“The triple bottom line is better than ESG for measuring a company’s financial, environmental and social performance”

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Robert S. Kaplan teaches at Harvard Business School (HBS). Speaking to Srijana Mitra Das, he discusses his management innovations that also help companies prioritize and measure their social and environmental impacts:

Q. What is the core of your research?

My research is best known for two innovations in measurement – Activity Based Costing (ABC), which examines the costs of goods and services to producers, and Balanced Scorecard (BSC) which is a more robust management approach than simple analysis of financial measures. The BSC recognizes the importance of financial performance, but also spells out the drivers of future financial performance – these include success with customers, brilliance in processes that create value for customers and shareholders and the learning and growth that relate to people, technology and culture. This is the foundation of excellence in internal performance, which again creates value. The initial motivation for these methodologies was to improve the performance of for-profit companies – over the past twenty years we have seen the opportunity to use them to solve environmental and societal problems.

Q. How does the BSC help solve these problems?

When the BSC started, it was about four perspectives: finance, customers, process, and learning and growth. But when we started working with leading companies, we realized that the most important metrics help describe, communicate and execute strategy. We’ve seen a trend in organizations’ use of the BSC, which we’ve linked to a visual tool called the strategy map. It represents cause and effect – it starts with people, technology and culture. Being good at these areas leads to improvements in business and process metrics – this creates more value and translates into strong financial metrics. We then started to apply the BSC also to government agencies, NGOs and non-profit organizations. For them, the customer perspective was about creating meaningful value for their citizens and constituents. So the BSC has evolved to present this. Then we met companies that wanted to improve the environment and strengthen the communities in which they operate. Thus, the BSC introduced high-level targets for environmental and societal performance through measures such as improving community benefits. An interesting case study was that of Amanco, a Latin American company that manufactured water pumps and pipes used for irrigation and wastewater treatment. Using the BSC, the company was able to determine the extent to which the efficient use of its goods and services improved farmers’ incomes and the environment by cleaning up water – the improved water then made farmers more productive. . It was a win-win situation – customers earned higher incomes, the community benefited from cleaner water and more economic activity, and the company made more sales.

Q. Why do you say that BSC’s triple bottom line approach is a more rigorous way of tackling environmental and societal concerns than ESG?

The triple bottom line is ESG without the “G” – it is environmental and social goals with financial goals. Usually an acronym, such as JIT for ‘Just-In-Time’ or TQM for ‘Total Quality Management’, conveys a single concept that is shortened. But ESG is not a single concept – the measurement of environmental, societal and governance performance is very different. There is no way to get outcome measures for governance since it is a process. The environment is more doable because it’s about measuring physical things. Societal goals can also be measured with consensus on social needs. With a three-bottom line approach, companies think about their environmental and societal impacts alongside their financial goals – by listing them on their scorecard and strategy map, they make these factors moot. Thus, when a new project appears, it is not only evaluated by its financial results but also by its environmental and social impacts. It can make decisions harder but more considered – it also helps companies have a better mix of investments and strategies. Our belief is that “if you don’t measure it, you can’t manage it”. Companies must measure their environmental and societal performance as rigorously as their financial performance. The triple bottom line approach is preferable because ESG is quite vague with a lack of rigorous standards. For real progress, we need verifiable measurements.

Agencies

Q. Has public concern about the environmental and social impacts of business increased?
Absoutely. There has been a marked difference over the past ten years. Customers, employees and communities are concerned and companies will have to become more responsible on these issues. There are verifiable ways to move forward. With Karthik Ramanna from the University of Oxford, I worked on a new way to measure greenhouse gases (GHGs) in business and consumer operations. By using appropriate costing approaches extended to greenhouse gases, we can measure the GHG content of all outputs of any business. When customers buy them, they not only buy a product, but they also absorb the GHGs used in its production which they can measure themselves. With this new E-responsibility approach, it becomes possible to measure GHGs across a company’s entire supply chain.

(The opinions expressed are personal)

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