The idea that if you want to invest sustainably you need to use a traditional active manager is nonsense. That’s the view of SAM ADAMS, the former Head of Financial Adviser Services for Dimensional in Europe. Sam now runs Vert Asset Management, a consultancy based in California that works with financial advisory firms on developing their ESG strategies. In the second part of this two-part interview with ROBIN POWELL, Sam explains why firms that don’t communicate with clients and prospects on social and environmental issues will lose out to firms that do. These interviews are produced by Regis Media and are sponsored by GSI.
About ten years ago, there were very few evidence-based advisers who were using ESG funds. But that has changed. Do you think evidence-based investing lends itself to ESG?
I think it lends itself perfectly well. Think about a factor-based strategy like GSI. The investment challenge is to deliver a return within certain bounds of the market while capturing these dimensions or factors or risks that you’re looking for. For example, I want small-cap, I want value, I want momentum, I want ESG. That construction process is very similar. To the degree that a firm has experience tilting to these different market areas, away from a purely market cap-weighted approach, ESG fits right into that. You understand the constraints, the trade-offs, how far to go to get certain outcomes, and it’s an excellent application of the technology.
Studies have highlighted a gap between what clients want regarding ESG and what advisers THINK they want. What do you make of advisers insisting that their clients aren’t interested in ESG?
At first, it’s hard to reconcile that. The surveys show that more than 75% of investors, when asked, say they’re interested in sustainable investing, and yet they’re generally not asking their financial adviser about it. But if you look at it a little deeper, it’s not that difficult to understand why. If I wanted to find an organic or sustainable meal, I’m not going to drive down the street and go to McDonald’s and ask them, “Hey, got anything organic?” and then go to Burger King and ask them. That’s not how we do that anymore! We go online, and we look around. We say, “Who’s got what I’m looking for?” The sustainably-minded investor, who’s aware that it’s possible, is checking advisers out online before they go. They’ll know if you have an offering or not, based on what they see, based on your brand, based on what you offer. So if you don’t have it on your website and people are not asking for it, that’s not surprising!
So the other part is: there’s an awful lot of people who don’t know that it’s available. But try this out. Ask somebody, “If you could invest the way you invest now, with similar expected returns, but you could reduce the carbon footprint or the carbon emissions in your portfolio by 50 or even 80%, would you do that?” I think a lot of people would say yes.
So how should an advice firm engage with clients and prospects about ESG?
I always like the honest approach. Just come out and say where you’re at on your journey. If you say, “I’m looking into this, I’m starting to see what we can do with regards to our investment strategies, and we’re building something, and I want to let you know about that”, great. If you only have ESG-modelled portfolios next to your conventional modelled portfolios, say, “This is what we have at the moment; we can’t make impact investing or SRI or custom portfolios.” If you can do the whole thing, do that.
The only thing I would say is don’t ignore it. You have to come out, at this point, and say to clients: “This is what we’re doing around sustainability. It’s that big a part of the conversation. I don’t see that you can not have a position on it. From the standpoint of figuring out what to do, there are lots and lots of resources out there to help you do that, but definitely, get started.
What about marketing and business development? How should firms incorporate the ESG niche into that side of things?
I’m glad you said niche because our education programmes talk about community marketing. I always say that community marketing is niche marketing, but people got so scared of niche marketing that they don’t like the word and rebranded it “community marketing”. A niche is powerful because you’re going deep, getting into what somebody’s really interested in or something really particular to them. Like retiring dentists: I know what their challenge is, that’s good, but then I can only get retiring dentists! That’s not a very big market. So that’s scary. But there’s a lot of power to going deep into someone’s particular issues.
Here’s the wonderful thing about the sustainably-minded investor: it’s deep – you can get right into what they’re most passionate about – but it is not narrow. Some people are concerned about sustainability from every part of the country, every part of the world, every profession, all across the socio-economic status, all across the political spectrum. There really are people everywhere who are interested in it. You can put a message out there that you have solutions for the sustainably-minded person, and you’re not going to shrink your universe.
There’s a concern here in the US that, with sustainability, you’re choosing a political side, which is just a weird aberration of recent history that will be cleaned up pretty soon. The younger Republicans have figured out that climate change is real! It’s just a great business-building opportunity.
In our workshops, we give advisers ways to present their offering in more subtle ways, in more direct ways, depending on what your business is building and your brand and your positioning want to be. But at this point, people aren’t not going to eat at a restaurant because they’re serving organic food. It’s not like people will not invest with you because you have a sustainable investment option.
Which are the advice firms that are doing ESG best? What do they have in common?
We do have some advisory firms here in the US who have been doing it for a long time and doing it very well. But my definition of “doing it well” is any firm that is moving along the track. If you think about an IFA firm and where you want to be in 2025 or 2030, can you imagine not having an ESG investment solution? It’s hard to imagine, so begin with that end in mind. You might say, “By then, I want an ESG solution. I want a values-based or socially responsible investment solution where I can tune the custom portfolios to clients’ specific desires, for the rarer client that needs that.” Or you might say, “I want some impact investing options, with philanthropy, a full service integrating people’s humanity with their money.” It’s about reattaching humanity to money. Where are you on that journey? Are you just building a set of ESG portfolios to go alongside your standard portfolios now? Great! Are you adding the next level? That’s what I think is excellence at the moment: anyone who is just developing their offering even more than they had.
What would you say to advise firms that aren’t offering sustainable funds?
Are you interested in going out of business? If you’re leaving the industry, fine. Sell your book to somebody and walk away. But look at the numbers. Look at the next generation of millennials and what they want. Over 90% of them demand a sustainable investing solution.
I think it has more to do with when that person learned about investing versus when they learned about the internet. Let me explain this. If you learned about Facebook or Twitter or any of these things where you “like” something or you “share” something, if that’s your conception of the world – “this is something that I see, I like it, I’m going to give it a thumbs up and share it with my friends”, and it blows up on the internet and becomes a thing – that person has kind of a participatory model to engaging with the world. When they learn about investing, and an evidence-based investor comes along and says, “You know, you have to own all 15,000 stocks that are out there – even these you can’t stand,” they’re like, “I’m not going to thumbs up or share that I love ExxonMobil or what have you.” It just doesn’t make any sense to them.
More people now have learned about the internet before they’ve learned about investing, so the new model isn’t a gambling casino model of the stock market; it’s a gardening model. Tell someone to go feed nutrients to the weeds that they don’t want in their garden, and they’re going to say, “No! I’m going to pull those out!” It doesn’t make sense to the new investor.
If this interview has inspired an adviser to explore ESG, where is the best place to start?
We have a range of education programmes, including a communications boot camp, on talking about sustainable investing with clients. Just go to VertEducation.com and sign up. Start asking questions of your asset management partners, the investment managers that you use. Most of them these days have resources around sustainable investing, and if they don’t, look elsewhere! And read up on it. I’m currently writing a book with Larry Swedroe. It’s called The Essential Guide to Sustainable Investing. It’s effectively a how-to manual. It’s not finished, but we hope it’ll be done by the end of the year.