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RI Interview: Social investment pioneer Sir Ronald Cohen: Risk, return … and impact

Labours of the philanthropist and private equity pioneer are starting to bear fruit

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Former UK Prime Minister Gordon Brown has tipped him for a Nobel Peace Prize for his role in catalysing the impact investment movement and Prince Charles recently credited his help when launching his first development impact bond for India.

Philanthropist and private equity pioneer Sir Ronald Cohen has spent almost the last decade travelling the world beating the drum for impact investing a movement he says “will define the 21st century”.

His labours have started to bear fruit in the past couple of years.

Many mainstream financial firms have some form of impact investing products, such as BlackRock, Bain Capital and just this month New York-based KKR registered the “Global Impact Fund” in Luxembourg.

“The conversation around impact creation has now become mainstream,” Sir Ronald tells RI, saying that this wasn’t the case four years ago when, as part of the G8, he chaired a taskforce on social impact investing.

Its report to the G8 at the time said: “The world has moved from the 19th century where we measure just financial return, to the 20th where we measured risk and return, and now the world has already started to move to risk, return and impact.”

Sir Ronald says the breakthrough came with the world’s first social impact bond. “We had assumed that nothing could be measured in a social area and the social impact bond basically demonstrated that you can measure a percentage of the cost of social issues and you can use that to calculate a social impact return.”

In social impact bond structures, investors back organisations to tackle social issues such as recidivism in the expectation of a return from an ‘outcome payer’. An outcome payer is typically a government body looking for savings from lower spending on the social issue in question.

Sir Ronald has repeatedly warned that governments lack the funds to effectively address growing social issues, and private capital will need to step in.

“The scale of the challenge is so huge on the social and the environmental side that governments can no longer cope with the budgets they have and can’t increase these budgets significantly in my view. They are spending twice the percentage they were spending 60 years ago on health and education for example and even in developed countries issues in these areas still abound.”

Calling it an impact revolution, Sir Ronald says impact measurement and intention is vital and predicts huge global growth for the industry.“I estimate that ESG investment over the period to 2030, which includes measurement of impact objectives, will be well over $20trn, about 20% global stock market capitalisation. We may get to much higher percentages with CEOs who have the intention but don’t measure. So I am excluding what I am calling impact washing.”

Sir Ronald thinks that green and social bonds is an asset class that will quickly move in the direction of measurement, estimating it will get to 10%s of the bond market, over around $8trn.

On impact bonds, where the measurement of impact is central, Sir Ronald believes it will grow to 1% or around $1trn of the bond market over time.

Recent data from the Social Finance Global Network finds that impact bonds have raised nearly $400m so far globally for 108 projects in 24 countries reaching up to 738,000 people.

For impact in other asset classes such as venture capital, private equity and real estate, Sir Ronald thinks figures could reach up to $1trn.

In the public equity space, he believes companies will move to setting impact objectives and measuring them, such as improving people’s lives in their supply chain. He notes the current approaches of listed companies such as Unilever and Danone seeking to avoid negative externalities and developing products helping relieve big social challenges.

He also says the proliferation of rating organisations looking at impact, such as MSCI, will start to pressure companies in the direction of measurement.

“I think the important message – whether you be an asset manager or an asset owner – is that you begin to survey how you optimise risk, return and impact. We are beginning to find vehicles for doing that and I think we can expect regulation and legislation to support this trend — because it is this or bust. I don’t know how else we can cope with the social and environmental challenges.”

Sir Ronald has been behind much of the global infrastructure driving the impact investing revolution such as the Social Finance Global Network, the creation of the world’s first social investment bank Big Society Capital and the G8 Social Impact Investing Taskforce.

Now he is chairing the Global Steering Group on Impact Investing (GSG), the successor to the G8 body. It currently has 18 country members with others in the pipeline to join including China.

Recently the GSG announced the setting up of two major impact investment funds in India to raise $1bn in the area of education. It will reportedly seek to make a first close worth $100m by the end of this year.

Sir Ronald sees the trajectory of the impact investment industry in parallel with that of venture capital and private equity. “It may be that the whole market won’t go there but the thought leaders in the market are looking at it.

“And when it begins to be apparent that this is a very good diversifier within a portfolio and there isn’t a necessary trade off between impact and financial return, we’ll see increasing amount of money going into it.

“If you look today at how ETFs tracking fossil fuels relative to those investing in new cleantech, it’s like that. If you’ve invested in new cleantech far from a trade-off there was a premium.”Around 10 years ago Cohen published his first book Second Bounce of the Ball that explored the development of entrepreneurship and the venture capital and private capital industry through the prism of his experience at private equity giant Apax.

Sir Ronald says he is now working on a new book on impact investing. He would like to release it this year, but says a lot of his time is tied up with people deploying capital who are anxious to do more in terms of impact.

The so-called ‘millennials’ are helping drive the movement, partly as a response to the financial crash of 2008 and also the result of living in a more interconnected world leading to greater empathy for global issues. “In a way they are rewriting the manifesto of capitalism.”

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