Triple Bottom Line Investing

The term ‘triple bottom line’ was introduced into modern language by John Elkington in 1994. As described by Elkington, his goal was to present the concept that businesses may measure their performance not only in terms of profit, but also in terms of their management of non-renewable resources (social justice) as well as their management of wastes (environmental friendliness).

Following its introduction, the term rapidly gained popularity. Today, the term is used broadly within the green community and environmental organizations. As its use has grown, its meaning has been interpreted broadly, leading to definitions so different that they have only passing similarity.

The concept of ‘profit’, the first bottom line, has changed little. Despite the general adoption of generally accepted accounting principals (GAAP), reporting of profitability is still open to creative expression. There is an old joke that every business has three sets of books: one you show to the government, one you show to your partners, and one that is the real records. This suggests that maybe ‘triple bottom line’ is not really a new concept, just different.

When Elkington coined ‘triple bottom line’, the second bottom line was ‘social justice’. As Elkington uses the term, he refers to preservation of non-renewable resources for future generations. The concept assumes that if we continue to consume certain resources at our current rate that at some time in the future that these resources will disappear, leaving nothing for our children, grandchildren or great grandchildren to enjoy. There is a saying in Native American culture that everyone walks in the shoes of seven generations. This describes an implied duty for everyone to act as a steward of precious resources.

As was pointed out recently by Lord Ron Oxburgh, the non-executive Chairman of Shell in the United Kingdom, that China, India, Brazil and Mexico are rapidly emerging markets, and "as countries grow and become more prosperous, they use more energy. It is a sad fact that if these countries experience the perfectly legitimate growth in GDP (gross domestic product) that they have a right to expect, and they do so in the same energy-inefficient way that we have seen our prosperity grow, then I think we are wasting our time. Because, frankly, the numbers of people are so large, and the rate of change is so great, that there will be simply no hope of meeting our targets [to stabilize the Earth’s atmosphere from increasing levels of carbon dioxide] by 2050."

Anyone can do the math. If China succeeds in hitting its target of quadrupling its GDP by 2020, non-renewable resources will become scarcer. The impact upon short term investing will be minimal, but the impact upon long term investing seems unavoidable. A person day trading will not have to change their way of investing, but a person planning for college or retirement must be careful to invest in businesses that incorporate strategies for increasingly scarcer resources.

The term ‘social justice’ has often been used interchangeably with ‘corporate social responsibility’. In doing so, the term has been used to include issues of global warming, economic development, ethics, human rights violations, etc. This wide ranging definition is not limited to environmental issues. Use of the broader definition detracts from its original purpose and confuses use of the concept.

Interestingly enough, use of the term ‘triple bottom line’ has been accused of confusing the definition of ‘corporate social responsibility’. In an excellent article, Getting to the Bottom of ‘Triple Bottom Line’ (In Press, Business Ethics Quarterly – March 2003) Wayne Norman and Chris MacDonald take the position that ‘triple bottom line’ is rhetoric that businesses may use as ‘a smokescreen’ to ‘avoid truly effective social and environmental reporting and performance”. http://www.businessethics.ca/3bl/triple-bottom-line.pdf

The third bottom line, ‘environmental friendliness’, refers to leaving the earth in the same shape that we found it (or possibly a little better). Like the term ‘social justice’, this measure of business performance has also suffered from problems with definition. It has been described as including conservation, recycling, renewable energy, as well as pollution prevention. A more precise definition is more in line with ‘zero waste management’ where nothing enters a landfill.

Despite the controversy over the definition of ‘triple bottom line’, there appears to be a general movement towards implementation of the concept. The Australian government convened a task force and developed at substantial expense its own approach: Triple Bottom Line Reporting in Australia: A Guide to Reporting Against Environmental Indicators. (June 2003) http://www.deh.gov.au/industry/finance/publications/indicators/pubs/indicators.pdf

However, without a standard definition, implementation is challenging, if not impossible. This has not stopped environmental activists and business bashers from complaining about the failure of businesses to comply and demanding new laws and regulations to mandate compliance.

A good overview of the history of ‘triple bottom line’ is set forth in book The Triple Bottom Line: does it all add up? (edited by Adrian Henriques and Julie Richardson - Earthscan, 2004). The book includes an introduction chapter by Elkington where he states that ‘triple bottom line’ is still a concept in need of development.

Qualitative Investment

Because ‘triple bottom line’ cannot be quantitatively measured does not mean that the term is useless. There are many examples where ‘triple bottom line’ is being implemented in some form. However, all measurements are subjective, relying upon the opinion of an individual or group. The factors relied upon in forming the opinions vary greatly. As a consequence, the statement by one person or organization that a business is successfully meeting its ‘triple bottom line’ may be disagreed with by another individual or group.

Take for example, the Dow Jones Sustainable Indexes, which is used for recommending stock investments. http://www.sustainability-indexes.com/htmle/assessment/overview.html . The index breaks criteria into three groups: economic, environment and social. However, the criteria are weighted, with twice as much importance assigned to economic as environmental criteria and twice as much importance assigned to environmental as social criteria. Certain individuals would disagree with this weighting. That does not make the weighting wrong, but demonstrates that any investment in reliance upon any ‘triple bottom line’ system must take into consideration the opinion(s) of the system’s author(s).

Strategies for Businesses Seeking Investment

Any business that is looking for capital should take into consideration how declining resources may affect an investor’s perception. The first strategic action should be to become educated on ‘sustainable development’ in all of the definitions that are commonly used.

Standards will be developed, whether voluntary or mandated by government regulation, which will impact each business in every industry. In self interest, every business should be proactive in helping its own industry develop environmental standards. Development of such standards will be the field of competition. Businesses that stand by and watch may find themselves at a disadvantage.

Each business should immediately implement its own strategy for ‘social justice’ and ‘environmental friendliness’. Such action will serve to positively differentiate the business from those competitors who are late to adopt such a strategy.

Strategies for Investors

Any individual or investment group should establish its own standards for investing in ‘triple bottom line’. These standards should align with the investment goals and objectives. In setting the standards, it may be helpful to group investment candidates by their role in the environmental industry: (1) social and/or environmental businesses, (2) regular businesses, and (3) facilitator businesses.

Social or environmental businesses have as their primary goal and objective the production and distribution of social and/or environmental products or services. Environmental businesses include renewable energy, recycling, remediation, pollution prevention and conservation. Social organizations are more commonly charities and government agencies, there being less opportunity to make money by giving it away.

Regular businesses are not engaged in producing and distributing social or environmental businesses. These businesses are car makers, accountants, and all of the businesses that everyone knows. These businesses look to adopt ‘triple bottom line’ by changing their operations to incorporate ‘social justice’ and ‘environmental friendliness’.

Facilitator businesses are those businesses that help regular businesses adopt ‘triple bottom line’, often by purchasing the products or services of social or environmental businesses.

From an investment perspective, investors who target environmental businesses will have to judge their potential for long term success. This may be viewed as the most rapidly growing business sector; however it will be subject to high risk as technology advances and resources disappear.

Investors who target regular businesses will look to those who can integrate ‘triple bottom line’ within a flexible framework that allows for working around problems caused by scarce resources. Better management teams may be expected to lead within their industries.

Some investors may look to facilitator businesses as the hot investment ticket. There will be a huge demand for those businesses that can help businesses convert their style of doing businesses. Although investors may expect this market to cool off over time, it should be around for the next couple of decades.

For those investors primarily interested in social causes, they will need to look to alternative forms of investment. Without the choice of equity ownership in the form of stock, investors will need to look to some form of revenue participation or debt instruments to make money available to charities (royalty) and government agencies (bonds).

Karl Dakin