Economics and business are fundamentally based on conventions between humans.
Take a second to reread the above phrase to understand its impact. In short, it means that economics is not an exact science like biology, chemistry or physics. This also means that we have the power to change an existing system if we choose to do so.
Why double bookkeeping is flawed
At the core of business and economics is our accounting system which registers the value created and the cost made to create this value. Today the large majority of businesses operate in a double-entry bookkeeping system.
Double bookkeeping registers two parts: the financial cost of a production factor, whether that is labour, an item or service or the cost of money itself. On the other side of the balance sheet you can find the value created from sales and financial returns.
At the core this type of accounting is limited. It does not take into account costs of the impact the production has on people and our environment, the so called ‘externalities’.
What if we insert externalities into the accounting system?
Most people understand the concept of negative externalities, for instance when we talk about pollution. Polluting companies don’t incur a financial cost for the air or water pollution they create, even though our environment has been negatively impacted during the production process.
Positive examples of externalities also exist. Take an organisation employing people with a disability. It might either be less efficient or generate less profit than an organisation which doesn’t employ disabled people.
However, the first organisation creates excess monetary value by activating people who may not necessarily find a job elsewhere and would cost society extra in unemployment benefits.
Today, by discounting externalities, our economies are modelled to focus on financial gain and not on value maximisation.
Laws obviously try to compensate by incorporating restrictions to unregulated enterprises. Too many times though, laws are too little or too late, both because of lobbying efforts and because one cannot foresee all scenario’s that require prevention.
Triple accounting to the rescue?
What if we were to remodel our economies to take these externalities into account?
Triple Accounting, also known as Triple bottom line (or TBL or 3BL), is the accounting concept that does exactly that. The accounting framework takes into account a social, ecological and financial dimension.
An important – but not insurmountable – obstacle is the measurement of a Triple Accounting based system. Do you measure everything in money? If you do, how much value do you assign to an acre of land or clean air?
The solution lies in making conventions. The GAAP, generally agreed accounting principles, which we use today also is a set of conventions, which also differ from country to country.
So, by modifying accounting laws, triple accounting can be implemented. In a second phase, taxation and subsidies on the triple accounting results could incentivise organisations to focus on value maximisation instead of profit maximisation.
How could governments make this work?
Since accounting is based on conventions, policy makers can determine to what extent they want to impose legislation as binding conventions.
Some examples that could inspire:
An employee that medically burns out – incur a cost of 5% of your yearly profits.
For people who need to work more than 40 hours overtime in a month, deduct 10% of the operational profits (EBITDA) off the month in which the overtime was required.
If you’re using natural materials as production inputs when alternative production methods exist, deduce 50% off your operational profits if the original production investments are written off.
The main thing to take away is not so much the actual numbers but the fact that we can modify what we register to be of value.
Where triple bottom line accounting is today
It may come as a surprise that Triple accounting is already used in different contexts, both in public and private sectors.
If you’re curious for some examples:
The United Nations has incorporated versions and parameters from the Triple Bottom Line principles to be able to perform full cost accounting.
In some countries, legislation supporting TBL has been put to the table and reporting pilots have been conducted. Take a look at the pilot annual report of this Australian government body.
Let that be the main argument against different criticisms focusing on the imperfect nature of the triple bottom line approach. Although it is not perfect, that doesn’t mean that it doesn’t have any value at all nor should it be discarded.
How can organisations start?
In case you want to test run triple bottom line principles but don’t know where to start, you can download an overview of principles and a comprehensive implementation manual, made available by the Global Reporting Initiative.
Like the article already mentioned: economics is not an exact science like biology, chemistry or physics. This means that we have the power to change an existing system if we choose to do so.
That means we also have the power to change the monetary system! How? Check out our Sustainable Money System!