Practicalities bottleneck to pension fund responsible investment?

Practicalities bottleneck topension fund responsibleinvestment?Riikka SievänenDepartment of Economics and Management, University of Helsinki, Helsinki, Finland

We found that pension funds may face a bottleneck as practical impediments to engaging in responsibleinvestment with respect to the role played by defining and implementing responsible investment. Furthermore,pension funds seek additional coherence and practical guidelines in this field to enable them to take intoaccount ethical considerations in their investment strategies and in implementing them. These findingsindicate that the availability of information may affect the stance that key decision makers of pension fundsadopt towards responsible investment.

Introduction

This study examines how key decision makers ofpension funds determine their stance towards respon-sible investment. Pension funds are organisations thatensure pension payments for retirees (OECD 2012)and form a single group of institutional investors.Responsible investment refers to considering envi-ronmental, social and corporate governance (ESG)factors in investment decision making (Eurosif 2010,2012). Earlier studies about responsible investment inthis journal have focused on its history, content andcharacteristics (Cooper & Schlegelmilch 1993, Taylor2000, Sparkes 2001, Signori 2009); attitudes, motivesand perceptions (Cooper & Schlegelmilch 1993,Vandekerckhove et al. 2007, Fieseler 2011); financial,social and environmental performance and demand(Muñoz-Torres et al. 2004, Valor & De La Cuesta2007, Salama et al. 2011); research trends(Capelle-Blancard & Monjon 2012); policies, strate-gies and implementation (Joly 1993, Taylor 2001,2005, Takala & Kääriäinen 2003, Schaefer 2004,Haigh & Guthrie 2009, Wen 2009, Ferruz et al. 2010)and tools for comparing responsible investmentmarkets (Benijts 2010). Relatively few studies in this

journal or elsewhere have focused on impediments toresponsible investment, the focus of our study.

Perhaps the most comprehensive study of impedi-ments to responsible investment reported in thisjournal is that of Juravle & Lewis (2008). The start-ing point of their study is its identification of threethemes that often relate to current discussions aboutresponsible investment: the agency problem, fidu-ciary duty and financial performance. The agencyproblem is about conflicts of interest, as differentactors have different motives (e.g. Ross 1973) in theinvestment value chain. Fiduciary duty refers to theregulatory obligations pension funds have towardstheir beneficiaries, in whose best interest pensionfunds should act (i.e. maximising financial return)(Richardson 2007, 2009). The financial performanceof responsible investment has motivated severalscholars to determine whether the financial returnsof conventional and responsible investment diverge,with no final answer yet (e.g. Fowler & Hope 2007,Adler & Kritzman 2008, Galema et al. 2008,Renneboog et al. 2008b). Based on these threethemes, Juravle & Lewis (2008) identify impedimentsto responsible investment on three levels: institu-tional, organisational and individual.

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Business Ethics: A European ReviewVolume 23 Number 3 July 2014

© 2014 The AuthorBusiness Ethics: A European Review © 2014 John Wiley & Sons Ltd, 9600 Garsington Road,Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA

doi: 10.1111/beer.12048

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The framework of Juravle & Lewis (2008) laid thebasis for examining impediments on the three levelsand suggested what these impediments at the differ-ent levels of the framework are. We extend theirstudy by focusing on the individual level in particu-lar, and more specifically on heuristic simplification.Our study points out how the availability heuristic,that is, relying on readily available informationrather than examining correct alternatives (Tversky& Kahneman 1973), may impact the stance that keydecision makers of pension funds form towardsresponsible investment.

Our exploratory study is based on 10 face-to-faceinterviews with the key decision makers of 10pension funds and finds that practical impedimentswith respect to how to define and implement respon-sible investment appear to play a role. Responsibleinvestment seems to hamper or even deter pensionfunds from adapting their investment and risk strat-egies and policies. Key decision makers of pensionfunds seek additional coherence and practical guide-lines in this field to enable them to take ethicalconsiderations into account in their investment strat-egies and in implementing them. The willingness ofpension funds with no responsible investment strat-egy (i.e. ‘conventional’ pension funds) to continuewith their existing investment strategies rather thanto examine other alternatives suggests that the avail-ability of information affects the stance that the keydecision makers of pension funds form towardsresponsible investment.

Our study extends the contribution of Juravle &Lewis (2008) first by providing a more detailed litera-ture review with respect to heuristics. Second, weactually collect empirical evidence by interviewingkey decision makers of pension funds, and third, weprovide an example of heuristic simplification inpractice. Fourth, we hope our study provides a moredetailed view of how practical impediments mayimpact the stance that key decision makers of pensionfunds adopt towards responsible investment.

Four reasons may make the findings of our studyhelpful and relevant. First, assets reportedly investedaccording to responsible investment criteria havemore than doubled between 2007 and 2011, and thetrend has already been growing for many years(Eurosif 2008, 2010, 2012). In other words, the maindrivers of responsible investment markets, institu-

tional investors, are not content just to considerfinancial criteria in their decision making. Second,pension funds are significant asset owners whoseinvestment decisions can affect the financial market.As such, their assets represent 34% of gross domesticproduct in the OECD (OECD 2011). Third, decisionmakers’ interest in increasing pension fund respon-sible investment has been growing and, for example,the OECD (2009) aims to find ways to design sus-tainable pension systems due to the losses pensionfunds experienced during the financial crisis of 2008.The European Union (EU) conducted a publicsurvey to receive feedback from individuals andorganisations to help build sustainability in pensionsystems in the EU (European Union 2010). Thus,our results provide information that may serve deci-sion makers in designing incentives for responsibleinvestment and thus help to increase responsibleinvestment. Finally, the existing literature on respon-sible investment has focused little on the impedi-ments to responsible investment.

This paper begins with a literature review. Thesection that follows explains our data and method-ology, and the subsequent section contains theresults. The last section offers conclusions.

Literature review

This section first provides a short overview of thedrivers of responsible investment and then explainsthe framework of Juravle & Lewis (2008), with aspecific focus on the individual level. The fourreasons why finding more about impediments toresponsible investment can prove helpful appear atthe end of the section.

No unified view yet exists to explain why institu-tional investors such as pension funds take – or do nottake – into account responsible investment criteria intheir investment decision making. In addition to thefinancial return at play (e.g. Renneboog et al. 2008a,Wen 2009; see also Glac 2009 and Lewis & Mackenzie2000, 2001 for the individual investor approach),factors influencing responsible investment on a macrolevel consist of institutions (e.g. Louche 2004,Bengtsson 2008a,b, Sandberg et al. 2009), taxation(Scholtens 2005), legal origin (Sievänen et al. 2013a),economics (Scholtens & Sievänen 2012) and culture


© 2014 The AuthorBusiness Ethics: A European Review © 2014 John Wiley & Sons Ltd310

(Scholtens & Dam 2007, Scholtens & Sievänen 2013).When also accounting for the individual andorganisational levels, factors such as attitudes (e.g.Vandekerckhove et al. 2007), values (e.g. Lewis &Juravle 2010), beliefs (e.g. Hawley & Williams 2000,2007, McLachlan & Gardner 2004, Woods & Urwin2010, Jansson & Biel 2011, UN 2012) andheuristics (e.g. Guyatt 2006) drive responsible invest-ment. We hypothesise that these factors can alsofunction as impediments to responsible investment,although their role as drivers is the main focus. Inthis study, we recognise these drivers while drawingmainly on studies about impediments to responsibleinvestment.

Juravle & Lewis (2008) argue that discussionsregarding the agency problem, fiduciary duty and thelevel of financial performance are clearly linked withimpediments to responsible investment at differentlevels. Figure 1 presents the theoretical framework ofJuravle & Lewis (2008), which distinguishes betweenthree levels. The first level, institutional impedi-ments, includes four elements: the investment valuechain describes impediments to responsible invest-ment at its different levels (see also Hebb & Wojcik2005), such as accountability deficits, conflicts ofinterest, information asymmetries and demand forresponsible investment. Accountability deficitsarise mainly due to the separation of ownership

Figure 1: Multi-level analysis of impediments to (socially) responsible investment by Juravle & Lewis (2008)

INSTITUTIONAL IMPEDIMENTS

INDIVIDUAL IMPEDIMENTS

Heuristic simplification Short-termismPositive illusions Lack of social andRisk and uncertainty aversion environmental concerns

ORGANISATIONAL IMPEDIMENTS

Structure/processes Dominant values Basic beliefsTeam segregation Financial returns Ethics-business splitLack of ESG integration Shareholder primacy MaterialityPerformance review SRI unconventionalityPerformance remuneration Market efficiencyInsufficient resources / skillsCareer management

Regulatory pressuresFiduciary dutyDuties of prudencePortfolio diversification

Normative pressuresReturns relative to indexValuation modelsShort-term performancereviewProfessional legitimacy

Mimetic pressuresHigh uncertaintyReputation/financialrisksInformational deficits

Investment value chainAccountability deficitsConflicts of interestAsymmetrical informationDemand for SRI


© 2014 The AuthorBusiness Ethics: A European Review © 2014 John Wiley & Sons Ltd 311

from executive control (Juravle & Lewis 2008).Vandekerckhove & Leys (2007) support the impor-tance of information asymmetries, proposing fivetypes of information asymmetries in responsibleinvestment on which several studies can be classified(Alm 2007, Coerwinkel 2007, Einolf 2007, Leys 2007,Scholtens & Spierdijk 2007). Examples related to thedemand for responsible investment include thosefrom Spain (Valor & De La Cuesta 2007), forexample, and South Africa (Viviers et al. 2009).

The second element of institutional impedimentsis regulatory pressures, which contain fiduciaryduty, duties of prudence and portfolio diversifica-tion. DiMaggio & Powell (1983) emphasised threetypes of pressures: coercive or regulatory mecha-nisms are the constraints (e.g. fiduciary duty ofpension funds) with which the organisations mustcomply; the normative pressures relate to how theorganisation ‘positions’ itself with respect to peerorganisations and to which contextual expectationsit decides to conform; and finally, mimetic pressuresare typical of high-risk environments (e.g. environ-ments in which investment organisations operate).Richardson (2007) indicates that, contrary to com-monly held beliefs that responsible investment is toounsuited to fiduciary duties to invest prudently,responsible investment actually seems to suit theserequirements well. However, a reform of fiduciaryduties could contribute to regulation of the financialsector (Richardson 2009). Another finding byEurosif (2011) is that corporate pension funds witha responsible investment strategy consider respon-sible investment to be part of their fiduciary duties,whereas pension funds with no responsible invest-ment strategy feel they do not fulfil their fiduciaryduty because they have no such strategy. In addi-tion, Viviers et al. (2008) report fiduciary duty to beamong the most important impediments to respon-sible investment.

The third element of the institutional impedimentsis normative pressures, which entail the level offinancial return, valuation models, short-term per-formance review and professional legitimacy. Thequestion of whether responsible investment deliverssuperior or inferior financial return remains unan-swered, although considering responsible investmentcriteria does not appear to have a negative impact onreturns (e.g. Bauer et al. 2005, 2007, Galema et al.

2008 and Cortez et al. 2009). Furthermore, valuationmodels that integrate ESG factors into financialanalysis are lacking, and performance reviews areoften short-sighted (Guyatt 2006). Professionallegitimacy with respect to the proponents of respon-sible investment is still maturing (Juravle & Lewis2008). This is in alignment with Herringer et al.(2009), who identified insufficient and inadequatehuman capital or skills as challenges.

The last element of institutional impediments ismimetic pressures, which consist of high levels ofuncertainty, reputation and financial risks, andinformational deficits. Clark & Hebb (2005), forexample, argue that institutional investors areincreasingly sensitive to reputational attacks on thefirms they hold in their investment portfolios, as suchattacks can directly impact their portfolio returns.This lack of symmetrical information leads to infor-mational deficits, which transparency-seeking insti-tutional investors aim to avoid. Furthermore,mimetic pressures are linked to herding, whichmeans that institutional investors tend to act simi-larly to their peers (see also Guyatt 2006).

The second level of the framework, organisationalimpediments, consists of three elements. Although wefind that distinguishing between institutional andorganisational impediments is essential, they alsoappear to share many similar characteristics. Thefirst element, structure and processes, covers teamsegregation (Juravle & Lewis 2008), lack of ESGintegration (Guyatt 2006), performance review andremuneration (Guyatt 2006), insufficient sources/skills (Herringer et al. 2009) and career management.These elements refer to organisational differences ininvestment and management styles and to the ‘space’that current practices allow for considering respon-sible investment. The findings of Pivo (2008) shareseveral similarities with organisational and institu-tional impediments. Pivo (2008) suggests that themain impediments to responsible investment in prop-erty investing include insufficient financial perfor-mance, lack of information, incompatibility withfiduciary duty, legal restrictions and internal resis-tance within organisations. Haigh (2011) finds thatthe authorities have provided limited support to thefinancial industry with respect to how to consider andaccount for climate change in investment decisions. Astudy by Sievänen et al. (2013b) finds that responsible



investment is perceived as difficult for pension fundsto define and to put into practice.

The second element entails financial returns andshareholder primacy and focuses on the dominantvalues of the organisation. A preliminary indicationsuggests that accounting for values in investmentdecision making is worthwhile. A study by Aktaset al. (2011), for example, points out that the stockmarket rewards socially and environmentallyresponsible investment. Lewis & Juravle (2010) findthat values play a role when it comes to responsibleinvestment in organisations.

The last element of organisational impedimentscombines the basic beliefs of the organisation, whichdo not necessarily leave room for responsible invest-ment practices: the ethics-business split, materiality,socially responsible investment, unconventionalityand market efficiency. Juravle & Lewis (2009)suggest that market short-termism and internalorganisational contexts dominated by a lack ofmoral engagement and disempowerment impederesponsible investment. Lewis & Juravle (2010) findthat, first, making a business case for responsibleinvestment; second, benefits that responsible invest-ment can bring to overcoming short-terminism; andthird, the belief that for responsible investment tohave significant influence, greater governmentintervention is required, are the three discourses thatrelate to launching responsible investment inorganisations. In addition, the topics of the frame-work, especially in the last element, seem to connectto the discussion with respect to market efficiency(e.g. Thaler 1999, Rubinstein 2001).

The area where this study specifically aims to con-tribute is the third level of the framework: individualimpediments. The individual impediments consist offive elements: heuristic simplification, which is ourfocus; positive illusions; risk and uncertainty aver-sion; short-termism; and lack of social and environ-mental concern. Juravle & Lewis (2008) relateindividual impediments to behavioural finance inparticular, which is the study of finance based oncredible assumptions about how people behave,and psychological experiments often confirm suchbehaviour (Forbes 2009). Thus, behavioural financeapplies psychological factors to the financial market,comprising both individual and institutional inves-tors, and also uses indicators from the financial

markets to identify evidence of the use of psychologi-cal biases and their impact on the financial markets(Shefrin 2000, 2007, Nofsinger 2008, Forbes 2009).As such, the behavioural finance literature stemsfrom the possible inability of the classical economictheory to explain anomalies of rational behaviour.Whether this inability actually exists remains debat-able (e.g. Thaler 1999, Rubinstein 2001).

Economic rationality implies that rationalitydrives markets – which are presumed to be efficient –and individuals to maximise their utility by followingthe axioms of expected utility theory and, further-more, being capable of unbiased forecasts about thefuture (Thaler 1999, Rubinstein 2001). In the frame-work of Juravle & Lewis (2008), market efficiencyis positioned among organisational impediments,under basic beliefs. Thus, interaction between thelevels of the framework is essential, and the elementsmay, if only hypothetically, belong to other levels aswell. As for rationality in decision making, Tversky& Kahneman (1973, 1981) and Simon (1955) havebeen the pioneers in emphasising the behaviouralaspects of decision making. Simon (1955) suggeststhat the assumptions of classical economic ration-ality are strong with respect to the limitations ofhuman rationality, namely, information, cognitivelimitations and time. He suggests that boundedrationality is the form of rationality that takes placein real life (i.e. seeking satisfactory solutions insteadof optimal ones) (Simon 1955). Furthermore,Tversky & Kahneman (1973, 1981) argue thatframing decisions and using rules of thumb do notnecessarily imply irrationality.

Examples of documenting a cognitive bias withindividuals include, for example, Ji et al. (2008), whoexamine cultural differences in stock market deci-sions based on price trends. By combining culturalpsychology and cognitive bias, the authors arguethat these factors lead to different predictions ofstock trends. According to Hedesström et al. (2007),better information for investors about how to diver-sify in pension investment fund choices is warranteddue to indications of possible default bias, a diversi-fication heuristic, home bias and the 1/n heuristic.Diacon & Hasseldine (2007) suggest that the way inwhich the past performance of a fund is presentedaffects investment fund choices (see also Glac 2009).Barberis et al. (2006) find that narrow framing –



which the authors define as the evaluation of a newgamble in isolation of other already known risks –may be more central to decision making than previ-ously acknowledged.

Documenting cognitive biases with institutionalinvestors has been less common, although someexpected documented cognitive biases with indi-vidual investors to apply to institutional investorsalso. The study of Guyatt (2006) is among the onlystudies to attempt to do so, although the behaviouralfinance literature expects anomalies of rationality tomomentarily affect activity in the financial marketwhere various types of investors, including institu-tions, invest (Thaler 1999, Barberis & Thaler 2003,Forbes 2009). Although individual and institutionalinvestors are usually examined separately, institu-tions consist of individuals who actually make thedecisions. Thus, interaction between individual,organisational and institutional levels should beaccounted for. Individuals are likely to comply withthe requirements of their employers and customers(organisational impediments), and the institutionalimpediments set the frames for the environment inwhich individuals and organisations function. Fur-thermore, the characteristics of responsible invest-ment are likely to leave space for personalinterpretation, as responsible investment takesvarious forms based on the values of the (institu-tional) investor in question.

In this study, we extend the existing framework byexamining in greater detail a single heuristic, namelythe availability heuristic of Tversky & Kahneman(1973). This heuristic refers to the ease with whichrelevant instances come to mind. In other words, theavailability heuristic describes the way in which aperson evaluates the frequency of classes or the prob-ability of events (Tversky & Kahneman 1973,Kahneman et al. 1982). Furthermore, Carroll (1978)suggests that instructions to simply imagine an eventare sufficient to raise expectations for that event. Inthe context of this pension fund study, the use of theavailability heuristic could mean that assessingresponsible investment takes place by evaluating theprobability of an event, such as the probability of apossible lower financial return, by using the informa-tion that is readily available at hand (i.e. responsibleinvestment delivers inferior financial return). Thiswould imply that the individual uses familiar, readily

available information about the perception of infe-rior financial returns instead of objectively lookingfor alternative and objective solutions.

Individuals use heuristics to simplify thinking(Tversky & Kahneman 1973, 1981). Obtaining deeperinsight into heuristics in the context of responsibleinvestment could potentially open new perspectivesthat are worth being accounted for if decision makersare to advance responsible investment. Additionalinformation on the use of heuristics in the context ofresponsible investment carries potentially significantmeaning for at least four reasons. First, responsibleinvestment has grown substantially (Eurosif 2006,2008, 2010, 2012). According to Eurosif (2010), thevalue of assets reportedly invested according toresponsible investment criteria in Europe was around€5,000 billion at the end of 2009, but around €2,665billion in 2007. The latest figures (Eurosif 2012) showstrong growth per responsible investment strategy,and a cautious estimate of the current market size is€6,763 billion. Second, more than 90% of the respon-sible investment market consists of investments byinstitutional investors (Eurosif 2012), and this studyspecifically focuses on pension funds that are substan-tial institutional investors due to the large value oftheir assets (OECD 2009). Third, research about thedrivers of and impediments to responsible investmentplays a pivotal role for various stakeholders such aslabour unions, employer organisations, nongovern-ment organisations (NGOs) and decision makers atdifferent levels. More complete knowledge would evi-dently enable decision makers at both the nationaland EU levels to design incentives that encourageresponsibility in pension fund investments. Interest inand the need for such encouragement is growing,because the recent financial crisis caused pensioners insome countries to receive a smaller pension thanexpected due to average losses of –22% in pensionfund investments during the financial crisis of 2007–2009 (OECD 2009). Furthermore, the age pyramidstructure in EU countries requires sustainable anddurable pension systems, which raises the question ofhow to ensure pension payments (European Union2010). Fourth, research on the topic of impedimentsto responsible investment is lacking.

From this review, we conclude that the frameworkof impediments to responsible investment by Juravle& Lewis (2008), which serves as the foundation for



this study, is among the first attempts to map impedi-ments to responsible investment on institutional,organisational and individual levels. We focus on theavailability heuristic. On the individual level, heuris-tics are crucial for simplifying decision making,which explains why knowing more about heuristicsin a responsible investment context could open newperspectives that should be accounted for if decisionmakers are to advance responsible investment.

Data and methodology

This section first presents the data collection, thenthe data analysis; lastly, it motivates the countrychoices.

Data collection

Our investigation of how the key decision makersof pension funds determine their stance towardsresponsible investment consists of 10 interviews withthe key decision makers of five pension funds inBelgium and five in Finland. We wanted to interviewkey decision makers because they are considered themost suitable and cognizant sources of organisation-level information (Norburn & Birley 1988). Further-more, salient topics are likely to draw their attention(Cycyota & Harrison 2006). Before contacting thepension funds, we investigated their web pages toidentify the most suitable person(s) to be inter-viewed. When this method proved unsuccessful, weexplained the situation to the person at the switch-board to connect us with the key decision makers.We conducted the interviews face-to-face in thespring and at the beginning of the summer 2009. Inthe four Belgian pension funds, we interviewed thekey investment decision makers. In one of theseinterviews, a representative from one of the fund’sasset management companies was present. In thefifth interview, we interviewed a key administrativedecision maker. In the four Finnish funds, we inter-viewed the key investment decision makers. In one ofthese interviews, the CEO and the legal adviser werepresent during part of the interview. In the fifthpension fund, we interviewed the key responsibleinvestment expert. Each key decision maker was in aposition to offer good insight into organisation-level

information. For two funds, each interview lastedapproximately half an hour. For one fund, eachinterview lasted approximately three quarters of anhour, and for the remaining funds 1–2 h.

At the beginning of each interview, we told theinterviewee that the aim was to determine how thepension fund approaches and considers responsibleinvestment and that we would ensure the pensionfund’s anonymity. Currently, no theory existsregarding why institutional investors such as pensionfunds engage in responsible investment, and howthey determine their stance towards it. For thisreason, we found an exploratory research approachto be suitable. Stebbins (2001) suggests that anexplorative approach is especially needed on a topicwhere new results and openings are welcome. Thiswas the case in our situation: we had no hypothesisof how pension funds determine their stance towardsresponsible investment. Nevertheless, we prepared asemi-structured questionnaire to support the inter-views, but let the interviewees direct the discussion inorder to obtain a genuine insight into each fund’ssituation (Crotty 1998, Bodgan & Knopp Biklen2007, Eriksson & Kovalainen 2008). The semi-structured questionnaire consisted of questionsabout opinions regarding responsible investmentand about how the pension fund considers respon-sible investment.

Qualitative business studies commonly use conve-nience sampling instead of more systematic samplingtechniques, which are typical of quantitative studies(Eriksson & Kovalainen 2008). For this study,pension funds were selected by addressing the centralones with the aim of including a good mix of pensionfunds from different sectors. Portfolio size was onecriteria (when available), but in addition, the sam-pling took into account the sector of the pensionfund. Our sample of 10 pension funds mainlyincluded funds with statutory pensions. The fundswere characterised as public sector, industry-wide,corporate pension funds. For reasons of anonymity,we provide no detailed characteristics, as the numberof central pension funds in both countries is limited.

Four pension funds had a responsible investmentstrategy. Two had none but believed that their fundnevertheless engaged in responsible investment, if toa limited extent. The four remaining funds believedthey do not take into account responsible investment



considerations, such as ESG factors, in their invest-ment strategy.

Data analysis

We analysed the recorded and transcribed interviewmaterial by using simple classification (Hirsjärviet al. 1997, Eskola & Suoranta 1998). After havingread the interview material several times, we markedcentral themes into a spreadsheet programme. Thenwe proceeded by adding subthemes in a detailedmanner. The main focus of the analysis was on whatis said instead of what conforms to a specific theory.In response to the results, we related the three centralthemes to the framework of Juravle & Lewis (2008)and to the behavioural literature. Because investiga-tions of cognitive biases usually take place in experi-ments and not in interviews, we can thereforecharacterise this study as an exploratory attempt toidentify heuristics in practice (see also Guyatt 2006).

Reliability (i.e. the extent to which the repetitionof the study would yield the same result) dividesqualitative researchers (Eriksson & Kovalainen2008), as does validity, which refers to the accuracyof a description vs. reality. This study sought reli-able, valid and trustworthy results in three ways.First, we let the interviewees direct the discussion.Second, in the data analysis, we focused on what theinterviewees said rather than on interpretations.Third, we triangulated the interview results with thekey decision makers by asking for permission to citethem. Triangulation is a common technique forensuring the validity of results in qualitative studies(Eriksson & Kovalainen 2008).

The generalisation of the results is among the keylimitations of this study, as our small sample sizereduces the generalisability of the findings. However,we argue that our methodology links results fromreal life to the behavioural literature and extends anddeepens the work of Juravle & Lewis (2008). We aimnot to generalise the results to key decision makers orto pension funds, but rather to demonstrate thatthese key decision makers take part in the decisionmaking of the pension fund. The results thus indicatewhat may affect the pension funds’ stance towardsresponsible investment. Furthermore, our empiricalanalysis of how the key decision makers of pension

funds determine their stance towards responsibleinvestment is a topic of few contributions.

Country selection

As to the selection of the countries, we chose Belgiumand Finland because they are at vastly different stagesin the practice of responsible investment: in theformer, responsible investment enjoys an establishedposition, whereas in the latter, responsible investmentis only now gaining momentum (Eurosif 2008, 2010,2012). Owing to our small sample size, we aimed notto compare country-specific differences but toprovide a perspective on how the key decision makersof the pension funds we interviewed at least partiallyshaped the stances towards responsible investment.In Belgium, the estimated size of the responsibleinvestment market is €96.9 billion (Eurosif 2012).Indirect and direct financing related to certainweapon types (anti-personnel mines, sub-munitionsand depleted uranium weapons) is forbidden inBelgium (Eurosif 2012).

Finland was included in Eurosif’s report for thefirst time in 2008. The Finnish market, driven byinstitutional investors, is only now beginning tostrengthen. Eurosif (2008, 2010, 2012) estimates thatthis trend stems from a few factors, including a pre-vious lack of asset managers for responsible invest-ment as well as previous lack of NGOs and mediaattention. Responsible investment by the pensionfunds has also received additional attention in theFinnWatch and SaferGlobe Finland report (Simolaet al. 2010). The Finnish Sustainable InvestmentForum now has 40 members, which makes it thelargest sustainable investment forum in terms ofmembers in the Nordic countries (FINSIF 2010,Eurosif 2012). The current size of the responsibleinvestment market size is €107.6 billion.

Results and discussion

We present the interview results based on the threemain themes that may impact the pension funds’ andtheir key decision makers’ stances towards respon-sible investment: first, the results relating to the prac-tical definition of responsible investment; second, thefindings on implementing responsible investment;



and third, the results relating to the ‘accessibility’ ofresponsible investment. A summary of the resultsappears in Table 1. For reasons of anonymity, not allinterviewees wished to be cited; we therefore usedcitations from selected key decision makers only.

Practical definition

Perhaps the most common theoretical definition ofresponsible investment is the integration of ESGfactors in investment decision making (Eurosif2010, UN 2012). The interview results indicate thatthe key decision makers of pension funds knew wellthe conceptual knowledge of responsible investment.However, the results of each interview suggest thatthe definition of responsible investment from a prac-tical point of view is multifaceted and complex(Table 1). We arrived at this conclusion for two mainreasons. First, none of the key decision makers indi-cates how they (would) account for each ESG crite-rion in investment decision making, but insteaddiscuss several other detailed items, such as the UN’schildren’s rights, alternative energy or compliancewith legal requirements, which they classify asresponsible investment. Second, because the analysisof the interviews focused on what the intervieweessaid, we easily identified the three main themes.

The following citation indicates that the keydecision maker believes that complying with legalrequirements is also a way to view responsible invest-ment. We find that it relates not only to the impedi-ments at the individual level of the framework(Juravle & Lewis 2008), but also at the institutionallevel as regulatory pressures (DiMaggio & Powell1983). Furthermore, the citation firmly connects tothe fiduciary duties of pension funds (Richardson2007, 2009, Juravle & Lewis 2008).

So . . . by responsible investment do you meanunethical activities such as tobacco or similar . . . Inthat sense, we have imposed no restrictions, but ourresponsible investment adheres to the law, meaningwe must invest the money according to legalrequirements. (Conventional pension fund C)

In some countries, legal requirements to someextent do frame responsible investment. In Belgium,investments in anti-personnel mines and sub-munitions, as well as depleted uranium weapons, areforbidden (Eurosif 2012). In Finland, no such legalrestrictions exist, although the national pension alli-ance, TELA, has published responsible investmentguidelines in 2004, and the revised version from 2008incorporates the United Nations Principles ofResponsible Investment (TELA 2008). However,

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Table 1: Interview results based on the three themes and the availability heuristic

Pension fund (PF) Practical impedimentsDefinition ofresponsibleinvestmentas difficultin practice

Implementationof responsibleinvestmentdifficult

Additionalcoherenceis calledfor

Indicationthat theavailabilityheuristic hasimpactedthinking

PF with a responsible investment strategy A YES YESPF with a responsible investment strategy B YES YESPF with a responsible investment strategy C YESPF with a responsible investment strategy D YESPF considers responsible investment to some extent A YES YES YESPF considers responsible investment to some extent B YESConventional PF A YES YES YESConventional PF B YES YES YESConventional PF C YES YES YES YESConventional PF D YES YES YESTOTAL 9 6 4 4...................................................................................................................................................................



responsible investment is usually understood to gobeyond legal requirements (Sparkes & Cowton2004), because responsible investors are interested incompanies that engage in corporate social responsi-bility (CSR). Furthermore, CSR also accounts formore than just law and is often seen as self-regulation(e.g. Gond et al. 2011). Thus, in these respects, thecitation above not only offers another perspective,but is also linked to fiduciary duty (Richardson 2007,2009, Pivo 2008), which the framework classifies asan institutional impediment to responsible invest-ment. Richardson (2009) suggests that a reform offiduciary duties could contribute to regulation of thefinancial sector. This aligns with the findings ofLewis & Juravle (2010) on the discourse that greatergovernment intervention is required if responsibleinvestment is to have a significant influence.

As for individual impediments and the availabilityheuristic, we suggest that the previous citation mayindicate that the key decision maker readily usesavailable information (Tversky & Kahneman 1973).This pension fund has no responsible investmentstrategy, but the key decision maker may neverthelessseek to contribute to the discussion of responsibleinvestment by using readily available information, asindicated in the reference that abiding by the law isresponsible investment practice. In this comment, thequestion as to what responsible investment is conse-quently relates to how the pension fund engages in it.We interpret this close link to mean that by investingaccording to legal requirements, the pension fundthen transforms into a practical definition the mostreadily available information regarding the definitionof responsible investment, that is, the ease with whichit comes to mind (Tversky & Kahneman 1973). Afurther comment by a key decision maker of anotherconventional pension fund includes the same messageof multiple ways of defining and engaging in respon-sible investment: their future actions with respect toresponsible investment remain unclear due to themyriad ways of engaging in it. We hypothesised thatthis may stem from the readily available informationthat responsible investment is difficult.

In both these comments, considerations as to whatresponsible investment is are then transformed intohow to undertake it. We understand that this indi-cates that the key decision makers have – at least inthe interview situation – adopted a stance on respon-

sible investment: they held a certain view of whatresponsible investment was, and they provided infor-mation about how to undertake responsible invest-ment in practice. Our next citation describesdiversity with respect to the definition and imple-mentation of responsible investment and ties it to thelevel of financial return and fiduciary duties. Theframework (Juravle & Lewis 2008) covers financialreturn on all levels.

(Also here) it has been aimed to collect funds toinvest in companies that promote employment. . . but our starting point is that the investmenttarget, no matter what its targets are . . . we have noopportunity to take it into account unless it pro-vides the expected financial return. (Conventionalpension fund C)

This citation has somewhat different content fromthe earlier ones, which are closely related to the defi-nition and implementation of responsible investmentwith various detailed items not directly covered inESG. This citation not only contributes to the diver-sity of what responsible investment is but specificallyemphasises that the key decision maker is uninter-ested in responsible investment due to possible lowerreturns.

The findings with respect to the availability ofinformation suggest that the information readilyavailable to the key decision maker in question, withrespect to the financial performance of responsibleinvestment, is that it is inferior to mainstream invest-ment. This relates to the findings of Carroll (1978),who suggests that simple instructions to imagine anevent are sufficient to increase expectations for thatevent. Thus, imagining a lower return with respon-sible investment can imply that the key decisionmaker raises the expectation that this really is thecase. Furthermore, this comment coincides with thefinding that institutional investors may not be readyto accept suboptimal financial return to pursueethical goals (Renneboog et al. 2008a) and thatfinancial return can be a driver (Wen 2009) orimpediment (Pivo 2008) to responsible investmentamong institutional investors.

The following two comments further illustrate thedivergence between the practical and the usual defi-nition of responsible investment among conven-tional pension funds and demonstrate that, for both



key decision makers and pension funds, this diver-gence is an impediment to engaging in responsibleinvestment.

(It) is very difficult to determine what is really theSRI (Socially Responsible Investment) approach.At this time we thought for our pension funds thatSRI is something too big, too large, too difficult tounderstand itself . . . (Conventional pension fundC)

What is socially responsible . . . we found it to betime dependent . . . meaning the years, the environ-ment, the period in time . . . often linked to eco-nomic circumstances, being in economic up- ordownturns, people might change the idea of what issocially responsible and what is not. So I think it isvery hard to find one standardised . . . all-in-onedefinition of what socially responsible investmentwould look like. (Pension fund considers respon-sible investment to some extent A)

Both comments indicate that the definition ofresponsible investment in practice is unclear andcan take different forms. The earlier citationsemphasised the diversity of what key financial deci-sion makers classify as responsible investment,whereas these citations focus on its time dependencyand the ‘environment’. Furthermore, three key deci-sion makers mentioned the search for added value infuture. One can argue that this is natural, as one canunderstand responsible investment in several ways.A concrete example of dependency on time in thedefinition of responsible investment is Eurosifreports, which classify responsible investment and itsforms differently over the years (Eurosif 2006, 2008,2010, 2012). The same reports list heterogeneityamong the assets invested according to a specificresponsible investment strategy, which indicates thisdependency on the ‘environment’ across countries.Considerations with respect to time and dependencyon the ‘environment’, and the search for added valuein future also relate to organisational impediments(e.g. lack of ESG integration and insufficientresources/skills) (Juravle & Lewis 2008) and to thefindings of Sievänen et al. (2013b) on how pensionfunds consider responsible investment challenging.

At the same time, however, this dependency ontime and the ‘environment’ leaves the key decisionmakers of pension funds with no clear benchmark ifand when they try to investigate how to view respon-

sible investment. We suggest that this looseness canhave a considerable impact on their stance towardsresponsible investment. If the availability heuristicserves as an explanation, this stance occurs becauseuse of this heuristic, combined with the difficulty ofdefining responsible investment in practice, maycreate a situation in which the most readily availableinformation on responsible investment is thatresponsible investment is a ‘struggle’. In other words,key decision makers may find this information to bethe easiest available when determining their stancetowards responsible investment without examiningalternative solutions. From our point of view, thiscan result in a bottleneck situation regarding pensionfund engagement in responsible investment.

We conclude that key decision makers of conven-tional pension funds in particular struggle to under-stand what responsible investment is in practice; thiswas evident in the interviews. Furthermore, key deci-sion makers used various detailed examples todescribe responsible investment. The overall pictureof integrating ESG factors into investment decisionmaking did not emerge in the interviews. In additionto the detailed examples (e.g. equating responsibleinvestment to investing according to laws), key deci-sion makers related dependency on time and the‘environment’ dependency to the definition, as wellas to the search for added value in future. Pensionfunds, which already engage in responsible invest-ment practices, and their key decision makers seemmostly to have dealt with these topics before. Wealso suggested that the use of the availability heuris-tic means that the information that the key decisionmakers of especially conventional pension fundsretrieve is that responsible investment is difficult todefine in practice. This suggested result relates to theframework of Juravle & Lewis (2008) regarding indi-vidual impediments and heuristic simplification, aswell as to the results of other studies (e.g. Pivo 2008,Viviers et al. 2008, Sievänen et al. 2013b). Lastly, wewere able to relate some of the citations to theorganisational and institutional impediments of theframework.

Difficult implementation

Pension funds that already consider responsibleinvestment reported no severe difficulties in imple-



mentation. We, however, observed that difficulties inimplementing responsible investment also relate tothe level of financial return. In seven pension funds,lower financial return would have been unaccep-table, which supports the findings of Pivo (2008),Wen (2009) and Renneboog et al. (2008a). The find-ings of Guyatt (2006), Herringer et al. (2009),Juravle & Lewis (2009) and Lewis & Juravle (2010)support the role of financial return as an impedimentto responsible investment. In the framework (Juravle& Lewis 2008), each of the three levels includesimpediments related to financial return. Further-more, the findings of the Eurosif 2011 report listreasons for the lack of responsible investment strat-egies among corporate pension funds, which includerisk and performance concerns, unfamiliarity withthe topic of responsible investment and lack ofresources.

Another finding is that four pension funds thatalready consider responsible investment apply a ‘fullapproach’ strategy across asset classes. Theirconcern is more with the credible and reliable imple-mentation of the responsible investment criteriachosen. The main issues here are where to set thelimits on the responsible investment screens and howto develop a long-term strategy that adds valuewithout lowering financial return. The long-termadvantages sought are linked to the concept of uni-versal owners (e.g. Hawley & Williams 2000, 2007),and more specifically to the belief in higher returns inthe long run, as Eurosif (2010), Woods & Urwin(2010) and UN (2012) have suggested. As long as thesearch for long-term advantages continues, it willpotentially remain an impediment to responsibleinvestment, as results about value-adding long-termstrategy without lowering financial return are likelyto prove impossible to obtain.

Difficulties in implementation are strongly relatedto conventional pension funds: two of them find itpossible to have a responsible investment strategy onpaper, but implementation can involve insurmount-able challenges. In other words, it appears thatimplementation can take several forms. We relatethis finding to the work of Hedesström et al. (2011),who find that the sustainability rankings of compa-nies vary from one sustainability analyst organ-isation to another (i.e. practice may take variousforms).

So, basically, we have carried out in the past someresearch on implementing socially responsibleinvestment criteria . . . and found it to be excep-tionally difficult . . . because if we always look at itas if there’s a kind of SRI restriction, then I mustlook at how we can verify it . . . practically, how wecan implement that; and that’s often the problem.(Pension fund considers responsible investment tosome extent A)

SRI is something very interesting in terms ofpolitical or moral reasons, but we must be ableto transform these moral considerations intoeconomic terms . . . (Conventional pensionfund B)

We have never discussed it in the sense of whetherwe should have a responsible investment policy,meaning should . . . all investing follow responsibleinvestment? The reason for this is rather simple:controlling it . . . is almost impossible. (Conven-tional pension fund D)

The main outcome of all three citations appears tobe the difficulty in implementing responsible invest-ment at the individual and organisational levels.The second comment shows the embeddedness ofthe importance of financial return (e.g. Rennebooget al. 2008a, Wen 2009) and fiduciary duty (e.g.Richardson 2007, 2009). The pension funds appearto have attempted to discover more about the imple-mentation of responsible investment. As such, thisdoes not support the use of the availability heuristic.However, if we focus on the outcome of these con-siderations, it appears that this outcome has resultedin a certain stance or attitude towards the implemen-tation of responsible investment: the interviewees donot consider the implementation easy. As such, thismay result in a decreased willingness to engage inresponsible investment, as this stance is somewhatcautious or negative. From our point of view,however, this may affect the thinking of key decisionmakers of pension funds and thus influence the for-mation of one’s stance towards responsible invest-ment. Therefore, readily available information islikely to lead to a cautious stance, which may meanthat the availability heuristic affects the thinking ofkey decision makers of these pension funds. In addi-tion, another finding emerged in the comments fromtwo key decision makers who considered responsibleinvestment screening services too expensive: this



view could contribute to a more distant approach toresponsible investment.

Additional coherence

By now, the results indicate that the practical defini-tion and implementation of responsible investmentare closely related. Therefore, planning and imple-menting a responsible investment strategy can bechallenging if the transformation of the definition ofresponsible investment into practice leaves amplespace for interpretation: the information that comesreadily to mind relates to responsible investment asa struggle. For this reason, key decision makers ofpension funds call for additional coherence andguidelines. A key decision maker of a conventionalpension fund who believed that pensioners wouldrequest responsible investment practices provided anexemplary situation. For the time being, however,this pension fund prefers to wait for the financialauthorities to set the rules. The following citationcontains a similar request:

Well, the different states can for sure set up thesesocial income funds – which are a significant part ofthe financial market – regulations or instructions.. . . of course it should (set regulations) that pro-hibit or regulate private equity funds and hedgefunds. I think that if they (private equity funds andhedge funds) will ever be regulated, the motives ofthe regulators are everywhere but in responsibleinvestment . . . it is to make sure they cannot causesuch a crisis, like what we’ve experienced . . . (Con-ventional pension fund D)

This excerpt shows a clear preference for addi-tional coherence via responsible investment regula-tions set by an authority. Furthermore, the citationaccounts for the institutional level. Four of theinterviewees directly mentioned their preference forregulations set by an authority. This call for addi-tional coherence corresponds with Haigh (2011),who finds that the authorities have provided limitedsupport to the financial industry regarding how toview and account for climate change in investmentdecisions.

Four conventional pension fund interviewees com-mented on the different ways to view responsibleinvestment given a lack of coherence: loosely and

practically across asset classes or in the form of strictscreens:

Of course it is possible (to implement responsibleinvestment) . . . as the big pension funds do . . .they apply it partly to the portfolios . . . many ofthem are big investors in hedge funds . . . and I’msuspicious whether any of these funds agree to thesecriteria . . . and I don’t even know whether it wouldbe sensible to set limits on investments in which theidea is boundlessness . . . so at least I would notadvance this kind of a programme because itcannot be implemented in a credible way. (Conven-tional pension fund D)

This awareness of more practical approaches,and how some pension funds implement responsibleinvestment, was an additional aspect these inter-viewees raised. It appears that they also wanted tohold to their view of finding a suitable way for theirorganisation to engage in responsible investmentshould they ever begin doing so. We base our opinionon two observations: first, it appears that conven-tional pension funds would rather examine alterna-tives instead of adopt existing ways to engage inresponsible investment from their peers. As such, thispractice does not support the use of the availabilityheuristic. Second, however, holding to their ownviews could also mean that the interviewees retainedtheir perception that the practical definition andimplementation of responsible investment is difficult,which suggests that readily available infor-mation affects their stances towards responsibleinvestment. We further hypothesised that, in additionto individual impediments, the impediments at theorganisational and institutional levels, such as lack ofESG integration and (short-term) performancereviews (Juravle & Lewis 2008), may strengthen theway in which key decision makers view responsibleinvestment and how they position it in their minds.

The conclusion from the results and discussionsection is that practical impediments regarding howto define and implement responsible investment inpractice characterise the way one determines one’sstance on responsible investment. These impedimentsseemed to be especially associated with pension fundswith no responsible investment strategy. The resultssuggested that the interviewees may have used theavailability heuristic (Tversky & Kahnemann 1973,1981, Carroll 1978) to determine their stance towards



responsible investment. Several researchers havefound that behavioural elements, including heuris-tics, do indeed impact decision making (Simon 1955,Tversky & Kahnemann 1973, 1981, Kahneman et al.1982, Thaler 1999, Barberis & Thaler 2003, Barberiset al. 2006, Diacon & Hasseldine 2007, Forbes 2009,Glac 2009), and several studies in finance have con-firmed that heuristics play a role (Guyatt 2006,Hedesström et al. 2007, Ji et al. 2008). Our studyconnected individual impediments to the two otherlevels of the framework of Juravle & Lewis (2008),namely organisational and institutional levels, andprovides a more detailed view of how practicalimpediments can affect the stances of key deci-sion makers of pension funds towards responsibleinvestment.

Conclusion

The aim of this exploratory study was to identifyhow key decision makers of pension funds determinetheir stance towards responsible investment. Tenface-to-face interviews with the key decision makersof 10 pension funds suggested that practical impedi-ments to the definition and implementation ofresponsible investment in practice, especially amongconventional pension funds, largely characterise howone determines one’s stance towards responsibleinvestment. Consequently, the key decision makersof pension funds sought additional coherence andpractical guidelines in the field, as they would enablethem to take ethical considerations into account inthe investment strategies of the pension funds and inimplementing them. These findings indicate that thekey decision makers of pension funds never evenconsidered engaging in responsible investment as aserious alternative if their stance had already beenset. Furthermore, these findings indicate that the keydecision makers of pension funds viewed responsibleinvestment as obedience to the law, which is yetanother perspective of the more common under-standing that responsible investment (Sparkes &Cowton 2004) and CSR (e.g. Gond et al. 2011) gobeyond mere adherence to legal requirements.

This study builds on the framework of Juravle &Lewis (2008) regarding impediments to responsibleinvestment with a focus on individual impediments.

Heuristic simplification, which forms part of theindividual impediments, was the specific area of theframework to which this study contributed. Thisstudy used an exploratory example to show how theavailability heuristic likely affected the thinking ofkey decision makers of the pension funds, that is, touse readily available information when defining andimplementing responsible investment in practice.These results extended the framework of Juravle &Lewis (2008) in four ways. First, individual impedi-ments to responsible investment are studied onlyto a limited extent, and even more limited is the focuson examining them through heuristics withinorganisations. This study brought a piece of novelinformation to this area. Second, the results arebased not only on a literature survey but also onempirical material. Third, the results confirmed thecrucial reciprocity between the levels of the frame-work. In addition, the results indicate that the topicsdocumented in the literature alone cannot explainone’s stance towards responsible investment; rather,influential factors also appear to include practicalimpediments that can be attributed to cognitivebiases such as the availability heuristic.

When assessing the fit of the results with thebehavioural literature, two issues deserve mention:first, our findings are based on interview results,whereas the usual way to document cognitive biasesis with experiments. Thus, our findings cannot docu-ment the use of the availability heuristic in the tradi-tional way, although areas of the literature, such asbehavioural finance, recognise and acknowledgeseveral cognitive biases and apply them to the finan-cial markets without experiments. Second, becauseindividuals, not organisations, use heuristics, theimplications of the conclusion that the availabilityheuristic can affect the thinking of key decisionmakers of the pension funds must be reflected on thepension fund level with great care. Thus, on the onehand, we can only suggest that use of the availabilityheuristic cannot be directly related to the pensionfunds stance towards responsible investment. On theother hand, the key decision makers are the mostsuitable and cognizant sources of organisation-levelinformation (Norburn & Birley 1988), and salienttopics are likely to draw their attention (Cycyota &Harrison 2006). As a result, we claim that the stanceof key decision makers of pension funds towards



responsible investment is likely to impact the stanceof the pension fund because the key decision makersare likely to participate in and offer input toorganisational decision making, such as board meet-ings. In all, our investigation brings additionalinsight and analysis from actual practice regardingimpediments to responsible investment and thuscomplements the work of Juravle & Lewis (2008) bymore closely examining how thinking affected by theavailability heuristic may pose an impediment toengaging in responsible investment. Despite the limi-tations of the study, our results point at a problemthat is meaningful in a wider economic context. Forexample, if decision makers at national and interna-tional levels wish to advance the responsibility ofinvestments, practical impediments to it should beacknowledged and accounted for in decision making.Future research is warmly welcomed to discovermore about impediments to responsible investment.

Acknowledgements

The author warmly acknowledges the financialsupport of the Foundation of Economic Education,the Jenny and Antti Wihuri Foundation and theNiemi Foundation.

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Practicalities bottleneck to pension fund responsible investment?