Good versus Bad Growth
Published in Investing for a Better World
Trillium Asset Management Corp. Newsletter
Fall 2005
All too often there is dissonance between our roles as
workers, family members and owners of capital on the one hand, and our
responsibilities as global citizens on the other. This tension comes to a head around the issue
of economic growth. Continuous growth
maintains employment levels and creates jobs for new entrants into the work
force. Growth is the rising tide that can
lift all boats, avoiding painful tradeoffs.
Growth puts money in investors’ pockets and raises the overall standard
of living.
Yet it is obvious to many of those that depend on growth for
employment, wages, and investment income that the status quo is
unsustainable. As
Some of the problems with growth are definitional. We manage what we measure, and GDP skews
perceptions and policies by lumping together both good and bad growth. In order to isolate the positive side of
growth, the non-profit group Redefining Progress estimates a “Genuine Progress
Indicator,” or GPI. This measure adjusts
personal consumption expenditures for income inequality, and then adds or
subtracts categories of spending based on their impact on the nation’s well
being, broadly defined. “Defensive
household expenditures” in response to a declining quality of life are
subtracted, such as money spent on pollution abatement and security systems,
and adjustments are made for the depreciation of environmental assets. Time spent on parenting and volunteer work is
added back in, as are the services provided by cars, refrigerators and other
consumer durables previously manufactured.
Not surprisingly, the GPI is rising much more slowly than the “all growth
is good growth” GDP. We can only
meaningfully accelerate sustainable growth if we develop widely accepted
metrics that accurately track social and economic progress.
No doubt, many people in developing nations need to consume
more and their economies must grow. All
the more reason for us to rapidly change our measures of social success: to develop indicators that reward good growth
while inhibiting harmful growth. Rather
than accepting unhealthy growth as a necessary evil, investors can choose to
put their money toward products and providers that support genuine progress and
avoid those that generate high social costs.
Since sustainable efficiency makes practical business sense, good growth
can underwrite the double bottom line of financial and social return. A recent study evaluated the investment
returns of companies based on their “eco-efficiency,” defined as the ratio of
the value a company adds with their products and services to the waste they
generate. While industries with heavy
environmental impact such as oil, gas, chemicals and utilities scored badly in
general, the authors identified the best-of-sector performers in each part of
the economy. The
"eco-efficient" portfolio created substantially better investment
returns than the companies with less eco-efficiency. [1]
Growth can be sustainable, healthy and profitable, or it can
be dangerous, destructive and self-defeating.
Getting the right kind of growth requires good metrics, as well as
purposeful consistency in our varied roles as consumers, workers, employers,
citizens and investors.
[1] Jeroen Derwall, et al., “The Eco-Efficiency Premium Puzzle,” Financial Analysts Journal, March/April 2005, pp. 51-63.