This article originally appeared in the Spring 2012 edition of Collective Insight which is published with Finweek magazine. To subscribe to Finweek please click here or visit Zinio.com and download in either English or Afrikaans.
By Jon Duncan
Head of Responsible Investment - OMIGSA
Jon is responsible for supporting the incorporation of environment, social and governance (ESG) factors across OMIGSA’s investment capabilities. He comes from a climate change and sustainability consulting background with 16 years of professional work experience.
Arguably one of the more challenging concepts for economists is the idea that we can continue to have unlimited economic growth in a world of finite resources.
This idea of “limits to growth” is not a new one. It was first proposed by Tomas Malthus in his 1798 treatise An Essay on the Principle of Population. In it he painted an apocalyptic image of man’s demise at the hands of unrestrained population growth and declining natural resources. Of course the world has not yet ended, despite humankind’s efforts to the contrary. The central critique of the Malthus’s thesis is his failure to account for humanity’s productive capacity in the areas of science and innovation, which, to a large extent, has allowed “pro-gress” at a rate ahead of population growth.
It is ironic that the same “scientific progress” that Malthus failed to account for is starting to illuminate the non-negotiable natural limits of the planet, namely its inability to regenerate the natural resources on which all economic growth depends.
The Global Footprint Network (GFN) estimates that we use the equivalent of 1.5 planet Earths to provide the natural resources and ecosystems services we require for survival. This means it now takes the Earth around one and half years to regenerate the resources that we consume in a year. Conservative projections using the GFN methodology imply that by 2030 we’ll need the equivalent of two Earths to support our resources and ecosystem’s service needs. And of course we only have one planet.
The common point of scientific agreement is that we’re living on an increasingly crowded planet (about one billion in Malthus’s day and presently seven billion) and consuming natural resources at a rate faster than Earth’s ability to replace them. And, in so doing, we impact the natural systems on which most of our economic well-being is predicated. This fact was well observed by Paul Crutzen, an eminent atmospheric chemist, who in early 2000 dubbed this the epoch of the Anthropocene – “the recent age of man”. It is a name that references humanity’s massive impact on the planet.
A 2009 study by the pre-eminent Stockholm Environment Institute was able to define threshold limits for seven life sustaining planetary systems. The threshold limits represent the safe operating limit for humanity, beyond which the potential for catastrophic non-linear system destabilisation increases rapidly. Preliminary analysis indicates that we have transgressed three of these systems’ boundaries and are making good headway on the rest. Importantly, we are developing a body of knowledge that is challenging our notions of growth.
Significantly, the financial community is starting to respond through voluntary initiatives such as the Code for Responsible Investing in South Africa and the United Nations Principles for Responsible Investment. Effective allocators of capital need to consider the long-term environmental, social and governance (ESG) issues associated with their investment and ownership decisions.
Another encouraging piece of work by Towers Watson and Oxford University, argues that the portfolios and strategies judged as well-suited to present-day conditions will prove unsuited to future conditions. Investors, who have previously been able to ignore these long-term non-financial factors, run a significant risk that their performance will not be sustainable into the future. The study presents a framework for developing a sustainable investment proposition that “anticipates the direction of change and integrates the present with the future”.
More radically, Richard Heinberg, in his recent book The End of Growth argues that we need to start thinking about an era of qualitative development rather than quantitative growth. “Growth will inevitably collide with natural limits that don’t respond to stimulus packages or bailouts.”
As we start to rethink growth, questions arise around age-old concepts of ownership, value and profit. Fortunately there are many sound examples to help guide the way to answering these questions. The Forum for the Future developed the innovative Five Capitals Model of sustainability (natural, social, human, financial and manufactured) which is now being used by many forward-thinking businesses (eg Unilever) to help them re-envision the way they create value. New models of ownership are being pioneered by organisations such as Novo Nordisk (owned by the Novo Nordisk Foundation) and John Lewis (100% staff-owned). Marjorie Kelly in her book Owning Our Future presents a compelling vision of generative as opposed to extractive ownership, because the aim is to generate the conditions for the creation of shared value.
So in answer to the question: “Do we need to rethink growth?”, I’d argue that answer is yes – we do need to start thinking about growth in broader, longer and more qualitative terms as opposed to the narrow prescriptions of GDP. For investors hoping to survive this transition, investing in businesses that create shared value and generative growth will be key.