True price – What do your purchases really cost?

True price: this is what your purchases really cost Bekijk de video

How can they make this for so little? You must wonder sometimes when shopping at your local supermarket or browsing in a department store, as some prices are strikingly low. When prices look too low to you, more often than not they really are. And that’s because they typically don’t factor in hidden costs such as environmental damage, carbon emissions, low wages and – in the worst case – child labour. These unpaid costs are shifted to local communities or the next generation. True cost accounting and true prices reflect what we find when we do factor in such hidden costs, as this true price is often a lot higher. In the real world, the true price serves as a shadow price, to help us see what proportion of the true price isn’t really paid. We can rightly call these hidden costs, which can be broken down into environmental and social costs.

Does my stuff really involve so many hidden costs?

The manufacture of clothes, for instance, frequently involves pollution of surface water by toxic substances. Hidden social costs are also high: workers working in hazardous conditions, not earning a living wage, and sometimes even victims of modern slavery. Suddenly, it’s less surprising that we can buy a new cotton T-shirt with a multi-coloured print for next to nothing.

Are true prices always higher?

Not necessarily, in theory a product’s true price can be below what we pay for it at the tills, as it can benefit society more than it costs. Eating fruit and vegetables, for example, makes for healthier and more productive citizens. That said, there are often hidden costs involved that aren’t covered, but how much varies greatly per product. 

ABN AMRO report: True cost accounting in agriculture

Calculating the hidden costs for standard versus organic farming (in Dutch only), Dutch consultants Soil & More Impacts found that the additional hidden costs for regular farming exceeded those for organic farming. In other words: organic products may be more expensive in the shops, but their true price may well be lower than those for non-organic products, as they have fewer hidden costs.

How to calculate a product’s true price

This may appear trickier than it really is. ABN AMRO has joined up with the Amsterdam-based Impact Institute to work out in detail the true price of jeans (in Dutch only) in a typical production chain. For one thing, the Impact Institute assumes that the hidden costs of water pollution are equivalent to the cost of surface water treatment, and goes about carbon emissions in the same way: how much does it cost to get CO2 out of the environment again? As for underpaid employees, how much should they have made to live in dignity, i.e. to earn a living wage? And what are the costs of clamping down on workplace harassment? The next step is to calculate these hidden costs, with the true price or hidden costs per pair of jeans averaging 33 euros in excess of the purchase price retailers currently pay.

So everything will be a lot more expensive if we start paying true prices?

In a sustainable world, shop prices should be equivalent to true prices, in which case products would no longer destroy people and planet. But that doesn’t mean that prices would be a whole lot higher, not for society at large that is. For one thing, prevention is often a lot cheaper than cleaning up afterwards, i.e. making sure that carbon isn’t emitted in the first place doesn’t cost as much as getting it back out. Using recycled materials should work out cheaper, while enhancing safety in factories is less expensive than the social cost of employees incapacitated for life after an accident at work. Also keep in mind that intermediaries are currently charging very steep margins, while paying a living wage would push up commercial prices.

So what does ABN AMRO do, other than writing sustainability reports?

For one thing, we want to familiarise our clients with true pricing methods as guidance to make any necessary changes to their own value chains. At the same time, we’re looking to raise awareness among consumers of the very phenomenon of hidden costs, enabling them to make considered choices when buying products. The Impact Institute has an important part to play as the bank’s strategic partner. 

In fact, ABN AMRO published an Impact Report alongside its 2018 Annual Report, the first bank in the world to do so. With the assistance of the Impact Institute, this report attempted to capture the costs and benefits for society of our own banking business as best we could. We’ll be doing the same for 2019 and are constantly looking for better ways to achieve improvements.

Read more

Check out our sustainability page.

Jan Raes

Jan Raes

Sustainability Advisor +31 (0)20 383 1753