A joint study1 by Qontigo and Clarity AI this August shed light on the current state of impact investing2 by reviewing prominent impact management and measurement frameworks, and assessing the alignment between theory and practice as applied by the industry.
Understanding the concept of impact and, more importantly, elaborating ways to measure it, is vital amid fast growth in this segment of responsible investing.3 Increasingly, investors are demanding a clear picture of the real-world social and environmental effect of their portfolios. The August study focused on the problems around defining impact from an investor’s perspective, which has led to important conceptual, mislabeling and applicability issues in the industry, and recommended a baseline definition.
In a follow-up whitepaper,4 the analysts at Clarity AI, with support from the sustainable investment team at Qontigo, now turn their attention to the challenges of measuring company-level impact. Despite its growing relevance as a portfolio consideration, there is no widely accepted impact measurement standard. And as the authors write, much less one that is easy to digest. Investors seeking to assess the societal impact of listed companies will stumble upon several obstacles: from complicated data collection, to subjective and inconsistent approaches, to heterogenous company singularities.
A tool to quantify the impact of companies
The new study introduces the approach developed by Clarity AI, which employs the United Nations’ Sustainable Development Goals (SDGs) as an appropriate tool to measure impact.
Clarity AI’s SDG impact methodology maps the impact of a company’s operations, products and services to 52 out of 169 SDG targets that have been identified as being relevant to investors, measurable and with an actionable timeline, and quantifies the social value that they contribute to the UN goals. The methodology calculates in monetary value the contribution that companies make to each one of the measurable targets.
This standardized and quantitative company SDG impact approach assists investors that are focused on the three impact-investing dimensions of intentionality, additionality and inclusivity. The paper walks through the step-by-step methodology that leads to a Clarity AI SDG Impact Score for around 30,000 businesses in different industries and regions.
Assessing the possibilities of a quantitative impact methodology
Building on the SDG approach to measure impact, the whitepaper looks at three aspects:
- First, the authors explain how the SDG framework can be turned into a methodology for estimating companies’ impact that tackles some of the shortfalls in alternative approaches.
- Second, they pursue this approach to gain insight into the amount of impact created.
- Third, having established how impact can be measured, they explore possible drivers of company-level impact.
Of particular interest to portfolio managers may be that the study provides a very detailed analysis of differences in impact across companies and sectors, as well as of the SDGs with the greatest impact.
“For the first time these analyses do give a sense of the magnitude of the relative contribution of different sectors and of each different issues (each of the goals) to the achievement of the SDGs, particularly in relative terms,” the authors write.
The study also presents aggregate results. For example, based on Clarity AI’s approach, the authors estimate that listed companies contributed a total of USD117 billion in social value in 2020. The report also sheds light on the empirical relationships between the SDG impact measure and other metrics such as ESG performance.
An impact measure is key to foster growth in the industry
As the authors write, the challenge of measuring impact correctly is at the heart of the theory-vs.-practice misalignment in impact investing. Using the SDGs as a framework for understanding what constitutes impact provides a starting point for a common measurement approach that can help bridge the gap, they argue.
An SDG-lens analysis can identify companies’ absolute and relative contribution to impact, and can assist in the construction of impact portfolios and indices. In this sense, the whitepaper will prove to be a very useful guide at a time when impact has emerged as a key investment pillar, right next to risk and returns.
1 Bocquet, R., Mehrotra, S., Georgieva, A., Pina, P. Coelho, R., Lastra, C., ‘On the Way to Impact Investment: Mind the Gap Between Theory and Practice,’ August 2021.
2 The Global Impact Investment Network has defined impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
3 Different organizations have provided an estimate of the size of the impact strategies market. According to the Global Sustainable Investment Alliance, impact investing accounted for USD352 billion at the end of 2019, the smallest of seven sustainability strategies tracked by the organization. The Global Impact Investing Network (GIIN) in June 2020 valued the impact market at USD715 billion.
4 Pina, P.; Olivares-del Campo, A.; Lastra, C.; Coelho, R., ‘Quantifying corporate societal impact using United Nations’ Sustainable Development Goals,’ November 2021.
