The Pace of Change: Socially Responsible Investing in Private Markets

Abstract

We study the pace at which socially responsible investors generate impact in private capital markets. Investors with broad pro-social preferences care about firm externalities independent of their ownership in the firm and hence value acquiring firms with high negative production externalities because they can reform these firms. The anticipation of trading gains for firms with high negative externalities decreases the incentive of current firm owners to reduce these externalities proactively, potentially causing delay in reform. Investment mandates through which investors can commit to paying a premium for firms with low negative externalities can incentivize reform in a timely manner.

Keywords: Socially responsible investing, sustainable investing, ESG, private markets.

JEL Classification: G11, G23, G24, G32, G34, H41, M14.