Corporate impacts are non transactional results that are absorbed by society and the environment, ie externalities. Stakeholders are scrutinising negative externalities and controversies, holding executives to account for poor decisions that ripple destructively into society and the environment. The best business response is to identify, acknowledge, target, measure, manage and disclose, ie internalise the externalities. 

3 min read | Last updated 5 March 2021

Economists refer to corporate impacts as externalities, defining these as the costs (or benefits) to society that occur when the production or consumption of a specific good or service impacts third parties.

Positive externalities include the invention of the World Wide Web, which is free to all; vaccinations, which protect the person who is vaccinated and limit the spread of disease; wildlife abundance associated with organic or regenerative farming; the social benefits of postal and library services; and safety for women associated with street lighting and public transport with frequent stops.

Negative externalities include the massive energy requirements of blockchain technology; flooding caused by soil erosion from intensive agriculture; medical costs relating to over-consumption of addictive foods and beverages; and damage to ecological systems caused by deep sea trawling. Businesses externalise the true costs of their inputs, outcomes and impacts when, for example, they pollute and don’t clean up or they don’t pay reasonable taxes in jurisdictions where they operate, though they make use of that country’s infrastructure.

Much sustainability activism is directed toward corporates to force them to internalise their most material negative externalities or face reputational, regulatory and legal risks. Activism comes from all quarters – investors, customers, employees, communities, NGOs and governments.

Controversies are major negative externalities directly attributable to a company, for which that company denies responsibility, downplays the damage or makes insufficient amends. Business face considerable downside risk in the case of ESG controversies. Avoiding controversy is a director’s duty because of the risk to business value. In an analysis of 80 high-impact controversies between 2005 and 2019, Société Générale found that in two thirds of cases a company’s stock underperformed the MSCI World Index by an average of 12% over the following 2 years (CNBC, 2020). An analysis by Bank of America of stock prices of US companies in the S&P 500 index across 24 controversy types (such as accounting scandals, data breaches, sexual harassment and ESG issues) found market value losses of US $534 billion and that it could take as much as a year for a stock price to reach a trough following a controversy (FT, 2019).

Controversies in the 21st century include:

  • toxic coal sludge river spill by Massey Energy in Kentucky that polluted the drinking water of a dozen communities (USA, 2000)
  • explosion at Jilin Petrochemical that spilled toxic chemicals into Songhu River, affecting the drinking supplies of millions of Chinese and Russian citizens (China, 2005)
  • pollution of the Niger Delta from two Shell oil spills affecting 69,000 people and expected to cost US$1 billion and to take 25 years to clean up (Nigeria, 2008).
  • breached dam at Kingston Fossil Plant that spilled toxic coal fly ash slurry into rivers near Kinsport, Tennessee, the clean up of which is linked to hundreds of cancer cases, including 36 deaths (USA, 2008)
  • turbine failure at Sayano–Shushenskaya hydroelectric power station that killed 75 people (Russia, 2009)
  • fatal explosion at a BP exploratory rig at Deepwater Horizon in the Gulf of Mexico, which resulted in a 206 million gallon oil spill, creating irreversible ecological damage (USA, 2010)
  • collapse of an eight-storey building housing five garment factories on the outskirts of Dhaka, killing 1,129 people (Bangladesh, 2013)
  • landslide at an open pit copper and cobalt mine at Kolwezi that killed 43 independent miners (Democratic Republic of the Congo, 2019)
  • deliberate explosions by Rio Tinto destroying Juukan Gorge, a 46,000-year-old Aboriginal heritage site, by Rio Tinto (Australia, 2020)

Internalisation is the process of taking responsibility for externalities. Some companies are doing this voluntarily. Others are being forced to do so by their stakeholders (KPMG, 2014 (pdf)). With respect to carbon emissions, the pressure on business to change is building exponentially. As more and more information comes to light regarding biodiversity loss, corporates should expect similar levels of stakeholder pressure. Human rights, in particular modern slavery, is another area in which stakeholders are applying increasing pressure on businesses to act responsibly.

Journalists and NGOs work to expose the negative consequences of poor business practices, shifting public sentiment, influencing government policy, pushing for changes to regulations and driving legal action.

Documentaries and films are effective vehicles for exposing business practices that result in damage to people and the environment. The trailers below showcase productions that explore the externalities of particular industries or organisations.

The environmental impact of the global fisheries industry
Chemical industry impacts on human health
The human health impacts of fracking
The human cost of the fashion industry