Sir Ronald Cohen: Making an impact
By Laurence Eastham , CA Magazine
28 October 2020
Sir Ronald Cohen tells Laurence Eastham how the impact revolution will supercharge our economic, social and environmental recovery
Big crises create the opportunity for big steps forward,” says Sir Ronald Cohen, Chair of the Global Steering Group for Impact Investment (GSG). Cohen, who has also earned the title of “the father of social investment” for his work in the field, believes the pandemic has created an opportunity to reform our current economic system and rethink its relationship with society and the environment.
His new book, Impact: Reshaping Capitalism to Drive Real Change, was written before the pandemic escalated and transformed our daily lives, but the message of rethinking capitalism for a new age now rings truer than perhaps anyone could have anticipated. “Covid is going to exacerbate social inequality,” Cohen tells CA magazine. “The most vulnerable are being hit hard and stimulus packages are focusing primarily on big companies. The philanthropic sector is being hit hard, too.”
Cohen points to the transformative power of crises past as examples of the economic sea change set to come: “The Wall Street Crash of 1929 precipitated generally accepted accounting principles. It’s hard to believe, but up until 1933, companies could put profit into hidden reserves without telling shareholders.”
And the global financial crisis of 2008, which “shook people up and increased social inequality”, would lead to the explosion of impact investment and the creation of the GSG. During the UK’s leadership of the G8 in 2013, then Prime Minister David Cameron selected Cohen to lead the Social Impact Investment Taskforce and, following its final report two years later, the GSG was born. The mission: to transform the risk-return paradigm that has dominated capitalism for decades to risk-return-impact.
“The G8 report, which was entitled The Invisible Heart of Markets, for the first time said that the world is moving to risk-return-impact,” explains Cohen. “We didn’t quite see yet but it’s where young consumers and young employees were heading. It’s where investment is increasingly heading. It’s where governments are going to have to head in order to be able to cope.”
Inside job
Cohen is a quiet revolutionary, seeking to realign our economic systems rather than tear them down. Having founded one of Britain’s first venture capital firms in 1972, he knows well the power that targeted and considered investment can have. He stepped down as CEO of Apax Partners, which now controls around $50bn (£39bn) in assets, in 2005 to devote his energies to bringing about the age of impact capitalism.
“Capitalism was capable of coping, and indeed it drove reductions in inequality in the early days of the Industrial Revolution,” he explains. “The problem arose when, because of the scale of industrialisation, the consequence of just looking for profit began endangering the climate and our planet and exacerbating social inequalities.
“We’re at the stage now where our system has become self-defeating. We keep digging a deeper hole for ourselves environmentally and socially because the consequences are too big for even governments to be able to cope through taxation. Businesses drive for profit and neglect to reduce the negative consequences – and improve the positive consequences – on society and the planet. After a century of focus on just making profits to the exclusion of every other consideration, we see that it has gone too far.”
Cohen’s book is full of examples of how investment decisions can be driven equally by profit and impact, all based on the blueprint of the social impact bond that he helped to launch under the governments of Gordon Brown and Cameron. The first bond of its kind brought together government, non-profits and investors to target the reoffending rates of those released from Peterborough prison. The idea was simple: if the non-profits failed to reduce reoffending by 7.5%, investors would receive nothing; but if reoffending fell by more than 7.5%, the government would pay investors a return according to the reduction achieved. By the end of the project, reoffending had fallen 9.7% and investors received 3.1% on top of their capital. The risk-return-impact paradigm had been proven to work.
Today, there are 192 social impact bonds and development impact bonds across 32 countries, attracting $400m in investment and representing more than $1bn in commitments to pay for successful outcomes. For Cohen, its success clearly demonstrates that capitalism can be reimagined with society and the environment at its heart. “We’ve got to change the system, but we don’t have to give up markets and the use of capital and entrepreneurship – even the profit motive,” he says. “But we can’t make the profit motive unbridled – we have to put impact by its side to keep it in its place.”
Reporting for duty
Now, with proof of concept achieved, Cohen believes the critical moment has arrived for the accountancy profession to join the impact revolution: “The idea that we must get our economic system to provide solutions has been around. What didn’t exist were the tools to do that. You can’t manage what you don’t measure and, without measurement, you’re down to intention.”
As parts of his efforts to bring rigour to the emerging discipline, Cohen also chairs the advisory board of Harvard Business School’s Impact Weighted Accounts Initiative (IWAI), a research group led by Professor George Serafeim and initiated jointly by the GSG and the Impact Management Project. The IWAI brings together academics, practitioners, companies and investors with the goal of creating a framework for impact-weighted accounts. In September 2020, the group released a dataset quantifying the environmental impact of 1,800 publicly listed firms from 2010 to 2018. Using these figures, for example, American Airlines would have incurred $4.8bn in environmental costs, wiping out its reported profit entirely.
Cohen believes recognising these costs will improve outcomes: “If you imagine we can measure the impact companies create and reflect it through their accounts, governments can then tax companies directly for the social and environmental issues they cause. Impact transparency is key to incentivising companies to bring solutions to the challenges we face, instead of creating and aggravating them. Mandating impact transparency is a big, bold step, but it’s absolutely necessary.”
He also envisages a future in which an impact accounting board establishes “generally accepted impact principles” and standardises the measurement of different areas of impact. It feels as if we’re a long way from that point, though. Sustainability accounting, if performed at all, is usually published entirely separately from the standard financial reports. As for standardising impact measurements, there are currently more than 150 programmes running globally, which Cohen characterises as “efforts to shape different bits of the puzzle without having a picture of the front of the puzzle”. Even the British government threw its hat into the ring with the launch of its unit cost database in 2014.
But, according to Cohen, governments have a much larger role to play in the introduction of impact-weighted accounts. “It will continue to make its way organically but, if market forces are left to do it, it will take a lot longer,” he says. “We need urgent action to emerge from Covid sooner and create a more equitable and more sustainable world thereafter. I’m very much in favour of government mandating that, starting two years from now, every company must publish impact-weighted financial accounts.”
Redressing social inequality, in addition to improving environmental outcomes, is a deeply personal cause for Cohen. He arrived in the UK as a refugee at age 11, speaking no English, his family having fled Egypt in 1957 following the Suez Crisis. Encouraged to work hard by his father, the young Cohen was awarded scholarships to the University of Oxford and then Harvard Business School, kickstarting what would become a long and successful career in business. It’s a story that illustrates the benefits of social mobility that Cohen is seeking to bring about more widely.
Cohen wants to ensure that young people today are not at risk of being failed by the economy, especially as the pandemic continues to bite. His advice is that they exercise their ability to change the system, rather than choose to disengage from it entirely. “Young people need to understand that they have the tools to exercise their power,” he explains. “Through their pension funds, they can begin to militate for portfolios that reflect their values; through their employment within companies, they can militate for companies to do the right thing; through their purchasing of products, they can also reflect their values; and as entrepreneurs, they can create companies that disrupt existing models.”
In other words, it is within our power as consumers, employees and investors to help bring about the impact revolution, and it all depends on our appetite for change. The pandemic has brought about a crucial moment to vote with our wallets as well as at the ballot box. As Cohen puts it: “Our political system is not actually the cause of the great challenges we face, our economic system is.”
Cohen was interviewed by London Area Network Chair Jason Harvie CA at the recent CA Summit.