Quote: “We invented venture capital, we invented stock exchanges. We hadn't done anything like that for people who wanted to improve the lives of others, and so I had the realization that we had to bring investment to solving these issues, and we would need to innovate to do that.”
Sheryl Fofaria: Professor Stephan Chambers: A warm welcome to Philanthropy Bites, where you get to deep dive into the lives of inspiring and visionary leaders - all of whom are working to change minds and move money to address some of the most critical issues of our time.
I’m Sheryl Fofaria from J.P. Morgan’s Philanthropy Centre and this podcast is brought to you by us, and the Marshall Institute at the London School of Economics, whose Director, Professor Stephan Chambers, is our host today.
Our guest today is Sir Ronald Cohen, who has become known as “the father of impact investing” and continues to be a tremendous driving force behind what he calls ‘The Impact Revolution’. Over to Stephan and Ronnie for more…
A very warm welcome to Sir Ronald Cohen, known universally by his friends and acquaintances as Ronnie. It's an enormous privilege to be in conversation with you and, at the risk of embarrassing you, being in conversation with one of the most influential figures of the last 50 years.
I thought what we might do is begin our conversation right at the very beginning, your boyhood in Egypt. I think you left Egypt for London in 1957, and I know that you arrived in London with a stamp collection and went on to do really rather extraordinary things. I wonder if you could take us back and describe a little bit about your childhood and your move to the UK.
Thank you very much for having this conversation with me and for everything you have done to improve lives throughout your own career
Sir Ronald Cohen: Leaving Egypt was, I suppose for my parents, a really traumatic experience. They lost absolutely everything and shifted to a country which they had no previous contact with, the UK, and my mother didn't speak English. But for me, my main concern was my stamp collection. I carried it and I carried the album under my arm through customs, very fearful that it would be taken away from me. I suppose that feeling of being a refugee, of being under threat, of being deprived of your possessions has given me empathy for people who are in a similar position.
When I came to the UK, Stephan, as you well know, I went to a state school, a grammar school. My education was paid for by the UK. I found a teacher who believed in me, Richard Farley, bless his soul, a history teacher who prepared me for my Oxford entrance exams. I got into Oxford and then got the scholarship to go to Harvard Business School. My whole youth was a story of being welcomed and helped and I basically want to do the same for others. I think my family values would have, in any case, led me to that but it certainly reinforced that feeling.
Professor Stephan Chambers: I've heard you many times argue that there's something different about young people now. Do you think that that was a view shaped by your Oxford experience or do you think it really is a discontinuity, that there's something now about climate and inequality which really has changed the outlook of people, let's say, under 30?
Sir Ronald Cohen: Well, some people have speculated that perhaps it's because people of my generation taught people of the generations that have followed, including the Millennial and Gen Z generations, that we see this change of values. Perhaps it's the same prevailing sense of imminent destruction that can happen through climate now, rather than the nuclear, which has created this massive change of values. But it isn't just climate, is it? We can see that social media has enabled young people to connect globally to people who are very remote from their lives and locations, and perhaps therefore to empathize with them in ways that we haven't previously had. All of these things have come together to shape the sets of values which are now driving ESG and impact investing and I believe a shift of our whole economic system.
Professor Stephan Chambers: Let's talk about impact. When you were at Harvard Business School, the doctrine of shareholder primacy was at its height. Companies were there to reward shareholders or owners risk with return. The idea that investment capital or corporations had a significant and decisive role in the state of the world was only just emerging. You are strongly identified with that change. I wonder if you could simply outline the views that you have brought to bear all around the world, at a policy level, at an investment level, at a measurement level, this idea of impact as outlined in your most recent book.
Sir Ronald Cohen: Milton Friedman published his famous article in the New York Times in 1970. You're right, that view about profit being the driver and sole goal of business prevailed for 50 years virtually after that. My own journey had always had the social dimension included. When in 2000, completely unexpected out of the blue, I got a phone call which I received in my office at APAX Partners, which I was leading, from the treasury to say, "Look at poverty will you. Look at it with a more entrepreneurial eye, and maybe you can chair a task force that can make recommendations about how we cope with it and how we cope with its consequences, because we don't seem to be making any serious headway in reducing it."
I immediately accepted. The work of the Social Investment Task force, as it was called, brought to me the realization that we had never thought to tackle poverty and other social issues in the way that we did the issue of, say, entrepreneurship and technical innovation. We invented venture capital. We invented stock exchanges. But we hadn't done anything like that for people who wanted to improve the lives of others, and so I had the realization that we had to bring investment to solving these issues, and we would need to innovate to do that. That resulted in a 10 year quest, which ended with the Social Impact Bond in 2010, where for the first time we'd developed a security where the return depended on achieving a social goal.
In the case of the first social impact bond, it was a reduction in recidivism, young people going back to jail within 18 months of their release. That first social impact bond reduced the rate of recidivism over five years by 9.7%. The investors got their 5 million pounds back with a 3.1% annual return. Now there, I thought we'd fulfilled the mission. We delivered a security that provides the key to the capital markets for people who want to improve lives or the planet. Then, when the government asked me to chair the G8 task force in 2013, and we got to work and the goal of the task force was to catalyze impact investment across the world, I began to realize that what the social impact bond does, which is to optimize risk return and impact was actually happening in our economies. It had already started. You could see it in the signatures to the United nations Principles for Responsible Investment, who then totaled about $40 trillion in terms of assets. Today they total more than a $100 trillion.
You could see it in the ESG, environmental social governance investment numbers, which were about $10 trillion and now they're $40 to $70 trillion. We titled a chapter of our report, the first trillion of impact investment, and it seemed a far off target and we actually got there in seven years. I began to realize that impact investment puts us on the path to impact economies, where investors influenced by consumers and talent and by their families, and in the case of asset management firms, by their clients, were already going in the direction of optimizing risk return and impact. Indeed, entrepreneurs were as well, you were beginning to see new business models emerge like Tesla, which had an impact objective, environmental pollution reduction in the case of Tesla, as well as a profit objective. I began to realize that the world was already going in the direction of optimizing risk, return and impact.
Professor Stephan Chambers: Presumably, for that optimization to be fulfilled, we have to reward positive impact and price or charge negative impact. For that to happen, we need to recalibrate the way we value corporations.
Sir Ronald Cohen: I think, Stephan, we're now at the watershed between the risk-return Milton Friedman paradigm and the risk-return impact paradigm, because we have proved through this Harvard Business School initiative, the Impact Weighted Accounts Initiative, that it is both feasible and valuable to measure impact and value them and include them in the profit and loss statement and eventually in the balance sheet of companies.
What's happening now in this impact revolution is we're using innovation in technology and in finance to deliver impact in ways humanity could never before contemplate. Humanity has never before had at its disposal machine learning, artificial intelligence, augmented reality, the genome and the computing coming together. That powerful, innovative force, when it converges with the change in values we've been talking about, and the ability of technology to enable us to measure in a granular way the impacts of companies from that operations on the environment, from their climate practices on people, from their products on people and the environment, leads to the paradigm shift that we've been talking about.
Professor Stephan Chambers: Can we talk a little bit about inequality and its cousin, philanthropy? The kinds of revolutions you've just described, the kind of innovation imperative for gene editing and for machine learning and for nano computing and for all these extraordinary pieces of science and technology and engineering that we now have at our disposal will create the businesses of the future, which will make railroads or banking or venture look modest. Presumably, that will exacerbate, as it were, certain forms of inequality and philanthropy is always mobilized as one justification, that the incentives exist for people to take risks and do extraordinary things. The returns are, on most measures, unjust, but it's okay because that gets recycled through more science, more research, more giving. Are you comfortable with that being imbalanced? Or, do you think that we're slightly out of balance?
Sir Ronald Cohen: Up until now, we haven't looked at companies as bringers of solutions. We've looked at them as bringing products that enable them to make a profit. In fact, that's created terrible damage along the way, because they haven't taken the consequences of their activities on people and the environment into account.
When you begin to make it unacceptable for companies to create this damage, either because investors are going to abandon you, or they're going to fight you. Then, you begin to build incentives for companies to do the right thing.
Now, the role of philanthropy doesn't reduce. The role of philanthropy in driving the innovation in this field is even more important than it was previously because it has massive leverage associated with it and helping to bring about this paradigm shift and then helping to guide capital to those whom the change of systems still leaves behind.
Professor Stephan Chambers: Put another way, you're arguing that aligning incentives to do well and to do good is a function of reporting accurately on the real underlying harms or benefits that organizations produce. How hopeful are you that policymakers, governments, central bankers and so on understand what you're saying?
Sir Ronald Cohen: I think it's inevitable now that they will understand and act. Let me explain why, Stephan. The Harvard data already shows the correlation with greater pollutions and lower stock market valuations. Now, what that says is impact is now stock price sensitive information. If that's the case, then companies can't mislead through their statements and have to provide data that has been verified on the same and provide it on the basis of comparable accounting principles. At the same time, that information has to reach every potential investor. It's inevitable that regulators who come together under IOSCO as you know, which is now looking at the issue of impact transparency are going to have to just step in to provide this transparency.
Professor Stephan Chambers: Ronnie, you recently published a now very influential book called, with admirable clarity, Impact, and all the royalties from that book are going to impact causes, but it prompts me to ask, what do you think the kind of medium term future of impact investing is? I think you argue that about a third of investible capital is under some kind of impact umbrella. Do you think that will be all of it? Do you think that there will be a reaction to what some people think of as an impact bubble? What's your view of the future of impact investing?
Sir Ronald Cohen: My view, Stephan, is that we're in the process of bringing now impact measurement to $40 to $70 trillion of investment that are going to achieve impact as well as profit. That impact measurement is going to change the way a boardroom discussion takes place at the end of this decade. In 2030, if we were both sitting around the boardroom table of a company, we would be looking at our normal financial accounts and we would be looking at impact weighted financial accounts. We would be focusing on how can we increase both our impact performance and our profit performance. It would lead us to change the business models of some of our activities to launch certain products that help more vulnerable populations, or that make them more accessible to those populations. It would change our employment practices and the way in which we expend money on training people in our work force, our recruitment practices, it would change our investment plans in terms of our environmental footprint, because shareholders will be tracking our progress to zero emissions and to diversity that reflects the total population.
Professor Stephan Chambers: You've had significant political influence through the commissions that you've chaired, through the initiatives that you've sponsored. I wonder if you think that you have achieved as much as you have by being outside politics or whether you think there's another reality in which you are committed your life to doing good through, as it were, the electoral system and being part of a government or a political system.
Sir Ronald Cohen: I was, in fact, invited to join the government previously. I decided to pass because I felt, Stephan, that I had a position that promoted policies rather than politics. It enabled me to advise the Liberal Party in the UK and then the Labour Party and finally the Conservative Party. I feel that probably, for me as a person, this was the right road. I think focusing on policies and helping government to arrive at the right policies is a very important contribution.
Professor Stephan Chambers: I wonder if we could return to the image of the seven year old boy with the stamp album under his arm, worried that he might lose his stamps. If you could speak to a seven year old boy with a stamp album today, what would you be saying to them? If what you wanted was them to have a chance of emulating the impact that you've had on the worlds of investment and policy and impact.
Sir Ronald Cohen: I would say to them as my parents said to me, education is the one thing that can't be taken away from you. They can take away your stamp collection, but they can't take away what's in your head.
Professor Stephan Chambers: That's a very powerful note for us to end this conversation. Thank you, Ronnie. It is always a pleasure to hear the concision and the force of your arguments. And it's always an honor to be with someone who really has changed the world for the better over the course of 50 years of engagement. I look forward enormously to seeing what the next chapter is and to speaking to you again when that begins to unfold. Thank you so much.
Sheryl Fofaria: Thank you very much, Stephan. The honor is mine.
Wow, what a story. I am totally and utterly inspired. If you are too, check out his book “A guide to the impact revolution”. Join us next time to hear from Mabel van Oranje, who is a serial social innovator and one of the leading human rights activists working on gender inequality.
"We invented venture capital, we invented stock exchanges. We hadn't done anything like that for people who wanted to improve the lives of others, and so I had the realization that we had to bring investment in to solve these issues, and we’d need to innovate to do that."
Sir Ronald Cohen
Chair, Global Steering Group for Impact Investment
Sir Ronald Cohen is a pioneering philanthropist, venture capitalist, private equity investor, and social innovator. He is recognized as the father of impact investment and European venture capital, and is driving forward the global Impact Revolution. He serves as Chairman of the Global Steering Group for Impact Investment, the Impact-Weighted Accounts Initiative at Harvard Business School, and The Portland Trust. He is a co-founder and former Executive Chairman of Apax Partners Worldwide, a global private equity firm. He is also a co-founder of Social Finance UK, USA, and Israel, co-founder Chair of Bridges Fund Management and former co-founding Chair of Big Society Capital. Oxford and Harvard educated, Ronnie was born in Egypt and left as a refugee at the age of 11, when his family came to the UK. He is now based in Tel Aviv, London and New York. He is the author of the Wall Street Journal Best Seller IMPACT: Reshaping capitalism to drive real change, which was published in 2020 by Penguin Random House.