Is Degrowth the Next Step in Stakeholder Governance?

You may not have heard much about the term degrowth, but that’s likely to change.

As we stare down multiple environmental challenges to our way of life and economic systems, more people are looking to degrowth and its promise of a more sustainable economic model.

What is degrowth? I’ll leave it to those who have been working on this much longer than myself to define it:

“An equitable downscaling of production and consumption that increases human well-being and enhances ecological conditions at the local and global level, in the short and long term.”

Degrowth 101.

Proponents of degrowth argue that an economy and culture based on eternal growth simply doesn’t work on a planet with finite resources. This makes intuitive sense. According to the influential 2021 report, The Economics of Biodiversity, humanity is using Earth’s resources as though we had 1.6 Earths to use. This number is closer to four Earths for developed markets. Earth Overshoot Day, the day in which we exhaust our budget for the resources we use each year, is slowly creeping earlier up the calendar. Earth Overshoot Day will be July 25th this year. It was August 2nd, last year. It was December 23rd, in 1970.

About 50 years ago a group of academics wrote the seminal report on Earth’s resource limitations titled, The Limits to Growth. The researchers forecasted several scenarios for the future, most of which predicted a point where natural resources would become so scarce that further economic growth would become impossible, and the quality of human life would drastically fall. The report predicted a collapse of global populations due to food and resource scarcities. Recent scholarship has revisited the predictions of the original report and found that unfortunately, we are right on schedule.

Those who embrace degrowth claim that we need to aggressively wind down industries that are harmful to human survival, (oil and gas), and reimagine our energy use, agriculture, transportation, and other industries. They see degrowth as a model that does less harm to the natural systems on which we depend for the resources that sustain us. For example, a degrowth economic model would likely look to cut down beef production. If beef production and consumption significantly declined, the result would prove beneficial to climate change mitigation, (less methane and CO2 from beef transport), water resources (beef production is very water intensive), land use (many acres of forests are cleared for cattle grazing), and result in less nitrogen and phosphorus leaking into our waterways (pesticides on crops to feed cattle have nasty consequences).

Investors are starting to take notice.

Investors are starting to pay attention to degrowth. The investment bank Jefferies has hosted seminars on degrowth, and recently highlighted degrowth as an important issue in their recent report, Ten Predictions for the future of climate investing.

European bank, Triodos in its 2024 Investment Outlook reports, emphasized letting go of growth as the ultimate economic (and business) goal. Triodos Chief Economist, Hans Stegeman, has written and spoken about the firm’s belief that we need to move away from growth.

Stegeman advocates a post-growth economy:

“An economy with fewer growth stimuli, less material growth, more time for each other and less ecological damage. This is not a political programme, but a pragmatic economic policy in times of increasing scarcity.”

In addition to Jeffries and Triodos, investors such as London CIV, AXA IM, and Purpose Capital are investing in companies that adhere to degrowth principles. Investors that include a degrowth lens in their analysis are focusing on companies that will benefit from a resource-constrained world. This includes companies that move to a model of less resource use, reusing materials, more efficient energy use, and more efficient manufacturing processes. These investors see industries such as fast fashion and short-haul aviation as particularly at risk in a world where consumers and regulators are more conscious of the impacts of highly polluting industries for which more sustainable alternatives exist.

Degrowth is gaining acceptance outside the investing world.

The investing world, and investment choices simply reflect the reality that investors see on the ground, or better yet, the reality that investors expect to see in the future. Investors who are starting to look at degrowth are doing so because they see a rising interest in degrowth among thought leaders, and the public at large.

A Yale 2018 poll shows that 70% of US Americans believe that “environmental protection is more important than economic growth”.

The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) included degrowth as part of the solution to our climate crisis. Two of the IPCC’s working groups — climate change impacts and mitigation — mention that degrowth policies are key to reducing the impacts of climate change.

On 15-17 May 2023, scientists, politicians, and policymakers met in Brussels for the EU Post-Growth Conference. The event included degrowth and post-growth thought leaders from around the world, as well as 20 Members of the European Parliament.

A recent survey of nearly 800 climate policy researchers around the world found that 73% support post-growth (degrowth or agrowth – which is agnostic on growth) positions. In the EU, 86% support post-growth positions.

A 2023 survey of 461 scholars, from 66 countries, asked what future pathways countries in different income groups should follow for local and global sustainability to be achieved. The scholars overwhelmingly suggested that high income and middle-income countries focus on degrowth or agrowth strategies, while answering that lower middle income and lower income countries should still focus on growth.

In August 2023, the International Degrowth Network was formed to better coordinate the efforts of degrowth groups around the world, so that they could share ideas, resources and better plan events and educational outreach.

Degrowth and fiduciary duty

Despite the recent uptick of degrowth in the zeitgeist, it is still a radical idea to many investors. A move to a degrowth focused economy could have a detrimental impact on many investments, especially those in sectors that would be wound down or eliminated in a degrowth focused economic model. Those that support taking a degrowth path to a more sustainable economy freely acknowledge that such a route would be incredibly disruptive to current markets, as well as a huge cultural change for most people in developed markets.

Read degrowth scholarship, and you will find an economic model that leads to a sizable decline in energy throughput, resource use and economic production. In addition to these changes to production, a degrowth model can include an increased use of things such as a four-day workweek, universal basic income, universal basic services, job guarantees, and other policies that look to move our way of life away from overproduction and overconsumption (remember we are using 1.6 Earth’s). Taking the degrowth path would move humanity to a steadier state economy where we stay withing our “planetary budget” in terms of natural resource use. This would include a significant slowdown in economic throughput in order to mitigate the problems that come with climate change and the breaching of other planetary boundaries.

Some businesses and sectors would surely thrive, but an economy putting the brakes on growth may adversely impact markets overall, which may adversely impact investments overall. How does this square with fiduciary duty and the duty to find the best investment returns for clients?

Whether or not degrowth can be considered in investing echoes the early days of incorporating ESG factors into the investment process. In 2005 when ESG integration was in its infancy the law firm Freshfields Bruckhaus Deringer released the report, A legal framework for the integration of environmental, social and governance issues into institutional investment : October 2005 (unepfi.org). The report paved the way for ESG integration in the investment process, by showing on a jurisdiction-by-jurisdiction basis the affirmative case for investors to integrate ESG data in their analysis.

Research on the intersection of degrowth and investment world is currently scarce. That will likely change in the coming years, as degrowth gains prominence in political, economic and investment conversations. But the argument is a similar one to the ESG argument from nearly two decades ago.

Including a degrowth lens in analysis means that we acknowledge the stark reality of our environmental predicament. Human activity has damaged the biosphere, which is where we live, and where every investment in our portfolios is located. These assets will be adversely impacted as climate change and other environmental damages increase in their frequency and destructive capacity. Degrowth simply acknowledges that it is quite likely that humanity will act to pull back from the brink as environmental damage increasingly manifests itself in our personal and business lives. To assume otherwise would be to deny the reality of the human drive for survival.

As the damage from our environmental problems becomes more evident, people will react. This will put more pressure on governments, companies, and investors to throttle back on economic growth to avoid passing catastrophic environmental tipping points.

Companies and investors both should recognize this and get ahead of this trend. That means understanding what degrowth is and isn’t. This brief writing only scratches the surface of degrowth scholarship.

As degrowth thinking gains in interest among the public, and then among investors, more business models may be challenged as unsustainable. Investors would be wise to get ahead of that trend and establish for themselves what businesses they can justify investing in for the long term and which may not have a long term.