Quantifying Corporate Societal Impact Using United Nations’ Sustainable Development Goals

Clarity AI’s ESG Rating Methodology: Identifying a consistent approach to ESG impact measurement

The second in a series of Qontigo and Clarity AI research papers primarily focuses on the challenge of measuring impact as a key means of bridging the gap between impact investment theory and practice. It also:

• Identifies the United Nations’ Sustainable Development Goal (SDG) framework, which comprises 17 goals and 169 targets, as a way to structure company impact assessments.
• Introduces and describes the approach developed by Clarity AI, which uses the SDGs to produce estimates of companies’ impact for each SDG goal plus an aggregated overall impact measure.
• Summarizes the aggregate results obtained by taking this SDG approach to identify the SDGs with the greatest impact, the impact by sector and the SDGs overall.
• Discusses the empirical relationships between the SDG impact measure and other metrics such as ESG performance and further company characteristics.

The challenge of measuring a company’s impact

The Global Impact Investment Network (GIIN) defines impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”¹

While this definition provides a theoretical starting point for evaluating companies, measuring the impact that they generate is a key challenge for impact investment. There is no widely accepted way of measuring impact, much less one that is easy to digest. This applies in particular to investors in listed companies, where impact is only one of several considerations in investment decision making. Systematically collecting impact-relevant data on target companies and evaluating their social impact is challenging when portfolio analysts have to consider hundreds of companies from different industries, and impact is one of several dimensions of the analysis. In the absence of a single standard, investors can be overwhelmed by the complexity of, and resources needed for, additional data collection and validation. Some existing approaches rely on tailor-made, detailed measurement methodologies that are implemented by specialist firms and that often reflect investment companies’ own principles or focus areas (e.g., poverty, health, geographical coverage). Conversely, many impact reporting standards that have emerged constitute a long list of metrics relating to every imaginable type of impact without giving any indication of their relative importance for different types of companies. For example, the Global Reporting Initiative (GRI) comprises roughly 200 different disclosures on everything from parental leave policies to the amount of water consumed.

The current state of measuring impact is to be expected in a developing field that is experimenting with different approaches to impact, and for which contributions towards social causes or the public good can take many different forms, from improving the labor conditions of their employees to lowering their carbon emissions or reaching disadvantaged consumers. As the topic matures, “impact” will become embedded in the approach and language adopted even by those investors that don’t have it as a main focus. Simple and consistent measures are needed that can be used by investors alongside traditional assessment dimensions such as risk and return. This would enable investors to make decisions in practice by using a common measure to compare the impact generated by companies in different sectors (e.g., energy companies and consumer goods companies), the relative impact that can be expected from an investment for different levels of return. Finally, possible trade-offs between these dimensions would be made transparent in a practical way. This is a key part of the toolkit necessary to realize the vision of incorporating societal impact as a third dimension alongside risk/return in a “new efficient frontier” – a vision that Qontigo has embraced (see Figure 1).

FIGURE 1
Qontigo’s vision is to be able to incorporate societal impact as a third dimension to risk/return to define investors’ new efficient frontiers

Investors wishing to assess listed companies will need measures that enable meaningful comparisons to be made across sectors, and that are simple and readily available. Impact currently has many dialects but no lingua franca. At present, companies and investors are doing their best to report on a long list of metrics that only a few impact-first investors and stakeholders can model and understand. By contrast, ordinary investors and stakeholders who want to use such reporting metrics efficiently or who need a holistic approach that synthesizes in a simpler way the many dimensions of the issue may struggle to make sense of the many different and occasionally conflicting approaches.

One way to tackling these challenges is to use the SDGs as a framework for understanding and measuring impact.² 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.”³ This is a consensus-based document adopted by all United Nations Member States in 2015 after long debate, and as such can serve as a measure of the impact companies can have. 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.⁴

Building on the SDG approach to measure impact, this paper looks at three aspects:

• First, we explain how the SDG framework can be turned into a methodology for estimating companies’ impact that tackles some of the challenges posed by alternative approaches. This is achieved by accounting for the impact of companies’ products and services (as well as their own internal operations) for every goal and attaching a value to these forms of impact that permits comparability in monetary terms. This approach builds on over a decade of thinking on how to embed impact in investor approaches, and is inspired by recent advances in conceptualizing and measuring impact by researchers at the Harvard Business School.⁵ Using the SDG framework and the measures derived from it enables investors to pursue the basic dimensions of any impact investment framework that we identified in the first paper in this series: intentionality, additionality and inclusivity.
• Second, we pursue this methodological approach to gain insight into the amount of impact created. For the first time, we can provide an estimate of the total social value that companies create and put into perspective, by comparing it with e.g. current foreign aid efforts, or the total value that would be generated by achieving the SDG targets. We are also able to compare the relative value to society of the different dimensions of impact (health, poverty alleviation, environmental improvements…) that companies generate. As an example, a comparison of the different sources of impact reveals that listed companies’ contributions are currently highest for the “Good Health and Wellbeing” SDG. We also find that there are “virtuous cycles” of impact, in which companies have a positive impact on different dimensions.
• Third, having established how we measure impact, we explore possible drivers of company-level impact. While causality is hard to establish, we describe some company characteristics that are correlated with impact in our data. We find that, by sector, Healthcare and Consumer Staples companies are the most impactful. We also find that companies based in emerging markets tend to have more impact than others. In addition, it is interesting to note that a large part of the variation in scores cannot be explained by these observable characteristics, something that highlights the need to analyze individual companies. We close with our finding that, while the two measures are different, companies that score highly on ESG criteria also tend to have greater impact. In other words, companies that perform well on the SDGs also tend to do better on other dimensions that investors may be interested in.

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1. GIIN 2020. What is impact investing?
2. See the first paper in this series for a variety of alternative approaches to measuring impact.
3. The 2030 Agenda for Sustainable Development.
4. PwC, SDG Reporting Challenge, 2018.
5. Other alternative approaches to quantifying impact include, for example, the Capitals Coalition and the Impact
Management Project.