Finance & Real Estate

2022-06-16 Andrea Beltratti, Alessia Bezzecchi

All Quiet on the Western Front? The Challenge of Sustainable Sustainability

In the last half-year, the economy has changed profoundly, from growth without inflation to the anticipated stagflation. What remains of the abundant talk of environmental sustainability and the attention to the social taxonomy? Are these really new values that are broadly shared and to be defended even in a situation of reduction of material well-being? And what can be done to ensure that the contingent difficulties do not divert us from our virtuous path? There is much data to demonstrate that speaking of sustainable sustainability can be useful, especially in Europe.

In six months the macroeconomic picture has changed radically: from growth without inflation to anticipated stagflation. In December 2021, the ECB forecast economic growth of 4.2% in 2022, a reduction from the forecast of 4.6% formulated in September of the same year. Inflation was expected to be 3.2% for 2022, a strong increase from the 1.7% expected in September. In June 2022, the forecast for growth fell to 2.7% and inflation could exceed 8% in May. In the United States, growth for 2022 could be 3%, but most economists see a recession coming within 12 months, and inflation is already 8.6%. Cumulative inflation of 10% in Italy has reduced Italians’ financial wealth by 500 billion euros, without counting the temporary reduction of the value of listed assets. Should we be discouraged? We don’t have a crystal ball, but we know what mistake has always been made by investors, businesses, and consumers: being infected by enthusiasm when things go well, and becoming depressed when there are difficulties, meaning acting with extrapolative expectations, rather than rational ones. Not only in financial investments, but in business decisions as well, the winning strategy has always been to keep calm, without thinking that everything will get worse, and at the same time have a clear idea of where one wants to go in the long term.

The macroeconomic picture risks producing a victim: sustainability. To better understand why, we must first remember what sustainability is: according to the historic United Nations report of 1987 “Our Common Future,” it is a process of development that meets the needs of the present without compromising the ability of future generations to meet their own needs. So pursuing sustainability requires a long planning horizon, an activity not exactly innate in human nature, that instead tends to move by responding to contingent needs. To pursue sustainability, we must produce harmonious and balanced growth of most of capital stocks, productive resources such as plant and machinery, human capital, environmental capital, social capital, and so on. The historical evidence is not comforting: Partha Dasgupta of the University of Cambridge wrote in 2021 an important report for the English government, “The Economics of Bio-Diversity,” in which he tried to measure the evolution of sustainability in the world since the 1990s, showing a reduction of 60% of natural capital, accompanied by a modest increase of human capital and a strong increase, of approximately 100%, in productive capital. Analyses like this provide the motivations for modifying our model of development beyond the problems associated with climate change.

Sustainability in the long term, or goods, services, and jobs in the short term? Is there really a concrete risk of forgetting sustainability? It’s easy to speak of sustainability when economic growth is lively. According to the Environmental Kuznets Curve, maintaining the stock of environmental capital, for example, is a classic luxury good: in the initial phases of development each country pollutes more because material goods are important, but with the growth of pro capita income it becomes possible to dedicate resources and preserve environmental capital, even at the cost of giving up some consumer goods or services. It is presumable that such reasoning also applies to other important types of capital, starting with social capital. The pandemic took us backward, and we have not learned much despite the many debates that took place during the lockdown. In the spring of 2020 we all noted with satisfaction that pollution and CO2 emissions had fallen, but two years after the pandemic (or better, as we have adapted to Covid-19) we see that the same old models have been followed: global CO2 emissions increased by 6% in 2021 thanks above all to greater consumption of coal, a trend reinforced by the war between Russia and Ukraine, and the astronomical price of gas in 2022. For now sustainability is losing, but unfortunately it is not the first time. In 2008-2009, during the last real global recession, Europe loosened the environmental restrictions set on high-CO2 emissions sectors in the context of the emissions permits market, causing among other things an 80% price drop. At the time, the justification was sought in the need to reduce costs for businesses at a time of economic crisis.

What the last 15 years have taught us is that we are all very focused on economic growth, and we are interested in the long term and sustainability, but only if it does not have material costs in terms of fewer resources produced. For this reason, all of those who are genuinely interested in environmental and social capital and are also willing to make sacrifices to increase quantity and quality must not make the mistake of thinking that we all have the same amount of love for these values. To summarize, to truly succeed in pursuing sustainability, we must never forget that “sustainability must be sustainable”; attention for the improvement of social and environmental aspects must never lead us to forget how difficult it is to do business and ensure returns for providers of capital that are consistent with risks and expectations. Creating inapplicable rules or assigning goals that can only be reached at a very high economic cost is not what will improve the living conditions of communities and workers, reduce the use of exhaustible resources, and improve the environment. As always, we want to be optimistic, though, thinking that 2022 will also teach us something, highlighting the need to move realistically toward a long-term goal that is entirely necessary: our quality of life. Everyone must perceive the legislative and regulatory measures, starting with the taxonomy, as something good but also useful and achievable. The Eagles concluded their greatest song, Tequila Sunrise, saying “This old world looks the same, another frame.” Let’s put it differently: to change the world, it’s not enough to change the frame.


Andrea Beltratti is a Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Real Estate Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) at the SDA Bocconi School of Management.

Alessia Bezzecchi is Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is Program Director of the Executive Master in Finance (EMF) and of the Executive Program in Real Estate Finance and Real Estate (EPFIRE).