Hey everyone, welcome back to another episode of My Weird Prompts. We are coming to you from our home in Jerusalem, and today is going to be a little bit different. Usually, our housemate Daniel sends us an audio prompt to kick things off, but today we actually decided to dive into a topic ourselves. It is something that has been sitting on our research pile for a while now, and honestly, the more we looked into it, the more we realized it deserved its own deep dive.
It really does. I am Herman Poppleberry, and I have been practically vibrating with excitement to talk about this one. We are looking at the life and the incredible financial innovations of Sir Ronald Cohen. If you have ever heard the term social impact investing, you are looking at the man who essentially birthed the entire movement. He is one of those rare figures who managed to master the highest levels of traditional finance and then decided to completely rewrite the rules of how capital can serve humanity.
It is a fascinating trajectory, Herman. I mean, we are talking about a man who was born in Egypt in nineteen forty-five and had to flee to the United Kingdom as a refugee during the Suez Crisis in nineteen fifty-six. His family arrived with only ten pounds to their name. He went from that to co-founding Apax Partners, which is now one of the biggest private equity firms on the planet. He is often called the father of British venture capital. But then, right around the turn of the millennium, he shifted gears in a way that most people at his level just do not do. He did not just start a foundation or write some checks; he started engineering new ways for money to work.
He realized that the gap between the scale of social problems and the amount of money available through government and philanthropy was just too wide to bridge with traditional means. We are talking about trillions of dollars in the private markets versus billions in charity. Sir Ronald’s genius was in realizing that if you could align the profit motive with positive social outcomes, you could unlock those trillions. He was knighted in two thousand one for his services to the voluntary sector and enterprise, which really marked the beginning of this second act.
And that brings us to his most famous innovation, which we have touched on briefly in past episodes, like back in episode four hundred thirty-nine when we talked about the new rules of impact investing. But today we really want to get into the mechanics of the first Social Impact Bond, or SIB. This happened in two thousand ten at Peterborough prison in the United Kingdom. Herman, walk us through the actual structure of that, because it was a radical shift in how government handles social services.
It was a total paradigm shift, Corn. Think about how government usually funds social programs. They pay for inputs. They pay for a certain number of social workers or a certain number of beds in a shelter. But they often do not know if those inputs are actually solving the problem until years later, if ever. Sir Ronald and his team at Social Finance United Kingdom turned that on its head. In the Peterborough case, the goal was to reduce reoffending rates among short-sentence prisoners. These are people who are in and out of jail so fast they usually do not get any rehabilitation services, and their recidivism rates are sky-high.
Right, and that is a massive cost to the taxpayer. Every time someone goes back to prison, it costs a fortune in policing, court fees, and incarceration.
So, instead of the government paying for a new rehabilitation program directly, they said to Sir Ronald’s group: If you can reduce reoffending by a certain percentage, we will pay you a portion of the money we saved. This is where the bond comes in. Private investors put up the five million pounds needed to run the program. That money went to a group of charities and service providers who worked with the prisoners.
So the government is completely off the hook if the program fails?
That is the beauty of it. The financial risk is shifted entirely from the taxpayer to the private investors. If the recidivism rate did not drop by at least seven point five percent, the investors would get zero. They would lose their principal. But if the program succeeded, the government would pay out a return based on the savings they realized from having fewer people in prison.
It is a brilliant alignment of incentives. You have the private sector’s focus on efficiency and results being applied to a social problem that has historically been a black hole for government spending. And I remember reading that the results for Peterborough were actually quite impressive.
They were. Reoffending dropped by about nine point seven percent compared to a control group, which surpassed the target. This meant the investors got their capital back plus a return of about three percent per year. It proved the concept. It showed that you could create a financial instrument where the underlying asset is essentially a positive human outcome.
I want to dig into the technical side of that for a second, because we should not gloss over how hard it is to actually measure that. When you are talking about a Social Impact Bond, you need an independent evaluator, right? You cannot just have the charity say, Hey, we did a great job, pay us.
Oh, the measurement piece is the most rigorous part of the whole structure. In a Social Impact Bond, you usually have four main players. You have the outcome payer, which is typically the government. You have the service providers, which are the charities or social enterprises. You have the investors who provide the working capital. And then you have the intermediary, like Social Finance, who puts the whole deal together and manages it.
And then the fifth player, the one who keeps everyone honest, is that independent evaluator.
They have to establish a baseline. They have to figure out what would have happened anyway without the intervention. That is the attribution problem. How do you know the reoffending rate dropped because of your program and not just because the economy improved or the local police changed their tactics? Sir Ronald has been very firm that these instruments must be data-driven. You use a randomized control trial or a very robust quasi-experimental design to prove the impact.
It really brings a level of accountability to the social sector that just did not exist before. I mean, we have talked about this in the context of sustainability bonds in episode five hundred thirteen, but the SIB model is even more focused on specific human metrics. But let’s talk about the evolution of this. Sir Ronald did not stop at prison recidivism. He has moved into something even broader, which is sustainability-linked debt.
This is where the market has really exploded, Corn. We are seeing the principles of the Social Impact Bond being applied to massive corporate loans and bonds. Now, we should distinguish these from green bonds. A green bond is what we call a use-of-proceeds instrument. You borrow money to build a solar farm, and you have to spend it on that solar farm.
Right, it is tied to the project.
But a sustainability-linked bond is tied to the performance of the whole company. For example, a massive retailer might issue a bond where the interest rate they pay is tied to their ability to reduce their carbon footprint or increase the diversity of their management team. If they hit their targets, the interest rate stays low or even drops. If they miss their targets, the interest rate kicks up.
It is like a financial penalty for failing to meet your own goals. It forces the chief financial officer and the board of directors to care about social and environmental metrics as much as they care about the bottom line, because those metrics are now part of the bottom line.
Precisely. It is about internalizing externalities. Sir Ronald’s vision is that we are moving from a world of two dimensions, which are risk and return, to a world of three dimensions: risk, return, and impact. He argues that in the twenty-first century, it is no longer enough to just ask how much money you made. You have to ask how much good or harm you did in the process.
And he is taking this all the way to the accounting level with the Impact-Weighted Accounts Initiative at Harvard Business School. This is one of the most ambitious things he is working on right now. The idea is to literally put a dollar value on a company’s impact and include it in their financial statements.
It sounds radical, but when you think about it, it is just common sense. Right now, if a company pollutes a river, that is a cost to society that does not show up on the company’s balance sheet. If a company provides incredible training to its employees that increases their lifetime earnings, that is a benefit to society that also does not show up. Sir Ronald wants to monetize those impacts so that investors can see the true value a company is creating or destroying. This work has actually evolved into the International Foundation for Valuing Impacts, or IFVI, which is working to standardize these measurements globally.
It would change the way we think about price-to-earnings ratios entirely. You might have two companies with the same profit, but if one of them has a massive negative impact weight because of their supply chain practices, their true earnings are much lower.
It would fundamentally change the invisible hand of the market. Sir Ronald often says we need to move from the invisible hand to the invisible heart. But he is not being sentimental when he says that. He is talking about hard data and market mechanisms. He is saying that if you can measure impact, you can price it. And if you can price it, the market will naturally move capital toward the companies that are doing the most good.
I love the intellectual rigour he brings to this. It is not just about being a good person; it is about making the market more efficient by accounting for things we used to ignore. Now, Herman, we have to talk about some of the challenges, because as much as we admire Sir Ronald’s vision, these instruments are not a silver bullet. One of the criticisms of Social Impact Bonds is the risk of cherry-picking, or what people in the industry call creaming.
That is a very real concern. If a charity is being paid based on their success rate, they might be tempted to only help the people who are the easiest to help. If you are trying to get people into jobs, you might pick the people who already have some skills and just need a little push, while ignoring the people with deep, systemic barriers to employment.
Right, because the harder-to-help populations are riskier for the investor. How does the structure of these bonds account for that?
Well, this is where the rate card comes in. This is a technical detail that Sir Ronald has championed. Instead of a flat fee for an outcome, the government can set a higher price for achieving an outcome with a more difficult demographic. So, if you get a long-term unemployed person with a criminal record into a job, the payout is much higher than if you get a recent graduate into a job. You use the pricing mechanism to incentivize the behavior you want to see.
That is clever. It is basically using the profit motive to drive resources toward the people who need them most, rather than away from them. But what about the complexity? These deals take a long time to put together. You have lawyers, intermediaries, evaluators. Does the overhead eat up all the savings?
In the early days, that was definitely a problem. The Peterborough bond was a bespoke, one-off project that took years to design. But Sir Ronald’s answer to that has been the creation of outcomes funds. Instead of doing one bond at a time, you create a large pool of capital that is ready to pay for outcomes across dozens of different projects. This allows you to standardize the contracts and the measurement metrics, which brings the transaction costs way down.
Like the Life Chances Fund in the United Kingdom or some of the Development Impact Bonds we have seen in places like India or Africa.
We are seeing this scale globally. Sir Ronald chairs the Global Steering Group for Impact Investment, which now has member countries representing over half the world’s population. This is not just a niche thing in London or New York anymore. It is a global movement.
It is amazing to see how his background in venture capital influenced this. He saw how venture capital transformed the tech industry by providing risk capital to entrepreneurs who were doing things that traditional banks would not touch. He is essentially doing the same thing for social entrepreneurs. He is giving them the risk capital they need to innovate.
And he is doing it with a level of humility that I find really impressive. He is a billionaire who could have just spent his retirement on a yacht, but instead, he is in the trenches at Harvard and with the Group of Seven nations, pushing for policy changes. He really believes that capitalism is at a crossroads. In his book, Impact: Reshaping Capitalism to Drive Real Change, which he published in twenty-twenty, he argues that the current model of capitalism is creating too much inequality and environmental destruction to be sustainable.
It is a very pro-market worldview, though. He is not saying we should get rid of capitalism; he is saying we need to upgrade it. He is saying that the profit motive is the most powerful engine for change ever discovered, and we just need to point it in the right direction.
I think that is why his message resonates so well with people like us. It is not about more government regulation or more taxes. It is about using the tools of the market to solve problems that government has failed to solve. It is about entrepreneurship and innovation.
It is also worth noting his connection to Israel, since we are sitting here in Jerusalem. He has been a huge supporter of the Israeli high-tech scene and has worked to bring impact investing to the startup nation. We talked a bit about the startup embassies in episode four hundred fifty-two, and Sir Ronald is a big part of that ecosystem. He sees Israel as a perfect laboratory for these kinds of financial innovations because of the culture of problem-solving here.
He really does. He has helped launch several Social Impact Bonds here in Israel, focusing on things like preventing Type Two diabetes and improving higher education for the Bedouin community. He sees these as scalable models that can be exported to the rest of the world.
Let’s talk about the future for a minute. If Sir Ronald’s vision fully takes hold, what does the world look like in twenty years? What does the average investor’s portfolio look like?
I think we are looking at a world where every investment is rated for impact. Just like you look at a credit rating today to see how risky a bond is, you will look at an impact rating to see what kind of world that bond is building. You will be able to go onto your brokerage app and see that your portfolio has helped provide clean water to ten thousand people or reduced carbon emissions by fifty tons.
And the crazy part is that you might not even have to sacrifice returns to do it.
That is the big takeaway from Sir Ronald’s work. The data is starting to show that companies with high impact ratings actually tend to outperform the market in the long run. Why? Because they are more efficient, they have better employee retention, and they are less likely to get hit with massive fines or lawsuits for environmental or social failures. They are better-managed companies.
It makes sense. If you are paying attention to your impact, you are paying attention to your long-term risks. Most companies that fail do so because they ignored a mounting social or environmental cost until it was too late.
Sir Ronald is basically teaching the market how to see the future. He is showing that what we used to call soft metrics are actually the hardest, most important data points for long-term value creation.
I want to go back to the technicality of the outcomes fund for a second, because I think that is where the real scale happens. How do you pool these things without losing the local touch? Because social problems are often very local.
That is the tension, right? You want the scale of a global fund but the expertise of a local charity. The way Sir Ronald structures this is through a decentralized model. The outcomes fund provides the capital and the rigorous measurement framework, but they partner with local intermediaries who know the community. It is a bit like a franchise model for social change. You have a proven system for measurement and finance, but you let the local experts handle the actual work on the ground.
It is really an elegant solution. It reminds me of the work we discussed in episode eight hundred fifty-two about building a post-capitalist economy, although Sir Ronald would probably call it an evolved capitalist economy. He is not trying to move beyond the market; he is trying to make the market finally see the whole picture.
I think that is a great way to put it. He is a visionary, but he is a visionary with a spreadsheet. He is not just dreaming about a better world; he is building the plumbing that will make it possible. And I have to say, I have a massive amount of respect for the way he has handled his career. To go from being a titan of private equity to being the world’s leading advocate for the poor and the marginalized, and to do it by using the very skills that made him a titan in the first place? That is a life well-lived.
It really is. He has used his influence to get this on the agenda of the Group of Seven and the Group of Twenty. He is not just talking to activists; he is talking to central bankers and prime ministers. And they are listening because he speaks their language. He is not asking for a handout; he is offering a more efficient way to run a country.
And a more stable way. If you look at the social unrest we have seen globally over the last decade, a lot of it comes down to a feeling that the system is rigged, that capital only serves the few. Sir Ronald’s innovations are a direct answer to that. They are a way to make sure that the growth of the market actually benefits everyone, especially the people at the bottom.
It is a powerful message, and it is one that we definitely need right now. I think his book is a must-read for anyone who cares about the future of our economy. It is called Impact: Reshaping Capitalism to Drive Real Change. We will put a link to it in the show notes on our website.
Definitely. And if you want to dive deeper into some of the technical structures we mentioned, like the specific mechanics of sustainability-linked loans, check out our archives at myweirdprompts dot com. We have covered a lot of the building blocks of this over the last few years.
Yeah, we have been following this space for a long time, but Sir Ronald Cohen is really the North Star of the whole movement. It was great to finally dedicate an entire episode to his work.
It really was. I feel like we only scratched the surface, but hopefully, it gives people a sense of why this matters so much. It is about more than just finance; it is about the kind of society we want to live in.
Well said, Herman. And before we wrap up, we want to thank our housemate Daniel for being the catalyst for so many of our discussions, even if we picked this one ourselves today. He is the one who keeps us on our toes and keeps the prompts coming.
He certainly does. And hey, if you are enjoying the show, we would really appreciate it if you could leave us a review on Spotify or whatever podcast app you use. It genuinely helps other people find the show and helps us grow our community.
It really does. We read all of them, and we appreciate the support. You can find all nine hundred and eight of our episodes at myweirdprompts dot com, and there is a contact form there if you want to send us your own weird prompts or feedback.
We love hearing from you guys. This has been My Weird Prompts. I am Herman Poppleberry.
And I am Corn. Thanks for listening, and we will talk to you next time.
Until next time!
