As a venture-capital pioneer and co-founder of Apax Partners, Sir Ronald Cohen experienced firsthand the emergence of an investment framework based on rigorously measured risk and return. How plausible is Cohen’s claim that a new revolution is underway, one which adds social, environmental, or development outcomes to the equation?
MILAN – In the second edition of his 2020 book, IMPACT: Reshaping Capitalism to Drive Real Changeventure capitalist Sir Ronald Cohen expands on his analysis of the rise of impact investing, highlighting areas where environmental and social objectives have been integrated into investment and business decisions. Are we on the brink of an “impact revolution”?
The last time finance and investment frameworks underwent a revolution, several decades ago, the outcome entrenched an approach based on rigorous measurement of risk and return. Cohen, who experienced this transformation firsthand as a venture-capital (VC) pioneer and co-founder of Apax Partners, argues that a similarly momentous transition is underway today, with investment and business strategies increasingly accounting for risk, returns, and impact.
The pillars of the impact revolution are innovation, careful measurement of outcomes, and cross-sectoral collaboration. The “revolutionaries” – including businesses, financial firms, and social entrepreneurs, governments, foundations, and philanthropists – recognize that governments and foundations alone do not have sufficient capital to tackle the largest environmental, social, and development challenges we face, some of which are existential in nature. Moreover, they are convinced that no current version of capitalism is equipped to deliver the necessary solutions.
A huge strength of Cohen’s vision of impact is his comprehensive view of the key actors and of their behaviors – the “impact ecosystem,” if you like. This is crucial because it is not just their individual values, incentives, and behavior that determine results, but rather the reinforcing interactions and complementarity of all three.
One of Cohen’s core messages is that profit and purpose, far from being mutually exclusive, are becoming mutually reinforcing. It is a somewhat controversial claim, which could stand to be developed further. True, as the share of investors, consumers, and workers who care about addressing shared challenges grows, risk-adjusted return and impact are brought into greater alignment. But, in assessing the progress and potential of impact investing, the degree of alignment matters, and we still have a long way to go before impact and returns are fully aligned.
The situation does, however, look promising. Impact-invested assets have grown significantly in recent years. While they still amount to only a small fraction of total global assets in 2024 – $2.3 trillion out of $225 trillion – the same can be said of global VC assets under managementwhich total about $3.1 trillion. And almost everyone would agree that VC investments are likely to have a massive impact on the global economy and its technological underpinnings.
Furthermore, all assets linked to environmental, social, and governance (ESG) objectives – of which impact-invested assets are an expanding subset – amount to $30 trillion, about 14% of global assets, with green bonds alone amounting to $5.7 trillion. Pension funds, which represent $59.4 trillion (26% of global assets), are active in ESG, including in impact investing. And 5,300 investors globally, representing $128 trillion in assets, have signed the United Nations Principles for Responsible Investment.
As the ESG market develops, with the measurement of outcomes becoming more accurate and verifiable, impact investment will probably grow further, since measured results – and, in many cases, specific targets – are what set impact investments apart from ESG investments more broadly. It helps that the International Foundation for Valuing Impacts (which began as a joint project with the Harvard Business School) and the Capitals Coalition are now working together to advance “impact accounting” – the quantification of social and environmental outcomes.
While nothing is guaranteed, Cohen’s claim that investing and capitalism are in the early stages of a transformation seems plausible, especially because impact investing can be self-reinforcing. As he shows, progress is driven not only by actors’ individual values, incentives, and behavior, but also by their mutually supportive interactions across the wider network. His comprehensive view of this “impact ecosystem” is one of the book’s greatest strengths.
This ecosystem is constantly becoming richer, owing not least to innovations like social impact bonds and development impact bonds. In these three-party contracts, social entrepreneurs pursue some measurable social or environmental objective. If they achieve that objective, the government pays up, and the investor profits. If not, the investor receives no returns. Social impact bonds now account for $771 million of investment across 40 countries.
There are numerous potential variations on this structure. Returns could scale according to measured outcomes, with governments, foundations, and philanthropists funding the incremental return over some established baseline. Similar incentive structures – for example, donation matching – are commonplace in philanthropy.
Accurate data on foundation assets globally are hard to find because of incomplete data and diverse reporting standards. In the US alone, assets of private foundations are well over $1.5 trillion. There is some evidence that ESG and impact investing are expanding in the foundation universe.
But foundations with endowments have traditionally managed the endowment for risk-adjusted return without reference to impact. A fraction of the endowment, say 5%, is then made available for impact grants in line with the foundation’s mission. The remaining 95% stays in the non-impact investing world. Cohen and others argue that given the foundation’s mission, there is a good chance of increasing overall impact by committing at least a portion of the endowment to the impact-investment ecosystem.
As Cohen points out, the creation of a new class of corporations (Benefit Corporations in the US, B Corps in the United Kingdom, and Community Interest Companies elsewhere), and the rise of impact-oriented entrepreneurial networks (Ashoka, Echoing Green, and Endeavor), are further evidence of the investment revolution he identifies. He also shares interesting case studies of firms, such as the yogurt producer Chobani, that have devised innovative ways to incorporate impact into their business models.
The best books, at least for me, are not those that confirm readers’ prior beliefs, but rather those that challenge us to update our thinking by helping us to see complex systems and change in a wholly new way. One does not have to agree with all of Cohen’s assertions to benefit from its comprehensive map of an ongoing transformation in the investment landscape and a renewed appreciation of the power of innovation and the art of the possible.
