The Triple Bottom Line

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1 The Triple Bottom Line Accountants can play a key role in finding the real value in corporate social responsibility programs. FROM: JAN-FEB 2004 ISSUE OF CGA MAGAZINE BY ALISON ARNOT Envision Credit Union, located in B.C.'s Fraser Valley, is committed to supporting its community through business education partnerships, sponsorship programs, and its own charitable foundation. Its initiatives include support for a project to build houses to accommodate foster children in Surrey, B.C., and providing co-op placements for high school students and in-class lectures to local schools. The credit union lets its members know about this work through its Web site and annual report. Larger corporations, like the CIBC, Enbridge Inc., or Suncor Energy Inc., formally report on activities such as these so that shareholders and other stakeholders have a full understanding of what the organization has been doing. Like all large financial institutions, under the Bank Act, the CIBC must produce a statement describing its contributions to the economy and society. It has been producing its Public Accountability Statement since Meanwhile, Enbridge's Web site includes a section outlining its Environmental, Health and Safety Policy as well as its commitment related to climate change. Suncor, for its part, releases an annual Report on Sustainability, prepared in accordance with the Global Reporting Initiative's (GRI) Sustainability Reporting Guidelines, which are international standards for tracking sustainability efforts. Each of these companies, to different degrees, is paying attention to its corporate social responsibility (CSR) its "commitment to contribute to sustainable economic development, working with employees, their families, the local community, and society at large to improve their quality of life," as defined by the World Business Council for Sustainable Development. "Credit unions by nature are creatures of the community," says Envision president Peter Podovinikoff, CGA. "Corporate social responsibility is a natural. The more socially responsible we are, the more members we attract." However, despite its efforts to be a good corporate citizen, something has been missing in Envision's CSR initiatives a formal report on how it is doing. This is not an unusual phenomenon. "Not a lot of companies are doing a good job on this right now," says Blair Feltmate, director of Sustainable Development at the Ontario Power Generation. "A lot of companies are doing well on sustainable development. What they're not very good at is communicating what they are doing in an effective manner." And it's important that this information gets out. The findings of a recent Ipsos-Reid poll underlined this with more than half of the respondents (55 per cent) saying they have consciously decided to buy a product or service from a company because they felt it was a good corporate citizen. Similarly, half of the respondents (52 per cent) have consciously refused to do business with a company that has not conducted itself in a socially responsible way. No longer is it acceptable to present stakeholders with pure financial information. They want to know how the company achieved that financial performance; they want to know the extent of its corporate social responsibility. Reporting Good Deeds Up to now, most organizations simply communicated CSR initiatives in policy reports or in the management discussion and analysis section of the annual report. However, there's been a recent push to measure it, to give it some tangible meaning for stakeholders to grasp. This is triple bottom line reporting a measurement of the social, environmental, and economic performance of a company. "This reporting would contain information on things like how an organization, by being a good corporate citizen, managed to fast-track expansion, streamline operations, achieve discounts on the cost to borrow capital, reduce insurance premiums or improve attraction and retention of employees," Feltmate says. While Envision currently describes its CSR initiatives in a section of its annual report, the credit union has been working with Canadian Business for Social Responsibility (CBSR), a non-profit

2 network of companies working to improve their CSR, to document this work and set down a specific CSR policy. The aim is to have a separate accountability report ready in Podovinikoff hopes this report will illustrate the impacts these efforts have on the bottom line. "That is the project we're working on, to try to get measurable qualifications of what CSR does," he says. Like Podovinikoff, company executives know that being socially responsible improves their bottom line. The recent Pricewaterhouse-Coopers Global CEO Survey indicates as much with 70 per cent of CEOs saying they believe corporate social responsibility programs actually contribute to their companies' profitability. But can these companies really get a true measure of this profitability? Feltmate describes the information contained in current triple-bottom-line reports as more anecdotal since, in many organizations, the finance staff does not handle the CSR function. "Practitioners of sustainable development have not communicated well with the financial community," he says. "I think accountants need to work more closely with the people who are making sustainable development happen within companies to identify the actual wealth creation being realized in dollars and cents or goodwill, or both." He adds that accountants should be charged with the task of conveying to stakeholders employees, shareholders, union groups, and regulators how sustainable development is a revenue generator or value driver for the company, with specific examples. New Measures So how do you measure the financial results of seemingly intangible efforts like Enbridge's "taking prudent and precautionary actions to reduce greenhouse gas emissions throughout the Corporation and its subsidiaries" or "providing education and awareness on climate change to our employees, customers, and stakeholders?" "The existing mechanisms that a company has for tracking and measuring financial performance can be used to track, measure, and report on other indicators," says Adine Mees, president and chief executive officer of CBSR. "A company needs to first agree on the non-financial performance measures to report," Mees continues. It then needs to understand who its most critical stakeholders are. Who is going to be using this information and what are they going to be looking for? What impacts does the company have on society and the environment? Where is there a potential risk or business opportunity? And what does the company need to be tracking and measuring with respect to this? "Simply monitoring a company's financial statements isn't really going to tell you how viable that company is," Mees says. The challenge is to tie the information on sustainability programs to the financial statements. Several measurement standards and guidelines, such as the GRI Sustainability Reporting Guidelines, have been developed to help organizations assess and report on their CSR initiatives (see sidebar, "Standards, Guidelines, and Assessments"). But few truly address the economic or financial component of the triple bottom line. There are no government or accounting initiatives to require corporate social responsibility, says Stephen Spector, FCGA, proprietor of Spector and Associates and chair of the CGA-B.C. ethics committee. "There's no hard way to measure it," he says. "How do you measure success?" He points out that if one company engages in actions deemed socially responsible and then experiences gains in its market share in comparison to its competitors, you could argue that the gains were a result of its CSR efforts. The measure would be associative, rather than conclusive. "For an oil company, it's less costly to do a good thing than to do a bad thing," Spector points out. To behave badly costs nothing, but there are indirect costs in bad publicity and consumer reaction. All CSR acts are the result of a cost-benefit analysis. "No business can survive by truly being altruistic," Spector adds. "In the long run, you believe that the gain to you through advertising, word of mouth, public recognition, the warm and fuzzies people have about you is going to be worth the expenditure. The biggest problem corporations have is quantifying the opportunity costs." Many reports are already written according to the GRI guidelines. Still, these don't drill down to value creation within companies and the ultimate impact on share price performance, Feltmate 2

3 says. For members of the financial community, such as financial analysts and institutional money managers, when they read a report, they are not going to read past the first couple of pages, he continues. "Don't tell them about saving the Earth; they want to know about the value creation realized through sustainable development." These reports need to include information on risk protection in financial terms, the impact on cash flow, the gain in access to markets, and the impact on employee productivity. Feltmate adds that GRI misses the mark since it doesn't explain the need to put the financial information up front. "Accountants are missing in the equation," he says. The Conference Board of Canada is working to change that. In November 2003, it launched a research project entitled, "Translating Corporate Sustainable Development Practices into Financial Valuation Measures." The aim of the project is to develop an analytical framework and guidance for companies to assess the quantitative values that they are creating through their CSR programs and communicate that to capital markets in a way they can understand, explains Ron Yachnin, senior research associate at the Conference Board. Current sustainable development metrics are difficult to relate to potential earnings or risk, he says. The Conference Board is developing a framework to help companies with this. "The aim is to identify key sustainable development measures of performance applicable to industry sectors," says Feltmate, who is working with Yachnin on the project. Then once they have identified 30 or 40 key measures, they will look for ones with a predisposition of being translated into financial valuation metrics. The research team will work with the CSR staff, accountants, and chief financial officers of companies in several industries, including technology, utilities, oil and gas, and mining, to find quantitative measures of sustainable development initiatives. Its target audience is corporate executives, organizations that make investment decisions in capital markets, commercial and investment bankers, retail and institutional investors, and all the accountants who work for these groups. The goal is to complete the project in August The Social Audit Even though real financial measurements of corporate social responsibility are still to be found, companies are using financial resources to audit their performance in this area. David Simpson, director of InterPraxis, a Toronto-based social and economic consulting firm, describes the social audit as using the tools of accounting to measure CSR, though the indicators are decided a bit differently. "There's a vagueness around the term social audit," Simpson says. "It closely resembles a financial audit." "A social audit is basically two things: an accountability mechanism and a management tool for learning about and responding to stakeholders, to see if what a company is doing measures up to its values," Simpson explains. It takes a broad approach, using an accountability framework to look at an organization's accounting for and reporting on policies and procedures, their impacts on stakeholders, its fairness and honesty to suppliers, and its community and charitable involvement. "Companies have obligations other than the financial in terms of being social and environmental. And the first stage of that is their reporting on that, going back to the old adage 'What gets measured, gets managed,'" says Simpson, adding that how effective that is is seen in the social audit. Although the social audit is an external function, the accounting department can provide assistance in assessing control and risk and performing audit tests. "The social audits that I've done have relied upon the financial audit," Simpson says "If I'm using stuff that's come out of the financials, or the general ledger, I have confidence that it's already been vetted, so you don't need that duplication." Envision plans to undergo a social audit in "We should first document policies and guidelines for our current initiatives so that an audit can then measure our initiatives against the policies and guidelines," Podovinikoff says. 3

4 Quality to Quantity Traditionally, accounting has been about accounting, looking at the financials of the company. However, emphasis has been increasingly placed on performance measures, broader concepts that include non-financial measures. Accountants now need to pay attention to a broader range of indicators. "The logical place for the social audit or the triple-bottom-line or sustainability reporting to reside is with the finance committee, the vice-president of finance, the director of finance, or the CFO," says Adine Mees. Currently, companies can report these non-financial performance indicators, presenting the whole corporate social responsibility picture, in the management discussion and analysis section of the annual report or in a separate policy document. However, as the Conference Board's Ron Yachnin points out, "Things will be moving toward an ability to go beyond a qualitative story about how the company is doing based on GRI metrics to actually beginning to quantify the impact in financial terms." "Companies need to work to tease out that link to how much business or financial value they are creating with these programs. And that's where an accountant could play a fundamental role," Yachnin says. And that is Envision Credit Union's goal. Podovinikoff says. "We know [CSR] does reflect on the bottom line, and we are trying to document that." Standards, Guidelines, and Assessments There are a variety of guidelines, standards, and assessment tools available to help an organization assess its corporate social responsibility. Here are just a few. The Global Reporting Initiative (GRI) [ has produced the Sustainability Reporting Guidelines. Its reporting framework presents principles and specific content indicators to guide an organization in preparing sustainability reports. The aim is to help organizations present a balanced and reasonable picture of their economic, environmental, and social performance, as well as promote comparability of sustainability reports. The Guidelines are not a code, set of principles of conduct, or a performance standard and they do not provide instruction for designing a data management and reporting system or offer methodologies for preparing, monitoring, and verifying reports. The AA1000 Assurance Standard [ was launched in March 2003 by AccountAbility, an international, not-for-profit, professional institute dedicated to the promotion of social, ethical, and organizational accountability. The standard is designed primarily for assurance providers and complements the GRI reporting guidelines and other approaches to disclosure of CSR policies. Using the standard, assurance providers would assess reports against three assurance principles: Materiality: does the sustainability report cover all areas of performance? Completeness: is the information complete and accurate enough to assess and understand an organization's performance? Responsiveness: has the organization responded to stakeholders' concerns and interests? The Corporate Responsibility Assessment Tool, developed by the Conference Board of Canada [ CR_AT/], is a Web-based tool that companies can use to manage, measure, and improve their CSR performance. It is designed to give management a better understanding of how developed their CSR practices are compared to public expectations. The tool provides a development scale to help companies identify where they are making progress and where they require more effort. The Good Company Guidelines, produced by Canadian Business for Social Responsibility [ good_guidelines.cfm] are a similar assessment tool. Their goal is to help 4

5 companies pinpoint their performance gaps, develop policies to address them, and report back to their stakeholders. The Dow Jones Sustainability Indexes [ were launched in 1999 as global indexes for tracking the financial performance of sustainability-driven companies. Using economic, environmental, and social criteria, they provide objective benchmarks for financial products and offer a performance baseline for mutual funds, certificates, separate accounts, and other investment vehicles that are based on the concept of sustainability. The Jantzi Social Index (JSI) was launched in January 2000 by Michael Jantzi Research Associates Inc. (MRJA), a social investment research and support services firm [ The JSI consists of 60 Canadian companies that pass a set of social and environmental screens. The aim with the JSI is to provide a benchmark against which institutional investors can measure the performance of socially screened portfolios. In addition, by tracking the JSI over time, MJRA hopes to answer the question: How does the application of social criteria affect investment performance? Alison Arnot is a freelance writer and editor living in Ottawa. 5