A ‘new era of impact capitalism’ has been likened to the Technology Revolution of the 20th century in a new book detailing the power that impact investment can have, such as transforming the economic system, and bringing solutions to the world’s biggest social and environmental projects.
Authored by founder of venture capital firm APAX Partners Sir Ronald Cohen, the book entitled Impact – Reshaping Capitalism to Drive Real Change is a manifesto of companies shifting away from focusing on profits and risk-return to incorporating – and more importantly measuring – impact investment.
Cohen predicts, similar to the rise of ESG investing over recent years, impact investing will be pushed to the top of C-suite agendas, driven by investor appetite and customer demand.
In an interview in ESG Clarity, he said: “We are seeing dramatic changes in behaviour, which will change the behaviour of companies. The younger generation are not interested in buying products that can do harm and they are changing their choices, and investors have become aware of this.
“Pressures will become great from investors, and those companies that don’t believe in this, will find themselves replaced.”
The book paints the picture of “a world where inequality is shrinking, where natural resources are regenerated, and people can benefit from shares prosperity”.
Numerous times in the book, Cohen likens the rise of impact investing to the Technology Revolution of the 1990s and says it is already in play.
“The Impact Revolution is already transforming the way we think about social responsibility, business models and investment,” he writes.
“It is beginning to change our economies, turning them into powerful engines that drive capital to achieve impact alongside profit. We can already see it marking the 21st century as much as the Tech Revolution marked the 20th.
He also added that just as companies operating in markets disrupted recently by technology brought in CEOs with tech experience, companies that will survive in the future will be those that have brought in executives that recognise the importance of impact investing.
‘You can’t manage what you don’t measure’
The key to impact investing being widely adopted be, he says, is the measurement of impact investing, something which the industry has struggled to get to grips with in the past.
“If you can bring the measurement of impact, it will have a greater impact on people’s lives. Governments need to realise they need to give investors the tools to measure ESG impact with.”
With this, he refers to the Companies Act of 1929 when accounting and auditing was legislated for the first time after much frustration from investors who were unable to measure profits of the companies they invest in.
The book goes into more detail: “It is a basic principle that you can’t manage what you don’t measure…This is why standardised impact measurement is so important. It makes it possible for impact to take its rightful place alongside profit by enabling us to arrive at a company’s net impact, or putting it in other words, its social and environmental bottom line.”
He adds little work has been carried out around the valuation of impact, but progress has been made; the “best framework” for businesses to measure and communicate about their impact is B Lab, which created the Global Impact Investing Rating System. The Global Impact Investing Network (GIIN), the Sustainability Accounting Standards Board and the Global Reporting Initiative’s Sustainability Reporting Standards have also looked at the best ways to assess a company’s performance, but are still in the “early steps” phase.
Cohen says the key will be measuring both profit and impact that a company makes through its products, employment and operations and backs the Impact-Weighted Accounts Initiative (IWAI), incubated at Harvard Business School and led jointly by the Global Steering Group (GSG) and the Impact Management Project (IMP) as being ahead in finding an impact measurement solution.
“This ground-breaking initiative brings together academics, practitioners, companies and investors and seeks to build on all impact measurement work that has been done to date,” the book explains.
To arrive at impact-weighted accounts, it continues, it is necessary to give a monetary value to the social and environmental impacts created by businesses.
“They will apply coefficients to the various lines of a company’s profit and loss statement – sales, employment costs, costs of good sold, to arrive at an impact-weighted profit line.” This, the book adds, will reflect the impact a company has on the environment, society, consumers, employees and supply chains.
Cohen also suggest firms implement an impact accounting board and explores in more detail how companies can measure operational impact as well as the impact of a company’s products in the chapter entitled Embedding impact in business.
Covid-19 accelerating impact investment
Turning to the current situation with the entire world embroiled in the Covid-19 pandemic, Cohen told ESG Clarity the crisis will push governments and investors to embrace impact investing as we look to rebuilding economies and society from one of the biggest hits in a generation.
“We will come out of this crisis with governments that are more strapped for cash then they were going in, they have been borrowing giant amounts of debt. We are going to have budget cuts and the most vulnerable people in society will suffer.
“Bringing in investors will help create solutions for our social as well as our massive environmental challenges. This will become a greater priority,” he said.
In the book, he adds: “There has never been a more a tangible opportunity to make a transformative difference, and each of us has a significant role to play in making it happen.”
He added that it is now more important than ever that every business should now take impact into account, or risk being deserted by customers, employees and investors.
“Covid-19 has shaken up habits and beliefs, it has opened the door for change. If we want to recover in a way that doesn’t address inequality and worsens the environment, we will have to bring impact alongside profit,” he said.
In his book, he comments: “Impact must become ingrained in our society’s DNA. Part of a triple helix of risk-return-impact that influences every decision we make regarding consumption, employment, business and investment. It needs to become a driving force of our economy.”
In an ideal world, he said to really prompt companies into action, governments would legislate that businesses need to publish impact-weighted accounts in two years’ time.
“Companies would start publishing these now instead of surprising in two years. If they start in two years, they will look terrible when investors get transparency.
“The focus will shift from risk-return to risk-return-impact,” he added.
However, he admitted he is not expecting an imminent announcement on this from governments given their current agendas, but he will continue to apply pressure and strive for impact-weighted accounts to be mandated.
“If an individual government did it, it would prompt the rest, but we are advocating for this change in all different countries.
“We want the message out there that investors are now the key force in bringing about change.
“It took four years for the [accounting and auditing legislation] to go through in the US, let’s hope that this goes through faster than that.”
Impact – Reshaping Capitalism to Drive Real Change is set to be published on 2 July. You can pre-order here. Sir Ronal Cohen is donating all royalties from the book to impact investment charities.