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By Edward KamonjohDirector of Impact Management, Calvert Research and Management

Washington - In recent years, more companies have stepped up their reporting of environmental, social and governance (ESG) metrics, prompted by heightened investor interest in responsible investing and greater ESG data coverage by services like Bloomberg, FactSet and Morningstar.

While this is welcome progress, the majority of ESG metrics concern operations: activities that happen within the company's control, like water usage, carbon emissions, employee safety, or diversity and inclusion efforts.

In our view, the next major milestone for ESG metrics involves measuring external impacts: how a company's products, policies and operations affect society and the environment at large—in financial terms. Examples here include how sugar-laden beverages or food products can contribute to heart disease, obesity and health care costs, or how plastic is endangering the health of oceans and certain species—and the associated costs.

We believe ESG integration into financial reporting cannot be considered complete until such "externalities" are part of the picture. These are largely downstream of the company's products or services.

Beyond Operations: Measuring 'RIFT'

To understand and quantify these broader, external impacts, Calvert sponsored research conducted by KKS Advisors, with findings summarized in the paper, "How Accounting for Impact Can Deliver the Real Value of ESG." Using several categories for capturing "real impact in financial terms" (RIFT) (Exhibit A), the analysis by KKS lays the groundwork for comparing impact-weighted accounts—line items on financial statements designed to supplement traditional financial reporting.

Exhibit A: Categories for Capturing "Real Impact in Financial Terms" (RIFT)


The study universe was comprised of a sampling of 118 companies1 where a range of metrics to quantify positive and negative impacts on employees, customers, the environment and broader society was available. Specifically, the study evaluated product impact by industry; impact on key financial metrics, such as return on assets, price-to-book and sales growth; impact on stock performance; and social impact over time.

Industry Matters

In terms of product impact, the study found that industry membership is a big driver—for better or worse—of a company's results. Industries such as beverages, electric utilities and food products carry a large footprint for product impact, while this dynamic is less true for retail banks, telecommunications and airlines. In terms of how industry membership affects financial performance metrics, the results were mixed. Industry relevance was strong for the airline, auto, food and telecom industries and weaker in economically cyclical industries, like retail banking.

Impact Ties to Performance

Ultimately, the paper's analysis found that impact "leaders" delivered stronger stock performance than impact "laggards."

The analysis further shows how positive impact, as disclosed in the comparison of impact-weighted accounts, can be a material driver for key financial metrics and stock performance. We believe that just as the growth of a financial accounting infrastructure enabled development of large-scale capital markets, impact-weighted accounts have the potential to be a similar catalyst for sustainability investing.

Bottom line: We believe the next frontier for responsible investing is to better understand and quantify external ESG impacts—how a company's products, policies and operations affect society and the environment—measured in financial terms. We think the analysis in this paper lays the groundwork for that assessment.

To read the full report, click here.

1. Sources: Calvert, KKS Advisors as of April 2022. Impact-weighted accounts derived from a universe consisting of 118 publicly listed companies with product impact data available between 2016 and 2020. These companies represent approximately 20% of aggregate market capitalization of the S&P 500 and FTSE EuroFirst 300 indexes.