SIR RONALD COHEN | The Impact Revolution

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Referred to by the British press as ‘the father of British venture capital’ and ‘the father of social investment’, he is now leading the Impact Revolution – a movement seeking to achieve real social and environmental change. With an impressive background in management consulting, venture capitalism, and social investments.


Sir Ronald has a compelling perspective on reshaping capitalism.


We spoke about his Harvard Business School research into impact weighted accounts. This research measured the environmental impacts from the operations of 3,000 companies and found 450 of them create more damage than profit, 1,000 create damage equivalent to 25% of their profit, and 2/3 create damage less than 25% of their profit. Sir Ronald believes changing the world and making a profit go hand in hand. He says investors should put money into the hands of those who do good and do well at the same time.

Sir Ronald Cohen, Author of IMPACT: Reshaping capitalism to drive real change & Chair of the Global Steering Group for Impact Investment. Sir Ronald Cohen is an Egyptian-born British businessman, who fled his birthplace with his family in 1957, following the Suez Crisis, with only £10 to their name. Despite his family’s economic struggles, Sir Ronald’s hard work saw him win a scholarship to Oxford and then attend Harvard Business School.

"I do believe that the effort at Harvard Business School has proved that impact accounting is feasible and that it gives you valuable insights about which companies you invest in. Why do I say that? If talent is going to the companies that are doing good and doing well at the same time, if consumers are looking for the product of these companies, if investors are going there, then these companies are going to perform better than companies that refuse to see impact like their predecessors, who refuse to see technology, changing that world."

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"We're connected in ways that we'd never been able to be connected before, we empathize especially the young generation, with people in far-flung places. And we have access to information about every subject and access to education, and now access to medical services, even if we're in remote places. So I think there are three major forces of which technology is one working to improve our world."


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Phil (34s):

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. How can changing the world and making a profit go hand in hand? My guest today believes that to survive, every business will need to incorporate what he calls impact initiatives into its business model. So please make them welcome, Sir Ronald Cohen. Thanks very much for joining me today.


Sir Ronald Cohen (54s):

Great pleasure, Phil.


Phil (55s):

So Ronald, you started life out as a refugee fleeing Egypt with your family and rising to the top of the venture capital world before realizing that you wanted to do more to help the world. So tell us a little bit about your background, which I believe started in Alexandria just before the Suez Crisis.


Sir Ronald Cohen (1m 12s):

My mother started in Alexandria before I was born, but I was actually born in Cairo, Phil.


Phil (1m 18s):

Oh okay, yep.


Sir Ronald Cohen (1m 19s):

And you're right, we were expelled from Egypt in May, 1957 following the Suez Crisis, which occurred in November of the previous year. And we ended up in the UK. I mean the Jewish refugees lost Egyptian nationality when they left Egypt and ended up where people would work with them. Some of them in Australia, some in Brazil, some in Canada and some in the UK and France. And my mother had a British passport and we ended up in the UK.


Sir Ronald Cohen (1m 60s):

And the UK welcomed me and I went to a state school where I met an inspired teacher, Richard Farley, bless him, who said to me, "Cohen you should go to Oxford." And he prepared me for my Oxford entrance exams. And thanks to Richard Farley, I got into Oxford. Incidentally I looked for him for years afterwards and eventually I found him 40 years after I left Orangefield Grammar School and had the privilege of knowing him for a few years before he passed away. He was a really wonderful man. And from Oxford, I got a scholarship to Harvard Business School and I felt I'd been helped and I want to help others in my turn.


Sir Ronald Cohen (2m 51s):

My family values reinforced that. I was brought up to think that if something wonderful happens to you, then you have to share your note with others less well off.


Phil (3m 3s):

And that's where you got involved in venture capital. And I believe at the time you thought that you could instigate change by being involved in venture capital. And it was during the time of the tech revolution.


Sir Ronald Cohen (3m 16s):

Yes, I was at Harvard Business School from '67 to '69, more than 50 years ago now. And this was just the very beginning of thinking about entrepreneurship, new technologies, the microchip had been invented. People differed about how far this would go. Some people thought it would change the computer industry they did. And of course, you know, I only had an intuition that this would go a lot further than that. That it would be natural for young people, with innovative ideas to be able to do better than big companies with all their received wisdom and all the inertia that goes with decision-making in big companies.


Sir Ronald Cohen (4m 6s):

And so I decided that going into venture capital was the perfect thing for me. It gave me the opportunity to be financially successful, which I needed to be in order to look after my parents who would have no pension and so on. But it also was a way of creating jobs in the UK at a time when there were millions unemployed.


Phil (4m 31s):

So venture capital, can you explain a little bit about how it works and what it means for the companies that are being invested in?


Sir Ronald Cohen (4m 41s):

Yeah, so venture capital is about identifying somebody with a great idea and the skills to execute it and turn the idea into a successful business. Now it sounds very high risk, you know, to the average person. But we used to say, if you jump over a precipice a hundred times without falling, is it really risky? And what I discovered very quickly, was if you good at picking talent and if you were good at estimating what was a reasonably good, excellent idea, then 20% of the companies you invest in would fail, but 20% would also hit the ball out of the park and make very attractive returns from them.


Sir Ronald Cohen (5m 33s):

And then in between you'd have the whole range of returns from almost losing it to almost making it. And so venture capital, which started out looking like a very minor addition to investing ended up being fundamental. It not only funded the entrepreneurs who brought this to the tech revolution: the PC, or the software that went with it, the cellular phone and then the internet and on and on from there. But it also created a change in our lives, which I like to think that has been, despite all of the challenges, a big change for the better.


Phil (6m 18s):

I think what you might be referring to there is how the technology has allowed so many people to understand what's going on around the world and to feel closer to people in situations that aren't as well off as some of us in the first world.


Sir Ronald Cohen (6m 33s):

Absolutely we're connected in ways that we'd never been able to be connected before we empathize especially the young generation, with people in far-flung places. And we have access to information about every subject and access to education. Now access to medical services, even if we're in remote places. So I think there are three major forces. Now, Phil of which technology is one working to improve our world.


Phil (7m 11s):

What are these three forces?


Sir Ronald Cohen (7m 12s):

So one of them is the leaps and technology machine learning, artificial intelligence, augmented reality that gene genome and computing coming together enabled us to deliver impact. As I brought it in my book in ways we could never do before the other two major forces are a major change in values of so the millennial generation that the gen Z, which was followed, that shifted the way from buying the products of companies that create harm, right, climatic harm or using child labor and so on.


Sir Ronald Cohen (7m 53s):

And they refuse to work for these companies that became obvious to investors who were also being pushed in the direction of doing good and doing well by the clients, by their pension savers and so on. And today you have $40 trillion. I mean, this is almost half of all professionally managed money that is seeking to achieve some positive impact as well as making money. And the third force is one which is going to revolutionize our world and it is being able to measure the impacts of companies.


Sir Ronald Cohen (8m 33s):

So you'll be able just two, three years from now, you can begin to do it now, but as I was explaining, we don't have total comparability of data, but you can begin to compare companies impacts. Now how much damage do they create environmentally from the operations, for example, how did they contribute to increasing diversity? What's the cost of exclusion that they bring to society and the differences in equality of pay between gender and ethnic groups and so on and find it, what are the impacts they deliver through that products to improve health, to improve lives in different ways and to improve the environment.


Sir Ronald Cohen (9m 23s):

I think these three forces together technology changing values and being able to compare the impacts of companies. And you can see it's actually shifting the way we do business and the way we invest.


Phil (9m 36s):

So just before we go on to talking about impact investing and what's going on here, you mentioned the genome before and you were involved in the company that cloned the first sheep Dolly weren't you, was that a good investment?


Sir Ronald Cohen (9m 51s):

No, it was a good investment for humanity because it crossed a milestone in scientific knowledge, but we lost all our money. Having said this it's the only company in our portfolio that was picked as one of the most influential hundred companies of the 20th century. So it did its bit for scientific progress.


Phil (10m 21s):

Getting back now to impact investing. I think a lot of people, when they think about what we're talking about today, look at ESG and that you can invest in ESG funds that they believe will have the outcomes that they feel that they're looking for. But you're suggesting something a little bit further than this, aren't you? And this is environment, social and government.


Sir Ronald Cohen (10m 50s):

So ESG investing, which is now 40 trillion plus as I was saying ESG investing has the intention to deliver impact, but it doesn't matter because up until now, we haven't had the tools to measure the impact of a big public company. Okay. But we've developed the tools in the last two or three years, and it's now feasible and valuable to use impact accounting and to compare the impacts of companies in dollar terms with their profits. So if you look at the Harvard Business School effort I've been involved with in preparing impact, weighted account to conduct at 3000 companies now and their environmental impact from that operations.


Sir Ronald Cohen (11m 44s):

And you discovered that 450 of them create more damage than profit every year. A thousand of them create that meant equivalent to a quarter of that profit, right? Two thirds create damage of less than a quarter of that profit. And so you begin to be able to sort the companies into buckets in this company, I can make a great profit and help the environment. And it may lead you to Tesla stock, which multiplied seven times in 2020, although you may exclude from your buckets, the oil companies, ExxonMobil whose share price dropped two thirds in three years.


Sir Ronald Cohen (12m 27s):

Okay? And so by beginning to bring measurement to ESG, and I believe that we will have regulation within the next three to five years, which will oblige every company to publish audited impact numbers within its financial statements. So you'll have two sets of statements, your normal financial one, how much money does a company make? And the second one team, how much does it make after all that impacts on people and planet, okay? so that's where we're heading now impact investment, which you asked about measures the impact it's tended to be in the investments that focus on the specific project, where you have one big impact, for example, that can be measured.


Sir Ronald Cohen (13m 23s):

It may be CO2 emissions, or it may be employment or whatever. Now impact investment has gone from zero to a trillion in the past seven years. The problem is it's not easy for the average investor to find these opportunities. They're often through venture capital funds or private equity funds and specialist, lenders, and so on. And so the question for our listeners today is how do I engage in such a way that I can make money and at the same time improve the state of people's lives and the planet?


Phil (14m 8s):

So we've been talking about impact investing, but you believe there's a difference between that and investing for impact. What is that difference?


Sir Ronald Cohen (14m 17s):

So for me, investing for impact is ESG. You're not measuring it, but you want the impact. The problem is the companies who invested make all sorts of things about the impact that created. Very often, not always, but very often some of these claims are misleading. Your blindfolded about impact basically without really knowing what you're investing in. You don't have transparency on impact, like the transparency on profit. With impact investing at the time when you invest, you've set, if the measures of impact that you're going to use.


Sir Ronald Cohen (15m 1s):

And what's interesting today, that is if you buy a bond of a company, a quoted bond, you can find bonds where if they achieve a certain impact on the environment or on people, the rate of interest on the bond actually falls. So the companies have an incentive and an electricity company, like Enel in Italy, has an incentive to improve its environmental record in order to pay a lower rate of interest. You have the pharmaceutical company, like a Novartis it's rate of interest falls on it's a $1.8 billion bond if its drugs reach a certain percentage of vulnerable people or a percentage of its sales goes to vulnerable people, to be more accurate.


Phil (16m 0s):

Ronald, I just wanted to clarify that now a bond is like when a company is borrowing money on the market, so they put a bond out. And so what you're saying here is these bonds are actually set up and designed so that the interest rate that the company pays, reduces if they're providing a positive impact. Have I got that correct?


Sir Ronald Cohen (16m 23s):

Yeah, exactly. So the company has an incentive to improve lives or the environment


Phil (16m 30s):

Because it's reducing their borrowing costs.


Sir Ronald Cohen (16m 32s):



Phil (16m 33s):

That's amazing.


Sir Ronald Cohen (16m 34s):

You know, how much has been invested in these bonds so far $159 billion? I mean, talking very significant.


Phil (16m 42s):

That's not bad. It sounds like measurement is very important to you. And we've talked about the measurement and that being able to look at companies and having clear metrics on what they're achieving is really important about what's going forward. And that brings me to your social impact bonds, which I believe are for governments to use, to get measurable outcomes of social goods. Tell us about some of those.


Sir Ronald Cohen (17m 9s):

Okay. So the social impact bond them, there are several in Australia, red, it started in New South Wales and then extended to Victoria and also South Australia. And that is a way of investing where your return depends on the improvement in people's lives. The first one involved young prisoners, you probably know that in Australia and elsewhere across the world, 60% or more of young prisoners go back to jail within 18 months of their release. Okay? So this first bond called the Peterborough Bond, after Peterborough Gaol, which was the focus of it, raised 5 million pounds from foundations of that time.


Sir Ronald Cohen (18m 3s):

But today individuals and others are investing in them to help prisoners stay out of jail. And the UK government agreed to pay for the reduction in the number, because the more go back to jail, the more expensive it is for the government to take them through the law courts and to keep them in prison. Right? So it's a win-win. After five years, we reduced the number going back to jail by nearly 10%. And the investors made a bit more than 3% a year on their money, which they got back. That thinking of bringing the risk of an investment, the financial return on that and its impact is at the heart of the change that I think is happening in the world today, it's going to transform our world for the better.


Sir Ronald Cohen (18m 58s):

Risk return impact is what the first sofa impact bond brought to us. Now, there are over 200 of these across the world now in 35 countries addressing 15 different social issues. But as we were just saying, the thinking has made its way into the bond market. So you have pay for success in the bond market now to achieve impact. The big challenge though and that's what interests most of our listeners today is companies that are quoted on the exchanges. And so how do you bring impact measurement to them? And that's where impact accounting comes in.


Sir Ronald Cohen (19m 39s):

And I do believe that the effort at Harvard Business School has proved that impact accounting is feasible and that it gives you valuable insights about which companies you invest in. Why do I say that, Phil? If talent is going to the companies that are doing good and doing well at the same time, if consumers are looking for the product of these companies, if investors are going there, then these companies are going to perform better than companies that refuse to see impact like their predecessors, who refuse to see technology, changing that world. And so for this and those looking for companies that have management that is going in this direction.


Sir Ronald Cohen (20m 28s):

So Tesla is the most notable example, but each of you have listeners will have access to information about investment opportunities. It's one of the things they should look for, what, to the attitudes of management, to this question of achieving employment impact and product impact and the environmental impact that's positive.


Phil (20m 50s):

Do you think CEO's are changing already and taking these kinds of things into account? I mean, I know here when I've been listening to CEOs talking, and we do have a company here who does provide a lot of metrics on all of these, and I've spoken to the, the manager of that company as well. It does seem to me that these ideas, these thoughts are being taken on board and are being taken very seriously, even by what we see as being very traditional companies.


Sir Ronald Cohen (21m 20s):

I think CEOs are realizing now that they can't stop the tide. You know, you can't be King Cnut. This is way beyond a flash in the pan. You know, when we published the report for the G8 countries and I invited Australia to be part of this task force, which I tread and Australia published a very good report. Also, we saw that the world was changing. The ESG money was under the 10 trillion then compared to 40 trillion today, impact investing was virtually zero.


Sir Ronald Cohen (22m 1s):

It's a trillion today, right? In those days, some people said this could be a flash in the pan today. CEOs realize it's not now. Some CEOs have tried to be ahead of the game. So about a hundred companies across the world, are beginning to practice some form of impact accounting measurement, okay. Some CEOs see it as a threat to their business model. Doesn't know how to react. So if you're a fossil fuel company, if you're ExxonMobil, what do you do? And what their transparency is beginning to expose as if you're ExxonMobil and you have $38 billion of pollution from your activities every year without counting the pollution from the cars put on the road and Shell has 23 and BP has 13, you're in the bad place.


Sir Ronald Cohen (22m 54s):

People are going to shift from you to Shell them BP, right? So the transparency is crucially important. Now, because without that transparency, you have have companies like ExxonMobil, making claims that they're delivering amazing impact in employment terms even though they're giving you negative environmental impact and not necessarily know the numbers, you won't be able to tell


Phil (23m 20s):

Ronald I'm really keen also to talk about the social impact bonds a bit further in that, it seems to me that it's also looking at the way governments operate and changing the way governments operate. Whereas in the past, they would have a problem and they throw money at the problem for many years. And there'd be no metrics to measure any success for the programs that they're putting in place. Whereas a social impact bond. If there's investors there who have got a bit of a profit motive and want to see things run efficiently, they want to see metrics on the benefits of the program that they're funding.


Sir Ronald Cohen (23m 56s):

Correct. You're absolutely right. It's a way to get government to spend money more effectively because government only pays when there is enough been achieved. Government hasn't measured outcomes or focused on them. When we talk about education budget, we're talking, we're going to put so many millions into schools. We're not talking, we're going to get to so many people of different backgrounds to graduate from primary school and secondary school and university. Okay. We're not talking about how much did it cost us to get every one of these people to graduate.


Sir Ronald Cohen (24m 36s):

And are we doing better than we did before or better than other countries? Now it's taken a while. It's taken longer than I expected for government to understand that it really needs this, that this is a way of bringing measurement to the halls of government expenditure. When you stop measuring for some outcomes, then you begin to focus on outcomes rather than activities and begin to measure for more. And what you discover is this just a better way to achieve your goals as a political leader, you get the data, why something is successful and why it isn't.


Sir Ronald Cohen (25m 23s):

You benefit from the knowledge you've had next time and turned to another contract. Somebody else took the risk to invest, to achieve your goal. You pay them a reasonable rate of interest, but it's dependent on success. So I've been surprised how long it's taken governments to understand the value of this. And there've been now serious reports written by the Oxford School of Government and others about how serious a tool this can be for government. I know the Australian government's been thinking about doing more.


Sir Ronald Cohen (26m 3s):

I hope your listeners will use their political influence to push them in this direction.


Phil (26m 11s):

I was interested in the story about the gym that was run with a bond. Can you tell us about the gym in an underprivileged areas?


Sir Ronald Cohen (26m 19s):

No. So the gym didn't have a social impact bond fund. It came out of a net bank venture capital fund. And the idea of that was gyms were being set up in middle class areas, but they weren't being set up in poor areas and people working in poorer areas often on night shift. Okay. And they don't have a lot of money. So you need that. The gym that goes up at 24 hours a day, that was cheap. And so Bridges Ventures helped to set up a company called The Gym, focusing on these areas.


Sir Ronald Cohen (26m 59s):

And the theory of change as we call it was look, if people exercise more, they're going to be healthier. You know? And so by opening the gyms, you'll have pink people who are less well off to catch up in terms of health. With those who're better off who tend to have longer lifespans and better health.


Phil (27m 24s):

There was one other thing that I wanted to cover. It's peace in the Middle East. You believe that these kind of metrics and thinking about investing can help lead to this.


Sir Ronald Cohen (27m 36s):

So my efforts in the Middle East started at the time that the best of impact investment 2003, but obviously they were designed to achieve that bank. And I set up with a very close partner. Sir Harry Solomon, the Portland Trust in 2003, to work on the economic dimension of peace, everybody is worried about security and political negotiation, but very few people have worried about the economic drivers of peace. Like if people have a future economically, it makes them look at the political solution in a different way, right?


Sir Ronald Cohen (28m 19s):

If they have the opportunity to improve their kids lives, then it puts a different slant on what they're prepared to accept. As it turns out, your comment is absolutely right. We have introduced social impact bonds, both in Palestine and in Israel. In Palestine, the first one was in the area of diabetes prevention, particularly among women living in refugee camps who have had the chance to avoid the obesity by working with somebody who is advising them on nutrition and exercise and so on.


Sir Ronald Cohen (28m 59s):

And the second one was for, or is for creating employment among youth straightening people for jobs. I think in countries where the financial discipline is less at the level of government and business. And so on that these development impact bonds as we called them are very important to, for us to use.


Phil (29m 26s):

So Ronald, tell us about your book and where people can find it and more information about impact investing and what you're working on.


Sir Ronald Cohen (29m 34s):

About three years ago, Phil, I began to see very clearly that the was going in the direction of risk return and impact when making investment and business decisions. But as I spoke to people, when they heard the word impact, some of them thought it was philanthropy. Some of them didn't know what it meant and what's happening is really fundamental and it can be accelerated by each and every one of us on this podcast, we can convince our governments to bring transparency to the impacts of companies by obliging companies, to publish impact accounts, impact weighted accounts as I have called them.


Sir Ronald Cohen (30m 28s):

We can through our consumption, but pressure on companies to amend their ways. And of course, as talent, if we're working for a company, we can influence them to go in the direction of measuring the impact, which is where you have to stop. And if you're an entrepreneur, then you can define a business model that helps you to solve a major issue while making a ton of money. You know, a unicorn there's the venture that becomes worth a billion dollars. I mentioned in the book that an impact unicorn is one that also helps a billion people improve their lives. All of these ideas, if they're understood, are capable of improving our world, improving our growth and the inclusion of the wider number of people in the prosperity that our economic system creates.


Sir Ronald Cohen (31m 22s):

And so I wrote the book, it's been a best seller in the UK and in the United States, it's a Wall Street Journal bestseller. It's just been picked in Germany as one of the top 10 business books of the year. We'll see whether it wins or not. And it's had some reasonable sales in Australia. You ban buy it on Amazon or in your local bookshop. And by the way, the cost of the ebook, I have kept as low as I can. If you can access Amazon US it's less than $3.


Phil (31m 57s):

Well, I'll put links in the blog post to where people can purchase and find this book and also to your website. My mind is brimming with more questions, I could hit you for hours about this, but I better let you go Sir Ronald. Thank you so much for coming on the podcast. It was a real pleasure speaking with you and meeting you.


Sir Ronald Cohen (32m 15s):

Likewise Phil, thank you.

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