Harvard Business School addressing sustainability, why tax is unavoidable and the benefits of eco-innovation
Sustainability equals innovation
It’s not often that sustainability issues make it onto the front pages. Much less the front of the Harvard Business Review. So what does the venerable HBR have to say? In a nutshell: sustainability is a “touchstone” of innovation, sustainability is the key to future competitiveness, and sustainability ain’t easy.
Practitioners will be familiar with the first stage of the argument. Social and environmental management systems reduce inputs and thereby add to, not reduce, the bottom line. Look at AT&T, which cuts carbon emissions from travel via telecommuting and saves itself $550m a year. Specialists in the sustainability industry have long argued this point. But it does no harm for the HBR to weigh in too.
The second part of the HBR story will also chime with those in the sustainability field: namely, it’s time for a rethink. Special attention is given to incorporating sustainable principles into new products and services. A “sizeable number” of consumers prefer eco-friendly offerings, executives must realise. Take Clorox. Last year, the US consumer products company launched its first line of non-synthetic cleaning products. The initiative cost it $20m and took three years to develop, but Clorox now controls 40% of this emerging $200m market.
Practitioners will find the management advice in the paper’s concluding section the most useful. “Don’t start from the present,” reads the first tip. Better to determine future performance and work back from there. Another piece of sage advice: multinationals should use their global presence to experiment. Emerging markets present fewer entrenched systems and therefore more leeway for innovation.
“Why sustainability is now the key driver of innovation” by CK Prahalad et al, Harvard Business Review, September 2009.
Taxing questions
Contemporary business scholars in general hold a dim view of paying tax and an even dimmer view of corporate responsibility. Corporate executives justify their appointment by serving the interests of the shareholders who select him (or, on rare occasions, her). When they start imposing “taxes” (read, “CSR spend”) this justification disappears. So Milton Friedman once argued, and so his adherents repeat. Taxation is the sole preserve of governments and, as the doyens of the public good, they have no place encouraging companies to make extra-fiscal contributions. In summary, a “yes” to profit maximisation. And a firm “no” to anything and everything besides.
Fortunately, this paper takes a different tack. Pushed to its extreme, the arguments of classic neo-liberalists show themselves to be “misguided”. In today’s globalised age, it is practically and morally impossible to sustain the argument that corporations have no wider obligations to the societies in which they operate. There’s a question of logic at stake as well. If governments exist to provide public services, how can they fulfil that function adequately if companies deny them the revenue to do so?
Holes can also be found in the case against governments encouraging greater social engagement by the private sector. Even supposing that corporate responsibility constitutes an illegitimate tax on shareholders, governments should incentivise such behaviour through fiscal incentives and procurement spend. Why? For the same reason governments leave public-run companies to the machinations of the market: companies do it better.
“Taxation, corporate social responsibility and the business enterprise” by Reuven Avi-Yonah, University of Michigan, CLPE Research Paper, Vol 5, No 3, 2009.
Eco-innovation: the funding crunch
The US energy sector receives about $8bn in funding for research and development, roughly 0.8% of its total revenue. The manufacturing sector, in contrast, ploughs up to 8% of revenue back into R&D. Innovations in the clean energy space require more funds. But where is the money to come from? This paper offers an insightful overview of the various financing channels available. Much derives from government coffers in the shape of subsidies, tax credits, direct funding and the like. Why? “Because innovation is inherently risky.” For every hundred lines of enquiry, only one might merit commercialisation by venture capital funding.
Environmental innovation is further complicated by externalities. Subsidies, for example, are wide open to criticism from interest groups. That leads to the adoption of covert subsidy mechanisms such as price controls. Many public financing mechanisms that look good on paper turn out to be politically unfeasible. Increasing taxes on carbon-intensive fuels presents a classic case in point.
In the end, most innovation is still funded by private sources, be it internally (through retained earnings) or third-party funding sources (such as bank loans and venture capital). The challenge for policymakers, this paper maintains, is one of balance: “encouraging financing and removing obstacles to the process while still allowing the wisdom of the market to function”. It’s good advice. Eco-innovation is vital, but it won’t happen without the necessary funding. Solutions must be found, and fast.
“Financing environmental improvements” by Daniel Johnson and Kristina Lybecker, Colorado College, Working Paper, August 2009.
On campus
French business school Insead and Unilever have set up an endowment fund to support research into leadership and diversity. The initiative is the result of a €3m gift by Unilever.
Oxford University’s Saïd Business School and the School of Management at Zhejiang University, China, have initiated the 10,000 Women Entrepreneurship Certificate Programme. The programme is designed to develop the entrepreneurial skills of women in China.