Impact Alpha, by Ronald Cohen
The existing social contract has expired – we need to draw up a new one. It’s time for a new financial model that values impact alongside risk and return.
On the brink of the G20 Summit, it is worth reflecting on how we are seeking to address some of the most pressing global challenges.
Wracked by rising inequality and human and environmental crises, capitalism as it exists today isn’t delivering on its promises: to increase prosperity and social progress for all. The gap between rich and poor grows wider every day. Economic opportunity has failed to grow meaningfully for billions of people. Meanwhile, the toll on our environment continues to rise—from global warming and deforestation to the pollution of our oceans.
Cue, the impact revolution.
The dominant model of capitalism practiced today is more than two centuries old. Our problems have changed, and so too must our response.
This moment calls for nothing short of a revolution, for a new approach that asks the question: How can we reach our financial goals while also doing measurable good in the world?
Capitalism as we practice it today is deeply flawed, but not hopeless.
Risk, return…and impact
When it comes to how we invest, there is an exciting shift underway, one that takes the current thinking about financial risk and return and adds a third dimension—impact—that measures positive outcomes for society and the environment. Under this new financial model, social impact matters just as much as a company’s bottom line. This does not require reducing profits. Instead, it inspires us to maximize both profit and impact at normal levels of risk, to create the kind of world that everyone wants to live in. Together, we are reinventing modern finance and reshaping modern business.
The private sector is the cause of any number of social and environmental ills. But it is also fundamental to solving them. We cannot address our most pressing issues without embracing the private sector and capital markets.
Innovation. Risk-taking. Achieving scale. The dogged pursuit of measurable results. These are hallmarks of entrepreneurs and the private sector. They are also key to solving complex problems and enacting changes quickly and efficiently. The tech revolution showed us what happens when private capital meets with scrappy and disruptive entrepreneurs. It’s time we took a page out of its playbook. By introducing impact, the risk-return-impact model brings out the best in entrepreneurs and the private sector in addressing our urgent social and environmental problems – problems that governments and philanthropists are simply unable to handle on their own.
Valuing impact does not have to mean sacrificing profits. On the contrary, we can deliver high rates of return because of impact, rather than in spite of it.
The millennial generation is different from its forebears. Millennials want to do more than collect a paycheck—they genuinely care about doing good. They want to shop, work, launch companies and invest in ways that express their deeply-held values. And investors, including some of the largest asset managers and pension funds, are moving in the same direction. Businesses are taking note. There isn’t a boardroom on the planet where the subject of social impact—and its growing importance to millennials—hasn’t come up.
If impact investing is our rocket ship to social change, impact measurement is our navigation system. We need to completely rethink it. For too long, we have measured social impact in ways that are imprecise, inconsistent and incomparable.
Many people dismiss impact measurement as impossible. The truth is, we can measure social impact with a greater degree of accuracy and rigor than we use to measure financial risk. We just need to get serious about doing it. The absence of measurement leads to a huge failure of our existing system to deliver social and environmental improvement, at great cost to the world.
Over the last 20 years, we have seen the rise of numerous initiatives to establish standards for impact measurement. One of the most promising approaches, advanced by The Global Steering Group for Impact Investment and the Impact Management Project, is to weight conventional financial accounts for impact. It involves applying impact coefficients to sales, employment costs, cost of goods sold—all the way down to the profit line—and doing the same for the balance sheet.
Impact-weighted financial accounts will allow for reliable measurement and comparison by investors. When every company publishes impact-weighted accounts alongside financial ones, impact will have assumed its place in investment and business decision-making.
We are seeing promising changes. Investors and businesses are becoming socially and environmentally conscious; impact entrepreneurs are gaining access to the capital they need to bring brilliant, life-improving ideas to scale; governments are seeing the value in harnessing the innovation of the private sector, channeling its talent and capital to find better solutions to society’s challenges; philanthropists are beginning to fund the delivery of measured outcomes. It’s time to accelerate these changes, and demand more.
The G20 Summit is an opportunity for world leaders to commit to enabling a global impact revolution.
Impact investing means evolving capitalist systems to build a better world, one that values social impact just as highly as profits. It means exposing the myth that social good comes at the expense of profit. And the accompanying myth that impact cannot be reliably measured and compared.
Ending the plight of billions of lives and the decline of our planet depend on our urgent, collective action. There is a way. And there has never been a greater need or a better time than right now.