Morgan Stanley's Audrey Choi: Focus on this macro trend

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Hello and welcome to The Way Forward. This is Ross Snell, news editor at Barron's Advisor, and I have the great pleasure today of speaking with Audrey Choi, Morgan Stanley's first chief sustainability officer and the founding CEO of Morgan Stanley's Institute for Sustainable Investing. Audrey, thanks so much for joining us.

Thanks, Ross. It's terrific to be with you.

I wanted to start by mentioning what we've heard from a few financial advisors. They tell us they don't care about environmental, social, and governance investing or ESG, and neither do their clients. So what would you say to advisors like that?

You know, Ross, well, I would say that that's really fascinating because that's not at all what we are hearing from our clients, and it's not at all what we're seeing in the data. In fact, just recently, the Global Sustainable Investing Alliance released the latest global numbers, and it shows that globally sustainable investing is actually a $35 trillion market. That's about 1 out of every 3 out of every $3 under professional management is actually focused on some sort of sustainable investing mandate as part of their investment thesis. In the US as well, it's about 1 out of every $3 under professional management where the clients are saying we want to consider sustainability and ESG. So, you know, I'm not sure who those FAs are that you're talking to, but the FAs that we're hearing and talking to are really inundated with interests. We've actually also at the Morgan Stanley Institute for Sustainable Investing, we've been tracking investor interest in in sustainable investing over the past number of years, starting back in 2015. And what we've seen is that it has been a really steady climb in the increase in interest. That most recently, 85% of individual investors say that they are interested in sustainable investing. And then when you go to large asset owners, 95% of asset owners say that they are either already pursuing sustainable investing or are considering how to integrate ESG across their portfolio. And then, you know, even closer to home at Morgan Stanley with our own financial advisors, we now have 88% of financial advisors using at least one of our sustainable investing products from our Investing with Impact platform with their clients. But 70% of them are what we call super users, and they are actively using and recommending at least 5 or more sustainable investing products for their clients. And, you know, recently Ross, actually just last week I was talking with Andy Saperstein, who's our co-president and the head of Morgan Stanley Wealth Management. And he said that frankly, these days, sustainability is a part of every single conversation he's having with clients.

Wow, those are impressive numbers and clearly reveal both growing interest in sustainable investing and that investors are putting their money where their values lie. So have you found correlations between advisors who are thoughtful and aligned with ESG and those who have had success growing their practices?

Absolutely. And actually, we have seen that some of our fastest growing teams are the ones who really were cutting edge on sustainable investing. And that, um, in terms of aggregation of new assets, we've also seen that, um, some of the sustainable investing products are among some of the fastest growing. In fact, you know, one product that we launched last year was a low-dollar minimum product focused on, um, protecting life in, in, in, in the oceans. And plastic waste reduction, you know, it was a $10,000 minimum investment that ended up being one of the fastest growing new product introductions that we've had on the platform in wealth management in quite some time. So we really are seeing that the leading edge advisors who are really knowledgeable about ESG, who can really advise their clients in a thoughtful way, that they are seeing a faster than average growth rate in their books. And also those products are often also seeing very fast aggregation of assets.

So it seems like savvy advisors really need to be paying attention to this space and to the products in this space going forward.

Absolutely. You know, and I think it's so critical, Ross, that you talked about savvy financial advisors. Um, you know, and one of the things that we've really seen from investors is that investors, by the time a client comes to a financial advisor and says, okay, Ross, as my financial advisor, I want to let you know, I've decided that I'm interested in sustainable investing. Tell me what you got. By the time a client is saying that, they've already done an enormous amount of research. And so it's really critical for advisors to have also done their homework so that they're able to go into that conversation in the best possible position to advise their clients. That's one of the reasons actually why several years ago at Morgan Stanley, we created the first of its kind impact director designation. And it's actually a whole set of qualifications, curriculum, and training that our advisors go through at Morgan Stanley to get this designation that they are an impact director, meaning they already really understand the basics and the fundamentals, and even more than that, around ESG and how to integrate it into a client's portfolio in a really meaningful, thoughtful, and sound way.

So it sounds like Morgan Stanley is putting the full weight of the firm behind efforts both to offer ESG-related products or sustainability-related products and also giving advisors all the tools they'll need to talk to clients about these products and about the issues. So how are Morgan Stanley's clients thinking about sustainability, either when they're raising money with the firm or when choosing how to invest? And how have those conversations changed over the last few years since you became Chief Sustainability Officer?

Yeah. You know, Ross, it's really been an incredible journey. So we started Morgan Stanley, we did start our focus on sustainable investing, frankly, much earlier than the rest of Wall Street. I actually started the Global Sustainable Finance Group in 2009. And you know, if you and your listeners, I'm sure, remember 2009 was a pretty chaotic time, especially in the financial services industry. And we at Morgan Stanley really kind of put a stake in the ground that even though it was 2009, right, we felt that very strongly. We believed back in 2009 that sustainability was very much a part of first, you know, top best-in-class investing. And that we wanted to really build this group and ultimately institute around understanding how do you really do best-in-class sustainable investing in a way that is consistent with all the tools and rigor of traditional investing enhanced by an understanding of these sustainability issues, environmental issues, and social issues and governance issues. But you're exactly right that the conversation with the clients and the journey has been so fascinating. You know, when we first started again back in 2009, and I would talk with financial advisors about what we were doing, there were, there were some, some of the early leaders who were incredibly excited and there are others who thought, Audrey, that's, that's really lovely. I'm glad that you're doing that. That seems really lovely. And it seems like a very charming thing to do. My clients aren't going to care. My clients come in and ask me every quarter about how are we doing? How much did we beat the market by? You know, how's— how are we doing financially? And they're not going to care, but, you know, maybe some wives might care. So maybe you could talk to the wives when we have the next conversation. And I'm only being a little bit facetious. I mean, I definitely did have some people who said, come to come Talk to the wives, cuz they care a lot about the family's philanthropy, the values, and maybe they'd be interested. But what's happened is over the years, you know, we at the Institute for Sustainable Investing really focused a lot of our research and our analytics around saying, well, look, is this a, is this something we're doing because it's the nice, the right, the good thing to do, or because it's really integral to fundamentals of understanding, you know, prudent and wise investing. And as we've been able to amass more and more data that shows how this is entirely consistent with and can really enhance your investment analysis, we've seen the client reaction change from, oh, isn't that charming? To, oh, that's quite charismatic and could be interesting, but you're still going to need to convince me. And now more recently, it has been something that people finally understand is absolutely commercial. That, you know, environmental and social governance issues are not in any way, shape, or form, so-called quote, extra-financial, but that they're actually core material to earnings. And, you know, I think more and more As we've been able to have more data and proof points, we've been really able to show that this perception that sustainable investing comes at a discount really is a myth. And I'll give you just a couple of quick data points, because I know that, you know, you've got a very savvy listenership here. We did a study where we took 11,000 investment funds. We examined their performance over 15 years, comparing the sustainable investing funds to the traditional funds. And over those 15 years, we found that actually the sustainable funds had no difference in performance except in one area. In terms of, uh, there was 20% less downside risk, which is a pretty interesting place to, to have to, to have to take a haircut. If you're gonna take a haircut in downside volatility, that's pretty good. And then more recently, um, we looked at, uh, the incredible bear markets that we had in 2019. And the incredibly volatile markets of 2020. And what was really interesting is, um, when you looked at the sustainable equity funds in 2019, uh, they actually outperformed traditional, uh, products by about 2.8% with less volatility. And then in 2020, they actually outperformed by 4.3% and again had lower volatility. So what we're seeing now is really more and more data just kind of ratcheting up that is showing that actually Thinking about environmental and social and governance issues and how that can affect the running of a company, the resilience, the understanding of risk, the understanding of opportunity, that all that is absolutely consistent with investing. And I think that's, you know, really been a big part of the movement of why we've seen just so many more assets shifting towards sustainable investing, asset managers trying to create product that's going to meet that need and really seeing this trend.

So outperformance combined with reduced downside risk, what's not to like?

Exactly.

But we have seen this sort of outperformance if you look at the average large-cap sustainable-oriented fund in recent years, as you mentioned. But in this year, we have seen a little bit of lagging, and I'm wondering how the conversation with clients changes if we go through a period where sustainable funds underperform market benchmarks?

Obviously, as in so many things in life, a lot of it is about timeframe, right? And I think that in the conversations that we've had, the investors who've understood that sustainable investing is not about a trend or a fad, it's about fundamentally saying, I want to look at all of the data. That could be relevant to how business operates and what's going on in the world and integrate that into my investment strategy. I think those investors really do see that it's not really about a week-to-week or even a quarter-to-quarter vacillation in trends, but they are saying, let's look at the macro trends as you would in any investment, right? Let's look at what's going on in the world. What are the macro trends that are going to affect industries, companies? And when you look at some of the pretty staggering events that we've had over the past year, year and a half, more and more investors are saying very clearly climate change is a mega trend that I need to think about in my investing. So we really have not seen a large shift in thinking because of this. And again, as I said, we've just really seen a continuation acceleration of interest in sustainable investing. That is thinking really about the long term.

And you obviously mentioned climate change as being a crucial issue that's getting a lot of attention right now. I wanted to ask you what aspect of ESG, climate change obviously being environmental, is getting the most interest from clients?

So one of the things we're seeing from clients now is that there is much more specificity that investors are looking for. I think there was a period a few years ago as people start to be interested in sustainable investing and there might have been a decent amount of interest in sort of what I'll call a vanilla ESG product, right? So some product that says, yes, in addition to whatever our normal investment strategy is, we're also looking at ESG factors. And so there, you know, then there is an interest in just sort of using ESG as a general enhancement to investing. But what we're seeing now, just as you sort of foreshadowed in your question, Russ, is that more and more people are saying, we're very specifically interested in the impacts that we most care about. And actually we at the Institute for Sustainable Investing, we We recently polled and surveyed investors about what themes they were most interested in, and the top 3 were climate change, plastic waste reduction, and circular economy. So just generally, you know, having a system that is focused on not generating so much waste and especially plastic waste, which has so many challenges to it, and community development. So what can we do to really increase the resilience of communities around the world? So yes, but climate change is definitely topping the list, and I think that even within climate change, more specificity that investors want around, is this something that is around the climate change transition? Is it climate change mitigation or adaptation? And what specifically, or is it about biodiversity? Is it specifically about renewable energy? So we're seeing investors just being much, much more sophisticated and wanting to be much more specific in how they achieve impacts that they care about.

When we talk about investors who are looking at ESG or involved in it, where is the interest strongest? And I'm talking about where investors are located geographically, and then also in terms of age.

That's a fascinating trend as well. Geographically, as I said, the latest global stats are that about $35 trillion of assets are focused on sustainable investing. Europe has clearly been in the lead for some time. And the latest figures show that in Europe, it's about 42% of the market is sustainable investing within Europe. The US is at about 33%. Um, Australasia is at 38%. Japan, um, had been low, but has really been increasing dramatically in recent years and is now at about 24%. Um, and in Canada, it's more than 60% of the market. Um, so we're seeing this really interesting trend there, but I would say in terms of velocity of change, um, US and Asia are really coming on gangbusters and we are seeing that gap starting to close. In terms of demographics, you know, as I said, we started surveying investors back in 2015 and what we saw then, and that has really been the case consistently, is that millennials were absolutely leading the way. Right. So in 2015, when we surveyed investors, 84% of millennials said that they were interested in sustainable investing, 76% of women and 67% of men. I'm sorry, 62% of men. A couple of years later when we did it, it was 86% of millennials, 84% of women and men were still down at 67%. Most recently, uh, you know, and this is now at a time when sustainable investing has been roaring ahead and that it's now about 1 out of every $3 under management. We now are seeing that 95% of millennials are interested in sustainable investing, 86% of women, and the men have now ratcheted up from the 67% they were before to now also in the 83%. So we're now really seeing that after millennials and women led the way for a long time, that we're really seeing, frankly, the whole market at in that 85 to 95% saying, yes, we are actively interested in sustainable investing.

So millennials leading the charge, but everybody is coming up, uh, with them.

Exactly. The gap has really been closing.

And what about in terms of client net worth?

You know, that is actually fascinating. In terms of interest, I think we've really seen interest the whole way along, you know, from, as we said, millennial investors who may not have had a huge amount of investable capital, you know, through other investors. But in the early years, frankly, sustainable investing, impact investing was much more accessible for high net worth investors. You know, I remember when we actually, in the early years, we were trying to say, how can we get impact investing or sustainable investing options to be accessible for other income bands? Because in the beginning, it really, you know, it was challenging to do if you weren't an accredited investor, able to potentially think about alternatives. And so we focus a lot on what we call the democratization of sustainable investing. And we started offering portfolios. And again, in the early years, so this would've been maybe, I don't know, 6 or 8 years ago, we offered our first diversified investment portfolios following the recommendations of our global investment committee that were all sustainability themes. And we were very proud that we were able to get the minimums down to $600,000 and $400,000 for the, you know, for the all equity or the blended or the all equity respectively. We've now gotten those minimums down as low as $5,000 where an investor can choose to focus on different ESG goals like climate or gender diversity or, um, uh, you know, or plastic waste reduction. And so it's been really fascinating to see that now we are seeing very robust demand across all levels of wealth and we're able to actually create product for all different levels.

And when you talk about that $5,000 minimum, is that a reference to your automated Investment platform, because I know that platform has sustainable portfolios.

Yep, exactly. That's through our, our Access Investing, where a self-directed investor can go on and choose at $5,000 to invest in a portfolio that's themed around gender or climate change or sustainability. Um, and then as I mentioned earlier, uh, a new product that we launched, um, in 2019, I believe, in conjunction with our plastic waste resolution to reduce plastic waste, that was a $10,000 minimum. And, uh, even with that, it ended up being one one of our fastest-growing new product launches on the platform, and it now has about $300 million worth of investments.

So money just continuing to flow into these sorts of investments. What's the cutting-edge thinking now on ESG, now that we've moved away from exclusion to engagement and we're looking to ESG to generate those benchmark-beating returns?

Yeah, I think one of the things that's been really fascinating over the last, I would say, 12 to 24 months is that increasingly investors are starting to think about ES and G actually as a nexus of issues, as opposed to, I think, before where people would say, well, I'm an E investor because I care about environment, or no, I really care about gender and other social issues. So I'm an S investor. As another would say, I'm really more just of a G, a good governance kind of investor. Increasingly now we've seen that people are really understanding more of those interconnections. In fact, one of the things that I've been spending probably the most time thinking about over the last 18 months or so really is this incredible interconnection, this intertwining of the massive climate crisis that we are facing, the global health crisis in terms of the pandemic and other health crises, and also sort of systemic social injustice. Right. And we've seen, unfortunately, all too much evidence this past year and a half about how climate change is having some of the most severe effects on lower income communities. Um, that also the pandemic is really, um, having disproportionate effect on vulnerable communities who already have been suffering from economic inequality and/or racial inequality. And that all of these things together really unfortunately reinforce each other. So we're seeing that we're spending a lot more time thinking about how do you address these issues at sort of a systems level, right? Where you're not sort of rifle shot, just going in and saying, okay, I'm just going to invest in affordable housing, or I'm just going to invest in a carbon reduction plan, but really thinking about this in systems. And actually, that's one of the reasons why last summer we actually announced a new initiative that I'm extremely excited about that we call our Sustainable Solutions Collaborative, where we actually went out around the world and sought out breakthrough thinkers who are trying to think about sustainability, not in a silo, but really in different ways, thinking about combining climate change and renewable energy and social justice or waste, plastic waste reduction. And we think that That kind of thinking that is really thinking about how do we solve these problems in a systemic way is really where the exciting future is going to be.

Interesting. And you mentioned this intersection of the pandemic with increasing evidence of climate change. And you also mentioned issues of racial justice. Obviously that was a huge issue in the wake of George Floyd's murder. Are Morgan Stanley's initiatives around racial equity investing capturing attention, or is it still early days to measure that?

You know, I think it may be still early days to measure, you know, performance and whatnot, but there certainly has been an increased focus from our clients, from our communities, and also Morgan Stanley in focusing on how do we really integrate social justice into investment theses. And so, you know, we did found sort of modeled on the Institute for Sustainable Investing that James Gorman Founded and chairs for us that we launched back in 2013. And we recently launched the Morgan Stanley Institute for Inclusion. We have also been having really interesting progress on within wealth management, focusing on different ways to look at diverse managers and also at different social inclusion themes, whether that be looking at again, diverse entrepreneurs that we be backing. We just launched a really exciting next level fund focusing on diverse entrepreneurs. We've also obviously been doing an enormous amount with our communities in terms of grant programs, et cetera. But also we've been focusing on other aspects of the S and how can we really mobilize capital markets to drive capital towards some of these important social goals. One example is, you know, in April of last year, you know, it's sort of towards the beginning of the shutdowns We actually worked with an Italian institution to underwrite a €1 billion COVID-19 social response bond for an Italian issuer. We underwrote a billion-dollar sustainability bond for Pfizer focused on supporting access to medicine and vaccines. And also we did an equity offering of, you know, $1.3 billion for Moderna to help them develop the mRNA therapeutics and vaccines. So we're seeing a lot more, both interest and and ways that we can bring together investors who definitely want to align their dollars with the search for vaccines, creating more equitable and just societies and communities, either close to home or internationally, and how to really put those sources and uses of funds together.

So many interrelated and interlocking initiatives underway at Morgan Stanley. Where do you feel personally that you've had the most impact on sustainability since joining the firm?

You know, I guess I would say that really the biggest thing in my mind has been the ability to drive sustainability as something that is not a narrow vertical, but really a horizontal. You know, when we founded our Global Sustainable Finance Group back in 2009, as I said, we were very, very conscious to to say this was not an initiative. This was not something that we were just gonna do out of sort of philanthropy or from a reputation perspective, although certainly those are important and critical, but we really said this needs to be a business group, right? This needs to be a business group and it needs to work not just with asset management or not just with wealth management, not just with our, you know, institutional securities group, our investment banking, but really across all of them because we firmly believe that sustainability, ESG, is something that really affects Everything, all companies, all stakeholders. And what's been really exciting is just the incredible response that we've had over the last 12 years as I've been able to work with my colleagues across every division of Morgan Stanley, that people have really understood this. And there is so much excitement across all divisions. And the thing that I'm most excited about is, you know, when you'll see colleagues across the firm innovating and really helping drive new products. And so whether that's, you know, recently with our incredible colleagues in the international equity in the equities division, we launched 20 different themed equity baskets around all sorts of different ESG themes across Europe, Asia, and the US. We've been a real leader in green bonds since the very first billion-dollar green bond offering back in 2013. And we've also been able to— so I think really I would say the most important thing has been that we have always regarded this as not a silo, but really a, you know, a red thread across our entire business. And then we've been able to do a lot of really, really, really exciting innovations around that. That as well. You know, again, when we started in, when we launched our institute in 2013, we said that one of the key pillars of our institute should be around capacity building across the whole industry. But also we, as I said, we saw that the millennials were really at the cutting edge of this. And we wanted to really focus on how do we build this next generation who I firmly believe represents the future of finance, right? This generation of leaders coming up who say, how could you possibly think think that profit and the impact on community, on the environment aren't interrelated. And that's where we wanna drive innovation. So we've been really excited that we've done a number of things over the years, an incredible partnership with Kellogg at Northwestern around a sustainable investing challenge where we challenge graduate students to bring us their best ideas for scalable financial products that can have a real impact, a fellowship that we do with the NextGen. And you know, I think all these things together are really making this a truly integral part of our business, of our talent strategy, of our product strategy, and obviously of what we can offer to clients.

Audrey, there's so much more that we could talk about with regard to sustainability and what Morgan Stanley is doing, but we are almost out of time. So in typical Barron's fashion, we like to end with an actionable idea. And so I wonder, what idea do you have to leave our financial advisor listeners with?

Oh, for your financial advisor listeners, look, I think it's, It's pretty simple. I would say that, and oftentimes I think, you know, the best ideas are, are simple and traditional, which is, um, ask your clients what they care about, right? Truly what they care about. Um, and I guarantee you that you're not going to have the reaction that you said at the beginning, Ross, which is clients saying, I don't care about this. You will find, whether it's, whether it's healthcare, whether it's affordable housing, whether it's social justice, whether it's climate change, whether it's biodiversity, whether it's gender equity, there is something that your client cares about profoundly. And if you as a financial advisor are able to say, that is absolutely something that we should think about in your investment portfolio. And I'm going to work with you to investigate the places where you can have the deepest impact. And oh, by the way, we now have the tools and the analytics to be able to let you do that in a way that not only is consistent with your financial goals, but that, you know, if we look at recent data that has shown evidence that it can really be, be really prudent and, and, and, and forward-looking investment that I think you're gonna be really happy with from both a financial and an impact perspective. So I would just, I would just encourage financial advisors to, to learn more about it and to have that conversation with your clients, cuz I think they'd be incredibly surprised.

Audrey Choi, we appreciate your time and look forward to talking with you again soon.

Thanks so much, Ross. It's been great being with you.

To our listeners, thanks for joining us. Tune in next week for another edition of The Way Forward.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.