Key Inputs from Summit Workstreams

LEVERS OF CHANGE: POLICY BRIEF: THE TRUE VALUE OF FOOD

The “hidden costs” of global food and land use systems are estimated to be US$19.8 trillion per year (Scientific Group of the UN Food Systems Summit, 2021): $7 trillion of environmental costs and $12 trillion of health costs (of which $11 trillion of loss of human life and $1 trillion of economic costs of illness). These costs, including high rates of diet related chronic disease, impacts of climate change, and unfair wages are often borne by the least advantaged segments of society (frequently smallholder farmers, youth, women, indigenous peoples, people of color, marginalized communities) and by future generations. By applying the right incentives across food value chains and systems, these costs can be mitigated to ensure that we create real value for society and business.

Without clarity on the invisible, but very real value of natural, social, and human capitals (see table 1 below); our economic, accounting, and investment systems cannot differentiate between exploitative and destructive (rent seeking) practices and sustainable value creation.

Without clarity on the invisible, but very real value of natural, social, and human capitals (see table 1 below); our economic, accounting, and investment systems cannot differentiate between exploitative and destructive (rent seeking) practices and sustainable value creation.

Table 1 – definitions

The UN Food System Summit has been a clarion call to harness the potential of markets and supply chains, to work with all food system stakeholders to transform our food systems for better investing in the health, environment, and social equality of future generations.

A new kind of economic basis for decision making is needed- one that accounts for the True Value of Food. This new basis will guide the decisions made by – consumers, businesses, investors and policy-makers towards good outcomes for people, the planet and prosperity. This new basis includes three elements: true cost accounting to systematically reveal externalities and impacts, true value systems that appreciate these impacts (both positive and negative) for use in decision-making and reporting, and true pricing policies that would further incentivize beneficial behavior and practices and disincentivize negative and harmful behaviors and practices.

To scale-up these practices, we need appropriate policy and regulatory frameworks. With such frameworks, we create greater transparency and a common “language” within the food system- governments can monitor the impact of policy choices, consumers can make more informed consumption choices, investors can understand risks more holistically, and businesses can make better internal decisions on their portfolio, and their procurement and supply chain management. To influence decisions effectively and in the right direction, the frameworks to quantify and value the true costs and benefits of food should have strong science-based foundations, which are harmonized and have broad acceptance amongst governments and market players. The result will be that the more sustainable and health promotive food system practices that have fewer negative impacts across the natural, social, human and produced capitals are more attractive propositions to consumers, food and agri-businesses, investors and all food system actors.

Implementation pathways

Given the high costs to the environment and human health revealed in the FSS Science Group paper, it is essential that UNFSS stakeholders actively identify externalities that represent ‘hidden costs’ in the food system and that ignore or incentivize unsustainable and unhealthy food systems. There are several pathways to operationalize the true value of food, and shift current production and consumption practices to a more environmentally sustainable, healthy, and equitable food system:

1. Policy incentives pathways:

   Governments and supra-national organizations recognize the value of people and nature and enact regulatory measures that appropriately incentivize and dis-incentivize products or production methods based on their impact on society’s stocks of natural, social and human capital.

2. Business decision-making pathways:

   Businesses understand the true social, human and natural capital costs of their product portfolio and the associated transitional risk (policy, legal, technology, market, reputational risks). As the world continues its journey to a more sustainable food system, the increasing prevalence of policies such as carbon pricing and sugar taxes that price externalities stimulate businesses to innovate to a more sustainable product portfolio. Using rigorous but scalable, fit-for-purpose frameworks in their decision-making, businesses can identify new win-win opportunities for action that benefit not only society but also their bottom-line. By measuring and managing their true costs and benefits, businesses can create long term value for their stakeholders within planetary and social boundaries.

4. Capital markets pathways:

   Businesses have a fiduciary duty to their shareholders. This includes deploying capital to good use, and regularly reporting on value creation. There is however a problem with this approach. The book value of businesses- the value that they can count- including equipment, premises, and liquid capital is only a small part of the picture- in some cases as little as 20% of total business market value. Public companies around the world therefore only make decisions on and report as little as 20% of their true value creation. By taking a multi-capital approach, businesses are better able to deploy capital and report on their value creation.

   Investors simultaneously require the True Value of Food to help extend their increasingly sophisticated ESG considerations so that they can better understand the risk and reward profile of food and beverage companies based on how quickly and extensively they are taking action. With an informed understanding, investors can enable the food transition by providing the capital and the right financial instruments to fund the journey (i.e., specific product portfolio including lending, certificates, etc.). If food companies systematically disclose their true value creation through impact statements or impact-weighted accounts together with their financial accounts, this enables capital markets to optimize the allocation of capital from a financial and societal perspective (Harvard Business School, 2019).

5. Consumption pathways:

   The cost and affordability of diets are key components to consumers’ food choices, but the price at the till is not the price that customers and society are really paying for the food. Currently, consumers lack information about the whether the price they pay reflects the true value. If consumers are aware of the true price of their products, they have the right information to make sustainable and healthy choices.

The proposed interventions

There is a $5.7tn economic incentive (by 2030, increasing to $10.5tn by 2050) to be realized by avoiding hidden costs in the food and agriculture system. In pursuit of this prize, it is recommended to work on three areas: True Cost Accounting, True Value Management, and True Pricing. Potential actions to progress these areas are listed below.

1.True Cost Accounting

Contribute to strengthening and mainstreaming true cost accounting as the tool of choice for food system decision-makers:

• Educate and build capacity among professionals in business, NGOs, and government about true cost accounting.
• Provide professionals with concrete tools to facilitate true cost and value accounting. Lowering the entry barriers of professionals to the field of true cost and value accounting can be facilitated by providing practical skills and approaches (toolboxes) for analysis.
• Generate a global agreement and create public-private partnerships around a roadmap to realize the SDGs by 2030 and reach fully sustainable food systems by 2050 with affordable and healthy food without environmental, social and health costs. Achieving the SDGs will be impossible without eliminating food system externalities, and we therefore recommend that assessment of and action on food system externalities forms a significant element of such an SDG roadmap.

Make true cost accounting information abundant to professional decision makers:

• Create a technological alliance to invest in affordable, traceable, sustainable, reliable and fair technologies to allow all market players, big and small, to implement true value concepts in practice. This includes technology, science, and inclusive governance to (i) measure primary environmental, health and social impacts and (ii) reliably trace and account for the true value of food products along the entire value chain.
• Foster internationally accepted harmonized true cost accounting principles across all applications and standardize practice. Together with experts, practitioners, and stakeholders from all fields in food and agriculture, harmonized true value accounting principles can be developed to ensure validity and comparability of results.
• Build consensus around a universal conceptual framework, core metrics and key performance indicators, data definitions, valuation impact factors, and reporting standards.
• Launch general and case specific policy and business briefs for the adoption of true cost accounting.
• Launch a new wave of true cost/value assessments with national and local governments, business, and farmers based on the UNEP-TEEB approach. This consists of (I) an initial stakeholder-led participatory dialogue to determine where the application of a true cost accounting approach might directly contribute to policy change; (ii) conducting a technical TEEBAgriFood Evaluation Framework application on the agreed proposed policy intervention, revealing changes in the stocks of natural, social, human and manmade capitals (and the flows of benefits such as ecosystem services that arise from these stocks) compared to Business-as-Usual; (iii) set out the constituency of winners and losers, and consult with all affected parties; (iv) develop and apply a Theory of Change to promote policy adoption. This TEEB Approach is currently being applied in a dozen countries and across scores of businesses to inform systems-based decision-making and understand opportunities and tradeoffs.
• Use statistics from country-level applications of the System of Environmental-Economic Accounting Ecosystem Accounting (SEEA-EA) to inform true cost accounting; SEEA-EA was agreed as a statistical standard in March 2021 and provides a robust, internationally-harmonized statistical framework to assess natural capital, and is consistent with the TEEBAgriFood Framework.

2.True Value

Demonstrate true value creation:

• Integrate true value systems into business reporting and controls (including accounting standards). By adding true value information into internal and external financial reports. Businesses can compile impact-weighted accounts and impact statements, enabling them to report and manage the value they create to all stakeholders via all capitals.
• Commit to public procurement based not just on lowest costs, but also on the broader value (including social, human and natural capital) such contracts can create for society.

Enable the use of true value information by capital markets by:

• Developing an investment management tool targeted at mainstream financial institutions.
• Launching a true value bond program, where large progressive food companies issue bonds that are linked-to a set true value performance.
• Launching a True Value of Food Impact Fund: Mobilize catalytic finance for food enterprises that have a measurable and large impact on food.

3.True Pricing

Consumers are in many cases willing to change and must be able to access and afford more healthy and sustainable foods. Labelling and other consumer information systems could be used to facilitate such consumer decision-making. Policymakers could also support changes in taxes and incentives on food and agricultural products in order to fully mobilize the consumption demand lever.

Recommendations to further true pricing could include the following:

• Create an enabling environment to educate consumers on healthy and sustainable choices by integrating true price accounting into product labelling.
• Launch a behavioral research program based on field experiments on the effects of true price information and incentives on consumer behavior.
• Establishing an international framework to measure true prices of products based on a scientific consensus process in alignment with governments and stakeholders.
• Create a modelling toolbox to estimate the effects of a range of policies on the environment, health, and affordability- this will be essential in order to ensure that the correct social protection measures are in place to preserve access to nutrition.
• Create a policy toolbox for governments to implement short term policy changes based on feasibility and impact studies of various potential policies.
• Subsidies must shift public finance so that food producers (small and large scale) produce healthy food in a sustainable way. Pursue pragmatic policies that create smart incentives that significantly correct the price signal without increasing food prices or imposing high administrative costs. Possible indirect incentives for business could include business parks with lower rents and taxes, and cheaper electricity and water suppliers, or low interest government-backed loans for nutritious food suppliers. This could also encompass the broader use of targeted payments to encourage improved farm management practices.

Conclusion

Placing the principles of the True Value of Food at the heart of the FSS agenda will be pivotal for achieving multiple Food System Summit objectives (see appendix 1). Moreover, integrating the principles and practices of true value across food systems and food system actors will be essential for moving from the $19.8tn of societal costs we face today, to ensuring environmental sustainability, fairer livelihoods and incomes, and healthier more productive lives that reduce the burden on the health system for the current and future generations. The transformative actions outlined here lay the pathway for the next iteration of the global development agenda post 2030.

Appendix 1. The True Value of Food as a critical enabler to Food System Summit objectives

The True Value of Food is the ultimate gamechanger, a cross-cutting solution that is an enabler of a large number of FSS priorities and will be critical to achieving development in line with the SDGs and the Paris climate accord. Some of the key connections to FSS priorities are highlighted in the following high-level mapping.

• Ensure access to safe and nutritious food for all. Priorities include “reducing the incidence of non-communicable disease and making (nutritious) food more affordable.”

These objectives depend on shifting production to more healthy and nutritious diets through highlighting health-related externalities and using policy instruments to incentivize healthy diets. According to the WHO estimates, investing $1 in reducing unhealthy diets returns over $12 through avoided expenditure treating NCDs (Saving lives, spending less, 2018)

• Shift to sustainable consumption patterns. Priorities include “building consumer demand for sustainably produced food.”

This aspiration depends on the right financial incentives, including policies that help to level the playing field by re-balancing consumer incentives. Food produced sustainably should be less expensive than food produced through methods that damage our environment, eroding societal stocks of natural capital through climate change, nutrient pollution, and other impacts.

• Boost nature-positive Priorities include “optimizing environmental resource use in food production and striving to support food system governance that realigns incentives to reduce food losses and other negative environmental impacts.”

A “True Value” approach is a pivotal component of re-aligning the incentives and subsidies, optimizing the deployment of resources in a manner that creates, rather than diminishes societal value and shifts production, processing and consumption patterns to more sustainable and healthy diets.

• Advance equitable livelihoods. Priorities include “promoting full and productive employment and decent work.”

Poor wages and working conditions result in negative social externalities as workers depend on the support of government, friends and family for help. Enhanced corporate governance and disclosure helps to highlight and minimize such hidden societal impacts and create new sources of value.

• Build resilience to vulnerabilities, shocks, and stress. Priorities include “promote global action to protect food supplies.”

Risks associated with biodiversity loss and antibiotic resistance are highlighted in the FOLU Growing Better report (2019), which concluded that “the near extinction of certain pollinators jeopardizes five to eight percent of agricultural production and $235 billion to $577 billion worth of annual output”. Applying an economic value to such ecosystem services optimize their usefulness for business and economic decision-making, helping to avoid, plan for, and therefore minimize the impact of such risks.

• Governance and Finance. Priorities include “strengthening accountability and incentive systems for sustainable practices” and “optimizing and scaling public and private finance to support sustainable food systems.”

Understanding the True Value of Food is essential in empowering governments and civil society to monitor, track, report and act on business practices that impact on human well-being, ecological health, and economic prosperity. Fostering accountability includes evidence-based health and sustainability targets and metrics, mandated public reporting, policies on conflicts of interest, and celebrating business leadership and progress.

Appendix 2. True value and antitrust rules

Competition law promotes competitive markets by policing “bad” business conduct – that is, conduct that by purpose or effect injures the competitive process and, in turn, reduces consumer welfare. Its major pillars are: 1. anticompetitive agreements, some of which are ‘per se’ illegal (price fixing between competitors, bid rigging, group boycott, market allocation, etc.), other are scrutinized under the ‘rule of reason’ where anticompetitive and procompetitive effects are balanced; 2. Single firm abuse of a dominant position, also called monopolization in some countries; 3. Anticompetitive mergers. While many antitrust issues can have an international/global dimension, competition law regimes are national and intervene when there is harm to a domestic market (there is no global harmonized antitrust regime).

From a legal perspective, an agreement between competitors to implement true value accounting will roughly be scrutinized in the following way: first, is the agreement creating anticompetitive effects? Second, can the agreement be justified on efficiency grounds? The details, scope, and burden of proofs of such analysis can vary across jurisdictions, but the general principles are similar. At present, there are various academic debates about sustainability objectives in competition law – in particular, whether they should be included as a potential justification for agreements that would otherwise be anticompetitive. The concern is that the fear of antitrust infringement may deter firms from cooperating on projects/standards that pursue desirable sustainability objectives but that at the same time may appear as collusion (or create effects that are equivalent to a collusive agreement, for example higher prices). Many commentators advocate for some form of leeway or antitrust immunity for competitors that cooperate on sustainability projects.

Risks of collusion are obviously reduced to the extent that true value accounting is mandated or endorsed by a public body or regulation rather than a private agreement between competitors. However, even when it is part of competitors’ private coordination, emerging trends may suggest that true value accounting could escape antitrust scrutiny. For example, The Netherlands Authority for Consumers and Markets (ACM) published Guidelines on sustainability agreements within competition law. The Guidelines increase the opportunities for competing businesses to collaborate in pursuit of sustainability objectives, by giving more scope to enter into agreements to achieve climate objectives such as carbon emissions reduction. It proposes to allow this coordination in cases where the benefits for society as a whole outweigh the disadvantages of any restriction of competition. Moreover, the ACM will not impose any fines for joint agreements where businesses have clearly followed the Guidelines in good faith but ultimately do not meet all the conditions (instead, the ACM will ask for the agreements to be amended).

Interestingly, the document mentions explicitly true cost pricing at para 35 as a potential benefit to be considered in the analysis of a potentially anticompetitive agreement under Dutch competition law:

These days, there is much discussion about true costs and true prices. Undertakings often want to know the social costs of their products, and to what extent these differ from the actual costs for businesses. These costs can sometimes be lower because certain externalities are not taken into account. The undertakings are subsequently able to set up their production process in such a way that the difference between operational costs and social costs is eliminated as much as possible. Undertakings can do this in different ways. For example, they can pay a ‘living wage’ or compensate for greenhouse gas emissions. In their marketing activities, they can use these elements to promote their product to consumers. Such improvements in the offerings of undertakings can, within the framework as explained in these Guidelines, also be considered benefits within the meaning of paragraph 3 of the cartel prohibition. 

Recently, the Greek Competition Authority also proposed the creation of a “sandbox” for sustainable development (sustainability). The sandbox is a supervised environment where undertakings can undertake initiatives that contribute significantly to the goals of sustainable development while not significantly impeding competition. This is done through the creation of a mechanism for the submission of business proposals aimed at creating or enhancing the conditions for sustainable development and which, in order to materialize, necessitate greater legal certainty in relation to competition law enforcement. This is another example of a more participatory approach between competition authorities and private firms regarding sustainability agreements (as well as another potential mechanism where the use of true value accounting by competitors would avoid competition concerns).

Given that true cost accounting may have a pro-competitive effect and create sustainability benefits that could be accounted as efficiencies, it does not raise antitrust issues as such, but potentially in the way it is designed and utilized by competitors. Three factors help mitigate competition concerns when true value accounting is adopted by competing firms: first, designing true value accounting in a way that achieves sustainability goals while reducing any unnecessary risk of anticompetitive effect; second, enabling quantification/comparison of beneficial effects vis-à-vis anticompetitive effects; third, endorsement in public standards or regulations.