The Financial Case for Degrowth 

Alternative economic growth models are rising up the policy agenda, but as concepts such as the circular economy face decline, will they ever enter the mainstream?  

Next week, European Commission President Ursula von der Leyen and Roberta Metsola, President of the European Parliament, will meet at the Beyond Growth conference where they will discuss topics from planetary limits to growth, the circular economy and alternatives to GDP for defining prosperity. Late last month Ireland’s president Michael Higgins condemned the “obsession” with economic growth. 

Timothée Parrique, an Economist at Lund University, says it signals that degrowth is “no longer a swearword”, with “growth critical” ideas emerging from the fringes and gaining traction due to an acceptance that democratically planned downscaling of production and consumption is required to halt ecological breakdown and reduce global inequality.  

Post-growth finance 

These ideas have also become a talking point of thought leaders in finance in recent years, says Dan Mikulskis, Partner at investment consultant LCP. But the sticking point is translating these big ideas into actual portfolio management, he says.  

“Growth is very deeply ingrained in the financial system – growth is the starting point for everything,” he says, adding that it’s viewed as “heretical” to assess the return on investment outside of the GDP growth lens.

Hans Stegeman, Chief Economist at Triodos Bank, says degrowth or post-growth is a “misunderstood concept”.  

“It is foremost a full-blown agenda to set the economy on a more sustainable footing,” he says. “It’s not per se about descaling everything, but rather about upscaling wellbeing.”  

At a practical level, Stegeman says to operationalise such thinking an organisation needs to have a clear idea of how to make progress towards a sustainable economy and a theory of change to make the most impact with its money.  

“This requires thinking ahead, setting strong principles and clear processes to make sure sustainability is actively embedded in all decisions,” he says. “We want to understand the consequences of what we finance or invest in in the real economy: simply always trying to answer the question will deliver change. 

“If you finance fossil fuel companies, you will generally destroy more value to the economy than you add – this is bad growth.” 

Instead, he says, investors should finance ‘good’ growth, such as investing in renewable energy production. Triodos Bank made profit of €50.8m (US$ 55.7m) last year with a model that focuses on sustainability and wellbeing.  

“We have identified five transitions, covering food, energy, resources, and individual and collective wellbeing,” says Stegeman. “Everything we do, whether through lending or through investing and financing, will aim to contribute to these five transitions.”  

He and colleagues have co-authored a paper outlining a pathway to a regenerative economy, which will require the adoption of radically different mindsets, financial systems, and governance models.  

“We have to thoroughly evaluate if our current economic setup, mostly directed at maximising profits and fostering economic growth is the right way forward,” he says. “Our answer is quite clear: we need to enter a post-growth paradigm, centred around wellbeing within planetary boundaries.”  

He says the circular economy is interlinked to a regenerative economy, with the resources transition requiring the circular management of all resources and materials to ensure that they can all be recycled indefinitely.  

Circular economy in decline 

Recent research from Circularity Gap found that the circular economy is in decline with rising material extraction. In fact, it has shrunk from 9.1% in 2018, to 8.6% in 2020, and now 7.2% in 2023. This means that more than 90% of materials are either wasted, lost or remain unavailable for reuse for years as they are locked in long-lasting stock such as buildings and machinery.  

This is worrying given that today five of the nine key ‘planetary boundaries’ that measure environmental health across land, water and air have been broken.  

The finance sector is on the surface responding to this gap, with a number circular economy funds in operation. But a number are taking a cautious approach, investing in firms that are migrating to circular practices. With top holdings such as Coca-Cola, Nestle and Microsoft in BlackRock’s BGF Circular Economy fund for example, their impact has come under scrutiny.  

KBI Global Investors runs a circular economy fund strategy to address the insufficient supply of food, energy and water on earth to sustain the global population, says Martin Conroy, Senior Portfolio Manager at the investment firm. It invests in companies that are providing solutions to these challenges and producing goods sustainably.  

“We are looking at companies that design a product with the full lifecycle of that product in mind,” says Conroy. “Whether it be sourcing of raw materials, whether it be in the production process or whether it be in the reuse, remanufacturing or recycling of that product or their materials until they’ve reached the end of their life – we’re investing across the whole value chain.”  

Its strategy also has elements that challenge traditional concepts of growth, with it looking to invest in companies that are decreasing demand.  

“It’s decreasing demand, by decreasing waste,” says Conroy. “If you take the amount of food waste globally, it is criminal. And there are solutions to this such as better food storage and handling.”  

As opportunities to invest in the circular economy start to take off, Mikulskis says the real struggle will be building consensus. 

“Reflecting on some of the difficulties of ESG, a lot of people struggle with the idea that you might be arguing against growth,” he says. “There’s quite a lot of work to do to take the degrowth argument from a small number of thought leaders and make the case more broadly.”  

He surmises that a facilitator for change could be putting a price on externalities such as pollution, or social harm, that companies create.  

He says there are signs this is starting to happen through initiatives such as Harvard Business School’s Impact-Weighted Accounts project.  

“The idea that if you weighted a company’s externalities against their profits you might end up with different numbers is starting to get traction. If a company generates US$4 billion of externalities, if they were properly costed, then that’s a US$4 billion in financial risk.”  

Mikulskis adds that there are arguments for moving beyond making the financial case for everything and getting comfortable with a moral case. “But at the moment, if you want to make progress, it’s around making that financial case.” 

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