Profitability and return on investment are not the only measures of success for today’s enterprises. Simply balancing the cost of doing business against revenue boils success down to a single metric that leaves out other key components of a contemporary organization’s balance sheet.
Considering social and environmental responsibility in bottom-line calculations is a more holistic way to measure an enterprise’s impact locally and globally. Actions that are viewed as socially responsible generate public goodwill, enhance image and reputation, attract talented employees, and provide a competitive advantage, all of which are essential to the enterprise’s long-term success.
The United Nations introduced the framework for socially responsible organizations in 1986 with the “Declaration on the Right to Development at 25.” These guidelines advocate the development of all people to “… determine their political status and to pursue their economic, social, and cultural development.” The guidelines also promote greater awareness of the environmental impact and free participation in business, and fair and meaningful distribution of the proceeds.
In 1997, John Elkington, author, speaker, and world authority on sustainable organizations, refined the framework in his book “Cannibals with Forks: Triple Bottom Line of 21st Century Business.” Elkington encouraged a broader approach to tracking organizational success, establishing the triple bottom line (TBL).
What Is the Triple Bottom Line?
Triple bottom line refers to the last line on a balance sheet that measures profit or loss. Sustainability, when referring to TBL, describes an organization that respects the needs of others (community, general public, employees) along with its own, which results in strengthened relationships between the enterprise and its stakeholders.
The TBL measures three areas of impact:
- People: Measures a company’s social responsibility, both in the workplace and community. TBL enterprises may establish initiatives to assist underprivileged people in their community through developmental programs or other economic assistance; or help their staff enhance new career, life, or wellness skills, or they may decide to boycott vendors abroad that rely on child labor. The people goals are interdependent with the goals of the enterprise.
- Planet: Establishes business practices that reduce an enterprise’s environmental footprint. This can include employing production processes to reduce waste, using recycled materials whenever possible, or educating staff on the importance of recycling and hiring recycling services for corporate offices.
- Profits: Refers to traditional cost accounting reporting.
Elkington’s triple bottom line has changed the way companies manage operations and measure effectiveness. Organizations of all types — publicly traded, privately held, health care organizations, and nonprofits — that seek to establish sustainability now understand the benefits to economic, environmental, and social consciousness.
Who Is Responsible for the Triple Bottom Line?
TBL requires company-wide adoption to be successful. However, specific employees may have more direct involvement in establishing the specific goals, measurements, and steps to achieve sustainability. Executives and company directors establish organizational goals, suggest benchmarks to measure TBL success, and determine how profits will balance with people and the planet.
TBL is a cost-accounting measure, so CFOs, controllers, and accounting directors are responsible for tracking measurements and reporting results. Because the planet and people aspects of TBL may not fall within traditional cost-accounting measures, accountants may have to use another measurement for success, such as the percentage of individual, company, or community acceptance.
Departments that can most affect sustainability must assess their responsibilities, determine which actions impact TBL, and brainstorm how improving operations can optimize TBL results. These activities may include:
- Community outreach
Long-term sustainability requires that each employee be as invested in social outcomes as profitability, which means they must understand TBL and contribute to sustainability goals.
Why Should Companies Have Sustainability Goals?
It might come as a surprise to some that consumers are willing to pay more or drive a bit further to shop at a business that commits to sustainable practices. In fact, 55% of global online consumers in 60 different countries said they would be willing to pay more for products and/or services if the company was committed to positive social and environmental impact. Savvy corporate executives have noticed this growing consumer trend and moved to instill a philosophy of sustainability into their company culture. Sustainable practices can attract progressive-minded customers while simultaneously boosting shareholder and stakeholder value.
As we learn to measure multi-stakeholder value more precisely, we find that it is positively influenced by sustainable products. Customers across the globe now vote with their dollars, and socially and environmentally conscious businesses are gaining traction. Toms, the Los Angeles shoe manufacturer started in 2006, is one example. It began with a philanthropic philosophy of donating a pair of shoes to those in need for each pair of shoes it sold. Since 2006, the company has expanded into eyewear and coffee roasting. The company has not only proven successful, it has also donated more than 10 million pairs of shoes and restored the eyesight of 200,000 people around the globe. The public is increasingly aware that unrestrained consumerism and organizations offering to “give back” are growing in popularity.
Employing the Triple Bottom Line
After determining overall goals and level of involvement, a closed-loop management system model can help teams implement the pillars of the TBL throughout the organization by decreasing the exchange of resources with the outside world. Using this model can assist with building initiatives focused on goals and supports feedback across many business units during development and beyond implementation.
To begin employing the TBL, follow these five phases of the closed-loop system:
- Establishment of goals: In addition to initial deliberations about goals, implementation teams identify internal resources and tools that can be used to support TBL initiatives. This phase involves the creation of a mission statement and code of ethics. The teams may choose to perform a SWOT analysis to identify internal strengths, weaknesses, opportunities, and threats that can affect TBL implementation.
- Strategy development: During this phase, leaders and stakeholders identify the objectives of each pillar, identify the departments that will be directly involved in advancing TBL initiatives, and establish key performance indicators as they shape the initiatives for the enterprise. The team may use flow charts to identify how the procedures work within and between business units.
- Implementation: Apply strategy to operations and identify additional procedures to ensure quality management and process improvement and the steps to achieve the goals established for the business units and enterprise.
- Monitoring: As soon as implementation begins, managers closely monitor each step to evaluate the outcomes from the new procedures and how they affect the business and staff.
- Optimization: Establish processes to evaluate and improve outcomes. What are the benefits of using such a model? Closed-loop systems can expose procedural shortcomings early in the process of implementing TBL. This allows for quick corrections to be made during the early phases of the strategy.
Creating an Effective Sustainability Index
In order for any business venture or objective to be accomplished, it’s necessary to identify measurable thresholds. Triple bottom line reporting differs from traditional reporting methods in that it goes beyond commonplace measurements such as profits and ROI. Instead, it attempts to quantify social and environmental dimensions.
Organizations can measure these dimensions by identifying ways to track sustainable processes and performance. After establishing a company’s allowable impact, practitioners of the triple bottom line then turn their attention to close monitoring of sustainability performance by using an effective index.
Businesses or organizations should select a sustainability index that is meaningful, measurable, relevant, and comprehensive. Data and target goals need to be established so that success can be determined and documented. While it’s relatively easy to define triple bottom line, tracking its success can be tricky.
For instance, social capital and environmental health are harder to quantify when compared to profits measured in dollars. This is why the sustainability index should include universally accepted accounting methods and relevant comparisons based upon established benchmarks.
Making Subjective Measurements Quantifiable
The triple bottom line usually employs non-traditional standards of measurement. This requires organizations to consider and choose measurements based on its specific goals carefully. Once goals are established, the organization can customize the index per their requirements and needs. The impact of projects, policies, and geographic boundaries can all be quantified. Some examples of seemingly subjective things that can be measured include the following categories:
Social variables can embody measurements of education, access to resources, health, equity, social capital, and quality of life. Some specific measurements might include:
- Median household income
- Unemployment rate
- Female labor participation percentage
- Educational levels/percentages
- Crime per capita
- Average life expectancy
- Average commute time
Environmental factors reflect natural resources and viability. Air quality, water quality, available natural resources, energy consumption, waste, land cover, and land use can all be measured and tracked. With the advent of the global economy, understanding different environmental regulations is a critical component of an international business career. Coupling this knowledge with an eye towards long-term trends can be valuable in determining that an organization is not exceeding its allowable impact. Such measures might include:
- Concentration of nitrogen
- Greenhouse gas emissions
- Amount of waste generated
- Use of post-consumer, recycled material
- Fossil fuel consumption
- Electricity consumption
- Water consumption
- Hazardous waste management
- Solid waste management
- Changes in land use
Economic variables can be easy to track and can impact an organization’s bottom line and money flow. Income, expenditures, taxes, employment rate, diversity factors, and business climate issues represent measurable variables. Others to include:
- Average incomes
- Underemployment costs
- Job growth percentages
- Establishment churn
- Percentage of firms in each sector
- Employment distribution by sector
- Revenue by sector
Changing Parameters and Goals
It should be noted that measures may have to be adjusted over the life of a project or as a business matures. Goals will naturally be adjusted, and new conditions and parameters will come into play as old ones are phased out.
The triple bottom line method of tracking sustainability has transformed the way businesses and organizations measure performance. Tracking people and planet impact in addition to profits can enhance both projects and policies. The flexibility of this approach allows for customizing it for specific business needs now and in the future.
Creating an index is key to measuring sustainability. However, since two-thirds of the triple bottom line definition is subjective, creativity and flexibility are important when establishing an index. Those businesses that become adept at measuring each of the three categories and finding relevant data will likely be the most effective at using the triple bottom line model to calculate sustainability.
Despite the challenges of subjectivity, the triple bottom line can be an effective and alternative method for a business to maintain awareness of its performance as well as its sustainability. For instance, a manufacturing plant can assess profit and loss while measuring sustainable attributes in parallel. It can measure its remediation efforts to offset its environmental impact or track its success in helping to place former employees following a layoff.
Building a Sustainable Framework for Tomorrow
Ensuring an organization is profitable, ethical, and socially responsible can be a complex undertaking, requiring a sophisticated and specialized education. The market (and the world) demand dynamic leaders who can do all of it, and a TBL-focused MBA can make a prospective candidate stand out.
An ethical and sustainable online MBA from The University of Scranton instills a high level of triple bottom line knowledge into its degree. That knowledge of TBL values shows prospective employers that job candidates are serious about their commitment to an ethical approach to business. These values can be a welcome asset to companies striving to positively impact their customers, their community, and the environment.