place where there were no subsidies for unsustainable businesses, a place where externalities were internalized, a place where sustainable business where not forced to bear the cost of certification, then going sustainable should not be more expensive.

The problem is that in the US, there are not subsidies for sustainable businesses (although there are tax incentives for some king of activities like energy saving oriented), externalities are not internalized, the certification costs and labeling are paid by the sustainable businesses, which is a huge disincentive, and the labor is so expensive that faster growing procedures make a big difference.

The conclusion is that in order to have a sustainable business there is no need for a green demand[13]. A sustainable business should be able to compete with other business if they did not have to bear certain costs. The problem is going to be that sustainable businesses are usually small operations, and the costs of small operations are worse distributed and the economy of scale is harder to reach. Also, the problem of externalities being internalized has to be with regulation[14]. Consumers have a role too, if they buy more sustainable products, then sustainable businesses will make more profits at expense of unsustainable businesses, and the externalities will be somehow internalized.

An example of a sustainable business in developing countries could be a sustainable brewery. Making beer takes a lot of time, but the main cost is the supplies (including lots of water) and bottles.[15] So if a brewery reuses the cleaning water, it would be more sustainable and cheaper because the water bill would go down. If they use local products, they would be more sustainable and cheaper because they would not have to pay for the transportation of foreign products[16]. If they resell the grain as food for poultry for example, they will be more sustainable and cheaper because they will get money out of those grains. If they sell the beer locally, they will be more sustainable and cheaper because they will not have to pay for transportation. Finally, if they did not have to bear the cost of labeling their beer as organic, the beer would not have to be more expensive because they will not have to add the certification costs to the final product. If the government gave incentives to sustainable business as a way of internalize positive externalities, the beer would be more sustainable and cheaper because the cost of production would go down. And we are not even taking into consideration the possible existence of a green market that would be willing to pay extra for a more sustainable final product.

[1] http://www.theevergreengroup.com/sustainable-business.htm

[2] http://www.fao.org/organicag/oa-faq/oa-faq5/it/

[3] http://ezinearticles.com/?The-Triple-Bottom-Line—What-Makes-a-Business-Sustainable?&id=3519550

[4] Paying better salaries and giving them benefits

[5] http://www.copperwiki.org/index.php?title=Organic_Food

[6] http://www.organicfoodee.com/sense/tooexpensive/

[7] The decrease in cost of a good because of large-scale operations

[8] As opposed to farmers who don’t care about animals welfare, which is proven to have more probabilities of the food being contaminated, like the example of free cage eggs.

[9] http://www.fao.org/organicag/oa-faq/oa-faq5/en/

[10] http://economics.fundamentalfinance.com/positive-externality.php

[11] http://economics.fundamentalfinance.com/positive-externality.php

[12] FDA did not mandate labeling of non-organic products. They did allow organic producers to label their organic products as a way of differentiation, imposing an extra cost on organic products.

[13] Although it helps because there will be people to pay extra, internalizing externalities.

[14] A producer can internalize negative externalities by themselves, although they will never do. But they certainly cannot internalize positive externalities by themselves.

[15] In most developing countries there is no such a thing like the 5 cents per bottle law that makes bottles come right back to the brewery saving resources for the company but mainly for the environment. 

[16] Assuming that local supplies are available

under: General

Comments are closed.