Could bounded responsibility push responsible investing into the mainstream?

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Responsible investing* continues to grow. But although the concept has its advocates, many large European and U.S. institutional investors have no policy with regards to responsible investing, and no intention of creating one.

Bounded responsibility
Among many institutional investors, responsible investing is not truly mainstream. The current situation is bifurcated: in or out. Investors in some regions (such as Holland) are generally more committed to responsible investing, others in the UK and US need more convincing.

What if, rather than focusing on persuading more investors that they should care, those promoting responsible investing focused instead on making it easier? After all, while there are some who would take long trips to recycling centres, most people are good at recycling as long as it’s not too much work to do so. We’ll put a certain amount of effort in, but our commitment only reaches so far.

I think we could call this idea “bounded responsibility”. You may have heard of “bounded rationality,” which is how Herb Simon expressed the insight that people are not always able, or not always willing to expend the effort, to solve complex problems. So they do the best they can. They’re rational – but only up to a point.

In the same way, many individuals and many institutions do care about some aspect of responsibility/sustainability/ESG, either because they see it as impacting the risk or the return potential of an investment, or because it is a core value: maybe it’s the environment, or labour conditions, or executive pay, or diversity, you name it. There is, however, a bound to their commitment: they care – but only up to a point.

And just as the idea of bounded rationality gave birth to behavioural finance and eventually transformed the focus of Defined Contribution investment from one of educating plan participants to one of making it easier to make sensible decisions (“choice architecture”) – so the idea of bounded responsibility maybe tells us that the key to broadening the reach of responsible investing could lie in minimising its disruption.

* Also referred to as ESG, SRI, sustainable investing and so on. There are subtle differences between the precise meanings of those terms but this blog is just making a general point: so the exact terminology and definition aren’t important here.

Bob Collie, Chief Research Strategist, Americas Institutional

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