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More than GDP: Measuring sustainable growth correctly

August 7, 2020

reading time: 5 minutes

by André Schmidt-Carré,  guest author

Girl in front of a measuring scale.

Gross domestic product (GDP) is considered a measure of the state of a country's economy. However, some economists are critical of this measure and are calling for indicators that also take environmental and social aspects into account. 

The explosion of the Deepwater Horizon drilling rig in the Gulf of Mexico ten years ago had devastating consequences for humans and nature. The cost of the clean-up and the multi-billion-dollar efforts to save nature were not, however, reflected in economic statistics. On the contrary, they actually resulted in a rise in economic output according to GDP. 

The reason for this is the method of calculating GDP, which is currently the most important measure of the performance of an economy and thus also of welfare. GDP measures the value of domestically produced goods and services and therefore the value added in a country. The problem is that a rising GDP does not always capture the possible negative consequences of an economic activity related, for example, to accidents, catastrophes or growing social inequality. This means that, according to short-term economic assessments, economies with a rising GDP are developing positively. But long-term impacts, also on the environment and society, remain overlooked.

The US’ Genuine Progress Indicator

Economists are therefore looking for alternatives to GDP that more comprehensively reflect the performance and condition of economies and societies. One of the most well-known indicators is the Genuine Progress Indicator (GPI), which was developed in the US based on the concept of the US economist and Nobel Prize winner James Tobin.

As an indicator of real progress, it supplements GDP with negative and positive social factors and also takes into account how unequally a country’s wealth is distributed. The result is that over recent decades, the GPI has shown much lower growth than GDP in the US, and has even stagnated in some cases. Certain states, such as Maryland, have been calculating the GPI for years and use the results to improve public transport and raise taxes on fossil fuels, for example. 

The EU’s Beyond GDP initiative

European governments have also identified this issue. The European Union therefore launched the Beyond GDP project 11 years ago. Experts were to look beyond economic performance to determine welfare in the member states and to also include the United Nation’s 17 Sustainable Development Goals (SDGs). Factors such as health, the environment and education are also taken into account.

Visual of the United Nation's Suastainable Development Goals (SDG).
The United Nation's Sustainable Development Goals include factors such as health, the environment and education.

What was the result of these assessments? Even the northern EU countries, which were found by Beyond GDP to be the leaders, are far from achieving sustainable welfare for all. According to the surveys, there are people suffering from hunger almost everywhere in Europe. Nearly all EU members have major deficits in terms of sustainable economic activity and climate protection, mainly due to CO2 emissions, which remain high.

The German Environment Agency’s National Welfare Index

Further initiatives have also been launched in individual EU countries. In Germany, the Federal Environment Agency has expanded GDP into a National Welfare Index (NWI) and added around 20 factors that increase and decrease welfare.

The latter include air and water pollution, but also the unproductive time spent traveling to and from work. Housework and volunteer work, on the other hand, are considered to increase welfare. The NWI has risen eight percent since the beginning of the 1990s, and therefore far less than GDP (40 percent). 

The OECD’s Better Life Index and Gross National Happiness in Bhutan

Some indices go one step further. The OECD’s “Better Life Index” comprises a broad range of areas – including income and employment, education, security and work-life balance. And it has an interesting feature: every citizen can use a specially designed website to assess the welfare of their country based on their own perceptions and indicate what is particularly important to them.

Bhutan is considered a pioneer in taking a holistic view of welfare. In the 1970s, the reigning king, King Jigme Singye Wangchuck, declared increasing the kingdom’s “Gross National Happiness” to be the measure of all things. Most recently, the rate of “happy” people in Bhutan was found to be around 40 percent, and the trend is on the rise.

The in-depth report is published every five years and serves as a basis for political action. This national index is key for Bhutan, but interestingly enough, the kingdom still ranks in the lower half of the World Happiness Report, and is currently in 95th place out of 156.

Children in Bhutan
Bhutan is considered a pioneer in taking a holistic view of welfare.

European countries regularly rank highest in the report, with the northern half of the continent clearly in the lead. In the latest report, Finland leads ahead of Denmark, followed by Switzerland in third place, Austria in ninth place and Germany in 17th place – different rankings, different results.

Investors can make a difference

Alternative ways of calculating growth have so far been mainly informative and engaging – what is still needed is for sustainable growth targets be more firmly rooted in the political agenda. Not all methods of calculating growth make sense from an investor's perspective. But the indices show how important it is to integrate sustainability into investment decisions.

For investors, the economists’ new approaches are already having concrete effects: the more the disadvantages of one-sided and high-consumption growth become visible and are evaluated, the greater the pressure on governments and the private sector. And the more it will pay off for companies to operate sustainably. In the long term, this new approach could also have an impact on corporate financing.

The more that nations as investors, banks as lenders and individuals who invest in bonds change their course and focus their commitments on sustainability goals, the more SDG sinners lose ground. The global divestment movement, which deliberately avoids environmentally damaging investments and, for example, withdraws capital from the traditional energy sector, has already clearly demonstrated this: the Norwegian sovereign wealth fund, for example, which is bursting with billions from oil in the North Sea, is today one of the largest and most prominent pioneers of sustainable investments. 

Investment firms are also increasingly focusing their funds’ investment strategies on sustainability criteria such as the SDGs. Goals such as clean water, sustainable energy, climate protection and health can also be promoted through entrepreneurial action. And this results in possibilities to invest concretely in new concepts for growth.

The capital markets are therefore in part shifting towards a more sustainable economy, as is evidenced by the rapidly growing number of ESG-compliant funds. Many impact investing strategies are also specifically geared to SDG targets, for example investments in sustainable sources of energy. And with the current COVID-19 pandemic, the new growth indicators could actually develop more positively than global GDP, given the already noticeably reduced negative global environmental impact.

Taking responsibility

The world is facing major environmental, societal, technological and political challenges. We must all fulfill our social and corporate responsibility and contribute to a livable future. LGT does this in a number of areas: 

More on LGT and Sustainability.

 

Sustainable investing: acting responsibly for future generations

Through its sustainability funds, LGT invests in companies, organizations and countries that have an exemplary track record in terms of environmental, social and corporate governance criteria and that add long-term value from a financial perspective.

More on sustainable investing.

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