Morgan Stanley exec breaks mold on impact investing

Lily S. Trager is the managing director, director of investing with impact and head of Impact Solutions for Morgan Stanley Wealth Management. Since 2006, Trager has dedicated her career to sustainable and impact investing; she joined Morgan Stanley in 2014.

In her current role, Trager works to provide individual, family and institutional clients with investment products, research and other tools to capture the opportunities and mitigate risks posed by key sustainability and impact themes.

She was named to the 2018 class of MAKERS @ Morgan Stanley Wealth Management, a recognition that celebrates women who are groundbreakers, advocates and innovators in their given field.

Trager earned an MBA in Sustainable Business from Presidio Graduate School (formerly Bainbridge Graduate Institute); her bachelor’s degree in anthropology comes from Bates College. She also co-founded Women Investing for a Sustainable Economy (WISE), a professional networking group in New York City with chapters in Boston, Washington D.C., San Francisco, Toronto, London, Los Angeles and Philadelphia.

Bard MBA’s Emma Jenkins and Lucien Harlow-Dion speak with Trager for this episode of the Impact Report. The conversation centers on how Morgan Stanley entered the sustainable and impact investing space, how impact is communicated to clients, and the tools that the financial services firm uses to do so.

Lucien Harlow-Dion: We wanted to ask you a little bit about a day in the life at Morgan Stanley and what you do. Could you speak to the size of your team and how it’s organized, what your clients are looking for, and how you consult to answer some of their questions around impact investing?

Lily Trager: Absolutely. So, by way of background, sustainable and impact investing has been a priority at Morgan Stanley for over a decade through the visionary leadership of James Gorman, our chairman and CEO, and Audrey Choi, our chief sustainability officer and chief marketing officer, who launched Global Sustainable Finance at the firm level in 2009 to really build a leading focus and strategy across all of our businesses, to knit sustainable and impact investing into our core capabilities around over a decade ago. 

And if you think about the timing on that, right, with the Great Recession having been since 2008, the timing was really remarkable, because it showed a commitment from the highest levels of leadership across our firm to sustainable and impact investing as a future growth driver of our business — at a time when most of our competitors were ultimately reducing their resource allocation to ancillary, as it was deemed, activities.

And so, I think that that visionary leadership ultimately has set the stage for Morgan Stanley to grow and develop our commitment to the space over time. And that has been certainly driven by increasing investor demand, right? Whether it’s clients who are interested in a values alignment, making sure that their impact goals are met through their investments. Or investors, like long-term institutions, that might be focused on mitigating risk or the potential for outperformance, but that demand has really been a key driver in our innovation, as well. 

And so, in 2012, we launched the Investing with Impact platform across Morgan Stanley Wealth Management — really the first major platform led by a financial services institution, solely dedicated to sustainable and impact investing. And since then, we’ve seen significant momentum, both across our firm and the industry.

Today, nearly 50 percent of financial advisers — we have upwards of 15,000 financial advisers — are consistently using Investing with Impact investment strategies to help bill portfolios on behalf of their clients. And so, that penetration, that utilization by financial advisers and clients has really grown over time. And what we’re able to do is focus our objectives across investing this impact on adviser and client education, on providing innovative products and portfolio solutions, on developing cutting-edge tools and analysis, such as our impact reporting capabilities, Morgan Stanley Impact Quotient, which we launched around a year ago this time, in collaboration with Global Sustainable Finance. 

It also allows us to develop thought leadership and publications that are helping to promote better awareness of sustainable and impact investing and connect our clients to themes that might matter most to them, like mitigating or adapting to climate change, or helping to accelerate the flow of capital to communities that have historically been underserved: women; people of color; the disabled; LGBTQ.

And so, our team is pretty remarkable in the sense that we have a lot of industry experience over — well over 50 years of industry experience — and we work really closely with the broader ecosystem of sustainable and impact investing efforts across the firm to deliver value to our clients. And that value that we deliver is — can simply be referred to as the ability for clients to generate market-rate return, right alongside positive environmental and social impact, and all of the products and portfolios and tools and research that supports and underpins that.

Emma Jenkins: The impact investing space is full of complexity and jargon. So how do you help clients really get a good grapple on their impact and what it means to do so through their investments?

Trager: Sure, it’s a fantastic question; it’s a subject I love, and as I mentioned, the development of Morgan Stanley Impact Quotient was really a firm-wide collaboration for showcasing the best and the brightest thinking across many of our capabilities, both technology, data, client insight and distribution. And the problem we were trying to solve was to help investors really get at the environmental and social impact of their investment.

And the challenge we were facing is that there’s inconsistent data. There are hundreds of data providers, which are now seeking to deliver insights on environmental, social and governance dimensions. Much of it is sort of inconsistent, non-correlated, ultimately requires a significant amount of massaging, auditing, verifying and ultimately making useful, and there’s no consistent rating system globally, right? Certainly, there are some global norms, like United Nations Sustainable Development Goals, and some other asset class-specific rating systems, corporate rating systems, but assets, sort of investor portfolio level, there really isn’t.

And so Morgan Stanley Impact Quotient (MSIQ) seeks to solve that problem and what we have been able to create is, again, launched in 2019, a patent-pending application that sits on the desktop of our financial advisers and captures and jets the client’s unique impact profile. So, that can be a selection from over 100 environmental and social priorities. And once those goals are understood and ultimately placed inside of this technology application. Then the adviser can ultimately run a set of reports, up to 15 modules, which x-ray the client’s portfolio and provide transparency into how well their current investments are aligned with their environmental and social objectives. 

And, from there, we’ve developed an alignment engine, whereby advisers try to identify new investment opportunities that might be better-aligned if there are in fact areas of the portfolio that aren’t meeting the client’s impact goals. So, it’s this really end-to-end system, right? Understand and discover the client’s impact goals, assess and provide transparency into the client’s current investments through the reporting application, and ultimately evolve the portfolio over time, as needed, to better match the client’s goals. That end-to-end client-centric system, I think, is what differentiates MSIQ today.

Harlow-Dion: Could you speak to specifically the [thematic] tool kits that Morgan Stanley uses and how that helps investors align impact goals to their investments?

Trager: Absolutely. So, the idea behind our tool kit is to provide a client-facing guide to help navigate complex, often politicized themes from an investment perspective.

So, what are the risks and opportunities associated with transitioning to a low-carbon economy and climate change and fossil fuel-aware investing? What are the investment risks and opportunities associated with gender equity investing or faith-based investing? And, ultimately, our client-facing guides navigate and provide a continuum of investment opportunities that are actionable, right — that the client can say, “OK, now I understand the theme, not as a subject I’m reading on the front page of my local paper, but I understand the theme as an investment idea and how it relates to the types of strategies that I might own in my family’s or nonprofits’, a portfolio, both public equity and public fixed income, as well as on the alternative side for qualified clients.”

And so the way we really developed this stable of tool kits is based on both product proliferation, availability, but also market opportunity and finally client demand. And so, ultimately, that’s really centered us around six or seven tool kits: retirement investing, 401(k) investing, climate change and fossil fuel-aware, diversity, equity and inclusion, faith-based investing and investing for foundations around mission alignment. How do you take your mission statement and translate that to an investment policy statement and an investment plan? And those tool kits have helped over the years our clients and their advisers navigate these themes and apply them to constructing a portfolio. So, we’re looking at providing access to innovative products, aligned with the themes, broader portfolios that are diversified across asset classes, and then, of course, tools like MSIQ that can help to assess the alignment with those teams over time.

The above Q&A is an edited excerpt from the Bard MBA’s Sept. 18 episode of The Impact Report podcast. The Impact Report brings together students and faculty in Bard’s MBA in Sustainability program with leaders in business, sustainability and social entrepreneurship.

Correction: Trager’s title has been updated