Sir Ronald Cohen is proud of a long career as one of the most influential investors globally in the past few decades. He is no less proud of his children who work in business but in the way Cohen believes is the future of business – impact investing and technology.
Impact investing aims to generate a measurable, beneficial social or environmental impact alongside a financial return. Cohen’s daughter Tamara is a co-founder of the startup Riseup that helps families balance their budget and his son Jonny works at the family’s investment fund.
Arriving penniless at age 11 with his family to Britain from Egypt, Cohen, graduated from Oxford University, helped pioneer venture capital in Britain founding Apax Partners Worldwide and later received a knighthood for his efforts.
However, those successes haven’t prevented Cohen, age 75, from seeing the weaknesses in venture capital and private equity and capitalism in general. At the time he was knighted 20 years ago, he turned his attention to the then-emerging field of impact investing.
He has now laid it all out in theory and in practice in his book “Impact: Reshaping Capitalism to Drive Real Change,” which was published last November and appeared on The Financial Times list of the Best Economics Books of 2020
“For more than 200 years, our existing version of capitalism drove prosperity and lifted billions out of poverty, but it no longer fulfills its promise to deliver widespread economic improvement and social progress. Its negative social and environmental consequences have become so great that we can no longer handle them,” Cohen writes in the book.
In an interview with TheMarker, Cohen discusses the impact revolution – what it means, how it can be achieved and how it can change the world for the better much the same way earlier upheavals in the capitalist system did.
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The typical investment portfolio in the 1970s comprised stocks and bonds issued in the investor’s home country. With the development of the concept of risk management, investors began to build their portfolios using risk-adjusted returns.
“This opened the door to multi-asset class portfolios with different levels of risk and return. It opened the door to venture capital and private equity and hedge funds. And so it funded the tech revolution that also opened the door to investment in emerging markets and funded globalization,” said Cohen.
“I feel the same way about impact today. There are, again, three very powerful forces at work at the same time, which are going to make this revolution. One is changing values – you see that young people don’t want to work for companies that create harm, they don’t want to buy their product.”
Influenced by their clients, the phenomenon was picked up by investment managers and their organizations. “Today, nearly half of all professionally managed money, is trying to achieve more than profit – trying to achieve impact, as well as profit,” he said, estimating the total being invested this way globally comes to between $30 trillion and $40 trillion.
“The second big change is that technology took huge leaps forward, which enables us to deliver impact globally, in ways humanity could never contemplate before – areas where Israel is particularly strong, such as artificial intelligence, machine learning, augmented reality, the convergence of computing and the genome and life sciences,” he says.
The third major force is the measurement of impact, said Cohen. And that is where he enters, in his role, described by many media outlets, as the “father of social-impact investing.”
“Big data and computing enables us now to measure the impact that companies have on people and the environment, through that product, their employment, and their operations …. You can measure plastic bottles and their impact on the environment. You can measure the impact of sugar on health, the impact of fiber on health,” he explained.
But how do you measure social impact, which is an inseparable part of ethical investing?
“You can do the same thing for equality of pay between genders, between minority groups, the level of diversity in a company, as you can do for environmental effects. How do you do it? You take the diversity within the company. Computing and big data enable you to compare it with diversity in the area around the facilities. You then take the salary levels of the missing people, if you’re missing a certain number of women, you take the salaries that would have gone to women. If you’re missing ethnic groups, you take the salaries that would have gone to the missing at every level of the organization. And it gives you a figure. And then you measure differences in pay. And you take the amount missing.
“That brings you to a conclusion that is striking like Apple’s $10 billion wage bill for 80,000 people in the U.S. – a $2.7 billion negative charge because of lack of diversity and advancement, and the quality of pay. Compare it to Costco, another big company, that employs twice as many people as Apple, it has a billion-dollar negative. So you know, Costco is more diverse, and the fairer employer than Apple.
“So what does this do? It gives investors the transparency they need to say to the management of Apple, ‘Hey, guys, you have to get going on improving the diversity, it’s better business for you.’ And interestingly, we are seeing shareholder rebellions now. We see the shareholders of Procter & Gamble, two thirds of them voting against management because of what? Because of deforestation created by the use of palm oil. So this data is now creating a movement to improve the behavior of companies.”
Yet despite all their promises, big corporations are repeatedly found to be violating workers’ rights, avoiding taxes and harming the environment. It all casts doubt on the ability or willingness of the business sector to change. How do you make them change?
“Through measurement. If you don’t have measurement, everybody can make claims, and they will be selective in the claims they make. And that’s the reason that many businesses oppose this transparency.”
Let’s take the case of Mark Zuckerberg, the CEO of Facebook. He is sure that he’s improving the world but Facebook has done immense societal damage.
“If you measure it, and soon we will have the product impact of Facebook, so I’ll be able to share it with you, literally in dollar terms. Let me tell you a little bit about how impact measurement works. I chair an effort at Harvard Business School, led by a professor called George Serafeim … called impact-weighted accounts initiative. What it does basically is to measure the tons of C02, the tons of sugar, the tons of fiber in products, the emissions of cars, etc. and create a pathway to monetizing them. What number should we use for a ton of C02? What number should we use for a ton of sugar in food products?
“The first thing we did was to publish the environmental damage of 1,800 companies. You can go to the Harvard Business School site IWA and you will find 1,800 companies’ dollar environmental impact with the breakdown of how it’s built up from the operations alone.”
The analysis shows that Exxon Mobil creates $39 billion of environmental damage a year from its operations, compared with $23 billion for Shell and $13 billion by BP. Overall, these 1,800 companies deliver $3 trillion of damage annually. The plan is to grow the list to 3,000 companies.
“What’s most important about this information is that you can already see that higher levels of pollution correlate with lower stock market valuation for the company relative to its competitors,” noted Cohen.
“What’s happening is the $30 billion to $40 trillion of ESG [Environmental, Social, and Corporate Governance] money is going to companies which are doing a better job of optimizing risk return impact,” he explained. “Why? Because you can attract better talent, you attract consumers, you’re attracting more loyal investors and you also avoid taxation and regulation.”You talk about changing capitalism, but greed and many of the traits that accompany the economic system are basic human traits that are hard to get rid of.
“We are not trying to eliminate [greed]. We are trying to foster a different objective, aiming money and delivering a positive impact. We’re not doing away with greed – we’re just saying to those who are greedy that if you don’t achieve impact, too, you will be less successful.”
Transparency is the way to get companies to change their behavior, Cohen asserts.
“What we’re trying to do here is to use capital and markets to achieve positive impacts. If the government doesn’t provide mandatory impact transparency from companies, we can’t really be very successful, because companies are selective about what they claim, they publish information on different bases, not all of the information and so and so forth.
“In 1929, at the time of the Wall Street crash, companies didn’t provide transparency on profits, and investors came to realize it. Every company could pick its own accounting policies – no auditors to verify their numbers. Companies could even shift some of their profits into hidden reserves without telling shareholders. It was completely crazy. Four years after the crash, the Roosevelt administration introduced profit transparency. Securities legislation came [into effect] [along with] the Securities and Exchange Commission, generally accepted accounting principles and the use of auditors.
“Now, people at the time screamed, ‘You can’t have a single accounting system for companies of different sizes and in different sectors.’ Well, today, with nine decades of experience, we say, ‘Yes, you can.’ Without it, we wouldn’t have the sophisticated financial markets that we have …. The same is happening today, but the transparency that is required is on impact.”
Is that actually happening on a governmental level?
“I [recently] wrote an oped to the Biden administration saying that the most powerful thing you can do to achieve your environmental and social aims is bring mandatory transparency on the impacts of companies. If you do that, you’ll harness the forces of investors and companies to achieve your objectives of greater social equality and environmental performance.”
And how do you see the administration’s performance so far?
“I think it is earnest in its desires. Two of the SEC commissioners have already come out talking about impact transparency.”