White House claims green investment reduced GDP by up to $196bn

Report also claims firms with DEI drives are 2.7% less productive, while LSE study warns climate change could knock 3–15% off global GDP

The White House has claimed that inefficient green investments caused a drop of up to $196bn in US gross domestic product (GDP) between 2016 and 2023. 

The Council of Economic Advisers (CEA) published its annual Economic Report of the President on Monday, in which it dedicated chapters to the economic costs of environmental investing, and diversity, equity & inclusion (DEI) programmes.

On the former, the Council said it had quantified the level of capital misallocation to green investments, which it defined those in which environmental factors distorted the financial valuation of an asset.

“As investors pay more for ESG assets, despite receiving equivalent cash flows from brown assets, ESG asset prices rise above fundamentals, lowering expected returns and financing costs,” stated the report.

“As a result, firms with higher ESG scores benefit from a lower cost of capital relative to non-ESG or carbon-intensive firms.”

“By reducing the financing costs of ESG firms, the premium directs capital toward ESG or environmentally-aligned activities, regardless of their relative productivity. Meanwhile, highly productive brown firms face higher financing costs, which constrains investment and dampens overall efficiency.”

That “wedge between financial valuations and productive efficiency” reduced US GDP by $98bn-$196bn between 2016 and 2023, the CEA estimated – an average of about 0.07% of GDP per year, and 10% of total output losses from capital misallocation over the period. 

Meanwhile, research published this week by academics at the London School of Economics claims that, by 2050, the effects of climate change could reduce average GDP per capita by 3–15%, and more than 20% in lower income countries.

The study looks at global average temperature rises of 2.2–2.8°C, and assumes no further increases in climate adaptation and resilience.

“In addition to these outcomes are the substantial impacts expected from changes in the frequency and severity of other extreme climate-related events, such as flooding, wildfires and drought,” said the authors.

“As such, the figures above are likely to constitute significant underestimates of the overall impacts of climate change on GDP per capita.”

Another chapter of this week’s White House report claimed that DEI practices have contributed to “significantly lower productivity” since 2016. 

“By 2023, industries that heavily pursued DEI were approximately 2.7% less productive than those that did not,” it said.  

The fact the trend only kicked in after 2016 – when “DEI pressures intensified” – means it isn’t a direct result of changes to the demographics of managers, according to the report, but instead is driven by “the DEI-based promotion practices that prioritise race over qualifications and contribution”. 

“It does not speak to the capabilities of any demographic group; an opposing discrimination against minorities would likely have caused a similar productivity decline,” the CEA noted. 

“These results imply that DEI practices lead to inefficient management, which raises the cost of doing business.”