How can we find bigger answers if we don’t ask bigger questions?

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TITLE SLIDE: Impact investing and the future of capitalism

EPISODE TITLE SLIDE: Part 1 – Going public and the myth of lower returns

QUYEN TRAN

Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment professionals with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy. Together they explore the topics that are driving markets and shaping investor decision-making.

Our second episode shines a bright light on impact investing, and I’m thrilled to introduce two pioneers and experts in the field.

Sir Ronald Cohen is widely recognized as the father of impact investing and European venture capital. He is driving forward the global impact revolution. Sir Ronald serves as Chairman of the Global Steering Group for Impact Investment, the impact weighted accounts initiative at Harvard Business School, and the Portman Trust. He was born in Egypt and left as a refugee at the age of eleven when his family came to the United Kingdom. He is the author of Impact, Reshaping Capitalism to Drive Real Change.

Eric Rice is Head of Impact Investing at BlackRock. He works as a portfolio manager and is the architect of the world’s first diversified public equity impact investing strategy, Global Impact. Early in his career, Eric worked as a World Bank country economist, and a diplomat in Rwanda with the U.S. Department of State.

In Part 1 of their three-part conversation, Sir Ronnie and Eric discuss impact investing and the myth of lower returns. Gentlemen, please take it away.

ERIC RICE

Thanks, Quyen. And hi, Ronnie. It's nice to see you.

SIR RONNIE COHEN

Hi, Eric. Great to see you, too.

RICE

So Ronnie, you and I have both spent years as impact investors. And historically, impact investment has lived in a very circumscribed space, focused in the private markets, and only on companies that are dedicated to solving the world's big problems. But now, in your new book, Impact, you write about a broader concept of reimagining capitalism. So what does this idea of reimagining capitalism mean to you? And why is it so important at this moment in history?

COHEN

Great question, Eric. The world is shifting economic paradigms.

CAPTION: Major shift: Companies measured not only on profitability, but on impact

It's shifting from risk/return to risk/return impact. And the implications of that change are massive because that they will enable us to measure the impacts of companies and to compare not just their profitability, but their impacts, too. And this is informing investment decisions today. But with new information coming on stream, we will be able to compare in great detail the impacts of companies.

RICE

You broaden the scope through your work on impact-weighted accounts to that whole economy. Can you tell us a bit about what you would hope to accomplish with that?

COHEN

Yeah. Everybody assumes we can't measure impacts.

CAPTION: Data is now available to measure and quantify impact

In fact, though, there's a ton of publicly available information which we can use algorithms and big data to analyze and to deliver to investors and other stakeholders. So what the impact-weighted accounts initiative does at Harvard Business School is take the metrics which have been laboriously prepared by some amazing organizations, like SASBI and GRI over the last decade or two, and sort out the most important metrics, and then create pathways to monetizing these metrics so we can reflect employment impact, and product impact, and operational impact on people and the planet through financial accounts.

RICE

I love the way you broaden that out to the entire economy, the entire market.

SECTION SLIDE: Broader impact: from private to public markets

For my team, we capture the narrow definition of impact investing. But we broaden the lens in a different way, which is to go from what was private markets to what's public markets, the recognition that if we're going to meet the demands of the United Nations sustainable development goals, it's been calculated that it's about $2.5 trillion a year shortfall for the emerging markets, and then to reach the Paris Climate Accord goals another about the same, $2.5 trillion. So to get to the $5 trillion extra that's needed, we've looked at this and said, well, impact investing has to go from private markets to public markets. And that's how we've approached it.

CAPTION: Meeting global impact goals requires expanding to public markets

COHEN

I totally agree. I totally agree with your characterization, Eric. And what we're doing by bringing the transparency on corporate impacts to investors is we're enabling investors now to optimize risk/return and impact, whether they're investing in private asset classes, or in public equities, or in bonds or any other form of investment. So bringing measurement to ESG through ESG impact accounting, if you like, is turning ESG into impact investing, which has the intention to create impact, but also the measurement of the impact created.

RICE

It's amazing to me that there's one issue that never seems to die. We hear from our family office clients and from institutional investors still that impact investing, while it sounds great from a philanthropic lens,

CAPTION: Impact investing is compatible with the fiduciary obligation to maximize return[06:27] it leaves out the fiduciary obligation to maximize returns, this view that impact investing necessarily gives up returns.

COHEN

So I think this myth is now being exploded, Eric. There's a lot of-- there are a lot of reasons why risk/return impact should deliver better returns than just risk/return optimization.

RICE

I agree. It's funny. Some years ago, we used to think about this. And it wasn't tested yet. We could say, theoretically, wouldn't you rather invest in these long runways of unmet needs, whether social or environmental? Or would you rather invest in the incumbents who are struggling to stay in the same place or who are struggling with stranded assets?

But now, we've had a chance to test it. Now, we can see what the returns look like over quite a number of years. And at least from our view, they're very good. I don't know what you have seen from your perspective.

COHEN

So I see the same thing. I see risk/return impact as a better way to do business and to invest today. You have to be crazy today to invest in a company with a good product, but which is creating huge environmental harm and using child labor, as an example because it's becoming clear that, with the changing values and the influence of policy makers that these changing values are having, these companies are going to be regulated and taxed.

So the world has already started to shift.

TRAN

Sir Ronald and Eric discussed important issues about investing with impact. The key takeaway, in my view, aligns with the message from BlackRock’s CEO, Larry Fink.

CAPTION: Larry Fink: “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”

The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term durable profits for shareholders.

We hope you’ll tune into Part 2 of our impact series where Sir Ronnie and Eric focus on the three forces driving change.

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