ESG and Intergenerational Equity – Mind the Gap (Part I)

30 March 2022
Knowledge Base

by Lieve Lowet & Lorenz Van Roosbroeck

Early February, the Actuarial Association of Europe (AAE) hosted a webinar entitled Sustainability and Climate Change – what does it mean for risk management in Insurance and Pensions? The webinar centered around issues of sustainability and the climate crisis. Since the EU Commission officially endorsed ESG considerations in its 2017 sustainable finance package, reinforced by the priorities of the current Commission and the Green Deal in 2019, the discussions are proliferating — up until the point that it is nearly impossible to follow all developments. As such, clear and distinct frameworks which capture the essence of the challenges we face are needed. It is within this context that the aforementioned webinar sparked interest as one of the speakers introduced a concept and measurement tool from ‘down-under’. More specifically, Gregorio Gil de Rozas, Instituto de Actuarios Espanoles, introduced the specific case of The Australian Actuaries Intergenerational Equity Index or AAIEI. After some research, it appears that The Actuaries Institute — i.e. the professional body representing the actuarial profession in Australia — published a Green Paper under the same name as the presentation, entitled Mind the Gap — The Australian Actuaries Intergenerational Equity Index (AAIEI). Here, we bear emphasis on this topic of intergenerational equity for several reasons.

First and foremost, despite the laudable fact that recent discussions on ESG have focused on urgent environmental issues, the trade-off has often been an observable reduction in discussions on social issues concerning sustainability. Secondly, environmental and social issues tend to be discussed separately, as if they bear no real, significant relation to each other. As such, discussions present themselves as zero-sum games; we choose to discuss about either the E or the S, as if a trade-off were to be made. Yet what about their intersection; do they not relate to each other? Indeed, we hear in the Youth for Climate marches that climate justice equals social justice. But how is this so? And, why is this so central to the ongoing protest by the young? Currently, vague ideas about the relation between social and environmental sustainability tend to be the norm; there is an obvious lack of clear and distinct concepts which capture this relation in meaningful and useful terms. Surely, there are reasons for this, but one can’t deny that a more exact understanding trumps a vague one. Consequently, understanding sustainability in precise fashion would benefit the transition, insofar as it grasps the contours of a more sustainable system.

Zero-sum discussions versus integrative concepts

In this light, our interest in the concept of intergenerational equity departs from a break with the aforementioned trends. First of all, the AAIEI is about a key issue of social sustainability, offering a tool to grasp it better. Indeed, in formulating the outcomes of their investigations the Australian actuaries concluded that the current intergenerational inequity present in Australian society is unsustainable. Their reasoning is rooted in the idea that people do not desire to live in a society where children would be worse off than their parents. Secondly, in order to calculate and quantify intergenerational (in)equity, the quality of the environment was taken into account. As such, not only does the AAIEI address the overdue issue of social sustainability, it does so in an integrative fashion; the environment is considered as an integral aspect of social sustainability.

Thus, the concept of intergenerational (in)equity achieves a break with the current deliberative culture surrounding ESG. Instead of dealing with sustainability in zero-sum fashion, it captures how issues of environmental sustainability are measurably part of social sustainability.

The Australian Actuaries Intergenerational Equity Index (AAIEI) as potential integrative ESG tool

In common usage, intergenerational equity mostly refers to the standard of living between youth, their parents, or grandparents — i.e. tomorrow’s retirees against today’s. Drawing on this, the AAIEI self-defines it as “the fairness or justice between generations, often covering economic, psychological and sociological aspects.” As such, it considers a broad range of different domains contributing to wealth and wellbeing dimensions across generations. Here, one could argue that environmental aspects should be included within its definition, for does it not cover an essential element of the current inequity?

Indeed, this appears to be the case; environmental indicators are included as a distinctive measure. Concretely, the index is set-up across six broad domains, each allocated a certain weight: economic and fiscal (30%), social (15%), environmental (15%), housing (10%), education (10%), and health and disability (20%). Subsequently, across these domains, 24 indicators were assessed between 2000-2018 — e.g. gender pay gap (social), atmospheric CO2 concentration (environmental), life expectancy (health & disability), poverty rates (economic & fiscal), and so forth… In turn, these were then distributed over three broad age groups (25-34, 45-54, 65-74 y.o.). Both absolute – and relative changes were taken into account; the former measuring face value improvement — e.g. more wealth due to economic growth, — the latter the manner in which developments differently affect age groups — e.g. the growing wealth gap between generations. Thus, the distinction is made because an absolutely positive trend (e.g. increased wealth for a group) can be negative relatively seen (e.g. growing wealth-gap).

Based on these findings, policy recommendations are suggested to offset these inequities. Hence, the purpose of the AAIEI is to better understand intergenerational inequalities in order to inform policy makers of trade-offs over time. As such, its usefulness departs from the understanding the burdens current generations place upon future ones. For example, increased government spending during the pandemic has placed a significant economic burden upon future generations due to increased spending — both on government (less budget) as on future workers. This understanding has the potential to lead to more deliberate public policy.

Outcome: Inequity for Younger Generations

All things considered, the intergenerational equity index shows that, in Australia, older people (65-74 y.o.) are better off than their younger counterparts (24-34, 45-54 y.o.) in both absolute and relative terms. As the researchers explain, absolute inequity should not necessarily surprise — e.g. older people have significantly more time to accumulate wealth. Far more worrisome is the relative inequity, which points to the fact that younger people have been disadvantaged relatively across different areas these past two decades, meaning they’re worse off in relation to older generations at a similar age. Hence, despite improvements in terms of health, education and social indicators, younger generations are considerably worse off in terms of economic, housing -and environmental indicators. In some cases, younger age groups have seen a regress compared to earlier studies; for them the gap is growing. The research identifies two main causes for this trend: one, the wealth effects of the housing boom, and, two, the large increases in government spending on pensions and services. Moreover, a relative increase in government spending on those aged 65-74 years old from 3.7 % of GDP to 4.5 % of GDP contributes to the higher absolute index value of older Australians. In addition, it was recognized that certain demographic developments combined contribute to the current gap – such as longevity increases and lower birth rates.

What about Europe?

The Australian Green Paper also reviewed some international studies on intergenerational equity. Concerning Europe, including the UK, the Intergenerational Foundation measured the impact of government policies on young people in its European Intergenerational Fairness Index. The most recent editions point to improvements in education and income, but drops in health, fiscal issues (pensions and government debt) and employment. Similarly to Australia, the pay gap between younger and older generations and the cost of housing are both rising.

The UK in particular offered some sobering prospects. Following the UK Resolution Foundation’s 2019 Intergenerational Audit, one out of five individuals born in 1991-95 will live in relative poverty in their late twenties, when raising children of their own. The main causes are the deterioration of relative earning, increasing housing costs as well as significant cuts to working-age benefits.

Intergeneration Inequity and Social Sustainability

The AAIEI formulates conclusions in terms of sustainability. As they state: “we need not live in a country where most people believe their children will be worse off – such a system is not sustainable.” Similarly they conclude that policies focused primarily on the needs of older Australians, but did not attend enough to the needs of working age groups. Based on these findings, the Actuaries Institute made recommendations for changing public policy which negatively affects intergenerational equity — i.e. tax and transfer system (incl. social security), housing, and employment policies. For example, one of the recommendations is to support and incentivise older Australians to participate in the workforce, increasing overall productivity. They equally identified youth underutilisation as a possible growth area to better intergenerational equity, potentially improving housing affordability for the younger generations.

However, intergenerational inequity is by no means an Australian thing; in Europe the same problem is apparent. As the population is ageing, maintaining pension and health spending poses an intergenerational equity issue, stalling investment in younger generations. Notwithstanding the deteriorating climate, the situation appears already socially unsustainable. In this context the authors claim that “today’s young cannot carry the burden of an ageing population without themselves having decent jobs, wages and fair living standards.”

Integrated Sustainability versus Box-Ticking

Interestingly enough, implicit within these conclusions is the proposition that governance practices which structurally nurture intergenerational inequity, do not contribute to social sustainability. By directly taking into account the ecological worries within its concept of social sustainability, this measuring tool has relevance in the current context of ESG; not only does it deal with the lesser discussed element of social sustainability, it does so in reference to the environment. That is to say, analytically, it clearly deals with a social issue, yet synthetically, it fits environmental factors into the picture in a clear and concise fashion.

Such integrated tools accomplish a rupture with the deliberative culture surrounding ESG, in which issues of sustainability are chiefly discussed in disjunction, solely relying on vague notions of the interrelation between the E and the S of ESG. Surely, a practical consideration underlies this trend, for it is imperative that certain pre-defined goals and targets are met. Yet we must be wary of converting sustainability into a ‘box-ticking exercise.’ Practical considerations mustn’t impede the advancement of knowledge, but co-exist with it. Thus, we must allow our understanding to continue to grow.

The next blogpost (part II) explores some further theoretical implications of intergenerational equity, offering a reflection upon certain underlying conceptual aspects of (social) sustainability and the need for integrative concepts. Moreover, this will be situated within the larger context of the occurring ecological crisis.

This blog was co-created with Lorenz Van Roosbroeck, master student in philosophy at KULeuven, who is currently writing his thesis on Marx and ecology, i.c. the debate between J.B. Foster and J.W. Moore.

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