As we outlined in our recent article, Impact Investing: Measuring What Matters, there is no singular universally recognized means of measuring impact. One approach that Clarity AI uses is to understand the impact that a company has on each of the UN Sustainable Development Goals (SDGs). The SDGs are the actionable core of the 2030 Agenda for Sustainable Development, “a universal call to action to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere.” Companies have begun to embrace it as a reporting device in relation to sustainability: over 72% of the 721 companies studied by a consulting firm include information about the SDGs as they relate to their company in their annual reports.
Each goal can be analyzed separately, but in practice, investors are more interested in holistic measures of impact. For example, comparing the impact of a company that provides inexpensive food for the underprivileged with one that is involved in ensuring energy security. The advantage of the SDGs is that they provide a thorough but restricted set of impact dimensions that we can use to develop a methodology for addressing this mind boggling complexity.
However, this presents a challenge since, as a recent paper stated, “the UN SDGs have been written by policy makers not by investors – therefore the goals, targets and indicators are considered from a country and governmental standpoint rather than a company one.“ Clarity AI’s methodology tackles these challenges by mapping the impact of a company’s operations, products and services to each of the SDG targets, and quantifying the social value that they contribute to the SDGs. In other words, it measures on a uniform unit (monetary value) the contribution that companies make to each of the measurable targets under the SDGs. It does this by applying the following set of principles:
- Considering the impact that companies have on individual SDG targets due to their products, services and internal operations.
- Providing a bottom-up measure of the impact created by individual SDG targets that can be aggregated into the impact by SDG and a single (monetary) value for the impact on the SDGs overall.
- Taking a quantitative approach to measure the impact companies have on the SDGs on the basis of their revenue sources and a measure of the impact that each unit of revenue generates.
- Using listed company data with a broad coverage, allowing near-universal assessment of companies from the outside in.
- Measuring impact using metrics that are relevant to each industry, while also providing comparability across companies and sectors.
- Measuring the impact for which companies are directly responsible and is agnostic about what would happen in the absence of these activities.
Using the SDG framework and the measures derived from it enables investors to pursue the basic dimensions of any impact investment framework.
