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The pace of change: How quickly can socially responsible investors create impact?

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Plants on coins illustrating green finance concept | © Plants on coins illustrating green finance concept | ©

Over the past decade, there has been a dramatic increase in socially responsible investing. In 2020, about $15 trillion of professionally managed assets in the United States considered environmental, social, and governance (ESG) factors, an increase from less than $2 trillion in 2010 (US SIF 2020). Despite this tremendous increase in socially responsible investing, there is little consensus among practitioners and academics on the optimal way for socially responsible investors to have impact. It is particularly important to understand how quickly socially responsible investors can cause firms to improve. For example, to generate timely impact, should socially responsible investors invest in “green” firms that have already reduced their externalities such as greenhouse gas emissions or in “dirty” firms that are still lagging, to push those firms to reform? The issue of timely impact is particularly salient in light of climate change as scientists argue that unless greenhouse gas emissions are reduced quickly, the world faces potentially catastrophic consequences.

In our paper, entitled “The Pace of Change: Socially Responsible Investing in Private Markets,” we study how socially responsible investors can have impact quickly. To this end, we develop a theoretical model in which investors can acquire a privately held firm. We consider the decision of the current owner of a dirty firm to turn it green and study how the presence of socially responsible investors in the financial market affects this decision. In this environment, the quickest way for a firm to become green is if its current owner reforms it immediately. Alternatively, if the firm remains dirty under the current owner, a socially responsible investor may be able to acquire the firm in the future and then turn it green. However, finding a socially responsible investor who is willing to acquire and reform the firm takes time in relatively illiquid private markets. Our model allows us to study how quickly different investment strategies can lead to a reduction in firms’ negative externalities in the context of private markets.

Should socially responsible investors acquire dirty firms and then reform them?  Some researchers have argued that investing in firms that are already green is not impactful because these firms already have environmentally friendly business models. Instead, to have impact, investors should invest in firms that are dirty and then reform the production processes. We highlight that such an investment strategy can generate high acquisition prices for dirty firms because socially responsible investors value the impact they can generate by obtaining control of dirty firms to reform them. We show that this investment strategy can backfire and cause delays in turning some firms green. The key insight is that the market prices for green and dirty firms affect the current owners’ decision to reform their firms proactively before meeting investors. In particular, when firm owners can sell a dirty firm, but not a green firm, at a high price to socially responsible investors in the future, they have a greater incentive to keep their firm dirty. We show that even if the current owner of a firm would have turned it green in the absence of socially responsible investors, the presence of these investors may actually lead to strategic delay in reforming the firm.

Should investors acquire firms that are already green?  We show that if a current firm owner can sell a green firm to investors at a premium in the future, this can incentivize them to reform their firm immediately. Intuitively, the premium at which they expect to sell a green firm increases the value of owning a green firm. Such an investment strategy therefore incentivizes current owners to turn their firms green themselves which is the quickest way to reform a firm in the environment we consider. It therefore leads to firm reform in a timely manner.

To implement such an investment strategy, socially responsible investors need to be able to commit to buying green firms at a premium. This in turn implies that socially responsible investors must be willing to accept a lower financial return when acquiring green firms. In practice, such a strategy can be implemented through an investment mandate that is explicitly “below market rate” and engages in positive screening such as investing in firms that already have high ESG standards. Our research suggests that the more concessions socially responsible investors are willing to accept on the financial returns of their green investments, the more they can incentivize current owners to reform their firms. Importantly, generating impact requires combining positive screening with concessionary returns. In our setting, positive screening by itself does not necessarily create impact.

Our paper has implications for the appropriate definition and measurement of “impact” in financial markets. In particular, socially responsible investors who employ positive or negative screening when choosing which firms to invest in but who do not try to create additional positive change post investment are typically not considered “impact” investors (GIIN Annual Impact Survey 2020). Our research suggests that only focusing on impact post investment can in fact generate delays in the improvement of firm production processes. In our paper, the best and quickest way for socially responsible investors to have impact is to commit to acquiring firms that are already green at a premium. This investment strategy incentivizes current owners to make their firms green before they are acquired by socially responsible investors. Most of the measurable improvement in the firm will therefore happen before the investment rather than after. Our results imply that focusing on post-transaction measures when determining impact only provides a partial picture of the impact socially responsible investors can generate. In addition, it is important to consider how socially responsible investors affect market prices for green and dirty firms since market prices in turn affect the incentives of current owners to reform their firms


GIIN, 2020, Annual Impact Investor Survey (10th Edition), Global Impact Investment Network.

US SIF, 2020, Report on US Sustainable Responsible and Impact Investing Trends 2020, The Forum for Sustainable and Responsible Investment.


Deeksha Gupta

Assistant Professor, Carnegie Mellon University

Alexandr Kopytov

Assistant Professor, University of Hong Kong

Jan Starmans

Assistant Professor, Stockholm School of Economics

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