The Triple Bottom Line: Authentic New Model or Tripartite Nonsense?

By Steven F. Hayward

            "It won't be an oil company that will change the world," declares TV producer Philomena Ryan in splashy full-page newspaper ads sponsored by BP corporation.  "BP " used to stand for "British Petroleum," but on the ad we are given to understand that "BP" now stands for "Beyond Petroleum."  BP shareholders beware: this ad campaign seems to suggest that BP intends to go out of business. 

The claim "It won't be an oil company that will change the world" is narrowly true: oil companies already did change the world a century ago, so now it is probably someone else's turn.  That's not what BP has in mind.  Instead, BP informs us that "In 1997 we were the first in our industry to recognize the risks of global climate change and set a target to reduce our own greenhouse gas emissions" at its refineries.  BP proudly achieved this target ahead of schedule to the plaudits of environmentalists, who (for now) politely overlook that fact that motorists keep using more and more of BP's CO₂-producing products-the equivalent of the anti-smoking movement praising tobacco companies for using recycled paper in their cigarette rolling plants.

What's going on here?

            Environmentalists have, of a sudden, begun to embrace the virtues of market capitalism-sort of.  Corporations, meanwhile, have begun to discover that environmentalism can be profitable-up to a point.  Is the lion really snuggling up next to the lamb after all?  And if so, in this age of genetic modification, what is the progeny likely to be? 

            The progeny of this odd convergence is something called the "triple bottom line."  To the standard bottom line of profit-and-loss are added two more categories with balance sheets of their own: environmental quality, and social justice.  Forget "win-win" situations; now we are told we can have "win-win-win" situations. 

            At first glance this new enthusiasm may appear to be environmentalists trying to make lemonade from the lemons history has dealt them.  The "limits to growth" argument that characterized the modern environmental movement has been widely and thoroughly discredited, while the American economy has proven that it is possible to have vigorous economic growth along with falling pollution and more efficient resource use.  The limits of bureaucratic regulation and the ascendance of market-oriented solutions to environmental problems (mostly developed by non-environmentalists) threatened to leave environmentalists at the back of their own parade.  The Worldwatch Institute, for example, published a book entitled The Natural Wealth of Nations: Harnessing the Market for the Environment, in which the author (David Roodman) conceded that government regulation fails "for precisely the reason that central planning has run aground almost everywhere it has been tried."  Another recent entry is Natural Capitalism: Creating the Next Industrial Revolution by Paul Hawken, Amory Lovins and L. Hunter Lovins.  The Lovinses are famous for advocating "soft" energy technologies (that is, energy sources that don't work for modern economies), while Paul Hawken, co-proprietor of the garden supply chain Smith & Hawken, has proven himself a capitalist genius for his ability to take a $3 trowel, paint the blade green and stain the handle, and sell it to you for $30.  (Did I mention that Smith & Hawken is based in Marin County, which long ago gave up any Smith & Wesson attitudes. . .)  Hawken, et al., praise markets for "their ingenuity, their rapid feedback, and their diverse, dispersed, resourceful, highly motivated agents [which] give markets unrivaled effectiveness."

            With all this market-affirming language, it is tempting for the long-suffering advocates of free markets and individual liberty to declare "we've won!" and do a sack dance in the lobby of the Sierra Club.  But a closer look at the details shows that the newfound green embrace of market capitalism is highly superficial, and represents a protean adaptation of their essentially unchanged socialist impulse for control over people and things.  Much of this new green capitalism has the quality that Winston Churchill once observed of Stanley Baldwin: "Occasionally he stumbled over the truth, but hastily picked himself up and hurried on as if nothing had happened."

            Consider the three parts of the "triple bottom line" in reverse order of mischief.  "Social justice" immediately raises a red flag (in every sense of the term) because it is a euphemism for egalitarianism; adding the adjective "social" to the idea of justice does not meaningfully inform the principles of justice, which have stood on their own for millennia.  In fact, "social" justice, if it has any distinct meaning at all, is a disingenuous attempt to turn justice on its head by claiming legitimacy for a redistributive agenda.  The people who use the undefined vocabulary of "social justice" are usually the same people who speak of "unbridled" capitalism without defining in any serious way what exactly is meant by "unbridled," let alone acknowledging that "bridled" capitalism is better known as either fascism, statism, or corporatism. 

            Environmental quality, the second leg of triple bottom line, can be more straightforward so long as sensible standards are applied.  Most businesses, especially manufacturing firms, have emissions and resource-use profiles that can be measured and improved-upon through various means.  And most large corporations these days now produce annual environmental reports to go alongside their annual financial reports, detailing company progress on various environmental benchmarks.  Most of these gains are mere efficiency gains, which can even be profitable in many cases.  In one widely heralded case, the Natural Resources Defense Council (NRDC) teamed up with Dow Chemical in Michigan on a "source reduction initiative" that set as its goal a 35 percent reduction in the amount of pollution discharged at Dow manufacturing plants.  At the end of a three-year process Dow had not only exceeded the target, achieving a 43 percent reduction in discharges, but saved a net $5 million a year in production costs that now flows to the financial bottom line as additional profit.  (The production changes required to achieve this savings cost $3 million.)  Here, we are told, is a classic "win-win" for both the financial and environmental bottom lines.

That an evil chemical company can make money while reducing pollution is almost no fun at all to hard shell environmentalists (The NRDC's Linda Greer, who spearheaded the NRDC-Dow project, told an interviewer: "If you told me five years ago that I was going to help Dow increase its profitability by $5 million a year, I would have stood and waited for the punch line!"), though it has provided the greens with the idea that there are huge profitable efficiency gains just waiting to be captured if only lunk-headed corporate executives will wake up and look for them.  Environmentalists are only too happy to lend their "expertise" on plant efficiency.  Although there are lots of efficiency gains that can be profitably attained, a one-dimensional focus on efficiency gains leaves out of account both opportunity cost of dedicating working capital and trained personnel to this as opposed to other tasks, and consideration of the internal rate of return (IRR) on the company's capital.  In other words, efficiency gains may have a much lower rate of return on capital than other potential investments a company may be able to make.  In the fullness of time, a corporation needs to devote its capital to investments with the highest rate of return.

This is not a hairsplitting or trivial consideration.  U.S. oil refineries, for example, spent nearly 50 percent of their capital expenditures between 1991 and 1995 on pollution abatement equipment, according to the World Resources Institute, little or none of which added to the bottom line.  (Most of this expense was required to comply with the Clean Air Act.)  The energy industry spent $8.5 billion in environmental compliance costs in 1998, which was more than twice the net income of the top 200 oil and gas companies.  After such mandated expenditures, it is natural that companies would wish to devote their remaining working capital to developing assets that add to the bottom line in a more meaningful way than an incremental efficiency gain.  (Also, given the long-term trend toward greater energy efficiency and raw material use, in many cases these efforts amount to merely speeding up efficiency gains that would be achieved in any case.)

While some environmentalists, such as the NRDC's Greer, recognize these finance considerations ("they have in mind other investments for that $3 million that they think will be more profitable," says Greer), the more creative environmentalists suggest that we need new "metrics" to calculate the financial bottom line that reflect the "value" of "social capital" and "intellectual capital."  Neither of these categories is self-evidently silly; to the contrary, the idea of "social capital" has been developed by scholars on both the left and right, such as Robert Putnam and the late Edward Banfield, while the significance of intellectual capital is central the rise of the information economy.  But the marketplace has ways of assigning value to the intellectual capital of firms such as Microsoft or Intel, where the higher multiples of earnings reflected in the stock market price express the fact that the accumulated human knowledge of the company's employees greatly exceeds the standard book value of raw materials and physical assets.  These valuations may or may not be "correct," but they are recalculated daily by millions of investors in the daily auction of the stock market, rather than imposed by subjective fiat of a special interest group. 

This is not what environmentalists mean by assigning value to these intangibles.  They are looking for ways to shoehorn the idea of sustainable development into accounting standards that assigns a proper negative asset and cash flow value to environmental externalities.  While no one has yet come up with proposed FASB (Financial Accounting Standards Board)-style rules for doing this, there is great agitation to make triple bottom line sustainable development "a board level issue."  And it is making some headway in boardrooms.  Monsanto's CEO Robert Shapiro wrote in a 1995 corporate environmental report: "We have to broaden our definition of environmental and ecological responsibility to include working toward 'sustainable development.'"

Meanwhile, environmentalists are not waiting for serious conceptual work on how objective accounting standards might incorporate environmental concerns.  They are starting to play the stock market game by "warning" investors that companies that do not heed the call of the triple bottom line will see their market value decline.  It is a sophisticated way of mau-mauing corporations that don't toe the green line.  A special target of green wrath is ExxonMobil, which has steadfastly refused to enter a guilty plea as a destroyer of planet Earth.  Campaign ExxonMobil, a self-appointed pressure group dedicated to making ExxonMobil annual shareholder meetings as unpleasant as possible, recently sponsored an ostensible shareholder valuation analysis by some outfit known as "Claros Consulting" which argued that ExxonMobil's market capitalization could fall by as much as 10 percent (or about $20 billion) because of its refusal to take global warming seriously or invest in renewable energy technologies.  Then the World Resources Institute got into the act, with a study of "Emerging Environmental Risks and Shareholder Value in the Oil and Gas Industry" which argued more cautiously (but still spuriously) that ExxonMobil and other energy companies face an average loss in market value of about 6 percent. 

There is something more than a little ironic-even comical-about environmentalists pretending to be stock market analysts at the very moment that stock market analysts have fallen into disrepute with the public, and when market volatility has greatly exceeded the possible range of valuation changes under either of these studies.  (Next they'll be telling us that internet companies are a good investment.)  This suggests that the probity of these studies is about zero.  Naturally the favorite companies of the greens are those companies that make vocal pledges to fight global warming and invest in renewable energy such as BP and Royal Dutch Shell.  If these green stock market valuation studies are correct, we could expect that investors would already be giving the greener companies higher valuations in the stock market.  Yet even after the horrendous market shakeout of July, ExxonMobil's price-earnings ratio was a third higher than either BP or Royal Dutch Shell, suggesting that investors believe the earning prospects for ExxonMobil are much better than for their greener competitors.  ExxonMobil also enjoys a higher profit margin and higher return on shareholder's equity than BP or Royal Dutch Shell, reflecting perhaps that ExxonMobil isn't wasting capital on unproductive renewable energy technologies.  (In fact, ExxonMobil has the highest return on equity in the entire energy industry, according to the Value Line Investment Survey.)

The green solicitude for shareholder value becomes even more absurd when we keep in mind the environmentalists' all time favorite energy company: Enron.  Enron endorsed the Kyoto protocol and was positioning itself to be a key broker of any tradable emissions permit scheme that might used to help meet Kyoto CO₂ reduction targets, though cynics may wonder whether Enron saw this as another market it could manipulate or employ creative accounting to puff up phony profits.  Indeed, the former CEO of Enron, Jeffrey Skilling, is reported to have said: "We are a green company.   The green we like is money."

Paul Georgia of the Competitive Enterprise Institute compiled a sampler of environmentalist endorsements of Enron.  An internal Enron memo in 1997 noted: "Enron now has excellent credentials with many 'green' interests including Greenpeace, World Wildlife Fund, Natural Resources Defense Council, German Watch, the U.S. Climate Action Network, the European Climate Action Network, Ozone Action, World Resources Institute, and Worldwatch."  Ralph Cavanaugh of the NRDC wrote: "On environmental stewardship, our experience is that you can trust Enron."   In April 2000, NRDC listed Enron as one of several "progressive companies" that "support responsible global warming policy."  And Jim Marston with Environmental Defense also praised Enron, saying, "They are smart.  They think that being pro-environment is a good business and political strategy."  And in his 2001 book Eco-Economy, Lester Brown praised Enron for being "keenly aware of the part it can play in the transition to the new energy economy."

            Enron's bankruptcy neatly parallels the bankruptcy of green accounting, as neither of the collateral bottom lines of the triple bottom line (environmental quality and social justice) could help keep Enron from collapse.  The thousands of people who lost their jobs and their retirement savings in the Enron debacle remind us that a corporation's first duty to its shareholders and employees is to make a profit; the old-fashioned, one-dimensional financial bottom line takes precedence.  The failure to do so, as Enron and other fraudulent corporations that have collapsed in recent months show, has its own serious social consequences. 

            The example of Enron shows that that environmentalists are trying to turn corporations into social service adjuncts of a statist agenda-something that market-oriented corporations are not supposed to be. 

Steven F. Hayward is F.K. Weyerhaeuser Fellow at the American Enterprise Institute in Washington, and author of the Pacific Research Institute's annual Index of Leading Environmental Indicators.
 

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