New Financing for Sustainable Development

• DOI: 10.1177/1070496516687344
• Author: Shunsuke Managi,Rintaro Yamaguchi
• Date: 01 June 2017
• Published date: 01 June 2017
• Subject Matter: Articles

Article

New Financing for

Sustainable Development:

The Case for

NNP- or Inclusive

Wealth–Linked Bonds

Rintaro Yamaguchi

1

and Shunsuke Managi

2

Abstract

We propose that national governments could issue bonds whose interest payments

are linked to green net national product (gNNP) or, almost equivalently, to inclusive

wealth. The main intention of this new financial instrument is to entice investors and

the national government to invest in human and natural capital for which the cor-

responding financial assets currently do not exist. As the concept of wealth expands

to include human and natural capital, so should the corresponding assets side in the

balance sheet of nations. While the argument for gross national product (GNP)–

linked bonds focuses on trimming public debt toward fiscal sustainability, the pro-

posed bonds aim to ensure long-term sustainability. The theoretical link associated

with welfare economics is also more plausible. Moreover, it could lead to the virtu-

ous cycle of increased government expenditure directed toward inclusive wealth,

expanding tax revenue, increased coupon payment to investors, and increased social

well-being.

Keywords

inclusive wealth, genuine savings, sustainable development, gross domestic

product–linked bond, net national product (NNP)

Journal of Environment &

Development

2017, Vol. 26(2) 214–239

!The Author(s) 2017

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DOI: 10.1177/1070496516687344

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1

Urban Institute, Kyushu University, Japan

2

Urban Institute and Graduate School of Engineering, Kyushu University, Japan

Corresponding Author:

Rintaro Yamaguchi, Urban Institute, Kyushu University, 744 Motooka, Nishi-ku,

Fukuoka 819-0395, Japan.

Email: rintaro.yamaguchi@gmail.com

Many attempts have been made lately to assess sustainable development of

nations by indicators of broadened notion of wealth. Wealth in common par-

lance refers to f‌inancial assets, but in the burgeoning literature of sustainable

development, it is inclusive of all capital stocks that are of relevance to human

well-being, from present to future generations. This would include not only

manufactured capital (physical infrastructure, houses, plant, and machinery),

human capital (educational attainment and health embodied in each individual),

and natural capital (forests, agricultural land, and f‌ishery) but could be extended

at least conceptually to social capital (trust and networks) and institutions

(transparent and democratic politics), in line with debates on sustainable devel-

opment in general (Cle

´menc¸ on, 2012). Whether wealth in this sense is to be

recognized by a larger audience hinges on to what extent macroeconomic

policy makers would strike a balance between short-term economic performance

and long-term sustainability. Indeed, the authors of a recent report on using an

inclusive wealth index as an indicator of sustainability suggested that such indi-

cators should be ‘‘mainstreamed’’ in the discussion on macroeconomic policy

making (UNU-IHDP & UNEP, 2012).

However, such mainstreaming looks unlikely at present. One reason for this

neglect of sustainability in the macroeconomic policymaking community is that,

on one hand, the latter targets traditional economic indices such as interest rates,

inf‌lation, unemployment, and gross national product (GNP), all of which do not

seem to have much to do with the environment. On the other hand, the literature

on sustainable development is focused on nondeclining social well-being in the

long run and thus the trend in wealth in a broad sense. As elaborated later, this

wealth in a broad sense is often referred to as inclusive wealth

1

and is made up

basically of manufactured, human, and natural capital. Given that macroeco-

nomic policy makers and sustainability proponents have dif‌ferent objectives and

time scales, it is no wonder that sustainability indicators are not mainstreamed in

macroeconomics.

A next natural question is that, if, as a thought experiment, policymakers also

cared about nondeclining social well-being and sustainability, what should they

do to achieve their goals? Obviously, increasing public and private projects in

manufactured, human, and natural capital is a proximate answer to this ques-

tion, but we immediately face the question of ‘‘how.’’

Given that inclusive wealth (and hence manufactured, human, and natural

capital) is a stock concept, unlike interest rates, inf‌lation, unemployment, and

GNP, one aspect to consider is to think of a country’s balance sheet, which is a

snapshot of stock of assets and liabilities of that nation. The liabilities side

represents how the assets side has been f‌inanced. For example, conventional

manufactured capital employed in private f‌irms is usually f‌inanced by corporate

debt or shareholders’ equity. On the contrary, public infrastructure and other

physical capital are f‌inanced by public debt or tax revenue. As this balance sheet

is expanded to include human and natural capital, along with manufactured

Yamaguchi and Managi 215