ESG Investing Is Heading for a Reckoning, Says One Veteran Manager

The ESG investment industry may be headed for a reckoning and many companies won’t survive this period of higher interest rates.

That’s according to James Penny, who’s been running ethically focused funds for about a decade and is currently the London-based chief investment officer at TAM Asset Management. He predicted that several companies owned by ethically focused funds will struggle to refinance their debt, without naming any specific firms.

“A lot of ESG companies out there that probably can’t survive with interest rates going where they are,” Penny said in an interview. “There will be ESG companies that will go to the wall because of this market.”

It’s the latest in a string of warnings to hit the ESG space. The investing style rode out the pandemic better than other corners of the market, but is now coming under pressure from higher inflation and interest rates. It’s been particularly punishing for technology stocks, a staple of ESG funds.

For fund managers, the period ahead “could be like a baptism of fire,” Penny said.

There are now signs that interest in ESG investments is flagging. After more than three years of inflows, stock investors pulled about $2 billion from US exchange-traded ESG funds in May, the biggest monthly redemption on record, according to Bloomberg Intelligence.

Meanwhile, the Impact Shares MSCI Global Climate Select ETF is set to close after less than a year because none of the backers pitched in with anticipated funding.