Are ESG Funds a Proxy for the Green New Deal?

After being soundly defeated in the Senate 0-57 (43 Democrats voted “present”), the Green New Deal continues to languish in the House.  Roll Call reported the following excuse from Speaker Nancy Pelosi: “I can’t say we’re going to take that and pass it because we have to go through our checks and balances of it with our committee chairs and the rest.”  She goes on, “We welcome all the enthusiasm that people want to put on the table, and the Green New Deal is one of them, but we have to operate in a way that’s evidence-based, current in its data.”

The Green New Deal, sponsored by Rep. Alexandria Ocasio-Cortez, debuted with much fanfare back in February.  It combines FDR’s massive expansion of government and environmentalists’ goal of powering the U.S. with 100 percent renewables to fight climate change.  If progressives truly believed the Green New Deal would work, that is, create jobs, grow the economy, and save the environment, it begs the question, why did Democrats hold back?  Perhaps here are a few clues.

The Green New Deal means closing every nuclear, coal, and natural gas plant; upgrading all homes and buildings to eliminate the use of oil and natural gas; replacing cars and other private transportation, including air travel, in favor of mass transit; requiring all manufacturing and agricultural industries to eliminate carbon emissions, even from cows (since the technology isn’t currently available, beef could be removed from our diets).  The Green New Deal also guarantees jobs, a living wage, and free health care.

What would this economy look like? Would it mean a cleaner environment, prosperity, and higher standards of living for all? For a proxy on economic performance, it would be interesting to take a look at the performance of Environmental, Social, and Government investment funds, popularly known as ESG funds.  These funds invest in companies that advance various environmental and social causes — the types of companies that would drive a Green New Deal economy. They would also avoid companies that don’t fit in, such as oil and natural gas companies or old smoke-stack industries.

In a recent study, PRI senior fellow Wayne Winegarden analyzed ESG funds’ long-term performance.  He found that ESG funds have historically underperformed funds investing in the broader market over the long-term.  The study analyzed 30 ESG funds that have either existed for more than 10 years or outperformed the S&P 500 over a short-term period.  Of the 18 funds with a 10-year track record, the study concludes that a $10,000 ESG portfolio would be 43.9 percent smaller compared to an investment in a broader, S&P 500 index fund. Just one fund would beat the earnings of an S&P 500 investment over 5 years, and just two would beat it over a 10-year period.

The reasons for long-term ESG fund underperformance were the usual that financial advisors always caution investors about when putting money in less diversified funds – higher risks and higher fees that could drag down performance.  Investors better have a lot of faith in the skill of an ESG fund manager to pick the winners and avoid the losers, not to mention be willing to pay up.

So, what does this say for a Green New Deal economy?  We should be even more weary, since the manager will be the government (gulp).

Rowena Itchon is senior vice president of the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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