The general goal of a sustainable business strategy is to positively impact the environment, society, or both, while at the same time also benefiting shareholders. Business leaders are increasingly realizing the power of sustainable business strategies in addressing the world’s most pressing challenges and driving their firms’ success. However, defining what sustainability means, solidifying clear and attainable goals, and formulating a strategy to achieve those goals can be daunting.
The Triple Bottom Line
One common way to understand a business’s sustainability efforts is by using a concept known as the “triple bottom line.” The triple bottom line is a business concept similar to what the two‐level model of sustainable finance theorizes that firms should commit to measuring their social and environmental impact, in addition to their financial performance, rather than solely focusing on generating profit, or the standard “bottom line.”1
They do this by focusing on three key elements: Profit, People, and the Planet.
Profit
In a capitalist economy, a firm’s success depends on its financial performance or the profit it generates for shareholders. Strategic planning initiatives and key business decisions are carefully designed to maximize profits while at the same time reducing costs and mitigating risk.
In the past, the goals of many firms have ended there. Now, purpose‐driven leaders are discovering they have the power to use their businesses to effect positive change in the world without hampering financial performance. In many cases, adopting sustainability initiatives has proven to drive business success.2
People
The second component of the triple bottom line highlights the societal impact or the commitment a business has to people. It is essential to make the distinction between a firm’s shareholders and its stakeholders.
Traditionally, businesses have favored shareholder value as an indicator of success by only striving to generate value for those who own company shares.
However, as firms have increasingly embraced sustainability, they have shifted their focus toward creating value for all stakeholders impacted by their business decisions. While this certainly includes shareholders, it also includes customers, employees, and community members.3
Planet
The final component of the triple bottom line is concerned with making a positive impact on the planet.
Since the beginning of the Industrial Revolution, large corporations have contributed a staggering amount of pollution to the environment, which has been a key driver of climate change. In 2017, The CDP Carbon Majors Report found that 100 companies in the energy sector were responsible for roughly 71 percent of all industrial emissions.4
While businesses have historically been the most significant contributors to climate change, they also hold the keys to driving positive change. Many business leaders are now recognizing their responsibility to do so.5 To some, adopting a triple bottom line approach may seem idealistic in a world that emphasizes profit over purpose.
Innovative companies, however, have shown time and again that it is possible to do well by doing good. The triple bottom line does not inherently value societal and environmental impact at the expense of financial profitability. Instead, many firms have reaped financial benefits by committing to sustainable business practices. Some examples to support this view include:
- McDonald’s uses humane slaughtering methods—reducing costly injuries and yielding more meat.
- Walmart’s fresh produce “green” packaging (transparent wrap made from corn sugars) is cheaper than petroleum‐based alternatives.
- Starbucks offers health insurance to U.S. part‐time workers—reducing turnover and training costs.6
Investors Are Watching
Beyond helping companies capitalize on a growing market for sustainable goods, embracing sustainable business strategies can be highly attractive to investors.
Mounting evidence has shown that firms with promising environmental, social, and governance (ESG) metrics tend to produce superior financial returns. As a result, more investors have begun focusing on ESG metrics when making investment decisions.7
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I hope you enjoyed the third post in our series on Environmental, Social, and Governance (ESG) investing. Check out other posts in the series here:
An Introduction To ESG Investing
The Theory Of Sustainable Investing
The Popularity of ESG Investing
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(1-3, 5, 7) Miller, K. (2020, December 8). "The Triple Bottom Line: What It Is and Why It's Important". Retrieved from Harvard Business School Online: https://online.hbs.edu/blog/post/what‐is‐the‐triple‐ bottom‐line.
(4) The Carbon Majors Database. (2017). "CDP Carbon Majors Report 2017". Retrieved from https://6fefcbb86e61af1b2fc4‐c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/3 27/original/Carbon‐Majors‐Report‐2017.pdf?1501833772.
(6) Yamada, M. (2019, June 13). "Is Corporate Social Responsibility Just a Marketing Ploy". Retrieved from Advisor's Edge: https://www.advisor.ca/columnists_/mark‐yamada/is‐corporate‐social‐responsibility‐just‐a‐marketing‐ploy/.
The views expressed within this newsletter are subject to change at any time without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security or strategy. This material has been distributed for informational purposes only. All investments carry certain risk and there is no assurance that an investment will provide positive performance over any period of time. Because ESG criteria excludes some investments, ESG strategies may not be able to take advantage of the same opportunities or market trends as those that do not use such criteria.