New Economic Index "Inclusive Wealth": Placing importance on the value of education, health, and nature

MANAGI Shunsuke
Faculty Fellow, RIETI

"Build resilient infrastructure," "Ensure healthy lives and promote well-being," "Ensure quality education and promote lifelong learning opportunities," and "Take action to combat the impacts of climate change."

These are some of the Sustainable Development Goals (SDGs) adopted by the United Nations (UN) in 2015. The agenda comprises 17 common goals and 169 targets, which the international community aims to achieve by 2030. Previous goals centered on supporting developing countries to eradicate poverty and other issues, however, these current goals include developed countries, and cover issues from human health to resource protection.

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However, agreement has not been reached in the UN with regard to how each country and region sets and evaluates individual goals, or the inclusive and comprehensive evaluation methods of each individual goal. Therefore, in recent years, the different values of infrastructure, health, education, and nature, which appear in the SDGs, have been converted into monetary units, and research is being conducted in various places into indexes in which they are comprehensively evaluated.

The representative comprehensive evaluation index is the Inclusive Wealth Index. This is the outcome of the wealth measurement project, which was advanced with the inclusion of the UN by a group of researchers including Sir Partha Dasgupta, professor emeritus at the University of Cambridge, and Kenneth Arrow, winner of the Nobel Memorial Prize in Economic Sciences, who are both recognized as leaders in the field of economics. On March 27, 2017, I presented the UN Inclusive Wealth Report 2017 at an environmental meeting in Berlin, which was held by UN organizations and others.

The Inclusive Wealth Index adds together produced capital, education capital, health capital, and natural capital, and is finally adjusted by total factor productivity (TFP), which reflects damage caused by climate change, capital gains stemming from rising crude oil prices, and technological advancement.

Produced capital is that which is normally referred to as capital, such as machines, buildings and infrastructure, and has a great effect on gross domestic product (GDP). Education capital is the value created by those who have received education, while health capital refers to the value generated by those who are healthy. Natural capital is the combination of the values of resources which are traded on the markets, such as oil, minerals, and lumber, and those which are difficult to see, such as the cultivation of water sources through forests.

In short, the Inclusive Wealth Index comprehensively measures the varied wealth (abundance) held by society as a whole. It can be used to reduce the risks which affect a country's development and to advance long-term economic and societal growth. It is shown in such a way that enables comparison between GDP and factors such as health, and can be used as a complement to pre-existing indexes. In the academic journal Science, we proposed a central role for the Inclusive Wealth Index in the implementation of SDGs.

The following is an introduction to the latest Inclusive Wealth Index research results. First, an investigation into the wealth of 140 countries in 2014 showed that 135 saw an increase when compared to levels in 1990. The worldwide growth rate was 44%, which amounts to an annual average growth rate of 1.8%. This is small compared to the annual average GDP growth rate (3.4%) over the same term.

If we examine the breakdown of growth in wealth by factor, we see that produced capital grew at an annual average rate of 3.8%, while health and education capital growth remained at 2.1% and natural capital decreased by 0.7%. In short, investment in produced capital, such as production facilities, advanced owing to the ease in which the current value can be seen. However, health, education, and natural capital, which can be said to be the value of future wealth, either grew modestly or decreased.

On a global scale, the configuration of capital is as follows: produced (21%), education (26%), health (33%), and natural (20%). Of these, the only one which decreased is the value of the natural environment. It can be said that its decrease was in exchange for the creation of artifacts.

If we compare Japan and the United States, we can see that the wealth per person in the former exceeds that of the latter, amounting to $284,700 and $277,175 respectively. Although infrastructure development growth is higher in the United States, growth in health and education in Japan is high, and the decrease in nature is low. On the other hand, if we examine the change in the total amount of wealth, we see that of the United States exceeds that of Japan, with increases of 2% and 1.3% respectively, and that population increases and decreases are closely related.

We can also expect the Inclusive Wealth Index to be utilized when evaluating regional economic and social policies and when setting goals for them. Multiple local governments, including Fukui prefecture, the city of Minamata in Kumamoto prefecture, and Fukuoka City are already showing interest.

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Furthermore, corporations and investors can also utilize the comprehensive evaluation approach. In solving the issues raised in the SDGs of the UN, the involvement of corporations, through the governments of each country, is required.

One example of this is Environmental, Social and Governance (ESG) investing. Investors consider not only profits, but also the ESG stance of a corporation when considering investment. For instance, the social standard covers equal opportunities for employees and contributions to regional society, while the governance standard covers management systems which respond to globalization and corporate ethics policies. ESG covers the categories of the SDGs related to corporations, and it can be said to be a corporate version of comprehensive evaluation.

We uniquely calculated the ESG score and productivity of over 200 large global corporations in places including Japan, the United States, Europe, and China, and studied their relationship (see Figure). The horizontal axis shows the ESG score. We studied ESG information disclosure levels, and expressed a full score as 100. Once a corporation embarks on information disclosure, it becomes aware of stakeholders, and the actual initiatives proceed. It can be said that corporations which score highly on ESG and productivity are profitable investments which comprehensively contribute to society.

First, if we look at the total score for ESG, up to a value of 50, we see a tendency for corporations' productivity to be slightly raised. From 50 to under 70, there are many corporations with a higher level of productivity. For 70 and above, we could not obtain highly reliable results.

Next, if we take an overview of each score, we can see that productivity rises when the environmental score exceeds 50. The environmental score takes into consideration environmental load reduction initiatives throughout the whole supply chain and an awareness of climate change risk. These factors are connected to high productivity. However, we can also see that when the score exceeds 65, there are many corporations with low productivity.

The social score also shows that, from 40 to 70, there is a gentle rise in productivity but that productivity is reduced when the score exceeds 70. Regarding governance, we can see a clear trend in which productivity increases as the score rises.

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From the results shown above, it can be said that ESG is connected to corporate productivity, in particular, environmental and governance initiatives can be easily linked to an increase in productivity. However, if the ESG score becomes too high, there is the potential for a trade-off relationship with productivity. Corporations should consider the balance of their initiatives with such understanding.

Corporations are actually seeing the need to raise both ESG and profit together. An example of this is the Government Pension Investment Fund (GPIF), which has set forth a policy placing importance on ESG investment. However, in a survey we conducted, the ESG score of Japanese corporations was not found to be high in general. First, it is important to deepen environmental and governance initiatives which are easy to connect to productivity enhancement. We should proceed in the direction of creating an appealing country and corporations in anticipation of the future, based on new evaluation standards such as inclusive wealth and ESG.

Figure: ESG is related to corporate productivity
Figure: ESG is related to corporate productivity

>> Original text in Japanese

* Translated by RIETI.

May 9, 2017 Nihon Keizai Shimbun

May 19, 2017

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