Could bounded responsibility push sustainable investing into the mainstream?

Sustainable investing continues to grow1. But although the concept has its advocates, many large U.S. institutional investors have no policy with regards to sustainable investing, and no intention of creating one.

Bounded responsibility

Among US institutional investors, sustainable investing is not truly mainstream. The current situation is bifurcated: in or out. Some might assume that it has to be that way; I’m not so sure.

What if, rather than focusing on persuading more investors that they should care, those promoting sustainable investing focused instead on making it easier? After all, while there are some who would take long trips to recycling centers, 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 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 labor 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 behavioral 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 sustainable investing could lie in minimizing its disruption.

1Also referred to as ESG, SRI, responsible 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.