In 1991, Michael Porter challenged conventional wisdom about the impact of environmental regulation on business by declaring that well designed regulation could actually enhance competitiveness. Since then, Professor Porter and the Institute have continued to explore how new government regulations, as well as company policies based on the concept of creating shared value, can impact profitability and its relationship to sustainable practices.
Porter suggests various mechanisms by which environmental regulations might enhance competitiveness; for example reduction in the use of costly chemicals or lower waste disposal costs. The traditional view of environmental regulation held by virtually all economists until that time was that requiring firms to reduce an externality like pollution necessarily restricted their options and thus by definition reduced their profits. After all, if there are profitable opportunities to reduce pollution, profit maximizing firms would already be taking advantage of those opportunities. Michael Porter stands conventional wisdom about the impact of environmental regulation on business on its head.
Climate change is now a fact of political life and is playing a growing role in business competition. Greenhouse gas emissions will be increasingly scrutinized, regulated, and priced. While individual managers can disagree about how immediate and significant the impact of climate change will be, companies need to take action now.
Companies that persist in treating climate change solely as a corporate social responsibility issue, rather than a business problem, will risk the greatest consequences. Of course, a company’s climate policies will be affected by stakeholder expectations and standards for social responsibility. But the effects of climate on companies’ operations are now so tangible and certain that the issue is best addressed with the tools of the strategist, not the philanthropist.
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“Strict environmental regulations do not inevitably hinder competitive advantage against foreign rivals; indeed, they often enhance it.”