Measuring the New 'Triple' Bottom Line

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GaryCokins

Over the past century, free-marketcapitalism has done much to raise theeconomic prosperity of citizens indeveloped nations. Now, capitalismappears to be accepting an advancedmission — to help and possibly savethe pkinet.

Indeed, the focus on corporatesocial responsibility (CSR) and envi-ronmental management is no longerjust an afterthought in an annualreport or a public relations message.Terms like "sustainabiiity" and "goinggreen" have become fixtures in thebusiness media.

These terms embrace environmen-tal and climate change responsibility,as well as corporate social interests in

consumer safety, healthand poverty reduction.And, sustainabiiity is away of thinking and act-ing when making deci-sions, not just a reactionafter wrong decisions havebeen made.

At a minimum, theCSR movement willinvolve external reportingthat falls within the nor-mal role of the chief ñnan-cia! officer. Reporting isone thing. Making positive changes isanother. Through a series of questionsand answers, the following attempts todiscover how CFOs might be affected.

With a growing focus onsustainabiiity and "green"initiatives, external reportingfor such activities naturally fallunder the CFO.It's a good time for financeexecutives to consider thescope of their responsibilitiesnow and into the future.

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• Howr do sustainaJ>ility andgreen ntovements affect aCFO's responsibilities?

The issues of oil, greenhouse gasemissions, global warming andpoverty affect every organization'ssocial and environmental perform-ance, as well as its financial health.This rather recent occurrence hasled to variations of the term "triple"bottom line reporting to encompassprofit, people and planet.

The chief financial officer'sorganization traditionally has beenresponsible for collecting, validat-ing and reporting data as informa-tion, The sustainability and greenmovement will extend this funda-mental role to nonfinancial andnonoperational information as thebusiness community redefines theterm "resource."

Eor example, the economicdimension of sustainability dealswith the organization's impact onboth economic conditions for itsstakeholders and on economic sys-tems at the local, national and glob-al levels. Therefore, an extendedfinancial performance aspectinvolves sustainability measuresthat take reporting beyond the tra-ditional measures oí performanceand quality.

In addition, greenhouse gas andenergy reporting to satisfy the triplebottom line will introduce new datasources and data collection proce-dures, but reporting methods usedby accountants will be similar tothose already used.

• What key Issues and chal-l e n g e s face the CFO*sorganizat ion?

A key challenge will be to bal-ance new and unfamiliar compli-ance reporting activities whileassisting the organization in mak-ing sound decisions regardingimprovement efforts.

With accounting, CFOs balanceexternal financial reporting forinvestors and regulatory stakehold-ers (mainly for economic valuation)with internal managerial accountingthat is valuable to the organization

for internal decision-making.If CEOs primarily focus their ener-

gy on compliance reporting, thenmanagers and employees alike aredenied the managerial informationneeded to improve the organization'sperformance. Too much emphasis oncompliance reporting can also have anegative impact on social and envi-ronmental reporting efforts. As aresult, only minimal contributionsare made toward finding ways formanagement to reduce the organiza-tion's carbon footprint.

Therefore, weighting the indica-tors that affect the triple bottom linereporting will become an importantissue when optimizing organiza-tional performance in the context ofsustainability. In short, CFOs willneed to encourage their organiza-tions to formulate sustainabilityand green strategies at the sametime they are supporting enterpriseperformance management initia-tives. There is an emerging connec-tion between adopting sustainabili-ty and green practices and success-ful, long-term economic growth.

• What do sustainabilityand greening portend forthe future role of the CFO?

CFOs may be concerned thattheir reporting workloads willincrease. The Sarbanes-Oxley Act of2002 — among other regulatorymeasures — has created additionalwork. However, as the CFO role hasevolved from history reporter tostrategic adviser, finance chiefshave become valuable members ofthe executive team.

The sustainability and greenmovements provide an opportunityfor the CFO's organization to focuson more than just reporting; it canalso provide the analysis needed toidentify, in economic terms, how tobetter manage the organization'sconsumption of natural resources,such as carbon dioxide and power.Many organizations have littleexperience with such analysis.

CFOs are now gaining competen-cies with performance measurementscorecards and operational dash-

boards. They are recognizing thatleading indicators measured during atime period have causal and correlatedrelationships with lagging indicators,such as the financial results, reported atthe end of a time period.

Environmental reporting will resultin the emergence of CSR and greenscorecards, including measurements ofkey success areas, shortcomings, opera-tional and organizaUonai risks and theirinfluence on economic performance.

Similar to business performancemanagement reporting, the key willnot only be monitoring the dials,but also the actions taken to movethe dials on analyzing information,forecasting trends and identifyinggaps, among other activities.

• What skills and adaptiven«easures might CFOs need?

The monitoring of greenhousegases, water and power usage willrequire accounting practices quitesimilar to monetary currencies suchas expense reporting and productand customer-cost reporting. That'sthe good news. Obviously, CFOsmust become competent in theaccounting methods used fornoneconomic resources, such as car-bon footprint calculations.

A challenge for the finance chiefswill be to shift their thinking fromdebit and credit issues to modeling.For example, activity-based costing(ABC) is widely accepted as consis-tent with the cause-and-effectaccounting principle to transformresource expense spending into cal-culated costs of outputs, such as aproduct cost, that consume resources.Costing is basically modeling.

However, many CFOs retain thetraditional practice of allocatingindirect expenses, using cost alloca-tion factors with broad averagesthat produce misleading costs.Advanced organizations havealready demonstrated that theirABC modeling software can substi-tute carbon dioxide equivalents formoney and quantify how much andwhere their energy inputs convertto specific outputs, such as build-ings or products.

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Carbon footprint modeling pro-vides organizations with visibilityand transparency for the carbon foot-print quantities of their products andservices back to the sources. OtherCSR methods include life-cycleassessment and design for environ-ment, used for performance andprocess evaluation. CFOs will needto adopt these types of progressivemethods, or else their managers andteams will have to guess where thebest trade-offs lie.

• Are CFOB "embrac ing"the suatainability andgreen ing nioven«ents?

The answer depends on the inter-pretation of the term "embrace."Most CFOs are personally cognizantof the new era, But truly embracingsustainability and greening willlikely require regulations, standardreporting and cap-and-trade marketforces to bring traction.

Market-based capitalism can bemobilized to facilitate greenhousegas management, monitoring andreduction. There is a price that can beplaced on carbon dioxide and otherenvironmental factors. This needs tobe done and put in a market context.The current climate-energy-pollutionsituation is an opportunity disguisedas a problem.

These methods are in their infancy.In the U.S., by presstime, the

House had passed its version of theAmerican Clean Energy and Securi-ty Act and climate change legisla-tion was making its way throughthe Senate.

• What advice is offered forCFOs dea l ing with thegrouring sustainahil i ty andgreen landscape?

CFOs need to accept that thismovement is here to stay. Theirchallenge is to start thinking of theorganization's social and environ-mental responsiveness as an assetand opportunity, not as a liabilityand extra costs.

Implementing CSR must take theimportant step from a cost focus to avalue-creation focus, where life-

cycle assessment, energy/carbonmanagement and design for envi-ronment become strategic tools formanaging the bridge from cost tovalue. This will be a strategicprocess challenging CFOs to sup-port their organizations in makingnew types of decisions based onnew information.

Not all of this information will heconventional numbers that can be con-solidated easily. Therefore, the CFOshould help build a knowledge man-agement organization that can calcu-late company performance, includingunstructured environmental, climateand social parameters.

Reasoned actions can favorablyresult in improved processes, inno-vations, reputations and increasedfinancial profitability. Investing insustainable practices can deliver apositive financial return for share-holders.

Ultimately, the sustainahilitymovement is about looking at thebusiness across a longer time hori-zon, and identifying long-term risksand opportunities before one's com-petition. It's about a fundamentalshift from short-term growth tostrength and long-term viability.The earlier the CFO is able to masterthis transition, the better off thecompany will be.

• What resources are avail-able to get up to speed?

An Internet search will produce alandslide of information. Forstarters, to understand sustainabili-ty reporting, check out the guide-lines of the Global Reporting Initia-tive, which are said to be voluntari-ly followed by more than 1,000organizations in 60 countries.

GRI is a nonprofit network-basedorganization (based in The Nether-lands) that produces one of theworld's most prevalent standardsfor sustainability reporting — alsoknown as "ecological footprint" —guidelines and aims to make sus-tainability reporting by all organi-zations as routine as and compara-ble to financial reporting.

Value reporting (as noted on

GRl's Web site) is where organiza-tions publicly communicate theireconomic, environmental and socialperformance.

Among past supporters listed onGRl's site are: European Commis-sion, UN Foundation, World Bank,Bill and Melinda Gates Foundation,Rockefeller Brothers Fund, the SorosFoundation and governmental bod-ies from the United Kingdom, Swe-den, Germany and Australia.

Another good source is the book.Green to Gold: How Smart CompaniesUse Enviro}ime}üal Strategy to Inno-vate, Create Value, and Build Competi-tive Advantage, by Daniel Esty andAndrew Winston. It contains exam-ples where organizations have affect-ed their bottom line with sustainabil-ity improvements and innovation.

Sustainability Can be ProfitableOrganizations face the perceivedparadox of simultaneously trying tomanage social performance for the"betterment of the planet," whilemaintaining financial performancefor shareholders. This creates chal-lenges to develop information sys-tems to identify opportunities andsupport decisions.

Through innovative thinking,they can develop new methods thatboth increase revenues and reducecosts. And higher profits provideexecutives discretion to divert someof the increase in retained earningsto more environmental investments.

Understanding the cost-versus-benefit ratio of sustainability initia-tives will involve analytics similarto those used in performance man-agement. The better an organizationunderstands the ratio, the better itsfinancial performance.

GARY COKINS (gary.cokins@sas.com) is a

product markefing manager for World-luide Performance Management Solutionsat SAS, a Cary, N.C.-based business ana-lytics software and services provider. He'san internationally recognized expert,speaker and author, whose latest book isPerformance Management: IntegratingStrategy Execution, Methodologies,Risk, and Analytics (www.witey.eom).

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