Posted in Finance Articles, Total Reads: 585
, Published on 19 August 2016
The Triple Bottom Line was developed by John Elkington to measure sustainability. Sustainability is been talked about as one of the important goals of any enterprise but defining a quantitative metric to sustainability and measuring it accurately is a challenge. Triple Bottom Line framework differs from the conventional measures of profits, ROI and value to the shareholder and incorporates two other segments- social and environmental dimensions.
It focuses on subjective and comprehensive results of investment by measuring growth along three facets – People, Profits and Planet.
Triple bottom line accounting has become a popular accounting method and is being adopted by for-profit, nonprofit and government entities worldwide.
Triple Bottom line is a evaluation methodology which includes three segments of a business organization’s performance: Social, environmental and financial. This differs from customary evaluation frameworks as it takes into account environmental and social dimensions which are otherwise difficult to track. These segments are also referred as 3 Ps: people, planet and profits. Though defining it as an amalgamation of three dimensions might appear easy, the challenge lies in measuring it.
All the three P s of TBL have different measures. Profits are measured in rupees. But how can one define metrics for social capital and environmental growth? We need to decide a common metric to accurately monetize social welfare and environmental development. While calculating all three in terms of money value makes it easier to measure, there are objections on measuring wellbeing and natural resources by monetizing them.
An index can be defined to calculate TBL. Through this approach, the issue of incompatible units is resolved and this allows easier comparison among enterprises by providing a universally accepted method of accounting. However, there is scope of some subjectivity with the index measurement as well. For example, how should we define the index component weights? How much weightage would each of the 3 Ps get? Are there further sub-components within each "P"? How are the sub components weights decided? Who takes the decision about these weights?
What Measures Go into the Index?
The standard method to calculate TBL is not defined. Neither there exists a universally accepted method to measure the three dimensions of TBL. This can actually be viewed as an advantage because entities (Government, nonprofit and business organizations) can define their own method of measurement to suit their needs.
Some entities may measure environmental sustainability by measuring the reduction in the quantity of solid waste that enters the landfills, but a local transportation system might define success and sustainability in terms of the distance travelled by passengers, where as a for-profit business would have earnings per share as a primary measure of success. Triple Bottom Line can accommodate these differences.
In addition to the above differences, TBL can be applied on a case to case basis i.e., to individual project or can be expanded to a broader scope spanning across large geographies and can measure impact efficiently. TBL framework can be applied at community, state and national level as per the type of projects involved and the success factors we want to measure. The type and size of the organization, level of projects and the geographic distribution will propel the decisions regarding the measures which have to be included. Having said that, it’s the stakeholders’ responsibility to determine the exact and accurate metrics. The experts on the subject will support in gathering the relevant data. Availability of data is a critical factor in the calculation of TBL as data unavailability can cause hindrance in arriving at a proper index measurement.
Measures of 3Ps:
Economic variables are those that have to do with the bottom line and the money flow. It involves business income and expenses, taxes, health of the business, employment rate, and diversity factors. Some of the measures are:
• Income of the employee
• Cost of unemployment
• Creation and destruction rate of business
• Establishment size
• Growth in a job
• Sector wise employment
• Sector wise percentage distribution of firms
• Sector wise wealth contribution to GDP
Environmental variables represent the existence and development of natural resources and portray the necessary steps to its essence and viability. Energy consumption, Quality of air, water, natural resources, solid and toxic waste, land cover are some of the measure of environmental growth. Every organization should have a clear idea about the impact of their decisions on each of the above measures not only on the short run bur also in the long run perspective. Some of the measures are:
• Concentration of SO2, NOx
• Harmful and toxic pollutants
• Excess nutrients
• Usage of electricity and Fossil fuel
• Waste & Effluent management
• Sewage Management
• Changes in land cover
Variables in the social dimension imply the welfare view of a region or community which comprises of elements like quality and reach of education, equality in terms of resource allocation, health and wellness, standard of living and social status or social capital. Some of them are:
• Ratio of Women in work force
• Average Household income
• Relative poverty
• Unemployment rate
• Share of degree holders in the entire population
• Average commute time
• Crime rate
• Life expectancy
• Mortality rate
Whom is the Triple Bottom Line for?
For profit Business groups, nonprofit boards and state and national government bodies – all these entities use the Triple Bottom Line
For profit Businesses
Due to years of unscientific evidence of a scope showing long-term profitability, sustainability has become a vital goal to businesses today and there is an increasing trend of adopting the TBL framework. Conglomerates like HUL, P&G, and Colgate Palmolive etc. are trying to score high on the environmental measure index by reducing plastic wastage and damage to ecology by adopting different methods of packaging. This also has the added advantage on the cost thus focusing on two measures at the same time.
Many nonprofit organizations adopt the TBL by partnering with corporates to address sustainability in a broad sense and involve all the stakeholders. Organizations with Corporate Social Responsibility goals partner with nonprofit boards to reach economic prosperity, social wellness and environmental development thereby achieving growth in all the three components of the TBL.
Governments are using the triple bottom line framework for decision-making and performance management. Policy making authorities make inferences from these sustainability measures to take a call on their future steps which impact the society. These measures give an idea about the effects of the projects on the sustainable development citizens of a society based on which the future projects and policies are planned.
The Triple Bottom line brought changes in the measurement of sustainability and performance of enterprises and nonprofit boards. Not only does it measure the sustainability with three facets to it – “People, Planet and Profits” but the Triple Bottom Line offers business organizations to customize and employ the concept in a tailored way which best suits their needs. However the implementation part of TBL poses challenges. These challenges include measurement of the three metrics, capturing relevant data and arriving at the exact contribution and allocation figures of a project towards sustainability. Keeping the challenges aside, Triple Bottom Lone approach allows businesses to have a long run perspective and assessment of the results of their decisions.
This article has been authored by Uma Bala from IIM Raipur
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