The Eco-Capitalist Guidebook:

Chapter 1: A triple bottom line view of our current economy

The modern industrial revolution, which began in the early-mid part of the 18th century was sparked by the invention of the steam engine and the replacement of manual labor with automation. Automation allowed the once slowly growing GDP per capita of Britain to increase at a dramatic rate, a phenomenon that is still running full speed today.

The industrial revolution brought around the triumph of the middle class, the creation of the modern entrepreneur, and the ultimate triumph over the aristocracy that had ruled Europe since the dawn of society.

The guiding mantra of these early entrepreneurs was driven by the benefit of automation. How do you make a product cheaper than it was made before? The simplest solution was to make more, faster.

The 19th century also saw the birth of the factory and with it social paradigms such as child labor and labor unions. The ultimate paradigm of which was communism; the essence of which was rooted in Karl Marx's thought that the bourgeoisie (those who owned the factories) were exploiting the proletariat (working class) who actually performed the labor.

In parallel with these social changes people saw the dawn of consumerism since goods could now be made more quickly and, in effect, more cheaply. This led to an aggressive population boom that helped the industrial revolution become a self fulfilling prophecy- the more that was made, the cheaper it would become and the more people would buy, thus causing even more to be made.

Since the social externalities of the industrial revolution, such as the British luddites movement and the horrors of child labor, were extremely visible and directly affected our species, these were addressed quickly. In response, the first British factory act was passed in 1802, almost at the heels of the industrial revolution, and was constantly upgraded to address the social externalities that emerged.

Today factories face tremendous regulations and regulators, such as OSHA (Occupational Safety and Health Administration), whose primary purpose is to ensure the safety and health of the factory workers. As a factory owner could tell you first hand organizations such as OSHA are meticulous in their safety concerns, not to mention the city inspectors and insurance inspectors that seem to make frequent visits and draw up a laundry list of points to address.

Therefore, the main social externalities of the modern industrial revolution are positive — the most important of which is job creation. And on a global sense the more any given company grows the more jobs it creates (whether these jobs end up in China, India or in the United States).

Perhaps the greatest oversight however has been the environmental externalities that the modern industrial revolution created. As Paul Hawken explained in his book Natural Capitalism, "more nature has been destroyed during the past one hundred years than in all prior human history. While industrial systems have reached pinnacles of success, able to muster and accumulate human-made capital on vast levels, natural capital, on which civilization depends to create economic prosperity, is rapidly declining."

There is a direct correlation between our exponential industrial growth, the use of fossil fuels, and the volume of goods that we manufacture. This is also true for almost every other form of natural capital, such as wood, fresh water, fish etc.

Ironically the capitalist system rewards aggressive economic growth with higher share prices and penalize those who aren't as aggressive. This has lead to the modern notion that businesses will either "grow or die." Fundamentally, after natural selection occurs, the companies that win are those that have managed to keep growing. Perhaps this pressure is also the cause of the tremendous increase in consumerism that is almost the very definition of the modern American economy.

Since almost every output that is produced through industry ends up as waste and growth is rewarded, we have been throwing out more and more waste each day. According to the EPA, in 1960 the average American, produced 2.7 pounds of waste per day and in 2003 that number had steadily increased to 4.5 pounds.

Therefore, a look at the three main bottom lines that we've discussed,economic, social and environmental, produces the following "triple bottom line" report card for the classic manufacturing business:

Profit, as the most important element, drives the entire model. Since there has been tremendous improvement in the social externalities of modern manufacturing we now see a positive social bottom line, mainly driven by job creation. This is a tremendous improvement from the same triple bottom line report card that one of the first British factories would have received in the early 1800s:

Here, the more the bourgeoisie exploited their workers, the more profitable their factories became. And since profit drives the model, the more profitable one became, the larger the negative effect on the society.

Thanks to the luddites and exploited children, this relationship has been in large part reversed. However, both report cards share one striking similarity: they each have a tremendously negative environmental bottom line. Moreover, in most cases the more profitable the company becomes, the worse the environmental return is. As a small example, the Dow Jones company in New Jersey recently decided that it was too expensive to hire people to wash the dishes from their 4,000 person cafeteria and opted for the exclusive use of disposable plates. This undoubtedly saved the company money and increased their economic bottom line but that was in exchange for making their environmental bottom line worse.

The notion of having companies account for these three bottom lines was initially put forward by John Elkington in his 1998 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business. However, it is safe to say that companies started caring about the environmental bottom line in the 1970s with the birth of the modern environmental movement (born on: 1970, April 22nd with the first celebration of Earth Day).

During the past thirty years companies that are evaluating their environmental impact and are doing something about it started to emerge. These eco-capitalist pioneers started using recycled materials in their packaging, even if at a higher cost than buying new packaging (such as Seventh Generation Cleaning Products, the nation's leading brand of non-toxic and environmentally safe household products), and gave back a part of their profits to the environment (such as Patagonia who since 1985 has pledged 1% of sales to the preservation and restoration of the natural environment.)

Today there are hundreds of examples of companies that do this. Just walk into your local Whole Foods or Wild Oats store and you will see the cornucopia of these new brands. The modern organic food movement also started on this principle, perhaps partly in thanks to Rachel Carson's 1962 book Silent Spring, which detailed the negative effect of chemical herbicides (namely DDT). Today the market for organic products continues to grow worldwide and is easily surpassing the growth rate of traditional food products. However, it is important to note that there is a much higher cost to produce organic foods, which is reflected directly in their premium price.

If we analyze the triple bottom line of the pioneers of modern eco-capitalism than we would have a slightly different view:

In this case, unlike the traditional manufacturing model, there is a smaller negative environmental return (instead of new packaging, recycled materials are used) and a larger social return (due to the payment of fair wages etc.) However, to pay for the increase in the social and environmental bottom line, profit is almost always sacrificed. This is manifested most commonly in higher prices and is thus supported by a consumer base that is not price sensitive and is willing to pay extra for their eco-friendly bar of soap.

The question then becomes: can this model take over the classical model and thereby save the world from self destruction, due to the exhaustion of all of our natural capital? Unfortunately this question is determined wholly by whether the population is willing to pay more for it. In the over fifty lectures that I have given in the past three years to various groups encompassing a wide range of people, I have repeatedly asked this question:

"You walk into your local supermarket and see bars of soap. The bar is $1.99 and is a normal bar of soap. Beside it you see the eco-friendly bar of soap for $2.99. Assume that the both bars are the same size, shape and color etc. Which bar of soap do you honestly buy?"

As if every audience is reading from the same book, always roughly 5% of the hands go up. I even asked this question in Vermont, at a recycling retreat, where the majority of delegates wore no shoes and had dreads, and surprisingly got the same result. It seems as if it is not that easy to pay extra for the warm and fuzzy feeling of helping the environment. Hey, I also count myself in the group that wouldn't pay extra.

However, in thinking of this question, it is prudent to consider the triple bottom line of the other spectrum of corporations: the not-for-profits. By definition not-for-profits are not driven by the economic bottom line and instead are here to either bring social good or environmental good to their stake holders. Since this benefit usually comes with a cost and since not-for-profits rarely produce any revenue we see the following triple bottom line report card:

Not-for-profits must raise money to render either environmental or social good. NPR has pledge drives every year to keep their educational shows on the air (at a cost of $120 million a year), which in turn brings tremendous social good. The Sierra club (whose annual budget is also roughly $100 million) also raises funds primarily through charitable donations to bring tremendous environmental good to the world. The similarity with both of these models is that the higher their budgets the more good they can bring. That is why the deeper into a negative their economic bottom line dives the more social good and/or environmental good they tend to deliver. As with the eco-friendly bar of soap, these groups have to convince people to spend their money on allowing them to deliver their social good, and in most cases consumers consider this a luxury. That is why the largest charities, such as the Mayo Foundation, only have an annual budget of just over $5 billion dollars versus the largest for profit companies, such as Exxon Mobil, whose revenues were over $339 billion in 2006. If the Mayo Foundation, as the biggest global not-for-profit in 2005, were compared just on annual budget it wouldn't even make it on the list of the top 500 companies in America (this is not even a global list). Nike holds that position with over $13 billion dollars in revenue in 2006.

On the flip side, companies that care about their social and environmental bottom lines, and thus have higher prices, are not that big either. Some of the biggest include: Whole Foods (roughly over $200M in profit in 2005) or Seventh Generation, the leading eco-friendly consumer products company, which is an order of magnitude smaller than Whole Foods.

I think that we can all agree that profit, or the economic bottom line, is ultimately king and corporations cannot grow tremendously big if they rely on the generosity of their consumers, either through donations or paying higher prices. Fundamentally we cannot rely on the consumer to pick up the tab for the environmental and social bottom lines.

Since it seems as if the current models cannot help save our world, is there a model that can? Can a model exist where all three bottom lines compliment each other by allowing a corporation to be wildly profitable, socially responsible and environmentally sustainable?

Chapter 2 ->

Disclaimer: These thoughts are pure musings on the potential of eco-capitalism in manufacturing. We must make generalizations to grasp macro thoughts. In other words, welcome to the rabbit hole.