How much can businesses help in sufficiently reducing our environmental impacts? That’s one of the most important questions in the modern world, but we rarely deal with it directly. Instead, we have a large group of people telling heroic stories about what businesses are doing to protect the environment while another large group, extremely dissatisfied with the progress to date, demands that businesses start living up to their heroic potential for protecting the environment.
Both groups are making fantastic assumptions about the potential for “sustainable business,” assumptions that seem to ignore facts about the relationship between business and the environment. After all, businesses are the organizations that transform matter and energy into the stuff we buy, with profit and environmental impacts as outcomes.
That isn’t meant to defend or vilify businesses for their impacts. It’s the physical reality of our world. The only way for Apple or Coke or Delta Airlines or any other company to have zero environmental impacts is to shut down their operations. Surely, then, the relationship between business and the environment is more fraught than is commonly believed. If we can cut through the noise and nonsense, perhaps those of us who are concerned about the environment could have a meaningful conversation about what to do.
A Closer Look
We can make some progress by considering what is arguably the core assumption of those who think that businesses are leading or can lead us toward a sustainable world. You have likely heard some version of it: The profit motive leads companies to eliminate inefficiencies, such as waste, which is good for the environment. As companies develop more efficient products or practices, they shrink our environmental impacts and grow their profits.
That sounds awfully nice, but it reflects a tiny sliver of reality and ignores a far more influential set of facts. Here are three of them.
First, there are different types of efficiency. Businesses are primarily in search of economic efficiencies (i.e., those that improve financial returns on investment). Sometimes physical efficiency improvements, like the elimination of waste, are the best way of improving economic efficiency, but not always. Businesses might find economic efficiencies that increase environmental harm, such as when they source raw materials from lower cost locations with weak environmental regulations. Unfortunately, efficiency-seeking businesses are not necessarily prioritizing environmental protection. The evidence of this is immense – almost the entirety of industrial history.
Second, environmental efficiencies can be elusive and illusive. Let’s understand what the market is requesting. People living in wealthy countries mostly want companies to produce the kinds of products and services available today but in a dramatically less harmful way without raising prices. We can’t say that’s an impossible task, but it’s far more difficult than is commonly admitted.
As destructive as fossil fuels and bulldozers and plastic and toxic chemicals are, they and technologies like them are outstanding at delivering our modern lives. That’s neither surprising nor an accident. We built our modern lives around the things these technologies do well. There is no guarantee that a cheap substitute can be found for them, no matter how much brain power is applied. That is the elusive part of efficiency-seeking.
To be clear, efficiency improvements are found, but not of the magnitude needed across our multiple environmental crises (e.g., climate, plastics, biodiversity loss, etc.). Many of the efficiencies being introduced simply transform one environmental problem into another instead of truly solving any of them. We should celebrate the people trying to find less harmful ways of doing some of what we already do, but we should temper our expectations about their success.
On those occasions when an innovation really does deliver the features we want with less destruction and at a savings to us, we run into the problem of rebound, which works against the progress of efficiency improvements.
For example, heat pumps are more efficient than other home heating technologies, but if you give people a more efficient (i.e., less expensive) way of heating their homes, they are likely to use more heating. That’s direct rebound, and it is the finding from empirical research on heat pump adoption and the adoption of other efficiencies.[i]
If we could stop people from using their would-be home energy savings on more heating, they are likely to spend at least a portion of those savings on something else that will have an environmental impact, possibly exceeding the impact saved through the adoption of the heat pump in the first place.
That’s indirect rebound, and it’s an exceptionally difficult problem to solve. Money is used to buy stuff, and stuff has environmental consequences. That’s why it doesn’t matter who gets the savings – the business by making higher profits, employees through receiving higher wages, investors through earning more dividends, or customers through realizing lower energy costs – the savings/profits are going to be spent. The rebound effect is what makes efficiencies illusive. Things look more efficient at first glance, but the system-wide effects may be less positive.
Third, the profit motive also encourages growth. This one isn’t complicated. Cost-saving efficiencies are only one way of increasing profits. Increasing output to grow revenues is another path to greater profits. If a company’s engineers work very hard to reduce the environmental impacts per unit of output but the company sells more units, the engineers’ work will be partially, fully, or more than fully offset by growth. That problem can be seen at national and global levels, too.
Most large companies have a growth imperative. That’s true of presumably every publicly traded company and probably most private equity-owned or venture capital-financed companies in the US. If a CEO in one of those businesses doesn’t pursue growth over some extended period, they will be replaced with someone who promises to deliver it. Either the existing board of directors will replace them, or large, profit-seeking investors will fight to win board seats for themselves and then replace the CEO.
In sum, most companies aren’t focused exclusively on environmental efficiencies, and even when they are, the efficiencies they’re searching for are extremely difficult to find at the scale needed or without simply shifting the problem to another part of the environment. And when efficiencies are found, they’re subject to the rebound effect. Finally, if a company somehow finds its way through that maze, if it grows, it offsets at least part of its environmental progress.
Of course, there are other paths for business. Privately owned companies may not feel the same urgency to prioritize and grow profits, which is why all of the most conscientiously run businesses I know of are privately owned. However, capital tends to flow to the companies that do prioritize profits, and the more conscientious, privately held companies must then compete with the richer ones that are mainly after profits.
Or companies can make and sell far less harmful products that are more expensive (à la Patagonia), which avoids the rebound problem. That seems like an honorable way of earning a living, but most people currently either can’t or won’t pay enough of a premium for that kind of business to get us very far in remedying our collective environmental problems.
Facing Reality
Businesses have considerable latitude in terms of their behavior, but they don’t have unbounded latitude. Governments, markets, and the laws of nature constrain them on every side. Some businesses will do the best they can because they have wonderful people working very hard to do the right thing with the resources they control. Others will do much worse by greenwashing, drumming up demand for yet more stuff no one really needs, and using political influence to oppose wiser laws and regulations. Yet others are somewhere in between. All businesses, though, face limits as to how benign their operations can be.
We obviously want companies to focus on doing less harm to the environment, but ‘less harm’ cannot be our ultimate goal. Sufficiently less harm needs to be the goal. There are multiple objective, biophysical boundaries that we, as a species, must respect if we want a reasonably stable environment, and there isn’t the faintest bit of reliable evidence that businesses can lead us back within those boundaries, especially while pursuing growth.
Let’s keep pushing businesses to behave better and to innovate in ways that are genuinely beneficial for us and the environment, and let’s celebrate them when they do. But we should not expect – and we certainly should not depend on – commercial salvation. That might be unfair given the immense power that large businesses wield, but it is the reality we face. We simply cannot count on corporate alchemy to transform our insatiable material desires into thriving ecosystems.
[i] Halvorsen, B. & Larsen, B. M. 2021. Identifying drivers for the direct rebound when energy efficiency is unknown. The importance of substitution and scale effects. Energy. 222, 119879.
Winther, T. & Wilhite, H. 2015. An analysis of the household energy rebound effect from a practice perspective: Spatial and temporal dimensions. Energy Efficiency. 8, 595-607.
Teaser image credit: A Patagonia store in Portland, Oregon, was located in a renovated 1895-built former warehouse until moving to a new location in 2017. By Steve Morgan, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=59885133