Is a UK Government commitment to the Sustainable Development Goals good for the economy and business in general?
Brooklyn Han, Patrick Leitloff, Sally Yang, Eddy Zou
One aspect of the United Nations Sustainable Development Goals (UN SDGs) is a sustainable use of natural resources and comprehensive environmental protection, mandating a significant change in economic and industrial practices (1). This discussion paper investigates the impact of a government commitment to the implementation of the UN SDGs relating to natural capital on the economy and business in the United Kingdom. We evaluate existing research and governmental policy declarations. The investigation finds that greater certainty around environmental regulations has a net benefit on business performance and that positive spillovers exist already. Policy gaps in waste and energy regulation exist. We also argue that a more accurate tracking of the progress in the SDGs leads to more commitment and better policymaking. This paper won the UK Office for National Statistics (ONS) Renaissance Prize in April 2020 (2).
I. Introduction In recent years, rising concerns over the environmental sustainability of human-driven economic practices have called for significant action. Len- ton et al. argue that the world may have already crossed several “tipping points” beyond which environmental degradation becomes irreversible, mandating immediate political and economic response (3). We thus choose to focus on natural capital-based Sustainable Development Goals (SDGs) in our discussion. Natural capital, defined as “stocks of the elements of nature that have value to society,” is used in combination with human, financial, and social capital to produce valuable goods and services (4). This differs from “natural resources” in the sense that natural capital is natural resources utilised to add value to society and the economy. It directly sustains human life, is not easily replenished, and is non-substitutable in certain cases, highlighting the need for sustainable use (5). We explore this with examples throughout our paper.
Our SDGs of focus are:
- Goal 12: Efficient use of natural resources and effective waste management - Goal 13: Climate change mitigation and adaptation - Goals 14 and 15: Preservation of water and land ecosystems
Henceforth we refer to these goals as NC-SDGs.
Figure 1. Natural capital-based Sustainable Development Goals (NC-SDGs) and auxiliary NC-SDGs
We consider Goals 6, 7, and 9 as auxiliary NC-SDGs as they have targets relating to water ecosystems, fossil fuels as subsoil natural resources, and “environmentally sound technologies and industrial processes” respectively (6). Figure 1 provides a graphic summary. We refer to “commitment” as the integration of SDG targets and indicators in the design and evaluation of policies, as well as promoting awareness towards achieving SDGs in the indicated timeframe. In the following sections, we outline the UK-specific businesses and economy-wide benefits, then examine positive spillovers from current sustainable development policies. After identifying policy gaps, we reflect on the recent developments in measuring SDGs.
II. Improved Business Performance There is strong evidence that environmentally sustainable practices improve business performance. Clark et al’s 2014 review of 200 studies on sustainability and corporate performance found that high environmental, social, and governance (ESG) standards lowered costs of sourcing capital and improved financial performance in 90 percent of cases (7). Similarly, Flammer identified a positive causal impact of adopting Corporate Social Responsibility (CSR) proposals, such as incorporating SDGs in business operations, on accounting performance, labour productivity, and business sales in 2015 (8). Flammer did so by exploiting variation in corporate proposals that are mostly independent of confounding factors, such as the passage of shareholder proposals on CSR that pass or fail by a small margin of votes.
Figure 2. The size of incremental SDG-related business opportunities in 2030.
Notes: Only the largest opportunities are shown. Source: Business and Sustainable Development Commission, 2017.
The implementation of SDGs also opens up new markets for UK businesses. A 2017 report by the Business and Sustainable Development Commission estimates that delivering SDGs in the four “economic systems’”—food and agriculture, energy and materials, cities, and health—can generate over £10 trillion (9) worth of business opportunities per year by 2030 (10). These closely relate to NC-SDGs (summarised in Figure 2) and are highly applicable in the UK. For instance, product-re- formulation strategies, which improve the nutritional content of processed food in the UK and enhance sustainable consumption (SDG 12), require total business investments of approximately £3.7 billion. This is significantly smaller than the estimated gains in Figure 2 (11). Further, this improvement to processed food is projected to improve the health of the population, saving a total of 1.7 million disability-adjusted life years. Healthy workers reduce the burden on the National Health Service by avoiding economic costs associated with falling ill or being hospitalised; they also work and consume more, which are major drivers of GDP.
Figure 3. The size of incremental SDG-related business opportunities in 2030, with externalities added.
Notes: Evidence at the global level suggests that pricing externalities adds market opportunities substantially. Source: Business and Sustainable Development Commission, 2017.
In addition, as shown in Figure 3, adjusting prices to reflect the positive exter- nalities generated by a business focus on SDGs can add up to 40 percent of busi- ness opportunities in the four economic systems identified (12).
Figure 4. Low-carbon innovation activity of EU ETS regulated companies compared with the counterfactual scenario.
Source: Calel & Dechezleprêtre, 2014
Carbon pricing policies can have a significant effect on business incentives in creating sustainable innovations (13). Figure 4 shows that the introduction of the EU Emissions Trading System (ETS) has led to an increase in the number of low-car- bon patents from companies. There is potential for the UK government to further commit to SDGs through measures such as maintaining carbon pricing. Such a commitment would result in even greater benefits from encouraging businesses to invest in low-carbon innovations and creating new business areas. As Europe’s centre of sustainable funds management, the UK’s financial industry has long incorporated ESG standards into its investment criteria to support the growth of sustainable finance. One common method of sustainable finance is investment in an eco-friendly fund which applies ESG criteria and focuses its investment options in companies which are less carbon-intensive or earn green revenues. Eco-friendly funds generally design their own metrics of “climate aware- ness” and adjust portfolios towards companies and assets that perform better along those metrics. One example is the Future World Fund managed by Legal & General Investment Management, which only includes companies meeting minimum environmental standards and exposes itself more to companies which, in addition to meeting environmental standards, engage in environmentally friendly activities (14). In 2016, HSBC placed £1.85 billion of its UK employees’ pension savings into the Future World Fund (15). Reasons for HSBC’s decision are reportedly greater expected returns, improved company engagement, and a more widespread perception that addressing climate change should be the “new normal” (16). The notion that eco-friendly funds can generate returns is supported by empirical evidence: Morningstar, a global research agency, compared average return, success and survival rates of 745 sustainable funds with those of 4150 traditional funds. They found that irrespective of the type considered (bond or equities), and the country of origin (UK or abroad), rates of return on sustainable funds either matched or beat their traditional counterparts. Many businesses also publicly urge the government to further commit to strengthening private-public coordination in delivering SDGs (17). While SDGs are beneficial to businesses, without an active governmental commitment to NC-SDGs to address market failure, firms and the economy more broadly may not fully realise these benefits. Market failures, whereby markets fail to achieve socially efficient resource allocations, necessitate government intervention. Many green investments are currently uncompetitive as they involve early-stage innovations yet to be commercialised. Gillingham and Stock use 2018 data from the US Energy Information Administration to compute the costs of abating each ton of CO2 by replacing electricity generated by an existing coal-fired power plant with the cleaner alternative (18). As a comparison, the UK in 2019 proposed a £16 ($19.2) tax per tonne of CO2 emitted by installations. This effectively means abatement costs for switching to most feasible “cleaner alternatives” are much higher than social costs reflected by carbon tax schemes. Furthermore, solar and wind are among the cleanest forms of energy (Figure 5), yet Gillingham and Stock show that solar thermal and offshore wind are the most costly to implement (Table 1) (19).
Table 1. New source generation costs when comparing to existing coal generation.
Notes: The table shows engineering costs per ton of CO2 abated by replacing electricity gener- ated by a current coal-fired power plant with the new generation source. Source: Gillingham and Stock, 2018
The UK Energy Research Centre’s review of evidence on the timescale of technological innovations showed that across 14 innovations studies, it takes an average of 39 years for an innovation to be commercialised and deployed (22). Furthermore, Gillingham and Stock suggest that much of the “green investments” in renewable energy suffer from path dependence, whereby rates of return go up in the long run only with sufficiently high inputs (23). Furthermore, environmental externalities in current pollutive technologies are not internalised, leading to overproduction. Greener innovations thus tend to be under-funded by private markets, causing deadweight welfare loss for both consumers and producers (24). Consumers continue to suffer the consequences of pollution, while producers forego the opportunity to achieve better business performance in the long run as outlined above (25). Government finance such as the UK Energy Entrepreneurs Fund, which was launched in 2012 and invested £75 million of grant money by 2019, can support the incubation of businesses before they generate revenues.
Figure 5. Solar and wind are among the cleanest forms of energy.
Source: Ritchie & Roser, 2020.
In addition, the government can provide a regulatory base to correct “imperfect information”. Standardisation prevents greenwashing, the act of labelling projects or bonds with detrimental or negligible impact on the environment as “green” to attract investors. Addressing the lack of clear common standards, cited as the largest source of investor uncertainty, can fuel demand for green bonds, which are bonds earmarked primarily for projects improving energy efficiency (SDG 7) (26). This is exemplified by the ASEAN’s adoption of comprehensive Green Bond Standards that categorise projects and specify the exclusion of fossil fuels (27). These actions reduce information asymmetries between firms and investors and may encourage the latter group to more confidently invest in green projects and bonds. The government can also help establish common reporting standards to lower the implementation costs of sustainability practices. HSBC found that 26 percent of the 1000 UK firms surveyed suggested that a confusion with ESG reporting undermined their sustainability practices (28). KPMG also found that one of the biggest barriers to sustainability for firms was the lack of common metrics to assess and compare performances (29). In 2020, the British Standards Institution (BSI) launched the first of its five-year initiative with the UK Government (BEIS) and the UK industry (City of London’s GFI) to develop consensus-based standards in sustainable finance (30). We argue that such country-wide standardisation is only achievable through regulatory changes directed by the government. While firms in the private sector can also attempt to establish uniform standards, their lack of enforcement power gives other businesses considerable discretion over which standards to adopt. This inconsistency not only raises search and adoption costs of standards, but also undermines uniform comparisons of companies’ performances along relevant dimensions. By contrast, government directives provide the incentive to report some common metrics, allowing investors and other stakeholders to better assess such information. Moreover, government-induced standards can go beyond helping companies assess their environmental impacts by tailoring case-specific solutions to incorporate environmental sustainability into existing business practices. This is illustrated by the BSI’s new ISO standards, which aim to allow businesses of all sizes to consider climate change adaptation while designing new policies, strategies, plans, and activities (31). The government can also exercise its authority to endorse consistent information and nudge consumer behaviour. For example, mandating businesses to disclose the environmental impact of their products through labelling highlights the impact of consumption choices and addresses consumers’ behavioural bias (32). Finally, government commitments to SDGs have the potential to improve coordination in the private sector. An example of such improved coordination is industrial symbiosis, where governments promote mutual synergies between firms from different industries. The UK’s National Industrial Symbiosis Programme (NISP), matches participating firms that can use each other’s byproducts with the view that “one company’s waste is another’s raw material.” For example, the waste filter cake produced by an air conditioner manufacturer is used by a fuel manufacturer as an oil absorption agent. In five years, NISP diverted over 47 million tonnes of industrial waste, contributing to improvements in SDG 12, production expansions and costs reductions (33).
III. Current Policies and Positive Spillovers In the first year alone, 90 percent of the actions in the 25 Year Environment Plan have been delivered or are being progressed (34). Further, complex interactions and positive spillovers between goals occur. In the NC-SDGs framework, the key areas include air quality, water quality, urban planning, and waste management. Commitments to cleaner air have shown significant progress. The World Bank suggests that 100 percent of the UK population has access to clean fuels and technology for cooking in 2020 (SDG 7.1.2) (35). The ONS also finds that the share of renewable energy in total energy consumption rose exponentially from 0.7 per- cent in 1990 to 10.3 percent in 2017 (SDG 7.2.1) (36). This is expected to enhance climate resilience and encourage the transition to an economy with a lower reliance on high-emission technologies (SDG 13.2.1). Recent policies further support the attainment of NC-SDGs. The Clean Growth Strategy seeks to align economic growth with “clean” development by improving industry efficiency and encouraging the transition to low-carbon transport (37). Climate change policies may shape incentives in technological change, promoting innovation (SDG 9) and sustainable infrastructural development (SDG 11). Secondly, a commitment to cleaner water sources is “good business” because it raises productivity and cuts costs for firms, according to researchers at the Stock- holm International Water Institute (38). Current policies such as the Nitrates Directive and the Water Framework Directive reduce contamination risk to water bodies while enhancing their quality. Such policies ensured that 100 percent of UK households have access to safe drinking water and are connected to wastewater treatment (39). Access to sanitary drinking water is vital for personal health, and healthy workers make valuable contributions to business and the economy. Thirdly, urban planning policies encourage infrastructure innovation. Congestion is a huge cost for the economy in terms of lost time spent waiting in traffic and the continuous emission of pollutants from vehicles. TomTom’s London traffic reports in 2017 to 2019 show that just shy of 150 hours per year are spent by each driver waiting in rush hour traffic jams (40). Further, greenhouse gas emissions from road transport make up 21 percent of the UK’s total greenhouse gas emissions, which motivate the importance of making road planning easier for vehicle owners (41). To maximise the value of public investment, the UK government has established a Transforming Cities Fund worth £2.5 billion to tackle congestion and promote smart traffic management. The government is also considering new vehicle types and innovative ways to simplify journey planning and payments as a part of their Future of Mobility Urban Strategy. The aspects of this strategy are to be tested with a £90 million investment in four “future mobility zones.” These policies complement the goal of achieving cleaner air; as the transport sector is the largest single contributor to greenhouse gas emissions at 34 percent of total emissions, introducing smarter vehicles and tackling traffic congestion can significantly reduce air pollution (42). Furthermore, there is a strong link between the sustainability of cities and communities (SDG 11) and the sustainability of an environmental ecosystem with which the cities and communities interact (43). Finally, waste management policies have also shown promise in maintaining cleaner environmental standards. Since 2000, the UK’s material footprint has shown a downward trend (44). Plastic waste has been a major area of focus for the government, with an aim to reach zero plastic waste by 2042 (45). Better waste management will benefit ecosystems on land and in water and preserve the quality of the resources that are necessary to everyday production and consumption. Further, achieving the sustainable management of natural resources (SDG 12.2) and promoting policies that are in accordance with such management (SDG 12.7) are closely associated with the development of sustainable transport and infrastructure (SDG 9).
IV. Shortcomings of Current Policies Despite considerable progress in some areas, there is strong evidence to suggest that gaps still exist, particularly in waste management and energy efficiency. Current trajectories pose a considerable threat to the future availability of natural capital. This necessitates immediate action to be taken against these issues. Hazardous waste generated, such as used oils and chemical waste, rose by over 10 percent between 2010 and 2016 (46). This waste pollutes water bodies and threat- ens aquatic biodiversity. It necessitates greater purification efforts, resulting in major costs of production (47). Energy efficiency is plagued by policy inconsistencies. Relaxations on fracking rules, freezes on fuel duty, uncertainty around the future of carbon pricing, and the end of hybrid vehicle subsidies damage expectations about the government’s commitment to a low-carbon economy (48). Low per capita spending on improving household energy efficiency and uncertainty in the government’s target to up-grade “fuel-poor” homes have caused the improvement in median energy efficiency ratings to level off (Figure 6). The proportion of households in fuel poverty has not changed significantly despite the fuel poverty gap decreasing since 2014 (49). Households are considered fuel poor if their fuel costs are above the national median level and their residual income after fuel costs would fall below the poverty line. A combination of slack minimum energy efficiency regulations, high fixed costs and the fact that returns are typically distributed over the long term means that private incentives, which are based on a series of myopic optimisation, do not bring enough investments to meet current targets (50). Given that energy efficiency is one of the most effective ways to tackle fuel poverty, stagnant improvements in this area stall progress in indicators such as 9.4.1 (CO2 emission per unit of value added) (51).
Figure 6. The improvement in median energy efficiency ratings between 2010 and 2015 has lev- elled off in recent years for fuel-poor households and all households
Source: Ministry of Housing, Communities & Local Government, 2018.
V. Opportunities for Better Measurement Existing improvements in measurement enable policymakers to track progress on specific SDGs, analyse root causes of challenges in delivering SDGs and de- sign policies that address problems for specific stakeholders, to “Leave No One Behind” (52). The ability to establish quantitative targets for indicators that currently lack clarity will further enhance governmental commitment by reducing the propensity to take discretionary action and exploit the vagueness of said indicator(s). 70 percent of 180 SDG indicators reported using UK data are disaggregated (broken down into subcategories) by at least one variable, such as geographic region (53). This data can be used to compare the socio-economic impact of policies across regions, enabling policymakers to identify and target regional economic disparities. For example, researchers can use UK regional Google patent rank data to quantify regional distributions of economic spillovers from innovation in- vestments (Figure 7). Policymakers can then direct innovation spending to regions with stagnant productivity.
Figure 7. A scatter plot of relative regional productivity and relative regional average spillovers for NUTS2 regions of the UK
Notes: From this estimation, it is clear that targeting regions with below national average produc- tivity and high innovation spillovers can generate higher benefits. Source: Rydge, Martin & Valero, 2018.
For NC-SDGs, we argue that the UK government can leverage the 100 percent coverage of climate action indicators and existing micro-level data to incorporate climate change-induced dynamics when investing in different parts of the UK. Existing literature suggests that foresighted infrastructure investments that con- sider dynamic effects of climate change, including inundation, sea-level rises, and floods, bring significant long-term economic welfare gains (54). An understanding of inter-linkages between SDGs allows policymakers to con- sider the distributional and long-term consequences of their decisions, thereby avoiding policy conflicts between different departments or omitting key areas of policy focus (55). For instance, the UN Statistical Division is collaborating with the ONS and other statistical agencies across developing countries to harmonise the use of indicators in understanding positive linkages between targets, to direct statistical reporting and policies to those with the greatest potential for positive externalities.
Figure 8. Proportion of Global Indicators for each SDG that have data reported on the UK National Reporting Platform, as of June 2019.
Source: UK Government, 2019b
Greater governmental commitment to NC-SDGs is essential to accelerate im- provements in data measurement. As shown in Figure 7, among specific goals we focus on, there is substantial scope for improved data availability in Goals 12, 14, and 15. Many indicators require more details on how they can be met. For instance, none of the transboundary basin areas in the UK currently have an operational agreement on water cooperation (56). In addition to improving local and international water resource management, clarification will also help the UK maintain international ties, the importance of which has only increased since Brexit.
VI. Conclusion Sustainable growth cannot be left to the private sector alone; a consistent, well-measured UK government commitment helps deepen the symbiotic relationship between stakeholders. This can help address market failures such as imperfect information and coordination problems in the private sector, where sustainable economic activity has the potential to take place on a large scale. Our assessment of current policies show that a stronger government commitment is consistent with current policy trajectories and that bridging existing policy gaps can deliver large gains. We have demonstrated the ways in which SDGs benefit the UK economy and businesses, such as reducing production costs through the maintenance of water sources, incentivising sustainable innovations through carbon pricing schemes, and strengthening the relationship between environmental ecosystems and the city. Environmental sustainability and economic growth are not always on a collision course. Rather, they should be viewed as complementary aims under the overarching goal of sustainable growth. With the advent of improved data collection methods and measurement of SDG indicators, we can better quantify progress towards a more sustainable future that benefits businesses and the economy.
1 We thank Chiara Sotis and Judith Shapiro for their continued support and guidance. We are grateful to the ONS for initiating the prize and agreeing to the publication of the modified version of the paper. We would also like to thank the editors, Alice Jo and Jacob Zeldin, for their comments and suggestions which have significantly improved the paper. 2 www.ons.gov.uk/aboutus/whatwedo/programmesandprojects/economicstatisticstransformation/ theonsrenaissanceprize
3 Lenton, T. M., Rockström, J., Gaffney, O., Rahmstorf, S., Richardson, K., Steffen, W., & Schellnhuber, H. J. (2019). Climate tipping points—too risky to bet against. Nature, 575(7784), 592-595. doi: 10.1038/d41586-019- 03595-0. 4 HM Treasury (2020). The Green Book: Central Government Guidance On Appraisal and Evaluation. 5 Neumayer, E. (1998). Preserving natural capital in a world of uncertainty and scarce financial resources. International Journal Of Sustainable Development & World Ecology, 5(1), 27-42. doi: 10.1080/13504509809469967 6 United Nations General Assembly (2015). Transforming our world: the 2030 Agenda for Sustainable development, A/RES/70/1.
7 Clark, G. L., Feiner, A., & Viehs, M. (2015). From the stockholder to the stakeholder: How sustainability can drive financial outperformance. Available at SSRN 2508281. 8 Flammer, C. (2015). Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management Science, 61(11), 2549-2568.
9 The original data is in USD. We employ an exchange rate of $1=£1.2. 10 Business and Sustainable Development Commission. (2017). Better Business Better World: The report of the Business & Sustainable Development Commission. 11 Dobbs, R., Sawers, C., Thompson, F., Manyika, J., Woetzel, J., Child, P., ... & Spatharou, A. (2016). Overcoming obesity: An initial economic analysis. McKinsey Global Institute, 2014. 12 Business and Sustainable Development Commission. (2017). Better Business Better World: The report of the Business & Sustainable Development Commission.
13 Calel, R., & Dechezleprêtre, A. (2016). Environmental policy and directed technological change: evidence from the European carbon market. Review of economics and statistics, 98(1), 173-191. Around 300 companies regulated under the EU ETS are included in the sample. “Non EU ETS companies” are a group of 3000 European companies that are not regulated under the EU ETS but operated in the same country and the same economic sector and are comparable in size and innovation capacity to companies regulated under the EU ETS.
14 Legal & General Investment Management (2016). The Future World fund range. 15 Flood, C. (2016, November 8). HSBC’s UK pension scheme to invest £1.85bn in eco-friendly fund. The Financial Times.
16 Bioy, H. & Boyadzhiev, D. (2020). How does European sustainable funds’ performance measure up? Morningstar.
17 UKSSD Network (2018). Measuring up: How the UK is performing on the UN Sustainable Development Goals.
18 Gillingham, K., & Stock, J. H. (2018). The cost of reducing greenhouse gas emissions. Journal of Economic Perspectives, 32(4), 53-72. While they conclude that solar thermal and offshore wind technologies are the most costly to implement, we caution that these measures represent underestimates of true costs of abating CO2, given that they only consider mechanical switching and differ from costs of policy responses needed to encourage switching. 19 Ibid. 20 The original data is in USD. We employ an exchange rate of $1=£1.2.
21 While the technical note was later withdrawn due to further developments in Brexit negotiations, there have since been new calls and consultation processes for implementation of a Carbon Emissions Tax.
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37 Department for Business, Energy & Industrial Strategy (2017). Clean Growth Strategy.
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