Identifying and Overcoming Behavioural Impediments to Long Term Responsible Investment: A Focus on UK Institutional Investors

Abstract

As society’s expectations about the appropriate behaviour of corporations has shifted over time, so too has the focus on what role institutional investors might play through the investment mechanism. This thesis focuses on the behavioural impediments to the adoption and effective implementation of responsible investment practices from the institutional investor’s perspective. Studies of behavioural finance that identify investor inefficiencies have been employed to consider how these might impact on an institutional investor’s ability to invest in a long-term responsible manner. The research draws from three case studies on UK institutions that have adopted a responsible investment policy and finds evidence of short-termism, herding/gravitation towards defensible decisions and ‘separateness’ of longer-term, governance and responsibility issues from the core investment process. A unified framework of conventions has been developed and applied to study the dominant conventions, investment beliefs and the justification process that contribute to these behavioural shortcomings. These analyses revealed that the external conventions of short-termism, over-emphasis on relative asset-based index returns and valuation models heavily weighted towards tangible financial criteria are reinforced by internal conventions within institutions including the performance review process, team responsibilities, team interactions and criteria used for manager selection. The process by which sub-optimal conventions might change is discussed through an evolutionary conventions lens, focusing on the problems with, and alternatives to, the prevailing convention of measuring and rewarding portfolio performance on the basis of returns relative to an asset-based index/benchmark. Finally, some of the scholarly contributions of this thesis will be discussed, including the links forged between the SRI, behavioural finance and portfolio theory literature, as well as the potential contribution that the conventions framework could make to future research on institutional herding.