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Sustainability Perspectives

Episode 3: Sir Ronald Cohen, the father of Impact Investing and European Venture Capital

Recognised as the father of Impact Investing and European venture capital, Sir Ronald Cohen is a philanthropist, venture capitalist, and private equity investor.  He is Chairman of the Global Steering Group for Impact Investment and Chair of the Impact Weighted Accounts Initiative at Harvard Business School.   In this episode, host Keesa Schreane chats to Sir Ronald about measuring impact weighted accounts, the importance of social factors such as diversity and inclusion and workforce engagement to stakeholders, and the evolution of capitalism.

Host: Keesa Schreane

  • Keesa: [00:00:10] Welcome to the podcast, this is Keesa Schreane. Today's guest is Sir Ronald Cohen. He's a philanthropist, venture capitalist, private equity investor, and is also recognised as the father of Impact Investing and European venture capital. He's the chairman of the Global Steering Group for Impact Investment and is with the Impact Weighted Accounts Initiative at Harvard Business School. He's co-founder and former executive chair of Apex Partners Worldwide and is the author of the book Impact Reshaping Capitalism to Drive Real Change. Now, Ronnie, I know we always, we shout out that you are the father of impact investment and the father of European venture capital. But we also want to call out and I love the fact that you called this out, you are also the father of Jonny and Tamara. So, let's give them a shout out, first and foremost.

    Sir Ronald Cohen: [00:01:02] Thank you Keesa, So they're both involved in Impact, incidentally, Tamara is an Impact entrepreneur and John is an Impact V.C.

    Keesa: [00:01:10] So it runs in the family clearly. So, I want to get into talking about Impact-Weighted Accounts. What does measurement and specifically measuring impacts towards success, what does that measurement look like in reality?

    Sir Ronald Cohen: [00:01:24] So you can see it and feel it and use it now. It's open source, it's available at HBS, IWA, as you mentioned, Harvard Business School, Impact-Weighted Accounts. You can see the environmental damage caused by 3,000 companies already in monetary terms broken down by their CO2 emissions or other gas emissions, use of water, biodiversity, soil erosion and so on. You can do the same thing with Employment Impact. You can see 2,600 companies’ diversity debit, which measures the difference between the demographics in their facilities and the demographics in the communities outside them. Ascribes the salary levels that would have been earned by the excluded members of these communities, and it gives you numbers, for Amazon $6.5 Billion of diversity debit, for Apple, $2.5 Billion from memory. You can measure it relative to wages. Amazon performs better. 16.5% Diversity Intensity, as we call it, and in the case of Apple, 25%. So, you can see that it adds a dimension to financial analysis and it begins to give the data for the trends that we see reflected in financial markets by virtue of which companies that pollute more are worth less than their competitors who do a better job on that dimension by giving that data to investors, you begin to affect financial analysis and the valuation of companies.

    Keesa: [00:03:13] So, Ronnie, if we're, and I'm glad you mentioned the value of the companies looking at companies who pollute more, et cetera. If we look at where investors are focused as well as where society in general, the focus is right now, it really seems to be environment and climate. Do you suspect that those social factors that you named, diversity and inclusion, workforce engagement, do you expect that they will at some point become just as important to the stakeholders or maybe even surpass where climate environment is now?

    Sir Ronald Cohen: [00:03:42] I think they will, and I think we're going to see shareholder resolutions in the year ahead reflect both environmental and employment performance. The reason is that investors are concerned about every form of impact, not just environmental impact. And when you see the result of rebellions across the world against economic inequality, they don't result from governments, for the most part, they result from the employment practices of companies. And so, I do believe that we will increasingly look at the impacts of companies across all of its dimensions, mainly three, the environmental impact that comes from the production facilities and logistics, the environmental footprint of a company as it's called, the employment impact through its employment practices and the product impact on people and planet.

    Keesa: [00:04:44] I'm glad that you mentioned this robust ecosystem, if you will, and I know that in terms of who is driving the change, I know you think regulators are, I guess, a bit reactive and they're not necessarily the drivers of change. Are you concerned with a segment of society or stakeholders who maybe will delay the change that's needed in terms of what's required in disclosures, what is requested from investors that will delay this more progressive agenda that seems to really be taking place globally? Do you think there are some stakeholders that we should be mindful of? And if so, who are they? Who could perhaps delay change?

    Sir Ronald Cohen: [00:05:21] In the pages of my book, I mention the causes of this impact revolution and that it was initially started by young consumers who refused to buy the products of certain companies because of the harm they cause. Talent that refused to work for them that this became visible to investors. And now you have 40 trillion dollars all of a sudden going to ESG investing. The investors are now driving the change. And companies are following, sometimes reluctantly. Because they feel that these metrics are going to expose poor performance on their part. There are, however, corporate leaders who are embracing the impact movement as their predecessors embrace the technology revolution who realise that it's the way of the future that businesses are going to have to optimise risk return an impact, and that their product strategies, their employment practices, their operating infrastructure have to achieve impact as well as profit. Take Tesla, Tesla didn't just arise as another automobile company, it arose as an automobile company responding to the values of a new set of consumers who were concerned about the pollution that comes from the combustion engine. And in 20 years, Elon Musk has built a trillion-dollar company and shifted the whole of the automobile industry to electric vehicles. This type of disruption is going to occur in every sector. We're going to see it in finance. We're going to see it in education. We're going to see it in health. We're going to see it in the consumption of goods and services. So those who are dragging their feet today, tend to be those whose impact performance is poor.

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    Keesa: [00:07:19] So I want to take that a step further. We're talking about the leaders and we're talking about the consumer. So, these stakeholders, I'm wondering too, do you see countries, specific countries, specific administrations, if you look at the leadership, as being ahead of the curve, I know UK, always gets positive shouts out about that. But who do you see as leaders that other countries should maybe model?

    Sir Ronald Cohen: [00:07:42] I think the UK, the EU, the US, countries like the Netherlands are all seeking to move in this direction. If the EU with its March announcement and if the US, with an announcement in the same month about the transparency of impacts, bring into focus, in the case of the EU, the impact of investors and in the case of the [SCC], the impacts of corporates, we may see a global movement now, to measure impacts and translate them into monetary terms capable of incorporation in financial analysis, and as I said, ultimately in the valuation of companies.

    Keesa: [00:08:31] So in getting to that, I want to talk about this concept of the new capitalism or at least the evolution of capitalism, and there is a quote from your book that I think really sums it up. You say capitalism is no longer answering the needs of our planet and there is a new way forward. And also, you mentioned that impact capitalism is private sector and government engaging together. How can businesses and investors better prepare for an impact capitalism future?

    Sir Ronald Cohen: [00:09:01] So the first thing they have to do is to begin to measure their impact, so they know what impacts they're delivering. Every business virtually delivers positive employment impact. Almost every business, delivers some negative environmental impact. If you look at the Harvard data, though, 450 businesses out of 3,000, delivered more environmental damage in a year than they do in profit. So, within certain sectors, fossil fuels, construction industry and so on, everyone is polluting. But there are leaders and laggards. I do see some companies doing a much better job than others. By bringing transparency to these impacts, we create a race to the top. And so, the companies that want to be at the top need to start now to measure their impact and to try to do something about improving them.

    Keesa: [00:09:57] Do you see the engagement between companies and between investors, do you think there is room for improvement there where companies feel that they are providing as much information as they can to investors? Do you think that there are some room for investors to maybe give a little more grace to companies? Where do you think that relationship is, or do you think there's room for improvement there?

    Sir Ronald Cohen: [00:10:17] I think investors, particularly the asset managers, more so than pension fund managers to date are responding to the needs of their customers. So, the pressure on asset managers to obtain information from companies about their impact performance to disengage from management teams that don't believe in impact and believe in continuing to pollute in the same old ways, engage with companies that may be creating environmental harm, but have a transition plan to improve their performance and a credible transition plan to achieve it. Invest in companies that are bringing solutions in the areas of clean energy and carbon recapture. Those types of pressures are coming from investors to companies, and they're coming in the form of 40 trillion dollars’ worth of ESG money. You can't avoid it today if you're a company and if you try to avoid it, as ExxonMobil did, then your shareholders will throw out three of your directors and appoint three new ones who understand something about environmental. So thoughtful companies are adopting this thinking, and they need to begin to measure the impacts, though it's not enough to think that way, you need to be ahead of the transparency, which is soon going to come. And so, the relationship between investors and corporates isn't an inimical one, in the same way that investors invest in a company and drive it to deliver greater profitability. Investors are now driving for greater impact as well. And companies are wise to get ahead of that curve.

    Keesa: [00:12:12] And finally, Ronnie, you've been talking about impact investing for years, long before many of us were even aware of what it meant. So really, we want to get an understanding of if we look at where we started with this impact investing journey and if we look at where the aspirational goal is, where would you say we are now in 2022 based on where we started and based on the aspiration of where we can possibly be?

    Sir Ronald Cohen: [00:12:36] So I define impact investing as the intention to create positive impact as well as profit and to measure both, to measure profit and impact. In that sense, you could say that impact investment started with the first social impact bond in 2010, which was the first time you had the security, whether return depended on the social improvement in that case, a reduction in the number of prisoners going to jail, Peterborough Jail. If you look at what's happened from 2010 to 2021, in 11 years, we have $40 trillion of ESG money. We have more than $2 trillion of impact investment where the impact is actually measured. We've had the ISSB set up by the organisation responsible for all financial accounting across the world, except the US, IFRS, to provide standardised metrics on the impact quantities delivered by companies, Tonnes of CO2, litres of water, and so on. It came two years after the beginning of the Covid-19 disruption, if you like. And we have now a G-7 Impact Taskforce report that just emerged in December saying impact valuation and impact transparency are the next milestones. So, we've come a huge way in just 10 years, and if you compare it to the four decades we spent talking about climate. The effort now is focused on companies, not on governments agreeing, and therefore, I think the progression is going to be a lot faster than people expect. I expect that within the next three to five years, we will have the mandatory publication enforced by regulators of impact statements, as you were saying at the beginning, starting with the statement that shows the revenues, the cost and the impact of companies in monetary terms.

    Keesa: [00:14:47] Love that prediction and hope that it happens as quickly as we talked about, so great information here, first of all, really insightful, about 400 companies out of the 3k that we discussed were polluting more than they were making a profit. Very interesting. With the amount of money that we now have in ESG money, it really shows that there is a shift. And to your point, as your book said, younger investors, consumers are really focused on this. And also, companies would be very wise to look forward before thinking in terms of the transparency that's coming down the pipeline and being aware that investors can impact boards and board members in the way that you pointed out. Ronnie, thank you so much for such amazing insights today.

    Sir Ronald Cohen: [00:15:33] Great pleasure Keesa, wonderful to chat with you.

    Keesa: [00:15:39] We invite you to subscribe to the podcast on Apple, Spotify or wherever you stream your content. What did you think about the podcast? Leave us a review on Apple or follow us on LinkedIn and Twitter for updates on our show. Thank you for joining! See you next time!