TRIPLE BOTTOM LINE ACCOUNTING

TRIPLE BOTTOM LINE ACCOUNTING

INTRODUCTION

Globalization has brought with it a wide realization that companies do not operate in isolation, but can have significant impacts on the environment and people at local, national and global levels (International Forum on Globalization, 2008). For the purpose of measuring the impact of business activities on the environment and the society, Hamilton (2001) noted that the conventional system of business and national accounts is inadequate, because it does not deal with the priceless environmental and social externalities, which are important in a sustainable development thus requires an extension of the standard framework. This has led to an increasing awareness of the “triple bottom-line” of business success – measuring the business not only in its financial performance, but by its social and environmental impact as well (Henri & Journeault, 2006).

The triple bottom line (TBL) refers to the social, environmental, and economic value of an investment. The concept is increasingly salient to economic development related fields such as business, finance, planning, and real estate. Triple bottom line is an accounting framework with three parts: social, environmental (or ecological) and financial. Some organizations have adopted the TBL framework to evaluate their performance in a broader perspective to create greater business value. In traditional business accounting and common usage, the “bottom line” refers to either the “profit” or “loss”, which is usually recorded at the very bottom line on a statement of revenue and expenses.

OBJECTIVES OF THE STUDY

The objectives of this  seminar paper is to examine the concept of triple bottom line accountings standard so as ascertain its relevant to the accounting systems of an organization and its impact on the social, economic and environmental effects of the firms activities on the local people.

SCOPE OF THE STUDY

Aspects of the Triple Bottom Line (TBL) concept are addressed in economic development literature; however, a clear definition of TBL economic development is lacking. Furthermore, little research has been conducted regarding how economic development professionals view and practice the concept. This study addresses those gaps, paving the way for more productive engagement with an important and timely topic. The study begins with an introduction to the TBL concept, review literatures on TBL; discuss the findings based on the reviewed literatures and draw conclusions.

LIMITATIONS

This seminar paper is limited to the above stated scope because of time, lack of available materials and financial implications of the research. However, the researcher makes necessary effort within his reach to ensure that the seminar paper is researched and conducted to a reasonable conclusion.

LITERATURE REVIEW

The Triple Bottom Line Concept

The triple bottom line term was coined in the 1990s by business consultant John Elkington to describe economic, environmental, and social value of investment that may accrue outside a firm’s financial bottom line (Elkington, 2004). The TBL approach aims to more accurately value assets and leverage resources, so that capital is employed as efficiently and effectively as possible. The concept is sometimes referred to as the 3Ps (people, planet, profit), triple value adding (Roberts & Cohen, 2002), and blended value (Emerson, 2003). Triple bottom line thinking is informed by and relates to the concept of sustainable development—the premise that development should occur in ways that meet the needs of current generations while maintaining conditions and opportunities for future generations to do the same (World Commission on Environment and Development, 1987). Inherent in the definition of sustainable development are concepts of environmental stewardship and inter- and intra-generational equity.

Efforts to define and address sustainability were born from the recognition that existing development patterns cannot proceed without jeopardizing the environmental systems necessary to sustain life and economies, and that significant disparity within and between generations is neither sustainable, ethical, nor in tune with development goals. Triple bottom line and sustainability concepts have gained traction in fields related to economic development including business, planning, finance, and real estate. This is evidenced by the growing number of journals, books, professional organizations, certifications, and conferences addressing sustainability in related topics such as impact investing, responsible property investment, and corporate responsibility. As discussed below, aspects of the TBL are addressed in economic.

According to Bernardez (2005), sustainable development is a concept, which underscores that the rate of consumption or use of natural resources should approximate the rate at which these resources can be sustained or replaced. It is a development process that aimed at achieving the needs of the present generation without depriving the future generation the ability to achieve their own needs. There are several approaches to achieving sustainable development. This paper is however concerned with the application of accounting framework in sustainable development effort. Spreckley (1981) argued that considering the impacts of business activities on the environment and society, enterprises should measure and report on social, environmental and financial performance to evaluate their contributions to sustainable development. He therefore articulated the triple bottom line in a publication called Social Audit – A Management Tool for Co-operative Working. The phrase “triple bottom line” was coined by John Elkington in his 1997 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business (Brown, et al, 2006). A Triple Bottom Line Investing group advocating and publicizing these principles was founded in 1998 by Robert J. Rubinstein.

Over the last decades, environmentalists and social justice advocates have struggled to bring a broader definition of “bottom line” into public consciousness, by introducing full cost accounting. For example, if a corporation shows a monetary profit, but their asbestos mine causes thousands of deaths from asbestosis, and their copper mine pollutes a river, and the government ends up spending taxpayer money on health care and river clean-up, how do we perform a full societal cost benefit analysis? The triple bottom line adds two more “bottom lines” social and environmental (ecological) concerns (Magee & Scerri, 2012).

For reporting their efforts companies may demonstrate their commitment to CSR through the following: top-level involvement- CEO, Board of Directors, policy investments, programmed, signatories to voluntary standards, principles – UN Global Compact-Ceres Principles, and reporting – Global Reporting Initiative(Bernardez, 2005; Kaunfman, 2011 ).

Dixon (1994) identified the following functions of triple bottom-line accounting: it assists corporate managers in targeting costs reduction, improving quality in reinforcing quality’ principles; reveals the firm’s financial, social and environmental assets and liabilities, hence employees are motivated to search for creative ways of reducing the liabilities; encourages changes in processes to reduce waste, resources used, recycle waste or identify markets for waste; allocates costs to the appropriate product, process, system or facility and thus reveals costs to  responsible manager; provides better estimates of the true cost to the firm of producing a product and this improves pricing, thereby increasing sales and consequently profit; reassures shareholders and investors about the operations and performance of the company and this enables managers reduce the information gap between them and investors, thus gaining investors’ confidence. This requires the firm to lower its cost of capital, raise its stock valuation multiples, increase stock liquidity and enhance interest by institutional investors; and indicates the level of business dependences on environmental resources thereby serving as a premonition to the business on its use of natural resources and the impact on the society (Matthews, 1993).

Economic Development in Practice

Having defined TBL and sustainable economic development, we consider whether and how the concept has been addressed in practice. Research regarding how economic development practitioners understand and prioritize TBL or sustainable development is sparse, though consistently identifies the population as having limited engagement with sustainability themes. Jepson (2003) surveyed 500 certified city planners and found that those who self-identify as economic developers offered slightly lower support for ecologically focused sustainable development activities than planners with other specializations. Zeemering (2009) utilized Q methodology with 28 economic development officials in the nine-county San Francisco Bay Area and found that participants do not hold a unified conceptualization of sustainability (e.g., varying levels of emphasis on economic, environmental, and social factors) and that prioritization of potential actions is influenced somewhat by context (e.g., whether a factor is constrained in their jurisdiction or viewed as within the organization’s scope of responsibility). Grodach (2011) explored barriers to sustainable economic development in 15 Texas cities through document analysis and interviews with economic development officials. He found that economic development officials rarely mentioned TBL themes when asked to define the purpose of economic development, but did mention TBL themes when asked to identify important assets for economic development (e.g., human capital, educated workforce, quality of life, accessibility, and regional collaboration).

Sustainability themes were viewed primarily in relation to how they may negatively impact future growth and as outside the economic developer’s control. A competitive and reactive approach to development was identified as a barrier, along with a conventional economic development mindset that emphasizes attention to economic growth over social equity and environmental protection.

DISCUSSION OF FINDINGS

Triple bottom line and sustainable economic development understand the purpose of economic development to be improved well-being and quality of life through the creation of jobs and wealth, and the process of economic development to include creation, expansion, retention, and recruitment, of jobs and businesses through a mix of techniques. These techniques include, for example, business assistance, workforce development, and the cultivation of networks, infrastructure, and amenities that support business development and influence business location decisions. It adds to this conventional view a recognition that economic development is inextricably connected to environmental and social factors, and that all three must be addressed for economic development to succeed.

The research indicates that economic development professionals generally favor the consideration of economic, environmental, and social dimensions when making economic development investments, yet few do so. A number of interrelated factors may contribute to this gap. First, economic development is situated in a broader context in which understanding of and support for TBL concepts may be limited. Research in related areas of planning, administration, and sustainability suggests that organizational and community characteristics impeding uptake and implementation of TBL concepts may include insufficient capacity, a weak understanding of and support by key organizational and political leaders, and low socioeconomic status (Conroy, 2006; Grodach, 2011; Hammer, 2010; Hammer, Allen, &Meier, 2010; Johnson & White, 2010; Saha, 2009; Saha & Paterson, 2008; Svara, Watt, & Jang, 2013; Wang, Hawkins, Lebredo, & Berman, 2012). Second, economic development occurs in a highly competitive environment where much of what affects outcomes is outside the jurisdiction’s control and success is narrowly defined. Furthermore, TBL economic development may be impeded by a lack of integration and coordination among various policies and programs, with existing programs often at odds with TBL principles, and trade-offs between economic, environmental, and social goals assumed to be required. Finally, TBL or sustainability principles are not core to academic and professional accreditation for economic developers, which likely translates into a lack of knowledge and skills to infuse TBL concepts into practice. For example, accreditation as a Certified Economic Developer or Accredited Economic Development Organization does not require any coverage or proficiency with respect to TBL or sustainability theory or practice.

CONCLUSION

Pareto principle posits that a development process that makes one better off and another worse off, is not desirable. In light of this, a business firm that achieves its financial performance and causes environmental degradation and social imbalance in the society where it operates needs to be called to order for sustainable development to strive. In this study, it was observed that triple bottom-line accounting operationalized as financial performance, social performance, and environmental performance, has a significant relationship with sustainable development. These findings agree with the works of Kaufman (2011), and Dixon (1994). This study confirmed that increase in the adoption of triple bottom-line accounting will result in about 59% increase in sustainable development in Nigeria.

REFERENCES

Brown, D., Dillard, J., & R. S. Marshall. (2006). “Triple bottom line: A business metaphor for a social construct.” Portland, Portland State University School of Business Administration Press.

Dixon, J. (1994) “Economic analysis of environmental impact” London, Earthscan Publishers Ltd.

Hamilton, K. (2001) “Indicators of sustainable development” Genuine Savings, The World Bank; Washington.

Henri, J.F., & Journeault, M. (2006) “Environmental performance indicators” An Empirical Study of Canadian Manufacturing Firms. Journal of Environmental Management, 86, 143-149.

James, P & Scerri, A. (2010) Auditing cities through circles of sustainability: In Amen, M., Toly, N.J., Carney, P. L., & Segbers, K. (ed) Cities and Global Governance, 111–36.

Magee, L. & Scerri, A. (2012) “From issues to indicators” A Response to Grosskurth & Rotmans’, Local Environment, 17(8), 915-933.

Matthew, M., R. (1993) “The emergence of ecological & environmental accounting” socially responsible accounting. London, Chapman and Hall.

Quarter, J., & Mond, R. (2007) “Social accounting for business” non-profits & cooperatives in Crolia; Academic Research Review 8 (2), 34-41.

Scerri, A. & James, P. (2010) “Accounting for sustainability” Combining qualitative & quantitative research in developing ‘indicators’ of sustainability”. International Journal of Social Research Methodology13: 41-45.

Spreckley, F. (1981) “Social audit: A management tool for co-operative working” Working Paper 6.

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