The current growth paradigm is baked into ESG investing, but is unsustainable for the planet and its people, including investors, a study has found.
ShareAction and the Charities Responsible Investment Network spent six months exploring the perspectives on possible limits to and limitations of growth in economic activity and investment returns.
Overall, and as detailed in the report Growth Narratives: An inquiry and provocation by charitable investors, the study found the prevailing, global economic model of growth is not functioning, and at best “growth and investment practices are both sexist and racist in their current forms”.
When investors talk about growth, they are generally referring to the continual aggregate expansion of economic activities accounted for by the Gross Domestic Product (GDP) measure, the report said.
“The GDP-growth model has served us well in certain respects, to the extent that it has been ‘naturalised’ as an inherently positive and boundless priority for global governments. However, we considered a number of compelling critiques, indicating that the model has had its time and calling for new approaches,” it said.
Beyond a certain point, it added, GDP-growth “does not improve human welfare or life satisfaction”, and overlooks and contributes inequalities, including on the basis of gender and race.
“Its cumulative physical footprint represents a ‘Great Acceleration’ in humans’ impact on nature’s capacity to regenerate, such that we are overshooting critical thresholds for ecological sustainability (or ‘Planetary Boundaries’ [see below]). And there is insufficient evidence that it can be decoupled from such material impact on the scale required to arrest this trajectory.
“Among the barriers to overcoming the GDP-growth model are the ways that our current economies structurally depend on it in order to avoid social crises. Positive Money refers to this as the ‘tragedy of growth’ – we can’t live with or without it as our economic system is currently designed – and highlights the financial system as one such structural factor.”
Throughout the study, the authors refer to the Stockholm Institute’s nine Planetary Boundaries, which analyses impacts on nine different environmental factors, including ozone depletion, biodiversity loss, chemical pollution and climate change, and foundational social needs as envisaged by Kate Raworth’s in the Oxfam discussion paper Safe and Just Operating Space for Humanity.
It also pointed to the recent Dasgupta Review, which found that traditional measures of economic success do not take natural assets into account and nature-related financial risks must be measured by financial institutions to slow down the decline in biodiversity.
The Dasgupta Review, published by the UK Treasury, also said: “No amount of technological progress can make economic growth as conventionally measured an indefinite possibility. Ours is inevitably a finite economy, as is the biosphere of which we are part.”
However, the report highlighted few investors have moved beyond measuring growth and this is also incorporated into ESG investing.
“Alternative system designs have drastic implications for the role of private capital, despite this being a relatively under-examined area to date”, said Lily Tomson, head of networks at ShareAction and report co-author.
Nick Robins, Professor in Practice – Sustainable Finance, Grantham Research Institute, London School of Economics and Political Science, added: “This initiative makes abundantly clear the current growth paradigm is unsustainable not only for the planet and its peoples, but also for investors. Investors have a particular responsibility to develop new approaches because the current paradigm is so baked into the models, expectations and incentives along today’s investment chain. Now is the time to build new approaches as we seek to finance a green and just recovery from Covid-19.”
While recognising that investment practices are not the only thing that needs to be changed, the report also identified specific actions charitable investors can take to accelerate the evolution beyond the growth paradigm – and said these need to move beyond disclosure and engagement.
Policy and regulation
- Anchor charitable investment powers in the “safe and just operating space”
Under current law, trustees are considered to “have a duty to maximise the financial returns generated from the way in which they invest their charity’s assets. Environmental and social impacts are understood chiefly in terms of their impact on financial value, rather than the public benefit purpose of all charities.”
The report calls for social and ecological thresholds to be placed at the heart of updated guidance for trustees, which would enable charitable investors to actively participate in economic transformation, even if profits are not maximised.
See also: – The interconnected nature of all things
2. Promote a requirement for sunset provisions alongside purpose statements in corporate articles via the Financial Reporting Council and/ or the Financial Conduct Authority’s Listing Rules
The report said this would “de-naturalise” the implicit expectation of perpetual growth and clarify a company’s “reason for being”, and also ensure the investment respects the social foundations and ecological ceiling.
3. Call for reporting standard-setters, such as the IASB and SASB, to link corporate activity and its material footprint to externally defined measures of social and ecological carrying capacity, such as the Planetary Boundaries
This points to the context-based approach to sustainability, which Bille Baue explains in Blueprint 6. Sustainable Finance – Systemic Transformation.
4. Provide investor support to campaigns for financial system change
Aligning credit creation and monetary policy with sustainability and shifting GDP measurement by government to focus on holistic wellbeing and a sustainability dashboard. In the UK Budget in early March, Chancellor Rishi Sunak revealed the Bank of England will be adding a climate remit to monetary policy.
5. Support sustainable investment initiatives, including the Principles for Responsible Investment and Charities Responsible Investment Network, to place social and ecological thresholds at the centre of their approach
The report said many investors are more concerned with the implications for financial value, than the “true sustainability of human wellbeing in a flourishing ecology”. Placing social and ecological thresholds at the centre of an investment approach is more sustainable.
Asset ownership and management
- Speak from the new paradigm of sustainability and post-growth.
The report highlighted the language these firms use can be powerful, and therefore they should be reframing investment policies and communications away from the maximisation of financial returns to reflect more holistic objectives to contribute to a “safe and just operating space” for humanity.
2. Engage with asset managers on their role in developing post-growth or “threshold” investment models
Collective discussions among asset managers are encouraged to explore the impact of unsustainability of the current growth paradigm.
3. Develop shared approaches to post-growth or “threshold” investing, including “non-financial” measurement frameworks anchored in social foundations and ecological carrying capacities.
Furthermore, investment managers are urged to collaborate on approaches to objectives, incentives and reporting.
“We could begin with a holistic, ‘multi-capital’ view of the relationships between our investments and social and ecological thresholds, broadening existing decarbonisation approaches to encompass the other Planetary Boundaries. Investor action could help to persuade governments to set and act on targets aligned with these Boundaries, similar to the UK’s ‘net-zero emissions’ law. While the requisite data and methodologies may not yet be complete, by signalling our intention we can incentivise shifts in this direction,” it said.
4. Invest in activities which are compatible with true sustainability, with an appropriate approach to scale.
Construct investment portfolios around activities which create alignment with the “safe and just operating space” for humanity.
ShareAction and the Charities Responsible Investment Network said the study was a starting point for conversation on this topic and encourage feedback to be sent to firstname.lastname@example.org and email@example.com.