Reshaping capitalism to drive change

In this episode Sir Ronald Cohen discusses impact investing, the role he has played in this fast-growing strategy and how we can expect to measure impact in the future.

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Transcript

Amanda 

Hello, I'm Amanda Young, your host for today and you are listening to the abrdn 
 Sustainable Investing Podcast, where we discuss all things relating to responsible and sustainable investing. 

I'm absolutely delighted today to have a very distinguished guest, Sir Ronald Cohen. Anyone who's familiar with the impact investment space will be familiar with Sir Ronald, who has played a leading role in driving for the social investment movement across the world. Before we hear a little bit more about him, may I take this opportunity to welcome him to our podcast. Sir Ronald, it is an absolute pleasure to have you with us today. Welcome.

Sir Ronald 

Thank you Amanda, it’s great to be with you.

Amanda

Now, Sir Ronald was once an Egyptian refugee whose family escaped to Britain with only £10 to their name, and with that he brings a personal understanding of economic struggle. After earning an MBA from Harvard Business School and working in consultancy, he co-founded one of the first venture capital firms in Europe, Apex Partners. Now through his work and determination, Sir Ronald was at the forefront of venture capital across the world.

Following his illustrious investment career, he went on to earn himself a reputation, as the press called him, ‘the father of social investment’. And this was done through his spearheading of the impact investment movement. For the past two decades, Sir Ronald's pioneering initiatives on impact investment have resulted in a number of global efforts, focusing on driving private capital to serve the environmental and social good.

Now, much of this began when in 2000, he was asked by the UK Treasury to lead the Social Investment Task Force established under the UK his presidency of the G8. This and other work led to the establishment of big society capital, where orphan bank account money was put to good investing in social impact opportunities. Among other appointments, Sir Ronald Cohan is Chairman of the Global Steering Group for Impact Investment. He is a Co-founder Director of Social Finance in the UK, USA and Israel and the Co-founder Chair of Bridges Fund Management. He is a graduate of Oxford University where he was president of the Oxford Union and serves as an Honorary Fellow of Exeter College. We've already mentioned that he was at Harvard where he earned his MBA, and to which he was also awarded the Henry Fellowship. Sir Ronald is an author of best-selling books, and his latest of which we will hear about a little later.

Now, Sir Ronald, as an individual, when he's not involved in finance enjoys all types of music from the Beatles, Bob Dylan and U2, to the classics and Opera. He lives in Tel Aviv, London, and New York with his Film Producing wife of more than 30 years and they have two children, Tamara and Johnny. So impact investing is not a new topic for this podcast, we've had a number of guest talking on a range of impact investing subjects so please do go back and listen to these wherever you get your podcasts. But today, the real honour is to have someone who has been referred to as the godfather of impact investing, Sir Ronald Cohen. Now, Sir Ronald, perhaps we can begin with terminology. As we know, the term impact investing is banded about quite a bit and used to describe a range of different investment activities. And I would really love to hear from you directly as to how you would articulate what impact investing actually is. 

Sir Ronald 

Certainly, Amanda. And once again, it's a great pleasure to be here with you. Impact investing is investment that aims both to make a profit and to improve lives and or the environment. It involves measuring the impact created and today is about a trillion dollar sector. Now, many of our listeners will have heard of ESG investing, environmental, social and governance investing. If we bring impact measurement to ESG, we turn it into impact investing because it has the intention today to deliver impact but doesn't measure the impact created. 

Amanda 

Now I understand that you've written a new book, “Impact: reshaping capitalism to drive real change”. Perhaps you can tell us a little bit about your book and whether this helps clarify some of the points that you've just made to describe impact investing. 

Sir Ronald 

Certainly, the proposition in the book is that we can’t continue to operate in the way we're doing. We can't cope with our climate challenges, we can't cope with the social inequalities that our system is generating. And there's a trend in the world to shift away from a system which has served us well for 250 years, which involved just measuring risk and return, trying to make as much money as possible without worrying about the consequences on people, on [the] planet, to a new paradigm, a new system, where investors and companies make decisions on the basis of risk with an impact. And the book says, Amanda, this is already happening at speed. If you look at how much investment money as we would just say, is being directed to create impact, as well as profit, the ESG and impact investment flows, it's over $40 trillion. That's more than half of all professionally managed money. And at the same time, as you will have noticed, Amanda, we have a new generation of young people that doesn't want to purchase the product of companies doing harm, that doesn't want to work for these companies. And they are driving investors to look at the consequences of these strange preferences, which is why these massive investment flows are now going in the direction of impact, as well as profit. And the book says this trend of changing values also meet the trend of great technological leaps, which enabled us to deliver impact in ways humanity could never contemplate before through artificial intelligence, machine learning, or augmented reality and so on. Then, finally, there's the third force, which is this technology enabling us to measure the impacts of individual companies in a very granular way, what their impact is on the environment and people from their operations, their employment, and their product. And this is leading us to a much better economic system, which will bring solution rather than create problems and will actually deliver enhanced growth and profitability. 

Amanda 

Now, you've had a long career in capitalism, you know, with decades of venture capitalism, founding Apex partners, and now many people wouldn't necessarily equate capitalism with social good. And we've already talked about how the world is changing but often the world is changing for the worse, particularly with growing environmental concerns and increasing gaps and inequalities. Perhaps you can touch on how entrepreneurialism can be a force for good and help both the environment and people to improve their lives and create jobs. 

Sir Ronald 

Yes, my proposition in the book is that we are already in the early stage of an impact revolution that is driven by entrepreneurs in a very similar way to the tech revolution that has preceded it and where I was fortunate enough to become involved from my mid 20s onwards. If you look at how entrepreneurs are thinking today, and the business models they're putting together, they're increasingly aiming to bring a solution to some of the problems we face. So you see Tesla, entering the automobile industry with the aim of shifting it away from the combustion engine and the position that it brings. You see new companies coming into the area of storing electricity, so that we can use solar power rather than fossil fuels that pollute [the] environment. I see entrepreneurs coming from across the globe to define business models that improve education, improve health, improve employment, improve almost every area of industrial activity. 

Amanda

Now, it's interesting because we talk about entrepreneurialism and we're investors and will obviously profit is a big part of being both an entrepreneur and an investor, so if capital allocation is all about investing with profit. What's your view on this and how environmental and social challenges, you know, equate to that desire for profit? 

Sir Ronald 

So the interesting thing that revealed from the work that I have been doing with my colleagues at Harvard Business School in the area of impact accounting is that if you begin to measure the environmental impacts of companies, and you look at their stock market valuations, you realise that the companies that pollute more are already worth less than their competitors. And that is the effect of this weight $40 trillion of ESG money moving into, into public markets so the perceptions of consumers and talent, and the investors of companies which are polluting are leading to a reduction in their market value, and they're translating into shareholder activism, with the directors being kicked off the board of Exxon Mobil, and other directors being imposed. So there's a real connection now between delivering impact and improving your stock market valuation. This is part of the reason why you see the share price of Tesla multiply seven times in the year, while the price of ExxonMobil stock falls by two thirds over a period of three years. 

Amanda

I mean, I think that's a fantastic argument for why impact investment is the way forward for investors. But obviously, there are some challenges. So what do you think the main challenge for investors who want to invest for impactors?

Sir Ronald 

The main challenge today, Amanda, is green washing. Companies are making claims very often about the impacts they deliver, which are just not substantiated. And so whether you're talking of consumers buying the products and using the apps that are coming up on the market now to look at the impacts that they that they create, or whether you're talking with investors who are seeking to invest in companies that do good and do well at the same time, we need reliable information and reliable information means accounting information that measures the impact and translates it into monetary terms, into dollars, or euros or four pounds. And it is possible to do this. It's been done at Harvard Business School. our listeners can go to IWA - Impact Weighted Accounts - at HBS and see the data sets that I've been talking about, they can see 3000 companies environmental impact in dollar terms. These are companies from across the world which have made information available about tonnes of carbon that they emit in gallons of water, and so on so forth. In the next few days, they'll be able to see the employment impact of 2500 companies. And so what we need now is governments to mandate that companies have to publish audited impact information that we can use to prepare impact weighted accounts so that we can look at companies that are net positive after their impact and still deliver a profit and those that are net negative and actually create a loss after all the impact that they deliver.

Amanda 

Now, you've been such an inspiration for so many following in your footsteps to change the nature of capital markets for the better. There must be something that has inspired you to make a difference. Now, my guests normally give me a bit of inspiration and this can range from things that have inspired them such as books, or films. What is it that has inspired you that you might like to share with our listeners? 

Sir Ronald 

Well, I have been inspired to see how Britain welcomed me. I was able to go to a state-run Grammar School, find an amazing teacher called Richard Farley who really did give me inspiration because he said to me, you should go to Oxford, and I'll help you prepare for the entrance exams.

But as I look around me today, I find the inspiration in entrepreneurs. And I want to describe, Amanda, a venture that gives such inspiration. There's a venture called Orcam, which I described in my book “Impact”, which has created the pair of spectacles to help the blind. These spectacles have a little memory stick like device on the side, which whispers into the ear of the wearer the page of the book they're reading, or the names of the faces, 300 faces that have been input into it, transforming the lives of potentially 35 million blind people and 250 million visually impaired people. But I'm talking to this company now about providing these spectacles to the 800 million illiterate adults in the world. And imagine what that could do for the lives and livelihoods to go from being completely illiterate to being able to read. I find inspiration in entrepreneurs today, whose aim is to improve our world and build hugely valuable companies at the same time. 

Amanda 

That is fantastic. And I have to say, I couldn't agree with you more listening to some of the young people coming out of university with business ideas. Now, one final question, what do you think the next 12 months holds for the impact of this movement?

Sir Ronald

I think they are likely to be pivotal in bringing the impact movement to the mainstream. The UK government has set up a G7 Impact task force, which is looking at this issue, we've been talking about the impact transparency and integrity, as well as boosting impact capital flows, so that they help us to achieve the Sustainable Development Goals and broadly improve lives and the planet. Big crises like COVID, like the 1929 stock market crash, create the environment for both government action. And I'm hopeful that within the next 12 months, we will see some governments beginning to talk about mandating the publication of impact weighted accounts by companies so that we can compare the profits and the impacts of a company on the basis of reliable, audited, comparable information. 

Amanda 

That is fantastic. So listeners, look out for impact weighted accounts hopefully coming your way soon. It certainly will help us as investors as we think about how we allocate our capital over the long term. Now, Sir Ronald, what an honour it has been to have you with us on our podcast today. You have, as I said, been an inspiration to so many in this field, and continue to do so with the launch of your book. So listeners, just a reminder of Sir Ronald's book “Impact: shaping capitalism to drive real change”. Now, thank you so much for being with us here today. 

Sir Ronald 

Pleasure, thank you. 

Amanda 

You’ve been listening to the abrdn Sustainable Investing Podcast, a podcast relating to all things responsible and sustainable investing and today a focus on impact investing. Thank you to all who have tuned in to our podcast to this one and previous ones and you can find all of our previous episodes on Apple, Spotify, Google Podcasts or wherever you listen to your favorite podcasts.Until our next podcast, Goodbye for now.