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Monday, September 20, 2010

Triple Bottom Line definitions and challenges!


The dictionary of sustainable management defines triple bottom line as the “addition of social and environmental values to the traditional economic measures of a corporation or organization's success.”[1] Fundamentally, a triple bottom line (TBL) accounting system “attempts to describe the social and environmental impact of an organization's activities, in a measurable way, to its economic performance in order to show improvement or to make evaluation more in-depth.”[2] With this definition as a guide, this paper will examine the significance of each prong of the triple bottom line sword, as well as look at some challenges these prongs face toward further integration into the business system.

Fishing around the world has personified prosperity and provided livelihoods for millions over the centuries. Especially in America the whaling industry prompted significant growth for New Englanders for so many years. However because of mismanagement and unsustainable harvesting patterns the whaling industry is all but exhausted in North America.[3] While still a powerful symbol of American prosperity in the 19th century it also “represents the shortsightedness of businessmen whose thirst for profit made their enterprise unsustainable”[4] The fishing industry exemplifies some powerful ways in which a triple bottom line system of accounting is prudent, if not necessary, for sustainable development.

Profit

‘Traditional’ profit could be defined as thesurplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid.”[5] A triple bottom line definition of profit is therefore different from traditional accounting definitions of profit. As part of the triple bottom line approach to accounting, "profit" is seen as the real economic benefit enjoyed by the host society. Put differently, ‘triple bottom line profit’ is the real economic impact the organization has on its economic environment. Despite the broad nature of this definition, it is still sometimes narrowly understood to mean the ‘internal profits’ of a given organization. While internal profits of a company may still be a fundamental starting point for a company or institution looking to implement a triple bottom line system, it is never-the-less a small piece of the whole picture. It is important not to think of profit, from a triple bottom line point of view, as simply the traditional understandings of corporate accounting with a smattering of social and environmental impacts. Unless triple bottom line ‘profit’ is viewed concurrently with the other prongs of social and environmental profit, the overall holistic nature of a ‘triple bottom line’ system is not complete.

Planet

Sometimes referred to as natural capital, the planet or environmental aspect of the triple bottom line involves responsible stewardship through sustainable environmental best practices. A company seeking to operate under an effective triple bottom line system endeavors to benefit the natural order as much as possible. At the very least TBL entity should observe the Hippocratic Oath as much as possible and attempt to ‘do no harm,’[6] thereby curtailing environmental impact as much as possible. Among other things, an entity striving for TBL success will find ways to reduce itsecological footprint’. This can be accomplished by careful management of energy and non-renewable resource consumption as well as reducing waste and reducing or eliminating toxins and other harmful agents. One such strategy for effective stewardship of natural capital is called “Cradle to grave”.[7] Proposed by William McDonough the cradle to grave philosophy champions the use and understanding of life cycle assessment of products. The objective of such a philosophy is ultimately to determine and quantify what the ‘true’ environmental cost is for a given product. This includes everything from the growth and harvesting of raw materials any manufacturing and distribution and finally to the eventual disposal and/or consumption of a given product.

Unfortunately, current methods for the disposal of non-degradable or toxic products are largely borne by governments, the natural environment, as well as by the residents near the disposal site and elsewhere. This means that the local population the society and government as well as the natural environment are all directly affected by the disposal of such products. From a triple bottom line point of view this is precisely the reason why the societal and environmental impacts of production need to be factored into the overall ‘profit’. A TBL approach for an enterprise that produces and markets a product which will create a waste problem should be held accountable by society. Therefore, triple bottom line accounting indicates that it would be more equitable for companies and organizations that manufacture and sell problematic products to bear the cost of disposal. Ultimately, ecologically destructive practices, such as overfishing as well as other unsustainable business practices, should be avoided as part of a triple bottom line approach.

People

Sometimes referred to as human capital, the people prong of the triple bottom line pertains to equitable business practices toward all stakeholders that have a ‘stake’ in the company. Entities pursuing a triple bottom line often conceive a ‘reciprocal social structure’ in which the well-being of all stakeholder interests are interdependent. Among other things a TBL enterprise seeks to benefit all of its constituencies or stakeholders. The stakeholder is an individual, group, organization, or system who affects or can be affected by an organization's actions. Fair trade agricultural practices are an example of a possible socially equitable feature of a triple bottom line system. Ideally, triple bottom line entities would not use child labor, would maintain a safe work environment and would not otherwise exploit a community or its labor force. Triple bottom line business may also seek to contribute to the strength and growth of the community or communities they work in or otherwise affect.

Quantifying the people and planet prongs of the TBL accounting system is relatively new and has not been standardized. Organizations like The Global Reporting Initiative (GRI) has developed guidelines to enable corporations and NGOs to comparably report on the social and environmental impact of a business and offers one of the world’s most compelling examples of sustainability reporting.[8]

Challenges

Along with the difficulty inherent in any potential financial or organizational change, the people, planet and profit prongs of the triple bottom line accounting method have their own challenges toward implementation. As it stands, the biggest challenge may well be the lack of a necessary understanding of life cycle assessment as well as sufficient standards that would help businesses and executives more toward a TBL future. Institutions like the Global Reporting Initiative certainly seem to be on the right track and may well, one day, be the hallmark of triple bottom line and sustainability reporting. These challenges do not seem insurmountable. Enormous strides have been taken in just the last few years in terms of the understanding and prevalence of alternatives to more traditional accounting and business methods like TBL. There are also no signs that these trends will slow down in the near future, quite the opposite in fact. More and more people are speculating that a way toward recovery may well be through TBL.

A recent article written January 8th 2010 stated that “there is a strong argument that triple bottom line or building sustainable businesses creates more profitable and successful business.” Indeed, pursuing environmental and social objectives doesn't have to be at the expense of financial objectives and often is reinforcing.[9] A report in April 2009 by Alling Henning Associates Inc. (AHA) examined why some banking institutions were prospering despite recent economic instability and scandal. They found that “financial institutions that commit to corporate social responsibility, back up their pledge with actions and communicate their position clearly are uniquely prepared to build and protect their brands—and even prosper—during market downturns.”[10] Unlike traditional institutions that are driven by profit alone. The banks examined by AHA found that, despite challenges, these triple-bottom-line banks and credit unions offer innovative and underexplored ways of measuring success—ways that not only help people and the planet, but also foster the long-term success and profitability of a company and therefore touch on all three of the prongs of a TBL company.

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