Editor’s note: This article is part of a continuing series in which Paul Ellis, a well-known advisor and consultant on sustainable investing strategies, interviews industry professionals on the topics of millennials and sustainable investing. What follows is an interview with industry expert, Lily Scott Trager, director of investing with impact at Morgan Stanley Wealth Management.

To read other article in the series, click on the links below:

http://www.fa-mag.com/news/the-wise-woman-and-the-millennial-23738.html

http://www.fa-mag.com/news/millennials-leading-the-way-in-sustainable-investing-24019.html

http://www.fa-mag.com/news/millennials-mainstreaming-impact-investing-24487.html

/news/an-sri-collaboration-across-generations-and-genders-24873.html

/news/like-minded-people-with-purpose-and-passion-25457.html

/news/green-investing--all-in-the-family-26082.html

/news/sri-investing-well-positioned-for-growth-26394.html

/news/a-passion-for-healthy-living-and-sustainability-26918.html

/news/investing-with-a-personal-touch-27147.html

 

Ellis: Lily, tell us about your background from the time you got interested in sustainable investing through where you are in your career today.

Scott Trager: In my undergraduate education, I majored in anthropology and French, which led me to study abroad in Madagascar, where more than 80 percent of the plants and animals are endemic. The culture was incredibly unique, and I saw how Malagasy women who had limited or no formal education, no business mentors and very little access to capital were able to start small businesses, which supported their families and enabled them to participate in their local community and politics. They used capital to affect change on a very personal level.

I realized that having access to capital can create viable businesses that generate positive environmental and social impacts for business owners and their community. This formative experience quickly became my focus professionally.

I returned from Madagascar and realized I needed conventional finance and investment experience to participate in transforming the existing system and generate positive social and environmental impact.

When I graduated from college, I worked at a traditional investment consultancy and actively sought out opportunities with clients interested in “socially responsible” or “mission related” investing. I’ve had the good fortune of working at the intersection of investment management and generating positive impact for over a decade, and to work with mentors to carve out the role I wanted to play in a relatively nascent industry. We had to build infrastructure and create the investment opportunities that were not within the existing system.

Ellis: This was 2006, and what you were seeing was a lot of opportunity but not the structure to take advantage of it for the future?

Scott Trager: Yes, at the time, an impact-consulting associate or sustainable investing role were few and far between. To create this, it really required an entrepreneurial stance to leverage relationships in the industry and build a network and community as well. My early experience at Cambridge Associates led me to a role at Veris Wealth Partners, a boutique wealth management firm completely dedicated to sustainable and impact investing.

At Veris Wealth Partners, I became head of research and due diligence, which really shaped who I am today. I joined Morgan Stanley a little over two years ago following my career ambition to move investing with impact into the mainstream. To empower all investors, regardless of size, to align their investment portfolios with their values and generate positive social and environmental impact. So that’s my path!

Ellis: How many advisors are there at Morgan Stanley?

Scott Trager: As of March 31, 2016, Morgan Stanley Wealth Management has over 15,800 financial advisors and three and a half million client households. This presents an incredible opportunity for investing with impact.

Ellis: How big is the sustainable investment group that you lead within Wealth Management?

Scott Trager: The Investing with Impact platform, which seeks to generate market-rate returns while demonstrating positive environmental and/or social impact, is not a group or business unit unto itself but rather a collaboration across the firm. The platform is integrated across the wealth management value chain and is part of a firm-wide effort to contribute to solving the anticipated extreme resource constraints around food, energy and water that a human population of 9 billion by 2050 will create.

In 2013, James Gorman, our chairman and CEO launched the Institute for Sustainable Investing, which is led by Audrey Choi, with the mission to maximize capital for a sustainable future. From this mission, a mandate was developed to leverage the multiple businesses within Morgan Stanley and innovate new ways of providing access to private capital in order to solve complex social and environmental issues.

Ellis: So the investor and their advisor can utilize the platform as part of their overall investment strategy?

Scott Trager: Yes, the Investing with Impact platform focuses on flexibility and engagement with our clients, allowing both targeted allocations as well as full integration of impact objectives into an investment portfolio. To support this, we continue to develop thought leadership, research and education, as well as diverse internal and third-party investment strategies.

Ellis: Please talk about the products available to Morgan Stanley advisors and clients through the Investing with Impact platform.

Scott Trager: We believe in making the best proprietary and third-party asset manager investment strategies available to our clients. These mutual funds, ETFs, separately managed accounts and alternative investment opportunities (for qualified investors) have the ability to generate market-rate financial returns as well as measurable positive environmental and social impacts. Through our Morgan Stanley proprietary framework, we have clarified the spectrum of approaches across which the investment strategies currently fit. This framework should be considered alongside Morgan Stanley’s traditional asset allocation, analysis and investment selection process. 

The first approach in the framework is values alignment, which minimizes exposure to objectionable industries through restriction screening. The second approach is environmental, social and governance (ESG) integration. This approach proactively considers ESG criteria alongside financial criteria to identify opportunities and risks during the investment selection process. The third approach is thematic exposure, focused in terms of the sector or theme the client is trying to address. For example, sectors dedicated to sustainability related domestic and global challenges such as climate change, diversity and inclusion, access to affordable housing and more. The fourth approach is impact investing in private enterprises whose business models are designed to create positive environmental and social outcomes.

Where we see value-add opportunities as a firm we will innovate and develop new strategies on behalf of our clients.

Ellis: How do you communicate with Morgan Stanley advisors about the investment strategies available to their clients through the Investing with Impact platform?

Scott Trager: The goal is to make it as simple as possible to integrate the platform into an advisor’s day-to-day activities. That said, you know that successful advisors have created effective practice management systems and pivoting toward a new opportunity such as Investing with Impact may not always come easily. 

So one of the things we have done through both the thought leadership and research of the Institute for Sustainable Investing and the work of the Investing with Impact platform is to codify the client interest in investing with impact so that advisors can understand the demand.

Ellis: You mean client interest within the Morgan Stanley client base of over three million households?

Scott Trager: Correct. The Institute for Sustainable Investing released a study in the first quarter of 2015 that polled individual investors. The poll showed that 71 percent of individual investors are interested in sustainable investing and yet 54 percent of those surveyed believe choosing between impact and financial gains is a trade-off. I think that financial advisors are somewhat reflective of the general population and have some of those beliefs as well.

Ellis: I can tell you from my experience in consulting with them that they absolutely do.

Scott Trager: We followed up this poll with a study that set out to reconcile perception and reality. The study examined performance data from over 10,000 mutual funds and nearly 3,000 separately managed accounts over the last seven years and compared those that were self-identified as sustainable investing strategies to traditional strategies. What we found was that in 64 percent of the time periods examined, the sustainable strategies met or exceeded the median return of traditional strategies.

This study addresses performance concerns head on and allows the financial advisor to confidently engage with clients who are asking for investing with impact or offer the opportunity to clients who are not actively asking for it, but may want to have a conversation about aligning their investments with their personal values. The Investing with Impact platform allows advisors to connect with clients at a deeper level, which is resonating with both throughout the firm.

Ellis: What about advisors who say “Why should I integrate something new into my already successful business model”?

Scott Trager: I would repeat what a financial advisor that I deeply respect recently told me, “If you stop evolving, you stop growing”. An important trait of successful financial advisors is their ability to innovate and evolve their practice as the world and their clients’ needs and goals change. Leading advisors are seeing this as an opportunity to evolve and grow their business.

Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients. Lily Scott Trager is the director of investing with impact at Morgan Stanley Wealth Management.