So far, this chapter has provided guidance on how to initiate a targeted TCA assessment and discussed its relevance in defining policies that transform agrifood systems towards sustainability. Indeed, policy interventions may partly correct existing market failures, but policy alone is unlikely to address all issues. Agrifood systems are largely shaped by the endeavours of the private sector, which could take on some of the responsibility for minimizing market failure. This section, therefore, complements the previous ones by presenting and discussing the relevance of the TCA approach and various related initiatives to agrifood businesses and investments.
With pressure from both consumers and governments mounting, agrifood business are increasingly adopting sustainable practices and reporting on their environmental, social and governance performance. Still, many private businesses might have a vested interest in maintaining the status quo, therefore governments may impose laws and regulations affecting the private sector. Such regulations might constrain the way private businesses produce, process and promote their products. Targeted TCA assessments can therefore help businesses monitor the hidden costs they impose on society.
However, agrifood businesses could see value in targeted TCA assessments for their own business interests. Specifically, BAU scenarios identify current and future risks to business viability by revealing the hidden costs that may be imposed on them. This allows businesses to rethink operational and strategic business models and change planning horizons from short-term profit maximization to long-term sustainability strategies as the foundation of businesses fit for the future.
How TCA can support sustainable business models and investments in the agrifood sector
Targeted assessments play a crucial role in providing a framework for businesses to assess and manage their impacts and dependencies more comprehensively and accurately. Whether the functional unit of the assessment is product, organization or investment, targeted TCA assessments can inform decision-making in different departments of an agrifood company (see Figure 14). For example, some environmentally conscious food-processing companies use TCA to assess supplier performance on various sustainability criteria, such as farming techniques, pesticide management and social justice. As such, TCA can lead to a slew of measures that enable agrifood business actors to make informed decisions that support the transformation of agrifood systems, bringing benefits to both the businesses and their investments, as well as the public.
FIGURE 14 Examples of how true cost accounting can inform decision-making in different departments of an agrifood company
True cost accounting can be integrated into everyday decision-making and management strategies. It can help agrifood businesses monitor and unlock opportunities at different stages of the supply chain, achieve sustainable production, attract private investment and avail of government incentives. When adopted by policy and backed by laws and regulations (see Chapter 4), TCA redefines key performance indicators and changes the bottom line of business success by including human, social and natural capitals. In brief, it redefines the concept of “successful business”. When adopted by businesses and investments, TCA can enable disclosures that improve their reputational standing, supporting their marketing strategies.
The concept of “materiality” was introduced in Chapter 1 in the context of incorporating into TCA assessments only those indicators that were meaningful to decision-making. A related concept is that of “double materiality”, which refers to (i) how a business is affected by sustainability issues, such as the risks of conducting business as usual, and (ii) how its activities impact society and the environment.21 In the case of agrifood businesses, double materiality helps identify material risks, as well as opportunities other than explicitly financial ones, so they can develop resilient strategies that attract investment.21 In this regard, TCA can help to change mindsets and make the private sector understand the importance of considering the impacts and interdependencies of all four capitals that are critical to business and investment success.
Financial institutions such as banks and insurance companies can also use TCA to determine credit and insurance conditions based on better risk assessments, thus improving credit and insurance conditions for sustainable businesses. A comprehensive assessment of costs and benefits with TCA can also help businesses mobilize financial resources for the transition to sustainability, opening up opportunities for new investment and upscaling. Box 14 describes a TCA study on climate-smart coffee production in Colombia as part of an effort to nudge coffee producers into adopting sustainable practices, attracting investment and controlling risks.
Box 14Incentivizing climate-smart coffee production in Colombia
Solidaridad is an international civil society organization, based in the Kingdom of the Netherlands, which promotes climate-smart agriculture (CSA) as a valuable model for coffee production. Focusing on Colombia, Solidaridad commissioned a true cost accounting (TCA) analysis using the True Price framework* to better understand the implications of investing in and adopting CSA practices in coffee production. The study is based on primary data from a group of 60 smallholder farmers in the state of Cauca, who use a set of 16 CSA techniques.
The TCA study assessed the environmental and social value of CSA in coffee production relative to conventional practices. The results showed that adopting CSA practices in coffee production is financially sustainable – as evidenced by a positive return on investment, increased profitability and greater cost-effectiveness. There are also substantial social and environmental benefits, largely due to the fact that climate-smart coffee uses far less fertilizer. It further reduces climate change risk, increases resilience to coffee rust and improves coffee quality. By making these insights transparent, businesses can mobilize investment with higher impact and lower risk. For investors seeking to have an impact on environmental issues, these results also suggest that switching to CSA farming is particularly relevant. However, as switching to CSA requires significant investment, both up front and in the early years, farmers must be given support, for example, in the form of loans or payments for environmental services.
NOTE: * The True Price framework aims to incorporate the environmental and social hidden costs of agrifood products into the prices at which they are sold.
SOURCE: Brounen, J., de Groot Ruiz, A., Isaza, C., van Keeken, R., Varoucha, E. & García, R. 2019. The true price of climate smart coffee. Quantifying the potential impact of Climate-Smart Agriculture for Colombian coffee. https://www.solidaridadnetwork.org/wp-content/uploads/migrated-files/publications/TP%20CSA%20Coffee%20COL.pdf
In addition, TCA can also help businesses respond to the growing demand for supply-chain transparency from consumers, who are increasingly becoming conscious of the different aspects of production, including working conditions and environmental impacts. According to a survey conducted by The Food Industry Association (FMI) in 2022, 65 percent of respondents were willing to switch from their preferred brands to ones that were more transparent on supply-chain conditions, and to embrace values such as fair trade and animal welfare.22 In this regard, TCA can also help businesses qualify for voluntary certifications (such as Fairtrade) and government incentives.
Insights from applications of targeted assessments in the private sector
Faced with the growing urgency of quantifying the hidden costs incurred by businesses, particularly those of agrifood products, several initiatives have taken the first steps. These target TCA within the private sector of agrifood businesses and financial institutions and can help fill data gaps and contribute to capacity building, both of which are fundamental barriers to scaling up TCA, especially in middle- and low-income countries. In addition to the TEEBAgriFood Operational Guidelines for Business discussed in Chapter 1, which adapt the TEEBAgriFood Evaluation Framework to the needs of transforming agrifood businesses, there are other efforts guiding companies on evaluating their impacts, as described in Box 15. Overall, the existing resources cover a significant amount of ground when it comes to the business applications of TCA. However, there are still areas where further development is needed to fully realize the potential of TCA in the private sector. These include frameworks and standards, methods, corporate governance and strategy, and reporting guidelines.21
Box 15TRUE COST ACCOUNTING INITIATIVES IN THE PRIVATE SECTOR
The private sector is taking significant steps towards implementing true cost accounting (TCA) in the agrifood sector. Several initiatives – in addition to the release of the TEEBAgriFood Operational Guidelines for Business23 – have been launched to provide concrete and practical TCA methodologies, standardize natural capital accounting and create impact statements for businesses. For example, the True Cost Initiative produced the True Cost Accounting AgriFood Handbook, which outlines a TCA methodology that was tested on 20 supply chains in 14 countries on 5 continents.24 The Transparent project issued a report to inform the standardization process of natural capital accounting in corporate environmental assessments,25 while the Impact Institute developed its Integrated Profit and Loss Assessment Methodology aimed at creating impact statements for businesses.26
At the primary production level, the Global Farm Metric launched the first edition of a framework that defines on-farm sustainability and measures whole-farm impacts.27 Other initiatives are advancing TCA in the field of true pricing, such as the True Price Foundation, which aims to incorporate the environmental and social costs of agrifood products into selling prices, and which published draft principles for true pricing in 2020.28
Several networks with a focus on joint communication have also been formed to increase visibility and outreach for TCA. Examples include Business for Nature and We Value Nature – both of which have emerged from the Capitals Coalition – in addition to the TCA Accelerator and the True Value of Food Initiative. These networks play critical roles in raising awareness of the hidden costs of agrifood systems, informing private- and public-sector policy, calling on governments to take action, sharing information and data, providing training, organizing events and forming partnerships to accelerate TCA upscaling.
Consequently, only a small number of agrifood businesses analyse the outcomes and effects of their actions, and even fewer assign a value (see Box 16 for examples). Notably, businesses often start their impact and valuation journey by assessing their impacts on and risks to natural capital, especially GHG emissions. This is probably due to the fact that resources, especially services and tools, are widely available and there is widespread knowledge of the urgency of the climate crisis, also among consumers. In this regard, the main comparisons made by agrifood businesses in their TCA assessments have been between organic or biodynamic agriculture and conventional agriculture.
Box 16How businesses make use of true cost accounting – evidence from THREE businesses
The following examples describe diverse ways in which businesses make use of true cost accounting. What connects the different efforts is their motivation and the goals of increasing transparency and reducing negative impacts on society and the environment.
Eosta is an agrifood business focused on the distribution of fresh organic fruits and vegetables based on fair trade. It keeps track of the different benefits and costs the business entails for the four capitals through its own accounting system, called Nature & More. Customers can visit the website and learn about the quality of certain products, and access background information on the growers and their ecological and social commitment, including metrics such as water and soil conservation and reduction in CO2 emissions. In 2017, Eosta performed an assessment of nine fruits and vegetables and concluded that, based on true costs, conventional, non-organic products are more expensive than organic produce. Based on its accounting system, Eosta has saved more than 100 000 tonnes of soil and 2 billion litres of water and reduced CO2 emissions by more than 10 000 tonnes.
Olam International is a food and agriculture business supplying food ingredients, feed and fibre to more than 20 000 customers worldwide, with operations in over 60 countries, including farming, processing and distribution, as well as a sourcing network of 5 million farmers. The business has developed a tool for multicapital accounting – the Olam Integrated Impact Statement – which allows Olam to disclose its impact on multiple capitals and to measure and value its annual multicapital flows and accumulated multicapital stocks. By monetizing, consolidating and reporting hidden costs alongside conventional financial figures, Olam can account for these costs, better understand future risks and manage them promptly.
PENNY, a popular German discount supermarket chain, started calculating the “true prices” of a set of products – including fruits, vegetables and animal-based foods – and posting these alongside their market prices in 2020. It found, on average, a gap of 62 percent between the true costs of conventionally produced foods and their retail prices. In the case of organic foods, the gap is 35 percent. Uncovering the true costs need not imply higher food prices, however. For example, if the root causes of hidden costs are addressed upstream in the value chain in a cost-effective manner, families’ expenditures on food need not increase.
SOURCE: Riemer, O., Mairaj Shah, T.M. & Müller, A. 2023. The role of true cost accounting in guiding agrifood businesses and investments towards sustainability – Background paper for The State of Food and Agriculture 2023. FAO Agricultural Development Economics Working Paper, No. 23-13. Rome, FAO.
Though these initiatives demonstrate a growing commitment from the private sector towards implementing TCA in the agrifood sector, there is still much work to be done to fully realize its potential. For instance, in the absence of a standardized methodology for TCA, there is a risk of genuine efforts not being appropriately recognized, while half-attempts that misuse numbers gain more recognition. Half-attempts refer to businesses that only dedicate a small portion of their budgets and resources to sustainable activities, but present them as an indicator of their sustainable nature. This reinforces the need to further formalize and mainstream TCA in the private sector.
