Green growth instead of a dark future

The goal is clear – to stop climate change. There are a host of potential solutions to this conundrum. One of these is called “degrowth”. This approach was developed in light of the finite supply of resources, and fleshed out in 1972 in “The Limits to Growth. A report for the Club of Rome's project on the predicament of mankind”. In 2016, “Reinventing Prosperity” followed a number of updates with the core message: “One percent (growth) is enough”. The aim was to curb, and even reverse, growth in one of the world’s main drivers of resource consumption – its population. This has echoes of Thomas Robert Malthus’s 1798 essay, “The Principle of Population”.  

No growth is no solution 

While growth is not an end in itself, no growth is no solution either – for at least two reasons. First, “degrowth” has to be a global solution. Second, humanity has the fundamental right to live in dignity, even though this is not the reality everywhere.  

As far as a global approach is concerned – zero and even negative growth would have to be achieved globally, as is plainly the case for carbon dioxide emissions. Only a small share (upwards of 12 percent) comes from the EU, about 2 percent comes from Germany, and a larger – albeit declining – share comes from the United States. Japan, too, contributes relatively little, while China’s share and that of the emerging economies have risen sharply over the decades (see Chart A/). So how likely is it that negative growth will become the new maxim in this context? 

If you don’t want growth, you must want redistribution

Redistribution from the rich countries to the poor? Branko Milanović, probably one of the most high-profile inequality researchers out there, illustrates how difficult, if not impossible, that is. He concludes that if global economic growth were frozen at the current level, either 10 to 15 percent of the world’s population would have to remain in absolute poverty, and around half would have to live on seven dollars a day (adjusted for purchasing power) – or there would have to be massive redistributions of wealth, which is simply not possible.  

According to Milanović, on global average people have 16 dollars a day of purchasing power. In Germany, that figure is well over 75 dollars a day, placing it towards the top. To go from 75 dollars a day to 16 so that everyone is equally poor? Unimaginable. So redistribution makes the pie smaller, not bigger. We should also mention that this thought experiment applies to the nearly 8 billion people alive today, not the expected 11 billion. Is that realistic?

The solution is therefore not “degrowth” but “green growth”, in other words growth which is decoupled from greenhouse gas emissions. That’s not a dream but a reality for practically every country. Take the United States for example. GDP there has increased in real terms by a factor of 3.7 since 1970, while carbon emissions rose by 40 percent until the new millennium – and have been on the decline since then (see Chart B/).  

This decoupling trend has to be sustained until we achieve net-zero emissions. To do that requires innovation and investment, which in turn require competitive markets to facilitate this process of transition.

#FinanceForFuture? FinanceForFuture!

A 2020 study by McKinsey¹ for Europe assumes that 28 trillion euros in private and public climate investment spending will be needed over the next 30 years. According to the study, the lion’s share of this estimated amount relates to (replacement) investments which were impending anyway, and so might as well also contribute towards decarbonisation. For the most part these investments are cost-effective, or will increasingly be so as the price for greenhouse gases rises.

And financing these investments is not beyond the realm of possibility. Let’s not forget that the roughly 4,000 signatories to the PRI Initiative (“UN Principles for Responsible Investment”, signed by asset managers, pension funds, insurers) manage 120 trillion US dollars collectively. These institutional investors have undertaken to base their investment decisions on ESG sustainability criteria. 

That ESG criteria need not be detrimental to investment returns is highlighted in a 2021 meta-study by NYU Stern Center for Sustainable Business and Rockefeller Asset Management that aggregated the findings of more than 1,000 research papers authored between 2015 and 2020.² The study found a positive relationship between ESG and financial performance in approximately 60 percent of the corporate studies, with 13 percent showing neutral impact, 21 percent mixed results and only 8 percent showing a negative relationship. For investment studies, 33 percent showed a positive correlation, 26 percent indicated a neutral result, and only 14 percent concluded that there was a detrimental impact. These figures provide a sense that the fight against climate change and for sustainability is about “Finance for Future”.

All of this goes to show that it is possible to decarbonise the economy. What we need in order to achieve this is a market economy, innovation and investment all working together. And “Finance for Future” has to play a part in this – because all of these investments ultimately need to be financed. Investing with sustainability criteria will be crucial in the journey towards green growth. 

¹ McKinsey: “How the European Union (…)“, December 2020.
² Whelan/Atz/Clark, NYU Stern, “ESG AND FINANCIAL PERFORMANCE: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020”, 2021