Business’ Impact on the Environment

Social responsibility is when a business decision benefits stakeholders other than shareholders i.e. workers, community, suppliers, banks etc.

This is very important when coming to environmental issues. Businesses can pollute the air by releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and chemicals into them, and damage the natural beauty of a place and so on.

Sense of social responsibility that comes from the fact that their activities are contributing to global warming and pollution It is expensive to reduce and recycle waste for the business. It means that expensive machinery and skilled labour will be required by the business – reducing profits.
Using up scarce non-renewable resources (such as rainforest wood and coal) will raise their prices in the future, so businesses won’t use them now Firms will have to increase prices to compensate for the expensive environment-friendly methods used in production- higher prices mean lower demand.
Consumers are becoming socially-aware and are willing to buy only environment friendly products. High prices can make firms less competitive in the market and they could lose sales
Governments, environmental organisations, even the community could take action against the business if they do serious damage to the environment Businesses claim that it is the government’s duty to clean up pollution



A business’ decisions and actions can have significant effects on its stakeholders. These effects are termed ‘externalities’. Externalities can be categorized into six groups given below and we’ll take examples from a scenario where a business builds a new production factory.

Private Costs: costs paid for by the business for an activity.
Examples: costs of building the factory, hiring extra employees, purchasing new machinery, running a production unit etc.
Private Benefits: gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs: costs paid for by the rest of the society (other than the business) as a result of the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near residents, loss of land (it could have been a farm land before) etc.
External Benefits: gains enjoyed by the rest of the society as a result of a business activity.
Example: new jobs created for residents, government will get more tax from the business, other firms may move into the area to support the firm-helping develop the region, new roads might be built that can be enjoyed by residents etc.

Social Costs = Private Costs + External Costs

Social Benefits = Private Benefits + External Benefits

Governments use the cost-benefit-analysis (CBA) to decide whether to proceed with a scheme or not and businesses have also adopted it. In CBA, the government weighs up all the social costs and benefits that will arise if the scheme is put into effect and give them all monetary values (this is not easy- what is the value of losing natural beauty?). They will only allow the scheme to proceed if the social benefits exceed the social costs, if the costs exceed the benefits, it is not allowed to proceed.


Sustainable Development

Sustainable development is development that does not put at risk the living standards of future generations. It means trying to achieve economic growth in a way that does not harm future generations. Few examples of a sustainable development are:

  • using renewable energy- so that resources are conserved for the future
  • recycle waste
  • use fewer resources
  • develop new environment-friendly products and processes- reduce health and climatic problems for future generations


Environmental Pressures

Pressure groups are organisations/groups of people who change business (and government) decisions. If a business is seen to behave in a socially irresponsible way, they can conduct consumer boycotts (encourage consumers to stop buying their products) and take other actions. They are often very powerful because they have public support and media coverage and are well-financed and equipped by the public. If a pressure group is powerful it can result in a bad reputation for the business that can affect it in future endeavours, so the business will give in to the pressure groups’ demands. Example: Greenpeace

The government can also pass laws that can restrict business decisions such as not permitting factories to locate in places of natural beauty.

There can also be penalties set in place that will penalize firms that excessively pollute. Pollution permits are licenses to pollute up to a certain limit. These are very expensive to acquire, so firms will try to avoid buying the pollution permit and will have to reduce pollution levels to do so. Firms that pollute less can sell their pollution permits to more polluting firms to earn money. Taxes can also be levied on polluting goods and services.


Ethical Decisions

Ethical decisions are based on a moral code. It means ‘doing the right thing’. Businesses could be faced with decisions regarding, for example, employment of children, taking or offering bribes, associate with people/organisations with a bad reputation etc. In these cases, even if they are legal, they need to take a decision that they feel is right.

Taking ethical/’right’ decisions can make the business’ products popular among customers, encourage the government to favour them in any future disputes/demands and avoid pressure group threats. However, these can end up being expensive as the business will lose out on using cheaper unethical opportunities.




Notes submitted by Lintha

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6 thoughts on “6.2 – Environmental and Ethical Issues

  1. hey, can you please elaborate more on ethical decisions, advantages and disadvantages and ways of being ethical. and ways of being unethical. and how this effects the business of being ethical and unethical.


    1. Hello Yousaf,
      I have mentioned the advantages and disadvantages briefly. Ethical decisions like using sustainable green technology or not using child labour will make a firm’s products popular and prevent backlash and protests from various social groups. People will also be more willing to work in ethical businesses.
      But installing green technology or employing adult labour is very expensive for the firm, making it less profitable, which will not suit the firm’s owners/shareholders/managers. There is a conflict of stakeholders interests.
      There is also the risk that some ethical actions may be viewed by customers/society merely as a way to appease them temporarily, and can be met with backlash if not sincerely/accurately executed. (Example: remember the Pepsi ad with Kendall Jenner? It didn’t go down well with viewers and Pepsi had to apologise and take it down. (Read more here: Making politically-charged decisions can be met with praise and criticism. If something goes wrong, it may damage the firm’s reputation for a long time.

      For the exams, you will have to elaborate on such points based on the case study given.

      As for ways of being ethical, some examples of being ethical are:
      – minimise use of plastics and paper in the firm
      – equal pay for men and women
      – employ people from diverse backgrounds and ensure there is no discrimination in the workplace
      – support local community initiatives, and initiate own programmes like giving out scholarships to poor students
      – use green technology which minimises environmental harm
      – respond positively to demands and suggestions from society
      and so on.
      Some real-life examples of ethical decisions made by firms:

      Hope this helps!


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