Environmental and ethical issues | IGCSE Class 10 Business Studies Notes

This note covers how business activity affects the environment, including global warming and pollution, the idea of externalities as external costs and external benefits of business decisions, sustainable development and how business can contribute to it, how and why businesses respond to environmental pressures and opportunities such as pressure groups, the role of legal controls such as pollution controls, and the ethical issues a business faces when profits and ethics conflict, including child labour and paying fair prices to suppliers.

How does business activity affect the environment?

Business activity can harm or help the environment, the totality of a society's natural and man-made surroundings, including land, water, air, plant and animal life, and the resources people use. Manufacturing, transport, distribution and the use of raw materials all create waste, and some of that waste is unavoidable.

When waste is released into air, water or land beyond what the environment can absorb, it becomes pollution, the injection of harmful substances that changes the physical, chemical or biological characteristics of the surroundings.

Pollution harms human life and the life of other species, degrades living conditions, and wastes or depletes raw material resources.

Sources of pollution

Industry is described as a major generator of waste in terms of both quantity and toxicity, and business activities such as production, distribution, transport, storage and consumption are among the most critical sources of environmental pollution problems.

Four types are usually distinguished: air pollution, caused mainly by carbon monoxide from vehicles and smoke and chemicals from manufacturing plants; water pollution, caused mainly by the dumping of chemical and other waste into rivers, streams and lakes; land pollution, caused by dumping toxic waste that damages land and makes it unfit for agriculture; and noise pollution from factories and vehicles, which is a health hazard linked to loss of hearing, heart problems and mental disorder, not merely a source of annoyance.

A clear example of a global impact is global warming, a gradual rise in the earth's average temperature linked to a hole in the ozone layer that air pollution from industrial and transport activity creates in the atmosphere.

Alongside global warming and ozone depletion, business activity contributes to wider environmental problems such as solid and hazardous wastes, water pollution, falling freshwater quality, deforestation, land degradation and danger to biological diversity.

Pollution of this kind is described as a common sight around major industrial cities, where emissions seriously affect people's health. The same pattern appears wherever heavy industry is concentrated close to where people live, and the damage to health and to buildings is felt by the whole community, not only by the firms that cause it.

Business as both opportunity and constraint

Business activity can therefore be both an opportunity, since firms that solve environmental problems can build reputation and new markets, and a constraint, since avoiding and cleaning up pollution raises costs by requiring better-quality raw materials and cleaner technology.

A firm that modifies its production process, redesigns equipment, or substitutes poor-quality materials with better ones can often reduce or even eliminate pollution at the source, turning an environmental constraint into a source of long-term cost saving and competitive advantage rather than only an added expense.

What are externalities, and how do they affect business decisions?

An externality is a cost or benefit of a business decision that falls on a third party who did not choose to be involved in the transaction.

External costs

An external cost arises when a business activity harms people outside the business without the business paying for that harm, for example when a factory's smoke or effluent damages the health of nearby residents or the quality of local land and water.

Because pollution degrades living conditions, wastes or depletes raw material resources, and damages cultural heritage such as historical monuments, the external costs of unchecked industrial activity fall on the whole of society rather than only on the firm that caused them.

Pollution exists partly because the environment can absorb only a limited amount of pollutants, so once that absorption capacity is exceeded, nearby residents, other businesses and the natural environment all bear costs that the polluting firm itself did not pay for.

External benefits

An external benefit arises when an activity helps people outside the business without them paying for it, for example when a firm plants trees, cleans a river, or trains local workers in skills they can later use elsewhere.

Business enterprises also command large financial, physical and human resources and know-how, so when they choose to apply these towards environmental or social problems, the gains often spread well beyond the firm itself, to suppliers, dealers, customers and the wider community who benefit without directly paying for that improvement.

This is one reason governments, pressure groups and courts intervene, since a business left alone may not take the full external cost of its decisions into account when deciding how much to pollute.

Because the firm that causes an external cost does not automatically bear it, there is a case for outside bodies to step in and make sure the cost is recognised and, where possible, reduced or paid for.

Definition: Externality. A cost or benefit of an economic decision that is experienced by someone who was not party to that decision; it can be an external cost (harm, such as pollution) or an external benefit (gain, such as cleaner water or trained workers).

What is sustainable development, and how can business contribute to it?

Sustainable development is development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.

Practical steps business can take

In practice this means a firm chooses purchasing policies that favour good quality raw materials, employs superior technology, uses scientific methods to treat and dispose of waste, and develops employee skills for pollution control, so that growth today does not reduce the resources or health available to people and firms in future.

A commitment of this kind usually has to start with top management, be shared across every division and employee, and then be checked periodically in terms of its costs and benefits, so that the firm's environmental programmes keep making genuine progress rather than being set up once and then forgotten.

Firms can also take part in wider government programmes, such as managing hazardous substances, cleaning polluted rivers, planting trees and checking deforestation, and can run educational workshops to share technical information with suppliers, dealers and customers so that they too become actively involved in pollution control.

Definition: Sustainable development. Development that balances economic progress, social progress and environmental protection so that today's growth does not damage the resources or wellbeing of future generations.

How and why does business respond to environmental pressures and opportunities?

Businesses face several external forces that push them towards environmental and social responsibility, even where the law does not strictly require it.

Forces pushing business towards responsibility

A pressure group is an organised group of people who campaign to influence business or government decisions on an issue they care about, such as pollution, animal welfare or workers' rights; they can raise public awareness, organise boycotts, or lobby for new regulation. Several further forces encourage business to respond:

1. Threat of public regulation: where business behaves irresponsibly, government is likely to step in with new laws, so firms often act first to avoid this.
2. Consumer consciousness: better educated, better informed consumers now expect firms to be customer-oriented, replacing the old idea of "let the buyer beware" with the idea that "the customer is king".
3. Changing social standards: economic activity is accepted as legitimate only if it also serves social needs, since society is what permits a business to exist and grow.

Turning pressure into opportunity

Businesses can turn these pressures into opportunities. A firm that is seen to protect the environment earns a better public image, wins the cooperation of customers, workers, suppliers and government, and reduces the risk of costly new regulation or compensation claims, so responding early can be good business as well as good citizenship.

Rather than waiting to be forced into action by a pressure group or a new law, a firm that commits to environmental improvement ahead of time can present this voluntary action as a competitive strength when it markets itself to increasingly conscious customers and investors.

What legal controls affect business activity and the environment?

Legal controls are laws, regulations and standards set by government that a business must comply with; unlike voluntary responsibility, failing to meet them can lead to fines or closure. Several specific types of law regulate how business may affect the environment.

Types of legal control

Governments typically regulate business impact on the environment through several categories of law. These commonly include laws that limit air pollution from vehicles and factory chimneys, laws that limit water pollution from the dumping of chemical and other waste, laws that protect forests and wildlife from damage caused by clearance or hunting, laws that govern the safe management of hazardous waste, and a general environmental protection law setting overall minimum standards for air, water and land quality.

Beyond laws, governments can also set up regulatory bodies and administrative rules, such as separate departments of environment, and can order manufacturing units that pollute heavily to close or relocate away from residential cities.

One example of legal control in action is a court ordering heavily polluting manufacturing units to move away from a residential city, or to close, to protect residents from ongoing emissions. Legal action of this kind can force polluting firms to relocate or shut down.

Pollution control measures that a firm might install, such as effluent treatment or filters on chimneys, help it comply with these legal controls while also reducing its risk of being sued or forced to pay compensation.

Definition: Legal controls. Laws and regulations passed by government that set the minimum standards a business must follow, for example rules limiting air, water, land and noise pollution.

What ethical issues does a business face?

Ethics is concerned with what is right and wrong in human behaviour, judged against a standard of conduct approved by society.

Profit versus ethics

Business ethics refers to the socially determined moral principles that should govern business activities, going beyond what the law requires. Examples include charging fair prices from customers, using fair weights when measuring goods, giving fair treatment to workers, and earning only reasonable profits.

The central ethical issue a business faces is a possible conflict between profits and ethics: an enterprise can be strong on economic performance, such as revenue and profit, while being weak on social performance, such as supplying good quality products at fair prices, treating staff fairly, or dealing honestly with suppliers and the community.

Decisions that raise short-term profit, such as using cheaper, weaker materials or cutting corners on safety, can conflict directly with what is ethically expected.

Why higher standards are expected

Because business people control large resources that affect many lives, they are expected to hold higher standards than most other individuals; this is described as the price paid for being trusted to make decisions on behalf of society.

The underlying reasoning is that it is through socially responsible and ethically upright behaviour that an enterprise earns the kind of durable, lasting success that a firm chasing only short-term profit is less likely to achieve.

Ethical business behaviour improves public trust and image, earns people's confidence, and tends to lead to greater success over time, so ethics and profit are seen as going together in the long run rather than always being opposed.

Definition: Business ethics. Socially determined moral principles, going beyond what the law requires, that should govern how a business treats customers, workers, suppliers and the wider community.

How can a business foster ethical behaviour and respond to ethical issues?

An enterprise can build ethics into its everyday working rather than leaving it to chance.

Building ethics into the organisation

Common elements include:

1. Top management commitment: senior leaders, including the Chief Executive Officer, must be openly and strongly committed to ethical conduct and provide continuous leadership on it.
2. A published code of ethics: a written document setting out principles of conduct, typically covering honesty and legal compliance, product safety and quality, workplace health and safety, conflicts of interest, employment practices, fair selling and marketing, and honest financial reporting.
3. Compliance mechanisms: building ethics into recruitment and training, auditing performance regularly to check compliance, and setting up ways for employees to report unethical behaviour.
4. Involving employees at all levels: since employees implement policy day to day, firms can form small groups to discuss ethics policies and examine staff attitudes towards them.
5. Measuring results: an audit to monitor compliance with ethical standards, then discussing the results with management and staff to decide what to do next.

Child labour and fair prices to suppliers

Two issues named for how business should react are child labour and paying fair prices to suppliers. Where children are employed instead of attending school, a business acts unethically even if this lowers its costs, and an ethically run firm avoids employing or buying from suppliers who use child labour.

Equally, a firm that pays fair prices to the small producers or suppliers it buys from, rather than using its buying power to force prices down below a reasonable level, is behaving ethically even where no law compels it to do so.

Advantages of businesses acting responsibly and ethically

Behaving responsibly towards the environment and acting ethically bring the firm several benefits.

Benefits to the business

Pollution control reduces the health hazards, such as cancer, heart attacks and lung complications, linked to pollutants, supporting a healthier workforce and community.

It reduces the risk that an enterprise will be held liable to pay compensation to people harmed by its gaseous, liquid or solid waste, so installing pollution control devices is sound business policy as well as good citizenship.

Effective pollution control can also bring cost savings, since poor production technology that creates more waste leads to higher costs of waste disposal and plant cleaning, so preventing waste at source is often cheaper than dealing with it afterwards.

A firm seen to control pollution and behave ethically builds an improved public image, which earns confidence and trust from customers, workers, investors and government, and this reputation supports stronger long-term sales and cooperation.

Benefits to society

Other benefits include clearer visibility, cleaner buildings, a better quality of life around the business, and natural products available in a purer form.

Assuming social and ethical responsibility also gives a firm a wider justification for its existence and growth, since prosperity in the long run depends on continuous service to society rather than profit alone, and it can help the firm avoid new government regulation by showing that voluntary action is already working.

Limitations and disadvantages of social and environmental responsibility

There are also arguments against a business taking on wide social and environmental responsibilities.

Arguments against taking on responsibility

Meeting environmental standards, such as installing pollution control equipment, can be very costly, and firms may simply pass this cost on to consumers through higher prices rather than absorbing it themselves, which can be seen as unfair and places a burden on consumers rather than on the firm that caused the pollution in the first place.

Some argue this takes the firm away from its main purpose. According to this view, business exists only to maximise profit, so time and money spent on social responsibility work against the objective of profit maximisation, and the firm best serves society by maximising profit through greater efficiency and lower costs rather than by diverting resources into environmental or ethical programmes.

The wider public does not always welcome business involvement or interference in social programmes, meaning such efforts can suffer from a lack of public support and fail for want of cooperation from the very communities they are meant to help.

Why some firms still try

Some firms also treat social responsibility as little more than lip service, making public claims about ethics or the environment without genuinely changing how they operate, which can mislead customers and undermine trust once the gap between claim and practice becomes visible.

These disadvantages do not mean responsibility should be ignored; rather, they explain why firms vary in how far they go beyond legal compliance, and why some action, part lip service and part genuine commitment, is often needed to balance profit with the expectations of a democratic society.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

What is corporate sustainability and corporate social responsibility?

Corporate sustainability describes the role companies can play in meeting this agenda, and it entails a balanced approach to economic progress, social progress and environmental protection together, rather than treating profit, people and the planet as separate goals.

There is no single universally accepted definition of corporate social responsibility; each definition that exists underpins the impact businesses have on society and the expectations society has of them.

One definition used internationally states that this responsibility is "the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families, as well as, of the community and society at large".

Another definition describes it simply as "the responsibility of enterprises for their impacts on society".

Which further forces push business towards responsibility?

Beyond the threat of regulation, consumer consciousness and changing social standards, several other forces are said to encourage business to respond:

1. Pressure of the labour movement: as workers have become more educated and organised, firms have had to pay more regard to worker welfare instead of a simple hire-and-fire approach.
2. Growth of professional management: professional managers, trained to consider many interest groups rather than only the owner's profit, now run most large firms.

Why do some people argue against social responsibility?

Business managers are also said to lack the training and social skills needed to solve complex social problems, which may be better left to specialised agencies that understand those problems in depth.

Four layers of responsibility

Corporate responsibility can be split into four overlapping layers.

Economic responsibility is a firm's basic duty to produce goods and services people want and sell them at a profit, since a business is first an economic entity, with little discretion in how this responsibility is performed.

Legal responsibility means operating within the laws of the land, so that a law-abiding enterprise is, to that extent, already socially responsible.

Ethical responsibility covers behaviour expected by society though not written into law, such as respecting customers' dignity and religious sentiments in advertising; there is an element of voluntary choice in meeting it.

Discretionary responsibility is purely voluntary action, such as charitable giving to schools or help for people affected by floods or earthquakes, with no legal or economic requirement behind it.

Why this matters for comparing firms

Seeing responsibility this way helps explain why two firms that both obey the law can still differ greatly in how ethical or environmentally responsible they appear to be: one may stop at legal compliance, while another chooses to go further through voluntary, ethical or discretionary action, and this difference often shows up in how customers, workers and the wider community judge and trust each firm over time.

It also helps explain why social responsibility is described as broader than legal responsibility: legal responsibility can be met by mere compliance with the law, while social responsibility is a firm's recognition of obligations beyond the law, with an element of voluntary action that a firm's own management decides how far to take.

Personal virtues that support ethical conduct

Universal personal virtues that support ethical conduct include being trustworthy, respecting others, owning responsibility, being fair in dealings, caring for the wellbeing of others, and being a good citizen through civic virtues and duties.

Glossary

• Environment — the totality of a society's natural and man-made surroundings, including land, water, air, living things and raw materials.
• Pollution — the injection of harmful substances into the environment, changing its physical, chemical or biological qualities.
• Global warming — a gradual rise in the earth's average temperature, linked to a hole in the ozone layer caused by industrial and transport emissions.
• Externality — a cost or benefit of a decision that falls on a third party who was not part of that decision.
• External cost — harm from a business activity suffered by people outside the business, who are not compensated for it.
• External benefit — a gain from a business activity enjoyed by people outside the business, who do not pay for it.
• Sustainable development — development balancing economic progress, social progress and environmental protection, so future generations are not harmed.
• Pressure group — an organised group that campaigns to influence business or government decisions on an issue it cares about.
• Legal controls — laws and regulations government sets that a business must follow, such as pollution limits.
• Pollution control — measures a business takes, such as treatment or filtering devices, to reduce the waste it releases.
• Business ethics — socially determined moral principles, beyond the law, that should govern how a business behaves.
• Code of ethics — a written document setting out a firm's principles of expected conduct for staff and management.
• Corporate social responsibility — a firm's commitment to contribute to economic and social development while protecting the environment, beyond its legal duties.
• Child labour — the employment of children, often in place of schooling, widely regarded as an unethical business practice.

Common errors and misconceptions

• Misconception: Legal responsibility and social responsibility mean the same thing. Correct: Legal responsibility is met by obeying the law; social responsibility goes further, including voluntary action society expects but no law requires.
• Misconception: An externality is just another word for any business cost. Correct: An externality specifically falls on a third party outside the transaction, not on the business or its customer.
• Misconception: Sustainable development only concerns the environment. Correct: It balances economic progress, social progress and environmental protection together, not the environment alone.
• Misconception: Pressure groups only oppose business. Correct: Pressure groups can also support firms that behave responsibly, and some firms work with pressure groups rather than against them.
• Misconception: Businesses that follow the law automatically behave ethically. Correct: Ethical behaviour goes beyond legal compliance; a firm can obey every law while still treating workers or suppliers unfairly.
• Misconception: Pollution control only costs money and brings no benefit to the firm. Correct: It can also cut waste disposal costs, reduce liability risk and improve public image.
• Misconception: Corporate social responsibility is the same everywhere. Correct: There is no single universally accepted definition; different bodies describe it differently, though all link it to a business's impact on society.

Exam-style questions with model answers

Q1. State what is meant by an external cost. [2 marks]

1. An external cost is harm caused by a business decision, such as pollution from a factory, that falls on a third party outside the transaction.
2. The third party affected, for example nearby residents, is not compensated for this harm.

Q2. A clothing factory discharges untreated dye into a river that a nearby village uses for drinking water and washing. Identify the type of pollution this causes and state one reason business enterprises need to control it. [3 marks]

1. This is water pollution, since the dye is a chemical waste discharged directly into the river.
2. One reason to control it is reduced risk of liability: the factory could be held responsible for compensating villagers harmed by the polluted water.
3. Controlling it also protects public image, since a firm seen damaging drinking water for a village would lose trust and cooperation from the local community.

Q3. Explain two ways a government can use legal controls to limit the effect of a factory's air pollution on the environment. [4 marks]

1. Government can pass an air pollution law, setting legal limits on the emissions a factory is allowed to release, with penalties for breaking them.
2. This forces the factory to install filtering or treatment equipment on its chimneys to stay within the limit, directly cutting the pollutants reaching the air.
3. Government can also order the closure or relocation of factories that pollute heavily away from residential cities, removing the source of harm from populated areas.
4. It can set up regulatory departments to monitor compliance, so factories know breaches are likely to be detected and penalised, which strengthens the deterrent effect of the law.

Q4. A supplier of raw cotton depends almost entirely on orders from one large clothing manufacturer. The manufacturer is considering whether to pay the supplier a low price to maximise its own profit, or a fair price that covers the supplier's costs. Discuss whether the manufacturer should pay the low price or the fair price. [6 marks]

1. Paying the low price raises the manufacturer's short-term profit, since its cost of raw materials falls, which may satisfy shareholders looking for higher returns.
2. However, this conflicts with business ethics, since fair treatment of those a firm deals with, including suppliers, is a recognised ethical principle, and the supplier may be unable to cover its own costs.
3. If the supplier cannot survive on the low price, it may go out of business, leaving the manufacturer without a reliable source of cotton, which threatens the manufacturer's own long-term production.
4. Paying a fair price supports the manufacturer's public image as an ethical business, which can attract customers who care about how suppliers are treated and reduce the reputational risk of being accused of exploiting a dependent supplier.
5. Ethical behaviour and profit are described as going together in the long run, so a fair price, even if it reduces short-term profit slightly, is likely to protect the manufacturer's reputation and its supply chain.
6. On balance, the manufacturer should pay the fair price, since the loss of a dependable supplier and damage to its reputation would outweigh the short-term saving from the low price.

Q5. Distinguish between legal responsibility and ethical responsibility, using one example of each. [4 marks]

1. Legal responsibility is met simply by obeying the laws that apply to a business, for example paying the taxes it owes to government.
2. Ethical responsibility covers behaviour that is expected by society but not written into law, for example respecting the dignity of people when advertising a product.
3. A firm can fulfil its legal responsibility while still failing its ethical responsibility, since the law does not cover every situation a business faces.
4. Social responsibility as a whole includes both, since it is broader than legal responsibility and involves voluntary action beyond what the law requires.

Q6. State two elements a business can use to foster ethical behaviour among its staff. [2 marks]

1. Publishing a written code of ethics that sets out expected standards of conduct for staff and management.
2. Involving employees at all levels, for example through small group discussions of the firm's ethics policies.

Q7. A toy manufacturer discovers that one of its overseas suppliers employs children below the legal working age in place of sending them to school. Explain how the manufacturer should react, and the business reasons for reacting this way. [5 marks]

1. The manufacturer should stop sourcing from that supplier, or require the supplier to end the use of child labour before continuing the relationship.
2. Using child labour is an unethical practice, since it denies children schooling and is widely condemned by society, regardless of whether local law permits it.
3. Continuing to buy from the supplier risks serious damage to the manufacturer's public image if the practice becomes known, since customers may boycott a firm linked to child labour.
4. Acting against it protects the manufacturer from the threat of new regulation, since governments and pressure groups are likely to target firms found tolerating such practices.
5. Ethical business behaviour is linked to long-term success, so removing the unethical supplier, even at some short-term cost, supports the manufacturer's reputation and future sales.

Q8. Evaluate whether environmental and ethical responsibility is good for a business's long-term profit. [6 marks]

1. In favour, firms that control pollution reduce their risk of costly compensation claims and avoid the expense of new regulation imposed because of past irresponsible behaviour.
2. Responsible firms build a better public image, earning the trust and cooperation of customers, workers, shareholders and government, which supports stronger sales and easier recruitment over time.
3. Ethical dealing with suppliers and workers reduces the risk of losing dependable business partners or facing strikes and poor morale, both of which damage long-term output.
4. Against this, meeting environmental standards can require large upfront spending on equipment and cleaner technology, which may be passed to consumers as higher prices or reduce short-term profit.
5. Some managers argue that solving social problems is not their area of skill, and that a firm best serves society simply by being efficient and profitable, so spending on wider responsibility can be seen as a distraction.
6. On balance, the view that ethics and profit go together in the long run is persuasive, since the costs of irresponsibility, lost reputation, liability and new regulation, generally outweigh the costs of acting responsibly, so environmental and ethical responsibility is likely to support long-term profit.

Key takeaways

• Business activity can create external costs, such as pollution, that fall on third parties who did not choose to bear them.
• Sustainable development asks business to balance economic growth, social progress and environmental protection together.
• Pressure groups, consumer awareness and the threat of regulation all push business towards greater environmental responsibility.
• Legal controls, including specific pollution and conservation laws, set the minimum standard a business must meet.
• Business ethics goes beyond the law, covering fairness to customers, workers and suppliers that society expects but does not require by statute.
• Profit and ethics can conflict, for example when cutting costs harms workers, suppliers or the environment.
• Firms respond to ethical issues such as child labour and unfair supplier prices through codes of ethics and compliance checks.
• Acting responsibly brings advantages such as lower liability risk, cost savings and a better public image, though it also carries real costs and limits.

Test yourself

What is the difference between an external cost and an external benefit?

An external cost harms a third party outside the transaction without compensation, for example pollution; an external benefit helps a third party without payment, for example cleaner water from a firm's investment.

Name three types of pollution business activity can cause.

Air pollution, water pollution and land pollution; noise pollution from factories and vehicles is also a recognised type.

Why might a business respond to pressure groups even when no law requires it to?

To protect its public image, keep the trust and cooperation of customers and the community, and reduce the risk that government will impose new regulation.

Give one reason a government might order a polluting factory to close or relocate.

To stop serious harm to the health of nearby residents and the quality of the local environment, especially in heavily populated cities.

What is a code of ethics?

A written document setting out a firm's principles of expected conduct, covering areas such as honesty, product safety, workplace health, fairness to customers and financial reporting.

Why can paying a very low price to a dependent supplier be seen as unethical?

It may leave the supplier unable to cover its costs, exploits its dependence on one buyer, and conflicts with the ethical principle of fair dealing with those a business works with.

State one economic benefit to a firm of installing pollution control equipment.

It can reduce the costs of waste disposal and plant cleaning that result from less efficient production, as well as cutting the risk of liability payments.