|Triple Bottom Line: From macro to micro|
|by Shannon Simmons|
|on June 07, 2011|
The triple bottom line is, in my opinion, a wonderful way of measuring the true success of a business. When I think back to my economics undergrad, investment exams, and certification material, nowhere did the phrase “Triple Bottom Line” appear. I was taught that the sole purpose of a business is profit. Most simply put, a business must make a profit in order to validate its existence and prove its success. This is and always will be the case; however, with triple bottom line accounting, profit is no longer the sole measure of a business’s success.
Now a company’s success can be defined by how well it balances social responsibility and environmental sustainability as well as profitability. People, planet and profit; only when all three of these are in play and balanced is the company truly sustainable for the long-run.
Bottom Lines Explained
People: Human Capital. A company must have beneficial business practices toward its own employees and the community where it conducts its business. This is demonstrated by fair wages, safe work environments and non-exploitive labour practices. In other words, well paid, respected and educated labour.
Planet: Natural Capital. A company must also have sustainable environmental practices. A business should strive to reduce its ecological footprint by reducing waste and managing consumption of energy and non-renewable resources. Non-ecologically destructive practices.
Profit: Financial Capital. A company must have saved-up financial wealth after all expenses in order to continue. Profit can be used as investment capital to grow the business or pay out to workers.
A three-legged stool is often used as a metaphor for triple bottom line sustainability. When the stool’s three legs – three bottom lines - are in equal proportion, the stool is sturdy and bears weight well. It is sustainable. However, if one of the legs is not held in equal proportion, the stool is weakened and it becomes imbalanced or unsustainable.
Only companies that produce a triple bottom line account for the full cost involved in doing business. The costs with TBL are no longer simply the dollar figures on an expense report. Instead, the costs of business include the loss of non-renewable resources, as well as the productivity from innovation that comes with well-educated human capital. This doesn’t sound anything like what I learned in my accounting classes, which is that if you cut costs, profit margins will increase. So why then, would any company want to strive for a triple bottom line?
The answer is sustainability. Oh yes... that rings a bell from my university economics days. If a company is sustainable, then it is growing at a sustainable rate, which will ensure its longevity. Now, that sounds like something I’d want to invest in.
What does it all mean?
On a global scale, an economy can be seen as reaching a level of sustainable growth when it is producing optimally. This means, making optimal use of the three factors of production: labour, land, and investment capital. This sounds a lot like people, planet, profit, doesn’t it? That’s because it is.
I like to think about the TBL on a macro-economic scale. Think of an OECD country. The government of an OECD country earns tax revenue (profit) in order to spend money. Aside from servicing a deficit and defence, a government generally aims to spend money on social programs, environmental programs, and business incentives. People. Planet. Profit. You could argue that a government attempts to have a triple bottom line. A government will spend tax dollars on these programs to ensure that all the factors of production, land, labour, and capital are at optimal levels so the economy of the country grows. When the economy grows, a country and its people prosper. Long-term growth is the measure of success.
As a country, if we properly manage the cultivation and use of our natural resources, we will ensure our ability to work and thrive in the future. If we educate our people, our country experiences technological innovation, less crime and better productivity. Lastly, if our country earns a good profit (i.e. sufficient taxes) by enticing business and investment, we will have more money to invest back into our social and environmental programs. The big wheel turns.
Practicing TBL in our own backyards
Triple bottom line accounting is an economy-wide theory. If every business held a triple bottom line, not only would it prosper in the short-run, but would also surge ahead of the competition over time. Respected, educated and well-paid employees, rather than unfair wages and child labour, will bring innovation and productivity to your business. Innovation and technological change are the most important factors for growth. Being socially responsible with the people in your business is, therefore, crucial for long-term growth.
It also makes economic sense for a firm to care about its natural capital. There are only so many natural resources and land available. As we know, natural resources and land are what give many businesses the ability to work. As non-renewable resources are depleted, the costs of doing business increase. For example, when gasoline prices go up, the cost of transporting good increases, which hurts a business in both the short and long-run.
The main problem with TBL accounting is that the three separate accounts cannot easily be added up. It is difficult to measure social responsibility and environmental accountability in the same terms as profit, or money. Money is a universally accepted quantitative measure, whereas social responsibility and environmental efforts are qualitative in nature and difficult to quantify. However, as corporate responsibility becomes more popular, organizations like the Global Reporting Initiative, the Institute 4 Sustainability and CERES attempt to streamline the methods used to quantify a firm’s corporate responsibility and TBL on a worldwide scale.
At the core of the triple bottom line is the idea of sustainable value creation. A company must be sustainable in order to prosper over the long-term. Therefore, it must be able to meet the need for the goods and services it produces in the traditional business sense without destroying natural and human capital along the way.
Although triple bottom line accounting is a big picture mentality, even at the firm level there are valid economic benefits to choosing a socially responsible business model. The triple bottom line aims to change the way businesses operate on a firm level that will create overall change for an entire economy, making everyone better off, both now and in the future.
Shannon Simmons is a financial advisor and founder of The Barter Babes Project. She offers professional financial advice to those who can't usually access it by providing her financial services in exchange for a bartered good or service instead of a fee.