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The phrase “bottom line” has its roots in traditional business accounting. The term refers to the bottom line of an income statement, where total profit or losses are recorded. In effect, the bottom line indicates whether a business is making or losing money. For many in the business community, showing maximum profit on the bottom line is the number one priority. A healthy bottom line attracts investment, allows business expansion, and ensures job security for employees and management. However, a growing number of people view the traditional bottom line as too simplistic.
The triple bottom line, a term coined in 1994 by economist John Elkington, attempts to encapsulate not only financial but also social and environmental costs. The three divisions of the triple bottom line, also called the three Ps for people, planet, and profit, are designed to create a method of full cost accounting that represents the real costs associated with economic decisions. If a company makes a profit mining coal, but in the process causes severe deforestation and health issues for mine workers, a traditional bottom line accounting approach would fail to account for the environmental and social costs. It would ignore the price of restoring the forest and the healthcare costs of treating the workers. These costs would likely fall to the taxpayer, and would put a drain on society as a whole, overshadowing the short term profit of the coal mine. By using a triple bottom line accounting framework, societal costs can be properly factored into any economic decision.
When compared to a traditional accounting method, adopting a triple bottom line approach can, at first glance, appear to be an economic drag which risks making a business uncompetitive. The truth is more complicated. While there may be some business strategies which are undermined by a triple bottom line approach, the underlying reason for that is the social and/or environmental costs of business are prohibitive. In a case such as this, serious consideration must be given to pursuing such a destructive avenue of economic development. Furthermore, a recent study by MIT found that corporate sustainability is in fact profitable and leads to improved innovation and a more positive brand image. While these advantages can be difficult to measure using a traditional accounting approach, they are nonetheless quite real. The study noted that only companies that make a serious commitment to corporate social responsibility reap the economic benefits, so greenwashing isn’t enough. Compared to traditional accounting, a triple bottom line approach can open new markets and expand existing ones such as fair trade products and ecotourism. Furthermore, socially responsible companies have fewer issues with employee morale, as evidenced by higher retention rates and a greater level of engagement.
The triple bottom line framework has been adopted by a growing number of organizations, both public and private. In 2007, the United Nations adopted a triple bottom line standard for urban and community accounting. The same year a triple bottom line approach to accounting was adopted by the International Council for Local Environmental Initiatives, or ICLEI. The ICLEI is an international organization of local governments that have made a joint commitment to sustainability. With its adoption by the US and ICLEI, the triple bottom line became the principal method of full cost accounting in the public sphere. The private sector also has a growing respect for the triple bottom line. Not only are many smaller businesses adopting a triple bottom line, but global companies like Nike, FedEx, and Tesco have as well. The number of companies that have decided to adopt a triple bottom line approach continues to grow rapidly, as more and more business leaders recognize the benefits of a triple bottom line approach.
The triple bottom line is a method of representing the true costs of doing business and sending a strong message about corporate social responsibility. The business benefits of a triple bottom line approach are significant, and an ever increasing number of organizations are recognizing this.
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Posted: May 11, 2015