The output economy is followed by the impact economy

The so-called output economy is no longer compatible with today's challenges, experts say. The impact economy, on the other hand, involves people and the planet in the further development of the economy. What does that mean?

Economists like Paul Donovan of UBS consider the way economic progress is quantified today to be an outdated model and expect big changes: «Output economics and its measures of growth, such as gross domestic product, are no longer fit for purpose in the world we now live in. In fact, it distorts exactly what economics is supposed to achieve», says UBS Global Wealth Management chief economist. In early May, the UBS Sustainability and Impact Institute published a new white paper on the subject. The report makes a compelling case for introducing new metrics to account for profit as well as people and the planet, and to move beyond outdated production metrics like GDP.

The impact economy offers many advantages

The report traces the evolution of the economic system and argues that equating living standards with the manufacturing of products and policymakers' focus on gross domestic product is a model of the past. The economists argue that the impact economy represents the necessary next stage of global economic development. «The impact economy is better suited to solve the fundamental economic problem between sharing limited resources and unlimited wants», Donovan explains. He continues, «It addresses a much broader range of human needs than just the pursuit of material wealth.» Thus, he says, the impact economy also considers financial institutions to be an essential part of responsible actors in civil society.

Governments should drive change

In their report, the economists call on governments to use both incentives and regulations to drive change. For example, on the one hand, tax incentives could be used to encourage capital flows into an impact economy. On the other hand, direct market regulations could limit or redirect capital flows as needed. Donovan continues, «Governments and regulators need to work with independent research and analytical organizations to build more transparent, accurate, and far-reaching data sources to underpin this new economy.» Society should move toward an impact economy that values people and the planet and considers all outcomes when valuing goods, services and the overall economy, he said. «Financial services firms like UBS not only have an obligation to adapt to this evolution, but also a clear role in helping their clients successfully manage change in many ways», Donovan said.

Financial service providers have a central role to play

Financial service providers must, first, emphasize the importance of people and planet as global employers, Donovan urges. Second, they must make a compelling case for an effective impact economy, using their intellectual firepower and data. And third, they need to advise their clients on how the global economy is changing and how that will affect their investments. Finally, as investors, financial service firms should leverage different types of capital to develop the impact economy and use their ownership of companies to drive change.