WILL GREEN GROWTH SPELL THE END
Scientists tell us that earth is overshooting its planetary
boundaries at a rate far quicker than the average
person would believe. This situation becomes rapidly
compounded by the significant challenges of population
growth, urbanisation, unemployment and rising socioeconomic
inequality. To complicate things further, the most
rapid change is occurring in those parts of the world with
the least resources and capacity to manage these effects.
The argument goes that the current capitalist system is out
of control, with no moral compass, that our economic
steamroller needs to be stopped dead in its tracks, and that
nothing short of a revolution will save us. In this light, it is
sometimes thought that the notion of green growth is nothing
more than a veiled attempt to drive a left-wing agenda that
has the redistribution of wealth as its central objective.
SEEKING THE MIDDLE PATH
A leftist Green agenda proposes that the route to avoiding
this apocalyptic outcome is the rapid reduction in the levels
of resource consumption and, consequently, a slowdown of
growth in developing countries. Proponents argue that this
would allow developing economies the room to increase
their quality of life and gross domestic profit (GDP)/capita,
and so stave off the collapse of the world as we know it.
When sketched out in this way the case for green growth
becomes polarised with shrill doomsday enviro-/socioactivists
on one end, and rabid free-market capitalists on the
other. So it is no surprise that neither side can see the wood
for the trees.
Having spent time in both camps, I’ve come to see that
at either end of the spectrum lie a number of assumptions.
These assumptions are both dangerous and, in some cases,
incorrect, and keep the protagonists locked out of seeing
the emerging green economy as the natural evolution of
our current capitalist system. A system which, at its heart,
rewards scarcity and is driven by efficiency. In my view,
both these elements are compatible with green growth.
INSIDE THE GREEN ECONOMY
What exactly does green growth mean and how can we be
sure that it is indeed occurring? The World Bank and other
organisations present the green economy as a low-carbon,
resource-efficient and socially inclusive form of growth. Is
it happening? Yes it is. Take, for example, the case for
renewable energy – despite the arguments against climate change, the need for baseload supply in emerging economies
and the current low prices for fossil fuels, renewables still
continue to make progress.
Numbers reported by the United Nations (UN) indicate
that 2015 was a record year for spending on renewable
energy, reaching US$286 billion – over double the amount
of investment in fossil fuels. Additionally, for the first time,
developing countries invested more in renewable energy
infrastructure than the developed world.
THE NEW ENERGY REVOLUTION
Bloomberg New Energy Finance (BNEF) goes further and
says that “cheaper coal and cheaper gas will not derail the
transformation and decarbonisation of the world’s power
systems. By 2040, zero-emission energy sources will make
up 60% of installed capacity. Wind and solar will account
for 64% of the 8.6 terawatts (TW) of new power generating
capacity added worldwide over the next 25 years, and for
almost 60% of the US$11.4 trillion invested”.
So, what is driving this? In the solar energy arena, the rapid
increases in technology efficiency and the reduction of costs
mean that for every doubling of the number of solar panels
produced, the costs fall by 26%. BNEF calls this cost solar’s
“learning rate”, and is the formula driving the new energy
revolution. They point out that rapid efficiency increases
and cost decreases are enabled by the fact that solar is a
technology and not a fuel.
Seen in this light, roof-top solar is to traditional electricity what
mobile phones where to fixed line telephony.
THE DEMOCRATISATION OF ENERGY
Take the example of Mkopa -- a firm focusing on off-grid energy
solutions in East Africa, which has a 350 000 customer base
that is growing rapidly. They provide roof-top installed solar
units in rural areas for less than a dollar a day. Daily energy
requirements are purchased via cellphone, which the company
also uses as a direct channel to maintain customer relationships.
Here is a perfectly capitalist business that is driving both social
inclusion and low-carbon energy outcomes.
On the utility scale level, costs are also decreasing. A good
example is the recent auction for the development of solar
plants with the combined capacity of 100 megawatts (MW)
in Zambia, which is supported by the Word Bank Group’s
“Scaling Solar Initiative”. The result is an all-time African low
of 6US¢/kilowatt hour (kWh) – circa 0.84 SA cents (currently
the average residential consumer pays upwards of 120 cents/
kWh). Dubai wins hands down with the current rate of 3US¢/
Above is a picture of an emerging technology that is set to
disrupt traditional energy systems – and this is to say nothing
of the potential impact of emerging battery and storage
technology that will enable solar to provide reliable baseload
power (refer to Prof Mark New’s article, Understanding the Forecast: African Climate Change); and electric
vehicles that are set to change the transport landscape.
MAINSTREAMING THE LEFT FIELD
Outside of these specific examples, one of the more interesting
pieces of work being done around the green economy is by the
FTSE, which has developed its own green economy taxonomy
as means to witness the transition to such an economy. Being
an index provider, they are interested in market taxonomies in
order to construct various baskets of companies for investors to
use as benchmarks.
Traditionally, the main method for creating an index is the use
of international securities identification numbers (ISIN) and the
stock exchange daily official list (SEDOL) numbers used by issuers. These 'market number plates' contain within them the
geography, sector and sub-sector details of each company,
and were developed using the industrial classification system –
which, of course, does not reflect the emergent green growth
agenda. What this means is that, until now, it would not have
been easily possible to select a basket of companies producing
goods and services that are part of the green economy, since
the existing taxonomy did not provide for it.
The FTSE has remedied this situation, and their taxonomy for
the green economy identifies 60 green economic sub sectors.
The beauty of their approach is that they have tagged the
green economy revenue lines within a company. This means
that you can, for example, create a basket of emerging market
companies that produce 40% or more of their revenue by
participating in the green economy.
To illustrate this, thanks to the FTSE’s new taxonomy, it is now
possible to identify a Chinese coal company that actually
derives 40% of its revenue from renewable energy . In essence,
it yields a new understanding of investee company revenue
IS GREEN A MACRO THEME?
If we extend this thinking to the idea that the green economy is
a macro thematic trend that is reshaping growth, it would stand
to reason then that a basket of companies with such revenues
should show some kind of outperformance over time.
In order to test this, we used the MSCI Emerging Market
(EM) Index to assess the difference in performance between
companies that generate their revenue from the low-carbon
economy compared to those companies that do not. We
sourced data from FTSE and used the constituents of the MSCI
Emerging Markets Index to create two portfolios:
- A low-carbon economy portfolio which includes all
constituents of the EM Index that have a low-carbon
- A non-low-carbon economy portfolio, comprising all
the constituents in the EM Index that do not have a lowcarbon
We then back tested the performance of the two portfolios over
seven years, and the outcome showed that the low-carbon
economy portfolio significantly outperformed the non-low-carbon
A DYNAMIC SYSTEM
Pondering developments such as these, it is true to say that
capitalism is not a static thing -- history shows that it has
evolved over time and across continents in ways that are
neither uniform, nor complete. In fact, from the emergence of
the 19th century debtors' prison to the limited liability company,
through to the protection of intellectual property rights, capitalist
structures morph according to the times.
We are currently in the midst of a transformation that is driven
by several behavioural shifts that are turning a number of longheld
capitalist ideals on their heads, for example:
- Venture philanthropy – challenges the profit motive
- Open source – challenges competition
- Sharing economy – challenges ownership rights
- Shared value across a broad stakeholder base -
challenges the notion of shareholder primacy.
Innovation, changing public sentiment and emerging policy
are also important drivers in the emergence of the green
economy -- but they are happening in the capitalist context,
adding a more accountable and socially-inclusive nuance to
the basic drivers of capitalism, and so it continues to evolve.
So, no – green growth is not the end of capitalism, but rather,
it is a natural extension of its evolutionary path. Seeing this
opportunity requires a willingness to learn from history and the
courage to think differently.
RESOURCES i. Standing on the Sun: How the Explosion of Capitalism
Abroad Will Change Business Everywhere
ii. 2016 New Energy Outlook - Bloomberg New Energy
iii. Bloomberg - http://www.bloomberg.com/