In 1994 British sustainability consultant John Elkington coined a term that quickly gained traction in the corporate world. To identify the true cost of doing business, the ‘triple bottom line’ argues that companies must account for the financial impacts and social and environmental effects (positive and negative) to arrive at a more complete and useful measure of corporate performance. These he neatly incorporated into the 3P’s, which we explore later in this article.
Elkington’s triple bottom line concept arrived exactly 500 years after the publication of Luca Paccioli’s treatise on double-entry bookkeeping, which, as he put it, formed “the cornerstone of single bottom line thinking.” It surfaced when the issue of climate change was front and centre on the world stage; just two years earlier, the United Nations Framework Convention on Climate Change was launched at the Rio Earth summit. It was clear that businesses would need to adapt their measurement and reporting processes to successfully play an active part alongside governments in tackling climate risk.
What Are the 3 P’s of the Triple Bottom Line?
The components of the triple bottom line are summarised as “Profit, People and Planet”, but each of these extends across a range of issues:
Profit: The conventional measure of corporate success derived from the business’s profit and loss account. This is the easiest of the three to measure as it is objectively based on financial performance.
People: The company’s impact on society. This includes employee rights, protections and opportunities, health and safety performance, community initiatives and educational programmes delivered by the business.
Planet: The company’s impact on the environment. This includes greenhouse gas emissions, waste management, raw material and scarce resource use, pollution and R&D devoted to environmental improvement.
The triple bottom line model states that equal emphasis should be placed on each of the three pillars to ensure an organisation is creating sustainable value in a responsible way. However, as we will see later, even the model’s creator admits this has proved hard to achieve.
Why Is the Triple Bottom Line Important?
The triple bottom line was the first moderately successful attempt to go beyond the conventional measurement of corporate value and recognise that corporate citizens have a responsibility to all stakeholders, not just shareholders. It arguably signalled the start of what we are now seeing grow to maturity as stakeholder capitalism.
In the three decades since its inception, businesses have accepted much more responsibility for their impact across the entire value chain; CSR reporting has become a standard feature of corporate communications. There have been bumps along the road — not least when companies have viewed sustainability reporting as more of a marketing vehicle than a warts-and-all exposé of corporate culpability. Accusations of greenwashing and selective reporting have been frequent as companies have matured in their approach to triple bottom line measurement.
Today, the commitment to place equal emphasis on environmental, social and financial performance is becoming a mainstream approach. As climate change has become a climate emergency, and inequality has been starkly exposed through the health crisis and evidence of global institutional racism, conducting business through the triple bottom line is now more relevant than ever before.
Triple Bottom Line Benefits
Balancing Profit with environmental and social responsibility is not just a moral imperative. Evidence is mounting that businesses with strong ESG strategies perform better financially over the long term. This is a result of the numerous benefits of a triple bottom line-led approach:
Earlier risk identification: Reporting on a triple bottom line basis means the business must incorporate ESG factors into strategic decision-making and risk management. This focus means the organisation has more opportunity to identify risks emerging from non-financial sources and act to mitigate them before they become threats. Businesses with better risk identification and control are more resilient and insulated against the impact of external factors.
Building reputation: As climate and social issues become more prominent, consumers are increasingly concerned about the impact their buying choices have, making them more likely to purchase from companies with a demonstrable track record on protecting People and the Planet. PWC’s June 2021 consumer insight survey found 59% of respondents say a company’s purpose and values influence their buying decisions.
Attracting talent: An organisation’s values and performance on ethical and social issues are becoming increasingly influential on employee attraction and retention. Deloitte’s Global 2021 Millennial and Gen Z survey found that 49% of Gen Z respondents had “made choices over the type of work they are prepared to do or organisations they’d work for based on personal ethics”. If your business wants to benefit from the talents of a diverse and politically astute workforce, it must show that its values align.
Attracting investment: Investors have also linked robust ESG and long-term market outperformance. ESG investing is a rising trend that is being led by the world’s largest institutional investor, BlackRock. Investors are asking more of companies on ESG-related issues, and they are explicitly excluding businesses that don’t comply. Goldman Sachs, for example, announced in 2020 that it would not take companies public unless they have at least one diverse board member.
Reducing costs: An effective triple bottom line approach can help combat rising expenses – such as those emanating from raw material costs — and become a source of competitive advantage. Research by McKinsey has found that such expenses can affect operating profits by up to 60% and a correlation between resource efficiency and financial performance.
Improving compliance: The library of legislation around environmental, social and governance issues continues to grow, and penalties for non-compliance can be severe in both financial and reputational terms. By focusing strategically on identifying, measuring and improving performance in these areas, businesses can minimise compliance risk and prepare for a future where ESG reporting requirements are only likely to become more onerous.
Challenges of Triple Bottom Line Reporting
John Elkington has himself questioned how the triple bottom line had been adopted as more of an accounting framework than, as he had intended, as a stimulus for systematic change. Indeed, in 2018 — the 25th anniversary of its initial publication — he went as far as to “recall” it as a concept. Writing in the Harvard Business Review, he suggests that businesses have failed to overcome their overriding focus on the financial bottom line and that: “Whereas CEOs, CFOs, and other corporate leaders move heaven and earth to ensure that they hit their profit targets, the same is very rarely true of their People and Planet targets”.
Elkington also highlights the confusion generated by the plethora of initiatives that followed 3BL — including Social Return on Investment (SROI), multiple capital models, Full Cost Accounting and, more recently, the TCFD and Environmental, Social and Governance (ESG) approaches, opining that the: “bewildering range of options now on offer can provide business with an alibi for inaction”.
A further challenge of triple bottom line reporting lies in the difficulty of measuring social and environmental impacts that are often intangible and hard to compare. After all, who can say whether a women’s entrepreneurship programme in West Africa is lesser, equal to or more valuable than an adult literacy scheme in inner-city Manchester? Both have merit, but distilling impact down to a metric is not easy.
Today, there is reason to hope that a genuinely useful successor to the triple bottom line is in progress in the form of the World Economic Forum’s ESG metrics, which aim to build on existing standards and enable meaningful progress measurement, monitoring and comparisons. These metrics include the triple bottom line’s People and Planet but amend Profit to the broader term of Prosperity, which incorporates wealth generation and employment, economic contribution and investment, tax paid, and the company’s financial commitment to innovation.
An essential pillar has been added to the earlier three that has the potential to drive that systematic change that Elkington hoped for. “Principles of Governance” covers an organisation’s governing purpose, the composition of its governing body, its ethical approach and record and its risk and opportunity oversight. The last explicitly states that companies should include the management of social and environmental risk.
By requiring boards to report on governance related to sustainability, the WEF metrics will provide a focal point and lens for senior leaders to view their own performance and keep ESG issues at the top of the agenda. This is a valuable route to instigate behaviour change.
How to Do Triple Bottom Line Reporting
As Elkington noted, the panoply of frameworks, standards and metrics have created some confusion — even a motive for inertia — around reporting on the triple bottom line. The sheer quantity of metrics that can be included makes it a daunting prospect, especially if it is not clear that the business’s methodology will be universally recognised.
However, there is growing consensus around the WEF’s ESG metrics, which are aligned with the UN’s Sustainable Development Goals and should now be seen as the best-practice starting point. Fortunately, as most metrics are based on existing standards, companies may find that they are already monitoring many of them. The challenge is how to draw them together to deliver the oversight and management required to ensure that progress is being made.
This is further complicated by a historical lack of benchmark data and the continuing evolution of standards across the globe. This is the issue that Diligent’s ESG Solutions address by providing accurate and constantly updating information on ESG standards. This is supplemented by in-depth governance data that enables boards to measure their own performance across that fourth “P” on issues such as diversity and executive remuneration. It is enhanced by built-in governance intelligence allowing directors to track emerging issues, allowing boards to look over the horizon to set meaningful goals that will deliver all the advantages of an ESG-led approach.
- Almost 30 years since the concept was developed, the principle of using the triple bottom line to measure and improve corporate performance is now more relevant than ever.
- Reporting on the triple bottom line can deliver major business benefits across a range of areas.
- Using the triple bottom line as a reporting standard is not without challenges, particularly in measuring intangible aspects of “People” and “Planet” initiatives and due to the multiple reporting frameworks that have emerged.
- The evolution towards standardised ESG metrics driven by the World Economic Forum offers a way forward for more comparable, measurable ESG reporting.
- Applying digital tools and intelligence to the challenge of triple bottom line target setting and reporting allows organisations to operationalise ESG. It gives boards and senior leadership teams oversight of ESG progress and measurement.
November 25, 2020
Measuring What Matters: Why and How UK Boards Must Continue Driving the ESG Agenda
Increasingly, consumers, investors and the public are scrutinising the actions (and inactions) of corporate entities and demanding that they go beyond simply a tick-box approach to meeting regulations. Boards are being challenged to adopt an environmental, social and governance (ESG)-focused mindset and apply it to every aspect of business strategy