Putting the Triple Bottom Line to Work
In late August, Robert Pojasek posted an article on these pages in which he largely agreed with assertions made by Wayne Norman and Chris MacDonald in their 2004 paper entitled, "Getting to the Bottom of the 'Triple Bottom Line'". While in no way disputing the view that organizations should strive to meet social, environmental and economic goals, Norman and MacDonald generally called the authenticity and usefulness of the Triple Bottom Line (TBL) construct into question, and claimed that a TBL methodology, per se, did not exist. They further argued that without a way to accurately measure the "bottom line" social and environmental performance of an organization, the TBL amounts to little more than a slogan or metaphor.
Times, however, have changed. At Deloitte, we're now using precisely the kind of methodology that did not exist when Norman and MacDonald wrote their article in 2004. The method we're using is the Social Footprint Method (SFM), which when applied more broadly (in a TBL sense), is known as the "context-based sustainability method." Thus, while Norman's and MacDonald's statement may have been true in 2004, circumstances have since changed. Four key insights have made this possible:
1. Sustainability performance is fundamentally about impacts on vital resources that people rely on for well-being. These are known as vital capitals. In the case of social and environmental sustainability (i.e., with respect to 'non-financial' performance), there are four such capitals: 1) natural capital, 2) human capital, 3) social capital, and 4) constructed, or built, capital. A TBL methodology that measures an organization's impacts on vital capitals, therefore, can constitute a basis for assessing non-financial performance. This capital-based interpretation of sustainability is the conceptual basis used in the formulation of the SFM and context-based sustainability measurement and reporting in general.
2. Sustainability measurement and reporting records impacts on vital capitals, but organizations can be obliged to have (or not have) considerably varied impacts on such capitals depending on their industry, their relationships with stakeholders, and their operating model.
Social and environmental metrics for organizations are therefore necessarily specific to an organization. Each company's metrics, however, do fall into larger categories that can be standardized across organizations. What, then, are the related categories? They are precisely the four vital capitals listed above, each of which maps to either the social, environmental or economic bottom line (see Table 1 below).
3. One of the main concerns with TBL methodology is the idea that it is possible to quantify a firm's social performance in a way that arrives at a 'bottom line' result.
In the SFM (and context-based sustainability more generally), we accomplish this quantification by utilizing a general specification for non-financial metrics called sustainability quotients.
The numerator of such a quotient represents an organization's impact on a vital capital, and the denominator represents a norm for what such an impact must or ought to be in order to ensure stakeholder well-being. The latter is typically determined by reference to environmental limits or social conditions in the world. We can do this calculation for all sustainability duties and obligations an organization may have. The units of measurement are variable, sometimes in monetary form as a proxy, but they must be consistent for both the numerator and the denominator of a given quotient. Once a quotient has been determined, the resulting score can be plotted on a common sustainability performance scale. For social and economic impacts, scores of > 1.0 signify sustainable operations (performance meets or exceeds stakeholder needs); for environmental impacts, scores of < 1.0 do the same (performance falls within environmental limits).
Next, the scores are combined; as the numerical manner in which quotient scores are computed makes it completely possible to combine them to create aggregated social, environmental and economic scores for an organization. To do this, we calculate the percentage of sub-bottom line scores that fall in the sustainable range of our performance scale, such that the highest possible unitary or net non-financial bottom line score would be 1.0, or 100 percent. These can then be averaged to create a holistic TBL score. Here it is important to understand that true TBL measures include economic, but not financial, performance. Economic performance reflects the company's impacts on the broader economies in which it does business, whereas financial performance, not directly referenced in the TBL, is captured by financial reporting.
As a quick illustration of the SFM in action, consider livable wage standards as a case in point. For companies that agree to hold themselves accountable to providing a livable wage as a standard of performance, the denominator of each organization's associated quotient might express a norm of paying all employees no less than a livable wage, whereas the numerator would record the actual proportion of employees paid according to the same standard. Any quotient score of less than 1.0 would therefore signify an instance of social unsustainability, since the actions involved would arguably fail to meet a company's own standards of performance relative to ensuring stakeholder well-being (employee well-being, in this case).
4. Another historical issue with TBL is the difficulty stakeholders might have in making comparisons between organizations' reports.
Indeed, how can stakeholders compare organizations' non-financial performance in the absence of a standardized methodology for measuring and reporting the social and environmental bottom-line performance of a firm? The SFM resolves this issue by providing just such a methodology. Does this mean that every organization's metrics and indicators should necessarily be the same as every other's? Of course not. As long as organizations have different stakeholders and different associated duties and obligations owed to them, their respective metrics and indicators will vary accordingly.
But this is true for all forms of performance reporting; financial reporting has many of the same variations. Is every firm's chart of accounts, for example, identical with every other's? Are their actual assets, liabilities, income sources and expenses always identical? Of course not. Instead, we have standardized categories for such things and generally accepted rules for how to populate them with company-specific data. The same can be said for non-financial reporting, as indeed it is for the SFM and its broader application, context-based sustainability.
Users of the SFM and context-based sustainability management are now routinely benefiting from the kinds of TBL tools and methods unavailable at the time of Norman's and MacDonald's paper. Jed Davis, Director of Sustainability at Agri-Mark, Inc., an avid SFM user, offers a first-hand testimonial:
"For companies like ours that are committed to measuring and managing our sustainability performance, we seek a rigorous, useful, quantitative tool. We've found that context-based metrics such as those utilized in the Social Footprint Method fit this need very well. Unlike any other method we know of, the context-based approach allows us to measure our impacts – economic, social and environmental – against performance standards (i.e., our actual impacts compared to impacts owed to our stakeholders). The quantitative reporting that follows tells us how well we're doing and where we should be focusing our efforts. This is incredibly valuable. Without it, we'd be flying blind."
In sum, while there may not have been a quantitative method for computing meaningful bottom lines for social, environmental and economic performance in 2004, that is not the case today. The SFM, and context-based sustainability more broadly, comprises at least one such method, and there are certainly others. Moreover, the SFM case shows that social, environmental and economic scores are indeed commensurable and can therefore be combined into unitary bottom line scores, albeit non-monetary ones.
In the final analysis, then, the question that a sustainability metric must answer is not a monetary one at all; rather, it is a normative one: Were the organization's impacts on vital capitals what they should have been in order to ensure stakeholder well-being?
Once we manage to quantify both actual and normative impacts, numerical bottom-line scores naturally fall out. Non-financial measurement and reporting in a true bottom-line sense can in fact be done, as experiences from companies like Agri-Mark have shown. What was admittedly the case in 2004 is no longer the case today.
Mark W. McElroy, Ph.D. is the director of research at Deloitte's Center for Sustainability Performance in Waltham, Mass., and leader of the performance management service offering for Deloitte's Enterprise Sustainability group. He can be reached at [email protected].
Map photo CC-licensed by Flickr user Caveman 92223.