Sustainable Investing From The Advisor's Perspective

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The Supreme Court is expected to issue a ruling this month that could curtail the Biden administration’s efforts to rein in greenhouse gases, and its impact could weaken the federal government’s power to oversee wide swaths of American life well beyond climate change. The upcoming decision on the Environmental Protection Agency’s (EPA) climate oversight in a case officially known as West Virginia v. The Environmental Protection Agency, could provide conservative justices on the nation’s highest court an opportunity to undermine federal regulations on a number of issues, ranging from limiting greenhouse emissions, drug pricing, financial regulations and net neutrality.

At the root of the case, critics of federal government oversight, including 27 Republican state Attorneys Generals and critics of the EPA, who say that it is “unlawful for federal agencies under the president’s supervision to make major decisions about industry regulations without clear authorization from Congress.” As for climate related regulations, they argue that the executive branch of government, which oversees the EPA, should not be allowed to set rules and regulations around greenhouse gas emissions. They say that should be up to Congress. Ironically, neither of the actual regulations at the heart of the case: the Obama-era 2015 Clean Power Plan and the Trump-era Affordable Clean Energy rule are currently in effect. But the Supreme Court’s decision, expected by the end of the month, could greatly reduce the Oval Office’s ability to regulate the fossil fuel industry’s greenhouse gas emissions. This is a big decision, especially as we head toward midterm elections here in the U.S. this fall.

Speaking of microchips, the $52 billion the federal government is investing to increase semiconductor production here in the U.S. could be an opportunity for the industry to become more sustainable. That’s according to a recent analysis from S&P Global Market Intelligence. The Chips for America Act, which became law last year but remains unfunded, would provide federal funds to increase U.S. chip production, but does not set environmental guidelines about how it’s done. Advocates for sustainable technology development are urging the world’s largest chip makers, including Nvidia, Broadcom, Texas Instruments, Advanced Micro Devices and Applied Materials, to make their chip making processes more sustainable.

The issue is none of those five companies have their own net zero targets, and the entire industry is plagued with a supply crunch, with firms trying to ramp up production using current processes. Those include the use of fluorinated compounds, which the EPA classifies as high GWP—greenhouse warming potential gases. They use these to create intricate circuitry patterns upon silicon wafers and to rapidly clean chemical vapor deposition tool chambers. In other words, those gases help chipmakers make chips faster. But according to the EPA, under normal operating conditions, anywhere between 10 to 80% of fluorinated GHGs is passed through the semiconductor manufacturing tool chambers unredacted, and are then released into the air. Nevertheless, S&P says the funding and development phase of building up domestic chip fabrication foundries presents the opportunity to invest in greener, sustainable technologies.

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Meet Peter Krull

Peter Krull is the founder, CEO, and Director of Investments for Earth Equity Advisors, a sustainability-focused investment management company. In his role, Peter focuses on creating and managing Earth Equity’s sustainable, responsible, and impact investment portfolios as well as writing thought leadership pieces and sharing the responsible investing story. Peter is a well-known leader in the green business community and a long-time advocate for fossil-fuel-free and sustainable, responsible, and impact (SRI) investing. Prior to his current role, Peter began his investment career at Merrill Lynch, before founding Krull & Company—the predecessor to Earth Equity Advisors—in 2004. In 2018, Peter was selected to the Investopedia 100 List, spotlighting one hundred of the most influential financial advisors in the U.S.

What’s in this Episode?

We’ve had several conversations on this show with asset managers, ETF issuers and the people behind the products and tools in the world of green investing. But we have yet to speak with investment advisors, the people who are helping individual investors and their families assemble portfolios aligned with their beliefs. Registered investment advisors, or RIAs, as we call them, manage some $110 trillion in assets for some sixty million families in the U.S. alone. That’s trillion, with a ‘T’. We know that a small but growing chunk of that money keeps moving into ESG and SRI themes month after month, year after year. Earth Equity Advisors is one of those RIAs helping to steer clients towards sustainable investments. Peter Kroll, the CEO, joins us this week on The Green Investor. Thanks for being here.

Peter: Thanks for having me. It’s a pleasure to be with you today. Thank you.

Caleb: What made you go down this path, Peter, as an advisor, and how did you make that pivot all the way back in 2004 when not a lot of people were doing this? What made you want to do it?

Peter: I had spent several years at Merrill Lynch, got some great training there, but it was time to move out on my own. And, at the time, I had been dating the woman who’s now my wife, who happens to have a Ph.D. in microbiology and molecular genetics. And so we were having some pretty in-depth conversations on environmentalism and sustainability and things like that. About the same time, I got to spend an afternoon with a gentleman named Bill McDonough, and Bill is an individual who was a green architect, still is a green architect, probably one of the preeminent green architects in the world. But he also wrote a book called Cradle to Cradle, which was focused on circular economies. And so I took the conversations with my wife, Melissa, and the conversations with Bill and put them together and said, “you know what, I think I can start something that is focused on sustainability.” And I started Krull & Company, the predecessor to Earth Equity, in 2004.

Caleb: That’s so cool. Well, you and I both married PHDs. I married a conservation biologist; she was one of the inspirations behind this podcast, so we’re doing something right! And here we are talking to each other—so cool. You say your mission is to empower your clients to magnify their impact through responsible investing. I love the way that sounds, but what does that mean in practical terms?

Peter: What that means is giving people an opportunity to align their investments with their values, which is something that, you know, that’s a tagline that I came up with back in ’04 and trademarked back then, because it was something important to really put out there—what we’re doing. So I’ll give you an example actually of a client we have. We have a client whose money dates back to a great grandfather, I believe, who was a business associate of Andrew Carnegie. This money has been in Pittsburgh for years. This money has been managed very traditionally for years. It’s a mother and daughter, and when they came to us, they were very uncomfortable with this money. They were uncomfortable with its origins, and they were uncomfortable with the way it was being managed. And what we were able to do with these folks is we were able to empower them. So instead of them feeling that this money was away from them, that’s it wasn’t part of them, we’ve actually been able to empower them to the point where they feel like that this money is theirs now, because of the way it’s managed, and because of the kind of investments that we put in there for them. And so now, the daughter is giving a lot of it away. She has invested it responsibly. She’s done well, and she’s giving it a lot of the way. The mother feels much more comfortable with the way that it’s managed right now. So that empowerment is really important, especially in people who are having money that’s passed down from generations that’s been managed traditionally, and that now can be managed in a way that doesn’t have fossil fuels in it anymore, that doesn’t have companies that are taking advantage of their workers, that are doing things that they find unethical, or they have products that they find that aren’t aligned with who they are.

Caleb: So in doing so, you are in reinvesting their money in public companies or in other securities that are more environmentally friendly, whether they’re responsible impact, ESG, or what have you?

Warning

The Green Investor podcast is for informational and educational purposes only and does not constitute investment advice. We will not make recommendations to buy, sell, or hold a particular security or asset, although we may discuss financial products with our guests. Some of our guests may invest in securities mentioned on this podcast. Some of our guests may sell or market securities mentioned on this podcast, but all listeners should do their own research or consult with a financial advisor or broker before making any investment decisions.

Peter: Absolutely. We manage money in a couple of ways. We manage money with diversified mutual fund portfolios that are hand-selected, that I really go through each and every one to make sure that the portfolios aren’t greenwashed. And we can probably talk about greenwashing a little bit, but we manage those kinds of portfolios. But we also manage an individual stock portfolio called the Green Sage Sustainability Portfolio that will actually have its ten-year track record as of this coming December in 2022 here. So we’re excited that we’ve been managing an individual stock portfolio over that time. So yes, we are transitioning from a more traditional way of investing into a way of investing that is aligned with our clients’ values and focused on sustainability. And sustainability, to me, means a number of different things, not necessarily the same thing to everybody. And that’s part of the problem that Wall Street is having right now—that definition of ESG and sustainable investing, and the problem we have with equating the two.

Caleb: I was checking out the Green Sage Sustainability portfolio. It’s pretty cool—you’ve created your own index of sorts, and it’s not a lot of the companies I’m familiar with. Tell us a little bit about how you construct the index and a couple of the companies in there, and what are the criteria?

Peter: So when I’m picking companies for this, I’ve got a list of industries that I really want to focus on. Obviously, sustainability has alternative energy. That’s always going to be a big part of it. But people don’t necessarily look at energy efficiency. You know, energy efficiency is important because the best kilowatt is the one that’s never used, right? We want battery technology. And up until the last two years, there has been no way to invest really in pure battery technology—it’s mostly been a part of a much larger conglomerate like LG or something like that. So it’s been nice that over the last few years we’ve been able to have more and more opportunities to invest in individual companies that are focused on areas of sustainability. Water is going to be a major, major issue. This is something that my wife and I talk about often, especially out west, where the droughts are continuing to get worse and worse and climate change is going to have a major impact. So access to water, access to clean water, energy, water efficiency, filtration technologies, green transportation, we’re seeing it everywhere now as EVs are becoming pretty much the new de facto. Both Melissa and I, we both drive EVs here that are charged with our solar panels on the roof. So we’ve really gotten deep into that. Another is real estate—REITs that are converting their buildings into more efficient buildings. They’re making them healthier. That’s an important part of sustainability. And I’ll mention one final area that we think is a huge opportunity in sustainability and that is insurance. Because ultimately insurers are the arbiters of risk. And this is happening more in Europe than it’s happening here in the States. What we’re what we’re seeing over there is insurers are increasingly taking climate risk into account in their underwriting practices, and we really need to be seeing the insurers here in the U.S. start to really pick this up, for two reasons. Number one, they really need to push the companies that they’re insuring to be more responsible and to really take climate risk into account. But number two, from their own bottom line perspective, the more that they are insuring companies that might have a risk, because let’s say they have a manufacturing facility on the coast or something like that, the bigger the risk they’re going to take. So we want to see companies that are actually actively taking a role in this area.

Caleb: Yeah, our listeners will remember our conversation with Spencer Glenn in Episode One. He spoke about the major risk that has to be underwritten, and also banks have been financing for years and years. So it sounds like you got some climate tech, sounds like you got some future tech, sounds like he got some insurer tech. These are the themes of the future if your investing along this theme. So let me ask you this. How do you navigate choppy returns or a bull market in fossil fuels like the one we’re in right now? You got some big tech companies in some of your indexes that are going to that have also been punished this year. But we are seeing a big shift towards fossil fuel stocks, towards energy stocks. You can’t deny that’s the market leadership at the moment. And some would say we’re in for another supercycle for commodities. As you approach this theme and try to steer clients into it, how do you deal with it?

Peter: We’re looking at this from a long-term perspective. You know, the reality is, is that the majority of our equity portfolios are on the growth side. That’s just simply the way it is. Value is really, really hard to put into a sustainable portfolio. There just simply aren’t the names there, the disclosure, the transparency, and simply they’re not necessarily companies that are going to be set up for the future. And when I looked at the way we put portfolios together for folks, we’re not putting portfolios together for today or tomorrow, even though, you know, we go back to 2020, we had just an outstanding year. We’re putting portfolios together for what my colleague over at Green Alpha calls them “the next economy,” because that’s coming really quite fast at us, and it’s coming for two reasons. Number one, it has to come because we’re being pushed there and the economy is not slowing down. Innovation is not slowing down. When we look at technology, yeah, it has not had a good year and a half or so here and our portfolios haven’t had a good, good year and a half. But we believe and we truly believe that as we move into a more sustainable and a cleaner economy, we’re going to see that the companies that we’re investing in are going to far outdistance the traditional companies. That’s part of what we run into with sustainable investing. And it’s really hard for institutions to put a good portion of their assets in sustainable investing. Part of the reason for that is they’ve got these limits based on tracking error, and tracking error is based on traditional indices, right? And so, if you’re going to try to benchmark our sustainability portfolio, you’re going to have a really hard time because of the kind of industries that are in there. And so that’s why it’s hard to get into an institutional portfolio. But ultimately the companies that we’re investing in are going to be the companies of the future. It’s really hard, I like to say, to invest for the future when you’re looking in the rearview mirror, which is what you’re doing by using a tracking error and using traditional indexes.

Caleb: Well, I was going to ask you that question, if you don’t measure against an index, how do you evaluate returns? Do you measure against your own index? How do you do that as an investment manager?

Peter: Well, for Green Sage, we measure against the All-Country World Index (ACWI) because that’s the closest, just from a generalized perspective. But ultimately, if you’re a registered investment adviser, you need to be indexing based on what your clients’ needs are. So not every client needs S&P 500-kind of returns. Most don’t. And so if you’re if you’re doing a decent job at planning and understanding your client, you can set a target return, because most people need in a five, six, seven percent range. And so it shouldn’t be a one-size-fits-all kind of deal. And that’s why we mix and match, if you will, when we put portfolios together for clients.

What You Need to Know

The Index Industry Association (IIA) recently released its fifth annual survey of global independent index providers, published in November of 2021. The results indicate that investor interest in sustainable investing continues to grow rapidly worldwide, as evidenced by the rise in the quantity of sustainability-focused financial products, exchange-traded funds (ETFs), and market indexes. The number of ESG-related stock market indexes available to investors rose by 43% in 2021 compared to 2020, representing the single largest year-over-year increase for any sector in the survey’s history. Additionally, 80% of surveyed investors believe that market indexes serve as a useful tool to help guide prospective investors to sectors and companies that perform well from an ESG perspective.

Caleb: You’ve been in this industry a long time. What is the financial planning and advice industry need to help more advisors help their clients make that pivot into sustainable investing? Is it education? Is it more podcasts? What do we need to help sort of make that shift even a little bit more dramatic?

Peter: That’s a great question. We offer portfolios that are, you know, separately managed accounts. And so a lot of times I’m talking to advisors and getting them to at least consider the fact that at a certain percentage of their clients are interested in it. The vast majority of them are not talking about it. And so for us, it’s just simply that awareness that they have clients and they’re going to get prospective clients that are interested. So awareness is first, and then we can talk about education, then we can talk about how to structure portfolios. I like to say to other advisors, you’ve got two choices. You can either talk to your clients about it now, or they can come to talk to me about it down the road, right? And I would much rather license one of my portfolios for them to give to that client—and they can continue to give their level of service to that client—than to have that client leave them, upend themselves, come to us, and have to start a whole new relationship. It actually works better for everybody when we do that.

Caleb: Well, how do you attract new clients to your business? We know a lot of you folks—and we celebrate them here at Investopedia with the Investopedia 100—are out there trying to market and spread education, spread financial literacy, lift the industry, educate the industry. How do you sort of attract more business into your own firm and how do you think other other firms are going to be able to do that?

Peter: Well, doing what we’re doing right now is a big part of it, obviously getting it out there. I’ve got a pretty big media presence, and I think, in terms of the size of our firm, we certainly are punching above our weight class in terms of the information that we’re getting out there, the articles that I’m writing on a regular basis, giving talks, webinars. Although I think we’re all tired of sitting on video by now, you know, doing webinars every once in a while. But I thinkthe biggest impact comes from putting information out there. There’s an article that I wrote a few months ago titled “ESG Investing is not Sustainable Investing.” And we’ve got several thousand hits on that, we’ve got a number of folks who have come to us from that. And the gist of that article was ESG is a group of metrics, it’s a group of numbers. And it doesn’t necessarily make the be-all, end-all portfolio. You have to set some eyes on it to ask the question that says, for example, does it make sense that Exxon is in an ESG portfolio? And the reason I use that is because Exxon is in some some of the largest ESG portfolios out there.

Caleb: We know, we talk about it all the time on this show.

Peter: Drives me nuts. Drives me absolutely nuts. Meanwhile, they’re seeing billions of dollars in assets go into those portfolios. And so the way I like to describe it, and the way I described it in the article, is that an ESG portfolio that reduces its exposure to Exxon is less bad. And I got that term less bad from Bill McDonough, who I was talking about earlier. An ESG portfolio that eliminates it entirely is better, but a portfolio that replaces it with First Solar or some other actual positive renewable company is a sustainable portfolio. In my mind, that’s a fairly simple way to break it down. When I talk to retail investors and I ask them, how many of you expect when you buy a sustainable portfolio to find Exxon in there, or to find McDonald’s in there, or to find Caesars Entertainment in there? No hands go up. So there’s a big disconnect between what the industry thinks retail advisors, retail investors want and what they actually want. And we try to meet that need, and I think we’ve done a pretty good job at it.

Caleb: We found that, too, in a survey we did with TreeHugger last year. A lot of folks think they know what it means, and then they actually select the companies that they think belong in those indexes and they’re wrong, or the companies that they’re surprised to see score very well across a lot of these ESG ranking tools. Always a surprise. Last question for you. How do you stay on top of the industry as the Chief Investment Officer (CIO)? What are you reading? What are your must reads or lessons that you could recommend to our listeners, just to stay abreast of what’s going on? I know you approach it as an investor, but you’re also an environmentalist at heart, green investor at heart, and married to a Ph.D. in Biology like I am, too. What do you what do you recommend?

Peter: Bloomberg Green is one of the things that I pay attention to on a regular basis. Canary actually has an email that goes out regularly, but the reality is that I’m simply just skimming a bunch of things. You know, Investopedia is on my list, of course, as are a number of different sites. I’ll go to the major media on a regular basis, The Wall Street Journal, New York Times, so that way I get these get a sort of balance between, you know, a left and a right view on both of those there. But, pretty much my entire day is spent doing one of three things: either working on portfolios which I’m doing today, doing media interviews, which I’m also doing today, and just consistently scanning media, because we have to be on top of things, especially in a world as crazy as it is right now.

Caleb: Yeah, hard to stay on top of it all, but I understand that very well myself. We really appreciate the time. Peter Kroll, the founder, the CEO and the Director of Investments at Earth Equity Advisors, thanks so much for joining the Green Investor.

Peter: Thanks for having me on. It’s been a pleasure.