Sustainability should be the true measure of US creditworthiness

The Guardian

August 15, 2011

Standard & Poor's historic downgrading of the US's creditworthiness delivers a righteous judgment on the state of American politics. What many missed amid the fallout, however, is that the rating agency astonishingly failed to raise even an eyebrow over the terrible state of its bloated, unsustainable economy.

The US Treasury has since been quick to point out an alleged $2 trillion maths error in S&P's calculations. Yet the failure of S&P, and indeed the other major rating agencies, to measure what really counts in shaping new economies for the 21st century passed unremarked. After all, the fundamentals of the US economy remain mired in the practice of overconsumption, under-investment in public infrastructure and services, and an unsustainable environmental footprint.

Rating agencies exist in order to provide a view of the future creditworthiness of borrowers. Yet today's mainstream ratings simply do not count the underlying sustainability of the economies in question, be they companies, cities or countries. Sustainability geeks all know the numbers. The United Nations Environment Programme estimates, for example, that annual environmental costs from global human activity already amounted to $6.6tn in 2008, equivalent to 11% of global GDP. Our current economic model, exemplified by the US, is building wealth on quicksand.

S&P is right to highlight the dangers of the US's political mess, but it is spectacularly missing the real point – that this noble country's future is threatened by the persistent, multibillion-dollar corporate lobbying that prevents it from doing what China and others are intent on, creating economies that can prosper within far more restricted environmental conditions and with far lower rates of material consumption. The US's failure to embrace a global climate agreement, and its roll-back of numerous attempts to price carbon domestically, hold back its transition to a "green economy", neutralising its all-powerful venture capital industry from doing what it does best. Its dogmatic insistence in remaining a gas-guzzling, carbon-spewing economy incentivises its impressive array of technology companies to focus on foreign expansions rather than domestic investment.

Failing to account for natural resources and social externalities is a practice that will bring the house down, economy and all. Starring in this show is the US political economy, which has turned cannibal, consuming its own capacity to succeed in the future. The truth is that if S&P had counted in this real measure of creditworthiness, the US would have faced a downgrade many moons ago.

Sustainability considerations, a true measure of a country's long-term potential, can be built into sovereign credit ratings. One study by Oekom Research highlights the high correlation between measures of a country's sustainability and its financial debt credit rating. The US is the main outlier in this analysis, having a far lower sustainability score by Oekom's measure compared with its traditional credit rating.

Another more recent study by Bank Sarasin suggests that longer-term, sustainability factors are more accurate in predicting creditworthiness: "To a large extent, a country's long-term solvency depends on its future tax receipts. This requires a sustainable tax base, which needs to be mainly in the form of future goods and services. This depends on a country's available natural, social and economic resources and its efficiency in converting these resources into goods and services."

The World Economic Forum, after many years of publishing its country-focused Global Competitiveness Index, is now preparing its first sustainability competitiveness index of countries, reinforcing the message that "responsible competitiveness", my own measured contribution to this debate and practice, is key in enhancing productivity and sustained wealth creation.

Credit rating agencies must count in environmental and social externalities, and the work of Bank Sarasin, Oekom and others demonstrates proof of concept in practice. These measures can and must be improved, but they already highlight the many ways in which externalities impact on underlying productivity. Sustainability folks have been largely silent on such matters beyond the usual rage against greed. Perhaps they are persuaded that this calamity, and the underlying solutions that need to be grasped, have nothing to do with sustainability as we understand it. Nothing could be further from the truth.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

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