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Do ESG Funds outperform, or are they doomed to lag the overall market?  You can find more studies than you would care to read arguing either side of the question (1) (2), but I believe that those who contend that ESG Funds are losers because they underperform are missing a better argument against them, and a much bigger issue.

ESG Funds, to the extent they focus on so-called renewable energy such as wind and solar, may show short-term outperformance, but in the long run the quest for “sustainability” and “net zero,” of which ESG Funds are a part, will give us less economic growth and lower standards of living.

Economic growth comes from productivity growth.  Productivity growth is the result of us being able to do more with less.  For example, during the Neolithic, we hunted fish with flint-tipped spears.  It is possible to harvest a fish with a spear, but it is time consuming and requires stalking the fish in shallow water.  The invention of the fishing net allowed fish to be caught en masse and in deeper water, a huge and classic increase in productivity: more fish from less effort, and less raw material input.

This chart from The Bureau of Labor Statistics shows how much productivity has grown since the end of WWII (3), enabling U.S. businesses to produce nine times more goods and services with almost no increases in hours worked. This enormous increase in productivity – and wealth – was fueled by high density coal, oil and natural gas.

In a short film, Energy and the Poverty of Nations, Dr. John Constable shows how the use of wind and solar, because they are diffuse and less concentrated forms of energy than fossil fuels, will force us to create fewer goods and services with more input, stifling productivity and reversing the enormous increase in wealth, living standards and longevity that we have enjoyed since the beginning of the Industrial Age.  The film and transcript can be found here at Net Zero Watch.

The more important issue is not ESG Funds’ performance, but the impact that their support of wind and solar will have on human well-being and productivity.

Don Harrison

Any opinions are those of Don Harrison and not necessarily those Raymond James Financial Services, Inc., or of Raymond James.  The information contained in this presentation does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Investing involves risk and you may incur a profit or loss regardless of strategy selected. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. There is generally an inverse relationship between interest rate movements and bond prices. 

1. https://www.morganstanley.com/ideas/sustainable-funds-performance-2023#:~:text=%E2%80%9COur%20mid%2Dyear%20update%20shows,for%20Sustainable%20Investing%20Jessica%20Alsford
2. https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-Reward-Or-One-Mans-Ceiling-is-Another-Mans-Floor
3. https://www.bls.gov/k12/productivity-101/content/why-is-productivity-important/home.htm#:~:text=Productivity%20growth%20is%20our%20opportunity,growth%20in%20the%20United%20States.