The power of the Triple Bottom Line

ACCOUNTANCY

Triple Bottom Line Reporting (TBL) refers to the expansion of the traditional financial reporting framework to incorporate environmental and social performance in addition to financial performance. The term TBL reporting has become increasingly fashionable in management, consulting, investing and NGO circles. The adoption of sustainable reporting by more and more companies reflects the awareness among companies that it is not only the financial bottom line, but also the social and environmental bottom lines which count. The slogan, 'people, planet and profit', succinctly captures this spirit.

The origins of TBL lie in the practice of environmental reporting. The concept of public environmental reporting emerged strongly from the United Nations Conference on Environment and Development held in Rio de Janeiro in 1992. In the following decade, leading businesses recognised potential benefits of environmental reporting and began voluntarily disclosing environmental performance in public documents. The next evolution in voluntary reporting was to expand environmental reporting to include social and economic criteria "" the triple bottom line (TBL). In 1997, CERES, a coalition of labour, investor and environmental advocacy groups, founded the Global Reporting Initiative (GRI). In 2000, GRI released its first Sustainability Reporting Guidelines. This was updated in September 2002. The guidelines provide the generally accepted parameters for TBL. They provide detail parameters against which the performance is to be measured. For example, as regards occupational health and safety, a company has to report percentage of total workforce represented in formal joint management "" worker health and safety committees; rates of injury, occupational diseases, lost days and absenteeism, and number of work related fatalities by region; education, training counseling, prevention and risk control programmes in place regarding serious diseases; and health and safety topics covered in formal agreements with trade unions.

The term TBL reporting itself, however, might be somewhat misleading. Bottom line in financial reporting refers to the net profit or loss reported in the income statement. The use of the term TBL gives an impression that performance against different parameters in environmental protection and social development are measurable and can be aggregated like incomes and expenses and some measures like net profit or loss can be estimated. This is not correct. It is difficult, if not impossible to measure performance against most parameters using some common scale of measurement like money. Therefore, the question of aggregation does not arise. It is futile to make efforts to present a score card like profit and loss account. It is, therefore, preferable to use the term 'sustainable reporting' rather than TBL reporting.

The KPMG International Survey of Corporate Sustainability Reporting (year 2000) reported that 45 per cent of the world's top 250 companies publish a separate corporate report with details of environmental and/or social performance, up from 35 per cent in 1999. The survey found that the incidence of reporting varies significantly across the globe. Out of the top 100 companies in each of the 19 countries surveyed, Japan had the highest number of companies producing corporate environment or social reports (72 per cent), followed by the UK (49 per cent), USA (36 per cent), and the Netherlands (35 per cent). India was not included in the survey.

No one can question the need for sustainability reporting. Stakeholders expect environmentally and socially responsible behaviour from companies, particularly from large companies which have huge resources under their control. Therefore, many large companies voluntarily report their performance against environmental and social parameters.

Some believe that increasing adoption of Sustainability Reporting Guidelines by companies reflects the transition to a new 'stakeholder society' from the traditional perception that companies should focus only on creating shareholder value. But this is not true. Companies are valued in the capital market based on their financial performance. Investors do not consider the environmental and social performance in valuing a company. Companies focus on 'socially responsible investment' and voluntarily disclose performance against environmental and social parameters because these help to improve financial performance. Many companies surveyed by KPMG in the year 2000 reported that embracing sustainability can enhance business performance, including: reducing operating costs and improving efficiency, developing new products and services for access to new markets, improving reputation and brand value through integrity management, recruiting and retaining excellent people, and reducing company's liabilities through integrated risk management.

The description of 'sustainability' provided by Ann Moore, chairman and CEO of Time Inc, in the 2005 sustainability report reflects the general perception about sustainability among corporate leaders. She says, "This ungainly word has come into vogue in recent years because 'protecting the environment' does not begin to describe all the dimensions of a corporation's responsibility. Sustainability for us refers to creating a durable business that provides jobs to communities and returns to shareholders for a long haul and that protects all our human and natural resources. A sustainable company will deliver at least as many benefits to future generations as it does to people alive today. Meeting economic, social and environmental goals are the three pillars of sustainability, and those goals are not in conflict. In our drive for sustainability, we are proving that a company can be thriving, profitable enterprise while still supporting the communities and the environment on which we all depend. In fact, there is no other path for lasting success."

If, we expect companies to focus on 'sustainability', should we not make it mandatory for companies to adopt sustainability reporting? Should we leave it to companies to report selectively? Many companies disclose positive contributions toward sustainable development but do not report negative contributions. For example, ITC Limited in its 2006 report indicated its contribution towards sustainable development but has not indicated how much of its products (e.g. cigarettes) have affected social health and contributed other kind of environmental and social degradation. ITC deserves applause for adopting sustainable reporting. But we should not close our eyes to the weakness of the report.

Empirical research shows that there is temptation among managers to disclose good news and to suppress bad news. Therefore, regulators should consider making sustainable reporting mandatory for companies. Companies should issue sustainability report audited by a third party. In fact, many respected companies already get their sustainability report audited by a third party to ensure its credibility.

One article published in the Business Ethics Quarterly in 2003 observes, "The concept of triple bottom line turns out to be a good old-fashioned single bottom line plus vague commitments to social and environmental concerns." It is not that all companies which issue sustainability reporting lack concrete and verifiable commitments to sustainability. But the danger that such reports might be misleading is real, particularly because companies without any serious commitment towards sustainability may issue the report without worrying too much about comparability with other firms. Moreover, in absence of any regulation and mechanism of filing such reports with a central authority, a company may choose some indicators in one year and drop some of them in a future year if measurements against those indicators are not favourable to the company.

Although, it may appear cynical to criticise an emerging healthy practice as a fashion or fad, it is the time for reality check. Some authority should critically evaluate the current practice of sustainability reporting. There is an urgent need to set out clear and meaningful principles of reporting and regulate sustainable reporting by companies. It will help companies to integrate environmental and social performance with corporate culture and will enforce accountability. In absence of the same it will be like a company's adoption of a 'code of ethics', which tells us little about the commitment of the company to the principles expressed in the document.

The author is professor, finance & control at IIM-C