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Krull Challenges Advisors to Embrace SRI

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Peter Krull, founder and CEO of Earth Equity Advisors, lives and breathes his mantra of sustainable investing: He uses solar panels on his roof to generate electricity for his home, drives an electric car and invests only in socially responsible stocks and funds. 

These are just some of the reasons the Asheville, North Carolina-based financial professional was selected as a 2021 winner of ThinkAdvisor’s new recognition program the LUMINARIES in Thought Leadership & Education.

Krull’s “eureka” moment on socially responsible investment (SRI) was twofold and came after he left Merrill Lynch. First, he met his wife, who has doctoral degrees in microbiology and molecular genetics and with whom he sees eye to eye on environmental protection. Second, he met the preeminent green architect Bill McDonough, who showed him many of the changes that must be made to help protect the planet.

Since its founding in 2004, Krull’s firm which now has $175 million in assets under management has been one of the go-to places for those interested in SRI investing.

We spoke to Krull about this trillion-dollar industry, where it’s headed and how advisors can imprint the SRI philosophy on their own businesses.

THINKADVISOR: Is there a difference between SRI and environmental, social and governance?

PETER KRULL: There is a difference between ESG and SRI, but they’ve almost become synonymous at this point.

ESG is a tool. It’s a set of metrics used to make decisions and SRI is the actual portfolio. It’s the process of taking that ESG data and implementing it in a way that aligns with client values that does work to have a positive impact.

And we’re seeing all too often now that big firms like BlackRock are just taking the ESG data and throwing a portfolio out there without actually passing the smell test, where we ask the question, does it make sense that Exxon Mobil is in the largest ESG fund available? Does it make sense that McDonald’s is in there?

Some groups say that to get a sector represented, they look at an Exxon, for example, which may be starting a green division, or doing some other work socially. Doesn’t that count?

Jeremy Grantham, who runs [Grantham, Mayo & van Otterloo, a wealth management firm], did a study that looked at what happens if we extract any particular sector from the S&P 500, and what that does to long-term returns. What they found is that [returns were] almost negligible. For example, if you took energy out of the S&P 500, you actually performed a little bit better, especially over the last decade.

This is probably one of the biggest stumbling blocks to full-scale use of ESG implementation.

Every big institution doesn’t want to see tracking errors greater than two or one, or whatever their particular metrics. The reality is, as institutions continue to hold on to this idea that they have to have a low tracking error, they’re not going to get what SRI is because they have to be able to eliminate old-economy companies, [which] inherently are going to be in those traditional benchmarks, and what they are basing tracking error on.

If we’re going to be investing for tomorrow, we want to invest positively for not only where we are going, but where we have to go from a climate change and sustainability perspective. We have to eliminate those old economy companies. They’re just dinosaurs.

What are the biggest changes you’ve seen in the past two decades you’ve been in SRI?

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The biggest change is I have more stocks to invest in. More companies are focusing on sustainability, be it building electric vehicles or the charging networks to those focused on water efficiencies and things like that.

Real estate, which is one of those, has a big opportunity in retrofitting our building infrastructure to make it much more efficient, and [that] is not only a good idea from a sustainability perspective, but it also affects their bottom line positively.

For our individual stock portfolio, the universe has grown over the last nine years that I’ve been running [it] from about 300 [stocks] to over 600 companies. The second thing is there are now more funds that I can invest. That’s a double-edged sword because a lot of them are greenwashed [i.e., promoted as environmentally sound even though they really aren't]. But there are also some really good ones out there, too.

Why aren’t more advisors joining the SRI movement?

I think they don’t understand it. And they don’t necessarily have the time to focus on the due diligence. And with all the mixed messaging out of Washington, especially with the [Department of Labor] law that came out during the last administration, and then the new guidelines, which just came out about how they’re not going to enforce those [last administration] rules and they’re going to put new rules out that ESG will be allowed in qualified plans.

The previous administration’s law on ESG and qualified plans basically said that you couldn’t integrate them because it wasn’t necessarily material, like climate change issues and things like that. Whereas the reality is that these [matters] are tremendously material.

At some point in the future, there won’t be ESG. This will just be integrated into everything. The question will simply be, what shade of green are you?

Also, I’ve seen these studies that are showing that prospective clients, upwards of 60%-70% plus, are interested [in SRI] across the board in terms of demographics. It’s not just millennials and women anymore.

But few advisors are talking to people about it. And [maybe] they’re scared of it. Again, there’s been mixed messages coming out of Washington, and there are a lot of advisors still just steeped in traditional Wall Street, and some people don’t like change.

But advisors don’t have to be experts in it. They just have to understand it. Like, for example, we license out our portfolios for other advisors to use. I do that because all I’m doing is focusing on sustainable investing, [and] other investors or other advisors don’t necessarily have to do that. They just have to understand that it’s no different than picking a traditional investment manager.

What other changes do you advocate?

One of the things that I’ve been preaching a lot lately is the responsibility of insurance companies in advocating, at least here in the States, [addressing] climate change.

Because, you know, they have the personnel, they have got the bean counters who can see what’s happening with climate change. And they’re the ones who need to be taking the lead in pushing the prices of insurance up in high-risk industries or high-risk locations and situations. And they simply aren’t doing it.

They’re not integrating climate change into their underwriting policies the way several of the European insurers are. And when they start to use their influence, it is going to have an even greater [impact] than any regulation.

Because if a company has a manufacturing facility on one of the coasts that continues to be battered by hurricanes or that continues to be threatened by wildfires, one of two things will happen. The insurer will start raising premiums or will stop insuring the firm. And that’s going to push companies to be more responsible.