SDG Revenue Alignment: Bringing Clarity to Impact Investing

Despite impact investing surpassing $1.5 trillion in assets under management (AUM), concerns about impact-washing and challenges with comparability cast shadows over the sector. With no single methodology or standard for measuring impact consistently across funds, it is difficult to pinpoint just how much money is invested in impact initiatives and how much impact they are truly having.

Because impact investing aims to generate positive, measurable social and environmental impacts in addition to financial returns,¹ it must be considered as a distinct category within sustainable investing. While sustainable finance frameworks such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) have provided investors with guidance on sustainable investment, there are fewer prescriptive regulatory standards for impact.

Specifically, under SFDR, Article 9 funds –those with sustainability as a core objective– can be seen as benchmarks for sustainable practices. However, they should not be equated to impact funds. While there is some overlap, Article 9 encompasses a broader range of sustainability strategies. These include ESG integration, best-in-class approaches, and exclusion-based strategies that prioritize minimizing negative impacts over driving measurable positive outcomes.

Still, investors remain confused about the exact difference between Article 9 funds and impact funds. This confusion exists partly because Articles 6, 8, and 9 were designed as disclosure categories, each requiring specific sustainability information to be disclosed. However, they were not intended as strict labels or categories with precise requirements to distinguish funds based on their sustainability performance.

In 2025, the European Commission is expected to propose changes to the SFDR. These changes may shift the focus from disclosure to labels based on sustainability categories, similar to the UK’s SDR regulation.

Additionally, and in part to address these ambiguities, the European Securities and Markets Authority (ESMA) introduced naming guidelines earlier this year. Among other things, the guidelines help to more clearly differentiate impact funds. Under these guidelines, funds with Impact-related terms in their names must:

• Adhere to the Paris-Aligned Benchmark exclusionary criteria.
• Allocate at least 80% of their assets to promote environmental or social characteristics or to sustainable investments.
• Demonstrate positive, measurable environmental or social impacts.

However, ESMA’s naming rules do not provide a clear framework for measuring the prescribed positive environmental or social impact. Despite efforts from other industry and regulatory bodies,² investors continue to grapple with challenges in defining and quantifying impact, as well as distinguishing it from broader sustainability strategies.

Impact funds vs. Article 9: What delivers on Sustainability and Impact?

With the goal of accurately differentiating Article 9 and impact funds, we conducted a study to compare the distinct funds using two core metrics:

1. 1. SDG Revenue Alignment: measures real-world investment impact based on revenue from activities aligned with the UN Sustainable Development Goals (SDGs).³
   2. Reported Proportion of Sustainable Investments:⁴ Measures the fund’s commitment to sustainability more broadly, as each fund will self-report the metric based on the sustainability strategy employed. As per ESMA’s guidance,⁵ Article 9 funds should only make sustainable investments except for investments made for cash and hedging purposes.

Our analysis shows that while there is an overlap between sustainable and impact investing, impact-focused products pursue a distinct objective not fully captured by the standard ESG metrics usually considered in sustainable investment strategies. Furthermore, it highlights that Article 9 funds, despite their sustainable objectives, do not necessarily meet the criteria for impact investing, and investors whose goal is impact need to look beyond Article 9 status.⁶

Methodology Overview: Impact Through SDG Revenue Alignment

Using Clarity AI’s SDG Revenue Alignment tool, we measure the impact of two types of funds: a group made out of funds with the keyword “impact” in their names (N = 417),⁷ and a group of Article 9 funds (N = 997). To prevent overlap, Article 9 funds labeled as “Impact” have been excluded from the Article 9 funds group (N = 143).

Our Revenue Alignment tool assesses the extent of a company’s alignment with SDGs, based on the percentage of revenue from activities contributing to specific goals. Economic activities that support goals, such as renewable energy are marked as “aligned,” while those with negative impacts, such as fossil fuel extraction, are “misaligned.” Neutral activities, such as the manufacture of general clothing, have no significant impact. We calculate the final Net Revenue Alignment by subtracting misaligned revenue from aligned revenue.

Figure 1. Net Alignment Breakdown: Assessing Portfolio Alignment and Misalignment Across UN SDGs

From left to right: No Poverty, Zero Hunger, Good Health and Well-Being, Quality Education, Gender Equality, Clean Water and Sanitation, Affordable and Clean Energy, Decent Work and Economic Growth, Industry, Innovation and Infrastructure.

From left to right: Reduced Inequalities, Sustainable Cities and Communities, Responsible Consumption and Production, Climate Action, Life Below Water, Life on Land, Peace, Justice and Strong Institutions, Partnerships for the Goals.

To ensure meaningful alignment, Clarity AI’s approach excludes minor or superficial contributions. As an example, for SDG 3: Good Health and Well-being, only solutions addressing diseases responsible for the top 80% of disability-adjusted life years⁸ are considered aligned. Revenue from solutions for less serious ailments is excluded. As a result of this distinction, popular funds like the Amundi MSCI Health Care ETF show only 13% SDG revenue alignment.

Additionally, to ensure the attributed revenue actually helps solve the specific goal, geographic assessments are also utilized. For example, some SDGs, such as SDG 13: Climate Action, apply universally, while others, such as SDG 2: Zero Hunger are more pressing in certain regions. Our tool uses a geographical filter to consider regional relevance, ensuring a precise assessment of company contributions.

Figure 2. Clarity AI Methodology for Assessing Portfolio Alignment with UN SDGs

Clarity AI’s precise tool allows for straightforward comparisons across sectors and facilitates the calculation of fund-level revenue alignment as the aggregate percentage of revenue weighted by position size (weighted average).

Impact-labeled funds almost double Article 9 funds’ SDGs Revenue Alignment

The analysis reveals that impact-labeled funds demonstrate an average net SDG alignment of 38%, nearly double the 21% average observed in Article 9 funds.

Figure 3. Comparison of SDG Alignment: Article 9 vs. Impact-Labeled Funds

This significant disparity underscores the existence of a measurable difference between impact strategies and broader sustainability strategies. Furthermore, these findings highlight the utility of SDG Revenue Alignment as a valuable metric for evaluating impact performance.

Article 9 Funds Remain at the Forefront of Sustainability

To evaluate the average proportion of sustainable investments within funds, this study relies on data reported through the European ESG Templates (EETs). For consistency, the universe of comparison is limited to funds that voluntarily disclose their sustainable investment data within the EET,⁹ which reduces the sizes of our groups to 785 for Article 9 funds and 153 for Impact funds.

Figure 4. Comparison of Reported Proportion of Sustainable Investments: Article 9 vs. Impact-Labeled Funds

Although the difference in self-reported sustainable investments between Article 9 and impact funds is narrower, a gap of approximately 12 percentage points persists. This disparity may stem from factors such as the inherently high proportion of sustainable investment expected of Article 9 funds or the stricter sustainability frameworks employed by impact-labeled funds.

However, while Article 9 funds report a higher proportion of sustainable investments, their impact – as measured by SDG Revenue Alignment – remains lower. This finding emphasizes that a greater allocation to sustainable investments does not necessarily equate to higher societal impact, reinforcing the importance of distinguishing between broader sustainability strategies and more targeted impact strategies.

SDG Revenue Alignment: The Straightforward and Effective Tool for Measuring Impact

Sustainable investing is a broad market, with impact investing a focused subset. While both aim to generate positive outcomes, they differ in objectives. Impact investing seeks the highest positive impact on people or the planet, while sustainable investing covers a broader range of strategies and measures.

Although it is common for impact frameworks to employ several different metrics to measure the distinct dimensions of impact, this approach has four main limitations:

1. Comparability: What has more impact: avoiding 100 tons of CO2 emissions or recycling 1 ton of waste? Answers to such questions are complex and often boil down to different interpretations of academic research. This makes impact frameworks difficult to standardize, creating significant challenges in comparing the performance of different companies or funds. This lack of comparability diminishes accountability and creates space for impact-washing.
2. Cost of Implementation: The more metrics required to assess impact performance, the more expensive the process becomes. This includes the cost of data acquisition as well as the human and technical infrastructure needed to process and analyze the data.
3. Data Availability: The reliance on multiple metrics significantly increases the likelihood of data availability challenges. Many of these metrics, particularly those that are complex or non-standardized, require data that companies do not regularly or uniformly report. This creates gaps in the data necessary to assess impact accurately, often forcing reliance on estimates or assumptions, which can further limit the reliability and comparability of these assessments.
4. Explainability: Often overlooked, this dimension refers to how understandable the metrics are to end investors. Retail investors in particular may lack the expertise or willingness to comprehend complex methodologies and instead gravitate toward simpler, more intuitive measurements.

For investors seeking a clear and effective way to assess the impact of their investments, Clarity AI’s SDG Revenue Alignment solution offers a comprehensive and reliable approach. By providing a transparent, explainable, and easily comparable metric, this tool enables investors to make more informed decisions about their portfolios. It balances simplicity and rigor, leveraging a fact-based, data-driven methodology to ensure accuracy and credibility. Contact us for more information on using revenue alignment to drive your impact goals.