Sunday, August 30, 2020

4 Reasons Why the “Triple Bottom Line” Has Failed Investors

Editor's Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following blog post by ESG Researcher Jaishree Singh, MSPH. Please contact Michael.Kraten@SaveTheBlueFrog.com with questions, comments, or suggestions about our blog, or to express interest in our organization.

What is it?

About 25 years ago, John Elkington, co-founder of the consulting firm SustainAbility, coined the term, “Triple Bottom Line” (TBL). This framework pointed out the multiple costs of doing business, namely “People, Planet, and Profit.” Elkington argued that corporations can no longer ignore their societal impact and must account for it in their business. Instead, they should take responsibility for the underlying systems on which they depend, such as human stakeholders (e.g. consumers, suppliers, community) and the environment (e.g. ecosystems, atmosphere).1
 
The TBL has led to numerous other frameworks for tracking progress against sustainable goals or scoring company performance, such as the Global Reporting Initiative (GRI), Environmental, Social, Governance (ESG), and the Social Return on Investment (SROI).2,3 Investments in sustainable funds and companies have also burgeoned. The U.N. expects that sustainable investing will amount to $12 trillion annually by 2030.4
 
During black swan events (like COVID-19), ESG and impact portfolios are better able to withstand economic shocks and generate positive societal outcomes.5 According to Morningstar, in Q1/2020, global sustainable funds made money ($46 billion) while non-sustainable funds lost money ($385 billion).6
 
TBL Strengths: A Foundation for Long-Term Investors

When asked about the value of the TBL framework in a recent interview, asset owners (AO) and managers (AM) said companies that perform well along TBL are likely to grow faster and sustain longer than companies that don’t take “People, Planet & Profit” into consideration. Also, TBL scoring helps de-risk companies and provide more accurate valuations. In the same interview, AMs stated there really is “just one bottom line.” The TBL simply brings attention to material risks/opportunities that affect all industries (either today or tomorrow).7
 
TBL Weaknesses: The “Profit Problem”

In a 2018 article by the Harvard Business Review (HBR), Elkington spoke out against the misuse of the TBL framework, saying that it wasn’t meant to be an accounting/reporting tool, but a means for redefining capitalism.8 His vision was to change the DNA of value creation, revive economies, societies, and the global ecosystem.9




[1]

 


He said that investors don’t need to be reminded about the “profit” prong - businesses are meant to make money. Instead, Elkington proposed changing “profit” to “prosperity,” stating that this word better reflects that idea that company money should ultimately funnel back into society.10

Other weaknesses of TBL and sustainable reporting methods include:[2]

  1. Mutually-Exclusive: The belief that companies/investors must sacrifice one value over another (Profit vs. Planet vs. People) when these values are synergistic.
  2. Non-Specific: Companies can hide bad behavior behind diluted reports that highlight sustainable initiatives and omit less favorable information.
  3. Non-Standardized: Businesses can use the fact that there are so many reporting frameworks to justify inaction against sustainability.

 Case in Point: Global Reporting Initiative (GRI)

The Global Reporting Initiative (GRI), a collaboration between the U.N. and CERES, is one of the largest purveyors of sustainability standards based on the TBL. In 2017, 75% of G250 and 63% of N100 companies used the GRI framework to report their sustainability.[3]

Companies highly regard GRI in that they can choose to disclose Environmental, Economic, and Social information based on what they consider “material.” They cover issues like climate change, human rights, governance, and social welfare. Signatories must adhere to certain reporting principles, but companies find the framework to be highly flexible. GRI’s standards are free to use, updated often, and created with the help of many stakeholders/partners.[4]

However, the weaknesses of GRI mirror those of the TBL itself. High GRI scores don’t correlate with sustainability performance. Companies can exploit the framework to highlight only their strong points, provide incomplete information, and “check a box” - not challenge what’s possible or curb human exploitation of nature. In short, The GRI framework is yet another marketing tool that enables greenwashing and blocks corporate accountability.[5],[6]

Impact Measurement & Next Steps

Investment professionals can take more proactive steps to better track and demand corporate sustainability. One call to action involves standardizing science-based impact measurement, requiring that companies report on all material issues using a single format. Collaboration between investors, companies, and scientists could lead to better compliance and non-dilutive reporting. While TBL has given birth to almost all of the sustainability frameworks used today, it must be revised in order to reflect a critical business component: societal value.

Sources

1.  Investopedia

2.  Forbes

3.  HBR

4.  HBR

5.  Wealth Professional

6.  Seeking Alpha

7.  Seeking Alpha

8.  Forbes

9.  HBR

10.  Forbes

11.  Forbes

12.  HBR

13.  van de Wouw, Seline, and Natali Bremer. "All That Glitters Is Not Gold: An exploratory study into converging and diverging stakeholders perceptions of sustainability reporting." (2020) (pg. 33-34 - in “top” bar.

14. van de Wouw, Seline, and Natali Bremer. "All That Glitters Is Not Gold: An exploratory study into converging and diverging stakeholders perceptions of sustainability reporting." (2020) (pg. 33-34, 35-36 - in “top” bar).

15. van de Wouw, Seline, and Natali Bremer. "All That Glitters Is Not Gold: An exploratory study into converging and diverging stakeholders perceptions of sustainability reporting." (2020) (pg. 35-36 - in “top” bar)

16.  Mähönen, Jukka. "Comprehensive Approach to Relevant and Reliable Reporting in Europe: A Dream Impossible?." Sustainability 12.13 (2020): 5277 (pg. 7-9).



[3] Bremer & van De Wouw, 2020 pg. 33-34 - in “top” bar

[4] Bremer & van De Wouw, 2020 pg. 33-34, 35-36 - in “top” bar

[5] Bremer & van De Wouw, 2020 pg. 35-36 - in “top” bar

[6] Mahonen, 2020 pg. 7-9


Saturday, August 1, 2020

Integrated Reporting and Risk: A Helix and a Spring

Editor's Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following blog post by Michael Kraten, Professor of Accounting at Houston Baptist University. Please contact Michael.Kraten@SaveTheBlueFrog.com with questions, comments, or suggestions about our blog, or to express interest in our organization.

This post has also appeared on the blogs of the Public Interest Section of the American Accounting Association, and on Dr. Kraten's own blog Save The Blue Frog. We encourage you to use these links to peruse these outstanding online publications.

Three years ago, COSO updated its Integrated Framework for Enterprise Risk Management (ERM). It was a noteworthy event in the business community, given that the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is the leading authority that promulgates guidance about internal control and enterprise risk management systems.

Prior to this update, organizations utilized a cubic ERM framework that COSO first promulgated in 2004, following a scandal plagued era that featured the collapses of Enron, Arthur Andersen, and WorldCom. The original cubic ERM model emphasized the practices of event identification, risk assessment, control practices, and response capabilities.

After years of widespread use, the 2004 COSO Cube became synonymous with the practice of ERM. In its 2017 update, though, COSO presented a new “Focused Framework” with five components: (a) Governance and Culture, (b) Strategy and Objective Setting, (c) Performance, (d) Review and Revision, and (e) Information, Communication, and Reporting. To emphasize the “interrelated” nature of these five components, COSO designed a visual framework that weaves the five together in the form of a multi-colored Helix.

The designers of the Integrated Reporting <IR> Framework may have taken this Helix into account when they defined their own framework development goals earlier this year. Since 2013, issuers of integrated reports have used the International Integrated Reporting Council’s (IIRC’s) colorful Six Capitals model to structure their presentations. Some even referred to the framework as the Octopus Model, given its vaguely mollusk-like shape.

Like COSO, the IIRC felt the need to update this original framework. Its design project remains in progress, but the organization recently issued a model entitled “From String to Spring” that features an extension of the Six Capitals model.

Each of the six capitals of the <IR> Framework, like each of the five components of the ERM framework, is represented by a colorful String. Whereas the five “interrelated” Strings of the ERM framework are woven into a colorful Helix, the six “integrated” Strings of the <IR> Framework are woven into a colorful Spring.

Given the obvious similarities between the Helix and the Spring, it is hard to believe that the two design teams were oblivious to each other’s efforts to update their original Frameworks. Indeed, by presenting such similar models, COSO and the IIRC remind us of the significant “interrelationships” and “integrations” that link the functions of enterprise risk management and integrated reporting.