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Sustainable development challenges: hidden side effects of economic growth

Sustainable development challenges: hidden side effects of economic growth
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ARTICLE TYPE
Insights
TOPIC
Opinion
PUBLISHED
April 03,2024
READ TIME
8 mins
AUTHOR
Irina Kurochkina
SHARE
Back
ARTICLE TYPE Insights
TOPIC Opinion
PUBLISHED April 03,2024
READ TIME 8 mins read
AUTHOR Irina Kurochkina
SHARE

While an improving economic outlook is always good news for financial markets, it is associated with a worsening environmental footprint in many developed countries, as modern consumption patterns deplete planetary resources at rapid speed. This detrimental impact is positively correlated with high GDP per capita level, even for those countries that are recognized as sustainability leaders globally.

Relationship between GDP and sustainable development

The GDP level and overall sustainable development of a country are positively related, as can be seen in many typical ESG assessments. While this relationship holds well for the average scores and sub-indicators related to government institutions and social progress, the relationship is actually negative for many climate-related factors. This is primarily driven by the high level of consumption in developed countries, which requires more goods to be produced, leading to high energy consumption as well as water and land use.

 

The assessment of country performance on the UN Sustainable Development Goals (SDGs) shows that high-income countries consistently have very low scores on SDG 12, Responsible Consumption and Production. This goal is about promoting sustainable practices in consumption and production to prevent environmental degradation that is associated with current economic progress and lifestyle choices. The quantitative score in the SDG Index1 is based on indicators related to the amount of waste per capita and waste management practices like recycling, as well as imported and production-based harmful emissions of nitrogen and sulfur dioxide (SO₂). With high-income countries having 10 times the footprint of low-income countries, there is a clear discrepancy in scores of countries in different income groups based on GDP levels (as defined by the World Bank). The high-income countries have an average SDG 12 score of just around 60 which is much lower than the average for other countries. At the same time, the overall SDG score which represents the average based on all 17 SDGs is the highest for high-income countries, at 77.

 

Comparison-of-SDG.jpgFigure: Comparison of the total SDG score versus SDG 12 across countries in different income groups. Source: Aegon Asset Management, Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023

 

It’s not only about emissions

In 2022, the UN endorsed 30 March as the International Zero Waste Day to draw attention to unsustainable production and consumption. The topic of waste is not something people discuss often or get easily excited about, but this is one of the key focus areas for sustainable development in rich economies. This topic tends to be overshadowed by other climate-related initiatives like reducing emissions which is indeed very urgent but not a standalone exercise. While ’net zero’ for emissions is pledged by many governments and corporations, a ’net zero waste’ commitment would be a better tool to achieve lower emissions with more efforts directed to responsible consumption and production.

 

Improving the way developed countries deal with their waste is crucial, with the focus not only on recycling but also on outright waste reduction as wealthier people tend to create more waste that is difficult to recycle. The higher level of GDP per capita allows consumers to, for example, replace broken things easily instead of fixing them, as well as ignore any government policies for recycling even if there is a monetary stimulus in place (i.e. throwing away a plastic bottle instead of delivering it back to a store in exchange of a deposit included in a retail price). The speed of new waste being dumped in landfills and oceans is alarming and only getting worse. There is also the sensitive topic of how developed countries cause negative externalities for other countries through exporting plastic waste, for example. Therefore, the pressure is initially on high-income countries given the cascading effect to consumption levels worldwide, and not only within their borders.

waste-comparison.jpg

Figure: Comparison of amount of waste (kg/capita) across countries in different income groups. Source: Aegon Asset Management, Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023

 

Leaders in sustainability also need to transition

For investors, implementing ESG rankings or average scores for portfolio construction should be done with extra care since it can be misleading or even lead to results that are the opposite of sustainable objectives. We believe that assessing granular data in combination with qualitative assessment is essential for understanding whether a county is on track in sustainable development across different dimensions.

 

While countries with high rankings in sustainable development enjoy their status of leaders and get few questions from responsible investors, they also need to continue to put efforts where it matters, so that they can improve their weak areas. To illustrate how severe this topic is, we selected five countries with the worst scores on SDG 12, out of 166 countries ranked. It may surprise some, but most countries on that list are viewed as quite advanced in their sustainable development. In the SDG Index, Denmark is ranked #3 and Norway is ranked #7, with others being ranked in the top 20% of all countries in the world.

lowest-sdg.jpg

Figure: Five countries with the lowest SDG 12 score globally in comparison to their total SDG scores. In brackets after the country name: GDP per capita for each country. Aegon Asset Management, World Bank, Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023

 

 

To explore new ways for sustainable development while maintaining economic progress, these countries should lead the transition. All of them enjoy high GDP per capita and with many SDGs close to being fully achieved. These governments can certainly shift the country towards sustainable consumption and production as they’ve done with other SDGs.

 

Ultimately, the jury is still out on whether economic growth and sustainable consumption and production can be reconciled. The role of government and international agreements will be key to delivering meaningful progress on these indicators. The UN resolution on plastic pollution and related work on waste management are important steps to promote global cooperation for the benefit of people and the planet. Hopefully, countries, companies, and individuals will recognize that their material footprint impairs sustainable development.

 

 

1 Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023

Important Information

More about the authors

Irina Kurochkina Portfolio Manager

Irina Kurochkina is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.

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