25 July 2011
Businesses must smarten up to deal with the changing environment, say John Houghton, Sarah Holmes and Duncan Tilney
The physical environment within which we all live and within which all businesses operate is undoubtedly changing, whether or not we agree on the cause.
We are seeing the mass movement of peoples, resource constraints, a contraction in the supply of credit and the distortion of the markets for commodities such as food and fuel. Drivers for change are increasingly global rather than local, and include the operation of future markets.
In the UK’s regulatory sphere the policy responses to global and local change are visible in the commoditisation of carbon, bans on trade in certain goods, limits on the freedom of businesses to follow leads set by markets and, for the consumer, the concept of edited choice.
The question for businesses is how to respond in the face of these external forces. “Just enough, just in time” was once the mantra of manufacturing businesses, whether or not they believed it or achieved it. Could the same approach be adapted to the current drivers for change? The short answer must, unquestionably, be “no”.
Sustainability is a term that has grown from being the preserve of green enterprise to become the buzz-word of contemporary business language. The ability to endure is what separates success from failure in the natural world and the concept is equally applicable to the fate of enterprise.
So how do sustainability and regulatory compliance interact? Existing regulatory compliance frameworks were not designed to deliver sustainability: they have evolved through the necessity of reacting to strategic events, growing from prescriptive control of point source pollution to a more outcome-focused style of regulation.
The latter approach reflects the complexities of influencing the behaviour of producers and consumers in global economies in which billions of seemingly small and inconsequential consumer decisions have collectively vast adverse environmental impacts.
There is still a tendency to see regulation cast in the demon role, to which the natural response has been either to sidestep the need to comply or to seek to do the bare minimum. There is undoubtedly a perception that compliance and cost have a proportional relationship; that there will be a natural resistance to regulation.
No matter how much we may wish otherwise, “business as usual” is not an option. At a very practical level there is a growing corporate awareness that the resource abundance on which economic growth over the past 50 or so years has relied is not infinite. Quite simply, businesses that do not recognise the need to change and adapt will not endure.
The focus of the sustainable business model is on preparing for tomorrow rather than merely surviving today. Profit today is important but – to endure - the ability to understand, anticipate and prepare for tomorrow is essential; risk reduction and compliance are prudent but embracing change and demonstrating the values that confer a “right” to operate in a given market stand to afford a competitive advantage; consolidation has its place but innovation is a necessary condition for success.
It is the human ability to imagine and so innovate that distinguishes our species from others on the planet; and it is education that facilitates understanding and so stimulates that imagination.
In the regulatory context, the sustainable business should look not to do the minimum harm but to achieve the maximum good. Businesses need to look to the life-time costs and benefits of their activities, to secure engagement at all levels and in all areas of the business and to understand the components of sustainability, so that they have the education and understanding necessary to imagine the future and navigate a path to it.
The cycle of ‘harmful event – re-active regulation – business response’ is slow. Where a business can recognize the strategic drivers for change, has the education and imagination necessary to interpolate the local effects of that change and the flexibility to adapt, it essentially bridges any compliance gap as it will already be operating in the space to which the rest of the pack is being herded.
However, imagination and flexibility are not one-sided. If regulation is to serve a sustainable function it must not be a barrier to necessary innovation: for example, facilitating the logical re-use of materials to keep them in the chain of utility. A business that is adapting in a logical manner to the external stimuli must not be hindered by an illogical move on the part of the regulator; in sustainability terms, each is reliant upon the other.
Ancient history relates that those that operate in a silo are, eventually, doomed to failure; but ancient history was kind and allowed businesses to decline gracefully. More recent history has not afforded them such a luxury and in an increasingly resource-constrained world the line between success and failure will be drawn ever thinner: survival not of the fittest but of the smartest.
John Houghton is a partner, Sarah Holmes is a senior associate and Duncan Tilney is an associate in the environmental law practice at Bond Pearce
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