Rockaway Beach Provides A Sad Example Of The Integrated Nature Of The Triple Bottom Line

Are you familiar with the Triple Bottom Line? First defined by John Elkington more than two decades ago, it refers to the principle that an organization should measure its social performance and environmental performance, and not solely its financial (or economic) performance. It is occasionally known as the Three P’s of performance, i.e. People, Planet, Profit.

But the principle can also be interpreted in a more complex manner. Each of these three performance factors impacts the others. Thus, the “bottom lines” of these factors should be reported in an integrated manner.

Last week, the City of New York sadly announced a community restriction that illustrates the integrated nature of the Triple Bottom Line. Due to the hurricanes and rising tides of climate change, severe sand erosion on the city’s southeastern peninsula has led to the closing of a prime strip of sandy beach in the Rockaways.

The decision occurred after local tourist businesses opened for the season. Residents, of course, have already begun to protest their government leaders’ decision.

In this situation, an environmental crisis has led to a social and economic catastrophe for a working neighborhood that relies on its primary community resource — i.e. its summer beach — for its survival.

The residents of the Rockaways will gladly attest to the integrative nature of the Triple Bottom Line. Hopefully, the municipal leaders of your own town will learn from the current travails of their New York City colleagues.

Sustainability Accounting

In my previous blog post, I described the history of sustainability accounting as a “fairly engaging tale (that) begins in northern Vermont on a Ben & Jerry’s dairy farm, segues over to the Alaskan shoreline on the doomed Exxon Valdez oil tanker, and then ends in the present with characters as diverse and colorful as former Mayor Michael Bloomberg of New York City and Charles, the Prince of Wales in Great Britain.”

And then what did I do? I segued into another topic! And I never returned to explain why these two places and two people played key roles in the development of sustainability accounting.

Although I can’t honestly say that I heard roars of protest over my segue, I did hear from several readers who expressed curiosity about these places and people. So I thought that I’d explain the references in this follow-up post.

First and foremost, please keep in mind that there is no universal consensus about what we mean by the word sustainability. Nevertheless, Merriam-Webster defines the word sustainable as meaning able to last or continue for a long time, and most other sources agree that it refers to the long term viability of a person, group, or organization. Or, on a very large scale, to the entire planet Earth.

So how did a dairy farm, selling milk to an ice cream producer, factor into the accounting for such a concept? In the business world, many individuals trace the discipline of sustainability accounting to Ben & Jerry’s annual issuance of Social and Environmental Assessment Reports (SEARs). Beginning in the 1980s, the firm has pioneered the process of establishing social and environmental goals and then publicly assessing its progress in achieving them.

Then, in 1989, the Exxon Valdez ran aground on the Alaskan shoreline, spilling massive amounts of crude oil onto pristine ocean beaches. As was the case during the BP Deepwater Horizon spill in the Gulf of Mexico two decades later, the clean-up activities were hampered by uncertainties over which organizations bore responsibility for various crisis management efforts.

The concept of Governance thus joined the concepts of the Environment and Society as key considerations of sustainability. As the operational complexity of the discipline grew more dense, the qualitative measurements of the SEAR reports evolved into more quantitative metrics.

Nevertheless, the two types of sustainability reporting have survived to the present day. Whereas the Ben & Jerry’s qualitative process now tends to be known as Corporate Social Responsibility (CSR) reporting, the Exxon and BP quantitative process now tends to be known as Environmental, Social, and Governance (ESG) reporting. Nevertheless, there is a significant amount of overlap between the two styles.

So where do we stand today? Well, the production of social and environmental metrics to supplement financial (or economic) profit measures has led to the development of Triple Bottom Line (TBL) reporting. Using standards and measurements promulgated by organizations like the Sustainability Accounting Standards Board (SASB), now led by Chairman Michael Bloomberg, a TBL report provides three sets of summary measures that collectively express the holistic performance of an entity.

And what of Prince Charles? He has led an effort to integrate these three distinct bottom line measures into a single integrated framework of holistic performance. His efforts helped launch the Integrated Reporting project, which created a framework called the Six Capitals model.

Here is a pictorial representation of that model. Can you see why it is colloquially called the Octopus framework? There are six tentacles on each side of the proverbial head of the octopus, with each tentacle representing a Capital, i.e. a type of resource that an entity must utilize while conducting its operational activities.

So what will come next in this history? In all honesty, who knows? With climate change causing massive disruptions to global economies, societies, and environments, many other colorful locations and charismatic personalities are sure to enter the story.

Hey, you didn’t know that the history of sustainability accounting is so interesting, did you? And given the volatility of our modern world, it’s a future that hasn’t yet been written.

Sustainability And Net Present Value

How can an organization possibly know whether an investment in an economically, environmentally, or socially sustainable project is worthwhile? For instance, how can it place a value on a flex time policy that reduces rush hour traffic? Or on an energy policy that shifts from a carbon based fuel to a renewable source? Or on a charitable contribution that supports a local hospital?

That may have been the question that generated the most “buzz” among the attendees at last week’s First Annual Conference on Sustainability in the Big Apple. Co-sponsored by the New York Hedge Fund Roundtable and the New York State Society of CPAs, the Conference attracted financial professionals from around the world to ponder such weighty concerns.

It’s a very important consideration because, if organizations aren’t able to value such expenditures, they may easily decline to make them. And without such expenditures, we might find ourselves confronting numerous situations of economic decline, environmental crisis, and social unrest.

Many organizations are addressing this question by defining complex models and metrics for measurement purposes. The Global Reporting Initiative, for instance, has now issued its fourth generation (i.e. its G-4) of sustainability standards. And the Sustainability Accounting Standards Board is doing similar work for more than eighty industries throughout ten organizational sectors.

Sometimes, though, it can be helpful to rely on traditional approaches to solve contemporary problems. After all, even if such approaches cannot provide comprehensive solutions, they can offer the universal tools and techniques that we can utilize to address our challenges.

So, with this in mind, here is a question: can the simple Net Present Value method help us place values on sustainability expenditures? The NPV calculation was first formalized in Irving Fischer’s landmark 1907 text The Rate Of Interest. Although it is more than a century old, it still serves as the contemporary investment industry’s favorite valuation method.

Basically, NPV values an investment as the sum of the (discounted) future cash flows that can be attributed to it. Cash flows that occur later (i.e. in the relatively remote future) are discounted by a greater extent than cash flows that occur earlier (i.e. in the near future) in order to account for uncertainty and the ability of investors to accrue interest income over time.

So how would we apply this concept to investments in sustainability projects? Well, organizations that invest in flex time programs, renewable energy sources, and local hospitals would be helping people, societies, and organizations conserve and generate resources. The future value of such resources, discounted appropriately to the current year, would represent the Net Present Value of such expenditures.

Is there anything wrong with such an approach? Of course, reasonable people may raise all sorts of concerns about it. For instance, individuals with a deep sense of morality and religiosity may protest that this technique (perhaps disturbingly) expresses charitable impulses in purely financial terms.

But if we need to start somewhere, why not start with NPV, the most commonly utilized valuation metric of the past century of financial analysis? On the one hand, it may strike us as a somewhat simple option. But on the other hand, as Friar William of Ockham once taught us, it may be wise — as a general rule, or “razor” — to prefer simpler scientific constructs to more complex ones.