Triple Bottom Line Reporting A communication tool on the journey towards sustainable performance for US water utilities

Triple Bottom Line Reporting A communication tool on the journey towards sustainable performance for US water utilities Abstract Steven Kenway, Carol Howe, Shiroma Maheepala (CSIRO, Australia) Steven.Kenway@csiro.au AWWA/WEF Joint Management Conference, Portland Febuary 2007 The Awwa Research Foundation and the Australian Commonwealth Scientific Industrial and Research Organization (CSIRO) have undertaken a jointly-funded project to produce a guide for Triple Bottom Line (TBL) Reporting. This is intended for use by United States water utilities and others. TBL reporting helps organizations understand their environmental, social and economic performance and hence find solutions to optimize all three. TBL reporting has developed as a means for organizations to respond to increasing public expectation to take responsibility for and disclose their non-financial impacts, particularly on the environment and the community. As a result, organizations have begun developing frameworks to track and voluntarily disclose impacts on natural, human and financial capital. There are a number of emerging and/or critical issues that are driving adoption of sustainability and TBL accounting and reporting principles within the urban water context. They include global issues such as climate change and technological innovations as well as the high capital costs of infrastructure replacement and expansion, increased stress on existing water supplies, requirement for return on investment from shareholders or government, recognition of the environment as an equal user of water; and demand by consumers that business and government operate in an ethical and environmentally friendly manner. Systematic TBL assessment and reporting is increasingly seen to have significant and beneficial business impacts. BL reporting is a starting point that is comprehensible to many, and has achieved a degree of consensus as a reasonable entry point into the complex issue of sustainability. TBL reporting is being increasingly adopted globally by a variety of organisations with a major benefit being increased trust from staff, customers, regulators and wider stakeholders. As a sound basis for stakeholder dialogue it also helps create reputation, attract and retain quality employees, improve access to investment markets, reduce risk profile and costs, and provide a valuable input to performance assessment and strategic planning. The AwwaRF report on TBL reporting (available through AwwaRF) includes information on how a utility can move towards becoming more sustainable and clarifies the role that TBL reporting can make in this journey. It includes step-by-step guidance on the preparation of TBL-reports including identification of potential environmental, social, 1

and economic indicators. It also provides guidance on decision making tools that can be used for sustainability assessment along with case studies of utilities that have undertaken TBL. US water utilities are increasingly under pressure from their customers, ratepayers and boards to perform efficiently. They face challenges including climate change, technological advances, rising infrastructure costs and increasing expectations of consumers, regulators and shareholders. There are many potential futures that could evolve. Globally there is recognition that to be successful utilities will need to make a purposeful move towards more sustainable operations. This report aims to assist US utilities on their journey to sustainability by providing a guide on how to produce reports covering their environmental, social, and economic (triple bottom line or TBL) performance. It builds on past Awwa Research Foundation projects and has been developed with input from Project Advisory Committee and over 15 utilities who participated in a TBL workshop in Los Angeles in November 2005. Detailed case studies of Seattle Public Utilities, and two Australian Water Utilities Yarra Valley Water and Sydney Water inform the report. Introduction The purpose of this paper is to outline a current project being jointly funded by AwwaRF and CSIRO. The project report (AwwaRF 2007 in prep) is intended to assist those who are considering TBL reporting its application in management. Understanding the Triple Bottom Line The term triple bottom line (TBL or 3BL) dates back to the mid 1990s when the management think-tank AccountAbility coined and began using the term (SustainAbility and UNEP 2002). John Elkington in his 1998 book Cannibals with Forks widened the understanding of the concept and gave it a tangible reference. The Triple Bottom Line or TBL is about organizations understanding and simultaneously adding value to their environmental, social and economic performance. At it broadest TBL is used to capture a whole set of values, issues and processes that companies must address to minimize harm from their activities and to create economic, social and environmental benefits. At its narrowest, TBL is used as a framework for measuring and reporting performance against economic, social and environmental parameters. Many names have been used to describe TBL. For example People, Planets, Profits (PPP) or Social, Environmental and Economic Change (SEE Change). Consistent among these approaches is a balanced approach to delivering environmental, social and economic objectives. TBL means the systematic management, performance improvement, and public disclosure in environmental, social, and economic dimensions at local, regional, and global scales. Here (After GRI 2002), TBL is made up of: The environmental dimension concerns the impact of an organization on living and non-living natural systems, including ecosystems, land, air, and water. This 2

dimension includes reliance of the organization on the environment to provide inputs (water, energy, materials) and assimilate outputs (effluents, emissions, waste), as well as related issues of biodiversity and environmental quality. The social dimension concerns the organization s impacts on the social systems within which it operates and which it affects. The social dimension includes public health, labor practices, human rights, and broader issues affecting consumers, community, and other stakeholders in society. The economic dimension concerns the impacts of the organization on the economic conditions of its stakeholders and on economic systems. An organization s own financial performance is fundamental to this understanding. However, many users of TBL (sustainability) reports look not just for information about the organization itself but also its contribution to the sustainability of the larger economic system. The area of sustainable performance can be found where improvements in economic, environmental and social performance overlap (Figure 1). Economic performance Area of overlap where sustainable performance solutions can be found Environmental performance Social performance Figure 1 Area where sustainable performance solutions can be found Challenges for US Utilities Globally the water industry is facing a number of critical trends including globalization increasing populations, and technology and science developments. Climate change is already having a significant impact on water management and this is projected to escalate, particularly in relation to the security of water supplies and the use and costs of energy. 3

A major push in the U.S. is the need for financial sustainability and customer service standards factors which are driving asset management. Other top trends in the US (after Means 2006) include: An increasing demand for energy coupled with increasing prices due to falling oil supplies. A growing need for skilled employees while the pool of workers with relevant skills decreases. The need to be more involved in politics to gain or keep water rights. Population growth will drive increased demand for water forcing increased recycling, conservation and use of marginal sources. Increasingly more stringent regulatory requirements. Increased customer expectations and need to manage organizational reputation. Increased water prices. Adoption of TBL principles and approaches can help utilities and other organizations illustrate, manage and develop value in the multiple dimensions that water affects. TBL can also help depoliticize decision making and relationships with staff, stakeholders and the wider community. Understanding and documenting TBL can help make transparent the full cost of water service provision and the necessary rating or funding base to support its management. It can also help to simplify the complex regulatory arrangements that often surround water management. TBL reporting uses real data to identify trends and performance against indicators. Incorporating sustainability into planning is a proactive process that uses data projections and models to compare future management options. The two processes reporting and planning form a continuous cycle that interacts as shown in Figure 2. Analysis & interpretation of TBL outcomes TBL Reporting Monitoring & Data gathering Planning Design & Implementation Figure 2 Relationship between TBL reporting and planning 4

There are many approaches to sustainability including The Natural Step, Natural Capitalism, Industrial Ecology and Ecological Design. Tools like the Ecological Footprint and Balanced Scorecard are methods of evaluating a utilities strategy and converting it into action. All of these approaches aim to develop and sustain systems where the use of resources is restorative and non-harmful and allow humans and ecosystems to thrive. A diverse range of sustainability assessment tools are available to assist in the analysis of projects, systems and regions to assist decision-making towards increased sustainability. A number of emerging tools are now available to assist assessment of sustainability. These include: economic tools such as net present value, capitalized cost analysis, least cost planning, externalities valuation and life-cycle costing, environmental tools such as life-cycle assessment, embodied energy assessment, impact analysis; social tools such as conjoint analysis; and decision-making tools such as multi-criteria analysis. Becoming More Sustainable Sustainability requires stewardship over all resources, not just financial capital. It requires a focus on achieving the greatest social, economic and environmental benefits from all activities including investments made. The US EPA (EPA 2005) in collaboration with water and wastewater trade associations are in the process of defining outcome areas of a sustainably-managed utility. These include areas such as community stewardship, stable, well-planned infrastructure, customer satisfaction and natural resources protection and enhancement. These outcome areas are consistent with TBL approaches which seeks to find solutions to optimize the value in all three areas. Becoming a sustainable water utility goes well beyond TBL reporting. For a utility to deliver sustainable performance TBL outcomes, there is a need for it to be thoroughly embedded into all aspects of management including: Strategic and business plans Asset management Service levels Performance indicators Performance targets Performance monitoring and reporting Management systems Integrated management, stakeholder involvement, benchmarking and a supportive organizational culture are also necessary to ensure that TBL is embedded into all necessary aspects of a utilities operation. The relationship of these processes, including sustainability assessment and TBL reporting is presented in Figure 3. 5

Operational management & response Capital program & operational budgets Strategic & business plans Sustainability assessment Asset management plans Service levels Key indicators & targets Stakeholder involvement Plan Do Check Performance monitoring Internal audits & reporting; Benchmarking Customer survey and feedback Publicly-available TBL report or information Management Systems Review Future Vision and Mission Management & wider stakeholder review of TBL performance Customer survey and feedback Figure 3 The continual improvement cycle and aspects related to TBL TBL Reporting Almost half of the Fortune 500 corporations compile and issue annual reports that detail their environmental and social conduct. Sustainability or TBL reporting is a good index of how non-financial risks are being managed, and an important aspect of governance. The financial industry is steadily embracing sustainability reporting as part of its analytical toolkit. TBL reporting is the documented public disclosure of environmental, social and economic information of all stakeholder-relevant areas including aspects of policy, goals, trends over time and review based on stakeholder responses. Benefits of TBL reporting include the: clearer accountability and the associated potential for higher levels of involvement with external stakeholders; improved risk management through enhanced systems and performance monitoring; interest from financial markets and screened investments; providing a mechanism to link and find value from typically separated functions such as finance, marketing, research, within an organization; formation of partnerships with stakeholders; improved benchmarking and understanding of performance; more coordinated governmental involvement and consistency with legislative directions; embedding of sound corporate governance and ethics throughout a utility. 6

Between 2000 and 2005, organizations (largely business and government) in Europe, U.S., Australia produced and registered 5007, 1016 and 759 non-financial reports respectively (Cororateregister.com). A breakdown of the report types for the top five sectors plus the water sector is shown in Figure 4.4. This indicates that in the U.S. nonfinancial reporting is well represented by the electricity industry, information technology hardware, and pharmaceuticals, with a total of three reports (0.3%) evident from the water sector. In Europe and Australia some 127 and 77 water sector reports were registered during the same period representing 2.5% and 10% of that areas total. Europe USA Australia Other Water Pharmaceuticals & Biotechnology Oil & Gas Chemicals Information Technology Hardware Electricity Other Water Electricity Construction & Building Materials Chemicals Banks Transport Other Steel & Other Metals Banks Electricity Water Mining 3194 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 Figure 4 Global non-financial report output for the top 5 sectors plus the water sector and other (data from corporateregister.com) Case studies of Seattle Public Utilities in Washington and two Australian utilities, Yarra Valley Water and Sydney Water - have shown that adopting TBL principles and reporting is helping them to manage and plan better by: linking the needs of the environment with the long-term commercial viability of the utility and make protecting the environment a key strategy; facilitating discussions and keep a record regarding the trade-offs and linkages between environmental, social and economic performance gaining support and trust from customers and regulators and better inform policy development; testing the integrity of strategies and in particular the need to simultaneously address the needs of customers, the environment and provide financial viability. 7

Preparing a TBL Report There are a number of steps involved in preparing a TBL report: 1. Understand the current position of your organization (some helpful checklists are provided in the report) 2. Develop objectives and principles for the report 3. Identify stakeholders (internal and external) and build support 4. Select indicators and develop the report content 5. Establish an organization s baseline and targets for moving towards sustainability 6. Identify useful information 7. Compile and prepare the report 8. Have the report verified for additional credibility 9. Disseminate the report and collect feedback Lessons Learned A wide range of approaches have been taken in developing TBL reports. Some of the lessons learned have been that: (use congruent language in the list) Data management can be a major issue. In Sydney Water s case, thousands of data points are required for compliance purposes with very short timeframes for reporting. Defining clear responsibilities for compilation and maintenance of data sets will help streamline the reporting process. TBL reporting must be linked to core strategies at the Board level or it will have limited relevance. Robust discussion of trade-offs between objectives will lead to better answers and implementation of strategies. Hard copies of the report are necessary and electronic copies should be treated as supplementary. Identification of the right indicators is critical and they should ensure the right balance between economic decision and environmental or social issues. Make a 5 year plan and take a small step in the first year. Aiming too high is a risk as internal supporting systems need to be put in place. Demonstrate the value of reporting to stakeholders. Conclusions and Recommendations There is no simple, single pathway to adoption of sustainable practices for water utilities. Triple bottom line reporting is but one tool of many that can help utilities progress the multi-dimensional challenges that they currently face. However, to be positioned to be able to produce a credible report, goals relating to the management of environmental, social and economic performance need to be embedded in a range of internal management measures including strategic and business planning, service level definitions, asset management practices, performance targets and performance monitoring. Additionally, it needs to be underpinned by formal management systems. 8

To further embrace TBL generally, and TBL reporting in particular, the report makes a number of recommendations including: For individual utilities: Just get started, learn and adaptively manage; Develop and implement training and capacity-building programs; Prepare, release and register a TBL report. For the industry as a whole: Continue to develop and include TBL principles into performance indicators and monitoring programs particularly including indicators not currently addressed such as energy use, biodiversity management, greenhouse gas emissions and total waste. Increase the knowledge of current TBL adoption by industry. Increase the knowledge of current reporting including legislative requirements; Encourage and assist utilities to prepare public TBL reports; Support the development of sustainability (TBL) assessment tools; Foster dialogue regarding integrated and whole of water cycle dialogue; Link or share knowledge with other international water initiatives. TBL is not just another acronym. TBL is about a diverse audience understanding and simultaneously adding value to the environment, to society and to the economy. Ultimately, the three are not separate entities, but must progress hand-in-hand. Because of the significance water has in all of these dimensions TBL reporting as a first step, and TBL management and planning in general, provide opportunities for water utilities to lead and create wide value from its implementation. Acknowledgments The authors would like to thank AwwaRF and CSIRO for making this project possible. Specific thanks to the Project Manager Linda Reekie and Project Advisory Committee members Cheryl Davis, Jim Horne, and Judy Hansen and utilities contributing to case studies (Seattle Public Utilities, Sydney Water and Yarra Valley Water) particularly Scott Haskins, Diane Clausen; Tony Kelly, Pat McCafferty, Fabian Sach, Kaia Hodge, and Christine Turner. Thanks too are extended to participants in the Los Angeles workshop. The views in this report reflect the view of the authors. References AwwaRF 2007 (in prep). American Water Works Association Research Foundation. Triple Bottom Line Reporting of Sustainable Water Utility Performance. (Project #3125). Prepared by Steven Kenway, Carol Howe and Shiroma Maheepala. Elkington, J. 1998. Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Gabriola Island, BC: New Society Publishers. ISBN 0-86571-392-8. 9

EPA. 2005. Meeting with Utility Leaders on Sustainable Management, July 27 28, 2005, Meeting Summary. GRI. 2002. Global Reporting Initiative. Sustainability Reporting Guidelines. Boston, MA. Means, E.G., L. Ospina, and N. West. 2006. A Strategic Assessment of the Future of Water Utilities. Report sponsored by AwwaRF and published by IWA Publishing. SustainAbility and UNEP. 2002. Trust Us: The Global Reporters 2002 Survey of Corporate Sustainability Reporting. <www.sustainability.com> 10