How we are reshaping capitalism

When one thinks about modern capitalism, ‘responsibility’ may not be the first value that comes to mind.
The capitalism that has been the dominant economic model during the past few hundred years has been driven by profit only. The rising prosperity it has brought has left in its wake enormous inequality, social ills and environmental damage. Those who have been left behind have become stuck there. The pandemic has aggravated these inequalities and shone a spotlight on climate change and our unsustainable world.

If we don’t change course, capitalism could spell the destruction of our planet

If we don’t change course, capitalism could spell the destruction of our planet. It’s imperative, therefore, that we urgently find solutions. At the policy level, the UN Sustainable Development Goals (SDGs) have become a beacon for what needs to be achieved. They enjoy wide support but unfortunately we lack the capital to meet their essential targets. Government and philanthropy simply don’t have the necessary funds. We need to harness investment capital and businesses in order to achieve the goals. Fortunately, the way to do this is within our grasp: through impact investment that connects financial markets with social objectives.

The world took an important step forward in this direction with the creation of the first social impact bond in 2010. For the first time, a financial instrument was devised to link a measured social improvement with a financial return. Twelve years later, this idea has inspired more than a trillion dollars of investment in sustainability-linked loans and bonds. It is also providing the inspiration for measuring the impacts that businesses create through their products, operations, employment, and supply chain, revealing a correlation between stock market value and impact-adjusted profitability.

A change in values, leaps in technology, and the measurement of impact are converging to shift capitalism from risk-return to risk-return-impact

The solution to our financing gap now looks obvious: a change in values, leaps in technology, and the measurement of impact are converging to shift capitalism from risk-return to risk-return-impact and bring solutions to the great challenges we face.

What’s needed to achieve this?

Firstly, we need to reliably measure, in a standardized and verified way, the impacts companies create. The Impact Weighted Accounting Initiative (IWAI) at Harvard Business School has shown how we can do this, expressing impacts in monetary terms that enable comparison between impacts and profit. This effectively brings impact within financial analysis and the valuation of companies. The fact that we already see, in the Harvard data, a correlation between higher levels of pollution and lower stock market valuations provides a powerful incentive for businesses to deliver positive impact alongside profit. The fact that impact data has become stock price sensitive also puts pressure on financial regulators to enforce full transparency. Time to Deliver, the G7 Impact Taskforce’s (ITF) report published in December 2021, points for this reason to the inevitable introduction of mandatory impact accounting in the near future.

With clear impact transparency, governments will be able to shift to a fairer tax system where companies are taxed according to the harm they do.

We are moving towards a world in which being in business with the sole intention to make money, with no regard to consequences to the planet and society, is unacceptable. Talent is refusing to join such companies, consumers are deserting their products, and investors are shunning their stocks. With clear impact transparency, governments will be able to shift to a fairer tax system where companies are taxed according to the harm they do, as with a carbon tax. They will be able to provide incentives as well as disincentives to achieve fairer and more sustainable economies.

Doing good and doing well at the same time is becoming the norm for the 21st century.

If in the 19th century investors measured financial return and in the 20th century they measured risk and return, in this century we are measuring risk, return, and impact. Our world will be a better place because of it. 

----------------

Sir Ronald Cohen is Chair, GSG (Global Steering Group for Impact Investment) and IWAI at Harvard Business School. He is the author of ‘Impact: Reshaping Capitalism to Drive Real Change’

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.