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Gross Domestic Past-it – rethinking how we value societal progress

Gross Domestic Past-it – rethinking how we value societal progress

22-09-2020 | Insight

The Covid-19 crisis has shown that we need to find other ways of measuring national success than just GDP, Robeco’s sustainability experts say.

  • Jacob  Messina
    Jacob
    Messina
    Senior SI strategist, RobecoSAM
  • Jan Anton van Zanten
    Jan Anton
    van Zanten
    SDG Strategist

Speed read

  • Lockdowns caused falls in GDP as governments saved lives 
  • The measure doesn’t capture life-or-death costs or benefits 
  • New solutions are required to truly understand value creation  

The pandemic caused massive falls in Gross Domestic Product (GDP) as governments around the world introduced lockdowns and social distancing measures to curtail the coronavirus. In doing so, they were saving lives and protecting well-being – a measure that is not properly reflected in GDP calculations. 

In a new paper, Jacob Messina, RobecoSAM’s Senior Sustainable Investing Strategist, and Jan Anton van Zanten, Robeco Strategist for the Sustainable Development Goals, argue that alternatives should be used rather than the blunt instrument of GDP. 

They discuss the macroeconomic picture down to the microeconomic implications for investors, suggesting that new solutions that monetize the key drivers of health and well-being are needed to align the financial incentives of investors with their sustainability objectives. The end result is a better understanding of value creation and a shift in how we allocate capital. 

Externalized costs and benefits

“The principal problem with using GDP is its failure to capture a myriad of externalized costs and benefits, many of which mean the difference between life and death,” the authors say in their report. “For example, the production and consumption of cigarettes, sugary drinks and fast food all inflate GDP. However, the adverse health impacts they inflict on their consumers is insufficiently captured by the metric, and are thus easily ignored.”  

“By the same reasoning, GDP measures the incomes (salaries, profits, taxes) from essential services such as health and education, but fails to adequately measure all the societal benefits that these activities provide to society in the long run. These shortcomings make investing in a sustainable future less attractive from a GDP perspective.” 

“Environmental stewardship, in turn, typically reduces GDP, because it does not include the value that nature provides. Healthy ecosystems and biodiversity provide numerous services, from pollination and clean drinking water to medicinal resources and recreation. Hence, nature provides the essentials for a high quality of life.”   

The true value of professions

The Covid-19 crisis has also exposed problems and perceptions with how we value so-called ‘low-value’ professions such as nurses, the authors say.  

“We see that many jobs at the frontline of battling the pandemic – from nurses and caregivers to cashiers and warehouse workers – receive relatively low wages. While GDP only measures these professionals’ contribution to society by looking at their income, their societal impact is of course much greater: they protect people’s health and well-being and sustain us.” 

“In other words, GDP calculations assume that price equates to value, when this is often not the case.”  

Beyond GDP

Countries are experimenting with alternatives to GDP. “One example is the Well-being Economy Governments (WEGo) partnership of nations including New Zealand and Scotland that aim to focus more on how healthy rather than wealthy their societies are becoming.” 

And in developing such alternatives, science plays a key role. “We see that scientific concepts for measuring social well-being and ecological sustainability are now turning into practical frameworks,” the authors say.  

“The concept of ‘doughnut economics’, for example, gained wide traction in recent years. This doughnut seeks to simultaneously ensure that people’s well-being is met through twelve social dimensions, while the environmental limits of our planet are not exceeded through quantifying the nine planetary boundaries.” 

Creating wealth and well-being

Robeco measures the various impacts of its investments using economic, social and environmental (ESG) indicators. Examples include the number of clean gigawatts per hour of energy provided and the amount of greenhouse gas emissions that were avoided in the RobecoSAM Smart Energy strategy, or the volumes of waste recycled and avoided in the Smart Materials strategy.  

However, standardization across the industry is lacking. Robeco is working with others in the industry to share knowledge and develop impact standards. An example is the Natural Capital Declaration, an initiative led by the United Nations Environment Programme Finance Initiative and the Global Canopy Program, that helps the financial sector to integrate natural capital considerations into investment products, as well as in accounting, disclosure and reporting frameworks.  

“Developing better metrics and integrating these into investment processes is a journey that we embarked on, together with peers and research institutes, that requires continuous improvement and development,” the authors say. “While we have not (yet) found the ‘holy grail’, we increasingly improve our assessment on investments’ economic, social, and environmental impacts.”