If you’ve got money to save you’re investing it, but do you know what you’re investing it in? Whether it’s in the bank, in a unit trust or in your pension fund it’s supporting a range of companies, but do you know whether they are environmentally responsible or are they making a quick return while making the climate crisis worse?
Reith Lectures
I mentioned the Reith Lectures a while ago - an annual series of lectures produced by the BBC. https://www.bbc.co.uk/sounds/play/m000qkms The speaker in the 2020 series was Mark Carney, former governor of the Bank of England. In the final episode he addressed the climate crisis. He explained how there were immense investment opportunities in rebuilding the global economy to be sustainable. He emphasised that we as savers and investors can influence corporations to do the right thing by choosing to invest our money only in responsible organisations. But how easy is it to know how responsible the underlying investments in our savings portfolios really are?
I recently spoke to a man who’s been concerned with this problem since 2004.
My guest this time is Peter Krull, who is CEO of Earth Equity Advisors.
Welcome, Peter.
Peter Krull:
Thank you, Anthony. It is a pleasure to be on the show today.
Anthony:
Great. Now we're talking about investment, but just to be clear, we're talking about types of investment. We're not here to make specific recommendations. If you have money to invest, you should always consult a qualified financial advisor, but we hope to help you understand the nature of the product you might be offered. And with that in mind, I've got a first question, but I'm going to ask you something else before I want you to answer the question.
Peter:
Okay.
Anthony:
So, if people are saving money for a deposit on a house, for a wedding, for retirement, or just to have that bit of security behind them, many people don't want that money invested in businesses that damage the environment. So, how can they be sure of that? Now before we get onto that, I just want to clarify a couple of things that you may be talking about. ESG, I think that's equivalent to our CSR. CSR is Corporate Social Responsibility. Am I right there?
Peter:
Yep. There are a ton of acronyms and they change on a fairly regular basis. So, it used to be that it was SRI, Socially Responsible Investing. And that started way back when. That started with a lot of religious folks who didn't want to invest in gambling, or they didn't want to invest in alcohol. And through the 70's, that sort of morphed into adding environmental aspects to it with the green movement. And, that moved right on through into I would say the last decade or so where SRI transitioned into Sustainable Responsible and Impact investing.
Anthony:
Right.
Peter:
ESG
And at that time, ESG, Environmental Social and Governance, which is sort of analogous to CSR as well, sort of sprung out of that as a way for investment managers to become a little less sort of emotionally attached to things. And, they're trying to look at it from a quantitative perspective.
They're trying to quantify the risk associated with Environmental Social and Governance issues. And we can get more into my feelings on that because I think that the quantitative side is important, but I also think that there are ways for companies to game the system in a way that you can have a company that isn't sustainable or isn't responsible in an ESG index or in an ESG investment, by the way they sort of play the game.
Anthony:
Okay. All right. Well with that in mind, then how can investors be sure that their investments actually measure up to the criteria?
Peter:
Due Diligence
I'll start off by saying you can never be 100% sure. The goalposts are moving basically all the time. The way we do it is, we spend a ton of time in due diligence. So if we use funds, so like a mutual fund, I'm not sure what they are in the UK, what they're termed, but if we use mutual funds we're basically lifting the hood and looking underneath to see, okay, what is actually in here? There's a big company here in the States called BlackRock. And they have made a ton of rhetoric around how they're going to transition into ESG, how they're going to transition into responsible investing, but the actual results haven't followed the rhetoric.
And when you lift the hood and look underneath and you see companies like, let's say McDonald's or Exxon in a portfolio that is considered, what do they call it? It is a, oh gosh, it's not going to occur to me here all of a sudden, an ESG fund. You have to question, is this real? Is anybody actually looking at this? Or are they just taking some arbitrary numbers and putting them in here? And that's what it looks like they are.
Anthony:
Right. Well, you mentioned BlackRock. Well, of course that's international. That's well-known.
Peter:
Yeah.
Anthony:
But, all big names seem to be making the same sort of claims,
UBS, HSBC, Fidelity, Investec, Jupiter, M&G, Standard Life, and so it goes on.
Peter:
Yeah.
Anthony:
Now you say you have to look under the hood. Do you have to look right into the detail? And I've got an example here which made me wonder how far you can go. Because you may be aware, and by the time we broadcast this I will have incorporated it in a podcast episode. There's a major coal project going on in India, and basically the banks won't touch it because it's coal, it's fossil fuel, and it's CO2 and all these sorts of things. So what's going to happen? Well, the National Bank of India is going to fund it. And then by coincidence, they're going to issue bonds for about the same amount. And, then all these companies are going to go along and buy the bonds and say coal, nothing to do with us. We're just buying bonds.
Peter:
Degrees of separation, right?
Anthony:
Absolutely. Can you get around that though? Things like that?
Peter:
It's really, really difficult. Over the years, we have diversified the way we manage assets for our clients. We really, really spend a lot of time, again, doing due diligence on the funds that we use for clients. But, what we've also done is we've also created portfolios that are individual stocks now. So, we have a little bit more control over what actually goes into the portfolios and we can do even deeper due diligence. We've got some pretty decent software from Morningstar that breaks down sources of revenue within a corporation. So if there's any particular source of revenue that's coming from fossil fuels, and you usually find this in utilities, for example, they'll break it down into how much is coming from nuclear, how much is coming from fossil fuels, how much is coming from alternatives, wind, and solar and geothermal and things like that.
And so for us, that makes a big difference because there's a lot of companies, there's a company here in the States called NextEra Energy down in Florida that is a big wind producer, but they also still have a ton of coal and nuclear facilities that just don't fit the mix. So while they're getting a bunch of accolades for being this big wind producer, people are ignoring the dirty side of the business still.
Anthony:
Yes.
Peter:
So going back to your original question, how do you do it? You just have to take time, or you have to find an advisor that you really trust, who believes in it, who lives it. The BlackRock's of the world and the Fidelity's and all the names that you listed there, they're sort of Johnny-come-lately's if you will. They weren't the ones who have been doing this for years, for decades.
I mean, we've been doing it since 2004. So, we've been doing it for 17 years now. And over that time, we have had the opportunity to really polish our processes. And we're always looking for ways to make our processes better, to make our portfolios as sustainable as it can possibly be. I mean, nothing's perfect. You still have to use roads to get from point A to point B. A lot of times when you're shipping products, we still don't have the electric infrastructure or the vehicles to transport products. So, you're still using fossil fuels that are on these different levels of carbon related to the company.
Anthony:
Unit Trusts
Okay. One thought occurred to me and that is mutual funds, unit trusts. They're always trading. They're always changing the investments. And that being so, it's going to be difficult to keep up with them isn't it? It's always a risk that they might prejudice their SRI credentials as they trade.
Peter:
Yeah. And that's where you have to believe in the firm that you're working with. You have to have a relationship with them. For example, we've got a really great relationship with a firm here in the States called Green Alpha. They're out in Colorado. I know the Chief Investment Officer. I know basically the whole team, and I have no concerns that they're ever going to put something in there. Whereas, if I am going to buy say the Fidelity Climate Fund - I'm just throwing the name out there just for the hell of it here - I have no idea what their motivation is. I have no idea where they're coming from other than, hey, you know, what? Sustainable investing is the fastest growing segment of the investment industry. We want in, not necessarily because it's part of their values, but because they see a value to the bottom line for the firm.
Anthony:
Investment Performance
Yeah. Yeah. Now one question which I think always comes up is, if I want to be an ethical investor, if I want to invest in something which has got all its ESG credentials, am I going to take a hit on my return? Am I going to get poorer performance than if I just go down the mainstream?
Peter:
Well, I will start out by giving the typical response that past performance is not indicative of future results. But the reality is, is that they are very competitive now. And, in many cases are showing better returns. So, there's two exchange-traded funds in the U.S. here that that mimic indices. We don't use them but it's a good way to show an example. So there's one, SPY, which mimics the S&P 500. And there's one, SPYX, which mimics the S&P 500 without energy stocks in it. And, the SPYX has over the last decade consistently outperformed the S&P 500, because it doesn't have the energy stocks in there. And, there's been a study by Jeremy Grantham of GMO, which is a hedge fund out of England. And he has looked at it from the perspective, what if we take out any particular sector from the S&P 500. Does it affect our performance at all?
And, this study basically shows that the difference between taking any individual sector out and the S&P 500 as a whole, from the worst performer to the best performer, over I want to say this was an 18 year period that he looked back on. The difference was 0.5%. So, I mean, 0.5 is not negligible over that time, but energy stocks, if you extracted them, you actually did better over that period.
Anthony:
Right. Okay.
Peter:
And, the reality is, is my friend Garvin, who runs the Green Alpha funds, he says, "you cannot benchmark where we're going with where we've been." And so, we need to look at it from a different perspective. We need to look at things. The way I try to invest is we want to invest positively. We want to invest based on where do we need to go as a society? Where do we need to go to be as resilient as possible? Because the reality is climate change, that train has left the station. We are going to feel the impacts of it at this point. So, how can we both minimise the impacts of it and deal with the impacts of it, and which are the companies that are going to be best suited to lead us there?
Anthony:
Sustainability Index
Okay. Do you find things like the Dow Jones Sustainability Index or the Financial Times equivalent and many other indices, are they a guide to investors in any way?
Peter:
In my opinion, what they're a guide to is, which are the best of the big companies that are out there relative to their peers? It's interesting. There's a book over your shoulder there called Cradle to Cradle by Bill McDonough. Bill was actually one of the people who I spent time with prior to starting my firm.
Anthony:
All right.
Peter:
And in his documentary,
The Next Industrial Revolution,
he has a quote in there and he says, "being less bad is still bad." And what I find with a lot of these indices like this is, you find a lot of less bad companies. And while that's better than if you just buy the ordinary index, it still is less bad. Now, a lot of those companies really are trying to make a difference, but I tend to be an anti-indexer. Because again, I'm going to go back to what Garvin said, "you can't index where you're going with where you've been."
So, I think we need to start looking at investing from a different perspective. There's a lot of institutional investors like university endowments and things like that, where they put into their investment policy statement that they can only vary from the index by X percent. They're tying the hands of the investment advisors. And the reason they are is because you go back to 2000, actually, you go back to 1998, 1999, and 2000, when the markets absolutely crashed because of the dot-com boom and all that.
You found a lot of managers were putting internet stocks into their more traditional investment vehicles when that was part of their investment policy. And so, they put a lot of these risk management guidelines in place so that way that didn't happen again. But what it's done is it's tied the hands of investment managers, so that way they're not able to actually manage. All they're really doing is making a quasi-index when the reality is, is you could just buy the S&P 500 or the Dow, or the Footsie or whatever it is and just follow that. If you want an investment manager, don't put handcuffs on them.
Anthony:
Okay. Okay. Well, talking about investment managers, I started off by saying that if people have money to invest, they should contact a qualified advisor.
Peter:
Yeah.
Anthony:
So, what's the questions I should ask my financial advisor?
Peter:
Experience
So the questions you should ask your financial advisor related to sustainable investing is, how much experience do you have in sustainable investing? Is it something that's new to you? Are you just learning about it or is there something that you've done for years or even decades? Europe is a lot farther along in the process than we are here in the States.
Anthony:
Mm-hmm (affirmative).
Peter:
Sustainable investing and responsible investing has long been a lot more of the norm than it is here. We're just finally catching on. So, ask them what experience they have. Ask about them from a personality perspective. For example, I'm sitting in a house right here. I have solar panels on my roof. I have an electric car parked out in the driveway. Is this something that is who you are or are you doing this just because it's the latest trend?
Now it's not a trend by any stretch, but is that the reason why you're doing it? Ask them about their due diligence process. Ask for a sample portfolio and then ask them to show you what is in the funds? What is under the hood? Because if you look under the hood, we've got a report that we give to clients called an Impact X-Ray. So if somebody wants to come work with us, but they want to see what they currently own, they send us their holdings, I put it through this screen and I can say, okay, in this particular fund you have 20% in fossil fuel involvement, and you have whatever percent in tobacco or in arms or whatever it is. And, that makes a big difference for folks who are trying to decide whether they want to work with us or not.
Peter:
So, you can ask them first, what do you currently own? And then ask them, how is it going to look if I transition to you? And I don't know if this is available in Europe or not, but there is a designation called CSRIC from the College for Financial Planning. It's a Chartered SRI Counsellor, which is a designation that I've received. I don't know if there's an equivalent over there or not, or if it's the same thing, so. But, that might be another thing to ask.
Anthony:
Absolutely. Well, I'm not an expert in it. Obviously our financial advisors are closely regulated, but I'm not aware of any specific qualification in sustainable investing, so that's an interesting question. Thank you, Peter. You've given us a lot of really interesting insights, a lot of things to think about. I'm going to send this recording to my financial advisor, I think, and see what he says. So, thank you very much for taking the time to talk to the Sustainable Futures Report. It has been really interesting.
Peter:
It has been my absolute pleasure, and any time you want to chat about it some more just let me know.
Thanks, Peter.
That was Peter Krull, CEO of Earth Equity Advisors. Find his website at https://www.earthequityadvisors.com.
Bill Gates
There’s a lot going on in sustainability at the moment. Bill Gates is doing a whole series of interviews because he’s just published a book: ‘How to Avoid a Climate Disaster’. I’m afraid I’ve not been able to fit him in to the Sustainable Futures Report interview schedule, but his book should arrive this week and my aim is to review it next time.
Patreon.com
A word to my patrons: thanks as always for your continuing support. My new part-work, An A-Z of Sustainability, available to patrons only: part 1 will be out on 1st March. A is for Action - and a number of other things, but you’ll have to be a patron to find out what. If you too would like to be a patron you can find all the details and sign up at patreon.com/sfr.
That’s it for this week. Thank you for listening.
I’m Anthony Day and that was the Sustainable Futures Report.
Until next time.
