Governments can’t tackle climate change, social polarisation and worsening inequality by themselves. The private sector is a key part of the solution. Investors have stepped in with capital – as of 2018, there were USD31 trillion in sustainable investing assets. Unfortunately, most of this is directed towards just mitigating environmental, social and governance risks – less than 5 per cent is directed towards making a positive change. What follows are Sir Ronald Cohen’s thoughts on what finance can do to make the world better, drawn from a recent interview.1
I was a child of the 60s…I had, when I went into venture capital, a sense that I was doing something that was socially useful. I was hoping to create jobs at a time when Britain had millions of people unemployed…but I realised, as the years went by, that although I had given backing to people who came from modest backgrounds and… enriched people their firms and their communities, the gap between rich and poor, was just getting bigger and bigger, which isn't what I had expected. And so when in 2000, when I was still leading Apax, I got a phone call from the British Treasury to look at the issue of poverty, with a more entrepreneurial eye, I immediately said yes, and that set me on the path to impact investment and that path has led us today to the path of impact economies, which I describe in my book [Impact: Reshaping Capitalism to Drive Real Change]
We can all see that capitalism, which has helped us to take billions of people out of poverty and to increase the general level of prosperity, today creates such negative consequences that even governments can't cope with them, we can see the climatic consequences, which are massive, and we can see the social consequences of underpay, lack of diversity, differences in gender equity. And so something has to change in our system, to bring companies and investors to deliver profit, but also positive impact on people and planet. And my thesis is that the world has actually been moving in the direction of adding impact, to risk and return…measuring the impacts of companies in a similar way to measuring their profit.
I believe as an investor, that optimising risk-return-impact actually delivers better returns financially than optimising risk-return. And the reason is twofold. On the risk side, if you avoid the risk of regulation and of taxation, because you're creating pollution or creating social issues... But also on the return side, when you begin to look at the business opportunities or investment opportunities through an impact lens, as well as a profit and a risk lens, you discover new opportunities, which are much greater than those who would have discovered had you only looked at risk-return. Now, the electric car firm Tesla is an example of this type of thinking. [Tesla founder] Elon Musk entered the automobile industry with the objective, not just of creating automobiles, but creating automobiles that do not deliver pollution in the way the combustion engine has done... There is a correlation already in financial markets in five or six different sectors between higher levels of environmental pollution, and lower stock market valuations, relative to competitors.
I see three major forces coming together today to boost this whole impact investment effort and lead us to impact economies. The first is a change in values...The second is there are huge leaps in technology that enabled us today to deliver impact globally in ways humanity could never contemplate...And the third is this technology enabling us, through the use of big data, to measure the impacts of individual companies...These three forces create massive opportunities.
So those who see the change and participate in it will thrive. And those that don't, will be left behind. Exactly as happened with technology. And those who do will go to their shareholders meetings with transition plans, which may well be voted on by shareholders, and those who don't are going to be under attack from some of their shareholders. We're at a crossroad similar to 1929, after the Great crash, and the COVID-19 great crash, I think is going to be followed by bold steps. I hope they’re bold enough…we need around between USD30-40 trillion in the next 10 years to achieve the Sustainable Development Goals.
I am an optimist. For four decades, the environmental movement has tried to find solutions at the government level. And finally, we're coming to the conclusion. The solutions have to be at the corporate level. The pollution is not created by governments, it's created by companies. Once you bring into everyone's ambit, the figures about the impacts of companies, you create a race to the top. Companies will strive to improve their impact performance because it improves the value of their company.
[1] This interview has been edited for clarity. Watch the interview as part of our Pictet Meets film series, or listen to the Found In Conversation podcast.
