Making Sense of ESG and Sustainable Investing

This Advisor Views Article was Written by Jeffrey Benjamin

Peter Krull is a partner and director of sustainable investing at Earth Equity Advisors, a Prime Capital Investment Advisors Company. He is a well-known leader in the green finance industry and a long-time advocate for fossil fuel-free and sustainable, responsible, and impact (SRI) investing.  

Practicing sustainable investing for nearly 20 years, Krull believes in the power of positive solutions-based investing. At Earth Equity Advisors, he focuses on creating and managing the firm’s sustainable, responsible, and impact investment portfolios, educating investors and advisors alike on the dangers of greenwashing, and writing thought leadership pieces.  

Jeff Benjamin: Did you launch your advisory practice with sustainable investing in mind? 

Peter Krull: Yes, back in 2004, I had been working in the traditional investment industry, and after long discussions with both my wife, who is a scientist, and green architect Bill McDonough, I launched the firm. In fact, I trademarked the phrase, ‘helping you align your investments with your values’ to differentiate our brand and offerings. I wanted to break away from the business-as-usual paradigm that typified the investment management industry.  

When I started the firm, I recognized that I wanted to help investors transform their portfolios to be more earth-friendly and socially responsible. People rarely think about the investments they own, especially if they own mutual funds or ETFs, because the underlying securities are sometimes hard to find. My goal was to empower clients to know what they own and transition them to portfolios that better reflected their personal values. 

Greenwashing, ESG and Politicization

JB: How do you distinguish between sustainable and ESG investing? 

PK: ESG is simply a set of metrics related to a company’s environmental, social, and governance risk. It’s a way to analyze a company beyond traditional fundamental metrics, but no less important. ESG analysis is a part of the process, but not the final product. Unfortunately, many asset managers believe that they can simply layer these ESG metrics over traditional indexes, make security adjustments, and call the portfolio sustainable. I consider these portfolios “less bad” because they’re better than the original index, but certainly not sustainable. 

Sustainable investing, on the other hand, is more intentional, solutions-based investing. Where ESG portfolios attempt to mimic a legacy index, sustainable investing focuses on investing in where the economy is going. 

ESG is 'Due Diligence'

JB: What are your thoughts on the politicization of ESG investing? 

PK: ESG and sustainable investing are not political. Period. They are enhanced due diligence investing, and I would argue a part of an advisor’s fiduciary duty to know as much about an investment as possible. Some politicians have chosen to politicize them in an effort to pander to their base because there is an environmental or social aspect to the practice. What they fail to understand is that these environmental and social aspects are potentially material to a company’s bottom line and relevant to the security analysis process. 

The actual genesis of the ESG opposition lies with fossil fuel companies that are typically excluded, or at least reduced allocations, from ESG and sustainable portfolios. They fear a loss of inclusion in large institutional portfolios and indexes and use their political allies to push their agenda. The reality is that most asset managers are at least using some ESG metrics in their analytical process and the anti-ESG campaign will ultimately fail. 

JB: How big a problem is greenwashing in the ESG space? 

PK: If we’re talking about mainstream ESG portfolios as I described earlier, it’s a big problem. Simply overlaying ESG metrics on a traditional index does not make a portfolio sustainable, it makes it less bad. The second largest ESG fund out there, the BlackRock ESG Aware MSCI USA ETF (ESGU), has holdings such as ExxonMobil, Chevron, DuPont, Norfolk Southern, McDonalds, and Caesars Entertainment. At the same time, the BlackRock website describes this fund as being sustainable.  

The problem we see is that most of the retail investors I’ve spoken to are interested in solutions-based portfolios, not these less-bad, greenwashed versions. They are constructed for an institutional client that focuses on checking an ESG box and measurements such as tracking errors. Retail investors, conversely, don’t want to see ExxonMobil in their sustainable portfolio, they want to see First Solar. Large asset managers need to stop equating ESG with sustainable investing and deceiving the retail investing public into believing that they are investing in solutions. 

JB: Are investors generally drawn to sustainable/ESG for the performance or because of the broader potential impact? 

PK: In my experience, most retail investors want to know that they’re having a positive impact on the world with a solutions-based portfolio. This is especially true of Millennials who are very interested in sustainable investing. In fact, some studies show that they are willing to give up return in favor of having an impact. Of course, they do want to make money, and the reality is that sustainable and ESG performance is competitive and comparable with their traditional investment counterparts. 

Contact Jeff Benjamin at [email protected]