Environmental Issues in International Business
- Understand the nature and causes of major environmental challenges such as climate change and transboundary pollution
- Appreciate the interconnections between local, regional and global concerns of the environment
- Get an insight into the role of national and international governments in tackling environmental challenges
- Identify the initiatives of the modern business in the area of environmental management and sustainable development
SUSTAINABILITY INITIATIVES AT MCDONALD’S
Sustainability is the latest buzzword everywhere. It finds its way into everything from building wind farms to replenishing the water table with a basic focus on saving energy, cutting waste and streamlining logistics. The end result aims to improve the bottom line and increase profits through policies aiming at reduced operating costs which benefit the environment.
Recent years have witnessed a new wave of sustainability plans where the MNE not only sets targets for the company, but also for the people it works with and sells to. The targets are not only about the environment but about society at large.
McDonald’s has adopted a host of sustainability initiatives in the last few years. This includes having a sustainable supply chain with a focus on products that have the greatest impact on the environment, such as biodiversity loss or deforestation which can be prevented or eliminated. This is part of the MNE’s Planet Pillar priorities and aspirational goals which includes suppliers, employees and even customers on this shared journey.
The company adopted a Global Sustainability Framework in 2014, under which it set aspirational sourcing goals for five of its six priority products—beef, packaging, fish, coffee and palm oil. Consequently, McDonalds now sources almost one third of its coffee from fair trade certified sources. In Guatemala it helps develop sustainable farming practices. It also aims at achieving zero deforestation by using a fibre packaging supply chain aiming that fry boxes, sandwich ‘clamshells’, wrappers, cups and other items that help to keep McDonald’s food ready to eat are made of only of fibre.
Environmental issues such as climate change, depletion of natural resources and pollution are issues of global significance concerning governments, business and consumers worldwide. Changes in the environment can occur naturally due to changes in climate and weather conditions over a period of time, but environmental degradation refers specifically to changes caused in the environment due to human activity.
Environmental degradation refers to changes caused in the environment due to human activity, including industrialization and urbanization.
Economic development over centuries is considered the major factor responsible for much of past and present environmental degradation. Processes such as industrialization, changes in farming methods and depletion of natural resources are some of the factors responsible for damaging the environment. The development of society and civilizations over a period of time have led to the misuse of natural resources causing changes in ecosystems with alarming consequences.
The development of agriculture in Europe and North America in the seventeenth and eighteenth centuries led to huge expansion in the area of cultivable land, technological innovations and the emergence of capital market relationships in agriculture. This resulted in the cutting down of forests, destruction of fertile land and a decline in different species of wildlife due to loss of their natural habitat.
The advent of industrialization through the Industrial Revolution led to a dramatic increase in both the intensity and geographical scope of environmental degradation. Although industrial development brought much-needed employment and income, it also led to resource depletion and pollution. Industrial production required land for factories, housing and other services such as roads and infrastructure. It is estimated that nearly 23 per cent of the entire world’s cropland, pasture, forest and woodland have been degraded since the 1950s. During the same time period, nearly one-fifth of all tropical forests have been cleared, most of them in the developing world. This results in a severe threat to biodiversity as many plants and animals that are unique to particular areas become extinct when the ecosystem is disrupted. Factory production relying on power sources such as coal was joined by newer industries such as synthetic chemicals, which generated a mixture of old and new pollutants.
Industrialization in turn leads to urbanization, as the rural population moves to urban areas in search of work in new industries. The processes of industrialization and urbanization began in the advanced economies of the world almost two centuries ago, but it is the developing world that is the centre of large-scale industrialization today. Urbanization then begins to encroach into hitherto agricultural areas while growing urban populations place increasing pressures on supplies of food, water and energy. The rapid growth and development taking place in large parts of the developing world along with the concurrent pressure of increasing population is contributing to the increasing environmental pressures.
Growth of the multinational enterprise has also had an impact on the environment. While governments in host countries welcome the investment flows and the attendant benefits of technology, jobs and growth potential, environmental damage does not seem to be a major issue. It is only when a forest is cleared to build a factory, waterways are polluted by waste from that factory and the air is polluted through emissions that we begin to see the environmental effects of international business.
For instance, in Guiyu Township, Guangdong Province of China, where residents and laborers have conducted extensive computer scrapping, water in local rivers and lakes and even groundwater turned brown and became non-drinkable. Analysis of sediment samples showed severe contamination. In the town of Yandang, where chemical processes have been used for extracting gold from waste computers for more than ten years, 80 per cent of the wells have been contaminated. Many of the area’s trees have withered; fish and shrimp have become extinct; polluted crop lands lie in waste. In addition, 90 per cent of workers surveyed suffered from red edema and 50 per cent from asthma.
Climate change is basically a process of global warming caused by a buildup of heat-trapping greenhouse gases. Issues of climate change focus on changes in the earth’s atmosphere as well as matters such as pollution of the oceans, dryland degradation, damage to the ozone layer, and the rapid extinction of plant and animal species.
Climate change is basically a process of global warming caused by a buildup of heat-trapping greenhouse gases.
The atmosphere is like a blanket around the Earth, made up mostly of nitrogen (78 per cent) and oxygen (21 per cent); traces of other gases like carbon dioxide (CO2), methane (CH4) nitrous oxide (N2O), also known as the Greenhouse gases; and traces of water vapour. Human activity over decades has led to a thickening of the Earth’s atmosphere through changes in the balance of gases, especially the greenhouse gases. For example, when we burn coal, oil and natural gas we release huge amounts of carbon dioxide into the air. Similarly, the cutting of trees for setting up factories or for residential purposes reduces the oxygen available to combat carbon dioxide. Other basic activities, such as raising cattle and planting rice, emit methane, nitrous oxide and other greenhouse gases. Deforestation such as in the rain forests of South America also diminishes the capacity of the environment to absorb carbon dioxide, further accelerating global warming. The notion that the sea may be able to absorb some of the rise in carbon dioxide has also become a refuted claim as the capacity of the sea to act a sink is more limited than was previously imagined. Increasing levels of the greenhouse gases in the Earth’s atmosphere are leading to a slow process of global warming. It is estimated that the phenomenon of global warming is likely to lead to an increasing temperature of 1 to 3.5°C over the next 100 years, at least some of which may be due to past greenhouse gas emissions. If emissions continue to grow at current rates, it is almost certain that during the 21st century atmospheric levels of carbon dioxide will double from pre-industrial levels. If no steps are taken to slow greenhouse gas emissions, it is quite possible that levels will triple by the year 2100.
Increasing levels of the greenhouse gases in the earth’s atmosphere is leading to a slow process of global warming, with complex and interrelated reactions including rising average temperatures.
The average sea level rose by 10 to 20 cm during the twentieth century, and an additional increase of 18 to 59 cm is expected by the year 2100 as higher temperatures cause ocean volumes to expand, and melting glaciers and ice caps add more water. It is estimated that as the higher end of that scale is reached, the sea could overflow the heavily populated coastlines of such countries as Bangladesh, cause the disappearance of some nations entirely (such as the island state of the Maldives), foul freshwater supplies for billions of people, and become the cause of mass migrations.
Agricultural yields are expected to drop in most tropical and sub-tropical regions and in temperate regions too if the temperature increase is more than a few degrees. Drying of continental interiors, such as central Asia, the African Sahel, and the Great Plains of the US, has also been forecasted.
It is expected that global warming will have complex interconnected reactions in climate patterns and ecology all over the globe. There is likely to be severe flooding in some parts and increasing desertification in other parts of the world. Arid and semi-arid areas in Africa and Asia will have higher temperatures, causing loss of vegetation and depletion of water resources. Melting of the polar icecaps may cause sea levels to rise and island nations and low-lying areas to get submerged under the sea. Extremes of drought and flood as well as extreme events such as storms are a risk to agriculture. There is the attendant problem of the spread of airborne and waterborne diseases. And although the increasing evidence on global warming points to the need to curtail emissions, arriving at a consensus on how to achieve it has been difficult.
Transboundary pollution refers to the transmission of pollutants through water, soil and air from one national territory to another. The transmission may be intentional, as in the case of hazardous waste, or it may be unintentional, as in an accident at a nuclear power plant. The working of industrial enterprises leads to the release of waste into rivers and emissions such as sulphur dioxide into the atmosphere. There has been a dramatic increase in the capacity for pollution in the twentieth century, with potentially devastating effects. Among the worst disasters ever witnessed by mankind in this context was the Chernobyl nuclear power station in the former Soviet Union. The fire that raged for five days released more than 50 tonnes of radioactive poison into the atmosphere, affecting Belarus, the Baltic States and the Scandinavian countries.
Transboundary pollution refers to the transmission of pollutants through water, soil and air from one national territory to another.
Closer home, the Bhopal Gas tragedy in 1985 saw emissions of methylisocyanate (MIC) gas from the Union Carbide India Limited (UCILs) pesticide plant at Bhopal in the wee hours of the morning, causing death and destruction to a few thousand immediately and maiming others for life. Other instances in recent times have been the BP oil spill off the coast of Mexico and the pollution in Ecuadorian forests by Temaxo.
Acid rain is a form of pollution in the atmosphere, caused by the burning of fossil fuels such as coal for the generation of electricity. Acid rain refers to acid that precipitates from the atmosphere in the form of rain, fog and snow, affecting the soil on which plants and animals depend. It may also be dry in form, such as acidic gases and particles that may blow into buildings, trees and homes. It consists of sulphur dioxide and nitrogen oxides, and its visible effects began to appear only when rivers and forests gradually begin to die. Aquatic ecosystems are particularly endangered by acid rain. International cooperation for reducing acid rain emissions in Europe and a North America has had a positive impact, but industrialization in the developing world has increased the problem.
Acid rain refers to acid which precipitates from the atmosphere in the form of rain, fog and snow, affecting the soil on which plants and animals depend.
Take the case of China, which relies on coal-burning power stations for nearly 70 per cent of its power generation. It aims to reduce reliance on coal as an energy source to 60 per cent by 2020, as it builds gas and nuclear power stations. China’s rapid economic growth has relied on increasing its output of coal for both power generation and steel production. Thus, while reliance on the use of coal is decreasing for developing countries and also for Eastern Europe and Russia, it is on the increase for China and India.
The impact of growth and development on pollution is clearly visible in the case of China, where the use of the private car as a sign of its thriving economy has resulted in smog and water pollution all along the Pearl River Delta in Guangdong province to neighbouring Hong Kong.
Nuclear power is being promoted on account of its low level of emissions and on account of being a non-depleting source of energy compared to coal and oil. Countries such as France and Japan, which are lacking in these natural energy resources, have switched to the use of nuclear power for electricity. Nuclear power, however, has its own risks, requiring safe treatment and storage of nuclear waste, including its safe transportation to reprocessing sites.
Nuclear power is a low emission, non-depleting source of energy, but is risky requiring safe treatment and storage of nuclear waste and its safe transportation to reprocessing sites.
The risks associated with nuclear-related industries have become geographically dispersed as these industries have grown. The use of nuclear energy is also considered risky on account of its repossessing and recycling as well as the safe treatment and storage of nuclear waste. The safe transportation of nuclear waste is a problem because of the likelihood of accidents as well as the fear of a terrorist attack. This has led to the exploration of alternative energy sources such as solar and wind power.
Improvements in transportation accompanied by the growth of the Chinese and Indian economies have led to increased vehicular movement and pollution. In the Indian context the Maruti became the ‘people’s car’ in the 1980s because of its affordability for the growing middle class. Similarly, the recently launched Tata Nano is targeting the hitherto neglected Indian consumer who has relied on two wheeler or public transport so far. Targeted as the ‘people’s car’ for the common Indian as a result of its friendly price of USD 2,500 (INR 1,00,000) as well as expected superior performance in terms of mileage, the Nano is already causing nightmares of congestion, pollution and traffic problems.
Damage caused by transboundary pollution is long-lasting and spread over decades, as in the case of the Bhopal Gas tragedy. Important issues pertain to the problem of apportioning responsibility and compelling the polluter to pay. The problem is compounded by the fact that legal action involves various jurisdictions, and the lack of adequate legal protection in the developing countries can lead to weak enforcement and the indeterminate stretching of these problems.
Environmental issues of climate change and transboundary pollution are caused by development processes such as industrialization with repercussions for business, consumers and governments all over the globe.
INTERNATIONAL LEGAL FRAMEWORKSFOR ENVIRONMENTAL PROTECTION
The earliest attempt towards cooperation between nation states on environmental issues was the United Nations Environment Programme (UNEP) in 1972.
In 1992, the United Nations Framework Convention on Climate Change (UNFCCC) adopted the concept of sustainable development as the basis for a global response to the problem of climate change. Sustainable development refers to meeting the needs of present generations without compromising the ability of future generations to do the same. Several important conventions were adopted at this meeting. The conference led to the Declaration on Environment and Development, also called the Rio Declaration, which aimed to respect the interests of all and protect the integrity of the global environmental and developmental system.
Sustainable development refers to meeting the needs of present generations without compromising the ability of future generations to do the same.
The declaration includes principles that are applicable to a variety of activities and incidents involving both states and corporations. It also acknowledges the principle of state sovereignty over resources, but is qualified by the ‘polluter pays’ principle. It also links sustainable development with poverty reduction and lays emphasis on resource allocation according to social priorities and concerns in the context of market-based economies.
The Convention has been signed by 194 nations.
The ultimate objective of the Convention is to stabilize greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system.
The Rio conference also adopted the Convention on Biological Diversity and the Convention on Climate Change.
The Convention on Biological Diversity aimed to sustain biodiversity through a number of measures, including national monitoring of biodiversity, environmental impact assessments and national progress reports from individual countries. It reinforced the principle of sustainable development.
The Convention on Climate Change was the beginning of an international framework and process to tackle the issue of climate change. It was an agreement signed by countries to take steps to reduce the effects of climate change, taking into account matters such as agriculture, energy, natural resources and activities involving sea coasts. It was an agreement to develop national programmes to slow climate change, encouraging countries to share technology and to cooperate in other ways to reduce greenhouse gas emissions, especially from energy, transport, industry, agriculture, forestry and waste management, which together produce nearly all greenhouse gas emissions attributable to human activity.
In 1992, the UN also adopted a Convention on the Transboundary Effects of Industrial Accidents, placing an onus on states to take preventive steps and also to respond responsibly when accidents occur.
A Convention on Nuclear Safety was signed in 1994.
Although all these international instruments focus on state responsibility for implementation of their provisions within their own jurisdictions, states vary in their commitment to prevent and control harmful activities. Awareness of environmental implications by business enterprises is therefore a crucial factor in the battle to protect the environment. In this context, TNCs need to shoulder major responsibility as global leaders in the protection of the environment.
The Kyoto Protocol was adopted at the third Conference of the parties to the UNFCCC in Kyoto, Japan on 11 December 1997. The Kyoto Protocol is a commitment by member nations to stabilise GHG emissions and was therefore meant to have more power than the earlier convention. The detailed rules for its implementation were adopted at Marrakesh in 2001, and are called the Marrakesh Accords.
The convention has 194 parties, 37 industrialized countries and the European Community, who have committed to reducing their emissions by an average of 5 per cent by 2012 against 1990 levels. It needs industrialized countries to first and foremost take domestic action against climate change. The Protocol also allows them to meet their emission reduction commitments abroad through so-called ‘market-based mechanisms’.
The Kyoto Protocol is considered to be the most far-reaching agreement on environment and sustainable development. A protocol is an international agreement that stands on its own but is linked to an existing treaty. This means that the climate protocol shares the concerns and principles set out in the climate convention. It then builds on these by adding new commitments, which are stronger and far more complex and detailed than those in the Convention. This complexity is a reflection of the enormous challenges posed by the control of greenhouse gas emissions. It is also a result of the diverse political and economic interests that had to be balanced in order to reach an agreement. Billion-dollar industries needed to be reshaped; some would profit from the transition to a climate-friendly economy, others would not. Ratification of the Protocol suffered many years of delay as the US and Australia, two major greenhouse gas emitters, did not ratify the treaty. The Protocol finally came into force on 15 February 2005 when Russia ratified the treaty.
The Protocol addresses six main greenhouse gases. These gases are to be combined in a ‘basket’, so that reductions in each gas are credited towards a single target number. This is complicated by the fact that, for example, a kilo of methane has a stronger effect on the climate than does a kilo of carbon dioxide. Cuts in individual gases are therefore translated into CO2 equivalents that can be added up to produce one figure. Cuts in the three major gases—carbon dioxide, methane and nitrous oxide—were to be measured against a base year of 1990 (with exceptions for some countries with economies in transition). Cuts in the three long-lived industrial gases—hydro fluorocarbons (HFCs), per fluorocarbons (PFCs), and sulphur hexafluoride (SF6)—can be measured against either a 1990 or 1995 baseline. Carbon dioxide is by far the most important gas in the basket. It accounted for over four-fifths of total greenhouse gas emissions from developed countries in 1995, with fuel combustion making a major contribution. Fortunately, CO2 emissions from fuel are relatively easy to measure and monitor. Table 18.1 lists the six gases that the Kyoto Protocol deals with and their global warming potential.
Table 18.1 Gases Covered by the Kyoto Protocol and Their Global Warming Potential
The Climate Change Convention calls on rich countries to take the initiative in controlling emissions. In line with this, the Kyoto Protocol sets emission targets for the industrialized countries only—although it also recognizes that developing countries have a role to play. Agreeing how to share the responsibility for cutting emissions amongst the 40 or so developed countries was a major challenge. Lumping all developed countries into one big group risks ignoring the many differences between them. Each country is unique, with its own mix of energy resources and price levels, population density, regulatory traditions and political culture.
For example, the countries of Western Europe tend to have lower per capita emissions than do countries such as Australia, Canada, and the US. Western Europe’s emissions levels have generally stabilized since 1990, the base year for measuring emissions, while other developed countries have seen their emissions rise. Japan made great strides in energy efficiency during the 1980s, while countries such as Norway and New Zealand have relatively low emissions because they rely on hydropower or nuclear energy. Meanwhile, the energy-intensive countries of Central and Eastern Europe and Russia have seen emissions fall dramatically since 1990 due to their transition to market economies. These differing national profiles make it difficult to agree on a one-size-fits-all solution.
The Protocol assigns a national target to each country not on the basis of any rigorous or objective formula but based on political negotiation and compromise. Developed countries have an overall 5 per cent target to be met through cuts of 8 per cent in the European Union (EU), Switzerland, and most Central and East European states; 7 per cent in the US; and 6 per cent in Canada, Hungary, Japan and Poland. New Zealand, Russia and the Ukraine are to stabilize their emissions, while Norway may increase emissions by up to 1 per cent, Australia by up to 8 per cent, and Iceland by 10 per cent.
The EU has made its own internal agreement to meet its 8 per cent target by distributing different rates to its member states, just as the entire developed group’s 5 per cent target was shared out. These targets range from a 28 per cent reduction by Luxembourg and 21 per cent cuts by Denmark and Germany to a 25 per cent increase by Greece and 27 per cent increase for Portugal.
Delegates meeting at the 16th Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC), in December 2010, dubbed the Cancún Agreements, also agreed to formalize mitigation pledges and ensuring increased accountability for them, as well as taking concrete action to protect the world’s forests, which account for nearly one-fifth of global carbon emissions. Agreement was also reached on establishing a fund for long-term climate financing to support developing countries, and bolstering technology cooperation and enhancing vulnerable populations’ ability to adapt to the changing climate.
The Kyoto Protocol uses different mechanisms for the implementation of the treaty and to help countries meet their emission reduction targets.
The three Kyoto mechanisms are:
- Emissions Trading (known as ‘the carbon market’)
- Clean Development Mechanism (CDM)
- Joint Implementation (JI)
The carbon market spawned by these mechanisms is a key tool in reducing emissions worldwide. It was worth 30 billion USD in 2006 and is set to increase.
The Kyoto Protocol uses Emissions Trading (known as ‘the carbon market’), the Clean Development Mechanism (CDM) and Joint Implementation (JI) as the three different mechanisms for implementation of the treaty.
JI and CDM are the two project-based mechanisms that feed the carbon market. JI enables industrialized countries to carry out projects with other developed countries (usually countries with economies in transition), while the CDM involves investment in sustainable development projects that reduce emissions in developing countries.
Since the beginning of 2006, the estimated potential of emission reductions to be delivered by the CDM pipeline has grown dramatically to 2.9 billion tonnes of CO2 equivalent, approximately the combined emissions of Australia, Germany and the UK. More than 1,230 CDM projects have been registered as of November 2008, with around 4,200 more in the project pipeline.
International Emissions Trading
As per the provisions of the Protocol, each industrialized country has a certain number of emission allowances (the amount of CO2 it can emit) in line with its Kyoto reduction targets. If a country’s GHG emissions are below their emission allowances (that is, meeting Kyoto targets) they can sell these allowances to other industrialized countries that are emitting more than the allowance and not meeting their Kyoto targets.
Let us take an example to understand this: A company in Brazil (a non-industrialized country) switches from coal power to biomass. The CDM board certifies that by doing this the company has reduced CO2 emissions by 100,000 tonnes per year. It is issued with 100,000 Certified Emission Reductions (CERs) which is also called a carbon credit. Under the Kyoto Protocol, the UK has to reduce its greenhouse gas emissions by 1 million tonnes of CO2 each year. If it purchases the 100,000 CERs from the Brazilian company, this target reduces from 1 million tonnes per year to 900,000 tonnes per year, making the goal easier to achieve.
There have been several initiatives between governments for mitigating the effects of environmental destruction caused by industrialization and growing international business. The most popular among these is the Kyoto Protocol which is a commitment among member nations for sustainable development through control over greenhouse gas emissions.
Certified Emission Reductions is a ‘certificate’ just like a stock and is representative of a carbon credit. A CER is given by the CDM Executive Board to projects in developing countries to certify that they have reduced greenhouse gas emissions by one tonne of CO2 per year. For example, if a project generates energy using wind power instead of burning coal, it can save 50 tonnes of CO2 per year, and can claim 50 CERs (as one CER is equivalent to one tonne of CO2 reduced).
Certified Emission Reductions is a ‘certificate’ just like a stock, given by the CDM Executive Board to projects in developing countries to certify that they have reduced greenhouse gas emissions by one tonne of carbon dioxide per year.
- Environmental issues, including climate change, the depletion of natural resources and pollution are issues of concern for the governments and businesses of the modern world.
- A major problem in the global economy is environmental degradation, which is the result of human activity such as industrialization and urbanization.
- Climate change is a process of global warming caused by a buildup of heat-trapping greenhouse gases.
- International legal frameworks such as the Rio Declaration form the basis of sustainable international development.
- The Kyoto Protocol is a major step towards greenhouse gas reduction, aiming to achieve 1990 levels by 2012.
- Transboundary pollution such as acid rain also has wide ranging effects that call for cooperation between countries.
- The challenges of sustainable development are particularly acute for the developing world, where development is often equated with the Western lifestyle.
- Environmental degradation
- Climate change
- Sustainable development
- Global warming
- Transboundary pollution
- Acid rain
- Certified Emissions Reductions
- What is environmental degradation and what are its effects?
- Discuss the role of industrialization and urbanization in environmental degradation.
- What are the major causes of climate change?
- Discuss the role of the Kyoto Protocol in achieving sustainable economic development.
- What is transboundary pollution? How does it impact the environment?
- Discuss the major environmental issues for firms in the global context.
- Write short notes on:
- TKyoto Protocol
- International Emission Trading
- Transboundary pollution
- Greenhouse gases
- Interactive feature:
Refer to the following video link on McDonald’s sustainability initiatives in its coffee sourcing.
Reference: McDonald’s and Coffee Sustainability, https://www.youtube.com, last accessed on 27 September 2018.
This can become the basis of class discussion. Students may be assigned group projects on similar sustainability initiatives of other MNEs.
- Discuss the importance of environmental management for global business. (15)
[B.Com (Hons.), 2010]
- Write a short note on environmental degradation. (7)
[B.Com (Hons.), 2011, 2012]
- Discuss the important environmental issues for a global business. (7)
[B.Com (Hons.), 2007]
- Briefly discuss international initiatives to combat the effects of environmental change in the context of global business firms. (15)
[B.Com (Hons.), 2009]
- What is the role outsourcing in India’s international business? What are the challenges faced by the Indian BPO-ITES industry? (7)
[B.Com (Hons.), 2017]
- What is outsourcing? Discuss the different factors which play a key role in a firm’s decision to outsource some of its business operations. (8)
[B.Com (Hons.), 2018]