Passive and ESG — two huge revolutions with one big difference: Sam Adams (Part 1)

SAM ADAMS is well known to financial advisers in the UK. He spent 17 years with Dimensional Fund Advisors, most of them in London, and started DFA’s European operation. Now based near San Francisco, Sam’s professional focus these days is on ESG. Vert Asset Management, the consultancy firm he runs with his wife Sarah, helps financial planning firms integrate ESG into their investment strategy and value proposition. In the first part of this two-part interview with ROBIN POWELL, Sam explains why, in his view, interest in sustainable investing will continue to grow on both sides of the Atlantic. The big difference with the transition from active to passive investing, he says, is that clients positively want ESG and are asking for it. These interviews are produced by Regis Media and are sponsored by GSI.

How did your interest in sustainable investing come about?

I’ve always been passionate about sustainability because I’m a climber, and I’m a skier. If you spend time up in the mountains, you notice climate change pretty quickly. I was launching Dimensional’s Sustainable Core Strategy in 2012 and, as I was talking to advisers about it, they were really happy with the strategy. But they asked all sorts of questions I didn’t have good answers to, so I spoke to my wife, Sarah. She had an investment consulting business that helped advisers roll out sustainable investing and impact strategies for their clients.

So I asked her, What are the funds that are out there? What are the stories that advisers are telling? And she said that evidence-based advisers didn’t like any of the funds that were out there. The funds were active, they were expensive, and they didn’t have an asset class remit — they kind of went anywhere. That doesn’t fit into a modern adviser’s portfolio. And I asked, What about the stories that funds and advisers were telling? She said they’re all promising 5% alpha, and you’re going to save the polar bears, and everything’s going to be great. I thought, Wow, somebody needs to step in there and provide a real service to advisers to help them do more sustainable investing in ways consistent with how they run their businesses now. Long story short: Sarah and I decided to start that business, and we called it Vert Asset Management.

So what exactly does Vert do?

Our mission is to make sustainable investing easier for financial advisers. We do that in a couple of ways. The main way is that we build investment solutions for the advisers. We only have one fund at the moment — it’s an ESG global real estate strategy. It’s actually the first ESG real estate fund available in the US, but it’s just a US-registered vehicle at the moment. So, that’s the product side, but a lot of the work we do is education and consulting. We have an education business at We do events, training and consulting to help advisers who want to integrate sustainability into their business. We show them how to build portfolios, how to talk about them with clients, and how to grow your business with a sustainable investing offering.

Can you see sustainable investing continuing to grow?

It’s definitely going to continue to grow quickly in the US and the UK. The reason I say that is that, before we shifted our careers to go in this direction, we looked at it and said: Is there a real demand for sustainable investing? Our answer came from the huge institutional investors. It turns out that ten of the 15 largest pension funds in the world, including the Norwegian Sovereign Pension Fund and the Japanese Pension Fund, are adopting ESG investing. If you think about that, they’re fiduciaries to millions of people. They don’t have a values-based or moral code that says we’re going to do it this way. They’re charged with being fiduciary and returning as much money as they can to their constituents.

So we realised this and said, this is something that adds value to the portfolio management process. Now it turns out that that the ESG investment proposition is also desirable to the sustainably-minded investor or consumer. So it’s this perfect world where you’ve got this great investment strategy, and you’ve got demand from clients. And that’s the part that’s different to the revolution from active to passive. With ESG, clients are actually asking for it! So it’s definitely going to last. In the US, the amount of money flowing into ESG strategies in 2020 was ten times larger than in 2018, so it’s more than doubling every year.

The jury is still out on how ESG will perform relative to the broader market over the long term. What’s your view? And are you concerned about an ESG bubble?

Yes, the jury is still out on performance. You’ve got to remember that ESG investing is only about15 years old, so we don’t have enough data to say with authority that it will perform this way or that way. Socially responsible investing (SRI) — excluding stuff you don’t like — goes back hundreds of years. We know that there are potential costs due to diversification issues, and traditionally SRI has been more expensive. So we’re just getting the truth out there and letting people decide that fit their business.

The bubble concern is valid. You should be concerned about all these things and take a look at them. But it doesn’t really bear up to closer scrutiny because ESG is unlike, say, small-cap investing or even value investing. People disagree with what an ESG stock is. If 200 stocks were ESG stocks, and then there were 10,000 that weren’t, you could see a bubble forming because all of this money going into ESG could potentially push the prices of those 200 stocks up. But if MSCI says Tesla is a poor ESG stock, and Sustainalytics is saying it’s a great ESG stock, well, we don’t have consensus, so all that money pouring into ESG is going to different stocks. It’s hard to argue that there’s a demand-driven bubble there.

Another concern that people have is “greenwashing”. How concerned should we be about that?

From a macro level, I’m not concerned; I’m flattered. If the conventional investment management firms are starting to dress their portfolios up to be a bit greener, that means they know that there’s demand, and they know there’s something to it from the investment side. That’s a good thing. Maybe they’ll get closer to doing it in actuality at some point!

From a practitioner’s standpoint, you need to be concerned about it because you need to know that the products you’re selecting really are doing what they say they’re doing. We’ve got some frameworks to help advisers to do that. You should look at the fund’s ESG tilt and ask, What are they holding? Are they actually walking the talk there? From a firm perspective, are they sustainable investment managers? Are they trying to help capitalism shift its way? Are they using their voice, their bully pulpit as a collective shareholder, to engage with the companies and try to improve the ways they’re doing things? If a fund manager isn’t engaging, a lot of investors will say, “I’m not interested in those guys. They’re just jumping on the bandwagon.”

There’s a perception that active management is the way to go when it comes to ESG because active managers hold company boards to account. But evidence suggests that they’re pretty bad at corporate governance.

Yes, there are two places where the word active comes up. There’s active management, which is stock picking and market timing, and then there’s active shareholder engagement. Being an active engager is about talking to the companies, putting proposals to them to change their ways for the better. Those are very different things. You can have a passive manager, who is an active engager.

There’s no evidence that active managers do better, from a performance perspective, in ESG than they do anywhere else. So don’t buy the investment management industry’s stories that ESG is this wonderful opportunity for active management to outperform. We don’t see that’s the case.

What’s your opinion on divestment versus engagement? From an ESG perspective, which is better?

We need both. We need people to divest, and we need people to stay and engage. I think it comes down to a personal preference. There are a whole host of reasons – moral and ethical – not to hold some of these companies. So I don’t think anyone should be criticised for divesting. It’s just a choice.

The original interview has been slightly edited for brevity and clarity.