Green Wealth Management Morgan Stanley’s Michael Pellman Rowland

February 10, 2014

JOHN SHEGERIAN: Welcome to another edition of Green is Good, and today we’re so honored to have with us my friend, Michael Rowland. He’s the Vice President and he’s the Financial Advisor and the Senior Portfolio Manager at Morgan Stanley. Welcome, Michael Rowland. MICHAEL ROWLAND: How you doing, John? JOHN SHEGERIAN: I’m doing great today, and it’s so good to have you on because we haven’t had someone who does what you do on the show before, but before we get into talking what you do every day, I want to talk a little bit about Michael Rowland. Michael, talk a little bit about the journey. How did you get here? How did you end up in this sustainability space doing investments and as a Senior Portfolio Manager at Morgan Stanley? What was your journey leading up to this? MICHAEL ROWLAND: Thanks, John. I started with Morgan Stanley back in 2002, right out of college. I was in Hamilton, economics major, and started looking for opportunities where I could make a difference, really kind of stand out from the crowd because there’s about 300,000 different financial advisors across the country and one of the things that sort of really rang true in sort of my own energy and my own heart was the idea was trying to find businesses and companies that I could invest in but that I also believed in and it’s sort of an interesting field. There’s a lot of different avenues, so to speak, that you can go down and really in a lot of ways, especially with my wife. My wife is from Canada and she’s out there talking about what she believes in all the time and we were talking a lot about ways in which to have a better impact on the world and it sort of coincided with this resurgence of sustainable responsible investing in the marketplace. Really back around 2005 was when it really started to catch fire and so I’ve just been sort of dedicating myself to learning as much as I can about this space to help clients align their wealth with their world view. JOHN SHEGERIAN: So, you do that now at Morgan Stanley but talk a little bit about for our listeners out there that want to look for the tuck-in firm that Michael works for, it’s called Vector Financial Group and you can go to VectorFinancialGroup.com and it will take you right to what Michael does and the page where you can find him and things of that such. Michael, talk a little bit about what Vector Financial Group does and then we’ll get into the blocking and tackling of the day to day of the actual investing. MICHAEL ROWLAND: Thanks, John. Well, the Vector Group is a wealth management team within Morgan Stanley. It’s myself and two other partners and we have a junior dedicated staff underneath us that manages the wealth for individuals, families, most of them high net worth, both in the U.S. and international. We work with some institutions and we do work with a number of nonprofits so clients will come to us with usually a specific issue or some sort of goal in mind. As it pertains to sustainability, a lot of times what the conversation will center around is they say. ‘Here are my beliefs. Here are the values that I have. Here are the things that I want to be basically reflected in my portfolio,’ so for somebody, that might mean that they want to be focusing on companies that are friendly to the environment or are friendly to animals or that have a board that has a lot of diversity, both in the gender and in race so maybe some clients say, ‘I want at least three women on the board,’ because actually, there have been statistics that have shown that boards that have a predominant number of women have better financial metrics so there’s this interesting sort of misnomer out there about how sustainable and responsible investing somehow handicaps your ability to make money and that’s really been one of the things that people have had to sort of get over to come to realize that in a lot of ways, it actually can be a profit driver so our conversation with clients really centers around helping them define what their values are and how that can be applied to their portfolio and then crafting an investment policy statement that actually outlines the dos and don’ts, what we’re going to include, what we’re going to exclude, right? So some people feel as strongly about not investing in maybe a VP or Monsanto or certain industries, like mining, that tend to have poor track records with regards to labor practices and slave labor so it’s a really interesting conversation and it really allows you to develop a really nice relationship and get into more about who your clients are and what’s important to them, not just about making money. JOHN SHEGERIAN: That is so fascinating so let’s step back and go through some of the metrics you just mentioned. First of all, there’s 300,000 or so financial advisors in the United States? MICHAEL ROWLAND: Right. JOHN SHEGERIAN: So, out of that, how small is your niche? MICHAEL ROWLAND: That’s a great question. I would say unfortunately, it’s pretty small in so far as the number of advisors that are advising clients in this space. The good news is that the SRI or sustainable investing universe itself is actually quite large. I think statistics recently have showed that about one out of every $9 that is going into mutual funds these days is going into some type of sustainable or responsible investing product so it’s capturing a large amount of fund flow, if I’m not mistaken, the fastest growing segment of the investment universe, in the last eight to 10 years. So a lot of people are on this train but they don’t necessarily have somebody to help them figure out which investments to choose from and that’s really where advisors like myself can add a lot of value because there are so many different funds that can fall under this umbrella of sustainable investing. Some of it’s environmental. Some of it’s social. Some of it’s simply governance, you know, which companies treat their shareholders well, so there’s a lot of different subfactors and screens that otherwise, would be very hard to discern so most people will simply just throw their money into anything that says social on it, right? So that just makes them feel better. I’ll choose this social fund in my 401K because I’d rather do that than the S&P 500 but they don’t necessarily know what’s in the portfolio and whether or not there might be an Exxon or another company in there that they may not necessarily think of when it comes to socially responsible investing. JOHN SHEGERIAN: So, part of your job is to deconstruct that and pull the curtain back and make it very transparent to them. MICHAEL ROWLAND: Exactly, and a lot of our work, actually the value we can add is in customization so one of the unique features we have is we can actually help a client put a portfolio together where they say, ‘Here are the areas that I mentioned earlier where I want to focus on and here’s what I want to exclude,’ and we can actually build it for them, as opposed to putting them into more of a cookie cutter sort of portfolio that is sort of a one-size-fits-all that may not necessarily align with the client’s wishes. JOHN SHEGERIAN: That’s fascinating and you’re kind enough and humble enough to say there’s probably not enough people doing this but therein lies the great opportunity for Vector Financial Group. MICHAEL ROWLAND: Yeah, so for us, it’s a real value add because we think we are one of the few elite teams that are doing this that has the financial background and the dedicated staff to put this into place because doing the customized work is a lot of work but we have the skills and the expertise to do it and obviously, a great firm named Morgan Stanley behind us to give us the platform so it’s been a huge source of business for us. JOHN SHEGERIAN: For our listeners out there that just joined us, we’re on today with Michael Rowland and Michael is a Senior Portfolio Manager at Morgan Stanley and if you want to learn more about what Michael does, and we’re talking about sustainable investing, you can look him up at VectorFinancialGroup.com. Michael, let’s talk about what we’re living through right now, the publicly traded seemingly sustainable companies, i.e. Tesla or Amy’s or Solar City and companies like that. Do they play a role in what you do? Do clients come to you and say, ‘Put those in my portfolio as well besides the more institutional mutual funds’? MICHAEL ROWLAND: Sure. This is actually a great question because a large part of what we do is actually not using funds. We tend to build the portfolios ourselves and actually pick the individual securities and the individual companies so a client in their portfolio will actually see a Tesla. They’ll actually see a Whole Foods. They’ll see companies in their portfolio as opposed to just investing in a particular fund so we don’t do a lot of delegating but yeah, for clients that this matters to, there is a special sort of breed, if you will, of investor that are very passionate about their beliefs and so of course, they’re going to come with some ideas already in their mind about what their portfolio should look like or what companies out there that they want to support so it’s very much an open dialogue where the client and us have that conversation to determine which companies are best to put in the portfolio while all the while, looking to keep the risks as low as possible because in this environment, obviously the risks, not just in the market but in the global economy in general are somewhat elevated and so you have to keep an eye on the risk as much as you do on the growth potential. JOHN SHEGERIAN: Let’s talk about trends in developments. You’ve been there eleven years so you know the ebb and the flow of business and how things go and you’ve lived through this huge financial crisis back in ’08 through ’10 so let me ask you this: Are you feeling that there’s some wind at your back? Are you feeling that people are truly more interested in sustainability and sustainable investing than ever before and more people are naturally gravitating towards your group than ever before? MICHAEL ROWLAND: Yeah, in fact, 2008 was a large catalyst for driving people into wanting to think more about the companies they’re investing in. There was so much sort of bad news that came out of the financial crisis, both with the financial sector, with real estate, with all the bad loans, so people starting thinking more about gee, I really want to start thinking more about what I’m investing in, not just for the risks that they pose but also I want to make sure I’m investing in companies that I believe in so that, in a lot of ways, has really put a huge initiative in the minds of investors to want to spend more time thinking about how they’re investing their dollars and so you’re seeing that having an influence now in companies. Just about every company website I go to these days has its own sustainability page now. It’s a full page that’s dedicated to all the initiatives they have to either reduce their water waste, to improve their supply chain, to donate back into their local neighborhoods, all of these sort of feel good sort of initiatives to show that they’re not just all about profits and I think some of that is window dressing and that’s where having advisors like us is important to understand who’s really doing the good work and who’s just sort of putting that up there because their marketing people told them to do so but yeah, I don’t think this is a flash in the pan. I really believe that this is a paradigm shift where you’re going to have more and more conscious investing taking place because you’re even seeing it at a much younger level. When younger investors are polled on what’s important to them, 45% or more rate having an investor that is knowledgeable about sustainable and responsible investing as a very important criteria so the younger generation that’s going to be taking over in the coming years, this is going to be one of the most important issues for them and it’s already happening with their parents and the parents above them so this exciting because I think at some point, the words social responsible investing will actually start to phase itself out and it’s just going to become a normal accepted practice of how you invest. JOHN SHEGERIAN: That makes sense. Walk us back through that statistic and do you have any other neat statistics like the one you just gave us on the women on boards? You’re saying the statistics prove that when there’s X amount of women on boards, that the company is more fiscally responsible? MICHAEL ROWLAND: Yeah, actually, there’s really amazing data that’s starting to come out because ultimately, in order to really prove that this works, you’ve got to have hard data and so there’s been a lot of great work being done on the part of many people across the world on trying to quantify the social benefits of investing consciously. Another really interesting statistic is that most companies that adhere to SRI practices have a lower cost of capital, which is huge, right? So this doesn’t mean that investors should be thinking about this. This means that the CFO of a major corporation should be thinking about this because even if you don’t necessarily believe in sustainable investing, you believe in a lower cost of capital to drive your profits, right? So if you have developed responsible practices in your business, the banks that are lending you money are going to recognize that. They’re going to feel more comfortable about your business and as a result, you’re going to probably get a better credit rating and as a result, have lower cost to finance your debt so there are many examples like that where it doesn’t necessarily just have to be sort of green. It can be just good business practice in addition to feel good. JOHN SHEGERIAN: Tell me some of the challenges you face on a regular basis. Are there still a lot of naysayers out there? Are there still people that say, ‘I’m not going to get involved with any of that.’ Do they look at you as a different type of banker, one that they downgrade immediately in their mind because all of a sudden the word social is involved and they figure it’s just not for them, there’s not enough capitalism involved and it’s too social? MICHAEL ROWLAND: Right. No, that’s very true. It’s a good question. I would say one of the biggest challenges is just getting people to sort of buy into the idea. Many are afraid of underperformance because they think that the sort of potential universe of investments they can choose from is going to shrink meaningfully and so that is going to somehow hinder their ability to perform well. The beautiful thing is that there’s enough statistics out there now to show that at worst, SRI does not impact performance so you’re not going to be any worse off by implementing these screens but there’s data now that’s actually showing that in many ways, it can actually enhance performance, actually make you more profitable because for example, if you had implemented a lot of the SRI, particularly the governance screens, to a lot of the financial companies before ’08, you wouldn’t have had a lot of those companies in your portfolio. You probably wouldn’t have had BP in your portfolio in 2010 when that stock dropped I think by more than two thirds after the disaster in the gulf. A lot of the companies that score very poorly on SRI metrics, particularly mining companies, tend to have much more outside downside, meaning when things don’t work out, they tend to really not work out for companies that score low so just by avoiding those companies altogether, you have much lower likelihood of having outside downside from the portfolio holdings you have so it can be a risk minimizer as much as it can be a profit maximizer. JOHN SHEGERIAN: Have you seen more companies buying into the cultural and DNA shifts, like you say, paradigm shifts, and do good at the same time? MICHAEL ROWLAND: A hundred percent. You’re even seeing it, most importantly, from the large corporations, from multinationals, like the Unilevers of the world that are out there talking about the next five, 10, 20 years, addressing climate change, addressing water shortages, addressing carbon initiatives to reduce their footprint, to improve their supply chain, and all of these things are going to ultimately lead to the bottom line and produce better business practices, which should in turn drive more investors to their stock, which will also help improve their performance so it’s a really beautiful sort of mix between having a positive impact on your business and having a positive impact on the world. JOHN SHEGERIAN: We’re down to the last three minutes or so, Michael, and we don’t often have socially responsible bankers on our show. In fact, you’re the first one so this is a fascinating conversation. We’re so thankful for your time today. Give us a little visibility on the future. Everyone wants to know where are we going, macro, both in terms of socially responsible investing and the sustainability movement on an international basis and also micro. What’s going on here in the markets in the United States? Give us your view on that. MICHAEL ROWLAND: I think one of the important things that’s going to be transpiring in the future is where you’re going to see the government coming more into play, designing more policies to support green initiatives because this has to be a marriage between the corporate sector and the governmental sector to work together on pro growth policies that are also taking into consideration the environment so whether it’s seeing subsidies for the solar industry, whether it’s certain limitations on the amount of greenhouse gases that you can emit that’s driving more corporations to solar. Strangely enough, I think Walmart is actually the largest solar panel company using the solar panels in the country so a lot of companies are using the government incentives to put these things into place which will ultimately drive costs down and make these businesses more sustainable so I think seeing more involvement at the governmental level is going to be huge and on top of it, I think you’re just going to see more and more of more investors demanding from their advisors, like us, that this be part of the conversation and that in and of itself is going to drive change because we’re seeing. I think Harvard has a big campaign to divest from their fossil fuels and the endowment. There have been a number of other major colleges and institutions across the country and pensions that have been divesting from certain industries that they see as having a risk in the portfolio, both socially and economically, so as more and more money shifts away from what is perceived to be problematic and shifted towards companies that are being looked at as sort of more part of the solution, that’s going to have a fundamental shift on the way companies are basically driving their business plans and will ultimately have a better impact on our environment and our society. JOHN SHEGERIAN: You feel positive about 2014 and beyond? MICHAEL ROWLAND: Yeah, I do. I’ve actually never felt more optimistic. In many ways, we’re seeing a lot of progress being made in this space and there’s no better way to really drive change than at the corporate level because it affects so much of our lives, the products we purchase for our homes, the cars we drive, the vacations we take, the air we breathe, the water we drink. All this stuff really affects everybody so this is something that all of us can be invested in, not necessarily just with their portfolios but with their lives because it can help to guarantee a much better future for the generations that are to come. JOHN SHEGERIAN: That’s awesome and for our listeners out there, you can socially and responsibly invest and you can do it with Michael Rowland and you can look him up on VectorFinancialGroup.com. Michael Rowland, you are an inspiring conscious capitalist and truly living proof that green is good. MICHAEL ROWLAND: Thank you, John.