Methodology
Our contemporary effort
It is essential that SMEs (small and medium enterprises) have a great role to play in contemporary and global sustainability efforts. ZHAW established Tech4SDG to encourage participation in these developmental attempts by establishing a balance between impact investment and value generated for businesses and society at large.
Existing impact measurement systems such as B-Corp are based on solid and recognized frameworks. Unfortunately, they require companies to undergo a detailed certification process which is costly and generally difficult to initiate.
The certification, commonly known as “inventory assessments”, generally requires data that even corporate insiders may not have access to. In some cases, this data cannot be obtained at all. The certification process is therefore subject to inaccessability.
Additionally to the lack of acceptance, these inventory assessments (whether they are conducted by a third party or not) are not easily scaled. They cost managerial time and resources and are incredibly selective in terms of which companies are chosen to participate.
Until now, no single established and acknowledged standard for measuring the real effects of impact investing across sectors and geographies has been established, even with the certification processes mentioned previously. The reason: Investors have diverse social goals.
How Tech4SDG measures real impact
When corporate impact had been measured before the establishment of Tech4SDG, the major ESG rating agencies used sectorial data and revenues to remap the disclosure-based ESG data to the SDG categories. The resulting estimates show how a company’s activities correlate with SDGs, although it does not indicate whether the impact takes place in a developed or developing country, which is vital if general human welfare is within the business and the investor‘s interests.
Tech4SDG takes a different approach to categorization by using natural language processing and text written by and about the company in question. As for the social objective function, Tech4SDG takes on the UN's sustainable development agenda and it categorizes that impact by using machine learning to assign an SDG category. We gather maps which correspond with those SDG targets and indicators, and use location to help quantify impact.
Upload your portfolioUse case for Tech4SDG‘s technology
Tech4SDG implies concrete changes to the various metrics to measure health needs. For example, the UN's health SDG uses maternal mortality per 100'000 live births in a region as a target. Taking this real local human health need and allowing it to interact with firm capacity characteristics such as the number of employees, we assess a firm's ability to have impact.
Tech4SDG is here to identify promising companies, benchmark investor portfolios, and quantify need and potential impact at a country or regional level. In other words, Tech4SDG endeavours to make our modern business better, more sustainable, and have a real impact on reducing human need in the world.
How & why Tech4SDG measures SME investability
Impact investing has transformed from a niche market into a global movement
Impact investing sets both financial and social goals. It first aims to achieve financial returns through exit proceeds (like traditional Venture Capital or Private Equity investments). In addition, the impact investors expect that companies they invest in to satisfy certain sustainable development goals (SDGs). Most impact investors are individual or institutional equity investors who either directly invest in private impact firms or invest through impact funds. Even though the market for impact investing has grown significantly, investors cite the availability of reliable investment alternatives as a critical factor that limits the scope and scale of impact investing. Ranking small and medium-sized enterprises (SMEs), which make up 99% of global firms, for investability and impact would enlarge the pool of investable impact firms , offering investors reliable alternatives for impact investing.
Selection of eligible SDG-SMEs for equity investors
A selection for investability metrics, reference SMEs that received equity investments in the past and also satisfy SDGs are necessary. While the information on equity investments into SMEs, such as volumes and funding rounds, are observable in databases such as CrunchBase, SDG aspect is not directly observable. This complicates finding a reference group for model calibration. To address this shortcoming, Tech4SDG focuses on the portfolios of the investors that belong to Global Impact Investing Network (GIIN), a non-profit organization, as our benchmark. GIIN investors are asset owners, asset managers, and service providers from a diverse, global community of over 360 organizations in approximately 50 countries. Most of the GIIN investors primarily invest in SDG-SMEs. Therefore, their portfolios provide a reliable benchmark for our identification.
Identifying impact investors from GIIN portfolios
For investability metric, reference SMEs that received equity investments in the past and also satisfy SDGs are necessary. While the information on equity investments into SMEs, such as volumes and funding rounds, are observable in databases such as CrunchBase, SDG aspect is not directly observable. This complicates finding a reference group for model calibration. To address this shortcoming, Tech4SDG focuses on the portfolios of the investors that belong to Global Impact Investing Network (GIIN) , a non-profit organization, as our benchmark. GIIN investors are asset owners, asset managers, and service providers from a diverse, global community of over 360 organizations in approximately 50 countries . Most of the GIIN investors primarily invest in SDG-SMEs. Therefore, their portfolios provide a reliable benchmark for our identification.
Selection of company characteristics
Several SME characteristics might influence investment decisions. We select company size as our first indicator of investability, considering that larger businesses may be more attractive investment propositions for equity investors. As a proxy for company size, we include the number of employees and revenue estimates in our models. In addition, we include firm age in our routine considering that more mature firms are usually more likely to receive equity funding than young start-ups. Firms' headquarters location is another aspect that determines the potential investability. Lastly, we already incorporate the likelihood of being an SDG SME using text mining tools in our investability metric.