The Dark Side of Sustainability

The Dark Side of Sustainability

Cost-benefit analysis must drive sustainability investment, says Dr. Marc Orlitzky. He explains why CSR may not improve financial performance.
Marc Orlitzky January 3, 2014
Rigorous cost-benefit analysis and research must underlie sustainability investment, says  Dr. Marc Orlitzky (University of South Australia). In this Thought Leadership post, he discusses why CSR may not improve financial performance. Thought Leaders are leading academics and practitioners: world experts on sustainability issues.

Once upon a time I believed wholeheartedly that corporate social responsibility (CSR) and sustainability would lead to economic pay-offs. I believed in a win-win scenario: firms that did good for society and nature would do better economically over time; and higher financial performance would in turn allow these organizations to do even more good. Some of my early studies sought to provide evidence for such a virtuous cycle.

Today, I am a skeptic. Now I believe that the uncritical pursuit of CSR doesn’t help individual companies and actually harms markets. Not all sustainability projects make economic sense for companies. And when investors (or other market actors, such as governments) support corporate sustainability unrelated to economic fundamentals, dangerous market fluctuations can result. Such reinforcement can be bad for companies, too: they are pushed to increase what may be ill-considered spending on sustainability.

What has changed my thinking? And how should companies and investors act more thoughtfully regarding sustainability. 

The Unintended Consequences of Sustainability

We cannot assume that sustainability’s economic effects are positive because:

A More Rational Response

To avoid unquestioning pursuit of sustainability: Some believe that governments could make markets more rational, ensuring that investors have the necessary information on economic fundamentals and act accordingly. This optimism about government intervention is misplaced because many governments do not consider their actions’ unintended consequences. In addition, their decisions and policies are often influenced by special interest groups. For example, many governments in the European Union are even more uncritical about CSR and green investments than investors and the public at large. Some governments are even making CSR disclosures mandatory. This trend toward mandatory reporting will only exacerbate pressures toward ever greater organizational expenditures on sustainability and data collection, without regard to the underlying economic fundamentals.

Return to Economic Fundamentals

Let's bury the myth that there are no widespread trade-offs between social or green action and a healthy economy.  Relationships between CSR and economic performance are highly variable and complex, and we need to act on objective data and facts rather than engaging in wishful thinking. We must become more rational about "socially responsible" actions that have so many emotional and moral connotations.

Currently the battle of ideas seems to be won by the true believers, who prioritize "humanistic," social and green causes over prudent business decision making. I believe, however, that financially prudent managerial choices based on economic fundamentals will ultimately be best for society and nature because there is some empirical evidence that high economic growth facilitates social and environmental progress ( e.g. Benjamin Friedman's The moral consequences of economic growth) — not the other way around.

About the Author

Dr. Marc Orlitzky is Chair in Management at the University of South Australia. His major research interests are in market behavior, business ethics, corporate governance, and methodology. He has published many widely cited papers and won numerous awards for his work. He co-authored Toward Integrative Corporate Citizenship: Research Advances in Corporate Social Performance (2008) and co-edited Corporate Governance and Business Ethics (2010).

Additional Resources

Orlitzky, M. (2013). Corporate social responsibility, noise, and stock market volatility. Academy of Management Perspectives, 27(3), 238–254.

(I present a more detailed model of the unintended consequences of CSR and sustainability.)

Orlitzky, M. (2011). Institutional logics in the study of organizations: The social construction of the relationship between corporate social and financial performance. Business Ethics Quarterly, 21(3), 409-444.

(I present evidence that research on CSR and sustainability may, to a large extent, be shaped by researcher ideology.)

Friedman, B. (2005). The moral consequences of economic growth. New York: Knopf.

(This book describes economic growth as a prerequisite for social and/or environmental sustainability.) 


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