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Comment & analysis
Let’s stop living beyond our means
Dieter Helm explains why it is so important for the planet to have a sustainable economy and outlines the often radical ways to achieve such an outcome
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Nobody seriously thinks that the economy is sustainable. The relentless adding to the concentration of carbon in the atmosphere has brought us to more than 420 parts per million (ppm) compared with around 275ppm before the Industrial Revolution, and it is well on its way to causing a 1.5°C warming in this decade. On biodiversity, the trends are also relentlessly downhill. Well over half the insects have gone in western Europe and few dispute that a mass extinction of species is under way.
The reality is that almost nothing has made much difference so far: the world is still around 80% dependent on fossil fuels, the rainforests continue to be felled and chemical agriculture continues to wipe out life on the land.
With these facts in mind, it is surprising that the logical conclusion has not been drawn: if it is not sustainable, it will not be sustained. There is an understandable reluctance to face up to the possibility of a much hotter world by the end of this century, and one with a lot less biodiversity.
Multiple ‘solutions’ are offered in response, one of which is labelled ‘green finance’. Environmental, social and corporate governance (ESG) investing is advocated as the way to channel savings into sustainable investment. Not surprisingly, there is also a suspicion of greenwashing and a questioning of what actually is sustainable. In my new book, Legacy: how to build the sustainable economy, I ask a prior question: what would a sustainable economy actually look like? How would it differ from what is currently going on?
The sustainable economy is one that leaves the next generation with a set of assets at least as good as the one we inherited. It is not our job to make them happy, but it is our duty to leave them with a decent bundle of natural capital and the core infrastructures to provide water, energy, transport and communications, and with a legacy of human capital and social capital.
These legacy assets are assets-in-perpetuity. They should not be depreciated. Rather, we should provide for capital maintenance. This is current-cost accounting. In the sustainable economy, there would be Domesday Book-style accounts: a list of the core assets on the balance sheet, with liabilities matching the assets. Any deterioration of the assets would have to be matched by operating spending on making good the damage. The potholes in the roads would have to be fixed and ecosystems would need to be properly conserved.
In these sustainable accounts, the amount available to spend would be net of the capital maintenance. The Chancellor of the Exchequer would need to provide for this in the current accounts, and hence the budget surplus would be net of spending on maintaining not just the natural environment (including the climate and biodiversity), but also net of road and rail maintenance, fixing leaks in the pipes, mending the sewers, and building out an energy system capable of meeting demand without further polluting the atmosphere.
It’s our duty to leave the next generation with a decent bundle of natural capital and core infrastructure
Provision would be made for the passing on of human capital through education and training (since each generation dies) and ensuring that the social fabric is kept intact. It does not matter conceptually whether these are private or publicly owned systems and land.

Paying for capital maintenance

A quick glance at what is actually going on tells us we are way off course to meet the conditions of a sustainable economy. The UK is one of the most biodiversity-depleted countries in the world. The roads are in poor shape; broadband and mobile communications do not cover all the citizens; the state of the water and sewerage infrastructure is scandalous; and the energy system is creaking even at this early state of decarbonisation.
What this tells us is that we are living beyond our means, eating up our capital assets and hence failing to leave them in a fit state for the next generation. To be sustainable, we would have to pay for all this capital maintenance – always.
Doing the capital maintenance is a necessary and radical step. But still the economy would not be sustainable. That would only be the case if we also applied the polluter-pays principle. We should incorporate into the economy the costs of pollution. We don’t. We even subsidise polluters to pollute – for example, across agriculture, the sector which relative to its importance in the economy (around 0.5% of GDP) is the biggest emitter of greenhouse gases, and the cause of so much destruction of nature on the land, in the rivers and in the estuaries.
The polluter-pays principle has a nasty sting in its tail. The ultimate polluters are you and me as consumers. We buy the stuff made from fossil fuels and the food produced with so much pollution. We want cheap chickens and cheap milk and cheap bread. If the polluter-pays principle were applied, our consumption would fall, and probably by quite a lot.
The sustainable economy has these two hits to consumption. We can only spend once we have set aside the money to fix the holes in the roof and when we have paid for the pollution caused by the production of the stuff we buy.

Finance to the rescue

It is against this background that green finance comes in. Perhaps the ‘wall of money’ we are told is out there waiting to be sustainably invested can fix the problem? Why is there so much confidence that the world’s savers are queuing up to rescue the planet? And why has all this potential investment not made much, if any, difference?
There are two reasons: one about the underpinning of the finance, and the other about the ESG criteria. Finance is the provision of savers’ money to projects, on the promise that the investors will get paid interest on the debt they provide, dividends on the profits and then get their money back. Finance goes nowhere unless there is funding. Someone has to promise credibly to pay the interest, the dividends and pay back what they are lent.
The reality when it comes to ESG is that there are no genuinely sustainable companies, full stop
It comes as a surprise then to listen to endless discussions of green finance without first sorting out green funding. Specific project-by-project revenue streams are created for carbon offsets and net biodiversity gains, rather than system-wide natural and physical infrastructure revenues. The amount of money for planting trees, restoring soils and protecting coastal wetlands is trivially small. Biodiversity offsets are similarly small beer. They do no more than scratch the surface. Why would you lend to a tree planting project when each tree might take 25 years to sequestrate a tonne of carbon, that is if it does not fall foul of squirrels, deer, disease or fire? At, say, a 5% discount rate, its present value is pretty close to zero.
That brings us to ESG. It became a fashion, earned lots of fees and, when the ESG funds were primarily focused on large information technology businesses, did well in the boom years. It looked too good to be true, and it was. Now its returns look below the market (as they should be if portfolios are truncated) and difficult questions are being asked. What is wrong with investing in a company that provided lethal weapons for the Ukrainians to use against the Russians? What is wrong with buying shares in an oil and gas company, when 80% of the world’s energy comes from fossil fuels? If we just stopped oil and gas, millions would starve. And what is so ESG about buying solar panels that may be made by forced Uyghur labour in China (80% of solar panels are from China), or an electric car whose battery contains cobalt extracted from huge mines in cleared rainforest in the Congo, where child labour is an issue?
The reality when it comes to ESG is that there are no genuinely sustainable companies, full stop. Some are just better than others, and not necessarily the Big Tech businesses that formed a large part of ESG portfolios. The next phase of ESG has to become much more sophisticated.
The sustainable economy is not complicated. What we have to do is to live within our environmental means, and that is going to be painful. It requires capital maintenance to be paid for out of current incomes and it requires pollution to be incorporated into prices. Green finance can contribute, as can careful scrutiny through ESG investing. In Legacy, I set out the rules, the asset valuations, the capital maintenance provision, the national accounting framework, the sustainable level of consumption, and how the institutions of regulation and system planning could achieve that outcome.
Dieter Helm
Dieter Helm is Professor of Economic Policy at the University of Oxford and Fellow in Economics at New College, Oxford. His latest book, Legacy: how to build the sustainable future, is published by Cambridge University Press