Measuring ESG impact using the World Benchmarking Alliance (WBA) and Clarity AI’s Frameworks
Many investors choose to start their impact measurements by evaluating company level impact, but that often fails to measure the magnitude of the impact likely to be driven by the company and considers all SDGs as equal. In light of this phenomena we found that the framework provided by the World Benchmarking Alliance (WBA) and Clarity AI’s UN SDG Impact Methodology both offer innovative approaches that are likely to reconcile the gap between theory and practice.
The WBA focuses on the seven systemic changes required to achieve the SDGs (see graph below). It then identifies “keystone” companies for each of these categories that, in a qualitative sense, impact the SDGs.
The 2,000 keystone companies identified across the seven systemic transformations, are in a position to influence and catalyze change in their sectors in the same way that certain species do in their ecosystems. The criteria used to identify these keystone companies are :
- Companies that dominate global production revenues and/or volumes within a particular sector
- Companies that control globally relevant segments of production and/or service provision
- Companies that connect (eco)systems globally through subsidiaries and supply chains
- Companies that influence global governance processes and institutions
- Companies that have a global footprint, particularly significant in developing countries
In a second step, WBA engages in an extensive consultation process to develop transformation benchmarks, which will be used to assess how well these companies are leading desired sustainable change.
The WBA therefore provides a powerful framework with which investors can channel capital to support leaders and actively engage with laggards that are slowing down the necessary evolution of practices in all economic sectors.
Clarity AI’s UN SDG Impact Methodology goes beyond measuring revenue alignment to SDGs. It focuses on measuring the size of the impact that companies create through contributing to each of the SDGs. In a first step, the methodology assesses for each SDG the potential contribution that can be made by the private sector, and more specifically by listed companies. It then identifies key metrics to estimate companies’ performance for each of the 52 official UN underlying targets found to be applicable to investors. Given the nature of the SDGs, when revenues for specific products are used, these are almost always limited to sales of products or services to underserved populations, illustrating how inclusivity can be practically integrated into impact methodology development. Finally, the impact is put in monetary terms by using an assessment of the value of specific social benefits, based on peer-reviewed estimates of the value of those benefits. This enables comparison, aggregation, and optimization across SDGs.
Over time, Clarity AI will also develop a measure of a company’s transformation potential beyond its current contribution (potential impact). This will be calculated by assessing the size of the positive societal benefit (or cost) that would result if all its sector peers performed in a similar way.
Sustainable investment will only deliver on its promise if it can rely on sound methodologies, data, and labels. Investors need to be careful to leverage the frameworks that are built on a holistic view of genuine commitment to avoid “Impact washing.” Impact investment is an attempt to re-establish a sound value proposition. It is a bet that seeking as yet unmonetized collective societal benefits will eventually translate into better conditions for long-term sustainable returns.
