Our ESG glossary consists of key ESG related terms that are defined and explained by our team of sustainability experts. We hope it will assist you in navigating the intriguing and multi-faceted world of sustainability and ESG reporting.
Climate Change Mitigation refers to efforts to reduce or prevent the emission of greenhouse gases. Mitigation can mean using new technologies and renewable energies, making older equipment more energy efficient, or changing management practices or consumer behaviour. It can be as complex as a plan for a new city, or as simple as improvements to a cookstove design. Efforts underway around the world range from high-tech subway systems to bicycling paths and walkways.
In line with the TCFD, this refers to the potential positive impacts on an organization resulting from efforts to mitigate and adapt to climate change, such as through resource efficiency and cost savings, the adoption and utilization of low-emission energy sources, the development of new products and services, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market, and industry in which an organization operates.
In line with the TCFD, this refers to the potential negative impacts of climate change on an organization. Physical risks emanating from climate change can be event-driven (acute) such as increased severity of extreme weather events (e.g., cyclones, droughts, floods, and fires). They can also relate to longer-term shifts (chronic) in precipitation, temperature and increased variability in weather patterns (e.g., sea level rise). Climate-related risks can also be associated with the transition to a lower-carbon global economy, the most common of which relate to policy and legal actions, technology changes, market responses, and reputational considerations.
The process by which CO2 emissions associated with electricity, industry, and transport are reduced or eliminated.
According to the GHG Protocol, a “quantified list of an organisation’s GHG emissions and sources.” Emissions inventories typically include emissions in scopes 1, 2, and 3
General term for sustainable practices, often used by financial firms.
Environmental criteria include a company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and its attitude and actions around climate change issues.
Other possible environmental issues include raw material sourcing (e.g., does the company use fair trade suppliers and organic ingredients?) and whether a company follows biodiversity practices on land it owns or controls.
Social criteria cover a vast range of potential issues. There are many separate social aspects of ESG, but all of them are essentially about social relationships. One of the key relationships for a company, from the point of view of many socially responsible investors, is its relationship with its employees.
Governance, in the context of ESG, is essentially about how a company is managed by those in the top floor executive offices. How well do executive management and the board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers? Does the company give back to the community where it is located?
In sustainable/green finance “ESG integration” refers to the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions. ESG Integration alone does not prohibit any investments.
Such strategies could invest in any business, sector or geography as long as the ESG risks of such investments are identified and taken into account.
These ratings are provided by agencies that collate data based on public information, third party research, company reports and direct engagement.
There are many agencies that offer this service, with no standardised approach to scoring. This has been one of the major criticisms of the rating system. Providers offer no transparency on their data collection methods, citing that the methods they use are commercially viable and need to be kept secret.
There is therefore little indication of the research method and weight given to each category, posing a problem for both investors and businesses. To try and combat this investors generally use multiple agencies to cover issues they are concerned with.
The engagement specialists maintain frequent touch with corporate representatives and track success against engagement targets over a period that usually lasts for three years. They frequently work together with other institutional investors on joint engagement projects. Analysts, portfolio managers, and clients receive the results of the engagement initiatives, which they may use to inform their investment decisions.
In line with Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) and amendment issued by the Greenhouse Gas Protocol on May 2013 the basket of greenhouse gases (GHGs) consists of:
Carbon dioxide (CO2);
Nitrous oxide (N2O);
Hydrofluorocarbon family of gases (HFCs);
Perfluorocarbon family of gases (PFCs);
Sulfur hexafluoride (SF6), and;
Nitrogen trifluoride (NF3).
Nitrogen trifluoride (NF3) is now considered a potent contributor to climate change and is therefore mandated to be included in national inventories under the UNFCCC. NF 3 should also be included in GHG inventories under the GHG Protocol Corporate Standard, and the GHG Protocol Corporate Value Chain (Scope 3) Standard.
A quantified list of an organization’s greenhouse gas emissions and sources.
The notion of producing a complete report that combines the two streams of data that most businesses publish. For example, sustainability data in a Corporate Responsibility Report and financial data in an annual report.
An integrated report integrates traditional sustainability statistics into the company's strategy and financial outcomes. It also converts sustainability goals into KPIs and generates revenue.
Impact investing is the conscious act of making investments with the intent of making a good impact on the environment or society while also generating a profit. Selecting businesses that can support the UN's Sustainable Development Goals (SDGs) is one of the most common types of impact investing.
Also known as Net Zero Carbon, Carbon Neutral, this describes a state where any CO2 and Greenhouse Gas (GHG) emissions left over after decarbonisation are offset by negative emissions of an equivalent amount of CO2 from the atmosphere, resulting in no net GHG impact. The offsets need to actively remove carbon dioxide from the atmosphere, as opposed to only avoiding emissions elsewhere which is allowed in the specification for carbon neutral. There is not yet an agreed standard on what constitutes Net Zero Carbon for an organisation, product, or country, although there are multiple organisations with working definitions, for example, the Science Based Targets Initiative
A Net-Zero Target refers to reaching net-zero carbon emissions by a selected date, but differs from zero carbon, which requires no carbon to be emitted as the key criteria. Net-zero refers to balancing the amount of emitted greenhouse gases with the equivalent emissions that are either offset or sequestered.
CDP follows the definition of renewable energy given in the GHG Protocol: “Energy taken from sources that are inexhaustible, e.g. wind, water, solar, geothermal energy and biofuels.”
Renewable Energy Certificates (RECs) are a market-based instrument that certifies the bearer owns one megawatt-hour (MWh) of electricity generated from a renewable energy resource. See also: GOs
Responsible investment is a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.
Targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
Science-based targets provide a clearly-defined pathway for companies to reduce greenhouse gas (GHG) emissions, helping prevent the worst impacts of climate change and future-proof business growth.
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
Additional terms you should know
CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. The world’s economy looks to CDP as the gold standard of environmental reporting with the richest and most comprehensive dataset on corporate and city action.
Six environmental goals are established under the Taxonomy Regulation.
- Mitigation of climate change
- Adaptation to climate change
- Water and marine resources are used and protected in a sustainable manner.
- The shift to a circular economy is underway.
- Pollution control and prevention
- Biodiversity and ecosystems are being protected and restored.
- For an activity to provide a significant contribution to each aim, several approaches may be necessary.
Global Reporting Initiative
The Global Reporting Initiative (known as GRI) is an independent, international organisation that helps businesses and other organisations take responsibility for their impacts, by providing them with the global common language to communicate those impacts. GRI reporting software provides the world’s most widely used standards for sustainability reporting – the GRI Standards.
The GRI Standards create a common language for organisations – large or small, private or public – to report on their sustainability impacts in a consistent and credible way. This enhances global comparability and enables organisations to be transparent and accountable.
The Standards help organisations understand and disclose their impacts in a way that meets the needs of multiple stakeholders. In addition to reporting companies, the Standards are highly relevant to many other groups, including investors, policymakers, capital markets, and civil society.
The Standards are designed as an easy-to-use modular set, starting with the Universal Standards. Topic Standards are then selected, based on the organisation's material topics – economic, environmental or social. This process ensures that the sustainability report provides an inclusive picture of material topics, their related impacts, and how they are managed.
The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change. The IPCC provides regular assessments of the scientific basis of climate change, its impacts and future risks, and options for adaptation and mitigation.
Partnership for Carbon Accounting Financials is a global industry-led partnership of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions associated with their loans and investments.
It was founded in 2015 by fourteen Dutch financial institutions, under the leadership of ASN Bank. The initiative was launched via a Dutch Carbon Pledge calling on the negotiators at the Paris Climate Summit in 2015.
PCAF aims to address the urgent challenge of climate change. To limit global warming to 1.5°C above pre-industrial levels, all sectors of society need to decarbonize and collectively reach to net zero emissions by 2050. The financial industry can facilitate the transition in line with the Paris Climate Agreement. Measuring and disclosing the GHG emissions associated with the lending and investment activities of financial institutions is the foundation to create transparency and accountability, and to enable financial institutions to align their portfolio with the Paris Climate Agreement.
The PRI is the world’s leading proponent of responsible investment. It works:
- to understand the investment implications of environmental, social and governance (ESG) factors;
- to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
The PRI acts in the long-term interests:
- of its signatories;
- of the financial markets and economies in which they operate;
- and ultimately of the environment and society as a whole.
The six Principles for Responsible Investment offer a menu of possible actions for incorporating ESG issues into investment practice
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
What is SASB?
The Sustainability Accounting Standards Board (SASB) is an independent, non-profit organisation that aims to develop and disseminate sustainability accounting standards to help US publicly-listed corporations disclose material information on how they impact value. The SASB Standards are comprised of disclosure guidance and an accounting standard on potential sustainability topics that corporations may find material in their industry.
The SASB Standards enable businesses around the world to identify, manage and communicate financially material sustainability information to their investors. SASB has developed a set of 77 industry standards, which provide globally applicable industry-specific topics and their associated metrics for the typical company in an industry. SASB has also developed the Materiality Map® an interactive tool that identifies and compares disclosure topics across different industries and sectors.
The Sustainable Development Goals SDGs are a set of 17 goals set out by the United Nations General Assembly to be reached by 2030. The goals are aimed at resolving complex economic, social and environmental issues at a global level as listed below:
The goals are broad in scope and interdependent and each goal is split out into 169 targets and 232 unique indicators (up to 3 per target) as a measure of progress. Most companies chose to focus efforts on a few select goals based on materiality and impact.
What is SFDR? Sustainable Finance Disclosure Regulation.
The Sustainable Finance Disclosure Regulation (SFDR) of the European Union went into effect in March 2021.
By standardised sustainability disclosures, the SFDR aims to assist institutional asset owners and retail customers in better understanding, comparing, and monitoring the sustainability features of investment funds.
Businesses must disclose business- and product-level disclosures on the integration of sustainability risks, consideration of adverse sustainability impacts, promotion of environmental or social issues, and sustainable investment objectives under the SFDR.
The Financial Stability Board (established the Task Force on Climate Related Financial Disclosures TCFD to review how the financial sector could take account of climate related issues The TCFD’s subsequent recommendations focused on voluntary disclosure of climate related financial information surrounding
- Risk Management
- Metrics and Targets
The recommended disclosures are in particular used to report on climate related risks and opportunities as well as scenario analysis, both of which are aimed to help lenders, insurers and investors obtain decision useful information on a company’s resilience to climate change Equally this encourages reporting companies to identify risks better understand future climate scenarios and create robust strategies for adaptation.
Stated by the UNFCCC, the Paris agreement is a “legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels”.
The UNFCCC secretariat (UN Climate Change) is the United Nations entity tasked with supporting the global response to the threat of climate change. UNFCCC stands for United Nations Framework Convention on Climate Change. The Convention has near universal membership (197 Parties) and is the parent treaty of the 2015 Paris Agreement. The main aim of the Paris Agreement is to keep the global average temperature rise this century as close as possible to 1.5 degrees Celsius above pre-industrial levels. The UNFCCC is also the parent treaty of the 1997 Kyoto Protocol. The ultimate objective of all three agreements under the UNFCCC is to stabilise greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous human interference with the climate system, in a time frame which allows ecosystems to adapt naturally and enables sustainable development.
The Value Reporting Foundation is a global non-profit organisation that maintains the Integrated Thinking Principles, Integrated Reporting Framework and SASB Standards. VRF offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value—how it is created, preserved and eroded.