Ethical Concerns: Multinationals and Sustainability – Part 2
Welcome to this session of the International Socio-Economic Context Course. This class continues the review of the Ethical Concerns and Sustainability Chapter that aims for a review of the increasing interest of different business world stakeholders, related to both topics.
In this session, the identification of new challenges that MNCs face as a result of growing environmental concerns will be presented. This is important because the response of enterprises constitutes the way they evidentiate their commitment with the ecological concerns.
So, by the end of this class you will be able to recognise the actions and challenges of MNCs in their pursuit of improving the climate conditions of the environment in which they operate and to what they belong to.
As Ajami. & Goddard J. (2015) mention, MNCs, for valid reasons, have been held responsible for their con- tribution to the increased environmental problems the world faces today and are called on to adjust virtually every aspect of their activities.
Establishing in House Environmental Ethics
MNCs’ approach to battling environmental pollution and ecological degradation is de- pendent to a large degree on the corporation’s ethical code. The corporation’s response to these problems depends on what it perceives to be its responsibility. MNCs have tremendous political leverage, particularly in small LDCs, which need their technology, industrialization, and economic growth. Environmental laws are less developed in LDCs, while public awareness of environmental issues there is limited, and there are few channels for the effective and voluble expression of public opinion. The ruling powers in LDCs generally tend to have almost universal authority, and their decisions are difficult to challenge, which allows MNCs to establish environmentally unsound projects, should they decide to do so, as long as they have the confidence of the local authorities. Many prior studies have shown that MNCs tend to locate their more polluting plants in devel- oping countries to escape the strict environmental standards and regulations imposed by developed countries. The inclusion of environmental initiatives in trade agreements could help to reduce the imbalance of enforcement of environmental improvement between the developed and developing worlds. Some developing countries have argued that developed countries have more historical and current culpability for environmental contamination then do the less-developed countries. It is extremely important for MNCs to take a responsible approach to environmental issues. Many corporations have adopted such an approach, voluntarily restricting their environmentally unsound operations and even stopping production of environmentally unsafe products. Many others have not.
Relocation of Production
In the past, MNCs’ location decisions were principally dependent on technical and economic criteria: raw material supply, infrastructural facilities, availability of a trained workforce, proximity to markets, availability of transportation, and so on. Now deci- sions to establish plants must evaluate potential effects on the environment. Not only must the economic consequences (such as feasibility and rate of return) be forecast, but plans must be made to protect the local environment. Thus, while permission from a government was sufficient in the past to establish a factory in a host country, MNCs are now likely to be required to discuss their site plans with local representatives and allay their concerns about a plant’s actual and potential impact on the local environment and ecological balance.
Modification of Technology
Traditionally, the main motivator of technological change was a search for more advanced and economically efficient technologies that would generate new and better products at lower costs. Recently, however, technology development has also focused on environmen- tal safety. Technologies in development must be monitored in regard to their environmental consequences. So-called green technology applies to generating energy, creating nontoxic cleaning products, fostering sustainable development, and so on.
Use of Raw Materials
Raw material use is an important focus of technological modification. The raw materi- als currently in use may not be available in the future, principally for two reasons: they may be nonrenewable, as are fossil fuels, and their use may result in consequences that are harmful to the earth’s environment. According to the Hotelling rule, the price of an extracted resource rises at a rate equal to the capital market interest rate. Thus, the smaller the remaining underground stock, the higher are the unit extraction costs. Unfortunately, if the expected profit is higher than the unit extraction cost, continued extraction is likely, in the absence of supply-based controls. As concerns with the environment grow, MNCs are called on to consider not only the monetary price of raw materials but their ecologi- cal consequences as well. Limitations imposed by these considerations exert pressure on MNCs to use technologies that reduce industrial waste, maximize consumption efficiency of raw materials, promote recycling of waste and used products, and concentrate on more durable and lasting products.
Use of Energy
Energy use is another important area of concern in the general technological modifications that MNCs will have to continue to undertake as part of their response to environmental imperatives. Typical approaches in this area include gradual phasing out of energy- inefficient technologies and introduction of technologies based on clean, renewable, and environmentally safe sources of energy (e.g., solar power and hydrogen), as opposed to those based on polluting, nonrenewable sources, generally limited to fossil fuels. The problem has been complicated by nuclear accidents at Three Mile Island in the United States and Chernobyl in Ukraine, which have placed a major question mark over the future of nuclear energy as an alternative to conventional fossil fuels. The small nation of Iceland has been successful in the use of hydrogen power. Approximately 70 percent of Iceland’s energy needs are met by geothermal and hydroelectric power. Iceland has a vast pool of geothermal energy beneath its surface, which allowed for the successful experimentation over the years with alternative sources of energy. All of Iceland’s homes are heated via these clean energy sources, and only its transportation industry still requires oil and gas. In 2003, Shell opened a hydrogen station in the country, and buses that run on hydrogen power were also introduced. This early market entry was followed by demonstration hydrogen stations throughout the world in recent years.
Energy sources are likely to grow more expensive and scarce, while patterns of en- ergy use are likely to be under increasing scrutiny from different quarters, including environmental groups and the media. MNCs must ensure that they use energy sources in an environmentally sound manner, which will require substantial investments in new or modified equipment, such as energy-efficient industrial furnaces, boilers, and exhausts, and new equipment to control atmospheric emissions, such as air filters and gas treat- ment chambers. Energy use will have to be modified not only in production, but also in all other facets of activity, including transportation.
The response to the environmental challenge cannot be limited to in-company modifica- tions in production, technologies, energy, product mix, or location decisions. It must extend beyond the corporation, because the environmental impact of the operations of industrial concerns affects the local community and, in an aggregate sense, its home or host country. Company responses must be designed to compensate for aspects of environmental regenera- tion that are most directly and visibly linked to the areas of the corporation activities. For example, companies that use substantial quantities of wood would be called on to support local and national reforestation and social forestry programs. Companies that have had a role in adding to atmospheric pollution would have to support programs that attempt to remedy the consequences of such pollution, such as the cleanup of lakes and other fresh- water bodies damaged by acid rain, or international agreements such as the Kyoto Protocol. As discussed earlier, firms responsible for overfishing should have the responsibility of adhering to scientifically based quota limitations. More generally, it is becoming a growing responsibility of corporations to foster environmentally responsible behavior both among their employees and in the communities in which they are located.
Environmental disclosure will be an important responsibility of MNCs in the future. MNCs will have to remain aware of and appropriately informed about the environmental impact of their activities through an efficient internal information system. These data would have to be shared with the outside world, both voluntarily and through mandatory reporting requirements and environmental audits. A touchy issue will be environmental compli- ance by an MNC’s joint-venture partners or partly owned subsidiaries in host countries. While an MNC may prescribe a certain environmental standard for itself and wish to have it replicated by its joint-venture partners or overseas subsidiaries, that wish may not be reciprocal. Similarly, overseas partners may impose more stringent environmental constraints that an MNC may not wish to be bound by. The issue of environmental safety has become important in many negotiations for international joint ventures, and environ- mental responsibilities are often incorporated as fundamental provisions in the terms of agreement. MNCs have become particularly sensitive to this issue because of the dangers of environmentally unsound acts that their joint-venture partners might commit, for which they might have to take the blame in both their home and host countries, and which could damage their reputation for environmental responsibility in other countries.
It is extremely important that MNCs disseminate information on their own about the consequences, both favorable and unfavorable, of their operations on the environment. Proper disclosure of such information will be extremely important in maintaining the environmental image of a corporation and facilitating a feeling of confidence among different groups—local governments, creditors, consumers, suppliers, investors—in the firm’s environmental soundness. Proper disclosure of the environmental status of a firm’s activities also has an important damage-control role, inasmuch as it informs the public about possible dangers. Any harmful consequences for the environment emanating from MNC activity would be much more damaging to a firm if it became known that the MNC had chosen to suppress prior information it had about such a possibility.
In-house Environmental Training
As a part of overall corporate planning, the environmental consequences of all future company activities should be assessed well in advance. A serious commitment to this type of oversight will enhance the corporate image.
One way of demonstrating this commitment is to include the corporation’s environmental approach in its mission statement and corporate objectives. Any business plan intended for external audiences should include company-defined environmental goals, as well as specific plans for implementation. Planning for environmental safety must be comprehensive, covering future investments in plants and other physical facilities, use of natural resources, treatment of industrial wastes, prevention of environmental damage, protection of water resources, and prevention of accidents.
No plan can be successfully implemented if the operating-level staff is not actively edu- cated. This is all the more true of plans for environmental soundness and safety because operating-level staff are likely to view the plans as peripheral to their central functions, not because of their antipathy to the environment, but simply because of their perception of its relative importance in the context of their work. MNCs must therefore engender a sense of commitment to environmental safety and responsibility among management and staff to elicit optimal cooperation in the achievement of the company’s environmental objectives.
Personnel must also be informed about the nature of the environmental problems that confront the world, in general, and the environmental consequences of their activities as company workers, in particular. One way to give meaning to this exercise is to spell out ways in which employees could contribute to overall environmental safety in their own tasks. To ensure that these guidelines are taken seriously, firms must establish an incentive structure that encourages employees to monitor environmental standards and provide practical suggestions on how the company’s environmental performance could be improved. A reward structure could also be established for groups or units, whereby the group could be rewarded on the basis of the environmental safety or standards it is able to maintain over a given period of time. It is essential to involve employees, at both management and staff levels, if any environmental safety program is to be successful.
In this session, a review of the major environmental concerns affecting the global community was presented and also, the implications particularly for MNCs.
Also, the emerging environmental concerns as a global trend was introduced at the time that this was related to the social responsibility term. The main focus of this session was the recognition of some of the main environmental issues such as greenhouse gasses, depletion of the ozone layer, deforestation, fishing stocks, hazardous waste, pollution and finally, the Kyoto protocol was presented as an example of the initiatives that tends to reduce the general deterioration of the Earth by human activities.
Ajami R., & Goddard J. G. (2015). International Business: Theory and Practice. Routledge (328-332).
Lowery, T. (February 8th, 2022). This Report Checked Climate Promises vs. Reality of the World’s 25 Biggest Companies. Here’s What It Found. Global Citizen . https://www.globalcitizen.org/en/content/corporate-company-climate-pledges-net-zero-report/