True cost accounting: capturing societal costs in financial figures

Why is true cost accounting of interest to businesses that want to improve their sustainability?

“At the moment, it’s still difficult to capture societal costs and benefits in financial statements. That’s exactly what true cost accounting tries to do. First of all, it measures the impact that products have on animal welfare and climate change, for example. Expressing that impact in financial statements enables it to be fully accounted for in production costs, profits and financial rates of return. And because this gives businesses an insight into the actual costs of producing and consuming their products, it enables them to work in a more focused way on reducing the social or ecological impact of production and consumption.”

You’ve looked specifically at the opportunities that true cost accounting creates for internal business operations. What are they?

"We think there are far more potential applications than many businesses realise. One well-known example is Tony Chocolonely, which increased the retail price of each bar of chocolate by 20% to compensate for the CO₂   emissions attributed to their production. But you can also use the method to highlight your sustainability objectives, or to give due consideration to external production impacts as part of investment decisions.

Some businesses use true cost accounting to measure the sustainability achievements of their staff and link them to rewards. ProRail takes yet another approach: it includes societal costs as a financial risk when calculating the costs of infrastructure projects. Finally, true cost accounting can help a business communicate its sustainability costs and benefits as part of its reporting process. ABN-AMRO, for example, has done this."

What are the risks to businesses of not introducing true cost accounting?

First of all, we should acknowledge that there still are quite a few methodological issues to address before true cost accounting can be widely rolled out to express sustainability costs and benefits in financial statements. For example, there aren’t any harmonised standards yet for expressing aspects of sustainability such as animal welfare in financial statements. We’re working on another project to research how these methodological questions can be resolved.

But if we succeed in developing standardised methods of calculating all of the societal costs and benefits of a product, it will be relevant to all businesses. There’s no escaping these impacts: they always find their way back. Not just in terms of reputation, your appeal as an employer, or in stakeholder support, but also when it comes to permit application processes, for example.

If a business doesn’t compensate its suppliers fairly, then eventually there will be a price to pay for that. This is a real risk in the cocoa industry at the moment, where major shortages are anticipated within the next few years because cocoa farmers don’t earn enough to make a living. So it’s really in every company’s interest to include non-financial costs and benefits in their business model. True cost accounting is a promising method of doing that."