ACCOUNTABILITY

ACCOUNTING FOR THE

Pressure is growing from
governments and their citizens for
business to measure and manage the
impacts and outcomes of its

TRIPLE

behaviour in a range of areas. The demand has led to the

formulation of a 'triple bottom line' to reflect economic,
social and environmental performance. By John Elkington.

arlier this year Shell, the question posed on the cover of Shell's
world's largest oil company report - and to find ways of answering it
and one of its longest surviv in the negative. In Shell's case the cathar
ing multinationals, issued a report about tic moment came after the twin damage
its values. With the challenging tide it sustained in the mid-1990s on the
Profit and Principles - does there have to be
environmental front, over the disposal of
choice?theAnglo/Dutch group set out to an oil rig in the North Sea, and politi
describe "how we, the people, companies cally, from its associationwiththe repres
and businesses that make up the Royal sive government of Nigeria.
Dutch/Shell Group, are striving to live
In the wake of these shocks to its selfup to our responsibilities - financial, belief Shell formed a social accountabil
social and environmental". 1
ity team which is now working with
There is nothing coincidental about SustainAbility, the pioneering UK-based
the three areas of responsibility high environmental consultancy, to make the
lighted by the report. They represent the triple bottom line an everyday manage
elements of a new equation for assessing ment reality within the company.
and expressing the worth of a company
So what, for Shell and any other
in terms of its 'sustainability'. Nor is it company addressing the sustainable
coincidental that this new value formula, agenda, are the major issues attached to
dubbed the 'triple bottom line', is being the triple bottom line and, more specifi
trailed publicly by Shell and other big cally, what are their implications for how
companies. Governmental and societal organizations measure their performance
pressure is forcing them to address the and what they measure?
Business leaders and executives want
This article is abridged with permission from Cannibals With Forks: the triple bottom line of 21st
ing to grasp the full scale of the 'sustaincentury business by John Elkington (Capstone Publishing Ltd, 1997. ISBN 1-900961-27-X).
18 MEASURING BUSINESS EXCELLENCE VOLUME 2 NUMBER 3

ACCOUNTABILITY

BOTTOM

LINE

ability' challenge confronting their cor

would-be sustainable corporation assess

porations and markets will need to carry

whether its business operations are eco

out an audit against the emerging

nomically sustainable? A critical first step

requirements and expectations driven by

is to understand what is meant by eco

sustainability's triple bottom line. In the

nomic capital. In the simplest terms,

spirit of the management dictum that

your capital is the total value of your

what you cannot measure you are likely

assets minus your liabilities. In tradi

to find hard to manage, we should first

tional economic theory, capital as a factor

ask whether it is even possible to measure

of production can come in two main

progress against the triple bottom line.

forms:

physical

capital

REFERENCE POINTS

indicators of sustainability might

be added.

machinery and plant) and financial capi

are still evolving in most areas -and need

tal. But as we move into the knowledge

to evolve much further if they are to be

economy, the concept is gradually being

considered in an integrated way.

extended to include such concepts as

human capital - a measure of the experi

THE ECONOMIC BOTTOM LINE

ence, skills and other knowledge-based

A company's bottom line is the profit fig

assets of the individuals who make up an

ure used as the earnings figure in the

organization.

Environmental bottom line What

is 'natural capital' and can it be
quantified and accounted for?

(including

T h e answer is 'yes', but the metrics

The economic bottom line How it

is assessed and what long-term

Social bottom line Factors which

businesses cannot ignore as
globalization gathers steam.

The triple bottom line Making

it happen.

migrate out of the organization?

earnings-per-share statement, part of

Among the questions business people

Accountability In most countries,

standard accounting practice. In trying to

need to ask in this area are: is our rate of

companies have an obligation to give an

assess a company's conventional bottom

innovation likely to be competitive in the

account of their financial performance.

line

pull

longer term? How can we ensure that

In the case of limited companies, direc

together, record and analyse a wide range

human or intellectual capital does not

tors are accountable to shareholders.

performance,

accountants

of numerical data.
Economic capital

How should a

1 The Shell Report- 1998: profits and principles - does there have to be a choice? Shell
International, 1998
VOLUME 2 NUMBER 3 MEASURING BUSINESS EXCELLENCE 19

ACCOUNTABILITY

Typically, though, there has been

little, if any, overlap between the areas
covered by financial auditors in serving
the interests of shareholders and the
issues of interest to other stakeholders in
terms of the environmental and social
bottom lines.
Accounting Despite 500 years of
evolution in mainstream accounting,
there remain huge controversies over
how companies account for acquisitions
and disposals, record extraordinary and
exceptional items, value contingent lia
bilities, capitalize costs and depreciate
their assets.
We have tended to see the bottom
line as the hardest of realities, represent
ing the unappealable verdict of impartial
markets.2 But it is increasingly clear
that such accounting concepts are manmade conventions that change over space
and time. Bottom lines are the product of
the institutions and societies in which
they have evolved. And, because
accounting inevitably involves compro
mises, the bottom line turns out to be
influenced by subjective interpretations,
quite apart from 'creative' accounting.
So, for example, when the UK's Rover
was taken over by BMW and subjected
to Germany's stricter valuation criteria,
the car maker's 1995 'profit' of 91 mil
lion became a 158 million 'loss'.
Issues and indicators Among the
items you would expect to see in a com
pany's report and accounts would be a
profit and loss account, balance sheet and
statement of total recognized losses and
gains. When it comes to wider economic

sustainability, however, there is a surpris

ing lack of generally acceptable indica
tors. Key considerations here might
include the long-term sustainability of a
company's costs, of the demand for its
products or services, of its pricing and
profit margins, of its innovation pro
grammes and of its 'business ecosystem'.

BUSINESS IS OFTEN
HELD TO ACCOUNT BY
ENVIRONMENTALIST
OR MEDIA CAMPAIGNS
WHICH MAY BEAR
LITTLE RELATION TO
REGULATED TARGETS.

ENVIRONMENTAL BOTTOM LINE

The social agenda for business probably

has a longer history than the environ
mental agenda. Think of the early con
troversies around slavery, child labour
and working conditions. But, following a
flurry of interest in social accounting and
auditing in the 1970s, the environmental
agenda has tended to attract greater
attention. This fact has had a marked
impact on the way the sustainability
agenda is defined by business.

2 Simon Caulkin 'When black means red'. Observer, 14 April 1996

3 Daniel Blake Rubenstein Business Council for Sustainable Development, Antwerp Eco-efficiency
workshop, 1993
4 Tim Burt 'T&N raises 42m for asbestos costs', Financial Times, 15 April 1997
5 Francis Fukuyama Trust: the social virtues and the creation of prosperity, Hamish Hamilton, 1995
20 MEASURING BUSINESS EXCELLENCE VOLUME 2 NUMBER 3

Natural capital How can a wouldbe sustainable corporation work out

whether it is environmentally sustain
able? Again, a critical first step is to
understand what is meant by natural cap
ital. The concept of natural wealth is
both complex and still evolving. If you
try to account for the natural capital
embodied in a forest, for example, it is
not simply a question of counting the
trees and trying to put a price-tag on the
lumber they represent. You have to
account for the underlying natural
wealth which supports the forest ecosys
tem, producing - as just one stream of
benefits - timber and other commercial
products. Wider forest functions that
need to be added into the equation
include contributions to the regulation of
water (in the atmosphere, water table,
soils and surface waters) and of green
house gases like carbon dioxide and
methane.3 And then there are all the
flora and fauna, including commercial
fisheries, whose health is linked to the
health of the forest.
Natural capital can also be thought of
as coming in two main forms: 'critical
natural capital' and renewable, replace
able or substitutable natural capital.
Among the questions business people
will need to ask are: what forms of nat
ural capital are affected by our current
operations - and will they be affected by
our planned activities? Are these forms of
natural capital sustainable given these,
and other, likely pressures?
Accountability In many countries,
companies are held accountable by regu
lators for aspects of their environmental
performance. In the US, the Toxic
Release Inventory (TRI) requires com
panies producing above certain threshold
limits of more than 600 chemicals to

ACCOUNTABILITY

report their emissions. Some countries,

like The Netherlands, also back up their
regulations with voluntary programmes
designed to push companies towards sectorally agreed targets.
Just as often, however, business is
held to account by environmentalist and
media campaigns, which may bear little
relation to regulated or voluntarily
agreed targets. And as companies begin
to challenge their supply chains, a new
dimension of pressure is being intro
duced.
Accounting The field of environ
mental accounting is relatively embry
onic, but is generating a growing litera
ture. As far as environmental externalities
go, many companies have been forced to
take on to their books impacts and effects
which were once externalized.
Take the case of T&N, which as
Turner & Newall was once one of the
world's largest asbestos producers. For
years, the company argued that the risks
involved in the use of asbestos were
acceptable. Eventually, however, the tide
turned, not only against Turner &
Newall but against the entire asbestos
industry. At the time of writing, T&N
had already paid out over 350 million
over ten years to meet asbestos claims and was busily selling off corporate assets
to fund a further 323 million
provision.4 And, in an attempt to draw
a line under its asbestos legacy, the com
pany had announced a 515 million
charge against annual profits to meet
future personal injury claims and insur
ance costs.
Issues and indicators The sheer
number of potential issues, and hence the
expanding range of possible environ
mental risks, is reflected in the potential
indicators. These includefinancialindi-

cators such as: trends in legal compli

ance; provisions for fines, insurance and
other legally related costs; and landscap
ing, remediation, decommissioning and
abandonment costs. But there is also a
growing need to measure environmental
impacts in terms of new metrics, includ
ing: the number of public complaints;
the life-cycle impacts of products;
energy, materials and water usage at pro
duction sites; potentially polluting emis
sions; environmental hazards and risks;
waste generation; consumption of critical
natural capital; and performance against
best-practice standards set by leading
customers and by green and ethical
investment funds.

WIDESPREAD
DISTRUST IN SOCIETY
IMPOSES A TAX ON ALL
FORMS OF ECONOMIC
ACTIVITY WHICH HIGHTRUST SOCIETIES DO
NOT HAVE TO PAY.

At the company level, the task is

being made somewhat easier by the
development and publication of interna
tional environmental management stan
dards. Globally, there is ISO 14001; in
Europe, there is the Eco-Management
and Audit Scheme (EMAS), which takes
a step beyond ISO 14001 by requiring

companies to produce an environmental

statement for each registered site. Both
schemes are voluntary, but the expecta
tion is that market forces will drive them
down through value chains in the same
way as the total quality management
(TQM) approach has spread.
But we will also need to consider
environmental sustainability at the
ecosystem level, where corporate envi
ronmental management systems are
going to be of little help.
SOCIAL BOTTOM LINE

How should a would-be sustainable cor

poration think about social capital? In
part, it comprises human capital, in the
form of public health, skills and educa
tion. But it also must embrace wider
measures of a society's health and wealthcreation potential.
The book which really switched me
on to the notion of social capital was
Francis Fukuyama's Trust: the social virtues
and the creation of prosperity.5 Fukuyama
says that social capital is "a capability that
arises from the prevalence of trust in a
society or in certain parts of it". It is a
measure of "the ability of people to work
together for common purposes in groups
and organizations". This ability is likely
to be critical to the sustainability transi
tion. It depends on the acquisition and
maintenance of such virtues as loyalty,
honesty, and dependability. The princi
pal benefits flow from a lowering of
social friction.
Conversely, "widespread distrust in a
society imposes a kind of tax on all forms
of economic activity, a tax that high-trust
societies do not have to pay".
Among the questions business people
will need to ask is to what extent are such
concepts as environmental justice and

VOLUME 2 NUMBER 3 MEASURING BUSINESS EXCELLENCE 21

ACCOUNTABILITY

intra- and inter-generational equity

likely to change the ways in which we
define and measure social capital?
Accountability Whatever its critics
may choose to believe, business is part of
society. Governments try to regulate and
otherwise control the social impacts
associated with industry and commerce,
but history is full of examples where the
agenda was created outside the inter
twined worlds of government and busi
ness. Whether it was the crusade to end
slavery or the various campaigns to end
child labour in European and North
American factories, business people have
long found their freedom of action being
increasingly constrained by emerging
social movements.
As globalization gathers steam, the
interface between the economic and
social bottom lines becomes increasingly
problematic. Consider the abortive
attempt by Germany's Krupp Hoesch to
take over its rival Thyssen. This repre
sented an attempt to make the German
steel industry more competitive in the
face of intensifying international compe
tition. But, faced with massed rallies by
steelworkers concerned about the impli
cations for their jobs and protesting
about 'casino capitalism' and calling for
'people before profit', Krupp - and its
partner banks, Deutsche, Dresdner, and
Goldman Sachs - backed down.6
Accounting Social accounting aims
to assess the impact of an organization or
company on people both inside and out
side. Issues often covered are community
relations, product safety, training and
education initiatives, sponsorship, chari
table donations of money and time, and
employment of disadvantaged groups.

Issues and indicators Among the

issues for which performance indicators
have been developed are animal testing,
armaments and other military sales,
community relations, employment of
minorities, human rights, impacts on
indigenous peoples, involvement in
nuclear power, irresponsible marketing,

PROGRESS CAN BE
MEASURED AGAINST A
RANGE OF INDICATORS
BUT THE NEXT STEP
WILL TACKLE
THIS AGENDA IN AN
INTEGRATED WAY.

land rights, oppressive regimes, political

contributions, trade union relations,
wages and working conditions, and
women's rights.
THE TRIPLE BOTTOM LINE
Like it or not, sustainability auditing and
reporting will be all about triple bottom
line performance - and social and ethical
accounting, auditing and reporting in
particular are likely to come up the curve
like so many rockets.7
Check out the 1995 NatWest Group
environment report. "At NatWest," said
Derek Wanless, the giant UK bank's

chief executive, "we are convinced that

the triangle of society, economy and the
environment are the determinants of the
future and we will continue to take
account of that fact in the way we run
our businesses." NatWest ran into some
major financial problems a couple of
years later, suggesting that the economic
side of the bank's triangle had been
somewhat neglected. But growing num
bers of banks will be focusing on this tri
angle in the future.
It is clear that progress - or the lack
of it - can be measured against a wide
range of indicators associated with each
of the three bottom lines of sustainabil
ity. However, the next step will be to
tackle this agenda in an integrated way.
Key tools will be sustainability account
ing, auditing and reporting. In many
respects these concepts are still 'black
boxes', more talked about in generalities
than defined in precise terms, but there is
now fascinating work under way in each
of these areas.
Ultimately, as Professor Rob Gray
and his colleagues put it, sustainability
reporting "must consist of statements
about the extent to which corporations
are reducing (or increasing) the options
available to future generations."7 This
is an extremely complex task, but one
which will probably look much easier
once we have worked our way through a
decade or two of experimentation in sus
tainability accounting, auditing and
reporting.
John Elkington is chairman and co-founder, in
1987, of SustainAbility, a UK-based strategic
management consultancy and think-tank. He
also sits on the European Union's consultative
forum on environment and sustainable

6 Michael Woodhead 'A Pyrrhic victory for Germany', Sunday Times, 30 March 1997.
7 John Elkington and Helen Stibbard 'Socially challenged', Tomorrow, March/April 1997

22 MEASURING BUSINESS EXCELLENCE VOLUME 2 NUMBER 3

development.