The “Business Case for Sustainability” Concept

Schaltegger, Stefan; Lüdeke-Freund, Florian

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2012

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Schaltegger, S., & Lüdeke-Freund, F. (2012). The “Business Case for Sustainability” Concept: A Short
Introduction. Centre for Sustainability Management.

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 The “Business Case for
Sustainability” Concept
A Short Introduction

Prof. Dr. Stefan Schaltegger &

Florian Lüdeke-Freund

Centre for Sustainability Management (CSM)

Leuphana Universität Lüneburg
Scharnhorststr. 1
D-21335 Lüneburg

Fax: +49-4131-677-2186
[email protected]
www.leuphana.de/csm/

Juni 2012
© Stefan Schaltegger and Florian Lüdeke-Freund, 2012. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system or transmitted in any form or by
any means: electronic, electrostatic magnetic tapes, photocopying, recording or otherwise,
without the permission in writing from the copyright holders.

Centre for Sustainability Management (CSM)

Leuphana University of Lueneburg
Scharnhorststr. 1
D-21335 Lueneburg

Centrum für Nachhaltigkeitsmanagement (CNM)

Leuphana Universität Lüneburg
Scharnhorststr. 1
D-21335 Lüneburg

Tel. +49-4131-677-2181
Fax. +49-4131-677-2186
E-mail: [email protected]
www.leuphana.de/csm

ISBN 978-3-942638-22-7
TABLE OF CONTENT

TABLE OF CONTENT

Summary .................................................................................................................................. II
1. Introduction........................................................................................................................... 3
2. The Business Case for Sustainability and Economic Success ............................................ 4
3. Drivers of Business Cases for Sustainability ........................................................................ 6
4. Key Challenges .................................................................................................................... 8
5. Future Issues related to the Business Case for Sustainability ........................................... 10
Literature ................................................................................................................................ 12

LIST OF FIGURES

Figure 1: Potential relations between corporate environmental and/or social performance and
economic success .................................................................................................................... 5

LIST OF TABLES

Table 1: Core drivers for the business case for sustainability……………………………………6

SUMMARY II

SUMMARY
A business case for sustainability intends and realizes economic success through (and
not just with) an intelligent design of voluntary environmental and social management.
A business case for sustainability is different from a conventional economic business
case. It can be characterized by three requirements which have to be met. Firstly, the
company has to realize a voluntary or mainly voluntary activity with the intention to
contribute to the solution of societal or environmental problems. These are intended
activities for the society or the natural environment which are not just a reaction to
legal enforcement and regulations or which would anyhow be expected for economic
reasons as part of conventional business behavior. Secondly, the activity must create
a positive business effect or a positive contribution to the economic success of the
company which can be measured or argued for in a convincing way. Such effects can
for example include cost savings, the increase of sales or competitiveness, improved
profitability, customer retention or reputation. The cause and effect relationship can be
direct or indirect, however, must not be speculative but rather based on a sound
management argumentation. Thirdly, a clear and convincing argumentation must exist
that a certain management or entrepreneurial activity has led or will lead to both the
intended societal or environmental effect and the economic effect. This argumentation
includes an explanation of the link between the voluntary social or environmental
activity and the economic and sustainability effect. A business case for sustainability is
thus characterized by creating economic success through (and not just along with) a
certain environmental or social activity. In summary: A business case for sustainability
results from the intelligent design of voluntary or mainly voluntary social and
environmental management and creates a positive business effect based on a distinct
management or entrepreneurial activity. The concept of the business case for
sustainability guides researchers and practitioners alike to find answers to the crucial
question: How can the competitiveness and business success of a company be
improved with voluntarily created outstanding environmental and social performance?

KEYWORDS
business case for sustainable development, business case for sustainability, business
case of sustainability, enlightened self-interest, win-win situation, triple-win situation,
triple bottom line success, corporate sustainability management
1. INTRODUCTION 3

1. INTRODUCTION
A business case for sustainability, or what scholars in business ethics often call
“enlightened self-interest”, is mostly described as a situation where economic success
is increased while performing well in social and environmental issues. The importance
of creating business cases for sustainability has been discussed for nearly two
decades from various perspectives (for an overview see, e.g., Carroll & Shabana,
2010; Schaltegger et al., 2012). One perspective fundamentally asks whether creating
business cases is sufficient to achieve corporate sustainability and contribute to
sustainable development. Another perspective elaborates on the question whether
environmental and social activities and a good performance herein are only a side
effect of pure economic rationality. The above given definition is in line with a third
perspective that acknowledges the general feasibility and relevance of business cases
for sustainability and focuses on the links between voluntary environmental and social
management and economic success.
On a general level, the links between social, environmental and economic
performance are a highly debated topic, in theory as well as practice. Whereas in the
beginning most of this debate was about whether a positive link or a business case
exists at all, or not, current research has shifted towards the question what kind of
links between voluntary corporate sustainability management and business success
exist (for overviews see Salzmann et al., 2005; Schaltegger & Wagner, 2006). One
conclusion is that some kind of an automatic relationship between voluntary social and
environmental management and economic success does not exist. However,
theoretical and empirical research indicates that most companies have the potential for
one or several business cases for sustainability. Various models have been proposed
to analyze these links theoretically and empirically, whereas earlier work mostly
assumed that the optimum level of environmental or social performance for a business
firm may be just to achieve compliance with legal regulations. This minimalist view is
based on the assumption that firms in general face a trade-off between (better)
environmental or social performance on the one hand and (worse) economic
performance or competitiveness on the other (Hemphill, 1997). While reactionary
people maintain that any kind of voluntary activity outside the narrower focus of
economic measures will hamper profit, observers of business reality with openness to
a more progressive view will find numerous examples of business supporting and
profit increasing social and environmental measures (Schaltegger & Wagner, 2006).
These relationships are also debated within the related field of Corporate Social
Responsibility (CSR) (Carroll & Shabana, 2010). Carroll and Shabana argue that from
the beginning CSR had to legitimate itself through (long-term) contributions to
business success (enlightened self-interest), i.e., through a business case. However,
the broad spectrum of CSR also includes purely socially oriented activities of corporate
philanthropy. But as long as no justification in terms of business success is required
(see second definitional element above), these are not covered by the business case
for sustainability concept. However, even philanthropic activities are often connected
to questions of creating competitive advantage (Porter & Kramer, 2008).
4 S. SCHALTEGGER, F. LÜDEKE-FREUND

2. THE BUSINESS CASE FOR SUSTAINABILITY AND ECONOMIC SUCCESS

Most of the more recent research on these issues emphasizes the possibility of win-
win or even triple-win potentials. Of course, examples can be found for both negative
as well as positive effects: end-of-pipe measures causing additional costs and
reducing profitability as an example for cost-increasing measures on the one hand,
and the sales success and profitability of green products or social services as
examples for profit-increasing measures on the other. The economic return of social or
environmental management will vary whether cost-driving or profit-driving activities are
chosen. In other words, there is no general answer to the question how it pays to be
sustainable. Instead, managing social and environmental engagement in a way that
contributes to business and economic success has to be accepted as an
entrepreneurial and managerial challenge of which success depends on what kind of
measure is chosen. In an article on “The Link between ‘Green’ and Economic
Success” Schaltegger and Synnestvedt (2002) proposed a model to visualize and
analyze the overall relationships between environmental performance and economic
success. This model can be used to illustrate the general challenge of linking social or
environmental performance with economic success and which helps in understanding
the concept of business cases for sustainability (Figure 1).
The line ES0-E-F-D in Figure 1 illustrates a case in which primarily cost-increasing
voluntary sustainability activities are chosen: A company that already complies with
regulations and achieves the economic success level ES0 will experience decreasing
economic performance while increasing its voluntary social or environmental
performance (moving to the right along the x-axis towards point D). In the extreme
case, below point D at ESP0, the company might even become unprofitable. This view
can be assigned to the minimalist view mentioned above that emphasizes trade-offs
between sustainability and economic performance. On the contrary, positive economic
contributions can be expected if primarily profit-increasing activities are realized: Line
ES0-A-B can be assigned to the expectations of the progressive view. In a certain
range, in Figure 1 until point B at ESP1, increasing voluntary sustainability engagement
contributes positively to economic success. It is important to recognize that neither
every measure nor an arbitrary activity level contributes to economic success per se.
To contribute to the economic success of the company the social and environmental
activities have to be designed accordingly. The “economically optimal” business case
for sustainability may be achieved at point A and ES* and ESP*. After this point the
economic performance might decrease while the environmental and social
performance is expanded towards point C. This relationship can be interpreted as
rising marginal costs for sustainability measures after the “low hanging fruits” have
been picked. Beyond this point, any additional measure leads to net marginal costs. A
“socially or environmentally optimal” business case would be just slightly above point
at ES0 and ESP1. However, even if the highly profitable measures can be identified
and realized, the economic performance will at some point have its culmination (point
A in Figure 1) and decline since no company has unlimited profit-increasing voluntary
social or environmental activities with a given business model. As a difference to social
2. THE BUSINESS CASE FOR SUSTAINABILITY AND ECONOMIC SUCCESS 5

businesses in general, it is not the goal of a business case for sustainability to solve
any social problem, but to contribute to solving which relate to the core business of the
company, and in doing so to strengthen the economic performance at the same time.
This may – but does not have to – lead to the development of a new business,
business unit or even company. It can also remain an integrative element of the
transformed original core business. In this context, the model in Figure 1 allows for
different conclusions. Realizing a business case for sustainability is an entrepreneurial
and managerial challenge as it requires finding the “right” measures in line with a firm’s
core business. It might even lead to the conclusion that the core business, target
markets or the business model of a firm have to be re-defined in order to purposefully
change the nature of the relationship between voluntary social and environmental
management and economic performance, i.e., to change the slope of the functions as
indicated in Figure 1.

Figure 1: Potential relations between corporate environmental and/or social performance and
economic success
6 S. SCHALTEGGER, F. LÜDEKE-FREUND

3. DRIVERS OF BUSINESS CASES FOR SUSTAINABILITY

The core question for the management of business cases for sustainability is thus how
profit increasing social and environmental activities, rather than cost increasing
measures, can be identified and realized. This is where identifying and unfolding the
potential for a business case links in with tasks such as sustainability accounting and
measurement, strategic sustainability management or sustainable business model
innovation. The potential of profit-increasing measures is often not recognized, even
by well-informed corporate professionals, because of distorted accounting and
management information systems and other organizational rigidities such as a lack of
integration with strategy formulation and, related to this, lock-in effects of established
strategies and business models which set limits to changing business behavior. From
these insights follows that a business case for sustainability has to be actively created
and managed – it does not just happen. This requires detailed knowledge about the
drivers of profit-increasing and cost-reducing measures in order to strengthen the
relationship that is described by line ES0-A-B in Figure 1. The drivers of a business
case for sustainability directly and indirectly influence economic success (e.g.
Schaltegger, 2011). These drivers are similar to the variables that influence a
conventional business case, whereas the relationships between voluntary social and
environmental management and economic success are often different from
conventional economic cause-and-effect chains, and so is the kind of influence a
social or environmental activity has on the economic drivers (an aspect that is explicitly
recognized by the Sustainability Balanced Scorecard concept). Looking closer at
potential business case drivers reveals a wide range from direct to indirect influences
on business success and economic performance.
Table 1: Core drivers for the business case for sustainability

Core business case

drivers

Costs and cost reduction

Risk and risk reduction

Sales and profit margin

Reputation and brand value

Attractiveness as employer

Innovative capabilities

The most direct link may be through costs. The role of costs and cost reduction is
often addressed as a driver with regard to energy savings, the reduction of material
3. DRIVERS OF BUSINESS CASES FOR SUSTAINABILITY 7

flows or cleaner production approaches. Another commonly mentioned driver which is

related to contingencies, potential and actual costs, is the reduction of technical,
political, societal and market risks. Opportunity-oriented drivers of business cases for
sustainability are addressed when sales and profit margins or the company´s
reputation and brand value are increased. Moreover, other drivers such as market
accessibility can play an important role depending on the circumstances and the
company´s market strategy. Besides these drivers with a rather direct economic
impact, some rather indirect effects are possible. One is the attractiveness as an
employer which can be driven through recruiting and selection, induction and
development programs. Another is the capability to innovate which sustainability can
improve because thinking in multiple dimensions is encouraged and more diverse
knowledge sources – e.g. from stakeholders – are sought. These core drivers of a
business case for sustainability are presented in Table 1. Current empirical research
confirms these six main drivers (similar to Schaltegger et al., 2012; see also Hansen,
2010; Revell & Blackburn, 2007).
An important issue which is often neglected when assessing the effect of
environmental and social activities on business success or economic performance is
that their path of influence, i.e., their cause-and-effect links, can be quite indirect,
involving non-market links and actors such as political initiatives and NGOs. In
addition, these relationships can be stochastic which makes their management even
more difficult. In consequence, creating and managing a business case for
sustainability is a real management challenge which at the same time offers business
opportunities and the potential to contribute to sustainable development. However, this
requires purposeful sustainable entrepreneurship and corporate sustainability
management.
8 S. SCHALTEGGER, F. LÜDEKE-FREUND

4. KEY CHALLENGES
The key issue of identifying, creating and managing business cases for sustainability is
about integrating the three dimensions of sustainability with market-oriented business
activities, both on the level of corporate visions and strategies as well as operational
management. Adding to the relationships between social or environmental
performance and economic success shown in Figure 1, the so called “sustainability
triangle” helps in understanding that the business case for sustainability is embedded
within the wider notion of corporate sustainability. Corporate sustainability can be
viewed as the result of management attempts to tackle challenges posed by the need
for corporations to move towards the goal of sustainability (Schaltegger & Burritt,
2005). Purposefully creating and managing business cases is one such attempt. But it
also faces limitations as can be seen in Figure 1 above: Movements along the x-axis
towards the right cannot go beyond levels which run counter to the idea of a business
case, i.e., even if a firm still has the potential to expand its social or environmental
performance (i.e., there is still “something to be done”), entrepreneurs and managers
might refrain from doing so. In consequence, it might happen that firms realize relative
improvements (in terms of increased social and environmental performance per unit of
economic profit) but do not achieve absolute improvements, or that they achieve
incremental but not radical improvements. Absolute and in many cases also radical
improvements, however, are vital to contribute to a sustainable development of the
natural environment and society. Hence, different scholars emphasize the need to go
beyond mere efficiency gains and include effectiveness criteria and principles of
justice in their definitions of corporate sustainability; some even distinguish further
cases such as “the natural case for corporate sustainability” or “the societal case for
corporate sustainability (Dyllick & Hockerts, 2002).
Whichever definition of corporate sustainability is applied, information is key to support
decision making. Identifying, creating and managing business cases for sustainability
leads to information needs which are not met by conventional information
management systems. Firstly, sustainability-related decision situations and information
needs have to be identified. Secondly, according sustainability accounting and
reporting frameworks are required to allow for an integrative information management.
The heuristic of a sustainability triangle helps structuring the information needs for
managing corporate sustainability and business cases for sustainability. It can be
applied in order to identify and refine the drivers shown in Table 1 and relate them to
business success and economic performance and analyze their effects according to
the model proposed in Figure 1.
The sustainability triangle combines the three dimensions of sustainability, social,
environmental and economic sustainability, as well as their interrelationships, and
distinguishes between different kinds of effectiveness and efficiency as goals to be
4. KEY CHALLENGES 9

achieved. Effectiveness, measured in absolute terms, is the goal whenever

management strives for the improvement of a single dimension (e.g., tons of waste
avoided, additional income in poor regions). Whereas efficiency, measured in relative
terms, describes the relation between different dimensions, e.g., socio-efficiency for
the relation between the social and the economic dimension (e.g., additional income in
poor regions per unit of additional turnover). The relation between the ecological and
social dimensions refers to the question if a firm’s business activities contribute to an
equitable distribution of access to and benefits from the natural environment among
different societal groups. The overall challenge for sustainable entrepreneurs and
corporate sustainability managers that can be derived from the sustainability triangle is
the so called integration challenge with its two facets: firstly, the contextual challenge
which requires the simultaneous handling of social, ecological and economic issues
and their synchronization with business goals, both in terms of effectiveness and
efficiency; and secondly, the methodological challenge which is about the operational
integration of social and environmental management into conventional economically-
oriented business management. Each sustainability challenge, social, ecological or
economical, with regard to considerations of efficiency, effectiveness and justice,
requires a thorough analysis of potential drivers and their contributions to corporate
sustainability and the business case for sustainability.
10 S. SCHALTEGGER, F. LÜDEKE-FREUND

5. FUTURE ISSUES RELATED TO THE BUSINESS CASE FOR SUSTAINABILITY

The business case for sustainability is a widely discussed concept of corporate
sustainability management as it directly touches upon two fundamental questions of
business ethics: What is the purpose of business? And: What is the responsibility of
business? Acknowledging that companies are economic entities set up for the purpose
of creating value, not only purely economic value of course, and acknowledging that
companies have to act responsibly with regard to society and the natural environment,
modern entrepreneurs and managers have to focus on the crucial question behind the
concept of the business case for sustainability: How can the competitiveness and
business success of a company be improved with voluntarily created outstanding
environmental and social performance? Today, theoretical work provides sufficiently
developed frameworks to guide empirical research in order to find answers to this
fundamental question – a question that any manager of the 21st century has to ask.
Still, empirical answers to this question are rare, both in terms of research and
business practice.
Three core topics for research and practice shall be mentioned: sustainability
accounting and reporting, sustainable entrepreneurship, and sustainable business
model innovation. Theoretically speaking, the common goal of these topics can be
described as finding ways to move upwards on the top curve as shown in Figure 1, to
change the function’s slope, i.e., to move it further up and to the right to allow for better
integrated and farther-reaching business cases for sustainability.
To this day, conventional accounting and reporting systems neglect issues of
corporate sustainability and provide distorted information as a basis for decision-
making (Burritt & Schaltegger, 2010). But identifying, creating and managing business
cases for sustainability effectively requires corrections to conventional accounting and
reporting systems. While sustainability accounting and reporting have made progress
in theory, industry studies show that companies are only beginning to implement such
systems (methodological integration) and their philosophical basis (contextual
integration) (e.g., Ernst & Young, 2012). Besides mastering these integration
challenges, the scale of firms’ social and environmental performance determines their
contributions to sustainable development. Figure 1 and Table 1 illustrate that business
cases for sustainability can be of different qualities: they can be socially and/or
environmentally-oriented, they can address efficiency and/or effectiveness, contribute
to justice, can have far-reaching or rather limited effects, and can be based on
different drivers. But the quality of a business case for sustainability will also depend
on whether it is addressed as an entrepreneurial or managerial challenge, as a core
business issue or as part of differently motivated approaches such as Corporate Social
Responsibility (CSR). Therefore, scholars differentiate different types of sustainable
entrepreneurship based on the scale of positive effects on market and society and the
5. FUTURE ISSUES RELATED TO THE BUSINESS CASE FOR SUSTAINABILITY 11

priority given to social and environmental issues as business goals (Schaltegger &
Wagner, 2010). In this perspective, social entrepreneurs, “bioneers” or “ecopreneurs”
will create different kinds of business cases. A rather new field of research on
corporate sustainability management deals with the role of sustainable business model
innovation that can be directly related to sustainable entrepreneurs and their
innovation activities (Boons & Lüdeke-Freund, 2012). The business model concept is
based on a firm’s resources and infrastructure, its customer segments and the
according value propositions, as well as a financial model. The quality of a business
case for sustainability will also depend on the degree to which these business model
elements deviate from conventional models and are better suited to support, e.g., the
marketing of environmental technologies, social enterprises or completely new
organizational forms. As there is no general answer to question whether business
cases for sustainability can be realized within a given business model, or whether new
businesses, business units or even companies are required, managing business
models is an important aspect of creating and managing business cases for
sustainability.
LITERATURE 12

LITERATURE
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