Impact

Reshaping Capitalism to Drive Real Change

Sir Ronald Cohen

• Publisher: Morgan James Publishing
• Year: 2021
• Print ISBN: 9781633691704, 9781631955167
• eBook ISBN: 9781631955150
• Topic: Business
• Subtopic: Business General
• Index: Business

" A Must-Read Book From The Godfather Of Impact Investing " - Forbes

Capitalism and democracy are being challenged.

The world must change, but we cannot change it by throwing money at old ideas that no longer work. We need a new path to a new world where inequality is shrinking, where natural resources are regenerated, and people can benefit from shared prosperity. This is the world being created by the Impact Revolution.

Preeminent international investor, entrepreneur, philanthropist, and social finance innovator, Sir Ronald Cohen, has dedicated two decades to leading the Impact Revolution to achieve real social and environmental change. As one of the founders of venture capital, which ushered in the Tech Revolution, he builds on his years of personal experience to deliver a compelling account of how impact investing is reshaping capitalism.

So, whether you're:

• an aspiring young entrepreneur
• an established business person
• an investor
• a philanthropist
• or somebody in government

or are interested, as a consumer or employee, in companies doing good and doing well at the same time – this book is a sure-fire way to find out how you can play a role in changing the world.

All royalties from the sale of this book are donated to impact charities.

" A powerful case for a movement that is gaining traction in society " - Andrew Jack, The Financial Times

" [IMPACT's] aim is nothing less than to create a new type of capitalism infused with a social purpose. The book deserves to be read by anybody interested in such a revolution."- Martin Wolf, The Financial Times

" A fascinating blueprint for a hope-filled future underpinned by the social power of impact investing. "-- Kristalina Georgieva, Managing Director, International Monetary Fund, Former CEO, World Bank Group

Chapter 1

THE IMPACT REVOLUTION: RISK–RETURN–IMPACT

We must shift impact to the center of our consciousness

We cannot change the world by throwing more money at old concepts that no longer work — we need new concepts and approaches. New words are coined to capture new ideas, which is as true of economics as in the world of scientific discovery.

What does impact mean? It was in 2007, at a meeting hosted by the Rockefeller Foundation at its Bellagio Center in Italy, that ‘impact investing’ was coined as a term to replace ‘social investment’. In its simplest terms, impact is the measure of an action’s benefit to people and the planet. It goes beyond minimizing harmful outcomes to actively creating good ones by creating positive impact. It has social and environmental dimensions.

‘Social impact’ refers to the improvement in the well-being of individuals and communities, and the enhancement in their ability to lead productive lives.¹ It represents genuine social progress: educating the young, feeding the hungry, healing the sick, creating employment and providing livelihoods for the poor.

‘Environmental impact’ is just what it sounds like — the positive consequences that business activity and investment have on our planet. Put simply, are we preserving the planet and passing it on to future generations, so they can benefit from it and do the same?

Impact needs to be brought to the heart of our society and take its place at the center of our economic system

Impact needs to be brought to the heart of our society and take its place at the center of our economic system. Our current system encourages decisions that are based on how to make as much money as possible with the lowest level of risk; we need to shift to a system that encourages making as much money as possible but in a way that is consistent with achieving the highest impact and with the lowest level of risk.

Impact must become ingrained in our society’s DNA, part of a triple helix of risk–return–impact that influences every decision we make regarding consumption, employment, business and investment. It needs to become a driving force of our economy.

When we follow this new model, the social and environmental benefits of our decisions become central to our thinking rather than a mere afterthought. But to channel this new way of thinking into social and environmental improvement, we need to be able to measure impact dependably.

Though we take the prevailing model of risk and return for granted, it wasn’t always the dominant model. Up until the twentieth century, business owners and investors only measured how much money they stood to make when deciding how to allocate capital. It wasn’t until the second half of the twentieth century that the measurement of ‘risk’ was formally introduced and that it became natural to quantify risk and look at its relationship with return.

Risk is defined as the likelihood of adverse outcomes that could cost investors money. It sounds like an indefinable concept, and it used to be considered unmeasurable, but the academic community eventually found ways to standardize its measurement across all forms of investment; by the end of the twentieth century, everyone was talking about and measuring it in the same way.

The measurement of risk has had profound implications for the investment community. It introduced new theories like portfolio diversification, which gave rise to new asset classes that came with a higher level of risk, but also disproportionately improved returns. These new asset classes included venture capital, which funded the Tech Revolution, private equity and hedge funds. It also allowed new investment themes to take hold, like investment in emerging markets, which funded globalization.

If we fast-forward to the present day, we see that the same revolution that risk brought is now being brought by impact. Investments are increasingly examined for their positive and negative impact, and investors and businesses are becoming interested in factoring impact into their decision-making. Is it harder to measure than risk? Not at all — in fact, one can argue that it is easier. All over the world, people are developing methods to measure it.

The Impact Revolution promises to be just as world-changing as the Industrial Revolution or the more recent revolution in tech. It is a peaceful movement started by young consumers and entrepreneurs, who are disrupting the prevailing business models once again, but this time in order to improve lives, reduce inequality and improve the planet.

The Tech Revolution

It has been amazing to see how, within just a few decades of my life, new tech companies have overtaken giants that long dominated their field. Once-obscure start-ups such as Amazon, Apple, Google and Facebook have rocketed to the top 30 most valuable companies in the world in just 30 years.² We all know the stories of entrepreneurs who through their talent and drive have come up with new ways to solve old problems, pioneered invaluable new technologies and reshaped our modern world.

Of course, breakthroughs like this don’t occur in a vacuum; one of the key factors that gave rise to the scale and speed of the Tech Revolution was the ready flow of venture capital investment, now a sector worth $1 trillion. If you told someone you worked in ‘venture capital’ 50 years ago, you would have been met with a blank stare.

Invented after the Second World War, venture capital gained a foothold in Silicon Valley in the 1970s and 1980s, and spread globally as the idea of investing in small, high-growth tech companies took off. Beyond their technical ingenuity, the skill of those early entrepreneurs lay in convincing investors there was money to be made by breathing life into their visions. Investors evaluate success based on profit, balancing the threat of risk and the potential for return. When they decided to invest in those early-stage tech companies, they were taking a leap of faith.

In the early 1980s, I was one such investor. The firm I co-founded, Apax Partners, invested in nearly 500 pioneering start-ups, each of which was intent on making an indelible mark on its field. Our investments included PPL Therapeutics, the company responsible for Dolly, the world’s first cloned sheep, Apple and AOL.

One of the main reasons I became a venture capitalist was my feeling that I could make a positive impact on society while also doing well financially. Apax Partners backed hundreds of entrepreneurs who enriched themselves, as well as the people working with them and their communities. They created many thousands of jobs in new fields ranging from technology to consumer products and media. I believed that providing new sources of revenue and jobs to improve people’s lives would elevate society as a whole.

However, as the years passed, I could see that the gap between rich and poor was widening. Some companies ended up doing more harm than good, and things got worse rather than better for many people at the bottom of the social pyramid. In the UK, even with the extension of the welfare state providing a safety net, poverty is still a huge challenge, and economic opportunity for the needy failed to expand meaningfully. The story is similar for the rest of the world. Although 60 million jobs were created in the new tech sector in the US, social and economic inequality continued to spread.

Part of the problem was due to supply and demand. The new skills required for tech jobs depended on higher-level education and so were in short supply. Firms competing for the talent drove tech salaries upwards, just as salaries in low-growth sectors were shrinking. The confluence of globalization, new technology that replaced workers and the flow of equity capital and cheap debt raised financial returns for the 1 percent, while competition for qualified talent contributed to the perfect storm for making the rich richer and the poor poorer.

By 2000, it was clear that this model was failing society. The Tech Revolution had created incredible wealth and many social benefits, but huge social and environmental problems continued to plague our world, some of which had been made even worse. The relentless consumption of our natural resources raised global temperatures, leading to the loss of wildlife, deadly wildfires, flooding and the destruction of the biodiversity on which our existence depends.

If we do not fix these problems, the results could be catastrophic, so we need a new revolution in our thinking. We need new solutions that address both our social and environmental challenges — two streams that are now converging, as climate change leads to forced migration. But where will we find our bold solutions? If neither governments nor the private sector have been able to bring the urgently needed improvement at scale, perhaps the answer lies in changing our economic system.

The Birth of Impact

I began to realize that we needed a system that aligned the interests of business, investors and entrepreneurs with those of government, non-profit organizations, philanthropists and impact enterprises and drove them to work together to improve lives and the environment. But what could that look like? The answer turned out to be very simple: social initiatives needed to be connected to investment, which would enable entrepreneurs to finance purpose-driven businesses and charitable organizations. It would allow us to harness entrepreneurial talent and innovation to tackle old problems in new ways.

When faced with huge social or environmental challenges, we must adjust our approach to investment in order to tackle them

Just as tech entrepreneurs were able to bring about change with the help of investment capital, impact entrepreneurs can make progress in overcoming the most pressing issues of our time. When faced with huge social or environmental challenges, we must adjust our approach to investment in order to tackle them. Investment is the fuel of our economic system, and in order to appeal to investors, it is helpful to start by viewing the world through their lens. This means focusing on profit and impact, evaluating success based on measurable results.

Reframing a social challenge as a chance to invest in our communities is more than a handy metaphor; it can deliver attractive financial returns and capture the interest of those who might otherwise focus their talent and investment on just making money.

In 2002, together with Philip Newborough, a former Apax colleague, and Michele Giddens, my right hand at the Social Investment Taskforce, I co-founded Bridges Fund Management to channel venture capital into the poorest parts of the UK. It was a simple idea: we would back businesses that were located in the poorest 25 percent of Britain in order to improve the lives of the UK’s most vulnerable populations. We wanted to make an impact through investment, so we thought like investors and set out to find a way to deliver measurable impact, alongside a 10–12 percent annual financial return.

Eighteen years on, Bridges has raised over a billion pounds and delivered an average net annual return of 17 percent. Just as importantly, it has done so while achieving significant impact; in 2017 alone, it delivered 1.3 million hours of quality care, provided healthcare services to 40,000 people, averted more than 30,000 tons of carbon emissions, directly supported over 2,600 jobs and helped over 2,600 children achieve better educational outcomes.³ Through our investments, we have helped to scale some of the best impact businesses in the country.

The UK government backed Bridges’ first fund with a £20 million ($26.6 million) investment, making it easier to attract private sector investment. It helped with another important social initiative in 2008, following the recommendations of the ‘Commission on Unclaimed Assets’, which I had set up three years earlier. The Labour government introduced legislation to direct money that was lying in unclaimed bank accounts⁴ to flow to three social purposes: the establishment of a social investment bank, which the Social Investment Task Force had advocated in 2000, as well as youth and financial inclusion.

Four years later, £400 million ($532 million) of this money, supplemented by a further £200 million ($266 million) from the UK’s four major banks, was used to establish Big Society Capital (BSC): the world’s first ‘social investment bank’. It was launched by David Cameron at the London Stock Exchange in April 2012. Since then, BSC has brought a significant boost to investment in charitable organizations, transforming their ability to scale and innovate.

Impact in Action

Encouraged by our early successes, in 2007 I created the UK’s first social investment advisory firm, Social Finance, with the help of the philanthropists David Blood, Lord (Stanley) Fink, Sigrid Rausing and Sir Philip Hulme. Our core mission was to invent ways of connecting social entrepreneurs with investment capital.

We set about recruiting talented young people from the financial and social sectors, and by the end of the third year our team had grown to 18 people, working under the chairmanship of Bernard Horn (formerly a director of NatWest Bank), with David Hutchison (formerly Head of UK Investment Banking at Dresdner Kleinwort) as our CEO.

Late in 2009, two members of the team, Toby Eccles and Emily Bolton, came to my office to talk about ways to reduce prisoner reoffending rates. Across the world, the statistics were jaw-dropping: as many as 60 percent of young prisoners returned to prison within 18 months of their release.⁵ This statistic had a ripple effect of negative consequences. Just imagine the human misery that could be avoided, the families reunited and the crime rates reduced, not to mention the savings for government, if we could somehow reduce that number.

Toby and Emily suggested that we tie the reduction in the reoffending rate to a financial return for investors, paying a return according to the social success that was achieved. In simple terms, investors would be paid for the increase in the number of prisoners who did not reoffend. This was a ground-breaking new idea.

I was inspired by the way in which venture capital had brought investors to fund the growth of start-ups. Working with Toby, Emily and David Hutchison, we designed the social impact bond as an investment instrument that would be capable of bringing investment to charitable social delivery organizations.

Armed with our proposal, which set out how the SIB worked, we went to meet Jack Straw, the Secretary of State for Justice. We offered to raise several million pounds from investors to fund charitable organizations that were already helping prisoners, if the Ministry of Justice would agree to pay investors back according to the increase in the number of prisoners that did not return to jail. The aim was to harness the profit-driven ingenuity of social entrepreneurs and the capital of investors in solving an unrelenting ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Introduction
• 1. The Impact Revolution: Risk–Return–Impact
• 2. The Age of Impact Entrepreneurship
• 3. Impact Investing Sets the New Normal
• 4. Embedding Impact in Business
• 5. The Dawn of Impact Philanthropy
• 6. Government: Solving Bigger Problems, Faster
• 7. The Invisible Heart of Impact Capitalism
• About the Author
• Glossary
• Notes