[The ESG-bound shift in the business world represents a move from the bottom line to the triple bottom line. No singular, but triangular focus.
But national governments are still GDP-bound. Will they too, like the biz world, triangulate the measurement of their performance and adopt new accounting frameworks?]
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Is ESG going to replace GDP?
Environmental, Social, Governance performance instead of the Gross Domestic Product.
At the national, and state level?
Most likely it won’t REPLACE it because:
· ESG is a set of non-financial criteria used by large companies
· GDP is one singular financial criterion - the total $ value of goods and services produced within one year by a country
We are not mixing apples with apples; ESG and GDP are used by different entities for different purposes.
But if you think about the speed and strength of the ESG’s ascend in business decision-making, how businesses are evaluated, and on what basis – besides the financial performance of course – they secure investment today, you’ll find that the triple bottom line is overlaying the bottom line, and ESG is the overlaying mechanism.
A single-stranded rope becomes a three-stranded rope
Judging by the ESG’s success, pervasiveness, and penetration to the Western, and now non-Western markets across the biz world, it isn’t too crazy to extrapolate and question the GDP’s position at the state, and national level.
Will governments follow the biz world and move away from GDP – a singular metric of financial output – towards something like ESG, where environmental and social criteria, along with financial performance, are considered and reported on?
It’s unlikely that ESG – or another equivalent, such as Human Development Index (HDI), or Genuine Progress Indicator (GPI) – will replace GDP.
GDP is harmonized and universally adopted all over the world.
But it’s likely that a set of non-financial indicators, not a singular one, will complement GDP, as suggested by the 2009 Stiglitz commission. That is similar to ESG complementing – not replacing – the bottom line in the biz world.
Before we glance at three countries that are already going “beyond GDP”, let’s remind ourselves - what’s wrong with GDP?
Almost everything, as summarized here. It’s a 1930s metric for evaluating economic performance and is unfit for the 21st century just as burning coal, an 18th-century method, is unfit for generating electricity.
The quotes below will give you a taste of how even the OECD (not David Attenborough, not the UN) sees GDP these days:
· “We can no longer rely on economic growth on its own to make our societies better off”
· “For most people today, rising GDP is no longer a sufficient measure either of their own wellbeing or their sense of society’s economic progress”
· “It’s not enough for GDP to be rising if the underlying patterns of growth are generating significant harms at the same time”
(If you don’t know why GDP is unfit, the OECD’s 2020 ‘Beyond Growth’ report, reviewed here, offers the most recent perspective, although the inadequacy of GDP was recognized as early as the 1970s, e.g. by the prominent economist Herman Daly.)
Criticizing GDP is easy … and a little bit worn-out
Coming out with a harmonized, universally accepted and adopted, simple, and a preferably singular alternative is hard (this four-pager hints at why).
Now, let’s look at those three countries…
Bhutan
We MUST start here.
Since 1972 – while the West was shifting towards neoclassical economics – Bhutan, a landlocked Himalayan kingdom of 770 thousand, did the opposite. They replaced GDP with Gross National Happiness (GNH) 50 years ago.
How?
By nominating ‘collective happiness of people’ as the ultimate goal for the country.
This goal stands on four pillars:
1. Equitable and sustainable socio-economic development
2. Preservation and promotion of culture
3. Conservation of the environment
4. Good governance
Further, there are nine domains and 36 indicators. The GNH Index, incl. ‘sufficiency cut-off’ provides an extra level of granularity which is necessary for quantifying abstract concepts, such as ‘psychological wellbeing.’
It is – when compared with GDP – a fairly complicated system.
GNH has been used as a role model for alternative approaches to calculating national books and the whole macroeconomic approach.
It is certainly interesting, even admirable.
But I don’t think this could be used as an example for Western countries, simply because Bhutan is a tiny collectivist Buddhist kingdom.
It’s WAY too different to be relatable to and adoptable by the West.
Moreover, critics of the Bhutanese regime claim that the kingdom’s ‘doctrine of happiness’ is brutal, punitive, and repressive and that, as one commenter said, the GNH “hides a pseudo brutal regime.”
New Zealand
In 2019, NZ’s Prime Minister Jacinta Ardern delivered the inaugural “Wellbeing Budget.” This was the first time a Western country took a budgetary measure other than GDP, namely wellbeing, and built it into policy at the state level.
“This approach is a significant departure from the status quo. We are measuring our country’s success differently. We are not just relying on Gross Domestic Product (GDP), but also how we are improving the wellbeing of our people, protecting the environment and strengthening of our communities” said NZ’s Finance Minister.
Focusing on long-term objectives, such as mental health, child poverty and domestic violence, housing quality and affordability, Indigenous people support, schools and hospitals, as well as climate change is a Kiwi way of moving away from the usual one to three-year budget plan.
Wellbeing of Kiwis and New Zealand as a whole is underpinned by four capitals – human, natural, social, and financial, as per the Treasury's Living Standards Framework.
Stocks of these four capitals – not only the financial – represent a wholesome indicator of the country’s progress.
Belgium
Belgium started to go ‘beyond GDP’ in 2014 when it began including a set of 70 ‘complementary indicators to the gross domestic product’ grouped in 13 themes below:
· Subjective well-being
· Standard of living and poverty
· Labour and leisure
· Health
· Education and training
· Society
· Environment
· Climate
· Energy
· Natural resources
· Land and ecosystems
· Economic capital
· Mobility and transport
Since 2022, they expanded to 86 indicators and changed them to the ‘Sustainable development indicators,’ aligned with the SDGs.
The country’s Federal Planning Bureau didn’t replace GDP but complemented it to include social and environmental issues to the economic measurements in an effort to measure people’s and country’s wellbeing.
Would any of these moves (Bhutanese, Kiwi, Belgian) work in your country? I am sheep fence-sitting, unwrapping dark chocolate sprinkled with Himalayan salt :O
…
Are we going to see GDP married with some other acronym in five years?
Looks like it.
But it’s going to be arranged marriage and the devil’s in the fine print.
There’re many uneasy questions about this necessary, important, and relevant shift away from GDP.
For example:
· Is this primarily about adopting a set of new accounting standards and frameworks, simply because we can, and twisting ourselves in knots to meet these standards? Cart before the horse.
· Or is this primarily about having different values (e.g. around the environment), and having the need to account for these values so that they are realized? Horse before the cart.
Common sense, if it exists, suggests that it’s the latter. If new accounting standards and frameworks reflect changing values, we are talking about alignment at the top – principles, then strategy, then tactics, then concrete steps, down to % of local suppliers engaged by X department during Y period. Hegel would call it “particularization of the universal.” Bhutan, NZ, and Belgium have already started, and more countries are following.
I hope that’s what we’re seeing.
Because the alternative is a toxic cocktail of wokeism, social justice wars and identity politics mixed with our ever-advancing ability to quantify, rank, dissect, split, and plot on charts.
A devilish cocktail.
Jan
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