Ecological Allowance – Accounting for the Triple Bottom Line

When John Elkington popularized the triple bottom line concept for accounting companies’ performance more holistically, the notion of people, planet and profit – or the ecological, economic and social dimensions of sustainability – immediately caught the attention of business people, consultants and researchers. The only problem was: there is no tripple bottom line. With a bottom line you draw the net value of a balance sheet of whatever kind. You add and subtract the ‘goods’ and ‘bads’ and arrive at a bottom line value that tells you if there is more ‘good’ than ‘bad’ in your balance. If you draw an economic bottom line, which is more or less a financial bottom line and not a holistic account of a company’s economic prospect, it is money  flowing out is subtracted from money flowing in – very basically (I won’t get into much more details on monetary or other assets). In financial terms, there is a more or less unambiguous ‘stuff’ with which to operate mathematically – money – and a more or less clear result: more money is better than less. What about the planet or people? What about the ecological and social dimensions of sustainability? What is an ecological, a social bottom line and how can you draw those? The answers remain vague. To be fair, Elkington himself has never proposed the concept to be rigorous in all its aspect but that it should be used as some kind of heuristic device, an alternative language for looking at what a company is doing and how it is impacting its many environments. However, some kind of metric that could live up to the concept of a bottom line for, say, the ecological impact of a company appears to be necessary in order to answer the simple question: are we sustainable?

Matthis Wackernagel and William Rees proposed the concept of an ecological footprint in order to get a grip on the absolute limitations a finite ecosystem like our planet poses to economic activity. Although you can calculate ecological footprints of countries and compare this measure to what would be ‘allright’ in ecological terms, a robust measure for companies is still missing. A while ago, together with my colleague Barbara Seeberg, I did an inquiry into a possible method for calculating an allowable carbon footprint for the automotive industry that probably comes closest to an ecological bottom line. The study was published in English in 2011 and, slightly updated, in German in 2013. The name of the metric: ecological allowance.

The core idea behind ecological allowance is that every company, just as any living organism on this planet, has a right to consume ecological space; a right to have some ecological impact as there is no way not to consume the natural environment when you are producing something. The size of ecological space impacted and consumed however is limited. Earth is finite and so are its ecosystems in their capacity to reproduce themselves. But where are the limits? We have chosen carbon emissions as the best available proxy for the ecological impact of a company. Carbon is also most likely the best researched ecological ‘problem stuff’ today, from science we know a lot about carbon and its connection to climate change. And even better, with climate change we have a internationally agreed target for the amount of global warming that can be translated, via the budget approach of the Potsdam Institute for Climate Impact Research that made it into the IPCC report, into an absolute limitation on carbon emissions until 2050. What is then left to do is allocate these allowable emissions to a single company. Here, economy comes into play. We need an economic allocator variable to do that and we went for gross value added. Gross value added is part of the so-called ‘output approach‘ to GDP accounting. With the output approach you look at the generative side of GDP i.e. who produces it. Households are out of the equation in this perspective, so we can concentrate solely on industry.

The easiest way to do it, at least how we did it, was by calculating an allowable product carbon footprint. We went for the automotive industry as there is hardly a product that defines global society as much as the automobile. Viewed from outer space, Earth looks like being inhabited by cars, with human beings as some form of parasites or symbionts to cars. The math is rather easy. We have about 750 giga tons of carbon emissions left until 2050 (now a bit less than when we conducted the inquiry). Normalized over 40 years this would account to 18.75 giga tons a year. Using gross value added of the automotive industry in relation to gross value added of the global economy as a whole (around 3%) and estimating short under one billion cars on the planet, we concluded that depending on statistics used the ecological allowance of a car would be somewhere between 900kg and 1,000kg per year throughout its entire lifecycle (including production, use and end of life). Now you can compare this ‘ecological allowance’ with numbers from lifecycle assessment e.g. from Daimler and their E-Class cars which is well over 2,200kg per year throughout its lifecycle. Even the Smart, Daimler’s two-seated urban car that is also used in the company’s carsharing daughter car2go, accounts for over 1,600kg per year. The ecological sustainability here is clearly in the red by a factor of 1.6 to 2.2.

As soon as you have such a metric, you can start to play with it for more strategic reasoning. We explored the ecological performance of various business models in the automotive industry, from product to sharing and hybrid business models, and here we were able to show benefits and shortcomings of new engine technologies and sharing solutions. Sharing is hereby a key strategy as regards ecological impact and performance and we could prove that. However sharing alone will not suffice. The most viable strategy both ecologically as well as economically when thinking about retaining gross value added is a hybrid strategy, with sharing accounting up to 12% of a car company’s ‘sales’. Given the so-called replacement effect i.e. that a carsharing car replaces between 4 and 8 other cars, the dynamic effects of such a strategy would be enormous and reshape the automotive industry like no other innovation in its 130 year history.

I will start working on ecological allowance again in the future trying to build a more solid fundament for economically allocating ecological space and also expand it to other industries. And it is also necessary to move beyond carbon and embrace the ecological footprint in its entirety, thus making ecological allowance more relevant for industries in which carbon is not the main issue. But regardless of its infancy, I argue that there is a contender for triple bottom line accounting, at least for its ecological bottom line, and it is the idea of an ecological allowance of enterprise.

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