Integrated Bottom Line: A Tool to Quantify Sustainable Business Performance
Businesses face a web of competing pressures: producing the goods and services their customers desire, delivering profit to their owners, and behaving responsibly to society in a world of climate crisis, and social unrest.
There is a difference between extractive business models that benefit only a few parties, and those that deliver Regenerative Value Creation, increasing financial, shareholder, and stakeholder value by implementing practices that are both more profitable and more responsible to people and to the planet. These approaches cut costs, reduce risk, and make the company a more attractive partner for investors, customers, employees, and the whole of society. They enable a company to prosper by achieving an Integrated Bottom Line.
Thousands of studies show that companies which are leaders in environmental, social, and good governance policies have stock value that is higher and grows faster, have higher market capitalization, and are better protected from value erosion than their more conventional competitors.
However, few companies track such liabilities and assets in management accounting reports. For example, a company that may face liability for pollutants, legal expenses, costs, and damage to brand value from unsustainable behaviour rarely describes such risks in management accounting reports. These omissions represent a potentially significant under- or over-statement of future business performance.
Conversely, the asset value to a company of employee retention and ease in recruitment of talent due to its sustainable practices, or the proper valuation of a company’s contribution to enhancing ecosystem services conferred by a sincere, public commitment to sustainability are rarely included in corporate finances.
Some companies adopted the Triple Bottom Line (TBL), a phrase coined by John Elkington in 1994 to describe keeping three sets of books to count value to people and planet in addition to planet. But even Elkington now agrees that this is neither complete nor accurate. It counts programs more as an expense, a cost-center, cutting profitability. Unlike the Integrated Bottom Line, TBL blinds executives to the business value that sustainability-oriented practices confer on the better-managed companies.
Managers who use more regenerative practices build core business value, and enhance shareholder value in the following ways:
- Using resources more efficiently is not just good for the environment, it cuts costs and thus drives profitability,
- Setting goals like net-zero carbon emissions drives innovation. Achieving this goal cuts costs, attracts customers and potential employees, and builds brand equity. CDP’s Climate Action and Profitability study shows that companies which manage their carbon emissions and mitigate climate change enjoy 18 percent higher returns on their investment than companies that don’t, and 67 percent higher returns than companies which refuse to disclose their emissions.
- Talented “millennials” want to work in companies that reflect their values. For a company, the value of reduced employee recruiting and retention costs is significant.
- Corporate diversity programs increase innovation and creativity. A Boston Consulting Group study of 1,700 companies in eight countries found that companies with above-average total diversity had both 19% higher innovation revenues and 9% higher EBIT margins, on average.
- Young people want to be engaged, to be implementing more regenerative practices as part of their day job. Gallup analyzed the results: An engaged workforce can give you up to 24% higher productivity and 21% higher profitability. These are material numbers.
- Businesses that invest in green building improvements reap very attractive ROIs both in decreased operating costs and more importantly enhanced labour productivity averaging 6 to 16 %.
- Reducing toxics in the workplace cuts risk and liabilities. Bayer, previously one of the most successful German companies, saw its stock value fall more than 50 percent after it paid $63 billion for Monsanto, the agrichemicals company. It is now valued at less than what it paid for the purchase.
- Impact capital is looking for companies with an authentic commitment to responsibility.
- Consumers preferentially buy green products, expanding market share.
- A commitment to long-term value creation enables management to deal proactively with over-the-horizon (“black swan”) issues.
- This makes relationships with stakeholders from governments to NGOs to the public easier, even preserving a company’s franchise to operate.
- Managers who better identify increases in earnings related to and caused by sustainability-oriented practices gain improved ability to transform qualitative stories into quantitative data.
Integrated Bottom Line accounting enables managers to track the reasons and factors contributing to Regenerative Value Creation. It provides executives with a more accurate tool for quantifying and managing sustainable business performance. Seemingly distinct challenges like climate, business success, biodiversity, ESG finance, health, feeding the world, regenerating soil and communities, reducing forced migration and populist politics can be successfully addressed by more sustainable practices that equitably integrate economic development and business success with the regeneration of people, societies, and nature.
By L. Hunter Lovins
President, Natural Capitalism Solutions;
Professor of Sustainable Management, Bard MBA;
and Managing Partner, NOW Partners