A longer time horizon can provide insights that lead to better results for all three elements of the Triple Bottom Line: People, Planet, AND Profit. A longer view is also consistent with the investment approach practiced by Warren Buffett, America’s most successful investor.
Capital investments at companies are generally made on the basis of return on investment (ROI) or time to break-even. The typical break-even period at larger firms is 2-3 years, and there are many opportunities that fit within that timeframe. When assessing capital investments that also have an environmental and social benefit, then a longer break-even timeframe makes more sense.
Let’s look at a simple example of buying new pumps in a manufacturing firm. The old pumps work just fine for now, but use a lot of electricity.
Installing new pumps would save 25% per year on electrical costs
The pumps are 20 years old, and have an expected additional life of 10 years
As the pumps age, there is an increasing risk of break down and work stoppages
Company policy on capital investments is a 3 year break-even timeframe
Due to the 3 year break-even requirement, the pumps are not purchased. In years 1-4, the financial benefits of not purchasing the pumps include:
Higher profitability for the firm
Improved cash flow
Higher bonuses for the management team
Higher company stock price (if investors don’t dig too deep on how decisions are made)
In years 5-10, the following happens as compared to having purchased the pumps:
Lower profitability due to missed savings on electrical costs
Decreased cash flow
Higher risk of manufacturing stoppages due to a malfunctioning pump
Lower bonuses for the management team
Lower stock price
If the firm decides to purchase the pumps now despite the longer time to recoup the cost, the following benefits accrue over the entire 10 year period:
Improved cash flow after 4 years
Lower risk of expensive manufacturing stoppages
Decreased impact on the environment from lower levels of energy use
Expected remaining 20 year life span for installed pumps
An accomplishment to record in the Corporate Social Responsibility (CSR) report
Improved employee morale from seeing the company “doing the right thing”
Financial benefits accruing from improved company reputation and more committed employees
When an investment decision has a social or environmental impact in addition to a financial impact, then the firm should use a longer than normal investment timeframe. In doing so, it will position itself for better results in each of the elements of the Triple Bottom Line – including profits.
(Disclaimer: For those of you in manufacturing, please note that data used for pump life spans and energy efficiency is for demonstration purposes only. Your actual results may be quite different. Nevertheless, the basic precept of using a longer investment time frame should still hold true.)