Essential elements of sustainable growth
On the one hand, some economic theory such as the environmental Kuznets curve state that no
government intervention is necessary to resolve the current environmental crisis. This is a
hypothesized relationship between indicators of environmental degradation and per capita income
(David I. Stern). The curve shows that initially, the country begins at both a low income per capita
and negative environmental impacts as the primary industries that most of the country’s population
work in such as agriculture and forestry do not produce significant environmental impacts. However,
as an economy develops and its per capita income increases, the population moves towards the
secondary and tertiary industries and the primary industry at a mass scale which begins to increase
the volume of harmful chemicals such as greenhouse gases that are released. Countries will then
further increase their levels of income across the economy, and this will have a converse effect on
the level of pollution as Kate Raworth described in doughnut economics (p. 207). This is because as
the income per capita and therefore the standard of living increases, the population of the country
can demand higher levels of sustainability and regulation around industries producing the most
harmful pollutants. The model predicts that as a country develops and as most of the population
moves to the tertiary industry instead of the primary and secondary there is a reduction in the level
of pollution which is normally produced in these sectors. This is also means that countries can afford
to use cleaner energy sources such as the implementation of renewable energy. Stern in 2002 also
found evidence that a “particular innovation is likely to be adopted preferentially in high income
countries, with a short lag before it is adopted in the majority of poorer countries”. This could lead
to emissions declining simultaneously in low- and high-income countries over time without waiting
for income to reach a higher level.
This theory is perhaps weakened by one assumption that there is no influence of environmental
damage on economic activity and that the economy is therefore sustainable. The curve does not also
consider that the pollutants produced by a country are not replaced by renewable energy but
instead by smaller levels of less harmful chemicals. This was acknowledged by Grossman and
Krueger (1995) who referenced a lack of data for local air and water pollutants, including
greenhouse gases and deforestation. For example, the change from sulphur and nitrogen oxides to
carbon dioxide and solid waste remains harmful to the environment. Furthermore, the impact of
improved regulation in economically developed countries is not as effective on a worldwide scale as
often heavily polluting industries and factories relocate to developing countries. This refers to a
country’s economy post industrialization as the working population change the industry that they
work in. The graph also does not predict that citizens can afford to start caring more about the
environment before reaching a higher level of economic development. Citizens do not have to wait
for GDP growth before demanding cleaner air and water. Mariano Torras and James K Boyce (1998)
concluded that in countries with lower inequality, higher literacy rates and better civil and political
rights, environmental quality is higher. This presents the idea that the power of the citizens in
pressurizing both industries and governments to act and raising their environmental standards is
increasingly important. Overall, the environmental Kuznets curve as economic theory is generally
not useful as a country should focus on developing institutional laws and regulations for better
environmental management rather than trusting that economic growth will solve environmental
problems at a fast enough rate.
Divestment is a modern-day financial strategy used in climate solutions by removing investment in
industries that are particularly damaging to the climate. Divestment campaigns such as from the
fossil fuel industry have involved removing capital, stocks, bonds or funds from companies in the
industry. This is an economic sanction which’s primary aim is to change how the company is run and
can be used to signal to governments where regulation and legislation are needed. Unlike most
sanctions of this nature, this is not by a government but normally a group of individuals who aim to
change regulation and prevent the damaging practices that some companies undertake. Divestment
is commonly practised in pension funds and universities with thirteen per cent of the largest
thousand European funds have divested from fossil fuels (Florian Egli, David Scharer, Bjarne Steffen).
Divestment has also been found to be more common in larger and publicly owned pension funds as
they have the greatest pressure to divest. Size, ownership and market competitiveness are the most
important determinants for divestment decisions. Divestments impacts are often both direct on
share prices and indirect by stigmatization. The direct impacts of divestment such as from fossil fuels
are likely to be limited (Atif Ansar and Ben Caldecott) as the volume of capital from universities and
pension funds is too small to have a major effect on share prices. Divestments’ key impacts are seen
in campaigns sparking broader debates about the risks of investing in assets that contribute to
climate change. Therefore, companies are less likely to expose their capital to climate risks as this
capital allocation has a greater risk (Ben Mckibben). The most important impact from divestment
comes from a lowering in a target firm’s net cash flows which causes a longer-term effect on profits.
By damaging their targets image, governments and politicians are less likely to engage with these
firms to uphold their reputation which could cause changes in management and cancellation of
contracts, mergers and acquisitions. An additional expectation that there will be a governmentimposed tax on the market is important in presenting uncertainty to new investors in the market.
One example of the use of divestment has been the fossil fuel divestment that began in 2012. So far,
the announced $2.6 billion by 436 institutions that has been divested has damaged firms’
reputations but has not had a significant impact on share prices except in coal divestment as looking
for alternate investors in that market is more difficult. The most impactful form of divestment occurs
when some investors invest in “climate positive” companies known as divest-invest. The effects of
divestment and stigmatisation is weakened as often certain companies are scapegoats as others
avoid any impacts. Despite this, the indirect impacts like the developments of new legislation like a
carbon tax are far more effective in enacting change and a reduction in the future environmental
impacts.
Reference list
David I. Stern (2003) Department of Economics, International Society for Ecological Economics
Internet Encyclopaedia of Ecological Economics The Environmental Kuznets Curve, Rensselaer
Polytechnic Institute, Troy, NY 12180
Grossman and Krueger, A. (1995), “Economic growth and the environment” Quarterly journal of
economics, P.110
Kate Raworth (2017), “Doughnut economics, seven ways to think like a 21st century economist”,
London: Penguin
Mariano Torras and James K Boyce (1998), “Income, inequality, and pollution: a reassessment of the
environmental Kuznets Curve”, Amherst USA
Atif Ansar and Ben Caldecott (2016), “Connectivity wars: Why migration, Finance and trade are the
geo-economic battlegrounds of the future”, USA
Bill Mckibben (2013), “The case for Fossil-Fuel Divestment”, USA
Florian Egli, David Scharer, Bjarne Steffen, (2022) “Determinants of fossil fuel divestment in
European pension funds”, Switzerland