Pollution and environmental damage used to be seen as the inevitable impacts of a healthy industrial economy. However, faced with a rapidly heating world, the consensus on this is changing.

Prioritising “green growth” is replacing 20th-century economic theory. The Organisation for Economic Cooperation and Development (OECD) describes green growth as “a means of fostering economic growth and development while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies”.

A rainbow behind turbines in Palm Springs, California. (Photo by David McNew/Getty Images)

Delivering green growth therefore means tackling climate change and decarbonising our energy systems, challenges many struggle to conceive as anything but a massive expense.

“I would say this is probably still the entrenched narrative,” says Tim Benton, energy and environment lead at UK think tank Chatham House. “For those people who are not steeped in climate concerns on a daily basis, there is still a framing of ‘Oh, it is too difficult. It is too expensive’. But that framing is rapidly declining.”

Indeed, the latest modelling shows the economic argument to be firmly in favour of the energy transition. Green and sustainable infrastructure has an economic multiplier two to seven times larger than traditional infrastructure investments, says a 2021 report from the International Monetary Fund (IMF). Meanwhile, analysis from the OECD suggests increasing the $6.3trn (€5.19trn) the world spends annually on infrastructure by just 10% ($600bn) would help limit global temperature rise to below 2°C.

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The IMF model for the multiplier effect estimates that by the fifth year, a $1 investment in renewables will crowd $0.11 into the economy. In contrast, a $1 investment in non-renewable energy will crowd out another component of the economy (investment, consumption, or net exports) worth $0.48.

“In the grand scheme of things, 10% of additional investment compared to the baseline is not that much,” says Patrick Saner from reinsurer Swiss Re. “You would need to invest in the economy to get the infrastructure updated anyway, and so you may as well do it in a sustainable fashion.”

The realignment of economies towards green growth will allow them to see “the benefits of the new green industries,” adds Alex Bowen, special adviser to the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, but businesses will require assurances the redirection of assets towards green enterprises gets strong regulatory support. “If a car manufacturer wants to pivot towards electric vehicles, it will want there to be an electric charging point installation programme from the government,” he says.

This is where stimulus packages like the EU’s €672.5bn Recovery and Resilience Facility  – of which at least 37% has to be spent on projects that support climate objectives – come in. In the US, President Joe Biden is trying to pass recovery packages through Congress worth a massive $4.5trn in increased government spending over the next decade. These packages include almost $2.6trn for investment in infrastructure and more than $1.9trn for investment in the labour force.

“Biden and the EU are leading the way,” comments Benton. “Policymakers are understanding that, from an economic growth perspective, we will be much better off in the decades to come if we take this kind of action now.”

Fiscal conservatives worry about too much state intervention in the economy, as well as the risks around ballooning government debt. However, low interest rates are set to keep the costs of borrowing down (unless recent US inflation data forces the Federal Reserve to change tack).

“When interest rates are low, there is some increased capacity to borrow,” says Matthew Agarwala from the Bennett Institute for Public Policy at the University of Cambridge, UK. Agarwala believes governments then have an obvious choice. “Either try in vain to prop up the dying industries of the 20th century, or invest in a high-growth, high productivity, low-carbon future,” he says.

It is important to “not spook the market” by over-borrowing and risking future inflation, he adds, but this can be avoided if governments “judiciously support targeted investment in decarbonisation, in skills, in jobs, in new infrastructure,” says Agarwala.

For wealthy countries with good credit ratings, there is further reason to borrow to support green growth now rather than in the future. A 2021 report from the Bennett Institute simulates the risk impacts of climate change on the credit ratings for 108 countries under different warming scenarios, revealing the potential for climate-induced credit downgrades as early as 2030.

“It makes more sense to borrow now to invest in the transition if you have a good credit rating, rather than in the future when the rating is at risk,” says Agarwala. “That way economies can be more climate-resilient, their credit ratings are more likely to remain intact and debt will remain cheap.”

In what might be a precursor to future climate risk-related downgrades, in February 2021, S&P Global Ratings cut the credit ratings of leading US oil producers Exxon Mobil Corp, Chevron Corp and ConocoPhillips by a notch. The agency cited massive quarterly losses, as well as the pressure to tackle climate change.

The ESG agenda

As the push for green growth gathers pace, investors are increasingly backing sustainable businesses. The value of assets managed by passive sustainable funds globally has increased more than 12-fold between 2010 and 2020, shows data from financial research company Morning Star. At the end of June 2020, there were 534 sustainable funds globally, with total collective assets under management of $250bn.

Investors are increasingly looking to companies with strong environment social governance (ESG) credentials. This trend does not simply reflect an increased desire for ethical practices; a growing body of research suggests prioritising ESG issues can have a material impact on financial performance.

A meta-study of more than 2,000 studies by Deutsche Asset Management shows a strong positive correlation between ESG strategies and financial performance. The world’s largest asset manager, BlackRock, also thinks ESG is sound economic strategy. In a January 2020 letter to clients, the company says “sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors”.

Britishvolt, a start-up battery manufacturer, is set to build a new £2.6bn giga-factory in the North East of England with a pledge to provide 3,000 jobs for the region and 5,000 more across the plant’s supply chain.

Last month, the company launched its series B funding round, aiming to raise as much as £100m. “Britishvolt is a huge interest to investors owing to its ESG credentials and its mission to create some of the world’s most sustainable, low-carbon, lithium-ion batteries,” said CEO Orral Nadjari at the time.

Britishvolt insists ESG is at the heart of everything it does. “It is not just in our product, supporting electric vehicle manufacturing,” says company chairman Peter Rolton. “We are massively investing in training people from the local area, which is one of the most deprived in the country. We have reached out to ex-offender charities, and also approached youth groups. We are very passionate about making a difference.

He adds: “There was a time when business was just about the bottom line, but now companies that drive the best market capitalisation and shareholder value are those with a strong ESG agenda.”

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Chatham House’s Benton agrees ESG has moved “from the fringes of business to being called ‘good business planning’”, but the Bennett Institute’s Agarwala also warns about the “massive” scope for greenwash in ESG. “You need to be vigilant and critical,” he says. “We are lacking robust and rigorous metrics [and] all claims must be constantly interrogated.”

Long-term risk

The economic case for green growth is clear: it provides new and superior growth opportunities, and governments and investors are increasingly prioritising it as an economic strategy. What is more, the long-term economic risks of not prioritising sustainable practices are increasingly dire.

A report from Swiss Re simulates the economic outcomes of risks associated with climate change. It factors in everything from climate shocks and supply chain impacts, to property damage, lost productivity, climate migration, and other realised and potential risks that may only occur over time.

The results show that even if climate change is curtailed to within the “well below 2°C limit” as stipulated in the Paris Agreement, global GDP growth will be down 4.2% in 2050 relative to a world without climate change. This fall will increase to 11–13.9% if the temperature rise is between 2°C and 2.6°C (the temperature rise deemed most likely by Swiss Re based on current policies), and 18.1% if the temperature rise is 3.2°C.

“No country is immune from climate change,” says SwissRe’s Saner, one of the authors of the report. “This means that basically everyone loses – the question is only who loses the most.”

The report shows climate change tends to have a larger negative impact on developing countries with lower per-capita income. In the 3.2°C temperature increase scenario, China would lose one-quarter (24%) of its GDP. As a result of its relative wealth, lower growth rates and cooler climate, Europe would suffer less (11%), with economies like Finland or Switzerland less exposed (6%) than France or Greece (13%). The US, Canada and the UK would each see a GDP loss of around 10%.

“If not addressed, climate change is civilisation-threatening,” says the Grantham Institute’s Bowen. “We have seen past examples of civilisations that have been brought down by environmental catastrophe – and businesses are now realising this. The Covid-19 pandemic has shown society can act collectively if it gets its act together. With collective action we can tackle climate change while maintaining economic growth.”