Sir Ronald Cohen, author of Impact, realized at the age of 60 that he did not want his epitaph to say “he achieved 30% per annum returns in his investments”. He had been co-founder and president of Apax Partners, where he managed $50 billion. Currently he chairs the Global Steering Group for Impact Investment, which encourages investment that optimizes risk, profitability and impact, measuring achievement.
He believes that capitalism no longer provides answers to the needs of our society and planet and that, as the technological revolution marked the twentieth century, a new moral system is being imposed in the 21st century. Impact is now the “invisible heart” as was economist Adam Smith’s “invisible hand” for markets.
He notices that the traditional model has been to generate as much money as possible, without worrying about doing good, and then provide philanthropy for causes. Moreover, our financial and economic system has a negative impact and depends on the government and philanthropy to solve problems it creates. But you can do good by doing it right. It is about accepting that risk and return need a third dimension: social and environmental impact.
“You can do good by doing it right. Risk and return need a third dimension: social and environmental impact”.
Sir Ronald Cohen, autor of Impact
It is a new “impact capitalism”, moved by profit and impact in equal measure, considering that kind of businesses more attractive to consumers, employees and investors and does not mean sacrificing profits.
He believes that the objective will be achieved when the 100 largest pension funds and foundations spend 10% on impact investment in all their portfolios, as well as world’s 50 largest foundations, 10% of the spending by most prominent social organizations and foreign aid financed by results-based contracts and 50 of fortune’s 500 global fortune companies measuring their impact.
The author illustrates this with the social impact bonus of Peterborough SIB, which helped reduce the rate of recidivism of prisoners in England. Investors, paid by the government, was based on the number of prisoners who did not committed crime again. Another example is Bridges Funds Management, which channeled on billion pounds to the poorest parts of England and provided a net annual return of 17% or Big Society, launched by David Cameron in April 2012, which has facilitated investment to charities, increasing its scale.
The key are results-based contracts, through a social organization the investor finances, being remunerated on measurable results by apayer, usually governments or foundations. If the objectives are not achieved the investor loses money, but he will have made a philanthropic donation. If they are achieved he/she will receive back the investment with a return that will increase with objectives achieved. In addition, it is about evaluating non-profit institutions and investing in those that provide best impactresults instead of just getting more funds. At business level, in Michael Porter’s words, “the purpose of a company has to be redefined as a value-sharing creator not only for profit and will lead to a new wave of innovation and productivity growth in the global economy.”
This is the case with Revolution Foods, which encourages healthy eating in schools. Adidas, for its part, has created shoes with recycled plastic from the oceans and is committed to employing 100% recycled polyester by 2024. Ikea has a furniture leasing program in Switzerland with which you can return the product used to refurbish and choose a new one.
In this regard, the Impact Weighted Account initiative promotes systematic measurement and weighted integration of impact on companies’ accounts, through generally accepted principles, such as generally accepted accounting principles. It is about giving monetary value to social and environmental issues in dimensions as quality, accessibility and recyclability or how healthy food products are.
Other initiatives include Global Impact Investment Network, Sustainability Accounting Standards Board and World Economic Forum International Business Council. Verification, discipline and transparency are needed. In this regard, the OECD recognizes that governments must play a role in developing measurement and reporting standards, with incentives for investors.
At the moment ESG (environmental, social and governance) and impact investments are equivalent to 15% of global assets, totaling $215 trillion and more than a third of professionally managed assets; green bonds represent 10% of the bond market and social and development bonds may reach 1% of the bond market by 2030. Pension funds show greater progress, consistent with their fiduciary obligation, totaling 38.3 trillion. Also, some private equity firms are starting to launch specialized impact funds. According to Global Family Office Report 2017, 40% of family offices planned to increase allocation to impact investment.
At the end of the day, Cohen believes that any investment will be impactable.
José Mª Serrano-Pubul, CFA, CAd, Certificate in ESG investing, member of CFA Society Spain
