What is an ethical business? 

What is an ethical business?

Ethical businesses aspire for their operations to have a positive impact. They aim to have a small footprint, be it on the environment, workers or animals. The most ethical brands will take a holistic approach, addressing multiple issues rather than focusing on a single one, such as plastics.

For example, ethical companies will measure and reduce their carbon emissions and periodically investigate whether workers’ rights in their supply chains are held up to standard. They are often fully vegan or have very high animal welfare standards, and they also make sure that they correctly pay their due taxes.

How do ethical businesses address the climate crisis?

Environmental actions to address the climate crisis can be taken from different standpoints. This includes steps to monitor a business's emissions, and steps to reduce greenhouse gas emissions.

Measuring emissions 

For a company to be able to reduce its emissions, it needs to understand the main sources of its greenhouse gases. Companies should calculate and report their emissions publicly, so they can be held to account by consumers, investors and campaign groups.

Greenhouse gas reports break emissions down into three main categories, known as Scope 1, Scope 2 and Scope 3 emissions:

• Scope 1 emissions are controlled directly by a company, originating, for example from burning fuel in vehicles it owns.
• Scope 2 emissions are indirect emissions from the generation of energy purchased, for example, to heat its buildings.
• Scope 3 emissions include all other indirect emissions a company may have. For example, emissions from growing or extracting a raw material; or from the emissions distributing the product to retailers.

Reducing emissions

The majority of a company's emissions usually come from its supply chain or indirect activities (scope 3 emissions). For example, they are likely to come from the factories that manufacture its products and the materials it uses.

Lots of companies claim to reduce their emissions while focusing only on smaller sources that are easier to address. For example, companies might change the lightbulbs in their offices into energy efficient ones to reduce their scope 2 emissions, while ignoring their whole supply chain.

Ethical companies make sure that they address their scope 3 emissions as well.

How does this work in practice?

The majority of a clothing company’s emissions, for example, will typically come from the material it’s using. Companies can therefore greatly reduce their scope 3 emissions by changing the fabrics they use. The majority of emissions from fabrics come from manufacturing (as opposed to, for example, transportation or use). Emissions from a fabric can be cut almost by half just by switching to renewable energy, and another 20% by switching to renewable sources for heat (e.g. for dyeing). Ethical clothing companies strive to ensure that their goods are produced in ways that have a lower impact.

Companies offering non-physical goods, such as mortgages or home insurance, also often have high scope 3 emissions. For a financial company, its investments, loans and underwriting determine the scale of these emissions.

Ethical financial companies will have strict policies not to invest in any type of fossil fuels. In fact, the most ethical companies will focus on investing in businesses that are actively supporting the transition, for example, renewable energy companies or green housing providers.    

How do ethical businesses address workers’ rights?

A lot of companies maximise their profits by trampling on the rights of workers who manufacture their goods. Many products are produced in countries where workers’ rights have less legal protection, such as China or Bangladesh.

But wherever suppliers are located, ethical companies have several ways of ensuring that workers’ rights are upheld.

Companies should have clear workers’ rights requirements in their contracts with suppliers. These should cover, for example, payment of a living wage, the right to join and form unions, and a ban on forced labour and discrimination. Once these requirements are in place, conducting regular audits – checks on factories that include interviews with workers – can play an important role in holding suppliers to account.

Worker-driven social responsibility is a gold standard for ensuring rights are upheld. It is an approach that puts workers at the heart of monitoring, ensuring education of workers about their rights in their own language and involving them in the design and implementation of any monitoring process.

A lot of ethical companies will also have long-term relationships with their suppliers. This can create trust and promote dialogue between the suppliers and the company. It can also help to avoid the risk that companies put unreasonable expectations on their suppliers, such as short manufacturing deadlines or long payment times. These can have major knock-on effects on workers, for example, if they are required to work long hours to complete last-minute orders and in return receive low, or insufficient wages.

Ethical companies also publicly disclose their suppliers to show that they have nothing to hide and to allow consumers and interested parties to track their supply chains.

How do ethical companies approach tax?

Ethical companies don’t look for or rely on loopholes to avoid paying their due taxes. For example, they don’t use subsidiaries in tax havens to siphon off their income and pay a lower tax rate on it. 

The gold standard of responsible tax conduct is an accreditation by the independent accreditor the Fair Tax Foundation.

The Fair Tax Foundation says:

“The growth of tax havens and unethical corporate tax conduct have become prominent concerns across the world. Aggressive tax avoidance negatively distorts national economies and undermines the ability of business to compete fairly, both domestically and internationally.”

Amazon is an example of a company with unethical tax avoidance strategies.

In contrast, several of our recommended and best buy brands are accredited and have the Fair Tax Mark, such as Coventry Building Society, Ecology Building Society, Friendly Soap, Leeds Building Society, Lush, Mid Counties Co-op, Suma, Unity Trust Bank, and Your Co-op.

And Ethical Consumer is also a proud Fair Tax Mark holder of course! 

How do ethical companies protect animal rights?

Animals are routinely used for 'animal products': their meat, bones, fur, and other items. For the sake of profits, their living and dying conditions are often horrendous and they have to endure unimaginable suffering.

Ethical companies tend not to use any animal products and some declare that they are fully vegan or plant based. If an ethical clothing company must use animal products, they often choose to use recycled products, such as reclaimed wool or feathers.

Ethical food retailers that sell meat or dairy ensure that the highest animal welfare standards are upheld in their supply chain, by working with suppliers they trust and having policies prohibiting issues like mutilations of animals such as tail docking, and outlining the need for adequate outdoor space. These companies may use the organic certification for products, as this is the strongest when it comes to animal welfare.

How to check if a business is ethical

Many people are looking for ethical alternatives to multinationals which appear to be driven by corporate greed rather than people and planet. Companies may use greenwashing to try and capture the growing eco and ethical market, and to gain competitive advantages over their rivals. For the layperson it can be tricky to see through the cleverly phrased, reassuring paragraphs on a company’s environmental credentials.  

Lots of companies are keen to promote their green or ethical credentials without really addressing their impacts. For example, in the past few years, large meat and dairy conglomerates have jumped on the vegan bandwagon. While selected products by such a brand are vegan, when a consumer buys any of these, their money goes to a company that continues to exploit animals. This is why we explain who owns which brands, so that consumers can have an informed choice when they come to buy a product.

Some companies may focus their green credentials on one aspect of the business e.g. packaging. To find a really ethical business, look for brands that are addressing impacts for all their products and across multiple issues. Ethical Consumer rates and ranks companies on ethical issues such as climate change, workers’ rights, animal welfare and many more. Our in-depth ratings provide unique, reliable and transparent insight into the ethics of the companies behind various brands. 

How to become an ethical business

If you would like to make your business more ethical, a great first step is to look at your supply chain and identify any major risks. Could your suppliers be more environmentally friendly and fairer to people and animals?

Ethical Consumer can help companies do their due diligence and check the ethics of their suppliers. Our Corporate Research Database gives instant access (to subscribed organisations) to the ethical credentials of 2500+ companies. Our ethical screening services provide further detailed information on any companies that are not yet in our database. Understanding how ethical (or not) your suppliers are gives you the chance to question them or ask for changes. If need be, you could also swap to a more ethical supplier.

A next step might be to look at the ingredients and the design of your products.

For example, if your product needs added oil, does it have to be palm oil? If so, use a sustainable version from a reliable source - one that reports to the Roundtable on Sustainable Palm Oil that it is using identity preserved or segregated palm oil.

Do you need to use animal products? Or are you able to leave these out and create a plant based product? If not, choose suppliers with the highest ethical welfare policies and practices.

For a non-food product, are you able to switch to recycled materials?

You could also ask: what will the products be packaged in? Is the packaging reusable, returnable and plastic free? If you need inspiration, look at the plastics article on our website.

Being transparent about steps you are taking and challenges you face is crucial. By publishing your supply chain (tier 1 and beyond), you can show consumers where your goods are made. By publishing your carbon emissions, Scope 1, 2 and 3 alike, consumers can likewise follow your journey towards becoming a low-carbon business.  

Finally, don’t forget to review who you are banking with. Every company needs to keep its income with a financial institution. Choosing some of the main high street banks may cancel out your company’s beneficial work,  as many of these invest in sectors such as fossil fuels and arms. 

Ethical banks by contrast will not use money they’re holding to invest in corporations with workers’ rights issues, deforestation, animal exploitation or other unethical practices. 

The business and charity banking guide reviews banks and building societies which provide accounts to organisations. Pension and car insurance providers may also provide options for businesses. 

Do ethical businesses perform better?

A number of factors play a part in making a business profitable. Experienced management teams, dedicated and productive employees and consistent consumer demand are key.

According to Investopedia however, business ethics is an equally important aspect of a successful company. The Work Institute also says “The perception of ethical behavior can increase employee performance, job satisfaction, organizational commitment, trust and organizational citizenship behaviors.”

Of course, it can be difficult to compete with companies that use loopholes to avoid paying taxes and exploit workers and the environment to maximise profits. However, with the rise of ethically minded shoppers, businesses can thrive while providing solid, ethical products that don’t harm the planet and pay a decent wage to all workers.

Ethical Consumer’s Market Report, which has followed the movement of the ethical market since 2010, has shown a continuous increase in ethical spending.