6th May 2021, words by Dominic Burke
Increasing numbers of citizens, cities and countries are building alternatives to a model which has had its day. From Wales to Amsterdam and Costa Rica, people are recognising that our approach to economic growth is incompatible with a sustainable future. But what does this mean for responsible investors?
Members of the Charities Responsible Investment Network recently explored this question in a report, ‘Growth Narratives’. Framed as an ongoing inquiry, rather than a final set of conclusions, our report asserts that charitable investors can catalyse an evolution in sustainable investing. We must move beyond the paradigm of limitless growth into a safe and just operating space for humanity.
The growth paradigm is incompatible with a safe and just operating space for humanity
According to economist Kate Raworth, this space exists between the social foundations essential for human flourishing and the thresholds of ecological sustainability, also known as planetary boundaries. It is where we can thrive by “meeting the needs of all people within the means of the living planet.”
Rather than aim for this space, however, global governments have pursued Gross Domestic Product (‘GDP’) as an inherently positive and boundless priority. This fixation on aggregate economic growth is at odds with many of the social and environmental objectives which charities pursue.
GDP only measures activity which has a monetary value, regardless of whether it contributes to or detracts from our social and ecological health. And, crucially, GDP-growth does not deliver the “progress” which we often assume it will.
Above a certain level of per-capita income, for instance, GDP-growth no longer improves peoples’ welfare or life satisfaction. More equal income distribution and access to quality public services are of greater importance. In fact, GDP-growth has often contributed to inequality, as the already-richest capture the majority of gains. In ‘Finance, Society and Sustainability’, actuary Nick Silver observes that, far from everyone enjoying a growing economic pie, the majority find themselves eating the same amount.
The cumulative physical footprint of GDP-growth also represents a “Great Acceleration” in humans’ impact on nature’s capacity to regenerate. The Stockholm Resilience Centre’s planetary boundaries framework shows that the physical extraction, throughput and waste associated with economic activity is threatening the processes we depend upon to regulate vital Earth systems. We are already breaching key measures of biodiversity, land integrity and chemical flows. Contrary to the hope of “green growth”, there is insufficient evidence that GDP can be decoupled from material impact on the scale required to stop this trajectory.
These challenges to the growth model are increasingly being validated by mainstream policy-makers, including the World Economic Forum’s Dashboard for a New Economy. In his recent, seminal Review of ‘The Economics of Biodiversity’ for HM Treasury, Professor Sir Partha Dasgupta remarks that “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.”
It’s important also to stress the extreme inequity of the current model in terms of who contributes, benefits and is burdened with the consequences. It is driven by the consumption patterns of the richest people in high-income nations, largely at the expense of those in the global South. We will still need certain things to grow to make sure that everyone can thrive within the safe and just operating space. But, in the words of Simon Kuznets, who devised the GDP measure, “goals for more growth should specify more growth of what and for what.”
Of course, there are reasons why governments continue to prioritise aggregate GDP-growth. Our economies have become dependent on constant growth in order to avoid unemployment and debt crises arising from recessions. The campaigning organisation 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. Our monetary and financial systems in particular, they suggest, are key drivers of this structural growth dependency.
Investment practices currently reflect this unsustainable worldview
So, how does this relate to the investment practices of charities? As with the economic goals of policy-makers, the problem is that compound financial return expectations ignore the science of ecological limits.
Investment Committees hope to grow their endowments by 4% or so each year. Their investment managers select companies on the basis of financial models which forecast profit growth in perpetuity and then incentivise management teams to deliver this, often at all costs.
While the relationship between GDP and investment returns is complex, overcoming the growth paradigm will clearly have significant implications for the role of private capital.
What about ‘ESG’?
We might hope that “sustainable investment” would, by definition, already recognise the unsustainability of this economic model and the financial system which sits within it. So far, however, ‘Environment, Social, and Governance’ (ESG) investors as a whole have not internalised or acted upon the flaws of the growth paradigm.
What distinguishes such investors is the attention they give to companies’ social and environmental impacts. In many cases, their intention is only to assess the implications for financial returns. But, even where investors seek real-world improvements, they are generally incrementalist or measured relative to peers, rather than anchored in externally defined planetary boundaries and foundational social needs.
Bill Baue, director of r3.0, observes, “so-called sustainable finance as currently defined lacks a specific link between portfolio-level impacts on ecological, social, and economic resources, and the overall stocks of those resources at the macro-systems level. Accordingly, “sustainable” finance as currently practiced has no mechanism for determining actual sustainability. To address this, sustainable finance will need to mature into a more robust definition of sustainability grounded in thresholds.”
Efforts to align investment strategies with a 1.5ºC carbon budget do reflect an understanding of planetary carrying capacities and will, if implemented, move us in the required direction. However, they address only one of the Stockholm Resilience Centre’s nine planetary boundaries and often overlook the social foundations.
It is this partial perspective which leads us to invest in the electric vehicles needed to decarbonise the transportation system, without questioning whether it is truly sustainable to replace, let alone grow, the current vehicle fleet given the overall material footprint involved. ESG funds often favour high-growth technology companies for their potential to generate massive revenues relative to low physical and energy footprints. But they have little to say on how their business models, such as advertising, drive unsustainable consumption.
In the sense that matters then – whether economic activity respects humanity’s safe and just operating space – our current efforts appear to be a continuation of unsustainable investment.
What might a sustainable approach look like?
While achieving a just and sustainable post-growth economy will require more than a shift in investment practices (with policies such as universal basic services, shorter working weeks, and monetary reform mooted as necessary components), we can identify a number of ways in which they will need to change.
Investors will need to proactively allocate capital towards activities which respect and sustain a safe operating space for humanity. These will support foundational social needs, civic infrastructure, material efficiency, environmental infrastructure and ecologies. Even with pockets of growth in these areas, investors will embrace lower returns to capital and longer time horizons.
Rather than focusing only on parts, for instance by “solving” for decarbonisation without accounting for the impact on ecosystems and communities, investors will think systemically about questions of scale and interdependence. To develop and maintain the social foundations, they will embrace more equitable forms of asset ownership.
For some, public finance may seem better placed today to lead these shifts compared to private capital. But, given our public benefit status as mission-driven investors, capitalised charities can bridge the two and act as first-movers or catalysts for new models of investing.
Charity investors can catalyse change
How do we get to this place from our current, unsustainable model? Our report identifies interventions which charitable investors can make at multiple levels of the investment system to support the transition.
We should reframe our investment policies away from the maximisation of financial returns to reflect holistic objectives which contribute to a safe and just operating space for humanity. Investment portfolios should target activities which build and maintain this space. And they should avoid or transform business models which are at odds with the reality of our sustainability context, such as consumer advertising and planned obsolescence.
We must take a systemic 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 some data and methodologies may need to be developed, we can incentivise shifts in this direction by signalling our intent.
Indeed, we shouldn’t overlook our ability to shape policy and market practice. According to current Charity Commission guidance, 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 and missions of charities.
The Charity Commission’s forthcoming consultation on investment powers provides an opportunity to embed social and ecological thresholds at the heart of updated guidance. This would support and drive charitable investors to actively participate in economic transformation, even if profits are not maximised.
Beyond our own sector, we could engage with the Financial Reporting Council – the companies regulator – and the Financial Conduct Authority’s Listing Rules to explore the potential for sunset provisions in corporate purpose statements and articles of association. These would de-naturalise the implicit expectation that companies should seek growth in perpetuity, and clarify their reasons for being with reference to specific social and ecological goals.
These are only a few of the actions outlined in the ‘Growth Narratives’ report. Already, it’s clear that simply speaking in these terms is powerful. The fact that more than 50 charity asset owners and investment managers have signed up for the roundtable launch of our report speaks to the appetite for change and ambition that exists within the sector. Our unsustainable approach to growth has been the elephant in the room – or investment committee – for too long, and we hope the report will create space for others to join our inquiry into new models of investing. Please join us.
A version of this article was published in Charity Finance Magazine in May 2021: https://www.civilsociety.co.uk/finance/the-pursuit-of-growth-for-its-own-sake-is-simply-not-sustainable.html
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