Mahsun Dogan & Kiemthin Tjong Tjin Joe: Time for a new perspective on the concept of sustainable economy

May 22, 2025

_{This article was originally written in Dutch. This is an English translation.}

A sustainable economy relies on more than just ecological sustainability. A sustainable level of government debt and a stable population are also important for the long term.

By Mahsun Dogan, Senior Portfolio Manager Fixed Income & Treasury, PGB Pensioendiensten, and Kiemthin Tjong Tjin Joe, Senior Investment Manager Fixed Income & Real Estate

When most people think of a sustainable economy, they initially think of protecting the environment and improving social well-being, taking into account the needs of the current generation without undermining the needs of future generations. However, a sustainable economy is based on more than just ecological sustainability. Today, the focus is too much on protecting the ecology and too little on protecting the economy (e.g. against high debt and a declining population). Both aspects are important. In this article, we explain why economic sustainability is just as important as ecological sustainability and how institutional investors can make an additional contribution to protecting not only the ecology but also the economy for future generations.

Economists generally agree that economic productivity is determined by the following six components within a multifactor model: 1) physical capital, 2) human capital, 3) natural resources (ecology), 4) technological know-how, 5) institutional infrastructure and 6) market efficiency. To ensure that future generations can also benefit from comparable or better economic productivity, these components must not be misused in the short term.

A sustainable economy meets the needs of the present generation without compromising the needs of future generations.

For example, an economy can be boosted in the short term by increasing physical capital and incurring more government debt, but future generations will foot the bill in the form of higher inflation or higher taxes. Another example is making it more difficult for people to start a family by creating an economic climate in which it is too expensive to have children. The costs are lower in the short term because less money is spent on education and more people can work, but in the long term there will be a shortage of people, which will undermine the economy. These are a few examples that illustrate that a sustainable economy must not only be based on ecological sustainability, but must also be viable from a purely economic point of view.

The concept of a sustainable economy has its roots in the 19th and 20th centuries. Gradually, concerns about the impact of far-reaching industrialisation on nature grew. The first principles of the concept of a sustainable economy as we know it today were laid down at the UN Conference on the Human Environment in Stockholm in 1972. An important milestone was the Brundtland Report in 1987, published by a UN-sponsored commission on environment and development. Here, the concept took on a more concrete form. It was described as development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Interest in the concept of a sustainable economy only increased in the years that followed, as more and more evidence emerged that global warming was largely caused by human activity. Today, the concept also has a social aspect. In addition to protecting the environment for future generations, social equality is also recognised as a factor that promotes a sustainable economy.

The current level of prosperity is not sustainable if government debt increases significantly and the population shrinks too much.

Historically, sustainable economics has therefore focused on the ecological aspect of sustainability. However, it is now becoming increasingly clear that the economy is no longer sustainable on a number of other fronts. The two most important problems that future generations will face are increasing government debt and population decline.

1) Government debt

A government normally borrows money to finance a budget deficit. It pays interest on this. Unlike a commercial company, which borrows money to invest, the government mainly makes non-productive investments, such as spending on social security. If the debt ratio becomes too high, the interest charges will eventually become unsustainable, preventing the government from investing in its own economy. It can even encourage young people to emigrate in search of a better future elsewhere. This is happening in Italy and in Eastern European countries, for example.

2) Population decline

An economy needs a workforce to maintain prosperity and ensure growth. In Western countries, the low birth rate of less than 2.1 children per couple is leading to an autonomous decline in population. A country such as Germany can only maintain economic growth by allowing migrant workers to enter the country. However, partly due to the actions of politicians, there is a prevailing sentiment in Europe that the problems surrounding immigration are unsustainable, which means that it is discouraged as much as possible. These politicians do not realise, however, that this greatly increases the risk of shrinking economies and, therefore, shrinking prosperity. The alternative is to increase the birth rate. Nowadays, many pension funds and other institutional and financial institutions have ESG policies, which motivate and sometimes even compel the entities in which they invest to operate in a more sustainable manner. The focus here is almost always on ecological sustainability and social equality. However, institutional investors are unaware that they can also contribute to an economy for future generations without high public debt and without the burden of healthcare costs due to an ageing population. Pension funds (one of the largest investors in government bonds) can, for example, put pressure on governments to take on less debt and/or reduce contributions for families with more children. With the right reduction in contributions, this could even generate money in the future through higher contribution revenues. We realise that having more children is at odds with the ecological idea of reducing the burden on the earth's population.

In conclusion, it can be said that the concept of a sustainable economy is currently overly focused on the ecological aspect of sustainability. It is becoming increasingly clear that the current level of prosperity will not be sustainable if government debt increases too much and the population shrinks too much if immigration is not allowed. Ecological sustainability and economic sustainability are not mutually exclusive: both concepts can coexist. It is time for a new perspective on the concept of sustainable economy.