Content uploaded by Nadia El-Hage Scialabba
Author content
All content in this area was uploaded by Nadia El-Hage Scialabba on Apr 06, 2022
Content may be subject to copyright.
TRUE COST ACCOUNTING UNVEILS ANOTHER STORY
Nadia El-Hage Scialabba (March 2021)
In the aftermath of World War II, the dominant narrative in the agriculture sector
has been ‘feeding the world’. True-cost accounting (TCA), tells us a different
story. By taking a sneak peek to the food and agriculture backstage, this brief
argues the case of TCA for food and agriculture policies that aspire to ecological
transition, social equity and health.
CONTENT
What’s at stake?............................................................................................................................................. 1
Wealth and wellbeing...................................................................................................................................2
Engaging in good governance...................................................................................................................... 2
Protecting public goods................................................................................................................................ 3
The hidden costs of food..............................................................................................................................4
TCA to link the core to the periphery...........................................................................................................5
A capital approach to everything.................................................................................................................. 5
A systemic view of life.................................................................................................................................5
The birth of a new narrative..........................................................................................................................7
The business case of TCA for policy making...............................................................................................8
TCA opportunities for policy challenges......................................................................................................9
TCA processes for improved policy-making................................................................................................9
Applying the evaluation framework.......................................................................................................10
Distinctive features................................................................................................................................. 11
TCA information to EMPOWER everyone to change................................................................................11
SEEA-EA for natural capital accounting................................................................................................11
TCA labels on organic food.................................................................................................................... 12
TCA appraisal to change the RULES OF THE GAME.............................................................................. 13
Green budget Europe.............................................................................................................................. 13
ESG reporting and non-financial disclosure........................................................................................... 14
Institutionalise TCA to support POLICY COHERENCE...........................................................................15
EU Farm2Fork Strategy..........................................................................................................................16
Wellbeing frameworks........................................................................................................................... 17
TCA in brief..................................................................................................................................................19
1
What’s at stake?
Wealth and wellbeing
Unbalanced growth and economic inequalities have forcefully come in the forefront during
the Covid-19 pandemic. Substantial human interference in the planetary cycles have led to referring
to our times as the Anthropocene. Whether we gaze at climate change storms, or social unrest world
over, the negative spiral that we have created cannot remain unaddressed. The current economic
system undermines our very human survival.
Starting with the industrial revolution and re-inforced by the World War II recovery,
economic growth and wealth have been the prime development indicators. Nowadays, society is
moving beyond evaluating progress in terms of GDP and income level, or maximum yield in
agriculture, to evaluate progress in terms of quality of life, healthy environment and future security.
In fact, a more integrated development indicator has been experimentally released in 2020; the
Planetary pressure-adjusted Human Development Index that links human development to carbon
emissions and resource extraction.
The economy being each and every one of us, the downward spiral can be
changed, starting with our collective mind-sets. The urgency is to embrace a
systems thinking, whereby the health of the economy, the health of nature and the
health of people are tightly linked. This link, how to recognize, measure and
manage it, is what this brief is tackling.
Organizational culture and leadership (Schein, 2017)
Engaging in good governance
Good governance in the food system (and beyond) is a shared aspiration but there are innumerable
views on how to achieve it. Bottom-up grassroots soft action, top-down command-and-control measures, and
2
all shades of grey in between these two extremes, have been experimented in various contexts. Ideally, best
results are obtained through the right combination of autonomous initiatives and policy support systems.
Sociologists indicate that we need a cultural shift from individual artefacts to underlying assumptions
that drive collective behaviour. Currently, the urge for more holistic development is heard and felt by
individuals as artifacts. The next step in organizational culture, driven by individuals influencing the culture
of their institutions, may be embedding innovative approaches in normal practices through policy
interventions. One day (hopefully not too far away), holistic practices will become a moral value, with
organizations spontaneously following certain practices (i.e. internalizing externalities), because they have
become basic assumptions of organizational culture.
Good governance mix (Peter Bruce-Iri, 2021)
Protecting public goods
An externality, which can be positive or negative, is an activity that affects people not
directly involved in an economic transaction. The internalization of negative externalities is driven
by three forces: public policies to protect public goods; stakeholder action (e.g. local communities)
to protect their interests, and market forces of supply and demand responding to resource scarcity.
Markets tend to externalize negative environmental and social costs, while failing to provide for, or
adequately value, public goods. In fact, most externalities (i.e. indirect effects having an impacts on
others) are not taken into account in product prices. As a result, private returns are different from
returns to society. From a general welfare perspective, this market failure to deliver efficient
outcomes is among the main reasons for government intervention in the economic sphere, through
taxes and subsidies.
3
Drivers of internalization (KPMG, 2014)
Public goods (e.g. clean air, law and order) are special types of externalities, because nobody
can be excluded from enjoying public good benefits. The fact that goods are free and available to
all, makes their private bargaining unfeasible on the market. When individuals, households or
companies do not internalize the indirect costs or benefits from their economic transactions,
government intervention is needed to ensure that externalities are internalized. The view of DEFRA
Secretary of State1 regarding healthy food which must be supported because it is an investment (not
an expenditure) to reduce future costs, sheds a new light on the public good concept. Although there
is room for market-based corrective solutions (e.g. labelling), legal, political and moral restrictions
are often required to protect public goods.
The hidden costs of food
The true value of public goods is not reflected in market prices and price distortions have led
to investments in produced capital, while underinvesting in natural and human assets. This market
failure is compounded by institutional failure to manage externalities.
The natural capital cost associated with global crop production is estimated to nearly USD
1.15 trillion, over 170 percent of its production value, whereas livestock production produces
natural capital costs is over USD 1.18 trillion, 134 percent of its production value2. In 2020, the
FAO flagship publication, the State of Food Insecurity, reported that ‘diet-related health costs are
projected to reach an average of USD 1.3 trillion in 2030; and the diet-related social cost of GHG
emissions related to current food consumption patterns are estimated to be around USD 1.7 trillion
for 2030 for an emissions-stabilization scenario’. Global subsidies that damage nature have been
estimated to amount to USD 4-6 trillion per year3.
Accounting for hidden costs differ, depending on what variables are included and which
valuation factors are used in the calculations. However, different studies converge in pointing in the
same direction, especially with regards hotspots. Generally, it can be confidently stated that we pay
three times for our food: (i) at the market; (ii) for environmental damage occurred to the very
productive base and mitigation costs (e.g. climate change loss, taxes to clean drinking water from
nitrates); and (iii) for decreased wellbeing (e.g. livelihoods, health expenses, land conflict)4.
1 Michael Gove MP. A Brighter Future for Farming. Speech delivered at the NFU Conference, January 2018.
2 FAO (2015). Natural Capital Impacts in Agriculture: Supporting Better Business Decision-Making.
3 Dasgupta (2021). The Economics of Biodiversity: the Dasgupta Review. February 2021. HM Treasury, UK.
4 FAO (2014). Food Wastage Footprint: Full-Cost Accounting. Final Report. Food and Agriculture Organization of the
United Nations, Rome.
4
Global damage on livelihoods has not yet been estimated for the COVID-19
period, but there are now opportunities to establish the right environment and
‘build back better’. Transformative change, first and foremost, requires changing
the way economic success is measured, by measuring our wealth in terms of all
capitals, or inclusive wealth, as well as the interactions between investments in
different assets. The tool to do so is described below.
TCA to link the core to the periphery
A capital approach to everything
The need to take a systems’ approach to understanding and acting upon life issues has been
advocated for long. While there is general agreement about the ‘holistic’ necessity, practitioners and
policy-makers have very different views on how to practically apply such an approach. This is
because the different ‘pillars of sustainability’ are expressed in different ways, from qualitative
units in the social sphere, to technical measurements in the ecological sphere, to monetary units in
the financial sphere. Also, the classical framing of sustainability of separate ‘pillars’ does not
account for the temporal dynamic of sustainability and the crucial role of institutional governance.
Full-cost accounting choses a unique language by adopting the term ‘capital’ for all life
spheres, which use flow is monitored in order to determine change in the ‘stock’ of the various
capitals. The six capitals, which are often boiled down to 3 groups (i.e. economic, social, natural)
are shown in the graph below. The ‘capital’ terminology is opposed by some scholars but is the best
proxy we have to address the externalities of our economic activities and in particular, to stop
generating negative outcomes on nature and people. The value of the multi-capital approach is its
pragmatism, which has nothing to do with the perceived commodification of public goods.
5
The six capitals (IIRC, 2013)
A systemic view of life
Agriculture functions as a system, a system of inter-dependence at all levels, from
organisms, to communities and ecosystems – with human management determining much of the
system’ interactions and feedback loops. In a systemic view of the farm (and of the world), the
classical characteristics of productivity and efficiency are complemented with adaptability and
resilience in the face of constant change, as well as with self-reliance and equity.
The development of systems’ knowledge goes through a number of stages: the first stage is
to recognize the thing like a system; the next stage is to name, describe and measure the thing,
including its mathematics, and compare it with similar things; next, deeper understanding is
acquired by studying how things function; and last and most importantly, systems thinking requires
to acknowledge the unknown-ness of the thing – because most of what exists around anything is
unknown. In fact, scientists struggle to formulate a universal definition of life, though the vast
diversity of life forms is intuitively recognized by people5. In fact, the way to engage with the
unknown is through extensive experience and intuition. Farmers who understand agroecology have
that wisdom, which is an understanding of time and space, of when and where things happen. Good
design and management takes into account all this time and space awareness, which is what systems
thinking is about6. Understanding systems in agriculture, including production, consumption and
recycling, requires understanding all sort of relationships, in order to enable beneficial processes to
operate in the most effective way.
Different conceptual models have been created to depict the connectedness of all capitals.
The ‘doughnut model’ is commonly used to represent the ‘just operating space for humanity’,
whereby all human activities must remain within the ecological limits. Thus, the system approach
boundaries are planetary (and even cosmic); impacts and dependencies of activities cannot but
consider the whole system equilibrium. Greenhouse gas emissions depict very well the extent to
which humanity can keep emitting carbon. However, the area of intervention of each stakeholder
can only be within the boundaries of a given stakeholder area of influence, or jurisdiction.
5 Zimmer Carl (2021). Life’s Edge. The Search for What it Means to be Alive.
6 Hill Stuart (2021). Who Started Systems Thinking? Permaculture Visions Global Online Learning System.
6
Within this framework, social and environmental pressures are no longer portrayed as
economic ‘externalities’. Instead, the planetary and social boundaries are the starting point for
assessing how economic activity should take place. The economy’s over-arching aim is no longer
economic growth in and of itself, but rather to the need to bring humanity into the safe and just
space (inside the doughnut) and to promote increasing human well-being there7.
A system approach cannot be limited to reducing environmental pressure without
considering local communities’ rights to land, water and political participation. Carbon trading
schemes, for instances, have created regulated market mechanisms that encroached on indigenous
people rights. Similarly, policies aimed at tackling poverty can exacerbate resource stress, for
example by subsidizing agricultural inputs to increase production but pollute the environment.
Systems thinking takes into account, as much as possible, the interactions
between different parts of a system and understands how together they are
effecting change, rather than simply trying to understand specific components in
isolation. Therefore, TCA unveils the many complex relationships between social
and ecological capitals, with a view to informing policy shifts towards economic
development that brings humanity within social and planetary boundaries.
7 Raworth Kate (2012). A Safe and Just space for Humanity. Can we Live Within the Doughnut? Oxfam.
7
The birth of a new narrative
Worldwide and from different angles, attempts are made to embrace new metrics of
progress, beyond economic growth, acknowledging that different policies are needed to change our
relationships with nature and society. TCA provides the means to depict such a collective narrative,
a shared story that creates the conditions conducive to life.
True-cost accounting is collectively understood as the expression of the systems’
approach to life through a language that speaks to financial decision-makers.
TCA assesses capital stocks and flows, and positive and negative impacts and
dependencies of the ecological, social, human, intellectual and produced assets.
The assessment results can be qualitative, quantitative, monetized, or indexed.
TCA is used to raise awareness, inform decision-making and support policy
coherence for a socially just and environmentally safe world.
In 2018, the United Nations Environment initiative, called The Economics of Ecosystems
and Biodiversity for Agriculture and Food (TEEBAgriFood), produced the true-cost accounting
framework that includes the measurement of the food system’ impacts on human, social, natural and
produced capitals (see graph below). TEEBAgriFood enables a commonly framed description of the
eco-agri-food system, allowing researchers from different backgrounds, farmers of different scales
and practices, policymakers from different countries, and private businesses operating across
countries, to use the same concepts and terminology to describe their respective contexts and
consider solutions. The guidelines for Applying the TEEBAgriFood Evaluation Framework have
been recently published8 and businesses are currently refining their own TEEBAgrifood Operational
Guidelines for Business9.
TCA guidelines, similarly to sustainability assessment procedures, abound in terms of
different scopes, themes covered, indicators and valuation factors. TCA tools range from impact
frameworks, to footprint calculation, databases of valuation factors and sophisticated ecosystem
models. The existing impact frameworks, such as TEEBAgriFood, provide an excellent framing but
leave the room open for stakeholders to choose the most appropriate metrics.
8 Eigenraam M, McLeod R, Sharma K, Obst C and Jekums A. Applying the TEEBAgriFood Evaluation Framework.
Overarching Implementation Guidance. Global Alliance for the Future of Food. Sept. 2020.
9 Capitals Coalition. TEEB for Agriculture and Food: Operational Guidelines for Business. Putting nature and people at
the Centre of Food System Transformation. Draft Report for consultation. August 2020.
8
The business case of TCA for policy making
All sections of society, both public and private, agree on need for more inclusive
sustainability, but not on how to reach this common objective. The Sustainable Development Goals
enshrine the perfect example of a universal agreement on ‘the goals’ but the siloed institutional
structures work against policy coherence. Despite numerous commitments in multi-lateral and
national fora, conceptual and practical difficulties stand in the way of progress.
By making the hidden costs visible, TCA offers a different narrative that can shift the focus
of food system policies. For example, understanding to what extent cheap industrial food creates
public health expenditures, with proof of wasted natural and human resources, triggers policies that
promote healthier foods. In particular, empowering stakeholders with information on the trade-offs
between different sectoral and sub-sectoral policies improves decision-making regarding resource
allocation and meaningful investments and expenditures.
Policies aiming to enhance sustainable development involve balancing the
economic, social and environmental objectives of societies. This requires taking a
broader view and using a longer term perspective about the consequences of
today's decisions. TCA information empowers decision-makers to better negotiate
their interests and ultimately, remove incentives to resource exploitation and to
reward stewardship - provided that political will exists to undertake change.
9
TCA opportunities for policy challenges
TCA processes for improved policy-making
The TEEBAgriFood evaluation framework, as most other TCA evaluation processes,
consists of four phases: frame according to the purpose of the assessment; describe the eco-agri-
food system and scope the focus of the assessment; measure and value impacts; and take action and
ensure the assessment has an impact on practice and policy.
10
Applying the evaluation framework
In line with the TEEBAgriFood operational guidelines, the following institutional policy
processes are triggered during the four phases of a TCA exercise:
Frame … and transcend institutional siloes. A TCA framework develops a vision
comprising all relevant food system interactions, upstream and downstream, in order to identify and
measure what matters to different stakeholders, including impacts and dependencies. Improved food
and agriculture economies seek to regenerate ecological and social assets, while transforming
production and consumption processes to reuse and recycle waste. Multi-stakeholder and inter-
governmental committees are needed to coordinate the policy strategy development across levels
and departments. The vision needs to be long-term in order to transcend political administrations
and ensure continuity.
Describe … and balance power. While TCA data is helpful for understanding complex
systems, understanding of power dynamics is vital, as they influence the strategies and narratives
that underpin change. It is important to map the power of stakeholders, with a view to promote or
constrain movement towards the stated goals. Thus, disclosure and transparency are paramount.
Engaging with a wide range of stakeholders, including experts, policy makers, civil society groups,
and citizens will be critical to ensure a collective assessment of materiality, with all relevant actors
appreciating why particular shifts are necessary to improve wellbeing, now and for generations to
come.
Measure … and design coherent policy. Based on TCA results, policy strategies can be
designed with a clear picture of trade-offs and synergies of different policy interventions, as well as
of the institutional bottlenecks and power dynamics. The assessment and eventual reform of
existing policies and institutional and legal structures can be further informed by specific TCA
scenarios.
Take action … and empower. TCA is a communication tool, and information empowers.
Although it should be clear that TCA results can only be as good as science knows (thus, leaving
space of some unknown), the construction of development scenarios provides an excellent basis for
democratic participation, to select and co-create new policies that align with collective values and objectives.
TCA is a tool that facilitates better decision-making by delivering information
adapted to the unique biocultural conditions of place. TCA does not prescribe any
policy, but creates the conditions to think differently and to engage, manage and
govern the economy differently. Policies pertain to the political space, subject to
11
public and private pressure. In fact, there is always a gap between technical
evidence and policy decision, and TCA is no exception.
Distinctive features
TCA promotes good governance principles in policy design: cross-disciplinarity through the
inherent system approach lens; transparency, through the systematic use of qualitative and
quantitative evidence; accountability as a consequence of transparency of power structures; and an
inherent participatory approach that further strengthens multi-lateral policy.
Recognizing the multiple dimensions and variety of agents that constantly interact and evolve in
a system requires that all stakeholders be considered. Active community participation triggers ( de
facto) alignment of government departments and local authorities in the delivery of public goods. In
particular, coordinated local action in designing and implementing policies ensures greater
legitimacy, adaptability and continuity of policy initiatives. Participation not only allows better
focusing of values and policy objectives, but also allows building a vision and outcomes that will be
hard to knock-down by powerful lobbyists. The success of a TCA process will therefore highly
depend on the engagement of all government institutions and meaningful public participation. By
providing a holistic framing and unveiling hidden costs, TCA allows for proper bargaining among
parties involved in externalities.
TCA is iterative and adaptive, based on learning and experimentation, with a focus on multi-
stakeholders and context-specific solutions. Currently, policy-makers are expanding their vision on
what is of value, beyond the here and now.
TCA information to EMPOWER everyone to change
Internalizing externalities in an equitable way is perhaps the greatest challenge of
contemporary economies. Carbon politics provide insights on lack of coherence of different
policies and pricing mechanisms at national and international levels, as well as unintended impacts
of exacerbated inequality. Decision-making ought to balance ecological, social and financial
capitals.
TCA’s power of transparency affects positive change, as society is empowered to
collaborate and act for nature and equity. Developing TCA scenarios through
multi-stakeholders models, with specific consideration for the needs of vulnerable
groups and local communities, offers opportunities for creative solutions. TCA
provides the framework for better understanding systems and consequently,
taking action at all levels, for both institutional policy-making and individual
purchasing decisions.
SEEA-EA for natural capital accounting
Moving towards agriculture and food activities that maximize public goods and minimizes
negative externalities requires that all public, private and civil society actors work together to
deliver on joint commitments, such as the Sustainable Development Goals. However, metrics must
be standardized in order to offer comparable and robust capital accounting. In March 2021, the UN
Statistical Commission adopted the System of Environmental-Economic Accounting – Ecosystem
Accounting (SEEA-EA) as an international statistical standard, which includes a common
framework, concepts, terms, definitions and accounting rules. This new framework will enable
12
countries to integrate their natural capital into national wealth calculations and to reflect nature’s
true value in policy planning and economic systems. SEEA-EA is a major step forward, that goes
beyond GDP economic reporting, reflecting the dependency of the economy on nature, as well as
the impact of the economy on nature.
Natural capital accounting enables the appreciation of the place of Nature’s services in the
economy, including ecosystem services, such as provisioning, regulating and cultural services. In
particular, natural capital accounting enables tracking the movement of natural capital over time.
About 34 countries are compiling ecosystem accounts on experimental basis and more will follow.
Countries are beginning to incorporate natural capital and ecosystem services into national
economic metrics of success, such as China’s Gross Ecosystem Product and New Zealand’s Living
Standards Framework. Substantial efforts will be needed for global statistical data collection and
hence, for improved decision-making at scale. With the Sustainable Development Goals and SEEA-
EA, an integrated vision and new metrics of progress are made available for TCA application in
national accounts.
TCA labels on organic food
Since 2017, TCA-based Integrated Profit&Loss are been piloted to raise consumers awareness
on the benefits of organic fruits and vegetables of small and medium-sized enterprises sold in
Europe. In fact, EOSTA uses the Sustainability Flower as a model to evaluate, manage and
communicate the sustainability achievements of organic growers. For instance, the health impact of
apples was estimated to be 0,19 cents different per kg, to the favor of Eosta’s organic apples,
compared with non-organic apples10.
In Egypt, SEKEM has been a role model of sustainable community development around
biodynamic farming. In the last few years, SEKEM started implementing TCA in order to bring full
transparency to its supply chain. In April 2021, nine products labelled according to the Economy of
Love standard and associated webpages will be launched on the Egyptian market. TCA revealed
that organic farming enables a cost reduction for the society for each and every crop evaluated,
because of the low damage costs included in the calculation. Even if the selling price of organic
products was to be equal to conventional products, the organic products would still be more
profitable for the farmer and cheaper for society, when true costs are considered11. Through TCA
information on sustainably and ethically produced products, the aim is to empower consumers in
healthy purchasing choices, beyond the price tag.
10 EOSTA (2017). True Cost Accounting for Food, Farming & Finance (TCA-FFF). Eosta, Soil&More, EY, Triodos
Bank and Hivos.
11 Seada T et al (2020). The Future of Agriculture in Egypt. Comparative Study of Organic and Conventional Crop
Production Systems in Egypt. Version 2, Carbon Footprint Center, Faculty of Organic Agriculture of Heliopolis
University for sustainable Development.
13
TCA appraisal to change the RULES OF THE GAME
The economy is driven by institutions and behaviours that contribute to, or detract from,
wellbeing. Financial and large corporate institutions have a crucial role in food system
transformation and more. A new economy narrative, broadly defined as ‘the way to provide for one
another’ can only be embraced by a deep understanding of relationships, power structures, and
long-term impacts.
Non-financial disclosure serves to substitute for imperfect market prices. While disclosure
does not directly drive internalization of externalities, it does make it easier for stakeholders to
scrutinize corporate externalities, which can in turn encourage companies to address them.
The transformative change needed to reverse nature loss, climate change and inequality
cannot be achieved without policy reform. A systemic change is required in subsidies and
incentives to reward circular and profitable business models that deliver positive long-term
outcomes. Most important is to also tackle perverse subsidies, which in total are equivalent to some
5 to 7 percent of global GDP. All prevailing subsidies have a historical rationale (e.g. distributional
justice, national food sufficiency, political pressure from powerful lobbies) which is why they prove
difficult to stop. However, the resources that would become available to governments if they were
removed could be used to finance programs that benefit not only populations at large, but in
particular the most vulnerable. Correcting inefficient economic distortions to resolve institutional
failures can serve the common good12.
Gathering evidence on non-market values is the first step to changing behaviours.
This typical TCA process helps creating the conditions for a policy mix of
subsidies, taxation and public procurement that promote responsible resource use,
restoration and circularity. In particular, TCA transparency and knowledge
sharing supports effective local action and international cooperation.
12 Dasgupta (2021). The Economics of Biodiversity: the Dasgupta Review. February 2021. HM Treasury, UK.
14
Green budget Europe
Green Budget Europe is considering a taxation system to internalise environmental non-market
values. Energy and transport are the only sectors taxed and in the European Union, and all pollution
taxes lumped together hardly reach 2.5% of GDP. Green taxation can potentially implement the
polluter-pay principle, as prices drive behaviour change. The aim is to raise average EU revenue
from environmental taxes from the current 5.9% (though three quarter of it is from energy taxes) to
10% by 2030. Polluters pay in the EU half the cost of air pollution, extremely little for water
pollution. Non-point source water pollution (e.g. agriculture) is particularly undertaxed.
A study commissioned by DG Reform13, based on simulations of shifted taxation by 2030,
found that switching from labour taxes to pollution taxes stimulates the economy and raises
employment. It further argues that the market-based instruments on air and water pollution are not
well-founded and that pollution taxes do not present distributional issues, as is usually believed.
Besides raising employment by 0.1%, more positive redistribution is achievable through careful
design of green taxes and market-based instruments. Based on member states experience and
simulations, advice will be provided on what to tax, how to set rates, who to tax and who to exempt,
how to ensure tax collection, and how to ensure fairness. DG Reform will be holding technical
workshops on instrument design and stakeholder meetings to encourage greater participation in the
policy process.
Fiscal reform is already part of the resilience and recovery plans of some countries (e.g.
Portugal, Slovenia) but could effectively expand, should TCA become embedded in policy making
processes. The Green Deal and Recovery Package are an opportunity to signal political
commitment.
ESG reporting and non-financial disclosure
Environmental, social and corporate governance (ESG) reporting is standard practice in
companies to define material risks and opportunities. However, ESG issues are not integrated into
core business vision, corporate strategy and plans. Furthermore, ESG ratings and ranking differ and
materiality metrics differ (e.g. CO2 measuring methods), which misleads investors and pension
funds, and greenwashing is rampant.
Post-COVID developments include a heightened awareness to move beyond ESG practices
to consider systems-level thinking, due to the multiple inter-connected factors that drive the
investment ecosystem. Standardized ESG ratings and disclosure are under development, in order to
increase the transparency and comparability of investment products with ESG-related features14.
Improved ESG standards will greatly assist pension funds, other asset managers, and financial
market regulators (i.e. central banks, financial supervisory authorities, banking commissions and
financial reporting councils) leading by example by incorporating ESG criteria into their own
investment portfolios and operational activities.
The Task Force on Nature-related Financial Disclosures, established in September 2020, is
another step in that direction. Similar to the success of the Task Force on Climate-related
Disclosures, it aims to shift private finance from destructive to nature-based solutions. These task
forces include 73 organizations from all continents, including the finance sector, corporate sector,
governments and various consortia.
In addition to voluntary disclosure, there is a global drive to mandate companies to be more
transparent about their societal value creation. Europe drives the ESG agenda, accounting for 245
reporting instruments15; an example of disclosure requirements is the EU Commission’s Directive
on Non-Financial Reporting, adopted in 2014, and currently under review to require large
13 Allan Buckwell (2021). Getting the Prices Right. European Commission DG Environment (April 2021, forthcoming).
14 CFA (2020). Future of Sustainability in Investment Management. From Ideas to Reality. CFA Institute.
15 Carroyts&Sticks. Sustainability Reporting Instruments Worldwide. Database of GRI, UNEP and USB (accessed
March 2021).
15
companies to publicly disclose information on human rights and environmental due diligence. The
regulatory landscape both reflects and drives perceptions of key material themes (e.g. Covid-19
driven materiality of public health) but changing societal expectations require that disclosures along
a common core set of ESG metrics be conducted through multi-stakeholders assessments.
Alignment in ESG reporting is still falling short and variations are too numerous on many
fronts. According to the TCA spirit, integrating non-financial information into the management
report helps aligning non-financial and financial disclosures, so that ESG matters are elevated into
corporate-wide decisions.
Institutionalise TCA to support POLICY COHERENCE
GDP is assumed to reflect the standard of living, but it does not account for variances in
income of various demographic groups (i.e. inequality) and excludes non-market transactions,
including bartering and unpaid goods and services, as well as negative externalities, such as
pollution and climate change. In the food and agriculture sector, the overarching productivity
welfare is crop yield per hectare: the focus on yields considers flows and not stocks, allowing
farmers to run down their assets up to an irreversible point of return, thus pre-empting future
growth, while generating externalities that affect all society.
More than mere market failure, our current path of ecological and human exploitation can be
traced to institutional failure, as well as the failure of contemporary conceptions of economic possibilities to
acknowledge that human activities are embedded within Nature. The current global and national recovery
efforts, including progressive stimulus measures and green deals, are attempts to correct massive
market and institutional failure. Their sustainability will depend on how much externalities are
accounted for in policy design.
The transformation of systems requires a suite of policy tools that redefine rights and
responsibilities and encourage, or discourage, certain behaviours. The economy can be shaped by
mandatory regulations (such as prohibition of use and taxes), flexible regulations (such as subsidies,
permits and quotas), and voluntary instruments (such as direct payments and public procurement).
While individual instruments, including taxing negative practices, subsidizing good
practices, or sector-specific regulations, can yield part of the desired outcomes, policy coherence
remains the most sought after, but also the most challenging, route to ensure both ecological and
social health. In virtually all countries, single measures are most often counteracted by other
measures. While policy coherence is challenged by siloed institutional structures and budgets,
another main bottleneck in policy development are vested interests that pressure and block political
action. Recognizing the inter-connections between the ecological, economic and social dimensions
of life means collaborations through multi-stakeholder’ processes.
16
Policy instruments for ecosystem services.
Source: Garrett and Neves (2016)16
By providing information on impacts and dependencies, trade-offs and synergies, TCA provides
direction to reduce agricultural production and consumption footprints, restore farm resilience,
conserve ecosystem services and respect the rights of indigenous peoples and local communities.
Governments, companies and financial organizations will take better decisions if they used TCA
qualitative, quantitative or monetary information that reflects the importance, value, and utility of
the natural, social and human capitals.
TCA should be embedded into all relevant mandates of administrations and
finance regulators, not only to minimize negative externalities and maximize
positive externalities, but to reduce sectoral fragmentation and achieve policy
coherence. Recognizing that every society has unique structures, mainstreaming
TCA in policy practices must build on familiar national processes, such as cost-
benefit analysis, life cycle impact analysis, living standard frameworks, non-
financial business reporting (ESG), or local community-based initiatives.
TCA seeks to support inclusive and sustainable policies through the construction of
simulations that consider public goods across the border of sectors and institutional structures. By
spatially and temporally unveiling trade-offs and opportunities among different policy measures,
open discussion among all stakeholders informs decision on the most suitable development path. As
a result, policies may be re-aligned, by phasing-out, adjusting, or expanding existing policies, and
eventually creating new ones. The TCA process moves beyond the traditional ‘cost-benefit’
analysis, to assess policies in terms of their contribution to current and future wellbeing, using also
value-based assessments, such as racial equity budgeting tools. At last, TCA assists prioritizing
16 Garrett, L. and Neves, B. (2016) Incentives for Ecosystem Services. Spectrum. FAO.
17
ecological and human wellbeing goals and identifying changes required in the economy to achieve
these goals.
EU Farm2Fork Strategy
The EU Green Deal, through its Farm2Fork strategy, will ‘pursue the development of Green
Alliances on sustainable food systems with all its partners in bilateral, regional and multilateral fora.
To ensure a successful global transition, the EU will encourage and enable the development of
comprehensive, integrated responses benefiting people, nature and economic growth’17. The
strategy also sets a target for converting 25 per cent of all EU agricultural lands to organic farming
by 2030, as well as a reduction of pesticides use by 50 per cent. This plan, qualified by the journal
Nature as a potential game-changer, is already threatened by an European Parliament decision to
keep allocating the bulk of agricultural subsidies to conventional agriculture in the form of per-
hectare premiums.
In response to these contradicting policies, three fiscal measures have been suggested to turn
the Farm2Fork strategy into reality: a tax on agrochemical pesticides, artificial fertilizers and
imported concentrates; an increased tax on meat products and a VAT reduction to 0 per cent on fruit
and vegetables; and a shift to taxing the value extracted from natural resources, leaving labour tax-
free, as laid out in the Ex'tax project advocated by the OECD. Also, TCA has been proposed for
bringing transparency to the process by putting a price tag on externalized costs of different
policies18.
Wellbeing frameworks
The New Zealand Living Standard Dashboard includes qualitative wellbeing indicators that
have informed the world first national ‘wellbeing budget’ in 2019. This wellbeing budget aimed to
create a new approach to economic policy by considering economic, environmental and social
objectives together. It incorporated three core principles into the policy design. First, breaking down
agency silos and working across government to assess, develop and implement policies that
improve wellbeing. An example of this shift was that the Treasury now requires collaboration
across ministries when submitting budget bids. This led to 10 agencies coming together to jointly
put in a bid to help address family and sexual violence. Second, it focused on outcomes that meet
17 EU (2020). Farm to Fork Strategy. For a Fair, Healthy and Environmentally-friendly Food System.
18 Engelsman Volkert (2021). Fiscal Measures to Save Green Deal. Eurofruit, 25 January 2021.
18
the needs of present generations, while also considering long-term impacts for future generations.
On the basis of their wellbeing assessments, the government identified 5 priority wellbeing areas for
the 2019 budget: improving mental health, reducing child poverty, addressing inequalities faced by
indigenous Maori and Pacific island people, thriving in a digital age, and transitioning to a low-
emission, sustainable economy. Third, it tracked progress with broader measures of success,
including the health of people, communities, the environment, and public finances. This included a
redesign of budget documentation to make clear how any policy or initiative, including the
government’s balance sheet and asset management contributed to improvements in wellbeing. The
2019 wellbeing budget was a bold experiment, in not only shifting understandings of progress, but
also embracing a new way of designing policies. While the 2019 wellbeing budget only accounted
for new spending for one fiscal year, the Government has now embedded a wellbeing approach into
legislation through the Public Finance (Wellbeing) Amendment Act 202019.
Iceland has also developed 39 wellbeing indicators based on the SDGs to ‘serve as the basis
for an assessment of real prosperity and quality of life in Iceland’. Following on from their
experience with gender budgeting, the government is now in the process of developing a wellbeing
budgeting initiative to inform their five-year fiscal strategies and annual budgets. It will analyze the
wellbeing impact of different policy options, with the aim of reforming and developing a coherent
mix of policies that can deliver on Iceland’s wellbeing goals.
Embracing the multi-capital approach has triggered the formation the Wellbeing
Economy Alliance, including WEGO front-runner governments (i.e. New
Zealand, Finland, Iceland, Scotland and Wales) and WEAll, with over 150
organizations from all over the world collaborating to support visionary policy-
makers to build more just and sustainable economies. The Wellbeing Economy
Policy Design Guide20 shows that a wellbeing economy is not only possible, but
already underway.
19 hps://www.treasury.govt.nz/publica#ons/wellbeing-budget/wellbeing-budget-2020-html
20 Wellbeing Economy Alliance. Wellbeing Economy Policy Design Guide. How to Design Economic Policies that Put
the Wellbeing of People and the Planet First. March 2021.
19
20
TCA in brief
Why bother? To see the elephant
The ancient parable of the “blind men and an elephant” tells the story of five blind men who touch
an elephant for the first time. Each blind man touches a different part (the tail, or the trunk, etc.),
and based on his experience of the part that they touched, describe what they perceive an elephant
to be. Similarly, the agronomist declares ‘the problem is crop yields.’ The environmentalist says
‘the problem is loss of biodiversity.’ The sociologist says ‘the problem is rural poverty.’ The
economist insists ‘this is a failure of markets.’ The health specialist says ‘the issue is malnutrition
combined with obesity.’ As the light turns on, all experts see the full picture and realize each
perspective was incomplete. Recognizing that each expert’s experience is valuable but inherently
limited by a deficit or inaccessibility of information leading to “silo thinking”, they decide to
collaborate in order to address the many challenges of the eco-agri-food system. FCA is the light
bearer.
What is it? A sort of Google maps
FCA is a tool that allows zooming-out to see the whole panorama and zooming-in again to better
address hotspots. It identifies the links between ecological, social, human and produced goods and
services, or capitals. Its’ value added is the integration of non-financial information into decision-
making.
How does it work? By scaling-out household economics
Economic theory of households considers all production and consumption decisions made by
households. The wellbeing of household members is inter-connected and the total income is divided
among household members according to a tacit sharing rule. FCA projects the principles of this
smallest economic unit at sectoral, national or global level by: framing issues across the food
ecology; mapping power dynamics and engaging with all stakeholders; considering scenarios that
minimize trade-offs and maximize synergies; and empowering each member to better negotiate
their needs.
Who to involve? Any enabler is good to start the process of change
An FCA process, which is inherently iterative, can be started wherever a group of people is willing
to engage, whether through a community project, or an embedded institutional practice. By
identifying FCA enablers, the process can be anchored in local contexts and be gradually expanded,
in line with specific biocultures.
Where to start? Any institution is a window of opportunity
Negative externalities are not market failures but institutional failure and both community initiatives
and policy support are needed. Each institution has distinctive levers to offer to the economy, until
FCA becomes a tacit supposition of organizational culture.
When is best? Now
Covid-19 exposed vulnerabilities throughout world economies and reinforced the public good
concept, including the role of governments. As new paradigms are explored, FCA offers the
21
necessary transparency for the effective integration of ecological, social, health and economic
prerogatives.
22