Sustainable investing, once something actively discouraged by many financial advisors, has become a hot topic in the investment world in recent years. Chas talks with Sam Adams, the CEO of Vert Asset Management, about exactly what sustainable investing is, how it has grown in the investment space, and the many opportunities to ethically invest in social good that sustainable investing now provides.
Hello, and welcome to The Wealth Cast. I’m your host, Charles Boinske. On this podcast, we give you the information that you need to know to be a good steward of your wealth, and to enjoy the luxury of financial independence. As an investment professional, and passionate fly fisherman, the subject of sustainable investing is very interesting to me. Today’s guest, Sam Adams, CEO of Vert Asset, and I will discuss the current state of sustainable investing, and what the future may hold. I hope you enjoy the conversation.
Sam, thank you so much for joining me today on The Wealth Cast. Just delighted to have you here to talk about ESG investing.
I’m really happy to be here. Thanks, Chas.
We’ve known each other a long time, and I know there’s been some evolution in your career over the years. I think it ties in really well with the ESG story. Why don’t we sort of start at 60,000 feet with that story, and go into the details.
Well Chas, we know each other from what I call my first career, which was 20 years at Dimensional Fund Advisors, helping financial advisors create more successful investment experiences for their clients—and I am very passionate about sustainability—so my second act, if you will, is to help investment advisors create more sustainable investment experiences for their clients.
So let’s talk about the commonality between the two in terms of evidence, et cetera. Why don’t we tie those two things together?
Well, I think the first thing we should do is probably define what we mean by “sustainable investing,” because there’s probably a thousand different ways to do it or even thinking about it. And it’s gotten really popular in the last couple of years, and the investment industry has noticed, right? So they’ve launched hundreds of products to kind of soak up that demand.
That’s the good news, because now investors have more options, and they can do more with their portfolios. But the downside to that is, is that with that proliferation of products, has come a proliferation of names and terms—and nobody seems to be reading from the same playbook. So people will use terms like ESG, and SRI, and responsible investing and Impact Investing interchangeably, and the investor and the investment advisor is left kind of clueless about what everyone’s talking about.
I like to describe the landscape of sustainable investing in three categories. It breaks it down to make it a little bit more digestible, and I think most types of sustainable best can fit into these three categories. Those three categories are ESG—which stands for environmental, social, and governance—SRI, which stands for Socially Responsible Investing, and Impact Investing.
What I typically try to do is lay out a framework for the range of options there, so let’s book in those three options with two things that I know most people are really familiar with: Conventional investing—we’ll put that on the far left—that’s where you’re just trying to maximize financial return for any given level of risk. Right. We’re all comfortable with that.
And most investors, I think, by number, do it that way, and if they have an environmental or social concern, or something that they want to help out with, they usually do that in their “philanthropy bucket,” right? So think of that as the over on the right hand side. And we have those two bookends, conventional investing on the left where you make as much money as possible, and then philanthropy where you give it away.
Yeah, in the old days, we used to advise clients that if they wanted to invest in a socially responsible or ESG manner, they could take some of the profits they earned, and donate that to whatever charity or cause they thought was important. That’s changing, right? The ability to fine tune that is becoming—you just have a better ability to do it. But it’s still in an evolutionary period.
It’s definitely changing. And, and as an investment professional, I used to recommend that to investment advisors—“Don’t do that socially responsible investing stuff, you’d be better off maximizing financial return and contributing more to charity where you can have some real impact.” I don’t say that anymore, and here’s why: The original form of sustainable investing was Socially Responsible Investing. That’s one of the main categories. It originated, we think, from deeply ethical investors or religious investors who said, “I’m trying to maximize total return, but I have some no go areas. I can’t invest in alcohol, or tobacco stocks, or gambling or pornography, or—now there’s all kinds—weapons, there’s nuclear power, you know, Sudan, South Africa; you can exclude all kinds of things.”
Now it’s gotten even more sophisticated. You can invest for things that you care about. But in all of these cases, in the bucket that I call SRI, or Socially Responsible Investing, the investor is balancing their pursuit of economic value with their individual values. For these people, it doesn’t matter what returns tobacco stocks are going to have, you know? They’re either a cancer survivor, or they just hate tobacco—they’re just they’re not going to invest in it, no matter what. There’s a balance there. We’ve had examples, like the Quakers in the United States over a hundred years ago, encouraging their followers to not invest in any companies that profited from slave labor. So it’s not just the products, it’s also the processes or the ways that companies do things.
So that category was the main category for a long time. I put SRI right in the middle, right there between investing conventionally and philanthropy, SRI is right in the middle, because you’re balancing your need for economic value and individuals. To the right of that, right next to philanthropy, I put Impact Investing—which now people use that term for everything, but originally, Impact Investing was a private placement into a specific project or a company or something where you were trying to alleviate one specific need
Housing or, you know, whatever it might be.
Poverty or hunger, or, something, and here’s the thing: It was originally wealthy capitalists who said, “My nonprofit approach to this, my philanthropy approach to solving this problem isn’t solving it. It’s alleviating it for some time, but we’re still sending money to sub-Saharan Africa, and food, and medicine and resources. It’s only making it a little less worse for some time.” And they thought, “Maybe if we put a for-profit enterprise in there, it could continue to provide those services on its own.” So let’s use a common parable: We’ve heard the story, “You give a man a fish he eats for a day, you teach a man to fish he eats for a lifetime.” You give that man some capital, help him buy a boat and hire some people and run a fishing business, maybe he helps feed his village for a lifetime. I had to work a fishing analogy in there for you.
Thank you very much. I appreciate it! So from your view, you’ve got SRI in the middle, and then Impact. And then ESG? Where does that fall?
Yeah, ESG is on the left, right next to conventional investing, and here’s why. ESG has been adopted by some of the largest pension plans and biggest asset managers in the world. Where it started from their perspective, is that they were seeing things blow up in their portfolio, like the Bhopal incident in India many years ago, or the Exxon Valdez spill—or more recently, Deepwater Horizon and Volkswagen, and these companies are doing something wrong.
They get caught out and there’s a big scandal or a problem and the stock price gets decimated. So they wanted to find out if there was something that they could see in the data, or from the company, that would help them identify these risks beforehand. So they started looking beyond the balance sheet, beyond the income statements, past the normal company reports and saying, “Okay, what’s going on here?” That data was called “extra-financial” or “non-financial” data, and then it started being called Environmental, Social and Governance data.
Let’s give some examples. This company makes widgets, and they rely on free and abundant natural resources to make those widgets. The question which isn’t on a balance sheet or on the income statement is, “Are those natural resources going to continue to be free and abundant as the company grows?” Or on the other side—”Is there any pollution that they create when they make these widgets, and is it going to affect a community downstream or their local community as the company grows?” Is that something we should factor into the risks and opportunities of this company? Or, “How do they treat their employees? Are their customers happy? Do they have risk in their supply chain? Are they relying on cheap labour in Southeast Asia that might have some human rights or some safety issues?”
These things don’t show up on the annual report or the 10-K, but they could have a big impact on the company! We have examples of this through time. That is how ESG investing got started, and now it’s evolved—it’s only about 15 years old—now, it’s evolved to the point where these ESG data are becoming codified and standardized so that it becomes more like regular financial information on the company.
One of my favorite examples is, in 2012, the UK required all companies that are listed on the London Stock Exchange to report their greenhouse gas emissions. So at that moment, that number went from an extra financial figure, to a financial figure.
So from an investor’s perspective, just to tie everything together here, the data is now—there’s more of it, it’s more reliable, it’s statistically becoming more sound—because the sample size is getting bigger—and thereby you can make better decisions using the data than you could 15 years ago, when we were defaulting to just donating what we thought were the profits from causes that we didn’t want to support.
Yeah! I’m not going to tell you the data’s perfect—it still has ways to go. One of the financial advisors that we work with has a great analogy around this, he says, “You remember when we used to go on a trip, in a car, we open the glove box, we pull out this piece of paper, it was called a map! You’d figure out where you were and where you want it to go, and you’d plot a course and, and it worked, we got there. Well, we don’t do that anymore, right? Because we have GPS! So it’s more information—it’s more up to date information that gives it tells us where the road closures are, where the traffic is, the fastest route, the scenic route, where the cops are, sometimes. It’s just more information, so why not use that to help us smooth our journey?
For the person who is sustainably minded in general, they want better outcomes for people and for planet in their pursuit of profit—sustainable investing in the form of ESG investing makes a lot of sense; it’s very attractive to that person, because it doesn’t have to compromise on risk and return—it can have the same risk and return characteristics as the conventional portfolio. That’s what the big institutions are doing. When CalPERS and the Norwegian government and the Japanese pension plans—seven of the 10 largest pension funds in the world do this ESG investing—they’re not compromising on risk and return because they’re the fiduciary for millions of their citizens. So that’s very attractive to the sustainable-minded investor who has just a general desire to make the world a better place.
The SRI category in the middle is for the investor who has those no-go areas, or is super passionate about particular ways and things that are done in their portfolio.
And then Impact Investing really is a for-profit version of philanthropy. It’s like private equity or private debt. You could get your money back, but the real purpose is solving that problem.
So with that spectrum, investors can choose, “Okay, what’s right for me? My retirement assets that I need to rely on for my family going forward—maybe ESG is the most appropriate. For the money that I want to have an impact with and do good work with and provide some catalytic capital, maybe Impact Investing is the right way to go. And if I have some deeply held beliefs about certain things, maybe SRI is the way to go.”
So is it possible to quantify at all the trade offs and returns going from traditional investing, over to Impact Investing, et cetera? Is it a quantifiable number? In other words, if I want to do this socially responsible investing, what should I accept in lower returns, if any, for doing that?
Well, you would say that, in general, that spectrum plays out like: ESG is closest to conventional in terms of risk and return. SRI is a little bit further away—you get more variance—and Impact is more like private equity or private debt. You could triple your money, but you could lose it 100% as well.
So that’s a general category, but I want to be more careful than that, because within ESG, you could go really deep—focus into ESG, and have a lot of difference between market returns. Same with SRI. So I like to look at these things in terms of a tilt, much like we tilt our portfolios internationally, and to value stocks into small cap stocks, and to profitability, and momentum—these factors in returns. If we say we want to track the market closely, we can do a small tilt to ESG. If we want to really get sustainable, we can go all in, and our portfolio will look a lot different than the market. So it’s an investor choice.
So Sam, the tools are becoming sophisticated enough to allow investors to start to quantify those tilts, those trade offs
Yes. For example, there are now ETFs, and Index-like ESG funds, there are factor based ones, there’s actively managed ones, there’s focused funds, there’s all kinds of options, now—hundreds of them. At my old firm, Dimensional, I was part of the team that launched the sustainability core funds back in 2008. They have more than a 10 year track record now. That gives people a sense that “Okay, this is like a market portfolio, but it’s tilted towards sustainability, you can design a portfolio either to be really close to the benchmark, or a lot different as you will.”
This has sort of transpired over the last fifteen years, this evolution. What do you see five, ten years from today—what’s going to change?
Two things I think are going to happen.
One is that climate risk is becoming more obvious to people. The companies are facing the physical changes from climate. We’re also facing the transition changes from climate—people are realizing that renewable energy, over the long term, is cheaper and cleaner, and so we’re going to transition away from a fossil fuel or carbon-based economy.
So conventional investors, whether they’re sustainably minded or not, are saying “I need to integrate some of those ESG risks into my normal portfolio,” and that’s happening already. But someone’s gonna say, “Okay, I’m not going to pay attention to sea level rise, because I’m not a sustainable investor?” No! What they’re gonna do is say, “I’m gonna pay attention to that, I’m just not a sustainably branded strategy.” So that’s going to happen: ESG’s going to just become part of normal investing, conventional investing.
But then there will be a group of investors who will say, “I’m going to embrace that across my portfolio.” And there’ll also be a group of investors who say, “I want to really tilt more to that,” and that’s fantastic.
For me, the whole point—the whole reason why I left Dimensional and started my own company here to, to promote sustainable investing is because I think we need to do this. What we want capitalism to do is to evolve from something that only counts what it can measure—like PE ratios and book-to-market ratios—to counting the things that matter. We care about people’s well being, we care about clean air. Just because it’s hard to put a price on that, doesn’t mean we shouldn’t.
Now I’m a firm believer in markets, and the power of capitalism, so if we can get capitalism to start pricing those things, capital allocation decisions made by companies and by investors will reflect that we care about those things. If pollution is a cost, capitalism will steer us away from those costs. The problem is, these things have been up until now, externalities. They’re not priced by the market.
So as these factors—whether it be pollution, or global warming, or whatever it may be— become priced, you’ll be able to more accurately tilt your portfolio away or to those depending on your point of view.
Yeah. And the most exciting thing for me in this is that we’re seeing massive changes in the corporate environment because of this. There are companies who are pledging to be climate neutral—they’re all making these commitments because they know that this is a risk for them long-term.
They’re responding to investor demands. These big pension funds, and now a growing cohort of individual investors are saying, “Hey, we’re part of this group of investors who want and demand sustainability from the companies we invest in.” In the United States, one out of every four professionally managed dollars is managed on some form of sustainability criteria, so that means a big public company is looking at their investor base and sees, “Hmm, 25% of my potential investors are demanding I have an ESG report, I perform better on this.” In Europe, it’s 50% of all money is managed in that way.
So companies realize that they want to get better at this, and we can see that in their performance. Fifteen years ago, only 15% of the S&P 500 companies reported to this organization called CDP, which collects climate and pollution data. Now it’s over 85% of those companies—and what’s measured and what’s reported, gets managed.
So, from the point of view of the capital markets, it’s, Adam Smith’s invisible hand is forcing the hand of companies to address these issues, rather than regulation. It’s competing for capital, et cetera.
I’m glad you brought that up. As you know, Chas, I worked in the revolution of investment advice, from a commission-based delivery system, selling product to investors, to an advice-based proposition, where you’re working for the investor. Now, around the world—I worked in Australia, I worked in the U.S., I worked in the U.K.—the regulator had different approaches to this.
In Australia, and then later in the UK, the regulator effectively banned commissions. The Investment Advisor community had to move to a way of working for the client and charging a fee. That’s great news! But in the US, we got there too. We didn’t have a regulator do it, the market drove the change. Now, you can argue, “Which one’s better?” I think we need both in different particular cases overall, with regards to sustainability, but the great thing about a market driven decision is it’s not political. It doesn’t flip flop back and forth.
I like to say, Obama didn’t kill coal, and Trump isn’t going to save coal. The market price has decided that coal is not competitive with natural gas and renewables. That a final decision, right? No matter how we feel about it. So again, if markets are pricing this stuff, we can kind of not be as concerned about the policy and the regulation environment.
And there is the kernel—the absolute connector between your two careers—it’s that markets work, in both cases.
Absolutely. So here’s what happened to me, Chas. When I made that connection—I am a climber. I’m a passionate climber. I love mountains, and I’ve seen the devastation that’s happening to them over time, and I wanted to protect them. So I used to invest for total return, conventional bucket, give as much as I could to charities that helped protect the natural environment and mountains in particular, and that was how it went.
Then when I realized that this sustainable investing movement could actually help—we could use my capital and help other people use their capital to change capitalism, to start making solutions for our climate, our transition to a low carbon economy, I got so excited, I had to leave what I consider to be the best job in the world at Dimensional and start this company.
I was listening to your, one of your earlier podcasts with Dr. Joseph Pica, and he was talking about having a mission, and how entrepreneurs just feel compelled: “They have to do this.” When I realized the synergy of this solution—that it was going to get the capital markets, which I’m a big fan of, to take care of the mountains and the environment, which I’m a big fan of—I just felt compelled to do it.
And the momentum that’s occurring—it’s industry wide. But people like you pursuing that passion and investors in general, is going to be a big component of solving the long-term problem.
The number in the United States is doubling every year—the amount of money that’s going into ESG, mutual funds and ETFs. It’s incredible, the growth. But also the number of companies that are changing the way they operate, is as well.
A lot of people point to the Business Roundtable last year, saying that they’re going to change their model of capitalism from a profit-first, shareholder model, to a stakeholder model, where they’re looking after people, communities, the planet. That’s not a leading indicator, that’s a laggard. That’s a tacit admission that capitalism is changing, and everyone needs to get on board.
I think that’s just fantastic because we’re going to get the same efficiency of capital allocation and markets working, but we’re just going to start integrating those things that we care about.
Sam, as you know, I’m a passionate fly fisherman and as a passionate fly fisherman, that’s music to my ears, to hear that there’s progress being made on this on this really important front.
With that, I just want to thank you so much for spending the last half an hour with me, and talking to me about what you’re passionate about which clearly, more and more people are becoming passionate about every day. I hope to be able to have the opportunity to talk to you about it again in the future, as things continue to evolve, and I’m sure there are going to be changes. I really appreciate your perspective.
Thanks for having me Chas, and I’d love to continue the conversation. As you can see, I’m very passionate about this, and I love alking about the solutions that are coming down the pike to help us with these problems.
Thanks again, Sam.
Thank you so much for joining Sam Adams of Vert Asset and myself today to discuss the current state of the world in terms of sustainable investing and what the future may hold. If you’d like to learn more about Vert Asset, you can visit their website at www.vertasset.com. Thanks again for joining us. Have a great day.
Sam Adams is the founder and CEO of Vert Asset, which works to make sustainable investing easier for financial advisors and their clients. Applying the premise that “the more sustainable choices investors make, the more sustainable our world will become,” Sam and Vert enable investors to accelerate the transition to a more sustainable capitalism—and benefit from it as well.
Before founding Vert Asset in 2014, Sam was Head of Financial Advisor Services for Europe at Dimensional Fund Advisors.
He holds a BA from the University of Colorado, Boulder, and an MBA from the UC Davis Graduate School of Management.
Original Release Date: October 21, 2020.
This podcast was originally distributed on October 21, 2020, by Independence Advisors. Independence Advisors officially merged with Modera Wealth Management on December 31, 2020. Please note that the information provided in these recorded conversations may no longer be current or may refer to events that have since passed.
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