Foresight

Should investors consider happiness rather than GDP?


About a decade ago, Nobel Laureate Joseph Stiglitz commissioned a report called Mismeasuring Our Lives: Why GDP Doesn’t Add Up. It presented the case for retiring GDP in favour of wellbeing and in recent years, this idea has gained traction under the Beyond GDP movement.

The idea of using wellbeing as a measure of societal performance has been accompanied by the rise in the number of investors considering social factors in their decision making. And figuring out what makes society happy helps us identify the risks to the global economy from the S in ESG.

Money can buy happiness, but only up to a point

GDP per person has a strong relationship with national happiness, but the richer someone is, the smaller the boost in happiness from becoming richer. Happiness plateaus as the average income in society reaches $70,0001.

The shape of the relationship between happiness and income is significant for two reasons. Firstly, in the broader context of inequality this supports the case for distributive policies. Secondly, for rich countries, there may be more effective ways for society to boost happiness than by solely pursuing more economic growth.

We use regression analysis to explore what objective social factors best explain subjective happiness, measured by life satisfaction. Four factors stand out as having the strongest relationship with happiness. These are personal income, long-term unemployment, self-perceived health and perceived corruption.

What does this mean for investors?

There are many examples of where “S” has weighed on financial markets. In most cases, disillusionment caused by low standards of wellbeing has led to populist governments.

From this perspective, rather than seeking return from “happy” markets, macro investors integrating ESG into their framework should instead consider the risks to their investments from unhappy markets.

Our work points to three risks to the world economy from the “S” in ESG today:

1. The broader mandate of monetary policy risks damaging “S”

Changing the concept of the maximum level of employment to a more inclusive measure, the US Federal Reserve is recognising the social implications of monetary policy and within this, its role in reducing inequality. This points to keeping interest rates lower for longer in the hope of extending the economic cycle and raising wellbeing. However, blunt tools risk the Fed reacting to inflation too late. Not only does inflation erode incomes, any reactive aggressive rise in interest rates risks tipping the economy into recession, creating a self-defeating boom-bust cycle, where lower income and higher unemployment hurt social outcomes.

2. The management of energy transition: “E” at the expense of “S”?

Managing climate change is crucial for the sustainable growth and the wellbeing of future generations. In the long term, the energy transition is an opportunity to create new relatively high paying jobs in clean energy. However, this will have to be managed very carefully as the transition will likely have social implications for today’s generation.

3. Social unrest after the pandemic: Could the pandemic expose weak “G”?

Governments have had a difficult balancing act to navigate during the pandemic where lockdowns enacted to protect physical health have damaged mental health, hurt incomes and lost jobs. Helped by an unprecedented amount of government support, surveys so far have shown surprising resilience in subjective happiness last year when it comes to evaluating life.

Why happiness matters

The shift to whether we should pursue wellbeing rather than GDP growth is underway and figuring out what makes society happy helps us identify the risks to the global economy from S.

Our finding highlights that social considerations stem from strong governance: In “ESG”, “S” is underpinned by G. For equity investors, this is consistent with the growing recognition that taking care of stakeholders has positive business benefits. This new social contract is here to stay and active investment managers play an important role in holding executives to account.


1 Source: World Happiness Report data/Gallup, 2021. 602255

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