Why Industry Leaders are Increasingly Turning to True Cost Accounting

Over the next two decades, the consumer sector is predicted to grow at a strong rate of five percent per year. Disruptions such as worker health and safety issues, labor rights violations, and the impact of climate change have the potential to dramatically alter these growth projections, as well as the total return to shareholders.[i] As a result, investors have been prioritizing sustainability initiatives that minimize disruptions and build resiliency at an increasing rate; $357 billion in assets were invested in sustainable funds at the end of 2021, more than four times the amount in 2018.[ii]

The COVID-19 pandemic accelerated the already growing use of sustainability metrics and elevated the challenges we face as an interconnected, global economy: labor shortages, supply chain disruptions, and fears of a recession creating uncertainty among businesses worldwide. Environmental, social, and governance (ESG) investment professionals now indicate that the pandemic highlights the need for systemic thinking.

It is tempting to look at short-term savings when facing economic contraction. In reality, this approach is the opposite of systemic thinking; it undercuts the stability of markets and undermines sustainable supply chain health.

Instead, one effective approach to systemic thinking is True Cost Accounting (TCA).

Also known as True Pricing, TCA is the idea that we can determine a price that better accounts for impacts on communities and the environment during the production process. TCA often translates to a higher upfront cost when sourcing or manufacturing a final product, which accounts for the resources the business must invest to keep their supply chains resilient and ethical.

In a time of economic contraction, why do market leaders invest their resources in using TCA for supply chain resilience?

In short: True Cost Accounting reveals externalities.

An “externality” is a cost associated with the production of a good that is not reflected in its final price. Communities or ecosystems tend to absorb and bear the burden of negative externalities. If a company places a production plant near a town and does not enact measures to keep local bodies of water clean, the community and the environment “pay” the cost. In addition, communities of color and vulnerable populations disproportionately experience negative externalities. These costs can also impact communities across the globe or future generations.

TCA includes the cost of actions taken either to prevent or to remediate negative impacts. These actions include removing carbon dioxide from the air, protecting or restoring forests, or providing fair wages so that communities remain healthy and free of practices such as forced or child labor. It is not a simple calculation; our world is increasingly interconnected, and every product draws on different sources of human and natural capital.

The last few years have shown that companies with higher ESG performance are more resilient, and this is recognized by investment firms and private investors. Now more than ever, Wall Street is paying attention to a company’s long-term investments in environmental and social sustainability as an indicator of business health and longevity. This shift away from short-term profit at the expense of communities and ecosystems in favor of stable, long-term investments that are socially and environmentally sustainable, is a shift away from shareholder capitalism towards stakeholder capitalism.[iii]

According to recent research, despite the hardships of the last few years, consumers’ willingness to pay for sustainable goods is increasing, and they accept that sustainably made products may have higher production costs.[iv] Consumer demand for sustainable products is growing, and businesses that respond authentically stand to profit.

Where does Fair Trade USA™ fit into this equation?

While no framework or program will account for every externality, the Fair Trade USA model is proving the value that products that more closely reflect their true cost represent in the market.

Fair Trade USA’s auditing system helps ensure workers are treated well.

• Our standards require that producers have the frameworks necessary to prevent forced labor and child labor, and to ensure workers receive fair wages, based on country-specific benchmarks.
• Working conditions are safer and producers have access to health care and emergency medical funds if needed. Because of community development projects and cash transfers, workers and their families also experience improved health. Projects focused on child education foster prosperity for the entire community.
• Participation in the fair trade system results in higher retention rates and less absenteeism, which are critical elements of a sustainable, resilient supply chain.

Fair Trade Certified™ products can have lower environmental externalities.

• Fair Trade Certified farms, factories and fisheries receive training focused on environmental performance improvement relevant to their industry. For example, farms are encouraged to evaluate and enhance biodiversity, soil health, and waste and water management.
• Fair trade farmers are also trained in organic farming and integrated pest management methods, which have lower greenhouse gas emissions and higher organic soil carbon sequestration than industrial farming methods.
• Collectively, these practices contribute to climate change mitigation efforts.
• Fair Trade Certified fisheries invest in long-term viability of species ensuring biodiversity and ecosystem protection. By leveraging data and monitoring systems, communities invest in the sustainability of the natural resources needed to ensure healthy oceans and species.
• Fair Trade Certified factories are required to implement practices related to the handling and disposal of chemicals that are hazardous to the environment or people, good waste management practices, and prevention of water contamination, which have very immediate impacts on worker/community health and the environment.

In a time of economic uncertainty, it is more important than ever for companies to continue investing in supply chain resiliency rather than focusing on short-term gains. Fair Trade Certified products help mitigate hidden social, economic, and environmental risks compared to conventional products, thus strengthening supply chains. While supply chain auditing and certification may have an upfront cost, they ultimately have a stabilizing effect on a business’ supply chain as well as its reputation – all while meeting consumer demand for transparency and sustainability.