Impact Investing and Financial Sectors

ESG Impact November 25, 2021

Research on impact investing shows 41% of results can be explained by a company’s sector

Clarity AI has a holistic approach to societal impact when aggregating all the different dimensions of impact for the UN Sustainable Development Goals (SDGs). What companies have the greatest levels of impact when all different impacts are evaluated and compared, and what is the source of that impact? Ultimately, it is the job of investors to select specific industries and companies. However, company sector impact correlations can help narrow down the search for optimal companies. 

Given the content of the UN SDGs, companies that produce certain types of products which directly affect health (healthcare companies), and that are targeted at the basic needs of the global poor, have the greatest impact. When we aggregate the impact of all companies in a sector and the impact on each SDG, we can conclude that the Healthcare sector (driven by the direct impact of pharmaceuticals and healthcare provision on extending people’s lives), Real Estate, Materials and Industrials have the most positive impact. Other sectors such as Consumer Discretionary (driven in this case by tobacco revenues) or Utilities (due to their high CO2 emissions) result in significant negative values. 

In fact, a large portion of the impact that a company has (about 41%) can be explained by the sector it belongs to. This also means that slightly more than half of the impact that companies have is still explained by other company characteristics. The net impact results (produced by aggregating positive and negative impacts by sector) are depicted in the graph below. This shows the absolute impact level for each sector, normalized by the size of the sector.

Although sector is an important element to consider there are a variety of components to analyze such as company size/productivity, geography, and relationship to ESG scores. An investor must examine all of these factors to appropriately determine the impact of an individual company.

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