Impact Investing on the Precipice

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 the future of capitalism.

Key Takeaways

• Our current form of global capitalism, which is based on the pursuit of profit alone, exacerbates social and economic inequality as well as environmental damage. It’s not working
• There are companies that are creating more negative environmental, employment and social impact than the profit they’re making. With the release of Harvard’s Impact-Weighted Accounts data, we will have, for the first time, a complete picture of the impact performance of companies
• If employees and investors want to invest in companies that optimize risk- return-impact better, then we are on the threshold of a new frontier for capitalism
• We need to streamline the measurement of impact across companies and all stakeholders

Summary

This session features two pioneering social innovators in an open discussion on how to meet the needs of the world’s great challenges by reimagining the future of capitalism in this unprecedented moment.

Speakers

• Darren Walker: President, Ford Foundation
• Sir Ronald Cohen: Author / Impact Chairman, Global Steering Group for Impact Investing

Session Notes

What is the priority challenge the world is facing, and what is the path to meeting that challenge?

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

• I’m concerned about social and economic inequality and equally concerned about the environmental threat the world faces. It seems like we are trying to deal with these issues by throwing money at old ways of doing things that just don’t work
• We have a system that exacerbates the inequality and environmental damage because our economic system is based on the pursuit of profit alone and leads to environmental and social damage which isn’t taken into account because it’s ‘invisible.’ Then governments try to tax us all for damages caused by some
• We’ve been talking about this for decades and have seen little to no improvement country to country. We need to change our system and reshape capitalism by bringing measurable impact to the center of our economies to keep profit in check
• Technology has enabled us to have full transparency on the impacts companies create (through employment, operations and products) on people and planet — these implications are massive
• Harvard Business School launched: The Impact Weighted Accounts Initiative, which brings us to take the metrics which have been assembled on these social and environmental issues for decades now and actually monetize them
• We already have $30 trillion going to achieve impact and financial returns and the only transparency we have are marketing statements from companies about the great things they’re doing for the environment and society, with no measurement of anything
• We are on the threshold of a new frontier for society and capitalism which will come from impact transparency

Darren Walker, President, Ford Foundation

• I agree, we have a crisis — a model for global capitalism that does not work. The capitalism we have been participating in has entrenched stakeholders who are simply interested in profit
• The aligned challenge is the crisis of leadership and a lack of moral leadership — leaders who are principled, consistent, operate on principles and inspire us and lift us up to make us better. We don’t have as many of these leaders as we need now, which is contributing to this capitalism problem
• We have to think about what policies and incentives can change this reality

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

• It’s inevitable. Governments are going to have to bring this transparency
• Per a Harvard dataset of 1800 companies, 250 create more environmental damage in dollar terms than they make in profit in a year; 1/3 (600 companies) create environmental damage equivalent to 25% of their profit
• So, this flow of $30 trillion to achieve impact through ESG and impact investment is causing companies that are creating more environmental damage in the sector to be worth less in the stock market. Investors, talent and consumers are shunning them
• We just published a paper on employment impact, including the measurement of lack of diversity in a company. The lack of diversity, lack of equality of benefits, lack of advancement, etc. numbers are astonishing and reduce the positive impact of Intel, for example, from a $7 billion wage bill to a $3.5 billion wage bill
• When you analyze this data with other companies you realize the cost of diversity; we’re going to be adding to this data to show the impact companies’ products create on people and the environment
• For the first time, we will have a complete picture of the impact performance of companies
• If values have changed, which I believe they have, and consumers, employees and investors want to invest in companies that optimize risk- return-impact better (and, as a seasoned investor, I believe optimizing risk-return-impact delivers better financial returns than just optimizing risk return), then we really are on the threshold of a new frontier

Darren Walker, President, Ford Foundation

• The challenge will be how to have companies and asset managers and owners adopt what we need to be a single analysis of the issue of impact
• I worry there are a dozen different measurement frameworks/organizations doing measurement of impact (SASB, Just Capital, Harvard, etc.)
• We don’t want companies using the framework that gives them the best grade
• We’re at a point where we need to concretize the kinds of data you’re working on at Harvard
• We also have to talk about how we rid our system of the ideology of Milton Friedman, the ideology that the purpose of the corporation is profit (this is embedded in generations of CEOs because business schools taught this)

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

• Friedman created that ideology 50 years ago when he could not have anticipated transparency of impact, but after seeing companies are creating more negative environmental and employment and social impact than the profit they’re making, it needs to be examined differently
• Even if you don’t believe these negative impacts are important, this is going to affect the behavior of talent working for these companies, the consumers buying their products and the investors investing in them
• We’re already seeing more than 1/3 of all managed assets in the world going to achieve impact with impact investment proper
• We couldn’t have imagined the $30 trillion assets under management in impact investing we’re at today; it’s equal to the whole of the venture capital pool
• We do need to displace the Milton Friedman thinking, but investors are helping us do this

What have you learned to inform the movement?

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

• Younger generations do not believe in just making money; they believe in purchasing products of companies that do good and they want to put their entrepreneurial energy into companies which achieve social and environmental improvement
• The unicorns of the future are going to be ventures that improve the lives of 1 billion people on top of making profit; there’s a major change in values happening
• We’ve also learned that it can actually be even more profitable than just looking at risk breakdown. Take Tesla —a company that went into the automobile industry because it thought it could disrupt it
• The risk-return-impact is the formula of the profitable company of the future (this is being said by very conservative investment groups like Bridgewater and Blackrock, as well)

Who is going to lead the world on bringing transparency on profit through gap accounting and auditors today?

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

• This depends on the results of the election in the US. The EU may do this or maybe individual governments like the Dutch or Danish, the British, New Zealand, Canada, France, etc. but we need some leaders to understand they need transparency in order to emerge from this crisis
• If leaders don’t bring business and investors alongside them to improve society and the planet, there’s going to be a very protracted recovery
• Optimistically, there seem to be enough places where there are great leaders that we can hope they will take us in this direction, and we hope the rest of the world will follow

Darren Walker, President, Ford Foundation

• The leadership may come from other parts of the world. We need to have leaders who we incent and discourage from bad behavior. It’s hard for leaders to be courageous when they’re being discouraged
• Some public leaders of companies want to do the right thing but fear some activist is going to come along and say why are you focused on these social objectives, you’re letting the valuation of your company drift, etc. Some leaders are concerned quarterly earnings will throw them off their strategy, so they aren’t looking long term

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

• At the P&G meeting a few days ago, 2/3 of shareholders voted against management’s decision with regard to the company’s deforestation consequences (this percentage would have been unbelievable previously)
• There’s rebellion coming from shareholder ranks; these asset management companies understand that it’s what their clients want
• I am putting all my faith in a change in values driven initially by young people who believe that it’s our duty to make money while improving the world and the planet — we don’t believe we shouldn’t make money, but we should be doing good at the same time

Darren Walker, President, Ford Foundation

• My call to action is that you be relentless in your advocacy for the idea of impact and impact investment, and that you use your own power and influence to make the markets work for justice. It is possible to have ethical enterprises that are also profitable and prosperous

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

• Soon you will have more information; each of you will have apps that will enable you to see the environmental and human damage of products and companies. Buy only the products of companies that you respect. Work only for companies that you respect. Get your parents to write to their investment manager and change their retirement investment plan to impact investment
• This is a revolution like the tech revolution

Want to know more?

For more SOCAP content, visit full session recordings on YouTube or see here for other Starting Up Good summaries of our favorite recordings.