The invisible heart of the market
Impact Investing Sir Ronald Cohen is Chair of the Global Steering Group for Impact Investing (GSG), described as "the father of British venture capital" and "the father of social investment", with 18 years devoted to pioneering the impact investing movement.
Here, Sir Ronald answers some important questions.
Q: You began in venture capital. What similarities do you observe between the tech revolution and the impact investing movement?
A: The tech revolution changed the world. Now we are seeing an impact revolution.
The impact revolution is the culmination of an evolution in thinking over the past 18 years. The government asked me to research poverty in the UK in 2000. That’s when I started really thinking about the impact revolution. My initial premise was simple: businesses should be able to transfer money to those who need it most.
For 250 years, business and investment decisions have been made on the basis of financial return first, and, in the last century, ‘risk and return’. Today, if we are going to cope with the magnitude of social and environmental issues we face, we need to shift to a model where investment and business decisions are made on the basis of three dimensions; risk, return and impact.
We need to shift capital flows through entrepreneurs, big business, investors, employees and consumers to bring solutions. Everyone has a role to play.
This revolution is unifying and expresses a change in our values. Inequality has increased since the tech revolution. The flagbearers of this change in values is the younger generation who are looking for more meaning than just making money.
Q: What is standing between impact investing and the mainstream?
A: We need a standard way to measure impact. We need to compare investment portfolios and judge which companies and entrepreneurs deserve backing.
The Global Impact Investing Network, which I chair, has joined up with the Impact Management Project to drive accounting principles and a framework by the end of 2019. We would like to start the decade with a framework in place so that serious investment money can begin to flow in the correct way.
Q: Individual investors and institutions are experimenting with different models for impact investing. What are the key principles binding this movement together?
A: There are no less than 150 different initiatives across the world that measure impact.
We must firstly, optimise risk, return and impact. Secondly, we must measure the impact and thirdly, focus on outcomes, not on activities. Once you measure outcomes you can create initiatives that prevent social problems.
We must recognise that impact entrepreneurs globally are our allies and we should fund them in the way we funded tech entrepreneurs.
Impact investing could bridge the $30 trillion gap needed to achieve the UN Sustainable Development Goals by 2030.
We can no longer rely on governments and philanthropists alone to tackle the scale of social and environmental issues. We need a radical change in our system to redirect capital flows.
Q: The impact investing space lacks is a universal measurement standard. How do we solve this problem?
A: We take our existing financial accounts and apply weights to sales, employment and resources to arrive at impact-weighted profit. You might have a company making a million pounds of profit but with an impact-weighted measurement, it might be making only half a million in profit or 120 billion pounds in profit!
They might have employment practices that are helping diversity and eliminating child labour and the resources they consume are better than water-neutral, carbon-neutral and plastic-neutral.
We need to put a monetary figure on social and environmental impacts. This is a revolutionary idea but it’s feasible. And we’re on the way to achieving it.
Q: What sort of future do you imagine the impact revolution will create? What does it look like to everyday people?
A: I see a world where inequality is shrinking, where natural resources are regenerated, and people can unlock their full potential and benefit from shared prosperity; a world focused not just on minimising harm but doing measurable good.
And every one of us has a role to play to bring about a better world. We have created growth, but the generous hand of prosperity has left billions behind.
We are seeking to harness entrepreneurship and innovation to overcome world problems. If Adam Smith could have envisaged measuring impact he might have said that impact is the invisible heart of the market to guide the invisible hand. Human nature is moved by altruism, empathy and fairness, not just the profit motive.
The impact revolution is providing a practical tool, capable of bringing real improvement. This gives us hope and empowerment instead of being frozen into uncertainty and inaction by the scale of the challenges.
Sir Ronald is set to publish his revolutionary new book that promises to be a catalyst for global problem-solving. To prepare the way, he will launch a Guide to Impact Investment in October at the GSG Impact Summit in New Delhi.