The notion of sustainable growth rate (SGR) has been defined and redefined over the past few decades. In general it refers to the rate of growth that can be maintained over the long-term without depleting the earth’s resources or damaging the environment.
The challenges in operationalizing the concept of SGR are many. First what exactly are the earth’s resources? Second how do we determine the environmental carrying capacity for different types of growth? Third how do we take into account the time horizon over which the growth takes place? And fourth how do we account for the distributional impacts of growth both within and across generations?
The most commonly used measure of SGR is the ecological footprint (EF) which was developed by Rees and Wackernagel in 1996. The EF is a measure of the impact of human activity on the planet expressed as the amount of biologically productive land and water required to support a given population at a specific material standard of living. It is basically a measure of the human demand on the planet’s regenerative capacity.
The ecological footprint has been used to estimate the SGR for different countries and regions. The results vary depending on the data and methodology used but a recent study by Global Footprint Network found that on average the world’s nations are consuming resources at a rate 1.6 times faster than what nature can regenerate. This means that if current trends continue we will need the equivalent of two Earths to support our current level of consumption by the year 2030.
There are a number of different ways to reduce our ecological footprint and thus help achieve sustainable growth. One is to improve resource efficiency for example by using less water energy and materials per unit of economic output. Another is to shift to less resource-intensive economic activities such as moving from manufacturing to services. And a third is to change our consumption patterns for example by eating less meat or driving less.
The concept of SGR is important because it helps to focus our attention on the need to achieve sustainable growth – growth that can be maintained over the long-term without damaging the planet or depleting its resources. But operationalizing the concept is fraught with challenges not least of which is the need to better understand the earth’s carrying capacity for different types of growth.
What does sustainable growth rate mean?
The sustainable growth rate is the maximum growth rate that a company can achieve without increasing its equity base.
What factors influence a company’s sustainable growth rate?
The sustainable growth rate is limited by a company’s available resources including its financial resources and the capabilities of its management team.
How can a company improve its sustainable growth rate?
A company can improve its sustainable growth rate by becoming more efficient in its operations and by increasing its financial resources.
What are the consequences of not having a sustainable growth rate?
If a company does not have a sustainable growth rate it will eventually run out of resources and go out of business.
What is the difference between sustainable growth rate and growth rate?
The growth rate is the rate at which a company is growing while the sustainable growth rate is the maximum rate at which a company can grow without increasing its equity base.
What is the sustainable growth rate formula?
The sustainable growth rate formula is ROE x (1 – payout ratio).
What is the ROE in the sustainable growth rate formula?
ROE stands for return on equity which is a measure of how much profit a company generates for each dollar of shareholder equity.
What is the payout ratio in the sustainable growth rate formula?
The payout ratio is the percentage of earnings that a company pays out as dividends.
Why is the sustainable growth rate formula important?
The sustainable growth rate formula is important because it shows the maximum growth rate that a company can achieve without increasing its equity base.
What are the limitations of the sustainable growth rate formula?
The sustainable growth rate formula has a number of limitations including the fact that it does not take into account a company’s debt levels.
What are the implications of the sustainable growth rate formula?
The sustainable growth rate formula implies that a company can only grow as fast as its shareholders are willing to reinvest their profits back into the company.
What are the benefits of the sustainable growth rate formula?
The main benefit of the sustainable growth rate formula is that it provides a framework for companies to assess their maximum growth potential.
What are the criticisms of the sustainable growth rate formula?
Some of the main criticisms of the sustainable growth rate formula are that it is too simplistic and that it does not take into account a company’s debt levels.
Is the sustainable growth rate formula a good tool for investors?
The sustainable growth rate formula can be a useful tool for investors to assess a company’s maximum growth potential.
However it is important to remember that the formula has a number of limitations.
What are the alternative methods to calculate the sustainable growth rate?
Some of the alternative methods to calculate the sustainable growth rate include the use of discounted cash flow analysis and the multiplication method.