With the dangers of climate change looming over the global population, there is widespread support for climate action. However, because of large fiscal deficits, policymakers are tempted to cut investment in green projects, which are seen as long term. Erik Solheim and Talal Rafi write that this would be a bad mistake. They describe five ways in which green policies drive economic growth.

The world is in a precarious situation. The 2015 Paris Climate agreement target looks increasingly impossible to achieve as the rate of global warming accelerates. Climate scientists Johan Rockström and David King have warned that this could even lead to the collapse of human life. With the dangers of climate change looming over the global population, there is wide public support for climate action, especially among millennials and Gen Z (those born between the mid-to-late 1990s and the early 2010s). Eighty-five per cent of investors are considering sustainability as a factor when investing. That leaves the ball in the government’s court to drive green policies.

However, even though green policies are positive for the world, they come with their own set of challenges. Lack of a universally accepted reporting framework makes measurability and decision-making complex. Even if there was a common reporting framework, reporting depends on how good the data is. Greenwashing, a form of deceptive marketing meant to give the impression that products are sustainable, has caused a loss of confidence from consumers and investors. Hiring skilled human talent on the green space is a major challenge due to a green skills shortage. To meet green standards, governments delay the approval of projects by six months to two years, which is a major turnoff for private investors, for whom delays cause financial losses. Lastly, with the global economic downturn, many governments are facing large fiscal deficits and policymakers are tempted to cut investment in green projects, since their benefits are seen as long term. That would be a bad mistake. Here we list five ways in which green policies drive economic growth.

Attracting investments

A study by Gartner shows that 85 per cent of banks and investors consider environment, social and governance (ESG) factors when making decisions. Investors are looking towards green investments not only because it is the right thing to do but also because it benefits companies’ bottom line. Firms that adopt a green business strategy tend to have an enhanced reputation and greater customer loyalty. They are better able to meet government regulations. For business models, greener is leaner. There’s greater efficiency and reduced waste. Government subsidies can help drive green investments, making products cheaper and businesses more profitable. Investment-friendly regulations make operations easier. The rising cost of fossil fuels increases the growth potential of the renewable energy sector. Last month, for the first time more investments were recorded in solar energy than in oil, a sign of shifting global energy trends. The availability of green investment products has increased drastically.

Creating jobs and attracting human capital

The International Labour Organization has predicted that around 24 million new jobs will be created globally if the right green policies are adopted. Another benefit will be lower employee turnover. The younger generation prefers to work in companies that are aligned with environmental sustainability. Many are even willing to take a pay cut to work in companies with sustainable policies.

Increasing productivity

Green policies lead to greater productivity as they focus on efficiency. There is a reduction in waste as economies move towards a circular economy and sustainable products and services.  The production of renewable energy is cheaper than fossil fuel in many countries such as Australia, India and China. This leads to reduced energy prices, which is key to boosting industrial production.

Stabilising balance of payments

According to the United Nations, 54 countries are under debt stress, mostly because of large current account deficits created by fuel imports. Importing fossil fuel energy is a major drain on foreign exchange for many developing countries. Renewable energy such as solar and wind are almost always produced inside a country’s border, resulting in the preservation of foreign exchange. It also means that the economy is not affected by fluctuating global energy prices, allowing economic planning to focus on the long term.

Driving trade growth

As large economies such as the US and the EU enact laws to attain their net-zero targets, the implications will be felt beyond their borders. The European Union’s taxonomy makes it tougher for exporters to enter the lucrative European market without proof that their business operations are environmentally sustainable. These policies will pressure many companies to adopt greener business models to make their products internationally accepted. Also, with large global corporations like Apple requiring carbon neutrality for their entire supply chains, businesses in countries that are not focused on sustainability will not be able to take part. Seventy per cent of global trade involve global value chains and many countries can ill afford to be left out.

Facilitating food security

Sustainable agricultural policies increase the circularity of resources, with less waste. A large portion of developing countries’ foreign reserves is spent on importing food, a major drain. Global food imports reached nearly $2 trillion in 2021. Countries react by increasing borrowing, causing unsustainable debt levels. Investing in agricultural practices such as vertical farming can reduce food imports. A report by the United States Department of Agriculture states that certain crops can yield 10 to 20 times more produce using the same amount of land in vertical farms, compared to open field ones.

As vertical farms are located closer to cities, this reduces the need for long-distance transportation, with a decreased use of fuel. Innovation in agriculture has also resulted in vertical farms using 95% less water than traditional ones. The UN Foundation makes it clear that we’re going through a global urgency: the world’s food production could decline by up to 30% by 2050 if there is no effective climate adaptation strategy in place.

• This blog post represents the views of its authors, not the position of LSE Business Review or the London School of Economics.
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