TCS Daily

Triple Threat

By Stephen W. Stanton - July 11, 2003 12:00 AM

"The triple bottom line (TBL) focuses corporations not just on the economic value they add, but also on the environmental and social value they add -- and destroy. At its narrowest, the term 'triple bottom line' is used as a framework for measuring and reporting corporate performance against economic, social and environmental parameters."

This definition comes from SustainAbility, a for-profit consultancy, selling tools to measure the two new bottom lines. We are all familiar with the old bottom line: profits, or perhaps cash flows. The importance of that bottom line is obvious. Does the firm create economic value or destroy it? If a company demonstrates consistent profitability, there is a positive return on capital. The company is worth something.

The reason people invest in the first place is to make a profit. We buy stock today expecting to receive cash flows tomorrow. In fact, we expect to receive more than we invested. Otherwise, we would just hold cash in a bank, or a mattress. (Why take a risk on a stock if you expect to lose money?) Not only do we expect a positive return, we demand that the expected risk/return profile of a particular stock must be superior to competing investment options in the marketplace.

How the other two "bottom lines" add value is a bit unclear. A company that squanders environmental resources is wasting money. Fuel inefficiency can cost a manufacturer millions of dollars each year. But that would show up in the financial bottom line. So why is an environmental bottom line needed?

Similarly, the social bottom line is an attempt to quantify a firm's impact on other stakeholders, mainly employees. Are the labor practices fair or exploitative? However, this too impacts a firm's profits. A firm with a reputation as an exemplary employer has no trouble attracting and retaining top talent at below market salaries. Conversely, a firm that mistreats workers must accept higher compensation costs and poorer performance given its disgruntled workforce and high turnover. Labor policies can also impact the other side of the ledger. As Kathie Lee Gifford can tell you, when customers find out about your sweatshops, revenues can plummet. So why do we need a separate "social bottom line"?

The answer is money. Some people will pay more and expect less if you paint your company green. There are at least three specific ways TBL reporting and sustainability can create value for a typical firm.
  1. A certified "sustainable" firm gains access to cheaper capital. Billions of dollars have been poured into "socially responsible investment" funds (SRI) over the past decade. Traditional investors seek maximum returns regardless of the businesses underlying the securities. In contrast, SRI funds limit their investment options to a set of securities that finance "sustainable" companies. From this smaller investment pool, asset managers choose the best performers. Simple supply and demand suggest that green investors will fare worse than traditional investors, as a growing number of SRI funds bid up the limited supply of qualifying securities. In other words, SRI investors are willing to pay more to earn less. This provides sustainable firms with access to cheaper capital than their competitors.

  2. A company that has a reputation for sustainability has a competitive advantage in attracting throngs of green consumers. Millions of people choose Ben & Jerry's over Haagen-Dazs to support the liberal causes slapped on the labels. Consumers are willing to overpay to "do good." The sustainable business enjoys premium pricing power and high sales volumes.

  3. A sustainable firm will also have an easier time attracting employees who buy into the whole sustainability thing. Once they are convinced that their jobs satisfy the highest levels in Maslow's hierarchy of needs, employees are willing to work for a lot less money than they could get elsewhere. The spare cash goes to stockholders, whose favorite kind of green bears pictures of dead presidents.

The fourth and most direct way sustainability can make money for a company is familiar to anybody who watches "The Sopranos." The sustainability industry is a lot like the mob's traditional "protection" racket. Those in the "business" create a problem for everybody in the neighborhood. Then they charge exorbitant fees to help deal with the problem, which is not curable, only treatable. Local businesses have to pay mob protection money forever. Fortune 500 companies have to report triple bottom line performance indefinitely, or at least as long as the pressure holds up.

And the pressure will continue. TCS editor Nick Schulz highlighted some of the more obvious links between companies pushing for more sustainability regulations and those that stand to profit from their passage. Actually, "links" is not the right word, since they are the exact same organizations.

These organizations have many accomplices that fall into two major categories: unwitting and enthusiastic. The first group consists of useful idiots, well meaning individuals ranging from misguided college student protestors to the limousine liberals that pour millions into SRI funds. For this group, some basic education may change their minds.

More diabolical are the informed allies of the CSR movement. They realize the harm they are inflicting on society, but they go along with it to advance their own personal agendas. Some are strictly opportunists, exploiting the sustainability movement to gain wealth and power. Others are ideologues, advancing the economically destructive movement to achieve an earthy-crunchy egalitarian nirvana (one part Castro, one part fuel cells).

What triple bottom liners rarely admit is that one bottom line usually covers everything. Mismanaging human resources typically hurts profits. Screwing up the environment usually attracts the attention of NGOs who alert the public. Environmental shenanigans alienate potential customers, frustrate employees, and attract expensive regulation and litigation, all bad for profits.

In the end, profits are the only thing that matter anyway. Corporate directors and executives have a legal duty to maximize shareholder wealth, which is usually calculated as the net present value of discounted cash flows. So by law, executives must generally maximize expected future cash flows.

At this point in the debate, the triple bottom liners recite their mantra: Though all profitable companies will inject economic wealth into the economy, only a sustainable company will not destroy society's wealth in terms of its environmental and human resources.

But how does one measure environmental bottom line? The concept is inherently subjective. Take greenhouse gases for example. Are they a serious problem? Is a partial reduction in emissions a worthwhile solution? Many environmentalists answer yes to both questions. Most of the facts prove otherwise. In Penn & Teller's aptly titled "Bullshit" reality series, the magicians cum crusaders debunk many of the claims made by extreme greens. They even showed a revealing interview with Patrick Moore, a founding member and former Director of Greenpeace International. Dr. Moore quit Greenpeace because its mission had been perverted by political opportunism and junk science. When there is little agreement about what environmentalism really is, what value could there be in an environmental bottom line?

Similarly, there is little agreement about what constitutes social justice. Which is more important, equality of condition or quality of life? Should a business offer people in Southeast Asia a job that pays $15 a day, or is it better to let them stay jobless and penniless? Or must a company sacrifice profits by offering first world wages in third world backwaters?

Triple bottom line reporting is just a bad idea. The very notion is absurd that a company would pay money to have outside consultants "objectively" report on their "eco-friendliness" and "social responsibility."

Better answers already exist. There are consumer watchdog groups, like the Better Business Bureau. There are environmental advocacy groups and think-tanks. Mistreated workers can go to for a better deal. The government is chock full of agencies whose mission it is to protect the environment and safeguard workers. We have EPA, OSHA, and DOL at the federal level, and a plethora of state equivalents.

We also have a large and growing number of media channels. Even if a company could sneak some environmentally damaging business practices past the major media outlets, it would have a hard time escaping the attention of Matt Drudge or the Blogosphere. Even without triple bottom line reporting, corporate dirty laundry will not stay hidden.

Most importantly, we have markets. If workers do not like their treatment, they can find a job somewhere else. If consumers and investors object to a company's environmental record, they will take their dollars elsewhere. In the end, those dollars are all that matter.

The bottom line is still the bottom line.

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