Op-ed
Uniform Prudent Investor Act¹
by
Peter D. Kinder

         A December 2004 survey by Mercer Investment Consultants revealed that 37% of the 195 money managers surveyed believed that social and environmental criteria would be included in investment decisions in the next five years. Sixty three percent of the European and Asian managers surveyed believed this would happen within the next five years. An equal percentage of U.S. managers believed it would never happen.

         These numbers prompt two questions:

• How can we accelerate SRI's prospects in the U.S.?
• And, why are its prospects currently so bleak?

Modern Portfolio Theory and the UPIA

         There are, of course, many interrelated answers to these questions. However, a major part of the answer lies in an obscure statute, the Uniform Prudent Investor Act (UPIA).

         The Uniform Prudent Investor Act presents two problems for social investors: one abstract, the other very concrete.

         The abstract problem is that the UPIA embeds the Modern Portfolio Theory into law. Its criteria compel trustees to adopt a short-term, quarter-over-quarter approach to their investments. It inhibits, if not prohibits, the application of which the original Prudent Man Rule, with its focus on the "permanent disposition" of assets.

         For example, from a short-term perspective, the merger of Duke Power and Cinergy might look less attractive to a manager than it does from a long-term perspective given the company's commitment to explore carbon-reducing strategies. New strategies always seem a threat to immediate earnings prospects.

         The practical problem comes from the comment to Section 5 of the UPIA. That comment, which is five times longer than the section itself, is largely devoted to a blast against the application of non-financial criteria.

         One might ask, why should a comment on a statute trouble us? Lawyers and courts treat official comments with great respect. So, a court will not find it persuasive that the comment omits all of the law journal articles which take a contrary position (it cites only those authored by the UPIA's reporter in opposition).

         The comment leaves the strong impression that SRI is without legal support when, in fact, it is the UPIA's position that is out of step. In addition, it omits any reference to the one U.S. case that actually dealt with the question of social screens. That case criticizes specifically the view the comment adopts of SRI.

What can you do?

         At last report, 14 states had adopted the Uniform Trust Code, a codification of what the National Conference of Commissioners on Uniform State Laws represent as what was the common law. The code is now pending in twelve states, including Pennsylvania, Connecticut and Massachusetts. The code incorporates the Uniform Prudent Investor Act which has been adopted, independently, by more than 40 states.

         You must act fast. The Commissioners of Uniform State Laws have great credibility. In the past they represented an apolitical force for constructive legislation.

         Here’s what you can do:

         1. E-mail Michelle Clayton (nccusl@nccusl.org) at the National Conference. She is the staff person in charge, and you should express your concerns to her.     
         2. Find out what committee of your state bar association is working on the Uniform Trust Code, and identify the lawyers sitting on it. You should communicate with them immediately and ask to be kept advised of committee meetings.
         3. Get your lawyers involved with the committee. Our paper, Pensions and the Companies They Own (http://www.kld.com/resources/papers/UniversityOfColorado_050311.pdf) will give you and your lawyers the information you need.
         4. Find out whether the UTC has been introduced in your state legislature. If so, what committee will review the codes. Who are the legislators on it?
         5. Use your newsletter, client outreach pieces and the like to drum up support for your efforts.

         This is a once in a lifetime opportunity to affect the way fiduciaries evaluate investments. You can help remove the bias against long-term investment strategies and open the way for evaluating companies against the realities of our contemporary world.

¹ Peter D. Kinder is co-founder and President of KLD Research & Analytics, Inc., an independent research firm based in Boston, Mass. This article is an adaptation of a talk given at the 2005 Green Mountain Summit on Responsible Investing