RI Interview: the UK’s social finance pioneer Sir Ronald Cohen on social impact bonds, fiduciary duty, regulation

Sir Ronald Cohen can justifiably claim to be a pivotal figure in the social impact investment world. The tycoon, who at 26 founded Apax Partners, one of the largest global private equity firms, is already called the “father of British venture capital” and is now being dubbed the “father of social impact investment” for his pioneering role in catalyzing the movement.

He chaired the UK Social Investment Taskforce in 2000 – which set the stage for the launch of Big Society Capital, of which Sir Ronald was the first chair.

He is also founder chairman of social investor Bridges Ventures and founder director of Social Finance in the UK, US and Israel and is chair of the G8 Social Impact Investment Taskforce, backed by the European Union, the UK government and the White House.

The taskforce recently made a series of recommendations to unlock what it calls the first $1trn, or around 2% of the world’s invested capital, towards impact investment.

Alongside this, Sir Ronald has considerable political clout; he is reportedly close to former Labour Prime Ministers Gordon Brown and Tony Blair, but often says he is ‘policy-driven rather than politics-driven’, reflected in the support given by the current UK Conservative-led government. Chancellor of the Exchequer George Osborne has praised Sir Ronald in Parliament for his role at the forefront of social impact investment, and the government has introduced tax breaks and millions in government funding to grow the market.

Having laid the groundwork in the UK, Sir Ronald is now turning his attention to the rest of the world. For example, after meeting Sir Ronald earlier this year, Gary Brader, chief financial investment officer at Australia’s largest insurer QBE, was inspired to allocate $A111m (€76.6m) to social impact bonds globally over the next three years.

Responsible Investor spoke with Sir Ronald on a broad range of topics, including his take on social impact bonds, fiduciary duty – and the regulatory drivers need to kick-start the market.

Have you seen other asset owners make this level of commitment to social impact investment?

I have not seen equally significant allocations but there are foundations that have made similar commitments. There is the Fisher Foundation in Florida which has made an allocation of 1.8% of its portfolio to social impact investment and the FB Heron Foundation wants to invest all of their portfolio in social and impact investment. Then there is the Esmée Fairbairn Foundation in the UK which has made an allocation initially of £25m and they’ve increased it since then. But the foundation which is doing most in this area now seems to be the Gates Foundation and [Program Director] Julie Sunderland is a member of one of the G8 Taskforce’s working group and is a very forward thinker in this area.The social impact bond market is still relatively new, so will QBE be able to find enough to invest in?

Of course like every new market it takes time for new investment opportunities to be put together but I can already see signs of a lot of market demand. I’ve spoken three times at United Nations forums on the subject of impact investment in developing countries, and the sums that are being talked about are absolutely huge. There is also a big pipeline in the United States – there are 10 issues in the pipeline over the next 12 months. In the UK, there are about 15 social impact bonds, which are albeit of a smaller size. There are efforts to launch social impact bonds in France and Italy at the moment. Like every market at first it will be a bit slow, but when we start to get standardized models for issuing social impact bonds and governments on line, then it will go a lot faster. It will take two to three years but I’m sure QBE will put the €76m away.

Where do you see social impact bonds sitting in a portfolio?

I think social impact bonds and development impact bonds (a version of SIBs for development issues) sit very nicely in vehicles capable of delivering around 7% uncorrelated return. It could be even more than 7%, so it is a very interesting part of the portfolio because it increases diversification and it can boost the average return of these bonds particularly if they are between 2% and 13% return.

Recently the US Securities Exchange Commission issued a ‘no-action’ letter to Social Finance US allowing it to act as a broker in social impact bond deals…

I am on the board of Social Finance US and also its co-founder. It is a very interesting development and we are hopefully going to see more movement in the United States. There is a Social Impact Bond Act in front of Congress and they are trying to change the ERISA [Employee Retirement Income Security Act] legislation. Social Finance US hopes the Act will pass presently as now elections have taken place the legislative agenda is picking up again.

In the UK the Law Commission has said the government should give charity trustees an explicit statutory power to make social investments. What will be the effect if the government takes it forward?

It’s a major contribution. Over the last 100 years or more among foundations there has been a complete separation of the investment side from the objectives of the foundation. What this new approach says is that it doesn’t have to be that way because the duty of a trustee is to deliver an acceptable return, but that acceptable return isn’t defined in terms of natural returns. So if trustees feel they can achieve a decent social return along with an acceptable financial return then they are in a position to do so. Basically, what the Law Commission report says is that you can do this with existing legislation, but it would be helpful to have legal clarification. If we get that it would be a huge step forward.

You have said that foundations should allocate at least 10% of their portfolio to social impact investment. And the G8 Taskforce has said it is an opportunity for asset owners such as pension funds and insurance companies. What will attract them to the market?

It certainly requires a change of mindset and most trustees know nothing about this. If you look at what happened in the field of venture capital, where I was lucky enough to be involved from the very beginning, it took a few years for the mindset to change with regard to venture capital. The considerations were similar in some ways, the illiquidity of these investments, trustees of pension funds and foundations and others getting their heads around portfolio construction. Now here we are coming out with concepts that are well received in the G8 report. It is very clear on what impact investment is and how it fits into the portfolio, but at the same time it argues that just as venture capital, you should treat this as a new asset class, and for those resources in pension funds, foundation endowments, insurance companies, until you have decisions on allocations and decisions on responsibility to deploy that allocation it is going to be sporadic process.

In the USA there has been a level of union opposition to social impact bonds. Is this of concern?

I think there are many things that people are lumping together and it is helpful to disassociate them. Trade unionists say social impact bonds are a way of reducing government responsibility. The reality is government sets them up, sets the metrics, verifies the metrics and they can decide whether to reissue a social impact bond or change policy in light of what is learnt -which is what happened with Peterborough [the prison bond pilot]. And then there is the notion that government is doing everything anyway which is wrong – the UK government contracts out £61bn in social services as it realizes it can’t do it all. And an important point is that SIBs open the way to innovation – by focusing on outcomes rather than inputs, and increasing the risk of failure to investor. If results are not delivered government doesn’t pay so that enables risk-taking in developing new approaches to delivering social services.This year the UK government cut short the flagship social impact bond in Peterborough. Will this affect investor confidence?

You can see that government has changed its policy – maybe for better or for worse. What is clear is that the Ministry of Justice learnt from the Peterborough social impact bond stuff that it might not otherwise have learnt.

Israel is looking at launching some social impact bonds. Can you tell RI readers more about them?

It is in an interesting place where Social Finance Israel is talking to the government who has pressed the button on spending lots of money on the issues. The social impact bonds which Social Finance Israel is working on are drop out rates from universities and colleges in engineering, diabetes and employment for ultra-orthodox Jewish men.

Do you expect another country to launch another Big Society Capital soon?

I hope so. It is an important part of the architecture but for each country the solution with be different. So in the US the Small Business Administration have allocated a $1bn to impact investment so you feel they could do the job. In Japan it is looking at unclaimed assets to set up a Big Society Capital-style institution, as in Israel.

What is the future for social impact investment?

With financial markets it takes time for investors to put in place the structure which allows capital to flow and similarly with organizations receiving the money it takes time for them to adjust to the idea that you can raise a lot of capital, so you have to be patient, it is not like switching on a light, it is a 10-20 year effort and we should see results in the next three to five years.

And finally, what regulatory levers are needed to help catalyze the market?

Movement around fiduciary duties and government commissioning are the key issues. If we get levers on both of those the market will move forward.

The G8 Taskforce will run until July 31 2015, then become a global steering committee.