The Triple Bottom Line and why it is important
Triple Bottom Line helps companies reconcile sustainability and profitability
According to the European Commission, sustainable development means "meeting the needs of the present whilst ensuring future generations can meet their own needs". To do so, companies must consider not only the economic aspects of their activity but also the environmental and social ones. This is where the concept of the Triple Bottom Line comes in.
What does 'Triple Bottom Line' refer to?
The Triple Bottom Line (TBL), also known as "People, Planet & Profit" or the 3 Ps, is a framework for measuring corporate sustainability and social responsibility, taking into account 3 dimensions: economic, environmental, and social.
TBL shifts the focus from shareholders to stakeholders, that is, any entity on which the consequences of business activity fall: employees, suppliers, consumers, governments, local communities, and so on.
The idea behind TBL is that companies should strive to achieve a balance between profit and respect for people and the planet. Put simply, they should ensure their activities generate economic value while also being socially responsible and environmentally conscious. This encompasses many aspects such as using renewable energy sources for production processes, reducing the environmental impact of products or services, and encouraging Corporate Social Responsibility.
What is Corporate Social Responsibility?
Corporate Social Responsibility (CSR) is a way of doing business that takes into consideration the Triple Bottom Line. It involves taking actions to improve the environment and society, such as reducing carbon emissions, using sustainable resources, or providing employment opportunities for disadvantaged groups. By taking these steps, companies can ensure they are not only profitable but also beneficial to the environment and society.
What are ESG factors?
Anther concept related to sustainable development is that of ESG: environment, social and governance. It refers to a set of criteria to evaluate Corporate Social Responsibility.
These criteria give insight into the negative externalities caused by corporate activities through a score that helps stakeholders assess the impact that the organisation's environmental, social, and governance values on performance. They are useful for companies to make decisions in order to ensure long-term sustainability.
Here are a few of the ESG factors:
- Environmental factors include energy efficiency, water management, waste management and biodiversity conservation.
- Social considerations include workforce practices such as safety, diversity and anti-discrimination policies, as well as community engagement and support.
- Governance factors consider how well a company is run, taking into account corporate culture, financial reporting systems, board composition and diversity initiatives.
People, Planet and Profit
Let's take a little closer look at the 3 P's of the Triple Bottom Line:
- People, the social equity bottom line, refers to the social responsibility of companies and their commitment to protecting the health and safety of their employees, customers, suppliers and local communities. A company that takes people into consideration is one that values diversity in its workforce, provides employee development opportunities, pays fair wages and compensations, and protects human rights.
- Planet, the environmental bottom line, focuses on the impact that a company has on its surroundings. Companies should strive to reduce their energy consumption and waste production, as well as use renewable resources in their production processes.
- Profit, the economic bottom line, refers to a company's profitability or financial performance. Profit concerns the economic value created after the cost of all inputs, including the cost of capital assets, have been subtracted. It is also the real economic benefit enjoyed by the environment in which the company operates. It is not simply the traditional accounting profit.
The 3 P's of the Triple Bottom Line
Reasons why companies should focus on the Triple Bottom Line
As we can see, CSR, ESG, and TBL are intrinsically linked, but why should companies focus on the Triple Bottom Line?
First of all, the issues of environmental sustainability and social responsibility have become increasingly relevant in markets. Today, consumers are much more attentive, and corporate choices influence their purchasing decisions. As a consequence, companies that consider the Triple Bottom Line are more likely to be seen as socially responsible and they may have an advantage over those that do not. Their reputation improves, leading to greater trust and loyalty.
This trust is not only about consumers, but also about investors.
While in the past investors used to be interested in projects that were attractive only from an economic perspective, today many want to invest in organisations that pursue principles they themselves believe in. Moreover, banks and financial institutions are using ESG ratings to make capital allocation decisions. Just to give you an idea, a 2020 CFA Institute analysis found that 85 percent of investment professionals considered ESG factors when making their investments, up from 73 percent in 2017. As a result, companies that act by following the Triple Bottom Line are more likely to access financing.
In addition to private financing, sustainability and responsibility also make it easier to obtain public financing and incentives. In fact, there is some idea that in the future ESG criteria may become mandatory, so organisations that are already choosing sustainability will have a marked advantage both from a compliance perspective and in accessing funds.
Moreover, as we have discussed in other articles, the adoption of a sustainable business strategy often requires digitisation and the use of innovative technologies, which lead to a reduction in various business costs, such as production costs and waste disposal costs. Another cost that is reduced by the Triple Bottom Line is that of staff turnover. In fact, employees are more likely to be engaged and motivated if they understand that their company is behaving responsibly.
But innovation itself is an advantage because it allows companies to keep up with market changes. And companies that take TBL into consideration are also better equipped to handle financial, environmental and social risks, since they have a better understanding of the externalities that their activities might cause. Moreover, they tend to have better long-term financial performance, since they can identify growth opportunities more easily, access larger markets, have higher stock prices, and achieve greater stability in the long run.
TBL and connected products
The term “connected product” refers to physical objects that can connect to the Internet, other networks, and devices. They are useful both for collecting and sharing data. In a certain way, a connected product is no more a product but a device that allows users and companies to get in touch. In fact, connected products are a valid ally for companies that implement TBL strategies. Through connected products, companies can share information on the sustainability and ethics not only of their products but of their entire supply chain. Furthermore, companies can also share content which conveys their values in a clear, transparent and credible manner.
All of this generates value for all stakeholders and encourages them to make more responsible purchasing or investment choices, creating a virtuous circle that supports sustainability at every level.