Green growth, degrowth or a-growth: What’s behind the new models proposed for sustainable economies?

• The pursuit of GDP growth has had damaging effects on the planet, and new models for economies have been proposed that seek to underpin a more sustainable future
• They include concepts such as green growth, degrowth and a-growth, all of which take different routes to sharply cut resources consumption and refocus economic policy
• Some form of change appears inevitable as time goes on, likely drawing on some of the proposed ideas. This will have clear implications for responsible investors

The universe may be expanding but the earth and its resources are finite. This thought taps at the shoulders of investors seeking to run responsible portfolios. We want growth that drives economies and allows companies to flourish, but we are increasingly aware that for growth to be sustainable it must be consistent with planetary boundaries.

Anyone who spent December hunting for gifts will know that a lot of entirely unnecessary, even wasteful, consumption goes on, making profits for companies and returns for investors – even defining national success. For the last 70 years we have measured the prosperity of countries using GDP – how much the total sales of goods and services has grown. The architect of this metric, US economist Simon Kuznets, did not intend it to be used in isolation because it fails to acknowledge the impacts from economic activity.¹ It is easy to argue that chasing GDP growth has been damaging to our planet and threatens our ability to thrive in the future, but what are the alternatives?

The fight against climate change is clearly central as we consider this question. Emissions are created all along the value chain as we draw on the world’s resources. And as we pursue improvements to social conditions and equality in emerging nations we bump up against a cold reality. Research published in 2022 for the United Nations’ (UN) child aid agency UNICEF found that if everybody in the world consumed resources at the rate of developed countries, the equivalent of 3.3 earths would be needed to keep up with demand.² The UN Environment Programme last year found that under existing national commitments, the world is likely heading for a deeply damaging 2.6°C warming.³

Simple facts like this help explain why business and financial leaders have been drawn into a long-running discussion, previously the reserve of economists and other academics, that proposes entirely new ways to structure economies that better align with a new sustainable era. ‘Business as usual’ does not offer a viable vision for the future, so we need to consider those proposed models, and the potential implications for investors.

Green growth

This is the closest to our current path. And it seeks to align with the warming commitments made in the Paris Agreement. Green growth is all about transitioning energy to renewable sources and capturing emissions with technology and carbon sinks. It focuses on shifting to less energy-intensive consumption without necessarily seeking to reduce demand. In fact, under this approach, growth linked to increased consumption can be justified. And so, electric vehicles are a green growth solution that aligns with how our economies and markets currently work, and which perhaps draws our eyes away from the more environmentally effective option of simply drastically reducing the production and use of cars.

As investors we can easily understand the imperatives that drive green growth. Political momentum and changes in public thinking mean companies already know that a genuinely sustainable corporate strategy may see it rewarded with both investment capital and consumer demand. This means clean technology has become a growth area, as have biodiversity-focused investments, and those seeking to improve social outcomes or address specific UN Sustainable Development Goals.⁴ Ultimately, the green growth ambition is to decouple economic expansion from resource use, something that has shown some signs of validity in the most developed markets, but which would require a truly massive increase in the adoption of renewable technologies if it were to succeed worldwide.⁵

Degrowth

Degrowth advocates accept the notion that reducing production and consumption, most notably in the developed world, may shrink economies. This can be an intimidating thought – a reimagining of pretty much every sacred cow that has marked our economic thinking since the industrial revolution. However, policymakers are increasingly open to degrowth ideas – such as a four-day week – because data shows us countries may be unable to hit emissions reduction targets with green growth alone.⁶ The role for investors in economies not organised around growth would require some creative leadership from governments (and asset managers), but it has broken through into mainstream thinking enough that Wall Street investment banks have started to alert clients that the concept may gather steam.⁷ It remains a fluid debate – some of its champions argue it should be solely about reducing energy and resources use, rather than seeking to shrink GDP.

Some key degrowth supporters are due to speak at the Dutch parliament in March, while others have attracted funding from the European Union, but for now, it remains more a lobbying position than a political force.⁸ There are many unanswered questions, not least about the impact on manufacturing-based developing economies if richer nations rapidly cut their consumption of imported goods. There are also doubts about how developing nations can ‘develop’ without growing their own economies.

The implications for investors are difficult to assess. What does a degrowth equity market look like? Can we build a viable investment universe from businesses that are socially useful, deliver no net harm to the environment and which do not seek to create new demand? Research into the potential effects is limited but at least one study predicts a stock market crash and a vicious cycle of deflation.⁹ These remain open questions, but ones that may be important even in a world where degrowth is not a formal policy goal – one argument from degrowth advocates is that it will one day be forced on us anyway, so it may as well be planned.

A-growth

Sometimes known as ‘growth agnostic’, this sister model to degrowth envisages an approach to economic development that prioritises social and environmental outcomes. GDP is effectively ignored while other goals such as improved air and water quality, increases in leisure time, better healthcare and equality dictate policy and define success. This is where the idea of the circular economy may find its home, a place where the lifecycle of goods is managed in a way that seeks to reduce waste to near zero while minimising energy usage. This should bring positive effects for the natural world and biodiversity as well as on emissions.

While degrowth might demand a wholesale shift in perspective, a-growth would also require substantial collaboration to reset the narrative. Some proponents talk about encouraging international organisations such as the International Monetary Fund and World Bank to adopt a “growth-neutral” paradigm.¹⁰ It remains the case, however, that alternatives seeking to measure well-being rather than material wealth still lack the simple clarity and comparative consistency of our familiar economic metric – a ‘Beyond GDP’ initiative from members of the European Commission and European Parliament is engaged in a long-term effort to address that gap.¹¹ From an investment point of view, the concern will be similar to that in a degrowth scenario: A large pension fund investor might understandably wonder how they will guarantee to meet their liabilities in a world where growth is ‘easy come, easy go’.

Responding to change

We haven’t looked at every proposed alternative here, and it won’t be a surprise that we’ll probably end up with a hybrid approach – all these models bleed into each other to some extent. Green growth is deeply appealing as it feels familiar – a tweak to our economic orthodoxy. But in truth, as we head towards the middle of this century it may not be enough to ensure societies can thrive if it fails to directly tackle the fundamental question of absolute resources consumption. As we consider alternatives, political plausibility is the gristle in the steak. It’s easy to tell an electorate that they can keep all the things they have become used to if we switch out of coal into solar, say, but much harder to insist on changes that might be said to reduce living standards.

At best guess our future economic reality will be drawn mostly from the green growth model, incorporate key elements of the a-growth, circular philosophy and nod to the idea of degrowth in the active moderation of excess consumption and waste. And it will likely be constructed piecemeal as reality bites, rather than imposed as some global doctrine.

As evidence builds of the climate and social impact of our post-industrial-revolution preoccupation with growth, momentum may well build for these new models. For investors, that means reading the runes will be important. The aphorism ‘slowly at first, then all at once’ might be a useful touchstone. Even if the path is gradual, we may see tipping points along the way where sectors, and asset classes, find themselves adrift. Our job as an asset manager will be to understand how that may unfold, and to identify where pitfalls and opportunities lie as it does so.