ESG vs Sustainable Investing for High Earners | Pete Krull with Dan Pascone | Ep #42

TL;DR: Pete Krull, founder of Earth Equity Advisors and author of The Sustainable Investor, joins Dan Pascone to demystify sustainable investing for high earners who have heard the terms but never gotten a clear answer on what they actually mean. The conversation covers the difference between ESG and truly sustainable portfolios, why most major ESG funds from firms like BlackRock are what Pete calls "less bad portfolios" rather than genuinely sustainable ones, how sustainable investing has performed versus traditional portfolios, and where Pete sees the biggest investment themes for the next three to five years: infrastructure, water, energy transition, green real estate, and biotech powered by AI-driven drug discovery.

ESG and sustainable investing are not the same thing. ESG risk metrics measure what environmental, social, and governance factors could harm the company, not how the company impacts the world around it. Most major ESG funds use these metrics to tilt away from the worst holdings rather than build a genuinely sustainable portfolio. The result is what Pete calls a "less bad portfolio," which still holds Exxon, Chevron, and McDonald's at reduced weights.

A truly sustainable portfolio is built from the bottom up by asking which industries, sectors, and companies are leading the transition to a cleaner, more resource-efficient, more resilient, and more equitable economy, and then building from there. Pete's firm does not hold any fossil fuel sector investments and draws from a universe of approximately 750 stocks across all other S&P sectors.

Sustainable funds outperformed traditional funds considerably in the first half of 2025, according to a Morgan Stanley report. Over the long term, Pete's thesis is that the economy is shifting structurally toward clean energy, resource efficiency, and resilient infrastructure, and that this shift is agnostic to political administrations. In 2024, 96% of all new energy capacity coming online in the United States was solar, wind, or batteries.

Pete redefines SRI from Socially Responsible Investing to Sustainable, Resilient, Innovation investing. Sustainability reduces impact so future generations can thrive. Resilience addresses the reality of more intense storms, infrastructure failures, and climate-related disruption. Innovation, particularly AI in biotech and drug discovery, accelerates both. This is the new framework he argues for in The Sustainable Investor.

Infrastructure is Pete's highest-conviction theme for the next three to five years. Hurricane Helene's damage in Asheville illustrated what happens when transportation, communication, and utility infrastructure are not built for climate intensity. Those failures are going to continue, and building more resilient infrastructure will require significant investment regardless of what happens in Washington.

A study by Jeremy Grantham's group found that removing any single sector from the S&P 500 produces a performance delta of less than 50 basis points over long time periods. This is relevant to sustainable investors who avoid the fossil fuel sector: removing one sector does not materially change long-term performance outcomes.

A set of risk metrics that measure what environmental, social, and governance factors could materially harm a company, not how the company impacts the world around it. ESG is a due diligence lens, not a values filter. Most major ESG fund products use these metrics to tilt existing index allocations rather than build a clean portfolio from scratch.

The traditional term, evolving under Pete's framework to mean Sustainable, Resilient, Innovation investing. Sustainable reduces impact. Resilient addresses climate and infrastructure risk. Innovation, particularly AI in biotech and drug discovery, accelerates both.

When a fund or product claims a green, sustainable, or ESG label but holds underlying investments that contradict that claim. The most common form is a major fund family applying ESG tilts to an existing index, reducing but not eliminating fossil fuel and other controversial holdings while marketing as sustainable.

A trend where companies continue their sustainability transitions, retrofitting buildings, shifting to clean energy, diversifying workforces, but stop publicizing those efforts in press releases to avoid political pressure. The operational changes continue. The public communications pull back.

An economic model where products are designed to be broken down into constituent components at end of life, then recycled or upcycled into new products rather than discarded as waste. The concept from Bill McDonough's book Cradle to Cradle was one of the intellectual foundations of Pete's approach to sustainable investing.

Energy Transition — Solar, wind, batteries, and the broader shift away from fossil fuel infrastructure. In 2024, 96% of all new energy capacity coming online in the US was solar, wind, or batteries. This trend is global and accelerating regardless of US political cycles.

Water — Efficient water use and universal water access, particularly relevant to the US West and Southwest where water scarcity is an increasing constraint.

Infrastructure — Pete's highest-conviction theme. Transportation, communication, and utility infrastructure must be rebuilt to be more resilient to increasingly intense climate events. Hurricane Helene in Asheville illustrated what infrastructure failure at scale actually looks like.

Green Real Estate — Buildings that reduce energy and resource consumption. Retrofitting is a bottom-line economic benefit for companies independent of political context.

Biotech and AI Drug Discovery — AI is compressing the timeline and cost of drug discovery. Bringing a new drug to market currently costs approximately $1 billion and takes a decade. AI-driven in silico models can identify which compounds are likely to work for which conditions and potentially compress both the cost and the timeline significantly.

• 0:00 – Intro: Sustainable Investing with Pete Krull

• 0:38 – Pete's Background & How Earth Equity Advisors Was Born

• 3:22 – What Sustainable Investing Actually Means

• 5:59 – ESG vs. SRI: What Most People Get Wrong

• 8:23 – How Earth Equity Builds a Truly Sustainable Portfolio

• 11:06 – How to Make Money Investing Sustainably

• 16:07 – Greenwashing: How to Spot It

• 20:09 – Public vs. Private Markets in the ESG Space

• 23:47 – Top Trends in Sustainable Investing (3-5 Year Outlook)

• 26:12 – Lightning Round & Pete's New Book

Pete Krull has been building sustainable investment portfolios since 2004, well before the current wave of ESG marketing made the term ubiquitous and well before it became politically charged. What he offers in this conversation is something most sustainable investing discussions do not: a clear, direct explanation of the difference between what most firms sell as sustainable and what genuinely sustainable investing actually looks like.

The distinction starts with ESG itself. Most investors assume ESG measures a company's impact on the world. It actually measures the world's impact on the company: the environmental, social, and governance risks that could materially affect performance. When BlackRock or Vanguard builds an ESG fund, they typically take an existing index, layer on those risk metrics, and reduce but do not eliminate holdings in companies like Exxon, Chevron, and McDonald's. The result is a less bad portfolio, not a sustainable one. When a client gets their semi-annual report and sees those holdings, they call to ask what happened to their sustainable mandate.

Pete's approach is bottom-up: starting with the question of which industries, sectors, and companies are leading the transition to a cleaner, more resource-efficient, more resilient, and more equitable economy, then building the portfolio from that universe. His firm manages both fund portfolios using thematic funds across energy transition, water, infrastructure, green real estate, and biotech, as well as an individual stock portfolio drawing from approximately 750 names across all S&P sectors except fossil fuel energy.

On performance, Pete is direct. His portfolios skew toward growth, which means they can underperform in value-driven years. But he cites a Morgan Stanley report showing sustainable funds outperforming traditional funds considerably in the first half of 2025, and points to the counter-intuitive historical pattern: clean energy actually outperformed fossil fuels during the first Trump administration, while fossil fuels outperformed during Biden. The trends are driven by economics, not politics.

The episode closes on Pete's new book, The Sustainable Investor, published by Wiley, which redefines SRI as Sustainable, Resilient, and Innovation-driven investing, a framework he argues is more honest, more useful, and a better story for both advisors and the investors they serve.

Pete Krull (00:00): Investing is, it's sort of like watching grass grow, right? If we average 12% per year, theoretically, you should be making 1% per month. That's the idea. And so when we talk about how you're gonna make money investing sustainably, it's about understanding the long-term. It's about understanding that this is a paradigm shift that is actively happening right now. And while we're probably not going to outperform every year, when you look at this over the long term, like any true investor is going to look at it, we believe that odds are you're probably going to perform at or better than the market.

Pete Krull (02:32 approx.): My degree is actually in communication. It's not in finance or business or anything like that. Doing sustainable investing, I think part of our challenge is always how do we communicate our value to clients? I started with Merrill back in 1998. In 2004, I hung up my shingle using LPL as my broker dealer and started what at the time was Krull and Company, but would eventually morph into Earth Equity Advisors. At the time I was dating my wife Melissa, who has PhDs in microbiology and molecular genetics. We were having conversations about the environment and climate change. And about the same time, one of my clients introduced me to a gentleman named Bill McDonough. Bill at the time was considered the preeminent green architect in the world. He had a book called Cradle to Cradle. Cradle to Cradle is sort of a tome on circular economies. That idea that when you're done with something, it doesn't go into the trash. You can break it down into its constituent components and use those to either recycle or upcycle into a new product. And not long after those conversations, I was like, I think I can do this. That was 21 years ago.

Pete Krull (05:59 approx.): They've probably heard of two things. They've probably heard of ESG and SRI. ESG means environmental, social and governance. And it came about from a paper related to the United Nations about how it would be good to start integrating this into the due diligence process. What most people think ESG is, is not necessarily what it actually is. If you listen to politicians or a lot of the media, you would think that ESG is basically rating a company's impact on the world around it. But it's actually just the opposite. ESG risk is what is the ESG risk on the company. So what's the environmental risk on the company? If one widget manufacturer has a plant on the coast of Florida and another does not, the first one has a material environmental risk associated with it because it gets hit with hurricanes. And so that's what ESG does: it provides more information beyond just PE ratios and debt and profitability to help you look at things that are material but just aren't typically counted with fundamentals. The way most investment managers like the BlackRocks of the world create their ESG portfolios, they'll typically take an existing index, layer on top of it those ESG risk metrics, and make allocation adjustments. But ultimately what you end up with, using Exxon as an example, it reduces the exposure but it doesn't necessarily eliminate it. Instead of making it a sustainable portfolio, it actually makes it what I call a less bad portfolio.

Pete Krull (11:06 approx.): From our perspective, a sustainable portfolio is more bottom up. It's asking the question, what are the industries and sectors and companies that are leading us into a cleaner, more resource efficient, more resilient and more equitable economy? And how do we build a portfolio based on those metrics? When we put our fund portfolios together, we are putting together a good core like you would for any modern portfolio theory: large cap, mid cap, small cap, international, emerging markets. But what we complement it with is thematics. The thematics include energy transition, water, infrastructure, biotech, and green real estate. Infrastructure in particular, we live in Asheville, North Carolina. Just about a year ago, Hurricane Helene came through and did a ton of damage. What we saw was a failure of transportation infrastructure, a failure of communication infrastructure, and a failure of utility infrastructure. And those failures are going to continue going forward as we have more intense storms. I look at it not just as a risk but also as an opportunity.

Pete Krull (17:17 approx.): Morgan Stanley had a report that came out within the last two months saying that the first half of 2025, sustainable funds outperformed traditional funds considerably. And you know, that feels good to see, to know that in spite of the sort of negative political pressure we're feeling right now, it's actually performing even better. I showed two four-year charts on my client webinar. One showed fossil fuels going up and clean energy going down. One showed just the opposite. Most people chose the one where clean energy was going up as the Biden administration. It actually was just the opposite. It just shows that these trends are agnostic to what's going on in Washington.

Pete Krull (20:19 approx.): When I'm putting our individual stock portfolio together, I've got a universe right now of about 750 stocks that I choose from. The only sector that we don't have in there is the fossil fuel sector, the energy sector. And that's an important distinction: when you see energy in the S&P sectors, that does not include solar, wind, batteries, geothermal. That is only fossil fuels. Solar typically comes under the technology sector, wind typically comes under industrials. A study by Jeremy Grantham's group went back about 50 years and showed that if you took out any specific sector out of the S&P and ran its performance, any sector you pull out, the delta between the worst performer and the best performer was less than 50 basis points. So pulling any one sector out does not necessarily negatively impact your performance.

Pete Krull (28:38 approx.): My current favorite book is The Sustainable Investor, which just came out. It's published by Wiley. There's one thing that I actually haven't mentioned yet. The traditional meaning of SRI was always socially responsible investing. But the S still needs to be sustainable. We need to reduce our impact so that way future generations can thrive just as much as we have. But the R needs to transition to resilience because, again, having dealt with Hurricane Helene, having looked at the devastation in Pacific Palisades, we need to be more resilient and we need to be building that into our portfolios. And then the I is innovation. Innovation will help us be more sustainable. Innovation will help us to be more resilient. And I think that's a new paradigm, a new definition of SRI going forward. The book is written both for financial advisors and for the lay public. It gets into the history of sustainable investing, understanding what ESG is, how to actually create a portfolio, how to put together a universe like we have. If you go to https://SustainableInvestorBook.com you can order it right from there.

Dan Pascone (36:05): That's it for the episode. You can find our podcast along with our newsletter and YouTube channel all for free at https://makingsenseofyourmoney.com. And as always, prioritize your version of a rich life.

• Earth Equity Advisors: Pete Krull's Practice

• The Sustainable Investor by Pete Krull (Wiley)

• Dollars and Change podcast by Pete Krull, available on YouTube, Apple Podcasts, and Spotify

• SEC: Investor Education Resources

• Morgan Stanley report on sustainable fund outperformance in first half of 2025, referenced by Pete in the episode.

• Jeremy Grantham GMO study on sector removal and S&P performance delta, referenced by Pete in the episode.

• Making Sense of Your Money

• Podcast Archives

• Tailored Wealth

• Dan Pascone on YouTube

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