Sir Ronald Cohen, Chair, The Global Steering Group for Impact Investment
Please give us a bit of background on yourself, and how your organisation plays a leadership role in the impact investing space.
Before impact investing, my background was in private equity and venture capital. In 1972 I co-founded Apax Partners and led it for 33 years. To date Apax has raised funds amounting to about US$50 billion. I started to look in depth at social issues in 2000 when the UK Treasury asked me to lead the Social Investment Task Force. For the last 17 years, I've been helping to create a field that brings capital markets to fund impact creation.
In that time, I’ve been involved in creating a number of organisations, including Bridges Ventures which I co-founded in 2002, the Commission on Unclaimed Assets, which I established and chaired between 2005 and 2007, Social Finance UK, which I co-founded in 2007 and launched the first social impact bond in 2010, Social Finance US and Social Finance Israel; and Big Society Capital, the first social investment bank, which I co-founded and Chaired in 2012 with equity of 600M GBP. Since 2013, I have led a global effort, first as Chair of the G8 Social Impact Investment Taskforce and then in 2015, as Chair of the Global Steering Group for Impact Investment (GSG). We have established a number of National Advisory Boards (NABs) that are running under their own steam and the GSG is there to lead and support their efforts to catalyse impact investment across 13 countries and the EU. We’re expecting to expand the number of NABs to 20 and are considering applications from a number of emerging countries as well as Scandinavia.
How well are companies adapting to the mainstreaming of purpose-driven finance? Where is impact investing making headway, and where is it lagging?
I think awareness of impact creation has grown and is now an everyday conversation subject; you come across it in conversation with governments, investors, investment firms, big companies, entrepreneurs, philanthropists, foundations and charities. Understanding has been greatly aided by the publication of the G8 Taskforce's The Invisible Heart of Markets report in 2013.
The message the report has put forward is that there is a paradigm shift occurring across the world, which is that we are all beginning to measure and seek a positive combination of risk, return and impact. Although many haven't quite realised that this is going on, asset managers with more than US$50 trillion have signed up to the United Nations Principles for Responsible Investment (UNPRI). There's also the millennial generation that is starting businesses whose measurable impact is core to their business models. Then there are investors like Bridges, Leapfrog, Aavishkaar, Double Bottom Line, TPG, Bain and many others, that are seeking to provide measurable social and environmental returns alongside financial returns.
Something fundamental is changing and the understanding is seeping in that capital will be allocated in a different way in the future than in the past.
The catalyst has been impact investing. It sits at the centre of an impact creation continuum. To the left of impact creation is SRI (Socially Responsible Investment) and to its right, is philanthropy. At its core, is the setting of measurable impact objectives and measuring performance in their achievement. It funds Profit with Purpose businesses as well as Not-for-Profit organisations. It is summed up in a simple formula: Purpose + Investment = Impact^2
It focuses on measurable outcomes. Under its influence, in the years ahead, entrepreneurs, big businesses, government, philanthropists, and social sector organisations will all focus on measurable outcome objectives.
Where I think there has been less progress than I would have liked in recent years is in getting governments to understand the importance for them of attracting impact investment to tackle environmental and social issues and making government actions more effective.
With some exceptions - namely the UK, which has created a supportive ecosystem, the US which is on the way to doing so, and Japan which has released unclaimed assets amounting to US$800 million for social purposes - governments across the world haven't progressed beyond exhortation for others to achieve positive impact. Governments need to establish a supportive ecosystem that gives an incentive for capital and talent to tackle social and environmental issues. The role of government in spreading impact investing is crucial but as happened with venture capital and technology, it is taking some time for government to help.
What challenges do you see for the future of purpose-driven finance?
The biggest challenge frankly, is a change of mindset. The various constituencies I've described need to think differently. For government, it starts with creating the ecosystem and changing the approach for its procurement of social intervention. To date we have lived with a mindset where government alone is expected to tackle social issues. We need to get to a point where governments want to attract investors who can take on risk in tackling social issues, making a financial return that is correlated with successful outcomes and losses if interventions fail. This new mindset will open the door to entrepreneurial innovation in tackling social issues.
For big companies, it also represents a big change of mindset, from the Milton Friedman sole purpose of a corporation to make money, to a new mindset where corporations need to provide shareholders with a positive balance between risk, return and impact. This doesn’t necessarily mean impairing profitability, but rather finding ways of achieving market rates of returns in impactful ways. We are already moving towards a point where impact performance is reported alongside financial returns. And there’s a new set of impact accounting conventions developing for this.
For young millennial entrepreneurs, impact investment is paving the way to more meaning than just making money through innovative business models where impact and financial return go hand in hand. Take Tesla or Rubicon, the US recycling firm, or The Gym in the UK as examples. They have created businesses where impact drives profitability rather than impair it.
How will impact and ESG-oriented investing continue to evolve in coming years?
Impact investment is gathering momentum. In the UK, there are more than 40 impact investment firms, most of them funded by Big Society Capital. Investors are moving into the space, new impact investment organisations are being created and professional intermediaries are springing up alongside. Front-line social sector organisations and Profit with Purpose businesses are accessing impact capital and using it to improve more people’s lives.
The focus of the GSG today is to get SRI to participate in bringing the paradigm shift. You can already see big companies like Unilever, Danone and Mars going in that direction. They're not changing their business models immediately, but they are transitioning to setting very specific impact objectives. By way of example, Danone and Mars have created a €120 million impact fund focused on raising the standard of living of the farmers and their supply chains. We will see other big corporations follow, setting specific impact objectives that interest their management and stakeholders, such as training unemployed youth, educating their work force in new technology, or creating economic development and jobs in poorer areas.
We’re beginning to see a ranking of the impact of public companies. There’s a lot of environmental and social information on Bloomberg terminals. And there are new companies, such as Arabesque in the UK, that rate big corporations according to their impact. As investors begin to allocate capital to companies that deliver good social and financial returns at the same time, we can expect big companies to begin measuring their impact.
Philanthropic foundations are also making big strides towards a new model. The Ford Foundation, for example, has allocated US$1 billion of its US$12 billion endowment to impact investment. This represents a shift in the model of philanthropy allocating grants to charity - a minimum of 5% of the endowment in the US - to, as Darren Walker, the President of the Foundation, puts it, using the other 95% to achieving the Foundation's goals. In addition, we're going to see an increasing number of foundations allocate some of their grant budgets to outcomes funds that pay on the success of programmes.
In the way that technology permeated large and small companies, social sector organisations and government, impact investment will eventually usher in a new mindset which will be impossible to ignore. It is the second bounce of the ball.
What will you be discussing at The Economist's Impact Investing event in London on June 15th?
I would like to achieve a deep understanding of the paradigm shift that’s taking place towards a risk, return and impact model and to address what’s needed to complete it.