Sir Ronald Cohen

Chair, Global Steering Group for Impact Investment

Promoting Transparency To Monetize Impact - Sir Ronald Cohen of Global Steering Group for Impact Investment

Dec 28, 2021
Sir Ronald Cohen

Promoting Transparency To Monetize Impact

Impact Hustlers proudly welcomes one of the pioneers of venture capital and impact investing, Sir Ronald Cohen, or Sir Ronnie. Having been in the finance industry for decades, he now has the well-deserved distinction of being known as the Father of British Venture Capital. He has also founded investment firms and companies that are regarded as leaders in the social impact space.

Sir Ronnie had an interesting childhood, leaving Egypt as a refugee at age 11 and moving to the UK. From his humble beginnings, his dedication and hard work landed him in Oxford and, later on, Harvard Business School. Interestingly, at age 53, he one day sat down with the management of Apax Partners, the investment firm he founded that now has over 50 billion dollars under management, and announced he would be leaving after seven years to focus on social issues. He was then tapped by the British Treasury to lead a task force on poverty, which led him on the path of impact. 


He shares how luck played a major role in his life, the valuable insights he learned throughout the years, what drove him to impact investing, and more. He also shares snippets from his book, Impact: Reshaping Capitalism to Drive Real Change, which is a worthwhile read, by the way, as well as the three major forces that are working to make the world a better place. This is truly an episode you won’t want to miss.

Sir Ronnie’s key lessons and quotes from this episode were:

  • “Our success or our failure, the types of challenges we have to go through are not all within our control. And once you understand that, you become a lot stronger in meeting the challenges that come your way.” (11:27)
  • “There's a greater purpose to your being on earth than just continuing to make more money.” (17:50)
  • “The profit motive needs to be guided by impact. Making money and not worrying about the harm you do is no longer possible.” (24:51)
  • “Mandatory reporting, use of accounting to measure impact, and measuring both social and environmental impact. If we do that, it will be a historical frontier for capitalism and for society.” (31:06)
  • “Bring impact into your thinking. It's the future. You will do better financially, and you will improve the world.” (35:41)
  • “Those who refuse to understand the importance of impact for the future of their businesses will once again be left behind.” (37:40)

In this episode, we also talked about:

  • An overview of Sir Ronnie’s journey, his childhood, and education (2:52)
  • Luck and how it helped Sir Ronnie get to where he is today (10:52)
  • Why 1998 was a memorable year for Sir Ronnie (16:06)
  • Integrating impact into the core of every business model (24:41)
  • Sir Ronnie’s book and social impact bonds (32:39)
  • The world in 10 years according to Sir Ronnie (36:13)

Transcript of the episode

Maiko Schaffrath  00:02

You are listening to Impact Hustlers, and I am your host, Maiko Schaffrath. I have made it my mission to inspire the next generation of entrepreneurs to solve some of the world's biggest social and environmental problems. And for this reason, I am speaking to some of the best entrepreneurs out there who are solving problems such as food waste, climate change, poverty, and homelessness. My goal is that Impact Hustlers will inspire you, either by starting an impact business yourself, by joining the team of one, or by taking a small step, whatever that may be, towards being part of the solution to the world's biggest problems. Today's guest is Sir Ronald Cohen, a true icon of venture capital and impact investing. He is viewed as the Father of British Venture Capital and one of the pioneers of impact investing. In 1972, he founded Apax Partners, an investment firm that now has more than 50 billion US dollars under management. Some of the most notable investments were into a company called PPL Therapeutics, which actually cloned Dolly the sheep, which some may remember, as well as big companies such as Apple and AOL, amongst others. While the firm was a massive success, Sir Ronnie, as he likes to be called, went on to establish a range of key players in the social impact space, especially in the UK. In 2002, he co-founded Bridges Fund Management. In 2007, he co-founded Social Finance. In 2012, he co-founded and served as the Founding Chairman of Big Society Capital. And now, he spends a lot of his time serving as the Chairman of the Global Steering Group of impact investment. We could probably do an episode on each of those activities, but I'm really excited to be talking to Sir Ronnie today on his personal journey, his thesis on impact investment on the future of what he calls impact capitalism, and also his new book that he released last year, Impact: Reshaping Capitalism to Drive Real Change. It's really exciting to have you on the show, Ronnie.

Ronald Cohen  02:24

Great pleasure to be here with you, Maiko.

Maiko Schaffrath  02:27

Thank you so much. You really had the privilege of shaping the income impact ecosystem, probably more than most of us. I haven't met anyone that has shaped it more than you. Maybe start by giving us a bit of an overview of your journey, and especially focusing on the accomplishments you're most proud of in your journey.

Ronald Cohen  02:52

Well, Maiko, as you mentioned, I started professional life as a venture capitalist in my mid-20s. At the time when entrepreneurship was barely visible and the prevailing view was that big companies were the ones that could innovate, there was no way new young companies could compete with them. I was fortunate to be able to live through this tech revolution to participate in it, and my intention was to achieve some sort of social contribution at the same time as making money, which I had to do, because, as you know, I left Egypt as a refugee at the age of 11, and I knew I would have to look after my parents in the later years. But as we backed hundreds of entrepreneurs, I began to realize that we were actually expanding the gap between rich and poor. While these entrepreneurs came from very modest backgrounds, the vast majority of them, and enriched the lot of people around them, those who were left behind in our societies were permanently stuck behind. And so, I decided that, at the age of 53, to say to my partners at Apax, "I will leave at the age of 60. I actually want to do more important things than deliver 30% net IRR. I want to see whether we can improve the lives of people who are suffering from social issues of one kind or another and to make a contribution to the Middle East in resolving or helping to resolve the Israeli-Palestinian conflict." And then, in 2000, I got a phone call from the Treasury asking me whether I'd lead the taskforce looking at how we deal with poverty, and that set me on the path of impact, because I realized, as we analyzed the situation and wrote our reports, that the reason we weren't coping better with social and today, we would take climate time at issues as well, is that we've been unable to bring investment to tackle them. We've relied on government spending and on philanthropy, and the power of innovation in finance had shown with venture capital how we can help bring about the tech revolution. And so, that led me to make efforts to innovate in connecting those who want to improve lives to the capital markets. This resulted in 2010 with the launch of the first social impact bond where, for the first time, we had a security that optimized risk return and impact where the return depended, in the case of the first social impact bond, on reducing the number of prisoners going back to jail. And since then, I've come to realize through the work of the G8 Task Force seven years ago, through the work of the G7 Task Force today that our whole world is shifting in the direction of risk return impact. You see it in the 40 trillion, the VSG money. You see it in new ventures like Tesla that have a higher purpose than just making money, that wish to shift us to improve our climate, as in the case of Tesla, or society. So, it's been a 20-year exciting journey, and it feels very much, for me, as a replay of the tech revolution, but this time, using tech, to achieve impact.

Maiko Schaffrath  07:26

Love it. Love it. We'll dive deeper into some of these things that you already said. For example, the social impact bonds, I'd love to learn more about that in a second. But first, you also already mentioned that actually, you have a very personal story of why you ended up in the UK, which was when you were 11 years old, you and your family were politically prosecuted and chased out of Egypt, and you came to the UK as a refugee. I'd love to understand, well, first of all, tell us more about that time, and I'd love to understand and how much that has shaped you as a person later on and also your focus on social impact in your career.

Ronald Cohen  08:12

Well, it may seem odd to some people that there should have been a large Jewish community in Egypt, but there was actually a thriving community of more than 80,000 people when Egyptian nationalism began to take off and we had the sewage crisis and the expulsions to which you have referred to. I arrived in the UK not speaking English with my parents having no assets and my father having to find a way of earning his livelihood. He took me to speak to the headmaster of a state school where he had to persuade the headmaster to take me and he said to the headmaster, "It's not because he's my son, but if you take him, he'll be top of the class." So, you can understand how I felt I had to do my bit in achieving the ambitions that my dad had set for me. Luckily, I was a good student and luckily, I met an inspired teacher, Richard Fowley, bless him, who said to me one day, "Cohen, you should go to Oxford." Now, nobody had gone to Oxford. Perhaps, one person in the whole history of the school, nobody in recent years. But Richard Fowley prepared me for the entrance exams and, of course, thanks to him, I got in. And then, once I was at Oxford, I became very involved politically. I was elected the president of the debating society, the Oxford Union and then, from there, decided to go to Harvard Business School at the time when tech and entrepreneurship were just beginning to be visible.

Maiko Schaffrath  10:24

Wow. So, your story is obviously characterized by a lot of ambition and drive, and also how you describe your motivation that you wanted to be financially independent, because you knew that you had to care for your parents when they were older. But also, you described this element of luck in some way, is that right? Do you think luck plays a role as well in your journey?

Ronald Cohen  10:52

Absolutely. Luck plays a role in all our lives and then you can go back, when you get to my age, in my mid-70s, you can go back, and looking back, you can see the breaks you got in life, and many of them are serendipitous, meeting a certain person at a certain time, and I think it's very liberating for an entrepreneur to understand that luck plays a big role. Our success or our failure, the types of challenges we have to go through are not all within our control. And once you understand that, you become a lot stronger in meeting the challenges that come your way. You can be a lot more optimistic about your luck changing in the future and helping you to get that, for example. So, yes, I'm a true believer in luck. I do also think that you can help your luck. If you sit behind your desk in your study at home and never go out and about, you're very unlikely to help serendipitously your chances of success.

Maiko Schaffrath  12:20

Got it. Absolutely invaluable lesson that you just shared there. Before we talk a little bit about your book and some of the lessons from that and some of the thesis that you described, I'm quite interested about the time in the early 80s. I think in 1981, you actually launched the biggest venture capital fund in Europe at the time with, I think it was 10 million under management. Probably back then, not that many people in the UK would even understand venture capital investing. How did you end up being a venture capital investor and why?

Ronald Cohen  13:04

Well, luck played a role in that too, because I wanted to set up a venture capital fund, but nobody had set up a venture capital fund before of any size in Europe. And by luck, I bumped into Alan Patricof who was one of the very first venture capitalists. He set up his first fund a few years there in 1969, just a two and a half million dollar fund. If you think about that today, when venture capital funds are hundreds of millions or over a billion, that was the biggest size, two and a half million dollars, 10 investors putting up to $50,000 each. I bumped into Alan, and I was lucky to meet somebody who thought similarly to me in many ways, who had an international perspective, but who was based in the US, and who had connections with investors. And when Alan, because of changes in regulation in the US, decided to raise a $30 million fund in 1978-79, I went around with him meeting investors and prepared the way for launching a fund in Europe in '81. Half of the money raised came through Allen's connections with US institutions, and half through our connections. So, meeting the right person is a big element in luck, of course.

Maiko Schaffrath  14:53

Got it. And then, we make another step in time in your book, again, Impact: Reshaping Capitalism to Drive Real Change, for anybody that wants to get a copy of it. I also see it in the background on your shelf. You actually described that 1998 was a real turning point for you. At that point, you already mentioned it briefly, you actually left Apax and decided to focus your career and the remainder of your career on solving social issues. One of the things you mentioned in the book as well, maybe I'm making it even more explicit, is investors inherently, their job is to make usually rich people richer, right? That's pretty much the job, and I think your focus was like, "Okay, I've actually been doing that. But at the same time, the gap between rich and poor is widening and widening, and I need to do something." Tell us more about that motivation at that time in 1998 when you were like, "Okay, now, I've got to change something. I've got to dedicate my career to impact investing or social impact."

Ronald Cohen  16:06

'98 is the year in which I said to my partners, Maiko, "I will leave seven years from now when I get to the age of 60. We will prepare a constitution for Apax Partners. We will hand over the leadership of the firm. I will pass on my ownership. We will create a partnership structure. Others that follow me will do the same." And over seven years, we transitioned to electing a leader, Martin Halusa, to run the firm. Now, when I got to the 1st of August 2005, some of my partners thought I wouldn't leave, but I left and I never looked back. They reached out to me from time to time, but I never looked back and tried to intervene in the affairs of the firm although I invested in every single one of the Apax funds. The reason is that we live our lives trying to get on an upward moving escalator, and when we get on that escalator, finally, having raised the fund that gets you into the venture capital business, having expanded the firm to billions and billions of dollars under management, that escalator keeps moving up. And if all you want to do is ride the escalator, that's fine, but you've made enough money, you've got a huge amount of experience, and there's a greater purpose to your being on earth than just continuing to make more money. Would you want your epitaph, Maiko, to say, "He continued to make money until he died"? Or, in my case, as I say in the book, "He delivered the 30% IRR"? That's not why we were brought to this earth, and I realized that if I didn't give myself a 20-year runway, it will be very difficult to achieve anything, because I saw in building up the venture capital industry and building up Apax, it takes time, especially by the way in financial disciplines, where trust is a major factor, trust and track record. For me, I have been living through a replay of what I did in venture capital, helping to build the venture capital industry and striving to become a leader of it. I feel now that we have got the framework that is necessary for our economic system to bring solutions rather than to create climate and social problems, and I've participated in working out that framework. Of course, there were trends. Eight years ago, when we started the G8 Social Impact Investment Task Force, we already had $10 trillion of ESG money around. But today, the figure is more than $40 trillion. We could see impact investment beginning, but there was no significant amount of impact investment defined as having the intention but also measuring the impact around. Today, it's more than a trillion. We could see that new business models would emerge like Tesla, but we couldn't see Tesla in the way that we can see it today, and what I felt was happening had been exemplified by the social impact bond. What was happening was the world was trying to shift to risk, return, and impact. And when we wrote our report for the G8 Task Force, we called it "the invisible heart of markets," that impact is the invisible heart of markets that guides Adam Smith's invisible hand. 

But, in order to achieve that, it became increasingly obvious to me that we needed to measure impact in a transparent way rather than like profit. And so, three years ago, I helped to kick off an initiative at Harvard Business School to arrive at impact accounting. We called it the Impact-Weighted Accounts initiative to make it very clear that we were going to take financial accounts, and we were going to monetize impacts and bring them to the traditional profit and loss statement initially, and eventually, to the balance sheet. And the breakthroughs that have been achieved at Harvard Business School enable us today to see how the world is going to change. 

Because if you look at it from 30,000 feet, there are three major forces working today to improve the world, Maiko. There's the force of changing values, of young people initially who didn't want to buy products from companies creating harm or work for them. It became visible to a wider population. It became noticed by investors. And today, we have 40 trillion of ESG money flowing, a massive change in values trying to achieve impact as well as profit. The second major force, of which you're very well aware too, is leaps in technology. Artificial intelligence, machine learning, augmented reality, blockchain, block computing, and the genome coming together enable us to deliver impact globally in ways humanity could never contemplate previously.  And the third major force is this force of transparency on the impact of companies, that technology enables us to assemble the data today, the metrics on tons of carbon, liters of water, numbers of people from diverse backgrounds working in companies, and monetize them according to principles rather like generally accepted accounting principles, generally accepted impact principles, and we can see the world now understanding that this is a necessity if our economies are going to deliver solutions rather than create problems.

Maiko Schaffrath  23:34

Got it. In the book, you're really describing this shift from, basically, capitalism having its main objective to have returns and make money to also build impact into the heart of business models. In previous episodes as well and whenever I talk to people, I'm somebody that's not a big fan of the concept of CSR where you have, "Do whatever you're doing as a business and on the side, you're doing a bit of nice things." Sometimes, these can have good impact, and I'm sure there's some amazing charities doing some good work with CSR money. But you also described the shift that that's not enough anymore. It really needs to be built into the core of a business model. Can you describe that a little bit more? How can we make sure that the quality of impact is actually still high and we're not diluting it by bringing it into the mainstream?

Ronald Cohen  24:41

Yeah, I mean, just to make it clear, we are not taking the profit motive out of capitalism. We're saying the profit motive needs to be guided by impact. Making money and not worrying about the harm you do is no longer possible. Look at to what is happening to the values of the fossil fuel companies and the shareholder rebellions. You're getting there like ExxonMobil's and Intel. And in order to guide profit-making activity to bring social improvement and climate improvement, we need to have transparency on the impacts created. Already, we see greenwashing as a major issue where companies claim to be delivering benefits that they're not delivering. It becomes a branch of marketing rather than of transparency. And so, it is fundamentally important today that we are able to look in a very robust way at the impacts of companies as well as their profits if we want our system to change, and I want to give you a peek into the future, Maiko. If you go to the Harvard Data, which is open source for everyone to use, you will see the first data set is on environmental impact created by 3,000 public companies across the whole world. If I say to you 450 of these companies create more environmental damage in a year than they make in profit, a thousand of them create environmental damage equivalent to a quarter or more of their profit, together, these 3,000 companies create 4 trillion dollars of environmental damage in a year, you begin to understand how measurement gives you insights about which companies you want to invest in. And very interestingly, you can begin then to measure the impacts of companies relative to their stock market valuations, and you discover that the companies that pollute more are worth less than their competitors on the stock market, and that becomes the mechanism for shifting our whole system around. So, the answer to the question you're asking is, transparency is fundamental. To get the sort of transparency that enables us to make business and investment decisions easily, monetization of impacts is necessary. And once we get to monetization of impacts, we can begin to build an impact accounting system and look at companies in terms of their profit after all the impacts. And if the change in values means that the companies that optimize risk, return, impact best attract the talent, attract the consumers, attract the investors, avoid the risk of regulation and taxation for the harm they do, then it's a better way to make money too, as a business and as an investor.

Maiko Schaffrath  28:17

Thanks for describing that. I think one case you make as well is for impact-weighted accounting, and I encourage everybody to read the book and learn more about your concept. But for that to be really at the core of financial reporting for a company, I think what still prevails, a lot of times in Europe especially, a lot of companies, again, having their CSR departments make an impact report every year and it looks nice, and that includes that the employees are volunteering for good causes, and that's about it, but it's not at the heart of financial metrics. So, do you see that shift happening in Europe as well where more companies are seeing it as part of their financial reporting, to report an impact?

Ronald Cohen  29:06

Some companies are. Their known published impact-weighted earnings per share weighted for environmental damage, but we see it with governments and with regulators. We see the EU passing legislation to bring transparency to funds that think to be ESG or impact funds. We see the SEC pushing for transparency on the impacts created by companies. We see IOSCO, which is bringing together all of the regulators of the world, pushing hard for climate transparency. And we see, very importantly, the organization responsible for all financial accounting outside the US, IFRS, considering the establishment of an accounting standards board for sustainability in November of this year, so the train has left the station. The key challenges are: one, are we only going to deal with environmental or are we going to recognize that environmental and social are totally intertwined and if you want to solve environmental issues, there are simultaneous equations you have to solve together? Or, you get the result that you had in France where the diesel tax and the "gilets jaunes" backlash. Two, can it be voluntary, or does it have to be mandatory? I firmly believe it has to be mandatory. And three, can you rely on reporting only of the qualitative nature or does it have to go to monetization and impact accounting eventually? And we have a historic opportunity to drive for those three things today. Mandatory reporting, use of accounting to measure impact, and measuring both social and environmental impact. If we do that, it will be a historical frontier for capitalism and for society.

Maiko Schaffrath  31:32

We talked a lot about the need for capitalism to shift towards impact capitalism, as you call it. I've got two more questions for you in the last few minutes we have here. One would be, while we talked about business models and companies needing to change and the rise of entrepreneurs that are building impact into their business models, there are still a few themes that are sometimes hard to solve through traditional business models, even those that are trying to build impact at the core. One example in the book you bring are the social impact bonds, where you bring the example of basically building a financial instrument, in the first case that you applied it to, to stop or reduce the rate of offenders coming out of prison offending again, and building a financial instrument to let investors invest in that. Tell us a little bit more about that briefly and how that can basically help solve issues that are maybe not directly profitable as a business model, per se.

Ronald Cohen  32:39

So, the social impact bond was a way of bringing investment to charitable organizations helping solve social issues as well as businesses that were seeking to do the same thing. Today, there are more than 200 dealing with more than 15 social issues in 30 countries. They haven't reached the scale they're going to reach. They're going to scale hugely now, but interestingly, Maiko, their thinking has gone into mainstream bond markets. There are now over $150 billion of sustainability-linked bonds where companies pay a lower rate of interest on their bond if they achieve social or environmental targets that have been set, and you're talking $150 billion, 10% of the pool of one and a half trillion of green social and sustainability bonds. So, "pay for success" is becoming a way of guiding investment to achieve impact. You achieve impact, you pay less interest. And I think, philanthropy, as I mentioned, there's a whole chapter in my book, as you know, devoted to philanthropy, is going through its own impact revolution, using some of its resources and "pay for success," measuring outcomes rather than measuring activities. Expenditure on visiting prisoners isn't what's interesting. The number of prisoners who don't go back to jail and get into jobs, that's what's interesting to measure. So, I think this impact thinking is actually creating a revolution in the business model of every stakeholder group, each of which I cover in the book, big businesses, investors, entrepreneurs, philanthropists, and even government. Philanthropy is a few trillion, three, five trillion dollars across the world compared to $200-300 trillion in investment markets, but philanthropy can play a major role in tackling the issues where investment is difficult to attract. By committing to "pay for success," it can attract the investment opposite to achieve the innovation, to improve children's education, for example, which is a massive challenge. So, for those who haven't read the book, whatever you're doing, whatever your activity is, bring impact into your thinking. It's the future. You will do better financially, and you will improve the world.

Maiko Schaffrath  35:51

Amazing. These are almost some really great closing words. I think we have one more minute to answer one last brief question, and that would be, in 10 years' time, how does the world look like if the impact capitalism, as you describe it, succeeds?

Ronald Cohen  36:13

A board will be sitting around the boardroom table, looking not just at the profit and loss but its impact-weighted accounts, showing what impact, positive and negative, it delivers from its products, from its operations, from its employment, the level of diversity measured in dollar terms, the health benefit, measured in currency terms, in euros or dollars, from the sugar content, from the fiber content of their food product, and the environmental impact from their operations. The companies that optimize risk, return, impact are going to be the most valuable. Like Tesla, we're going to see new leaders emerge, optimizing risk, return, and impact where existing leaders are making money but creating huge problems. And so, like those who, at the time of the tech revolution, thought that the invention of the microchip would only change the computer industry, they didn't see the cellular phone, the internet, social media, everything else coming behind. Those who refuse to understand the importance of impact for the future of their businesses will once again be left behind.

Maiko Schaffrath  37:53

Thank you so much, Sir Ronnie. We'll wrap up with that. Thank you so much for joining us today.

Ronald Cohen  38:00

Great pleasure. Goodbye.