The Pace of Change: Socially Responsible Investing in Private Markets

We show that socially responsible investors can have a negative impact by slowing the pace of firm reform. Investors with broad prosocial preferences value acquiring dirty firms with high negative production externalities because they can reform these firms. The anticipation of trading gains for dirty firms decreases the incentive of current firm owners to reduce externalities proactively, potentially causing delay in reform. The presence of financial investors—alongside socially responsible investors—can exacerbate delay. Investment mandates through which socially responsible investors commit to paying a premium for green firms can incentivize reform in a timely manner. (JEL G11, G23, G24, G34, H41, M14)