The Economics Of Environmentalism

Environmentalism can actually strengthen and support business
03/03/2017 05:22 pm ET Updated Mar 03, 2017
https://www.flickr.com/photos/davedugdale/4959660085

For some reason, years ago, someone decided that business and environmentalism should be mortal enemies.

Well, maybe that’s not quite how it happened. But some days, it feels like it.

Calls for environmental protection often include plans for regulations, particularly on businesses and their water, soil, and air pollution. But businesses usually like free markets, and free markets don’t like regulations.

These differing priorities have put these two sides in fierce competition, each viewing the other as the enemy: businesses often characterize environmental reforms as overzealous, impractical limits on their freedom, while activists depict business executives as cold, heartless misers.

But this isn’t always the case: in fact, environmentalism can actually strengthen and support business, and vice versa. A very prominent example is Patagonia, the outdoor clothing and gear retailer. Their environmental and social activism is well known and is a core principle of their philosophy; the company mission statement reads, “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Patagonia supports many activist causes, funding and supporting programs, books, and documentaries, such as the Jumbo Wild film and its corresponding screening tour in late 2015 and early 2016. Last November, the company pledged to donate 100 percent of Black Friday sales to grassroots nonprofits, which amounted to $10 million, over five times the estimate.

But the difference in Patagonia’s efforts lies not in their activism and support of these side projects, but in the very way the products are made and the business is run. For 20 years, they’ve used exclusively organic cotton. They closely monitor the wages and working conditions of their employees around the world. Where some businesses cut corners to save money and make profits, Patagonia has taken an even longer route, adding extra effort and time — and therefore money — to do so. Looking at these practices, in combination with the donation of $10 million in sales, one can’t help but wonder how this business can be making any money at all.

And yet, the company is doing better than ever before. Between 2008, when current CEO Rose Marcario first became CFO, and 2015, Patagonia’s profits tripled, and the compounded annual growth rate was around 14 percent. Apparently, they can afford to devote so much to activist causes and a sustainable supply chain. But more importantly, they can’t afford not to.

In their 2016 “Environmental + Social Initiative Report,” Patagonia elaborate on their Traceable Down Standard and their increased dedication to responsible animal practices. When an animal advocacy group called Four Paws reported mistreatment of animals from which their materials were sourced, Patagonia received an onslaught of complaints from their customers: “We received 36,000 emails in a two-month period, between December 2010 and January 2011, expressing outrage at the alleged harm done to geese in our European supply chain.” In 2015, PETA released a similar report about abuses from wool-sourcing farms in Argentina, and again Patagonia “received a barrage of complaints expressing chagrin and betrayal.”

Patagonia’s customers don’t allow them to cut corners on environmental and social good. This is to be expected for a company that markets to the conscientious consumer. But Patagonia also has a much easier way to reach these nature-loving customers than, say, a furniture manufacturer. Patagonia sells outdoors apparel, with particular emphasis on technical gear for sports like hiking, mountain climbing, surfing, and skiing. Their customers are more likely to be in favor of environmental causes because they spend so much time in the environment: hikers want to protect their trails, surfers want to save their oceans, climbers want to keep scrambling up their cliffs. If Patagonia’s policies don’t align with their customers’ causes, they’ll lose their business.

But this is not just a Patagonia phenomenon: it’s basic economics. If the customers stop buying and decrease the demand, the suppliers must either change their product or lower their price to a point that is potentially too low to cover the cost of the item. Conversely, if there is an increased demand, businesses will start supplying more and increasing profits, giving more firms an incentive to enter the market. Extending this to environmentally-conscious businesses, if more people are demanding eco-friendly products, more firms could potentially profit if they adopted greener practices, while those companies who do not meet the demanded standards will suffer in sales. Of course, businesses can also support environmental causes just because they feel it is the right thing to do. But speaking from a purely pragmatic, economical standpoint, businesses can also profit if they adjust their policies to match an environmentally conscious market.

The intuitive ties between Patagonia and nature give them an advantage: their target consumer already cares about environmental causes, and has shaped that market accordingly. The issue lies with firms that can’t define their customers’ opinions on environmental issues with any certainty. Take Apple, for instance: buying an iPhone has little to no correlation with one’s views on environmentalism. Further, Apple’s market is so extensive that it is bound to include customers with views across the entire spectrum. With no evidence that a large portion of their customers care about their environmental practices, Apple has much less of an incentive to pursue great activist causes than a company like Patagonia.

But here’s a radical idea: what if all their customers did care? The wilderness explorers that are so fond of Patagonia are passionate about the environment because of how familiar it is to them. Once people become personally invested in and attached to something, they’re much more likely to protect it. This is a great underlying principle of the National Parks System: if people are able to experience the grandeur of Yosemite, Yellowstone, the Grand Canyon, they’ll see the value in caring for and preserving them. The National Park System’s Every Kid in a Park program, which waives the park admissions fee for fourth graders across the country, seeks to instill a love for these lands in children, in the hope that they will continue to care for and protect the parks throughout their entire lives. Creating this personal connection to the land is crucial: it’s the same reason why someone might be skeptical about climate change if they haven’t seen retreating glaciers in Canada in person, but understand that the air pollution in their home of Los Angeles is dangerous and damaging.

The physical aspect of this connection is important as well. Heartbreaking documentaries are certainly powerful, but they’re more likely to convince those who were already partial to environmental causes. Those who truly need convincing are more likely the type of people who don’t like to be preached at and told they have to care — similar to those businesses that oppose environmental regulation on the very principle of being told how to run their company. But it becomes much easier to care when one sees the Shenandoah Valley, the volcanoes of Hawaii, or the great peaks of the Rocky Mountains first hand.

Unfortunately, it isn’t always financially possible to travel to these places or splurge for the organic cotton sweatshirt. But it doesn’t have to stay that way. Giving as many people access to these publicly protected lands through programs like Every Kid in a Park, or increasing education and awareness about these causes will increase appreciation and love for them. The resulting increase in demand of environmentally-friendly products and the resulting increase in supply of such will eventually drive the cost down. As Adam Smith writes in The Wealth of Nations, if the profits of a company in an untapped market were “commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that… the market price would soon be reduced to the natural price, and perhaps for some time even below it.” With this heightened “green demand,” the natural progression of the market would, potentially, cause a shift in business practices, to the point where corporate responsibility becomes the norm rather than the exception. Patagonia and similar companies have found this small but profitable market; if it increases in size, other companies should find it as well.

For so long, we’ve demanded policies from the government to artificially enact change in businesses. Isn’t it about time we use our power as consumers and start to ask for change from ourselves?

This article originally appeared in The Pensive Post, an intercollegiate political publication.

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