Future Scenarios of Responsible Investment Processes Across Asset Classes: A Morphologic Analysis

Abstract

We contribute to the responsible investment literature by pursuing the first morphologic analysis of the responsible investment process. Morphologic analysis decomposes a process in its relevant variables and defines the thinkable properties of these variables. By generating new combinations of these properties, we can then develop more or less extreme future scenarios, of how the responsible investment process could be conducted. These scenarios allow a greater understanding of the potential of responsible investment with respect to three performance measures: It's financial performance, its environmental, social and governance (ESG) performance, and it's impact on corporate ESG behaviour. We discuss nine groups of scenarios. These groups comprise ideas like Best in Investment Style or Best in Country responsible investment, which aim to aid financial performance as Best in Class screening does. Impact on corporate ESG behaviour is the main focus of Double Responsible Investment, which takes a long position in a high ESG rated and a short position in a low ESG rated asset. Similarly, Engage to Consider responsible investment aims to impact corporate behaviour by engaging with supposedly irresponsible companies, which are offered consideration of an investment in them in case of improved ESG behaviour. Triple Responsible Investment combines the previous two approaches. Mutually Guaranteed Responsible investment ensures responsible investors to invest only in assets, whose absolute ESG performance meets their demands, and it guarantees assets with such (excellent) ESG performance to be proportionally invested in by these investors. Overall, our scenarios display the boundaries of responsible investment’s potential to achieve, at least separately, a (very) good financial performance, ESG performance or ESG impact on corporate behaviour. Our scenarios also aim to be thought provoking for both, academics and professionals.

Keywords: asset classes, corporate governance, corporate social responsibility, environmental management, ethical investing, responsible investment, futuristic scenarios

JEL Classification: B40, G00, G11, M14