How apply ethics to a sustainable business innovation

Road To Forest Valley Podcast

Published on 2021-12-29

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The question "How to apply ethics to sustainable business innovation?" was the starting point for Thorsten Harstall, who gave us a presentation on how ethics can be applied to different types of business strategies both for start-ups and established companies, and some useful tips on how to start a journey towards sustainable ethics.

 

The research focus - What is ethics for businesses

My research title is "How is ethics applied to sustainable business innovation?" 
And my main motivation to deep dive into that context was apparently first an outside-in view on what is happening in the world around us. 
The reference I took was primarily the Earth Overshoot Day, which is basically giving us some sort of an indication of how we, in economic terms, manage what the planet can regenerate within a year. And, according to this index, we're actually having a really barely bad trend line, from the beginning of the Seventies, where this date was still at the end of December, and this year, in 2021, we're already at the end of July. So, that means we are overconsuming, from the planetary boundaries aspect, what the planet can give us back. In other words: we're getting worse and worse. 

That was my main motivation to understand what does it mean to be sustainable; what does it mean to not only be doing things less bad.

Now I'm already using ethical terminology: good and bad. But actually, what can corporations, in particular, do to contribute to sustainable development, in a sense of a net positive contribution to economic, but in particular to environmental and social contributions. 

 

The introduction of sustainability in business

The first founding was to understand what is actually sustainability because it's an overused word. I tagged it basically from two topics: the first was more of a macro understanding. What I did here is deep dive into the history of sustainability divided into three important milestone steps. 

The first was in the Seventies: the Club of Rome and the publication "The limits to growth". This report studies using a computer simulation, the exponential economic and population growth with a finite supply of resources, coming to the conclusion that the most likely outcome will be a rather sudden and uncontrollable decline in both population and industrial capacity. 

Then you maybe remember at the beginning of the Nineties, we had the first Earth Summit in Rio de Janeiro. That was kind of the founding moment where across the United Nations sustainability became a key topic. At the time at the preparation and famous Brundtland reports there was a declaration of definition created - which I think is still the most relevant today and the most used today - which essentially, in a nutshell, is talking about the justice of the current generation and the justice of the future generations. So, in other words, cannot over-consume now just to our pleasure and then let the future generations suffer. 

When you talk about justice, you are very close to ethics and exactly that was the sweet spot I wanted to discover: how is ethics actually used for sustainability innovation in particular on the corporate level.

 

Ethics in business

I did a survey with more than 70 professionals online and here I asked, for example, questions, such as: "How familiar are you with the Sustainable Development Goals?", "At which stage are you in the implementation of these goals?". It was very surprising because a lot of companies report on the SDGs or at least use the logos that you can see if you go on their homepages or in the report’s pages, but 60% of the people actually didn't know or said their were not very familiar with the SDGs.

In the second step, I asked all the questions assuming that ethics is a key feature of sustainability, and there are a lot of smart professors doing currently new research and work on sustainability ethics. But then when you ask managers "have you ever been trained, on the job or before you got into your professional career, on ethics or business ethics?", it turned out that about 30% never had any ethical training

So that is obviously not good news, I have some hope also looking at the future, the younger generation - so let's say people who graduated in the last five years, maybe at the beginning of their career - is quite different. I think they integrate now SDGs in various different causes, might it be, let's say in chemistry and engineering, but also in business. Business ethics becomes more and more part of the curriculum in cutting edge business school. So I see a new generation coming up driving that agenda also with a completely different set of awareness and consciousness. But I think the current leaders in charge of taking the main decisions, according to my statistic, have a very low level received on ethical training, but also have a relatively low level of a deeper understanding of the Sustainable Development Goals, and the sustainability framework provided by the UN.

 

Traditional established corporation vs startup: two way of thinking

The cutting edge schools are integrating ethics and business, and also they link it oftentimes to this old debate: Milton Friedman "What is the purpose of business? Is it to maximize profits" versus a more stakeholder approach. 

 

It is not only to satisfy your investors and to satisfy consumer as king: you're actually a moral actor as an organization, as a corporation. You need to include nature and society, a different set of stakeholders. 

 

So I think coming along with that ethical education is certainly coming to a huge shift from what is, in general, a call to shareholder management and a shareholder focus towards stakeholder management. I think those two things come almost together.
 

What is the difference between an established organization, who typically has to defend a lot of old existing business and supposedly based on classical economic indicators, doing a really good job because they allegedly grow the bottom line, the net sales, the customer base; and startups. You obviously have a completely different conversation with startups or in particular that say if you talk with people who work in the environment of social entrepreneurship. 

In that group of social entrepreneurship startups, I found a lot of people that say their founding thought was very purpose-driven, very ethical driven. So they're not coming from that Milton Friedman thought school: often their first motivation is to fix a social or an environmental problem, and the utmost they believe in "if I'm able to fix those things with my competence, with my passion, as a consequence, I can make money with it. 

Traditional thinking - and that I think is the general transformational challenge of established organization - often has a mindset that people and planets and profits are like two different goalposts and it's always a trade-off, it's always a dilemma

Here, I think what I found, to try to transform the biggest barrier is culture, is mindset, awareness, it's also the organizational setup. The most cutting edge companies I talked to create some sort of separate units oftentimes called corporate entrepreneurs or innovation departments. They have different names for it but, essentially, they connect the attributes, the culture, the consciousness of a social entrepreneur with the resource and the access to human capital, to the financial capital of a huge organization. 

Obviously, if you bring those two things together, I think you can not only do cutting edge sustainability innovation at the highest level, that would be contributing positives to sustainable development goals, but you can also make huge change by scale because this huge organization definitely needed to drive the agenda and to transform. 

 

The different drivers to ethics business

My subtitle master thesis is "A truly sustainable innovation and the invisible hand, hat and heart". And maybe by the word, invisible hand, people who studied economics can send some sort of connection to Adam Smith.

And in fact, what I'm trying to signal, and I try to research in my work, is that sustainability transformation requires the full set: you need the heart, you need the moral conviction that is the right thing to do and not only doing the right things.

But equally, I would not discard an element that Adam Smith called the invisible hand, so the self-interest and drive of a corporation, an entrepreneur, or a human being, should not be completely neglected. Entrepreneurs oftentimes come from a more ethical motivation, but there is still market competitive. And the big corporations in a combination with the three things will always aim to be competitive in the marketplace.

So I think what's happening is almost like an evolutionary approach: you have on one hand moving a push from what I would like to call the greed entrepreneurs, and then you have the big green David, and then, on the other hand, you have the big Golia trying to become green.

And so I think it's both the moral belief, but also the competitiveness. So those two things come together obviously with the execution, to make it happen. I think that is what ultimately is driving transformation for both, for the smaller entrepreneurs, as much as for the big established corporations. 

 

The sustainable business categorization: 1.0 - 2.0 - 3.0

I'm making reference to a typology by two professors from St. Gallen - Thomas Dyllick and Katrin Muff - have created: basically there's a system where sustainability is subdivided into 1.0 2.0 and 3.0. That could answer the question: What is good enough sustainable or what is just a little bit sustainable?

According to their logic to say that a company is sustainably 1.0, the company has to focus on risk management reputation. And I think in simple terms, they put a flag and say" I'm part of the new sustainability party" but they're not changing from within, they're not changing their operating mindset, the operating model. In simple terms: they do things a little bit better but they’re not fundamentally transforming.

A sustainability 2.0 company would be a company that basically set up a business, monitored, and ran their business already with a triple bottom line. So they want to know what is their impact on a social, environmental and economic dimension.
This is a really difficult journey to go from 1.0 to 2.0. Criticism could be that doesn't guarantee they're making a positive net contribution to sustainable development goals. Eventually, it's still possible they're just doing things less bad. Again, we're in a category of ethical terms of good and bad. 

And a 3.0 what they do is basically set themselves up to contribute to positive sustainable development goal transformations on social economic and environmental aspects. So they are founding logic is completely different because they look more" what is my contribution to the world?". They look beyond their own balance sheet performance, they actually look at "what is my contribution as a moral actor to the sustainable development of the society and the planet". 

 

How many businesses are ready for the sustainable transition?

According to my research, starting on a 2.0 or aiming to become a 3.0 you can find mostly social entrepreneurship startup environments. Most big companies are on a journey from 1.0 to 2.0, and as I said before, they eventually come up with some sort of separation.

Let me take the example of Unilever: when they bought Ben and Jerry, the ice cream company. Ben and Jerry were founded with the aspiration to be a 3.0, and I think a big corporation like Unilever eventually acquired them or integrated them into their portfolio not only because they have smart additions to their product portfolio. I think what they also acquired was some sort of cultural intelligence, sustainability intelligence and I think to have those separate units who also can experiment, who can explore new sustainability ways, is a manner for big corporations to accelerate transformation. 

It is really hard within your existing business environment, within your efficiency drive within your short-term requirements to give the head mind space to explore such necessary solutions. 

 

Four ethical recommendations for future employees.

The first two recommendations are indeed some sort of upskilling training. First on the SDGs for me is a must-know for every company to understand that framework and also understand the complexities, the difficulties, the contradiction of that whole concept. The concept requires a lot of system thinking capabilities. 

And so my second recommendation is: as sustainability holds a very strong justice stroke ethical feature. My strong recommendation is to do a parallel upskilling into ethics and business ethics. I do not recommend that companies simply hire a philosopher on the board and all the others remain business as usual. I indeed suggest and recommend that every manager, every employee needs to be some sort of small philosopher or to have that ethical reflection, but also the techniques needed to apply it.

My third recommendation and that goes mainly to establish companies who have a more challenging job to transform, is that they eventually consider separate units with a different exploration spirit to really experiment "how can I become a 3.0". So that is the starting thought and basically taking all the learnings from these social entrepreneurs into corporations.

And my last recommendation is strongly related to the G, the governance, of ESGs. Again, it's not the old Bill Friedman thought school that a corporation should perform within the rules of the game and the only moral obligation is to focus on profit maximization. The cutting edge is that every organization is a moral actor and I think the best company I talked to actively pushed the institutional regulations. So which sounds insane for an economist is saying make my life more difficult because at the end of the day it takes us as a society in the right direction and the earlier I participate in that conversation the better my competitive advantage will be. So I think the really big game changes will only be possible if you have some sort of institutional or cross competitor, cross-industry alignment to also change the rules of the game, you can not wait until legislation comes up with that because oftentimes legislation is just too slow to react to this agility, which corporations can bring to this. 

 

The importance of ethical upskilling in modern organizations

If we talk about the governance part of ESG, the ethical guideline it's part of the corporate governance codex, for example. And if you go into those documents you find a lot of ethical features incorporated into them. 

I think there are two parallel positive forces: ethical traineeship and guidelines. I think guidelines help but at the same time, they're not the driving force. 

So here, I'm back again to ethical training and ethical upskilling. My experiences, when you do have done ethical workshops, for example, you start in almost like in a sense of transform ethics as a topic related to regulations, to compliance applying the rule, which in my definition is not even ethics that is legal. You move the conversation into a creative framework: what is possible? How do I arrange organizational set settings to do good?

I think our regulations are important. It creates some sort of a standard, also a comparison. But equally, you need to train your ethics. You need to train and reset your ethical frameworks, how human beings can perform in an organization. And I think with that, you certainly come up with more creative, ethical, and sustainable solutions. 

 

Takeaways to put sustainability in practice in organizations

For me, it was fascinating in my research to put the topic of ethics in front of a lot of diverse people across different generations. And for example, I made experiences where let's say a manager's aged 50 to 65 admittedly say" that was never part of my education, but I want to know more about it." So they have a positive relation to it, but they maybe didn't have many opportunities and chances to relate to it. So that was a really rewarding experience. 

And the second one was essentially on the organizational unit that we have to sort of say unchained some of our most talented people, most educated people when it comes to sustainability, when it comes to ethics and give them a new playing field where they can creatively explore more sustainable solutions, we feel we have it. We have the people, we have the technology, we have the financial capital, but we have to unchained that existing framework and organizational structure to get the best out of what we have. And so in summary, that gives hope that we, as human beings will be able to turn the Earth Overshoot Day in the right direction, back to December instead of January.

 

About the author

Thorsten Harstall

Sustainability Brand Strategist and Master in Behavioral Ethics, Economics and Psychology.

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