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The triple bottom line is a form of reporting that takes into account the social and environmental impact of a business in addition to its financial performance. For some companies it is a way of demonstrating their strategy for sustainable growth.
Introduction
Define & explain: Triple Bottom Line, Sustainability (sustainable growth), and Why sustainability is important
Triple Bottom Line (TBL) is an accounting theory that accounts for three areas of performance, which are social, environmental, and financial aspects of performance. The TBL approach introduces new elements such as social and ecological or environmental measures, which are difficult to define with a specific form of measurement. Generally, the TBL elements are the 3Ps that consist of people, planet, and profits.
In 1994, Elkington introduced the concept of sustainability (Elkington, 1994). He claimed that organisation ought to prepare three various bottom lines. The first bottom line was for profit and loss account. The second bottom line was for people. In this bottom line, an organisation had to account for its social responsibilities towards people throughout the operational period.
The third bottom line, planet, looked at how firms were environmentally conscious about their operation. Thus, Elkington aimed to measure the social, environmental, and social performances of firms within a given period (Beechy and Conrod, 1998). In this context, only firms that had a complete account of the 3Ps were aware of full costs of running a business.
However, environmentalists had already met challenges on how to measure and assign an appropriate framework for sustainability. Consequently, many studies have focused on sustainability and its importance. Moreover, they have used sustainability to define the TBL.
According to Andrew Savitz, the TBL “captures the essence of sustainability by measuring the impact of an organization’s activities on the world… including both its profitability and shareholder values and its social, human and environmental capital” (Savitz, 2006). Other scholars have claimed that the TBL is like the balanced scorecard.
Such arguments claim that both the TBL and the balance scorecard have the same fundamental principle i.e., measurements focusing on results, which a firm is likely to pay attention to in its strategic objectives. Thus, the aim of measuring social and environmental impacts of an organisation can ensure that we have socially and environmentally responsible firms.
The TBL gained recognition when firms realised the value of corporate social responsibility (CSR), changes in the environment, and fair trade (Clarkson, 1995). In fact, Western nations had to introduce the 3Ps alongside cost-cutting measures. As a result, sustainability has been a major aim for many firms. However, the measure of the extent of sustainability has presented challenges to all organisations.
Sustainability approach involves the use of a simple principle, i.e., people depend directly or indirectly from the natural environment. The importance of sustainability is to create a condition under which “humans and nature can exist in productive harmony that permits fulfilling the social, economic, and other requirements of present and future generations” (Galpin, 1997).
Therefore, sustainability ensures that we have and will continue to have important resources that can sustain life and the environment. With regard to business, sustainable growth is a “realistically attainable growth that a company could maintain without running into problems” (Galpin, 1997).
For instance, a business that has a rapid rate of growth may face challenges of funding the growth rate, whereas a business that has a slow rate of growth may stagnate and fail to meet its obligations. Thus, firms must have the best growth rate for sustainability.
Sustainable rate of growth is most desirable for any organisation because a firm can operate at that rate with no changes to its financial position. Therefore, it is important to understand how much a firm can sustain its rate of growth before borrowing money for its operation. The model for determining a sustainable growth of a firm takes into consideration:
- The need to maintain a given investment structure with no new equity
- The need to maintain the ratio of share payment
- Enhance the rate of sales based on the fundamentals of the market
This approach assumes that the firm’s assets at the start of a trading period are constant, and company only has reserved earnings as its source for raising capital. Returns and assets cannot surpass the reserved earnings and any other debts to the extent that the reserved earnings cannot support.
Data from the sustained growth rates indicate that many firms are not willing to issue new equity. However, any company that decides to issue new equity does not want any financial strain on its growth rate because the return on equity has direct impacts on the sustainable growth rate of a firm.
Triple Bottom Line
The TBL does not have a general method of measure. Thus, getting a single unit to measure the 3Ps is a challenge because we measure profits in terms of dollar, but there are specific units for measuring social or environmental aspects of the TLB concept. Some scholars have championed the need to monetise all aspects of TBL with regard to social welfare and damages to the environment.
On the other hand, some have opposed the idea of attaching monetary values to lost land or endangered species. Besides, there are also challenges of determining the exact price of such environmental impacts. Others have proposed an index for gauging the TBL. This approach eliminates the challenge of unsuited units of measurement.
However, there must be a universally acceptable accounting system for making comparisons among various cities, firms, projects, or any other standard for such measurements. There are various indices for measuring various components of the 3Ps. However, there still are challenges based on the weight of each P and their sub-components.
Still, others believe that it is appropriate to eliminate both the dollar and index in measuring the TBL. This implies that every P should be on its own. However, when every P stands alone, there may be cases of proliferation of metric, which may affect the result of sustainability. These are some of the difficulties with the TBL. However, there are potential approaches that can provide effective metrics for analysing the TBL (Blewitt, 2008). We can understand such metrics through the application of TBL aspect in an organisation.
TBL Practices
There are no universally accepted methods of measuring and calculating the 3Ps. At the same time, there are no standard metrics for measuring each aspect of the TBL. In this regard, the lack of standard measurement procedures provides an opportunity for entities to create their own framework that meets the unique needs of their organisations and various geographical locations. Business and other organisations can measure impacts and sustainability of the environment.
For instance, they may determine the quantity of solid waste for the landfill, whereas other entities may measure their achievements in terms of earnings. In other words, the TBL has the ability to account for all variations in measuring the impacts on sustainability. In addition, the TBL can apply to both specific and broad aspects of a project in different locations or within a narrow scope or a location. For instance, the 3Ps may measure the impacts a venture on the environment at different points.
Various aspects that relate to the entity, project, and location have significant influences on the type of TBL measure to use. However, these elements of measurement also depend on decisions of stakeholders, issues of concerns, and data needed. Entities that wish to use the TBL can get relevant information from relevant institutions.
Economic Measures
Economic measures for the TBL must account for the bottom line and issues that relate to money. For instance, the TBL measure may look at “income or expenditures, taxes, business climate factors, employment, and business diversity factors” (Freeman, 2004). Specifically, the analysis may involve individual’s income, job growth, employment trends in a sector, the number of companies in a given sector, and costs related to underemployment among others.
Environmental Measures
These measures must account for natural resources and show possible impacts on their viability. For instance, the variables may show the quality of air and water in a given location, energy consumption, amount of solid waste materials and toxic levels, land use and cover.
It is also important to have different trends on environmental issues so that a firm can easily identify impacts that its policies or activities will have on the environment (Hacking and Guthrie, 2008).
Specific areas of interests in environmental variables include the presence of solid wastes on the environment, hazardous waste management, consumption of fuel, electricity, concentration of chemicals, and changes in the use of land among others.
Social Measures
Social measures in the TBL reflect aspects related to social factors in a given region. The variables may include measurements on equity, gaining access to social amenities, education, social well-being, health standards, and social resources among others. Specifically, such variables may focus on the rate of unemployment, household income, the number of people with a given education qualification, life expectancy, rates of crime, and poverty level among others.
Data that relate to all areas of the TBL are accessible at different stages. They can serve organisations, which have interests in the TBL. However, it is important to note that such data change over time due to changes in the economic, environment, and social statuses of a location or people. In some cases, it is necessary for an organisation to determine elements of TBL at the local level.
We have many ways in which we can gain the support of stakeholders to take part in the formulation of the TBL framework. For instance, Peter Soderbaum proposes that we can develop “a decision matrix to incorporate public preferences into project planning and decision-making” (Soderbaum, 1982).
Terre Satterfield, Paul Slovic, and Robin Gregory note that we can use “a narrative format to solicit shareholder participation and comprehensive project evaluation” (Satterfield, Slovic and Gregory, 2000). Finally, Sheppard and Meitner see the need to have “stakeholders rank and weigh components of a sustainability framework according to community priorities” (Sheppard and Meitner, 2005).
Purpose of TBL and Why adopt the TBL
The escalating cases of corporate malpractices have forced a number of firms to review their practices. For instance, Nike and Tesco had to review their policies of sourcing and ethical practices of their suppliers around the world. Regulation and policies of labour markets vary from country to country.
Therefore, manufacturers and suppliers exploited such weak laws at the expense of social and environmental concerns. The TBL also enhanced the development of a fair trade movement, which influenced the production and trade in socially and environmentally acceptable goods. The fair trade movement gained momentum in the last few years (Willard, 2002). Now, the movement only focuses on agricultural produce like coffee, tea, and cotton among others. These commodities account for a small percentage of grocery sales.
The major challenge with the TBL is that its three components cannot easily add up because we cannot measure people and planet in terms of cash. Such concerns have led firms to formulate ways of creating sustainable growth. However, achieving a sustainable growth has not been simple due to changes from political, competitors, environment, consumer trends, social, and economic challenges.
Every issue has unique challenges to firms, which seek to create sustainable growth. For instance, social and consumer trends have shifted significantly in the last few decades. Modern consumers have become price-conscious due to rising costs of living, which has left them with a lesser amount of wealth to dispose.
Such factors, together with demands for quality and cost reduction measures, have forced many firms to redefine their values in order to retain their clients and have competitive advantage over competitors. Besides, competitions in various industries have become stiff and barriers no longer exist to distinguish them.
Challenges in sustained growths manifest themselves in different ways across different industries. For instance, many firms may face challenges of developing and launching unique products that can serve the needs of their customers.
On the other hand, some firms may experience challenges in their attempts to capitalise on opportunities from globalisation. Still, other firms focus on expanding their opportunities and the global presence. Some firms may apply all these methods simultaneously in order to enhance their capabilities in various areas of operation.
Most scholars contend that achieving sustainable growth is quite difficult without understanding the underlying factors like growth strategies and firm’s capability. Therefore, firms that fail to account for all the elements of the 3Ps may not achieve their sustainability objectives.
In some cases, such firms may realise short-term gains but fail to achieve long-term objectives for sustainability growth. Thus, it is necessary for firms to have an excellent growth strategy alongside appropriate mechanisms of executing such strategies. Such approaches must account for the TBL concept.
Conclusion
John Elkington (1998) was the first scholar to capture elements of TBL in his various works, which included Cannibals with Forks: The Triple Bottom Line of 21st Century Business. The aim of TBL is to measure profits, as well as impacts of the firm’s activities on the planet and people within a local and global context.
The concept of TBL emanates from the need for firms to have responsibility towards the use of the environment, economy, and society. These are the elements, which make up people, profit, and planet. In some cases, people use corporate social responsibility (CSR) reporting interchangeably with the TBL concept.
Stakeholder theory is applicable in the TBL concept. Stakeholder theory relates to “organisational practices and business ethics that addresses morals and values in managing an organisation” (Freeman, 1984 and 2004). Freeman identified various stakeholders of an organisation and provided methods by which the management team could protect the interests of such stakeholders.
He aimed to show important elements of an organisation. With regards to the traditional opinion about a company, stockholders and shareholders own the organisation. Therefore, the organisation has a fiduciary duty to protect interests of its owners by increasing the value that owners can get from it (Phillips, 2003). On the contrary, stakeholder theory posits that a firm must recognise parties other than shareholders (Donaldson and Preston, 1995).
These other parties include political organisations, employees, unions, associations, communities, customers, and financiers among others. In some cases, competitors are also a part of the stakeholders of an organisation because they have the ability to influence practices and obligations of an organisation.
Samantha Miles notes that the “nature of what is a stakeholder is highly contested because of many definitions existing in the academic literature about a stakeholder” (Miles, 2012; Friedman and Miles, 2006). The stakeholder theory consists of other theories such as resource based and market based theories. In addition, it also has socio-political elements of a firm. The concept of a firm in this theory applies to certain stakeholders of an organisation. The theory also examines how an organisation should treat its stakeholders. Therefore, identification and salience of stakeholders have become important elements for understanding the current context of stakeholder theory (Mitchell, Agle and Wood, 1997). Charles Blattberg has argued that stakeholder theory assumes that an organisation can balance or compromise interests of certain groups at the expense of others (Blattberg, 2004). Such arguments claim that the stakeholder theory relies on negotiation as the main way of dealing with conflicts among stakeholders. This leads to compromise of some stakeholders. In this regard, Blattberg has proposed the use of “conversation instead of dialogue in order to protect a ‘patriotic’ conception of the corporation” (Blattberg, 2004). Mansell notes that by using a “political ideology of a ‘social contract’ to the corporation, stakeholder theory undermines the principles on which a market economy is based” (Mansell, 2013).
The gross domestic product (GDP) and gross national product (GNP) are the best indicators of growth in economies. The GDP and GNP have overall effects on economic growth of a country and lives of the people based on the Pareto-improving theory. Economists have not been able to embrace the concept of sustainability fully because they viewed it as an issue of resources rather than a matter of public concern (Ratner, 2004).
However, this is not a good approach to sustainability because in most cases only management teams can gain great accessibility to resources, whereas majorities at the bottom continue to share meagre resources. Moreover, conventional economic theory is also incompatible with the sustainability. However, economic concepts are necessary as a prerequisite for understanding sustainability because some economic concepts are critical for sustainability.
In this regard, many economists apply the concept of willingness-to-pay (Roberts and Mahoney, 2004). The concept of willingness-to-pay allows us to “analyze the impacts of the environment and economic growth, to take into account the environmental and social impact, to treat nature as an economic externality, and to utilise the natural resources in a conservative manner in order for a development project to be considered sustainable” ( Rogers, Jalal and Boyd, 2008).
Others studies have pointed out that what is necessary is how firms enhance their positive images in the community by reducing negative effects and promoting positive impacts on individuals or the community. The focus has been on social impact because of its closeness to the well-being of people and other organisms within a given environment.
From the perspective of moral philosophy, we focus on business ethics and social responsibility within the context of the theory of the good. In other words, we have to understand how organisations add or create value to the world. The issue of how organisations add value to the world has been a pertinent matter for many decades.
However, many philosophers relate such fundamental questions about a firm with the theory of right. In this theory, the focus is on whether firms respect or disregard rights of other stakeholders. In most cases, people have to deal with issues about rights and obligations and contend with actions that may have positive or negative impacts in the world.
However, we have to note that the direct connection between utilitarian acts and maximisation of well-being is not clear (Sen, 1999). In effect, the most “socially responsible corporation is the one that has the greatest net social impact on society” (Sen, 1999). This is what advocates of CSR believe.
The triple bottom line has gained recognition in the last few decades a framework of understanding performances of organisations. Elkington coined the framework in order to measure other impacts of organisations other than the profit. In this sense, he aimed to highlight different values that firms had to adopt during their activities.
These included social, environmental, and economic aspects, i.e., profit, people, and planet (3Ps). In other words, the TBL accounting practice aims at going beyond the old system of reporting profits and disregarding effects of an organisation on people and the planet. Thus, it provides a framework for accounting for social and environmental performance of a firm.
One major challenge is the issue of measuring the 3Ps of the TBL concept. For instance, we can attach a dollar as unit for measuring profits. On the other hand, it would be difficult to measure impacts of organisations on people and the environment by using a dollar. Besides, there are no universally accepted units for TBL. However, any attempts to measure TBL must account for economic, social, and environmental impacts of the organisation.
TBL is important for regulating practices of firms, which may exploit the environment or engage in questionable activities with suppliers. Therefore, organisations have been able to take CSR seriously as a part of their sustainability agenda. Sustainability growth is a challenging task for many firms and requires adequate planning.
There are many theories that relate to the concept of TBL. The stakeholder theory shows why a firm must consider all stakeholders in its decisions. Some of these theories take philosophical approaches in order to explain the issue of responsibility and social development in society.
Reference List
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