Ethical and environmental considerations in operations, including ethical sourcing, fair treatment of workers and suppliers, reducing waste, recycling and pollution, and the costs and benefits to the organisation.

What this key area is asking

Customers, governments and pressure groups increasingly expect firms to produce ethically and sustainably. The SQA wants you to describe the ethical and environmental practices a firm can adopt in its operations, and to discuss the costs and benefits of doing so. Higher rewards balanced judgement: ethical operations build reputation and can cut costs, but often cost more in the short term.

Ethical considerations in operations

Ethical practices include:

• Ethical sourcing: buying raw materials from suppliers who treat their workers fairly and are paid a fair price, for example Fairtrade ingredients.
• Fair treatment of workers: paying fair wages, providing safe conditions, and refusing to use child labour or exploited labour anywhere in the supply chain.
• Fair treatment of suppliers: paying fair prices and on time, rather than squeezing small suppliers.

Environmental considerations in operations

Firms can reduce their environmental impact in production by:

The costs and benefits

Benefits to the firm:

• a stronger reputation and brand image;
• customer and investor loyalty from those who value ethics and sustainability;
• long-term cost savings from less waste and lower energy use;
• meeting legislation and avoiding fines and bad publicity;
• better staff motivation and recruitment (people prefer ethical employers).

Costs to the firm:

• ethical and sustainable methods are often dearer in the short term (Fairtrade and sustainable materials cost more);
• investment is needed in cleaner technology and waste reduction;
• higher costs may raise prices or cut profit;
• extra monitoring, auditing and certification costs.

Examples in context

Example 1. A chocolate brand using Fairtrade and reputation. A chocolate company switches to Fairtrade cocoa, guaranteeing fair prices to growers, and promotes this to customers. The beans cost more, raising production costs, but the firm gains a strong ethical reputation and loyalty from customers who care about sourcing, and can charge a premium. This shows the central trade-off: higher cost against reputation and customer loyalty.

Example 2. A manufacturer cutting waste and energy. A manufacturer invests in energy-efficient machinery, recycles offcuts and reduces packaging. The investment costs money upfront, but over time it lowers energy and materials costs, reduces waste sent to landfill, helps meet environmental regulation and improves the firm's image. This shows how environmental measures can become a long-term cost saving as well as a reputational gain.

Try this

Q1. Describe two environmental practices a business could adopt in its operations. [2 marks]

• Cue. Reducing waste by using materials efficiently; recycling and using recyclable packaging; reducing pollution and emissions with cleaner processes or renewable energy; using sustainable materials such as certified timber (any two).

Q2. Explain two benefits to a business of operating ethically. [4 marks]

• Cue. It improves reputation and brand image, attracting customers and investors who value ethics; it builds customer loyalty and can justify a higher price; it helps meet legislation and avoid fines and boycotts; and it improves staff motivation and recruitment (any two, developed).