KSA SCMPE CA S.S.

RAJAGOPAL

TRIPLE BOTTOM LINE – PERFORMANCE EVALUATION

1. INTRODUCTION

The objective of any organization is to earn profits and maximize the

shareholders wealth. This is the most common view about a business
entity’s purpose of existence. This view of a business entity is like
saying that, the objective human existence is eating. Business isn’t
just about profit, it is something more. Its stake holders are not just
Investors and customers; it gets widened to the society at large and
the planet we live.

Sustainability is the ability to meet the needs of the present without

compromising on the ability to meet the needs of future generations.
There is nothing wrong in an organization aspiring to earn profits but it
should strive to earn it through sustainable means, in the process
contributing to overall wellbeing of the society.

Twentieth century saw businesses follow ultra consumerism principle.

Planet earth was seen as a machine to generate money instead of a
home for sustainable living. Entities followed a liner business model
comprising of TAKE-MAKE-DUMP strategy. In this model, natural
resources like minerals, trees, water, coal etc are taken from the
planet, refined into products for use and the waste dumped back into
the planet. The assumption in this model is that the resources are
available in unlimited quantity and the planet has the ability to take
unlimited dumped waste. Of late, entities began to realize that this is
not true; hence the need to do sustainable business is slowly
becoming a reality.

When we think about two companies Tesla and TOMS, in two

extremely different sectors namely Cars and Shoes, what comes to our
mind as unifying factor between the two is the similarity in their Vision
and Mission. TOMS mission states that, it is in the business to
“IMPROVE LIVES”, the company gives a pair of shoes free to needy for
every pair of shoes sold by it. Tesla’s Mission is to “to accelerate the
advent of sustainable transport by brining compelling mass market
electric cars” and Elon Musk invested his fortune for this mission.
These companies in addition to PROFIT thought about PEOPLE and
PLANET in their business models.

Traditionally there was a single Bottom line i.e Profit. Now business
entities considers two more namely People and Planet. This is referred

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to as Triple Bottom Line. The TBL consist of three P’s namely Profit
[Economic], People [Social] and Planet [Environment].

In 1994, John Elkington the famed sustainability guru coined the

phrase Triple Bottom Line. The idea is that, companies can be
managed in a way that not only makes money but also improves
people’s lives and planet’s sustainability.

2. COMPONENTS of TBL

1 People “People” considers employees and the wider community

where a corporation does business. Another way to look at
“people” is, how much does a company benefit society?

A triple bottom line company pays fair wages and takes

steps to ensure humane working conditions in its factories.
Triple bottom line companies make an effort to “give back”
to the community by sponsoring community development
programmes, lending its work force time to do community
work etc
TBL companies also desists using socially regressive
practices in running a business like use of Child labour.

2 Planet The “Planet” piece of the triple bottom line indicates that an
organization tries to reduce its ecological footprint as much
as possible. These efforts can include reducing waste,
investing in renewable energy, managing natural resources
more efficiently, and improving logistics. In a study it was
observed that more than 60% of population are concerned
about global warming and related issues. Hence
organizations with business models those are
environmentally sustainable gets customer loyalty and
higher brand valuation. [for more aspects about this area,
see our notes on EMA]
3 Profit Profit surplus of Revenue over cost. TBL considers profit
also as one of the organizations goals if not the only goal.
As generally believed, profit and the other two components
are not mutually exclusive, they compliment each other.
Companies seen contribution to well being of the society at
large will enjoy positive brands that help in its profitability.
Similarly environmentally efficient practices like energy
efficiency or waste recycling creates new revenue
generating opportunities and cost saving avenues to the
company that improves its profit.

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3. TRADITIONAL ACCOUNTING FRAMEWORK VS. TBL

FRAMEWORK

1. Under-costing and information to limited stake holders

Traditional accounting framework has a “single bottom line” that

focuses on the profit that a company has made during the financial
year. This is calculated by reducing costs, including the cost of capital,
from revenues earned during the period, to arrive at the net profit that
is available to the shareholders. This reporting framework has its focus
on meeting the informational needs of mainly one category of
stakeholder within the company, namely its shareholders. It satisfies
the information needs of those interested in the financial aspects of
business. It does not provide much insight on the social,
environmental and economic implications of its operations.
Even though, some information about its operations is available in
various parts of its annual report, like the management discussion and
analysis section or the chairman’s letter to shareholders. However, this
is generally not sufficient to satisfy the information needs of other
stakeholders, some of whom can be the company’s employees,
customers, suppliers, communities living near the factory site or even
the government. Transactions that do not directly impact the company
are ignored.

Recognition of an expense partly depends on utilization of assets. For

example, costs incurred to operate machines used in the
manufacturing process would include labor expense, repairs,
depreciation, utility etc. These get captured as part of cost of goods
manufactured in the financial reports. Therefore, assets and their
related expenses, that are owned and within the control of the
company will be reported in the financial reports.

However, certain assets are neither owned nor controlled by the

organization, yet it utilizes these resources in its operations. For
example, if waste water from the company is discharged in the river
nearby. The waste water contains solids, chemicals and metal
compounds that were used during production. This pollutes the river
water, which is the primary source of water for the nearby town. This
poses both an environmental and health risk to the citizens; here the
company does not pay to clean up the river water. It is the
government that undertakes the onerous task of cleaning up the river
water and also bears the clean-up cost. This aspect of company’s
operations and the associated cost will not get captured in the financial
reports. Hence, the true cost of operations of the company is greater

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than the costs reported in the financial reports. Moreover, the market
price that we charge to the customer for the product does not factor
this cost. Consequently, both the company and the customers who use
the product end up under-pricing the cost to the environment and
society.
On the other hand, triple bottom line reporting framework focuses on a
broader view of the company addressing the interests of various other
stakeholders. The objective is to force the entity to identify areas of
operations to create sustainable initiatives that would, in the long run,
be beneficial to its current and future stakeholders as well as to the
company itself. It focuses on the impact of the decisions and
operations of the company on the society, environment, and economy.

2. Measurement issues

Traditional accounting framework uses the reporting currency as the

unit of measurement. It follows the accounting and reporting principles
generally accepted in the country it operates. Materiality under this
framework, is measured in monetary terms, that could impact the
decisions of a rational investor. On the other hand, there is no uniform
standard or measure for the TBL framework. Measurement of an
aspect, therefore its materiality, could either be financial or non-
financial. Organizations could follow the metrics suggested in the
Global Reporting Initiative (GRI) framework. In India, efforts are
underway to align the GRI with the Business Responsibility Report
(BRR) mandated by SEBI for some of the public companies. The TBL
report focuses on both the positive and negative impact of the
organization’s performance on the society, environment and economy.
TBL reporting may be (i) core reporting, report selective metrics or (ii)
comprehensive reporting; a detailed report based on the GRI
standards.

4. CASE STUDY

Paper Solutions Ltd. (PSL) is a paper mill producing excellent quality

writing and printing paper. It is located in a small town where
eucalyptus, acacia and casuarina trees grow in plenty, which are
required in the paper production process. It sources its raw material
from pulp-wood plantations that grow the above-mentioned trees.
These plantations are located in degraded agrarian land surrounding
the factory site, which was previously wasteland. Their owners are
subsistence farmers, who have been encouraged to grow these trees
to source raw material for the paper mill. The mill’s local procurement
policy has thus provided a source of livelihood for this community.

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Moreover, almost 40% of the staff working at the mill are from the
local community. Most of the mill’s labour force lives in residential
areas near the factory site. Catering to the mill employees’ livelihood
needs like food, clothing, education etc. has given the town alternate
sources of income and thus has benefited the town. The plant
managers at the mill have been working on various projects in order to
build a sustainable business. This includes, reducing waste during the
manufacturing process, imparting knowledge to local farmers at the
pulp-wood plantations to improve the quality of wood through
breeding and seed improvement techniques. Operations at the mill
have yielded substantial profits over the last 15 years since inception.
You are the chief accounting officer of PSL taking care of all the
reporting (internal and external) needs of the company. Recently, you
read about the Triple Bottom Line (TBL) reporting that many other
companies are following. You feel the need to introduce TBL reporting
because:
The vital role played by the mill towards the development of the town.
This can be highlighted in the TBL report. This will enhance the
company’s goodwill. At the same time, you feel the need for
transparency of operations and balancing the need of various
stakeholders involved. All this can be addressed by publishing the TBL
report periodically.
The mill’s operations are driven by the resources available in the
environment. What the mill takes should be returned in equal if not in
a higher measure. TBL reporting can help identify opportunities of
giving back to the environment.
You have an appointment with the Chief Executive Officer to discuss
this reporting framework. During a preliminary discussion, the CEO
was sceptical of the need for additional reporting. “We are here to do
business, profit should be the sole parameter for measuring our
success. Shareholders are our only stakeholders. Annual reports would
provide sufficient information to others who are interested in our
operations.”

Required
To convince the CEO, you need bring out the differences traditional
accounting framework and the triple bottom line framework. Draft an
e-mail on this subject that you need to send to the CEO for discussion
at the meeting.
[Solution in ICAI Study Material].