The Pace of Change: Socially Responsible Investing in Private Markets

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