Bottom Line Accounting: How Serious Is It?
S. Schilizzi is Senior Lecturer, School of Agricultural and Resource
University of Western Australia, Perth.
What is TBL?
environmental accounting efforts
technicalities or ethics?
It would be a
provocative statement these days to assert that ‘triple bottom line’ (TBL)
accounting is just empty rhetoric. The question is, what do we actually mean
by TBL? Can it be operationalised, and if so, how?
TBL is an
expression referring to three key dimensions of business performance:
financial, environmental and social. In the private sector, financial
performance reflects success in the marketplace and stewardship to
shareholders. Environmental performance reflects compliance with government
regulations and stewardship to a growing class of customers. Social
performance reflects stakeholder management, or partnership - in particular
the workforce and local and neighbouring populations.
environmental accounting efforts
current practice of business accounting,
there is, strictly speaking, no such thing as TBL. What we have is, first,
what Schaltegger and Burritt (2000) call environmentally related financial
accounting (ERFA). This includes the cost accounting of on-going
environmental management activities and the financial accounting of
environmentally related investments. Neither is simple. For both,
accountants face the longstanding problem of cost allocation. How are we to
know how much of an investment was ‘environmentally related’? Replacing
old polluting equipment with a new cleaner one could have happened
irrespective of pollution considerations if the equipment needed replacing
anyway – because it had become obsolete or dysfunctional. Different rules
can be, and have been, imagined, but without standardisation they are bound
to appear to some degree arbitrary.
have ecological accounting, or environmental impact accounting. While ERFA
is done in monetary terms, ecological accounting is done in physical units,
such as tonnes of CO2 or SO2 emitted per year,
kilolitres of wastewater into water bodies, hectares of land disturbed
through logging, mining or clearing, etc. ERFA examined the impacts of
environmental management on the firm’s financial status; ecological
accounting examines the impacts of the firm’s activities and products on
the environment. Schaltegger et al. (1996) develop the concept of
environmental impact added (EIA). An obvious problem is consolidation and
aggregation. How do you add up different physical quantities? One –partial
– solution is to use what we may call (Lesourd and Schilizzi, 2001, p.
118) ‘functional aggregation’. An example is in terms of global warming
potential (GWP), where e.g. one kg of nitrous oxide is equated to 310 kg of
CO2. However, different environmental functions cannot readily be
aggregated (e.g. GWP, and soil and water acidification potential).
aspect of ecological accounting appears when the focus shifts from
activity-based to product-based accounting. The former leads to so-called
eco-balance accounting, where a given economic unit uses an accounting
framework in the form of an input-output materials-balance to track all
potential pollutants and environmental impacts. On the input side you have
natural resource use and on the output side you have emissions to land,
water and air, as well as biological disturbances. Product-based
environmental accounting has lead to so-called product life-cycle assessment
(LCA). Here the firm tries to account for the environmental impact of its
products in terms of manufacturing, packaging, use and final disposal.
Interestingly, this apparently technical issue has correlated with an
intense debate on the firm’s responsibilities: just how far does its
responsibilities extend beyond its field of direct control? Instructions on
packages about how to use and dispose of the product have become a focus of
attention. Unfortunately, the legal aspects have far outperformed the
technical ones: LCA is still a controversial technique that lacks the
necessary level of standardisation, partly because it is so hard to
would like to integrate both types of environmental accounting, as well as
any system of social accounting, with financial accounts. We are a long way
off. There are efforts, in particular in the German-speaking and
Scandinavian countries, to implement eco-financially integrated accounts,
stemming from Müller-Wenk’s seminal work on ‘environmental impact
points’ in 1978. These countries have mainly focused on integrating cost
accounting and ongoing environmental impacts. Recently, Schaltegger and
others, mainly in Switzerland, have tried to link financial accounting to
‘environmental investments’ (and disinvestments), but the reality of
potential liabilities – both environmental and social – still eludes
accounting - translating environmental and social liabilities into financial
terms - can become a reality, however, provided current accounting
techniques and frameworks evolve in a specific manner.
only financial performance is measured in a clearly regulated and
quantitative way. Environmental accounts do exist, but they are not (yet?)
regulated and are not easily comparable across sectors or companies, or
between countries. And social accounting is still in its infancy. Most
importantly, there is no accepted framework to bring all three dimensions
context, what is TBL accounting supposed to mean? Reminiscent of the use of
the term ‘sustainability’, it signals a willingness to show concern for
the three dimensions of business performance, as opposed to a single-minded
focus on ‘just profits’.
At worst, TBL
may be seen as a spin doctor’s exercise in PR. At best, however, it
signals a genuine desire to perform well in all three areas – motivated by
what customers, consumers, government and society at large think and feel.
Because, very simply, upsetting customers, consumers and government is
likely to bring on extra costs. This may happen as reduced market share, new
and more stringent regulations, or loss of access to key resources, leading
to a likely fall in the value of company shares. In the process, a company
will lose some of its clients’ trust or loyalty, and suffer image and
reputation damage: in other words, a loss of social capital. There is
growing evidence that good reputation in terms of environmental and social
management pays when it comes to investors’ choices on the stock market,
even if the link is more of a correlation than a clear causal relationship.
For example (Lesourd and Schilizzi, 2001: p. 232-9), stock indexes such as
the Domini 400 Social Index have slightly outperformed the Standard and Poor
500 Index over the last decade or so, and this generalises to most
‘sustainable business’ indexes.
and social impacts, then, are materially important to a company insofar as
they are likely to lead, sooner or later, to higher costs or liabilities.
Indeed, disgruntled stakeholders constitute just such a liability. This
liability is a contingent liability, however: it eventuates only if
government or civil society take action. As a result, a proactive, strategic
attitude is needed that clashes, in many ways, with the standard approach to
business accounting. But then, standard accounting, and financial accounting
in particular, is, as Kierkegaard (1997) and others have been increasingly
pointing out, in crisis. There is as yet no accounting system which reliably
and timely predicts bankruptcy!
The crux of
the matter is that it is very difficult, at present, to measure and quantify
a contingent liability. It is in the future and it is uncertain: financial
losses may never eventuate, or they may be huge. This redefines what TBL
accounting should be all about, if it is to mean anything real.
initially started out as a philosophy of social duty must now be seen as a
technical challenge. Currently, there is no easy way to translate
environmental and social liabilities into financial terms. And yet, such
liabilities are as real as any other. All that is needed is to pin a number
The good news
is that there is hope. It should be possible to develop techniques to
estimate and quantify such liabilities. The bad news is that it is not easy,
at least not yet. The solution to the problem should come from bringing
together insights from financial economics and from environmental economics:
by combining option valuation techniques with non-market valuation
techniques. The approach holding most promise, it seems, is that of real
options valuation. The standard reference to this approach is Dixit and
Pindyck’s (1994) remarkable book, “Investment under Uncertainty”. The
next step should be to include consideration of unpriced assets, whether
natural or social capital.
In the public
sector, TBL accounting can involve three areas of separate accounting; but
in the private sector, it can only mean an end result in terms of financial
outcomes. From the company’s point of view, implementing new accounting
techniques that reflect TBL concerns will also reflect stakeholders’ level
technicalities or ethics?
disappear behind technicalities? No. In considering an uncertain future, the
rate at which decision makers discount future financial impacts, and their
willingness to take risks when others’ interests are at stake, both
involve ethical aspects. It may then be up to government, the legal system
or consumer organisations to influence managers’ risk attitudes and
approaches to discounting. There seems to be as yet an unfathomed link
between risk attitudes, discounting of the future and equity considerations!
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