Entrepreneurs: Reshaping Capitalism to Drive Real Change with Sir Ronald Cohen

By: Brady Press

This post is part of a series highlighting sessions from the SOCAP 2020 Virtual Global Impact Summit. Continue reading for information on impact investing and social entrepreneurship.

Key Takeaways

• Harvard Business School recently launched the Impact Weighted Accounts Initiative, which published the environmental costs created by 1,800 companies. Through this data, we see that 15% of these companies (250+ companies) deliver more environmental damage than they do profit and 32% deliver environmental damage equivalent to 25% of their profit
• With this impact transparency, investors will begin making different investment decisions and executives will prioritize impact. Companies that don’t deliver on impact will be worth less
• If you’re an entrepreneur today and decide you want to take advantage of a market opportunity, think about how that opportunity helps solve an environmental or social problem. Wherever there are people in need, there is a business model that has the potential to create as much or greater value than if you didn’t have impact

Summary

As we come upon the 50th anniversary of Milton Friedman’s shareholder primacy letter to the New York Times, we’re beginning to question this ideology. Our current system is not working, as evidenced by the climate crisis, vast economic inequality, the pandemic, upheld systemic racism and more. These issues demand that we shift to a stakeholder economy. This session, which focuses on the role of social entrepreneurs, shares recommended solutions to economic change that each stakeholder group can implement, and speaks to the critical role of impact investing. This is the inaugural event of a 5-part series on Sir Ronald Cohen’s book, Impact.

Speakers

• Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing
• Cedric Chavez, Founder of Feed (a food bank app)
• Professor Bobby Parmar, Shannon Smith Emerging Scholar at the Darden School of Business at UVA, social ethicist and co-producer of the film Fishing with Dynamite and author of The Power of Gentlemen

Session Notes

Bobby Palmer (BP): How is impact transforming entrepreneurship?

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• Today, we are faced with doing well and doing good at the same time; we are beginning to get impact role models (e.g. Elon Musk — proves the more impact you have, the more money you can make, and you can become as big as any venture has previously)
• If you’re an entrepreneur today and decide you want to take advantage of a market opportunity, how does that opportunity help solve an environmental or social problem?
• If a unicorn previously was a venture that became worth $1 billion, an impact unicorn is one that also improves 1 billion lives

BP: This makes me think about businesses creating value. The terminology of impact allows us to imagine in more detail the different types of value that businesses can create — whether it’s sustainability, value for employees, addressing issues around poverty — businesses can be a vehicle to creating that type of value/having that impact. All generations are becoming more enthusiastic about this idea.

Cedric, can you tell us more about your work with Feed and how you think about impact and social entrepreneurship?

Cedric Chavez, Founder of Feed

• Feed started with a Hackathon; we were students working on a project for a food bank. After the Hackathon a group of us went and volunteered with the Hays County Food Bank, which operates as a food bank and a food distribution center (meaning they go to stores like Walmart and collect donated food, repackage it and send it to families)
• They were doing all of their data entry for this process on paper. It would take up to 6 hours per week to enter all the food items into their database. We wanted to eliminate those 6 hours of data entry, which would help them have easy access to their data and also apply to grants (you often need specific data for grant applications like how much food you have thrown away in the last 3 months)
• Following the Hackathon, we won another event with Net Impact and Microsoft where we got $6,000 of seed funding to develop the application
• From there, we were recognized by LinkedIn in the LinkedIn Compassion awards and admitted into Git Hub’s Open Source for Good program to source our software to other foodbanks that may have similar issues

BP: Sir Ronald Cohen, can you give us an example of how impact investing works?

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• I’ll start with an example of impact entrepreneurship, which often involves technology. There is a very successful entrepreneur in Israel who sold his company, Mobileye, to Intel for $15 billion. He had an aunt who was going blind, so he created a company called Orcam that makes spectacles for people going blind. The glasses whisper into the ear of the person wearing them things like the page of the book they’re reading, the bank note in their hand, etc. This is a great impact venture because it optimizes risk, return and impact
• Where impact entrepreneurship comes in is you say to yourself, how can my technology help the maximum number of people in the world. We don’t usually ask this in the business world, but you get a surprising answer, which shows your power as an entrepreneur. Because in this case, the answer is what if you gave these spectacle to the 800 million illiterate adults in the world? What does that do for their livelihoods, their economies, or the world economy?
• An impact venture has the purpose of solving a particular problem. In this case, the problem of enabling blind people to live more normal lives
• There isn’t a trade-off with making money. If you have a $1.1 billion market, that’s a massive market and you wouldn’t have discovered it if you hadn’t asked yourself that question
• I think that the disruption that technology brought in business models is going to be brought now through impact models — Tesla and Orcam are disruptive business models
• So, investors in these ventures can say they’re maximizing risk, return, impact by investing in a fund which is looking for these types of opportunities. If this company goes public, they can invest in the public markets for a company of this kind
• The characteristic today of risk, return, impact is that it attracts talent like Cedric and offers more potential. Therefore, there is no trade-off. You should be able to deliver better financial results and better growth if you optimize risk, return, impact than if you just optimize risk builder

BP: How we make money is just as important as the money we make. For example, my friend did research on for-profit coal mines and coded social media attention on the coal mines in the communities they were operating in. He coded for positive and negative reactions — are people excited about the jobs the coal mine is bringing, etc.?

When his research team looked at the positive and negative distribution of stakeholder relationships on the stock price they found that the price of gold was worth 2X as much if it was coming out of the mine where you had positive stakeholder relationships (supportive communities, employees who were excited to be at work, etc.)

I think what’s driving this impact revolution is people are tired of businesses making money by forcing externalities on other stakeholder groups. They’re saying there’s a cost some other stakeholder group has to bear (the environment, communities, etc.). In impact ventures, we are pricing those externalities back into the investments.

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• We’ve had breakthroughs in the last month using technology at the Harvard Business School. The Impact Weighted Accounts Initiative published the environmental costs created by 1,800 companies and we see that 15% of these companies (250+ companies) deliver more environmental damage than they do profit. Nearly a third (32%) deliver environmental damage equivalent to 25% of their profit
• In my book I look at Exxon Mobil, Shell and BP. Exxon Mobil delivers from its operations alone $39 billion of environmental damage per year. Shell delivers $13 billion and BP delivers $8 billion
• Even if you want to have fossil fuels in your portfolio, it doesn’t make sense for you to invest in Exxon Mobil once you know these numbers, because it’s going to get regulated or taxed or the talent is going to go away from it. It’s a terrible polluting company and its a laggard relative to its competitors. It’s competitors will deliver a better combination of profit and impact and in the end, better profits
• When you begin to measure impact you begin to make different investment decisions. If you look at the database you will see there is a correlation between companies that pollute more and lower stock valuations. It doesn’t happen in every sector yet because we don’t have transparency everywhere, but what’s the lesson Executives are going to take from this? They’re going to say if I don’t deliver better impact performance my company is going to be worth less, so I need to start solving problems rather than creating them. Everyone can see the number of problems a single company is creating

BP: Is it harder to start a business that is impact-focused than one that is purely profit-focused?

Cedric Chavez, Founder of Feed

• In terms of trying to get funds, it’s a little bit more difficult because a lot of investors are focused on traditional profitability. This was a challenge we faced. That said, there are people who are very impact focused and if you find those people, they will be willing to invest in your impact venture
• Once we got into conversations with people who were passionate about food insecurity, it became easier to explain what we were trying to do and the potential impact it could have in the community
• It was really easy to recruit people because they realized they could have a real impact on their community and a global issue

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• I agree, I think you attract better talent and you achieve more if people are passionate about what the company is trying to do versus just making money. What’s difficult is it’s new
• Research shows that if people are under stress their IQ drops 25%; they make poor decisions. My daughter in Israel created a fintech company called Rise Up that helps people manage their funds and save money. It has raised $20 million. They have investors that are venture capital firms, High-Net-Worth Individuals (HNWI), Hedge Fund managers, etc. They’ve gone into it because they think this company could be as good as any other fintech, but also, there is this sense among many investors today that our investments have to help improve the world
• We can’t keep digging ourselves a hole where companies create harm and governments tax everyone to remedy the harm and they never have enough money to do it so the situation keeps getting worse
• Next year, Harvard Business School is adding to product impact and deployment impact and will begin to get transparency on all the impacts of companies and we will begin to turn $30 trillion of ESG investing into impact investing because impact investing today is about $700 billion across the world (which took 6–7 years). It’s going to hit $1 trillion and today capital and private equity are only $5 trillion, so this is major

BP: In the book you make the point that when we measure and intentionally manage impact we can more quickly find remedies for social ills; we can figure out what works faster and can scale that more effectively. We can learn, work and scale faster. What are some examples of impact ventures that are doing a good job learning about the underlying mechanisms, such as recidivism in prisons?

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• If you look at the way social entrepreneurs have worked until now, 90% or more of them have done it through charitable organizations and when they raise charity money or a foundation gives them money, those giving the money dictate how they focus on funding the activities (e.g., you’re going to visit the prisoner X times per week and teach them Y). In 2–3 years the investors say move on to other initiatives
• Every charitable organization in the world has two characteristics in common: 1) it’s small and 2) it has no money
• So, the idea came to us to bring investment capital to social entrepreneurs using charitable models. In 2010, we invented the social impact bond
• Using the example from the book to explain how a social impact bond works: you get someone to promise to pay you (in this case the British government) for reducing the number of young people going back to jail — globally over 60% of young people go back to jail within 18 months of release)
• So, we said to the government, we will raise 5 million pounds and you will agree to pay that money back with a rate of return depending on if we hit the numbers. If we don’t hit the numbers, the money was a gift, but if we reduce the number of prisoners going back to jail by more than 7.5%, the government will pay back the 5 million pounds and an increasing return beyond that
• The big difference is unlike the philanthropic model where people tell you what to do, you’re backing social entrepreneurs and saying to them look we have a problem with young prisoners coming back to jail and you’ve been working in this space, we’ll help you like a venture capitalist helps an investee but you’ve got to find the solution. So they start delving into the problem like they never have before and begin to solve the problem; we are scaling it up massively
• Instead of the government paying the loan, we’re setting up two $1 billion outcomes funds in Education. One for Africa, the Middle East and one for India. These funds have philanthropic money, local government aid, etc.
• Social entrepreneurs will use new technology, etc. to solve problems, thus opening the door to innovation

BP: What does it take to get started and move in this direction? Down this path of impact?

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• It depends on what kind of investors you’re talking about. If you’re talking about HNWI, some of them are becoming angel investors for these types of ventures. But if you’re talking institutional investors, this is still very new for them. It’s like the early days of venture capital
• We’re beginning to see a bit of movement with institutional investors and their trustees, but not enough. With some of the big pension funds, the community is leading them to think differently and to create allocations. For example, with the Black Lives Matter movement there’s a big push to fund venture capital funds run by entrepreneurs of color and to back venture capitalists of color
• It’s moving slowly. The way to make it happen is to provide impact transparency so you can look at the accounts of a company so you can see its profits and its profits after taking its impact into account. This is what Harvard is doing
• When you have this transparency, you will start finding the big pension funds. If governments require this transparency, investors will have the tools to make informed investment decisions because they’ll be able to look at companies that deliver more environmental impact than profits
• If we don’t have transparency we have what we have now, which is “impact washing” by companies

BP: Once your reputation becomes cemented, it’s hard to undo that. So there’s a timely incentive for senior leaders to figure out their impact. What is some advice for an entrepreneur trying to get started in this space?

Cedric Chavez, Founder of Feed

• Start small and figure out what the problem is. We volunteered with the food bank for 3 months so we learned the processes and could be completely clear about what challenges they’re facing and how we could help

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• Find an issue you’re passionate about solving and find a business model that allows you to solve it and make money. It’s hard work, like any business venture, but it is feasible and, as Elon Musk has shown, can create even greater value than if you didn’t have impact

BP: When is this going to truly become the expectation/the norm?

Sir Ronald Cohen, Author / Impact Chairman, Global Steering Group for Impact Investing

• I think it’s when you have impact transparency. Today our system is defining our values, but this is changing. If you have impact transparency, success becomes making money and having a positive impact

Q&A

Low-income and low-skilled workers bear the brunt of capitalism. What are some big picture ideas to drive real impact and change for these folks?

SRC: We’re going to be facing the issue of reskilling coming out of COVID because big companies are slimming down and aren’t going to recruit everyone back. To improve the lives of the unemployed we’re going to need to reskill them for new jobs. Through impact investment, you can actually create a business that reskills people. If you’re a reskilling nonprofit, come up with a business model.

BP: A lot of these people also have amazing ideas for businesses in their communities. Ex: a man is differently abled and could rarely find taxis or cars that could take him in a wheelchair. So, he started his own company that is basically a taxi and/or Uber service for differently abled people. It was very successful in his area. If we don’t give these folks opportunities to share their ideas and experiences, businesses and value are left on the table.

From your experiences, what are impact investors doing to make space for indigenous communities to define, measure and report on impact in ways that are actually rooted in indigenous world views, values and principles and that prioritize their understanding of what impact means?

SRC: I’ve had conversations with people in Australia and Canada about indigenous communities, but I have not yet seen business models that satisfactorily bring solutions to these communities. There’s been a lot of talk of impact bonds to help them skill for employment but no solutions yet (that I’ve seen).

BP: I think about some of the oil drilling rights in Alaska and some of the ownership is given to indigenous tribes in those communities, so they get a voting share and an ability to drive the direction of some of these oil companies. I think giving them a seat at the table is the first step to understanding how these ideas impact them and how they would like to see them impacted.

What impact industries are good ideas to go into as entrepreneur?

SRC: There’s a lot that needs to be done with education globally. Using technology to achieve education is a major opportunity. It’s obvious there is a lot of opportunity in health, especially using mobile phones. Wherever you look there are people in need. Wherever there are people in need, there is a business model. Public transport, hospitals, etc.

What’s the most critical standard or regulatory body whose adoption of the Impact-Weighted Accounts would cascade to a global norm in the financial market to shift to a risk, reward, impact thinking?

SRC: Great question. I have been working hard on that every day for months. Two days ago the International Accounting Body said we need to shift to sustainability accounting. We’re going to need our financial regulators (the SCC, accounting boards SASB and IRFS, etc.) to be attune to these ideas. Consumers, employees and companies have a major role to play. If you can influence your parents to find out how their pension plan is being invested — is it following ESG principles? Does it have allocation toward impact investing? That’s one thing you can do. But we have to work on the big asset management groups like Blackrock, etc. because they have the power to influence government.

Investors are the most powerful lever — people who have pension funds, insurance companies, etc. We need to change the atmosphere around this right to know. Transparency is a human right. We all have a right to know what impact a company is creating.

Want to know more?

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Brady Press is a Director at Changing Our World, where she specializes in building strategic corporate citizenship programs. She is a consultant to SDGCounting and StartingUpGood.