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October 26, 2010
Will the Principles for Responsible Investment Prevail in the US?
    by Robert Kropp talks with Peter Kinder, the founder of KLD Research and Analytics, about his self-described gloomy assessment for large-scale uptake of the Principles in the short term.

The annual PRI in Person conference, held earlier this month in San Francisco, was surely a triumphant occasion for the Principles for Responsible Investment (PRI). The United Nations-backed organization has seen its membership increase to over 800 signatories from 45 countries, with approximately $22 trillion of assets under management. Furthermore, in what must be construed as a response to the financial crisis, the number of new signatories since July 2009 alone now stands at 268.

The increase in US-based signatories to the PRI would seem to be cause for optimism as well. According to the PRI's
2010 Report on Progress, the number of North American signatories to the PRI grew the most in 2009. At present, the number of US-based signatories to the PRI stands at 120, the highest number recorded by a single nation. Seventy-two of those signatories describe themselves as investment managers.

So why does Peter Kinder offer a gloomy assessment of the chances for significant uptake of environmental, social, and corporate governance (ESG) considerations in investment decision-making in the US, at least for the next two years? In a recent blog post entitled
Principles for Responsible Investment: A Tough Road Ahead in the US, Kinder wrote, "Much of the PRIís success has come from strong support in Europe and Australia...Canada apart, North America has proven resistant."

"I regret to say that I donít believe that the US situation will change for at least two years," Kinder continued.

In an effort to learn more about his perspective, spoke with Kinder, who founded KLD Research and Analytics, an ESG investment research firm, in 1988. Kinder continues to consult with MSCI, whose acquisition earlier this year of RiskMetrics Group included KLD. He also serves on the boards of the
Capital Institute and the Center for Political Accountability, and is a member of the Circle of Advisers for the MBA Program at Marlboro College in Vermont, as well.

"Why do I have a gloomy view of the uptake here?" Kinder asked. "Nowhere else in the world has the buy-in into the Chicago School of Law and Economics been so complete, the belief in the absolute rightness of a market-based ethic. We now define performance almost exclusively in terms of stock price, which is a pretty small tail wagging a very large dog."

"In my opinion, two types of very large institutional investors have significant barriers to signing the PRI," he continued. "Those are the Taft-Hartley union pensions and the ERISA pensions."

The Employee Retirement Investment Security Act (ERISA) covers corporate pensions, and the Taft-Hartley Act does the same for union plans. Both are administered by the US Department of Labor, whose acting Inspector General at present is a leftover appointee of the Bush administration, which in 2008 issued an interpretive bulletin barring economically targeted investment (ETI) by corporate pension funds. ETI "includes applying ESG-type criteria in investment decisions," according to Kinder's blog.

On the same day in October 2008 that the ERISA interpretive bulletin was issued, the Department of Laborís Employee Benefits Security Administration (EBSA) issued a second bulletin that addressed proxy voting. According to Kinder's blog, "If the ERISA fiduciary canít show a dollars and cents justification for a vote, it must refrain. And EBSA has backed that up by advising fiduciaries to keep records on voting, including the cost-benefit analyses."

Referring to the Second Principle of the PRI, which states, "We will be active owners and incorporate ESG issues into our ownership policies and practices," Kinder wrote, "I doubt EBSAís explicit rejection of these items was either coincidental or accidental."

"Taft-Hartley was adopted in the late forties to target the misappropriation of union pensions, the most notorious example of which was the Teamsters," Kinder said. "The language of Taft-Hartley was adopted by ERISA, which was that the focus of the trustee has to be the exclusive benefit of the pension beneficiaries."

"Obama has been very slow in rooting out the Bush appointees," Kinder continued, noting that the 2008 interpretive bulletin could be revoked in minutes, without the necessity of additional rule-making.

Another significant barrier to the widespread implementation of the Principles in the US can be found in the political arena, Kinder observed. Referring to legislation proposed by Democratic Congressman Jim Langevin of Rhode Island, which would direct the Federal Retirement Thrift Investment Board (FRTIB) to add a sustainable investment option to the Thrift Savings Plan (TSP), the retirement savings and investment plan for federal employees, Kinder said, "You'd have to convince the board of the FTSP that this was consistent with fiduciary duty. That could be a difficult sell."

The FRTIB has publicly opposed the legislation, according to an article in
Pensions & Investments. Tom Trabucco, a board spokesman, stated, "The 4.4 million individuals with TSP accounts have invested their retirement savings with an explicit 'no politics' commitment from the Congress. The board opposes all efforts to alter this commitment and introduce political or social considerations into TSP investment policy."

"To make the political challenge concrete, keep in mind that every single Republican Senatorial candidate, with one minor exception, is a climate denier," Kinder said. "No board is going to take on this issue without a hell of a lot of support, and that support doesn't exist right now."

However, the fact remains that the PRI has been gaining ground in the US. Aside from labor union and corporate pension funds, Kinder observed, "The uptake has been significant among other institutions. There is a perception in the marketplace that these criteria are important, and the perception is still growing."

"Within the signatories themselves, there is a perception that this is a market that has to be served," he continued. "The financial services industry is largely reactive on the providers' side. Twenty years ago, the reaction was a blank stare; what do we need this for when we don't have a demand for it? Now, it's no surprise that there is an increasing number of service providers that are signing up to the PRI."

"There is more awareness in corporations of these issues," Kinder added. "Corporations are political, and the kind of lobbying of corporations that was pioneered by the
Interfaith Center on Corporate Responsibility (ICCR) is effecting changes."

"Long-term, we win," Kinder concluded. "There's no question in my mind."


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