Peter Krull is the Founder, CEO and Director of Investments at Earth Equity Advisors.
He 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.
In today’s episode of Power Your Advice, Pete and Doug Heikkinen discuss the state of sustainable, responsible and impact investing in the financial services community today. Is everyone who says they do it really doing it? How can you tell the difference? They also discuss:
- The screening process for a green stage portfolio
- How sustainable portfolio returns compare to portfolios that don’t take sustainable or impact investing into account
- How divesting from fossil fuel holdings can help with risk management inside a portfolio
- Why Pete believes that you can trace breadcrumbs from an investment to saving the world for our kids
- Why Pete thinks advisors should be on the green wave for their clients
RESOURCES: Earth Equity Advisors
Peter Krull, Douglas Heikkinen
Douglas Heikkinen 00:00
Hello and welcome to the Power Your advice Podcast. The Power Your Advice podcast is designed to bring you new ideas, why those ideas should be considered and how to implement them into your business. This podcast is brought to you by Iris XYZ, the most helpful place advisors can come to to grow their minds and businesses. This is your host, Doug Heikkinen. . .
Peter Krull 01:11
Thanks, Doug. It's really glad to be here.
Douglas Heikkinen 01:15
We're going to talk about a very popular topic today, the planet, it's on everybody's podcast, television show, and big in the new administration plans in 2021. and beyond. Tell me a little bit about the path that got you here and why it's so important to you. Well, I, I was working at Merrill Lynch. And I realized that it wasn't a system that I want it to be. And this was back. I had started with Maryland 1998 2003 2004, some of the time around that I was dating my wife, Melissa. She has PhDs in microbiology and molecular genetics. So I definitely married somebody much smarter than myself. We were having deep conversations about social responsibility, climate change, and the environment. And about the same time, I had an opportunity to spend a day with gentleman named Bill McDonough, who is a rather famous green architect, and also the author of the book Cradle to Cradle, which was sort of a tome on circular economy. And I brought these two things together, and in June of 2004, hung up my shingle, and have certainly never looked back.
Douglas Heikkinen 02:30
There are many financial firms that claim to be on this bandwagon. Did these claims add up in your estimation?
Peter Krull 02:39
Certainly not always, you know, we've been in this space for over 16 years now. And I can usually tell the difference between you know, those who've really integrated it into their practice, and those sort of late comers who've just jumped on the bandwagon because they see the market trends. Now, at the same time, you don't have to be us, you know, you don't have to have solar panels on your roof and an electric vehicle in your driveway to be the real deal. But you do have to take it seriously. And for me, the best way to really look at a firm or look at a fun family is look under the hood at their investments. You know, right now there's about 400, mutual funds and ETFs out there. And so there's a ton of room for greenwashing. And that's what we're seeing a lot of right now. And you know, taking the taking the time to look under and say I you know, McDonald's is considered a an ESG company, and I'm not quite sure why your fund holds that and asking the hard questions or, you know, why is there a fossil fuel company in your in your portfolio?
Douglas Heikkinen 03:46
What's the real screening process for a green stage portfolio?
Peter Krull 03:51
So green Sage is an investment, individual stock portfolio that we have, it's in our signature stock portfolio. And we call it we start with what I call a positive bias. So we know traditionally socially responsible investing or Sri has been about exclusion, What don't we want to own? And, you know, while we certainly avoid fossil fuels and mining and other offending industries, we want to ask the question, more importantly, what do we want to own? You know, what businesses and industries are going to move us forward from an environmental, societal and economic perspective? So it has to really hit all of those. You know what, when I look at putting this portfolio together, you know, we want to see alternative energy energy efficiency, battery technology, which is finally starting to be have publicly traded options, water technologies, green transportation, natural and organic products and services, sustainable real estate, you know, one of the biggest contributors to co2 emissions are our buildings. So how can we make our buildings more efficient Certainly technology, big data, Internet of Things, stuff like that. Green finance insurance has played a big role recycling circular economy, and cutting edge biotech. These are really the areas that we focus on in this particular portfolio. And in order to do so we maintain a universe of stocks that we're constantly adding to and removing based on on a number of metrics. When it comes time to build our portfolio, we use data from a number of sources, including Morningstar sustainalytics, which is actually now a part of Morningstar, we also use an outside ESG firm called act analytics. And from a lot of this data, we build a composite score. So we take these 500 or so stocks, and we build composite scores based on one based on fundamentals, one based on ESG, metrics, and one based on street consensus. And we look at those from each of those columns. And then I also make a an overall composite based on all those. And finally, when, when all is said and done, we put it all together to diversify it. So number one, it's diversified into multiple sectors, different market caps, and it's it's broken up globally, as well. And at the end of it, we end up with a 50 stock portfolio that I'm comfortable to put up against just about any portfolio that you can find out there.
Douglas Heikkinen 06:25
How can investor tell the junk out there? Are there quick ways? Or does somebody have to really dig deep into what they're investing in?
Peter Krull 06:36
For me, it's as simple as like I said earlier, looking under the hood, when if you have Morningstar or even if you just have Yahoo Finance, you know, you can you can take a very quick look at any fun that's out there and say, Okay, if you see that there are holdings in the energy sector, which is, remember that solar energy and things like that are not classified as energy, they're typically classified as industrials. So if you see energy in a portfolio, they're not taking sustainability seriously. For us, and I believe it should be across the board here. But there's no such thing as a sustainable fossil fuel company period. They are the the main reason why we are in the climate crisis that we're in at this point. There's there the other thing that there's there's a lot of indexes out there that use ESG metrics to create their portfolios. And that's great, a great starting point. But the metrics only tell part of the story. Because what's happened now is companies have begun to game the ESG system. There's a lot of consultants out there now that will go to big companies and say, well, we can help you get your ESG score up so that way you can be included in these indices. For example, let's say you're a big oil company, and you know, you're never going to get a good EA or environmental score. What do they do? Well, let's throw some money at some charities. So let's increase our s RSS, social score. Let's perhaps add a woman or minority or both to our board of directors and improve our governance score. And in my mind, that doesn't make a company sustainable, it makes them deceptive in a way. So you know, when we look at a company, when we look at a fund, I want to I don't want to just see that they've used a bunch of arbitrary ESG metrics. I also believe that you have to have like human eyes on it. You have to use your common sense and look under the hood and say, Is this really a company that my clients would view as being environmentally sustainable, socially sustainable or governance? Maybe not to a as much of an extent, but is this a company that I would consider sustainable?
Douglas Heikkinen 08:56
Give me the argument for a green portfolio stacked against a portfolio that doesn't take these considerations into mind? Can it provide similar returns? Or is the investor giving back this returns to make a responsible investment?
Peter Krull 09:14
Well, the bottom line is that sustainable responsible and impact investing is not charity. And I'll go back to our green Sage sustainability portfolio as an example. And of course, because you don't have all advisors, I'm sure who listens to podcasts, I'll make sure that, you know, your listeners know the past performance is not indicative of future returns. So keep that in mind. But our portfolio has been around for eight years. In fact, this past Monday, December 21, was our eighth anniversary. As of our anniversary of Monday, the average annual return over the last eight years is just shy of 17%, which is about 2% annualized better than the s&p 506.7 percent better than the benchmark that we typically use, which is the MSCI all cap world index, because we view our fund more as a global fund, and year to date. So again through December 20. Number two, I say here, December 21, the portfolio is up 49%, which is about 34% better than the s&p 537% better than the all cap world index. And we've done that by never putting a fossil fuel company in there, and always maintaining our positive investment strategy.
Douglas Heikkinen 10:36
Let's pick on the fossil fuel people again, I recently read that investing in fossil fuel actually improves investment performance. If so, can you explain that?
Peter Krull 10:47
Absolutely. So, yeah, it's definitely true. So So Jeremy Grantham GML, hedge fund fame commission to study a couple years ago to see what would happen if you extracted any particular sector from the market. And what he found was that between 1989 and 2017, you actually did point oh, three better if you had divested from fossil fuels, or basically took the energy sector out of the s&p 500. But the reality is, is there's only a 50 basis point delta between the worst performing and the best performing, if you extract any particular sector, from from the s&p 500. So the reality is, is you can divest and not hurt yourself. But this is more than just, you know, feel good. We want we want to divest from fossil fuels, because it is something that's aligned with our values. There are a lot of other factors at play right now, Exxon Mobil just wrote down something on the order of between 17 and $20 billion on some natural gas holdings. For your listeners who haven't heard of something called stranded assets, stranded assets, are assets that these fossil fuel companies are not going to be able to pull out a pole from the ground, you know, be an oil or natural gas or coal. And the reason they won't be able to pull them out might be because of regulatory issues or because, obviously, you know, climate changes is the major reason why we are we're moving away from a fossil fuel economy. So it's not just a feel good decision. It's also a risk management perspective. And if you, you know, an easy way to sort of track the performance of the s&p 500 versus the s&p 500 minus fossil fuels is there's two ETFs out there. Sp y, of course, is the s&p 500. But SP y x is fossil fuel is fossil fuel free. And so you can compare the over the last five years, the SPX spy x, beat the s&p Spyder by about 45 basis points annually. So you know that that does add up over time, and I don't see any reason why that is going to change going forward.
Douglas Heikkinen 13:19
That's amazing. I was listening to the Bill Gates Rashida Jones podcast this week, super stuff. Bill's working hard on this topic and spending a fortune. He claims we're in a race to have this solved by 2050. For the next generations, can you trace the breadcrumbs from an investment to actually saving the world for our kids?
Peter Krull 13:38
Absolutely. And I think and the reality is, is I think 2050 is really pushing the limits. We need to be working on this now. But I also understand that there are the the realities of the of the entrenched interests that are gonna be really hard to move. But, you know, the first thing to answer your question is, we first need to recognize that climate change is real. And it's happening all around us. It just is there's there's scientific consensus, anybody who tells you otherwise. You need to ask what their motives are, again, being married to a scientist, and somebody who has a good background in studying issues related to the oceans and microbes and how climate change is interacting with gas exchange and a whole bunch of stuff this way to hell over my head. I know that this is going on. And I know that this is real. We need to identify what the causes are, but also what the solutions are from an investment perspective. And then we need to ask the question, Where do we need to go to move forward from where we are? So what do we need? We need clean energy, we need clean transportation. We need greener buildings. We need nutritious foods and healthy care. We need education and fulfilling job opportunities, things that are going as our economy shifts that we're going to have to be cognizant of. I said health care, but we need really need cutting edge biotech, in my opinion, that's one of the things that we've put in our green Sage portfolio. And a lot of these the things that that we need to move forward, these breadcrumbs, as you, as you mentioned, are really parts of the United Nations Sustainable Development Goals, which are 17 goals or 17 areas of focus that I believe in, in our portfolios, we we address 10, or 11, I can't remember off the top of my head here, but 10 or 11 of these particular goals, everything from again, alternative energy to healthy communities, etc. And once you recognize these different aspects of it, you know, we can you can put together a portfolio from there.
Douglas Heikkinen 15:56
Do you have any reason why people don't believe this is happening? I mean, take this year, and people staying home and not traveling and the effect it has had on the world just in eight months? Why do you think people don't believe
Peter Krull there's been a lot of studies done on this, and sort of this year aside, so the so the yell, yell has a climate Communications Group and they study, you know, why is it that there is this this group of hardline folks who refuse to, to believe into it, and they call it believe six Americas, and you have folks who are on the, on the far one side of it, where pretty much everything they do, every decision they make is wrapped up in it, and they are worried and they are concerned, and they are scared of it. And then you have the absolute opposite side, who completely dismiss everything. The the people are in the middle are the ones that I think really make the biggest difference. The folks who don't believe it, they typically are aligned with an affinity group. So while they may think that there might be some credence to what the scientists are saying, because their affinity group denies it, because their affinity group is basically is out there saying, well, this, this can't be happening. They go along with the group, and they don't want to break away because they're connected more to the group than they are to a set of, to the to the reality of the situation, actually. And conversely, the folks who do believe it, typically, are going to rely a little bit more on the data. Now, they also have groupthink as well, but they are going to rely a little bit more on the data. And so this is this, this is what this these studies are showing us that it's it's not necessarily about the facts. It's about who do you feel comfortable in? Who are you associating with? And where are you getting your information from?
Douglas Heikkinen 17:58
Give me the top reasons advisors should be on the green wave for their clients.
Peter Krull 18:03
Well, number one is your clients are demanding it, there's no doubt about it. The if you aren't getting out in front, and talking to your clients about it, they're going to be picking up the phone and talking to me, that's the reality of the situation. We don't do a whole lot of outbound marketing, a lot of what a lot of what the, the prospective clients we have coming to us are coming to us from traditional advisors, who are who are either downplaying the, you know, sustainable investing in general, who say you can't make the same kind of returns, which is unfortunately a fallacy. Now, it may have been true 10 or 15 years ago, but it's not true anymore. So you need to get out ahead of it, and you need to be talking to your clients about it. Number two, is sustainable. Investments now account for one in three professionally managed investments in the US. That's about a 42% growth rate from just 2018 to 2020. And it's around the $17 trillion, give or take. There is there there is a lot of evidence that this is continuing to pick up steam, especially this year, which people have been home people have had more time to actually do, like I said earlier, look under the hood and say, why is it that my investments on this, this isn't aligned with my values. And number three, there is an upcoming wealth transfer that we've that we've all read about. Women and Millennials are going to be taking over trillions of dollars of assets in the coming decade, decades. Who has the most interest in sustainable investing women and millennials and so once again, you need to be able to speak to those folks about it and you need to be able to speak more than just on a surface level. You need to understand it
Douglas Heikkinen 19:59
You recently A Robo called Align Digital. tell us about it and how it works.
Peter Krull 20:05
We were really, really excited to launch this platform. And the reason we launched it is because, you know, we Our mission is to bring sustainable and responsible investing to everybody. The problem with that is as an advisory firm, we have a $250,000 minimum. And so that makes it difficult when we have multiple prospective clients coming to us that might have $50,000, or $100,000, or $10,000, for that matter. And so we created this, this portfolio. First of all, to meet the needs of those folks, we didn't want to have to turn them away. But second of all, I also know that there's other advisors out there who don't want to be experts in sustainable investing, who don't have the time who would prefer to outsource the research, the research and the actual implementation. And so, you know, our goal was was twofold to really hit those two markets, the folks who don't hit our minimum, and the investment advisors out there who need somebody to outsource to that they can trust that isn't greenwashing that isn't that that actually cares about the investments that go into the portfolio, and that you're not all of a sudden going to look at the portfolio and see that you've got Chevron in there and s and have to ask the question, why is this in our portfolio, the way we put it together is it uses the exact same universe of stocks, pared down just a little bit that we use for the green Sage sustainability portfolio. And we've teamed up with folio institutional, and they actually are custodian, but they also also have a portfolio engine, that that helps us a little bit. Clients are asking a series of question on risk. And also sustainable values, such as things like, do you want your portfolio to be farm friendly? Or do you want to have extra renewable energy because it's got renewable energy in it by definition, but you might want to have a little bit more. And it even asks if you want to have Pot Stocks in there. So we've tried to make it as inclusive as possible. So what the portfolio engine from folio does is it combines the answers with our universe and creates a custom diversified individual stock portfolio of about 80 to 100 stocks. But it also includes green bonds, and green and ESG bonds, to sort of make a complimentary asset allocation. So if you're an advisor, we're not here to compete with you on this, we're here to actually be your partner. So you can rest easy and send a client that you want to that who wants a sustainable allocation to line digital. It costs 75 basis points for line digital, and we won't be competing with you will actually be your partner in this.
Douglas Heikkinen 23:04
So advisors and end investors can access that through you.
Peter Krull 23:09
Douglas Heikkinen 23:10
If you're an advisor, and they want to work with you, how do they get in touch with you at Earth equity.
Peter Krull 23:16
So there's there's really two ways to work with us. First of all, we have we have an SME version of green Sage sustainability portfolio and our diversified mutual fund portfolios. So if some If a If a advisor wants to go the the SME route, we can make that happen. We are currently on two platforms. Right now we're on folios platform and we are on the E trade Advisor Services platform. And continuing to expand that however, we have several advisors as well, who we work with on signals, because green Sage only trades twice a year and because our mutual fund portfolios are rebalanced quarterly, there's not a whole lot of work that we do. That's that's necessary on a signals basis. And so, you know, we send a signals basis, we send you out a couple days prior to the end of the quarter or when we trade green sage, you put it into your system, you trade on the date that we tell you to make the trade on. So that's for folks who truly want to outsource it saves you a little bit of money it's 50 basis points instead of 75. So we help you with communication, education and portfolio management. That website is Earth equity dash smma.com that's Earth equity dash SME comm or again, you can go to align digital, which is Earth equity online.com and, but if anybody has any questions, you can always feel free to reach out to me directly at its simple info at Earth equity advisors calm
Douglas Heikkinen 24:53
Peter, this is really great stuff. Thank you so much for being with us today.
Peter Krull 24:56
Thank you, Doug. It's been a pleasure. I look forward to hearing from to chat and get some time,
Douglas Heikkinen 25:01
Great! For everybody at Iris Media Works, our producer Jakie Beard and the Power Your Advice podcast team. This is Doug Heikkinen.
portfolio, advisors, sustainable, fossil fuel, investment, s&p, green, podcast, esg, stock portfolio, question, reality, climate change, basis points, folks, clients, greenwashing, happening, company, stocks