The practice of gratitude helped me get through the blockages of Covid-19 last year. Every day I wrote down three things that I enjoyed in my life. It allowed me to think about what made me happy.
I recently found this gratitude journal and re-reading it it was clear that the things that made me happiest tended to be things that money can’t buy.
This goes against everything I have learned in my career as an economist, where gross domestic product (GDP) as the monetary value of an economy is the primary measure of societal performance. I shouldn’t be as happy as the material things I own.
Of course, I’m not the first person to think of this. About ten years ago, Nobel Laureate Joseph Stiglitz commissioned a report titled Mismeasuring Our Lives: Why GDP Doesn’t Add Up. He made the case for retiring GDP in favor of well-being and in recent years this idea has gained traction within the Beyond GDP movement.
The idea of using well-being as a measure of societal performance has been accompanied by an increase in the number of investors taking social factors into account in their decision-making.
And figuring out what makes society happy helps us identify risks to the global economy from the “S” of ESG (environment, social and governance).
Money can buy happiness, but only up to a point
GDP per capita has a strong relationship with national happiness, explaining 56% of the differences between countries.
But the richer someone is, the less the increase in the happiness of getting rich. Happiness reaches a plateau when the average income in society reaches $ 70,000 (1 million rand).
The shape of the relationship between happiness and income is important for two reasons. First, in the larger context of inequality, it supports the case for distributive policies. Second, for rich countries, there may be more effective ways for society to stimulate happiness than to seek only greater economic growth.
What does the rest matter?
The Organization for Economic Co-operation and Development (OECD) was one of the first international organizations to bring together internationally comparable measures of well-being as part of its Better Life Index.
But some things matter more than others when it comes to driving well-being.
To explore this, we use regression analysis to explore which 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;
- Perceived state of health; and
- Perceived corruption.
Corruption erodes social trust
Investors have long viewed corruption and broader governance measures as important. The perception of corruption data that we use in our work is actually a measure of institutional trust, which captures both government and corporate corruption. Specifically, survey respondents are asked if corruption is prevalent in government and business?
It also has a good relationship with a wider trust in society, where people are asked if they can trust others.
It is not surprising that emerging markets have a higher perception of corruption than developed markets. Within developed markets, the Nordic countries have the lowest perception of corruption and the highest levels of social trust. This helps explain why these countries consistently rank among the happiest in the world.
However, Eastern Europe stands out with a particularly high perception of corruption, with Romania, Portugal and Hungary leading the list in major developed and emerging markets. Italy and Greece also score relatively low.
Mental health matters
Unsurprisingly, health has a close relationship with happiness, and it’s a theme that came up several times in my journal.
The measure we use is self-reported health, that is, the share of those who report having “at least good” health. Importantly, this reflects that self-rated health combines both mental and physical health. Mental health is particularly important to consider in advanced economies, where life expectancy and other measures of physical health are already very high.
What does this mean for investors?
From a top-down perspective, there is no relationship between happiness and stock returns using historical data from developed markets.
This is perhaps not too surprising given the very weak relationship between GDP growth and stock market returns that researchers have found in the past (as in “What’s growth got to do with it? Equity Returns and Economic Growth ”, CFA Institute Journal Review, 2015).
Just as GDP growth rates do not explain market performance, social factors generally do not have much impact on markets either at the country level, unlike at the firm level, where they are. important.
Corporations are punished for poor standards of governance, but countries rarely are unless there is social unrest that fuels political change, or countries are subject to international sanctions.
There are many examples where “S” has weighed on financial markets, especially in the emerging and frontier world. In most cases, the disillusionment caused by low levels of well-being has led to populist governments. Investors will remember the Arab Spring in 2010, Greece in 2015 and the recent protests in Latin America.
From this perspective, rather than looking for a return in “happy” markets, macro-investors integrating ESG into their framework should instead consider the risks to their investments coming from dissatisfied markets.
So what are the risks to be concerned about? Our work highlights three risks to the global economy from the “S” of ESG today:
1. The broader mandate of monetary policy risks harming “S”
By changing the concept of the maximum level of employment to a more inclusive measure, the US Federal Reserve recognizes the social implications of monetary policy and, within that, its role in reducing inequalities. This suggests keeping interest rates low for longer in the hope of extending the business cycle and improving welfare.
However, blunt tools risk causing the Fed to react to inflation too late. Not only does inflation erode incomes, but any aggressive reactive rise in interest rates risks pushing the economy into recession, creating a self-destructive boom-bust cycle, where lower incomes and higher unemployment. harm social outcomes.
2. The management of the energy transition: “E” to the detriment of “S”?
Managing climate change is crucial for sustainable growth and the well-being of future generations. In the long term, the energy transition is an opportunity to create new relatively well-paid jobs in clean energies. However, this will need 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 the weak “G”?
Governments have had a difficult balance to navigate during the pandemic where lockdowns enacted to protect physical health damaged mental health, hurt incomes and lost jobs. Aided by an unprecedented amount of government support, surveys so far have shown a surprising resilience of subjective happiness last year when it comes to assessing life.
Why happiness matters
The question of whether we should seek welfare rather than GDP growth is an ongoing one, and determining what makes society happy helps us identify the risks to the global economy of S.
Our work shows that the measure of societal success can be improved and should be broader than GDP and unemployment. Ultimately, the focus on improving health, reducing corruption, and increasing social trust would make society happier.
Our conclusion that low corruption countries are happier highlights that social considerations arise from strong governance: in “ESG”, “S” is supported by G.
For equity investors, this matches 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 empowering leaders.
- By Piya Sachdeva, Economist at Global Investment Manager Schroders
Read: Can Money Really Bring Happiness in South Africa?