Ever since the origins of business, there has been the calculation of profit. In today’s world, which is more informed and connected than ever before, we need a new way to calculate cost. True Cost Accounting allows enterprises to make more responsible choices, and provide greater transparency to consumers.

What is True Cost Accounting? 

Here’s a brief summary of the origins and definitions of accounting methods:

  1. Accounting. Since the first days of trade and commerce, companies calculated profit by determining the sale price of a product and the cost to produce it. This allowed for accurate financial projections and product pricing. 
  2. Cost accounting. In the beginning of the industrial age, businesses had more “fixed costs.” The ongoing cost of owning and operating an office, for example, created expenses that needed to be included in the cost of producing a product, in order to create profit.
  3. True Cost Accounting. True Cost Accounting (TCA) includes not only variables in costs within a company, but includes the external environmental and social “cost” of creating and selling a product. By calculating environmental impacts (for example) in monetary terms, the wider effects of production are made visible. 

The concept of True Cost Accounting has been gaining recognition for years, but began to come to general consciousness in 2014 with the UN FAO Food Wastage Footprint report. While the motives and the values of those who advocate for TCA are similar, definitions for the term vary somewhat. TCA is:

  • An economic value theory that attempts to assign a monetary value to hidden costs of production, so those values can be included in balance sheets and Profit & Loss statements
  • An initiative that expands the present-day economic methods used to understand all of the various impacts of diverse production systems
  • An attempt to internalize formerly externalized costs, and pass them on to consumers in the price of goods or services
  • An analysis of the global economic significance of biodiversity, in terms of the costs of the loss of biodiversity due to failure to take protective measures, versus the costs of effective conservation. 

Why True Cost Accounting?

True Cost Accounting looks at sources of worth that are not currently valued. Ecosystems, terrestrial resources, social structures, and human knowledge are all forms of natural and social capital. These public goods are “commons”: resources that are shared not only among humans but by all life. If some individuals or organizations damage these commons in pursuit of their own interests, all life suffers as a result. However, the cost of these damages are currently disregarded by market incentives. 

Damages to the commons are referred to as “hidden costs” or externalities: costs that result from an activity or transaction, and that affect parties who did not choose to participate in the activity or transaction.

Companies routinely shift part of these hidden costs onto the environment or onto the public.For example, when tax dollars are spent to clean a toxic industrial site, the costs has been shifted from the business that is responsible for the damage, to the public who did not participate in the transaction, and does not share in the profit. 

Rather than allowing an industry to offload these kinds of costs onto the environment or the public, True Cost Accounting includes them upfront.  

How TCA is Calculated 

Although True Cost Accounting is a recent term, it is not a new concept. Monetary values have long been assigned to externalities when corporations are penalized, or when insurance firms calculate costs in industrial accidents. Some examples of TCA include:  

  • In 1972 the Club of Rome published Limits to Growth, suggesting that business as usual would result in worldwide economic collapse before 2100. Fifty years later, their findings appear to be generally valid. Some business leaders took note even then. Antoine Riboud, CEO of Danone, said in 1972 “That a company takes into account all its stakeholders is not an act of faith, but an act of reason; no company can thrive in a desert.” 
  • Recently the government of Indonesia considered True Costs when implementing their current Five Year Plan for forestry & agriculture by substantially increasing their investment in agroforestry to replace some palm oil plantations. 
  • In Senegal, the government decided to invest in small-scale rice production and farmer agro-training rather than industrialized rice farming. Industrialization would have required Senegal to undertake burdensome loans. A TCA model showed that with the money those loans would cost, they could instead invest in a sustainable system that will bring economic benefits to their people and better environmental outcomes to their land. 
  • True Price is a Dutch social enterprise founded in 2012. They developed methods and tools to measure and monetize societal impact. Their mission is to assist companies to transition to a sustainable and social economy. Michel Scholte, Executive Director and Co-Founder of True Price explains: “First we assess the entire supply chain of a product. Then we identify any violations of human, sustainability, and labor rights within the supply chain, and finally we calculate the cost of remediating these violations, based on the sum of restoring, compensating, preventing, and possibly fining the violations.”
    • In 2018, True Price spun-off the Impact Institute. They offer organizations tools, training, data and services to measure, report, and manage their natural and social impact. The goal is “an impact economy, in which companies and professionals contribute to broad prosperity and to solving social problems, instead of causing them.” 

The Economics of Ecosystems and Biodiversity (TEEB) offers recommendations based on TCA to re-design corporate structure. Their recommendations are:

  1. Measure and disclose all externalities, including biodiversity and ecosystem services 
  2. Make advertising more accountable 
  3. Limit leverage for “too big to fail” corporations
  4. Replace profit taxation with taxation on resource extraction and use 

These steps would embody the recognition that natural and social capital do not belong to the corporation, but are public goods that the corporation uses respectfully and responsibly.

The truth is, every economic transaction has an environmental cost. TCA aims to make those costs visible, transparent, and potentially even taxable. It allows both businesses and consumers to make more informed, responsible choices in their everyday lives. If we are to move forward into a more healthy, balanced future, these costs must be accounted for.