N.B.: The following Q&A is based on a recent exchange between an Australian business reporter and Peter Kinder, President of KLD Research & Analytics.

Socially responsible investors believe businesses must incorporate environmental, social and governance (ESG) factors into their management strategies.

Institutional funds are major shareholders and play an important role in corporate governance. Australia, for example, has the fourth-biggest superannuation pool [money in pensions] in the world. That money could influence industries worldwide.

Can trustees and their fund managers pursue socially responsible investing? It has been argued that while an individual can consider non-financial factors in evaluating a stock, trustees must only seek the highest immediate return for their clients. Are there fiduciary issues involved?

Absolutely. The key here – and I’m speaking from the perspective of American law, which I don’t think is substantially different from Australian – is the trustee’s duty of loyalty to the trust’s beneficiaries and their interests. This duty is absolute – one of the common law’s very few absolutes.

But how do you define “interests”?

At its narrowest, “interests” refers to the beneficiaries’ right to the pensions they were promised. I would argue beneficiaries also have an interest in how the trustees manage their money for their long-term benefit. Are the investment decisions, including proxy votes, taking into account the country’s societal interests – and hence the beneficiaries’ – over the likely life of the pension fund?

Funds don’t exist in vacuums or silos. Their sponsors, their beneficiaries and their investments make them integral to and integrated with their societies.

But, if you equate the beneficiaries’ interests solely with the maximization at every opportunity of their trust estate’s dollar value, it’s hard to argue trustees should take anything other than a very short-term, opportunistic approach.

From that short-term perspective, an issue like climate change would seem insignificant.

That’s right. The trustee’s time horizon dictates the result. So, if it’s short: Global warming? CSR? Irrelevant. Take the money!

Trustees today live in a quarter-over-quarter world. That’s the period over which they measure their scheme’s and their managers’ performance and report to their beneficiaries.

Today, only brave trustees – but there are a growing number of them – insist on longer time horizons, on bringing to bear on investment decisions the full range of information available to them, their staffs and their advisors.

For example, when companies are taken private, the existing shareholders almost always get a premium for approving the deal. When weighing whether to support private equity or hedge fund “activists,” trustees should also consider the transaction’s effects on the medium- or long-term national economy, and hence its indirect effects on the scheme’s long-term ability to meet its obligations to its beneficiaries.

This question is one that trustees should have asked during the corporate raider/leveraged buyout (LBO) period in the 1980s and 90s: What will be the impact well beyond next quarter – in ten or fifteen years – of a proposed deal on the broader economic and social environment?

The disaster that is today’s American air transportation system is the LBO era’s most visible legacy. Without the support of institutional investors, the buyouts that have starved our airlines of needed capital would never have taken place. The long-term effects of those short-term decisions are now clear: ancient fleets, slower flights, poorer service resulting in real costs to the American economy – and hence to all the American companies in institutional portfolios.

Today, a growing number of investors – led by college endowments and some government pension funds – do consider ESG criteria. As socially responsible investing has matured, what trends do you see? Why have investors moved past the short-term perspective?

The growing anxiety about global warming is altering – slowly but inexorably, like the rising sea level – the institutional perspective on environmental and CSR issues. (On the KLD blog, there’s a speech I gave to the National Advisors Trust conference in April that outlines why and how this is happening.)

What effects will this change have on trustees?

Today’s legal framework for the investment decision-making process will have to evolve, just as it has since the Middle Ages when trusts first appeared. I believe this evolution in fiduciary thinking will mean:

o Trustees will have to extend their time horizons for investments. What’s good for today’s portfolio may be toxic for tomorrow’s. Exposure to major carbon emitters, for example, or to companies that depend on cheap energy, is probably a long-term risk as society moves to account for the price of carbon emissions.

o Trustees will have to expand their criteria for evaluating investments to include environmental and social factors and, at the same time, become active, responsible, involved – engaged, even – owners. This applies equally to public companies’ shares and to interests in private equity and hedge funds.

o Trustees will have to factor intangibles and unquantifiables into their decisions. Right now we’re witnessing a proxy fight between the management of the American freight railroad CSX and The Children’s Investment Fund (TCI). If investors vote with TCI, they might raise share prices. But in supporting TCI’s maximizing of CSX’s share value, they may affect the values of the publicly-traded utilities and manufacturers that depend on the railroad, and, indeed, the economy of the entire American southeast.

Do trustees share your view of how their priorities have evolved?

Conversations with Australian superannuation schemes’ trustees and staff over the past three years – from two trips to Australia and an AIST conference last month in San Francisco – have encouraged me.

From across the spectrum of social and political perspectives, they understand how today’s challenges affect their beneficiaries’ future needs. This awareness, however, is only the first in a series of very difficult steps required to adjust their investment decision-making processes to the new social and environmental realities.

Fortunately, here past performance is an indicator of future performance. Fiduciaries and legislatures have proven repeatedly over the past 800 years they can respond to unprecedented challenges while keeping faith with their beneficiaries.

They will again.