The Triple Bottom Line: What Is It and How Does It Work?

Timothy F. Slaper, Ph.D.: Director of Economic Analysis, Indiana Business Research Center, Indiana University Kelley School of Business

Tanya J. Hall: Economic Research Analyst, Indiana Business Research Center, Indiana University Kelley School of Business ustainability has been an performance: social, environmental putting a dollar value on wetlands often mentioned goal of and financial. This differs from or endangered species on strictly Sbusinesses, nonprofits and traditional reporting frameworks philosophical grounds. Others governments in the past decade, yet as it includes ecological (or question the method of finding measuring the degree to which an environmental) and social measures the right price for lost wetlands or organization is being sustainable or that can be difficult to assign endangered species. pursuing sustainable growth can be appropriate means of measurement. Another solution would be to difficult. The TBL dimensions are also calculate the TBL in terms of an John Elkington strove to measure commonly called the three Ps: people, index. In this way, one eliminates sustainability during the mid-1990s planet and profits. We will refer to the incompatible units issue and, by encompassing a new framework these as the 3Ps. as long as there is a universally to measure performance in Well before Elkington introduced accepted accounting method, allows corporate America.1 This accounting the sustainability concept as “triple for comparisons between entities, framework, called the triple bottom line,” environmentalists e.g., comparing performance between bottom line (TBL), went beyond the wrestled with measures of, and companies, cities, development traditional measures of profits, return frameworks for, sustainability. projects or some other benchmark. on investment, and shareholder Academic disciplines organized An example of an index that value to include environmental and around sustainability have multiplied compares a county versus the social dimensions. By focusing on over the last 30 years. People inside nation’s performance for a variety of comprehensive investment results— and outside academia who have components is the Indiana Business that is, with respect to performance studied and practiced sustainability Research Center’s Innovation Index. along the interrelated dimensions would agree with the general There remains some subjectivity of profits, people and the planet— definition of Andrew Savitz for even when using an index however. triple bottom line reporting can TBL. The TBL “captures the essence For example, how are the index be an important tool to support of sustainability by measuring the components weighted? Would each sustainability goals. impact of an organization’s activities “P” get equal weighting? What about Interest in triple bottom line on the world ... including both the sub-components within each “P”? accounting has been growing across its profitability and shareholder Do they each get equal weighting? Is for-profit, nonprofit and government values and its social, human and the people category more important sectors. Many businesses and environmental capital.”2 than the planet? Who decides? nonprofit organizations have adopted The trick isn’t defining TBL. The Another option would do away the TBL sustainability framework to trick is measuring it. with measuring sustainability using evaluate their performance, and a dollars or using an index. If the users similar approach has gained currency Calculating the TBL of the TBL had the stomach for it, with governments at the federal, state The 3Ps do not have a common each sustainability measure would and local levels. unit of measure. Profits are stand alone. “Acres of wetlands” This article reviews the TBL measured in dollars. What is would be a measure, for example, concept, explains how it can be useful social capital measured in? What and progress would be gauged based for businesses, policy-makers and about environmental or ecological on wetland creation, destruction or economic development practitioners health? Finding a common unit of status quo over time. The downside and highlights some current measurement is one challenge. to this approach is the proliferation examples of putting the TBL into Some advocate monetizing all of metrics that may be pertinent to practice. the dimensions of the TBL, including measuring sustainability. The TBL social welfare or environmental user may get metric fatigue. The Triple Bottom Line Defined damage. While that would have Having discussed the difficulties The TBL is an accounting framework the benefit of having a common with calculating the TBL, we turn that incorporates three dimensions of unit—dollars—many object to our attention to potential metrics

4  Indiana University Kelley School of Business, Indiana Business Research Center for inclusion in a TBL calculation. Following that, we will discuss how businesses and other entities have The level of the entity, type of project and applied the TBL framework. the geographic scope will drive many of the

What Measures Go into the decisions about what measures to include. Index? There is no universal standard method for calculating the TBL. Neither is there a universally subject matter experts and the ability would help organizations identify accepted standard for the measures to collect the necessary data. While the impacts a project or policy would that comprise each of the three TBL there is significant literature on the have on the area. Specific examples categories. This can be viewed as a appropriate measures to use for include: strength because it allows a user to sustainability at the state or national • Sulfur dioxide concentration adapt the general framework to the levels, in the end, data availability • Concentration of nitrogen needs of different entities (businesses will drive the TBL calculations. oxides or nonprofits), different projects or Many of the traditional sustainability • Selected priority pollutants policies (infrastructure investment or measures, measures vetted through • Excessive nutrients educational programs), or different academic discourse, are presented • Electricity consumption geographic boundaries (a city, region below. • Fossil fuel consumption or country). • Solid waste management Both a business and local Economic Measures • Hazardous waste management government agency may gauge Economic variables ought to be • Change in land use/land cover environmental sustainability in variables that deal with the bottom the same terms, say reducing the line and the flow of money. It could Social Measures amount of solid waste that goes into look at income or expenditures, Social variables refer to social landfills, but a local mass transit taxes, business climate factors, dimensions of a community or region might measure success in terms of employment, and business diversity and could include measurements of passenger miles, while a for-profit factors. Specific examples include: education, equity and access to social bus company would measure success • Personal income resources, health and well-being, in terms of earnings per share. • Cost of underemployment quality of life, and social capital. The The TBL can accommodate these • Establishment churn examples listed below are a small differences. • Establishment sizes snippet of potential variables: Additionally, the TBL is able • Job growth • Unemployment rate to be case (or project) specific or • Employment distribution by • Female labor force participation allow a broad scope—measuring sector rate impacts across large geographic • Percentage of firms in each • Median household income boundaries—or a narrow geographic sector • Relative poverty scope like a small town. A case • Revenue by sector contributing • Percentage of population with (or project) specific TBL would to gross state product a post-secondary degree or measure the effects of a particular certificate project in a specific location, such as Environmental Measures • Average commute time a community building a park. The Environmental variables should • Violent crimes per capita TBL can also apply to infrastructure represent measurements of natural • Health-adjusted life expectancy projects at the state level or energy resources and reflect potential Data for many of these measures policy at the national level. influences to its viability. It could are collected at the state and national The level of the entity, type of incorporate air and water quality, levels, but are also available at the project and the geographic scope will energy consumption, natural local or community level. Many are drive many of the decisions about resources, solid and toxic waste, and appropriate for a community to use what measures to include. That said, land use/land cover. Ideally, having when constructing a TBL. However, the set of measures will ultimately long-range trends available for as the geographic scope and the be determined by stakeholders and each of the environmental variables nature of the project narrow, the set

Indiana Business Review, Spring 2011  5 of appropriate measures can change. The Genuine Progress Indicator companies do not have an index- For local or community-based (GPI), for example, consists of 25 based TBL, one can see how they projects, the TBL measures of success variables that encompass economic, measure sustainability using the are best determined locally. social and environmental factors. TBL concept. Cascade Engineering, There are several similar Those variables are converted into for example, a private firm that does approaches to secure stakeholder monetary units and summed into a not need to file the detailed financial participation and input in designing single, dollar-denominated measure.6 paperwork of public companies, has the TBL framework: developing Minnesota developed its own identified the following variables for a decision matrix to incorporate progress indicator comprised of 42 their TBL scorecard: public preferences into project variables that focused on the goals • Economic planning and decision-making,3 of a healthy economy and gauged o Amount of taxes paid using a “narrative format” to solicit progress in achieving these goals.7 • Social shareholder participation and There is a large body of literature o Average hours of training/ comprehensive project evaluation,4 on integrated assessment 8 and employee and having stakeholders rank and sustainability measures that grew o From welfare to career weigh components of a sustainability out of the disciplines that measure retention framework according to community environmental impact. These are o Charitable contributions priorities.5 For example, a community not constrained by strict economic • Environmental/Safety may consider an important measure theory for measuring changes in o Safety incident rate of success for an entrepreneurial social welfare.9 Researchers in o Lost/restricted workday rate development program to be environmental policy argue that o Sales dollars per kilowatt the number of woman-owned the three categories—economic, hours companies formed over a five-year social and environmental—need o Greenhouse gas emissions time period. Ultimately, it will be to be integrated in order to see the o Use of post-consumer and the organization’s responsibility complete picture of the consequences industrial recycled material to produce a final set of measures that a regulation, policy or economic o Water consumption applicable to the task at hand. development project may have and to o Amount of waste to landfill assess policy options and tradeoffs. Variations of the Triple Bottom Nonprofits Line Measurement Who Uses the Triple Bottom Line? Many nonprofit organizations have The application of the TBL Businesses, nonprofits and adopted the TBL and some have by businesses, nonprofits and government entities alike can all use partnered with private firms to governments are motivated the TBL. address broad sustainability issues by the principles of economic, that affect mutual stakeholders. environmental and social Businesses Companies recognize that aligning sustainability, but differ with regard The TBL and its core value of with nonprofit organizations makes to the way they measure the three sustainability have become good business sense, particularly categories of outcomes. Proponents compelling in the business world due those nonprofits with goals of who have developed and applied to accumulating anecdotal evidence economic prosperity, social sustainability assessment frameworks of greater long-term profitability. well‑being and environmental like the TBL encountered many For example, reducing waste from protection.11 challenges, chief among them, packaging can also reduce costs. The Ford Foundation has funded how to make an index that is both Among the firms that have been studies that used variations of comprehensive and meaningful and exemplars of these approaches are the TBL to measure the effects of how to identify suitable data for the General Electric, Unilever, Proctor programs to increase wealth in variables that compose the index. and Gamble, 3M and Cascade dozens of rural regions across the Engineering.10 Although these United States.12 Another example

Companies recognize that aligning with nonprofit organizations makes good business sense, particularly those nonprofits with goals of economic prosperity, social well-being and environmental protection.

6  Indiana University Kelley School of Business, Indiana Business Research Center is RSF Social Finance,13 a nonprofit organization that uniquely focuses The concept of the triple bottom line can be on how their investments improve all three categories of the TBL. While used regionally by communities to encourage RSF takes an original approach to economic development growth in a sustainable the TBL concept, one can see how the TBL can be tailored to nearly manner. any organization. Their approach includes the following: • Food and Agriculture (economic): Explore new the baseline of “doing nothing” or sustainable economy in Cleveland economic models that support against other policy options.14 by focusing on a TBL-like concept. sustainable food and agriculture Internationally, the European The city uses four key areas for while raising public awareness Union uses integrated assessment measuring sustainability: the of the value of organic and to identify the “likely positive and personal and social environment, biodynamic farming. negative impacts of proposed policy the natural environment, the built • Ecological Stewardship actions, enabling informed political environment (e.g., infrastructure (environmental): Provide judgments to be made about the and urban growth patterns) and the funding to organizations and proposal and identify trade-offs in business environment. Each key area projects devoted to sustaining, achieving competing objectives.”15 has six goals. At this point, specific regenerating and preserving the The EU guidelines have themselves measurement indicators have not earth’s ecosystems, especially been the subject of critique and been fully developed; however, the integrated, systems-based and have undergone several rounds city is looking to create a dashboard culturally relevant approaches. of improvement.16 The process of that could be combined to create an • Education and the Arts (social): refining the guidelines shows both index for overall project success. This Fund education and arts the transparency of the process and dashboard would allow for quick projects that are holistic and the EU commitment to integrated year-to-year assessment in the SC2019 therapeutic. assessment. progress.

Government Regional Economic Grand Rapids, Michigan, and the State, regional and local governments Development Initiatives Surrounding Region are increasingly adopting the The concept of the triple bottom In 2005, the Grand Rapids region TBL and analogous sustainability line can be used regionally by created the nation’s first “Community assessment frameworks as decision- communities to encourage economic Sustainability Partnership” to making and performance-monitoring development growth in a sustainable develop a roadmap to lead Grand tools. Maryland, Minnesota, Vermont, manner. This requires an increased Rapids to sustainability. The Utah, the San Francisco Bay Area and level of cooperation among region employs 14 major indicators Northeast Ohio area have conducted businesses, nonprofit organizations, related to the region’s quality of analyses using the TBL or a similar governments and citizens of the life and environmental factors to sustainability framework. region. The following examples determine progress made towards Policy-makers use these throughout the United States show sustainability. Rather than create an sustainability assessment frameworks various ways the TBL concept can index, target goals were established to decide which actions they should be used to grow a region’s economic for each indicator. More detailed or should not take to make society base in a sustainable manner. information of the metrics used more sustainable. Policy-makers for each indicator can be found in want to know the cause and effect Cleveland, Ohio their TBL report.18 Below are brief relationship between actions— In 2009, the mayor of Cleveland explainations of the variables used to projects or policies—and whether convened the Sustainable Cleveland measure their TBL. the results move society toward or 2019 (SC2019) Summit to bring • Environmental Quality away from sustainability. The State together hundreds of people o Waste: trends in recycling, of Maryland, for example, uses a interested in applying the principles refuse and yard waste blended GPI-TBL framework to of sustainability to the design of o Energy: energy compare initiatives—for example, the local economy.17 The SC2019 consumption, natural gas investing in clean energy—against is a 10-year initiative to create a

Indiana Business Review, Spring 2011  7 can be easily organized into the three consumption and alternative the flexibility of the TBL allows TBL categories (economic, social and fuel usage organizations to apply the concept environmental). o Water: water consumption in a manner suitable to their specific 9. Theo Hacking and Peter Guthrie, “A Framework for Clarifying the Meaning o Air Quality: toxic release needs. of Triple Bottom-Line, Integrated, and inventory and number of air There are challenges to putting the Sustainability Assessment,” Environmental pollution ozone action days TBL into practice. These challenges Impact Assessment Review 28 (2008):73–89 and Wouter de Ridder et al., “A Framework o Built Environment: number include measuring each of the three for Tool Selection and Use in Integrated of LEED registered and categories, finding applicable data Assessment for Sustainable Development,” certified projects and calculating a project or policy’s Journal of Environmental Assessment Policy and Management 9, no. 4 (December 2007): o Land Use and Natural contribution to sustainability. These 423–441. Habitat: inventory of land challenges aside, the TBL framework 10. Cascade Engineering, “The Triple Bottom use and forest canopy allows organizations to evaluate the Line Report,” 2009, www.cascadeng.com/ pdf/TBL_2009.pdf. o Transportation: public ramifications of their decisions from a 11. Nancy Fell, “Triple Bottom Line Approach transportation ridership truly long-run perspective. n Growing in Nonprofit Sector,” Causeplanet, • Economic Prosperity January 21, 2007, and Peter Senge, et al., The Necessary Revolution (New York: Doubleday, o Personal Income: personal Notes 2008). income per capita 1. John Elkington, “Towards the Sustainable 12. For example, see Nancy Stark and Corporation: Win-Win-Win Business o Unemployment: Deborah Markley, “Rural Entrepreneurship Strategies for Sustainable Development,” Development II: Measuring Impact on the unemployment rate California Management Review 36, no. 2 (1994): Triple Bottom Line, Wealth Creation in Rural o Redevelopment, 90–100. America,” July 2008, www.yellowwood.org/ 2. Andrew Savitz, The Triple Bottom Line (San Reinvestment and Jobs: wealthcreation.aspx. Francisco: Jossey-Bass, 2006). 13. “Focus Areas,” RSF Social Finance, http:// results from brownfield 3. Peter Soderbaum, “Positional Analysis and rsfsocialfinance.org/values/focus/. redevelopment investment Public Decision Making,” Journal of Economic 14. “Maryland’s Genuine Progress Indicator: Issues 16, no. 2 (June 1982): 391–400, and job creation An Index for Sustainable Prosperity,” www.jstor.org/stable/pdfplus/4225177.pdf. Maryland: Smart, Green and Growing, o Knowledge Competitiveness: 4. Terre Satterfield, Paul Slovic and Robin www.green.maryland.gov/mdgpi/. third-party report ranking Gregory, “Narrative Valuation in a Policy 15. Commission of the European Communities, Judgment Context,” Ecological Economics 34 U.S. regions “Communication from the Commission on (2000): 315–331. Impact Assessment,” May 6, 2002, http:// • Social Capital and Equity 5. Stephen R. J. Sheppard and Michael trade.ec.europa.eu/doclib/docs/2005/ o Safety and Security: crime Meitner, “Using Multi-Criteria Analysis february/tradoc_121479.pdf. and Visualization for Sustainable Forest statistics 16. EU Secretariat General, “Memo: The Main Management Planning with Stakeholder Changes in the 2009 Impact Assessment o Educational Attainment: Groups,” Forest Ecology and Management Guidelines Compared to 2005 Guidelines,” degree attainment levels 207 (2005): 171–187. Another example can http://ec.europa.eu/governance/impact/ be found in Katrina Brown et al., “Trade- o Health and Wellness: infant index_en.htm. Off Analysis for Marine Protected Area 17. Sustainable Cleveland 2019, “Action and mortality rate and blood Management,” Ecological Economics 37, no. 3 Resources Guide: Building an Economic lead levels trends (June 2001): 417–434. Engine to Empower a Green City on a Blue 6. See Herman E. Daly, John B. Cobb and o Quality of Life: home Lake,” October 2010, Clifford W. Cobb, For the Common Good: www.gcbl.org/system/files/SC2019+Executiv ownership, poverty, and Redirecting the Economy towards Community, e+Summary+%289SEP10%29.pdf. reduced price and free the Environment, and a Sustainable Future 18. City of Grand Rapids, Michigan, (Boston: Beacon Press, 1989) and John lunches trends “Community Triple Bottom Line Indicator Talberth, Clifford Cobb and Noah Slattery, Report,” September 2008, www.grpartners. o Community Capital: 211 “The Genuine Progress Indicator 2006: A org/pdfs/resources/TBLFinal1.pdf. calls for assistance, voter Tool for Sustainable Development,” www. environmental-expert.com/Files/24200/ participation and population articles/12128/GPI202006.pdf. and ethnicity 7. Minnesota Planning Environmental Quality Board, “Smart Signals: An Assessment of Progress Indicators,” March 2000, Summary www.green.maryland.gov/mdgpi/pdfs/GPI- The Triple Bottom Line concept Minnesota.pdf. developed by John Elkington 8. Integrated assessment is used as a general rubric for all sustainability has changed the way businesses, assessment frameworks, including TBL. nonprofits and governments The proliferation of frameworks and measure sustainability and their acronyms often complicates the issues associated with implementing a the performance of projects or TBL framework for evaluating economic policies. Beyond the foundation of development initiatives. Except for a measuring sustainability on three couple of sustainability frameworks, the accessibility components and measures fronts—people, planet and profits—

8  Indiana University Kelley School of Business, Indiana Business Research Center