What’s it: The triple bottom line is a framework for measuring company performance, covering three aspects, namely profit, people, and planet. Profit measures the economic dimension. Meanwhile, people and the planet measure performance in social and environmental factors.
These three aspects are the basis for a sustainable business. Companies do not only have to focus on the economic dimension (profit), as in the conventional approach. However, they must also pay attention to their social and environmental impact. Thus, companies must direct their strategy to have a positive impact on society, the environment, as well as benefit shareholders.
Why is the triple bottom line important for business?
The triple bottom line framework is vital for a sustainable business. Social and environmental issues are increasingly becoming a concern, especially for stakeholders such as consumers, suppliers, and governments.
For example, the BP oil spill, climate change, and the 2008 financial crisis have hurt our lives. Such bad events have moved the public to seek better ways to fix them and ensure sustainability in our lives.
Sustainability is vital for business. Suppose the environment is damaged and humans suffer, for example, due to pollution. In that case, it exposes a significant negative impact on the business.
For example, a company needs an environment to extract natural resources and turn them into raw materials. Likewise, they need people to recruit as workers. They also depend on people to buy their products.
So, if the environment and people’s lives are disrupted, businesses will have huge problems. In short, there is no business without people and no environment.
Therefore, companies must also prioritize ethics and social and environmental responsibility in their operations. They can’t just be profit oriented.
Example of the triple bottom line and its application
The triple bottom line theory guides companies to calculate the full costs of doing business. They don’t just focus on what’s listed in the financial statements. However, they also have to look at social and environmental costs.
As previously mentioned, the triple bottom line theory includes three dimensions, namely:
All three are abbreviated as 3P. Let’s explore them one by one.
Profit is a traditional indicator to measure company performance. It is calculated by subtracting revenue from expenses. We can see it on the income statement.
The bottom number on the income statement is net income. We also call it the bottom line. We look at it to assess how well the company is performing.
A positive net profit shows the company’s success in making money. They posted more revenue to cover costs. An increase in profits over time indicates the company is making more money.
In the past, profit was the primary goal. Businesses focus on generating profits for shareholders. They develop strategic planning and critical business decisions carefully to maximize profits.
The triple bottom line theory emphasizes fair and ethical principles in making money. They make positive changes in the world without hindering financial performance. It may involve:
- Sell products at fair prices and not just chase more revenue by charging exorbitant prices
- Marketing products by not using deceptive practices to attract consumers
- Approach consumers by paying attention to aspects such as privacy
- Ensuring products and operations are safe for the environment and consumer health
- Charge wages that are reasonable and up to standard – don’t charge low wages just to keep costs down
- Do not employ underage persons or engage in discriminatory practices
- Process waste and garbage to reduce pollution to the environment
- Using recyclable and renewable raw materials, such as natural fibers
- Extract natural resources responsibly and not exploit them
People refer to stakeholders and society. They may influence or be influenced by the company, for example;
Companies must be responsible and apply ethical practices toward them. Take the example of employees. Corporate social responsibility towards employees can involve:
- Paying fair wages
- Creating a safe and healthy work environment
- Encouraging professional development
Meanwhile, social responsibility to consumers may involve – some have been mentioned before:
- Environmental and health-friendly product
- Non-deceptive marketing practices
- Reasonably priced – relative to quality or market price
In addition, social responsibility should also be directed to the general public and local communities. The general public includes those who are not customers or employees. Meanwhile, local communities are those located close to companies/factories. They are exposed indirectly by business activities. For example, greenhouse gas emissions affect local communities, the general public, and even those living abroad.
Planet refers to the environment in which we are. While “people” has implications for the company’s income. Planet implicated in costs.
For example, related to raw materials and processing. The company takes raw materials from nature and processes them into goods. Their environmental responsibilities could involve the following:
- Implement non-exploitative practices
- Minimizing habitat destruction and environmental degradation
- Using renewable raw materials
- Using fossil energy sparingly
- Minimizing greenhouse gas emissions
- Treating waste to reduce pollution
The examples of environmental responsibility above are relevant for companies in the primary and secondary sectors. They are directly involved in raw material processing activities.
So what about the tertiary sector or services? They are not directly involved in processing raw materials into goods. Instead, they are users.
Service companies use a variety of goods to provide products to customers, for example, office equipment. And their environmental responsibility practices can be through several ways, for example:
- Implementing paperless by developing digital channels
- Separating collection of waste such as paper, plastic, metal, and glass before disposal
- Saving water and electricity
Pros and cons of the triple bottom line
Implementing a triple bottom line has pros and cons, especially related to the implications for business profits. Among the advantages are: Maintaining sales because consumers are increasingly paying attention to social and environmental issues
- Minimizing negative campaigns by the public and avoiding lawsuits
- Increase retention, for example, by ensuring safety and security at work
- Reduced recruiting and training due to low turnover
Meanwhile, the triple bottom line exposes weakness. Operating costs increase, especially in the short term; for example, the company has to pay for waste treatment.
Companies also cannot reduce costs, for example, by imposing wages below the minimum standard. Or they can’t employ low-paid underage workers.
In addition, adopting a triple bottom line may also reduce a company’s chances of maximizing sales – from their perspective. For example, they cannot use deceptive or privacy-invading methods to market their products and sell more.