This blog entry will put forward a case against triple bottom line reporting.
Much of my life lately has returned to capital investment decision making. This area resides with me way back in my roots. I was always drawn to the methods and processes that assisted decision makers in making the decisions that one way or another will alter the course of the organisation. Lately, the focus has moved to assessing investment decisions on a triple bottom line basis. Firstly to jargon. What is triple bottom line? Triple bottom line refers to the observation that any entity, be they an individual or an organisation, has an effect on the human world in three ways; the human world itself (i.e. the society), the natural environment that surrounds that society, and the measure of wealth that exists in that society. With this observation made, it as asserted that each investment decision should be made balancing these three elements. Triple bottom line reporting refers to a report that will measure either qualitatively or quantitatively the effects a decision will have on these three elements. Sometimes it will be referred to as Economic, Social and Environmental reporting. These terms are synonymous in my opinion.
There are many methods of measuring the 3 aspects of the triple bottom line. The most important element to define first, before choosing your method, is time. What time horizon are we looking at in making our decision? If a decision maker's time horizon is very short, then the economic factors will outweigh all else. However, the paradox here is that the decisions made for short term economic effect will have significant medium term and catastrophic long term economic effects (i.e. The measure of wealth will fall). The drivers of this catastrophic economic consequences are the resulting deterioration in society and the environment over the longer term.
If the time horizon of the decision maker is medium term, then the economic effects will still outweigh the social and the environmental. In this instance, the long term economic effects will still be negative and considerable. This time, the main driver initially will be environmental and then this will drive social responses that will then drive economic consequences.
If the time horizon is longer term, then the primary focus of the triple bottom line will be environmental. All things will stem from this. The current measure of this is the economic wealth that is valued in the long term.
There are many definitional issues with the statement above, and like all theories I need to create observations and experiments to prove it. However, if my analysis is correct, then triple bottom line returns to being bottom line reporting and bottom line reporting currently is the measure of wealth. My point is that people misunderstand the purpose of economics. Economics is an abstraction of reality. Wealth is an abstraction of reality. Society and the environment is the reality that economics is describing. By combining the three we are mixing the drivers with the result. Society and the environment are the drivers and economic wealth is the result, or at least one result. Economics provides us with a measure to assist us in making a decision and in tracking performance to that decision. The measure it uses, money, is based on the society and the environment. In essence, triple bottom line is double counting and sometimes triple counting.
Why does it exist? It exists because economics, in its abstraction, does not describe the world effectively enough. In my opinion, either economics has to evolve to better describe the world or a new method of describing the world needs to be developed. The intermediary process of triple bottom line is only confusing the measurement and decision making framework rather than improving it.