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Connections - Farm, Food and Resource Issues


Triple Bottom Line Accounting: How Serious Is It?

Steven Schilizzi

Dr S. Schilizzi is Senior Lecturer, School of Agricultural and Resource Economics,
University of Western Australia, Perth.

What is TBL?

Current environmental accounting efforts

New prospects


Just 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?

What is TBL?

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.

Current environmental accounting efforts

Within the 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.

Secondly, we 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).

Another 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 standardise!

Ideally, we 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 current solutions.

New prospects

TBL 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.

Technically, 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 consistently together.

In this 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.

Environmental 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.

What 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 on them.

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 of satisfaction.

Just technicalities or ethics?

Will 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!


Dixit A.K. and Pindyck R.S., 1994. Investment Under Uncertainty. New Jersey: Princeton University Press.

Lesourd J-B. and Schilizzi S., 2001. The Environment in Corporate Management. New Directions and Economic Insights. Cheltenham: Edward Elgar.

Kierkegaard H. (1997). Improving Accounting Reliability: Solvency, Insolvency, and Future Cash Flows. (Original Title: Dynamical Accounting). Westport, London: Quorum Books.

Schaltegger S. and Burritt R., 2000. Contemporary Environmental Accounting. Issues, Concepts and Practice. London: Greensheaf.