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.
For a project or organisation to be carbon neutral, an equal amount of CO2 must be removed from the atmosphere for every unit of CO2 released. This may be accomplished by providing financial or other aid for initiatives aimed at removing CO2 from the atmosphere, such as the creation of renewable energy projects, planting trees, using carbon credits or carbon trading systems. A company can achieve "carbon neutrality" without cutting its emissions.
The term Carbon footprint refers to the total greenhouse gas emissions of a given person's, business's, or another entity's activity.
It covers both direct emissions, such as those produced when fossil fuels are used in manufacturing, heating and transportation, in addition to indirect emissions resulting from the production of electricity used to power services and goods. However, most of the time, it is difficult to quantify the overall carbon footprint precisely due to a lack of information on the intricate interconnections between the systems that contribute to it, including the impact of natural processes that absorb or release carbon dioxide.
Circular economy refers to a framework for systems solutions that address issues including pollution, waste, the loss of biodiversity, and other major global crises. It is built on three design-driven tenets: eradicating waste and pollution, distributing goods and resources at their best value, and regenerating the natural world. A switch to sustainable materials and energy serves as its foundation. Decoupling economic activity from the exploitation of limited resources is necessary to move toward a circular economy. This reflects a structural change that fosters long-term adaptability, creates commercial and economic opportunities, and benefits society, the environment, and all living things.
Read more here: How to Build a Circular Economy | Ellen MacArthur Foundation
Climate change mitigation
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.
"Consume less, consume better" can be summarised as one of the finest approaches to decarbonise.
• By striving for energy efficiency when running factories, heating buildings, running our vehicles, etc.
• By putting a strong emphasis on a strategy that entails lowering energy usage and is geared toward achieving energy sufficiency.
• By utilising sources of renewable energy. Natural gas will eventually take the place of more polluting fuels like coal and oil used to produce power and heat in the short and medium term. Green gases, biogas, and hydrogen - renewable and made, for example, from organic waste - will displace natural gas in the long run.
• By creating methods to capture and store CO2, we can protect carbon sinks, or the naturally occurring ecosystems (such as soil, forests, etc.) that absorb carbon.
Environmental, Social and Governance (ESG)
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
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?
ESG Analysis refers to the process of evaluating a company’s environmental, social and governance policies and practices. This helps identify any potential risks or opportunities associated with those areas, including climate change. By considering ESG factors, businesses can make better decisions that may help the environment and their shareholders in the long run.
ESG funds are bond and equity portfolios that give ESG factors top priority in the investment processes. They focus on investments with strong sustainability ratings while ignoring those with serious ESG problems, such as track records for pollution and labour unrest.
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.
Conventional investments (stocks, exchange-traded funds, and mutual funds) that are considered "green investments" have underlying companies that are in some way engaged in activities that try to better the environment.
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.
When a company's management team makes inaccurate, unsupported, or blatantly deceptive claims about the sustainability of a product or service, or even about business operations in general, this is known as "greenwashing." When management lacks expertise or awareness, greenwashing might happen accidentally. However, it can also happen on purpose through marketing strategies.
An inventory of greenhouse gases (GHGs) is a list of emission sources and the corresponding emissions that have been calculated using standardised techniques.
There are many reasons why businesses create GHG inventories, including:
• Managing the dangers posed by GHGs and locating possibilities for reduction
• Taking part in GHG programmes, either voluntarily or mandated
• Engaging in GHG markets
• Getting credit for quick volunteer action
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.”
On the other hand, fossil fuels, such as coal, oil, and gas, are non-renewable resources that require hundreds of millions of years to develop. When fossil fuels are used to create energy, they release dangerous greenhouse gases like carbon dioxide. When compared to burning fossil fuels, producing electricity from renewable sources produces far fewer emissions. The most effective way to combat the climate catastrophe is to switch from fossil fuels, which now produce the majority of emissions, to renewable energy. In the majority of nations, renewables are now more affordable and create three times as many jobs as fossil fuels.
Renewable Energy Certificates (RECs)
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
The PRI defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.
There are numerous methods to responsibly invest. The majority of approaches combine the following two main categories:
• Taking into account ESG issues when building a portfolio, also known as ESG incorporation. ESG issues can be combined into current investment strategies by using three different methods: integration, screening, and thematic.
• ESG performance improvement, also referred to as active ownership or stewardship. Investors can persuade businesses they already own stock in to enhance their ESG risk management or adopt more environmentally friendly business practises.
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.
Scope 1, Scope 2, Scope 3 emissions
The GHG Protocol classifies a company's GHG emissions into three categories or 'scopes', to unify reporting and accounting of emissions worldwide.
Scope 1 emissions: Covers all direct emissions from owned or controlled sources, such as energy consumption, fuels, vehicles, etc.
Scope 2 emissions: Covers indirect emissions from the generation of purchased electricity, steam, heating or cooling energy consumed by the company.
Scope 3 emissions: Covers all indirect emissions that occur in the value chain of the reporting company, meaning that the emissions are out of the company’s operational control, including both upstream and downstream emissions. As scope 3 emissions are the result of activities from assets not owned by the company, one company’s scope 3 emissions may originate from another company’s scope 1, Scope 2 or even scope 3 emissions. Scope 3 emissions are split between 15 categories, which in return are organised into two types of emissions, whether they are upstream or downstream in the value chain.
Socially responsible investing (SRI)
SRI is a type of investment approach that strives to produce both social change and financial gains for the investor. Businesses that have a sustainable or positive social impact can be included in socially responsible investments, while those having a negative impact can be excluded.
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.
Sustainable finance is defined in the policy context of the EU as financial support for economic growth while lowering environmental constraints and taking into account social and governance factors. Transparency on the risks associated with ESG elements that could have an influence on the financial system is a component of sustainable finance, as is the mitigation of such risks through responsible corporate and financial governance.
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.
ESG Data Convergence Initiative (EDCI)
The ESG Data Convergence Initiative (EDCI) was launched in late 2021.
This initiative is an industry-led effort by the private equity community to drive consensus around meaningful ESG metrics and generate comparable, performance-based ESG data.
EDCI's goal is to create a critical mass of meaningful, performance-based ESG data from private companies by converging on a standardized set of ESG metrics for private markets. The standard can allow GPs and portfolio companies to benchmark their current position and generate progress toward ESG improvements while enabling greater transparency and more comparable portfolio information for LPs / Investment Managers.
EU Taxonomy Regulation
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 (GRI)
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.
Institutional Investors Group on Climate Change (IIGCC)
The IIGCC is a European membership body for investor collaboration on climate change, with 360 members representing €50 trillion of assets under management, as of December 2021.
More information: https://www.iigcc.org/
Intergovernmental Panel on Climate Change (IPCC)
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.
The IPCC prepares comprehensive Assessment Reports about the state of scientific, technical, and socio-economic knowledge on climate change, its impacts and future risks, and options for reducing the rate at which climate change is taking place. It also produces Special Reports on topics agreed to by its member governments, as well as Methodology Reports that provide guidelines for the preparation of greenhouse gas inventories.
International Energy Agency (IEA)
The IEA is a global energy authority, that provides data, analysis and solutions on all fuels and all technologies. The IEA works with governments and industry to shape a secure and sustainable energy future for all.
More information: https://www.iea.org/
International Sustainability Standards Board (ISSB)
The International Financial Reporting Standards (IFRS) Foundation has established a standard-setting board with the goal of delivering a wide-ranging baseline of sustainability-related disclosure standards that advise investors and other capital market players about the sustainability-related risks and opportunities faced by companies and assist them in making educated choices.
Partnership for Carbon Accounting Financials (PCAF)
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.
More information: https://carbonaccountingfinancials.com/
Principles for Responsible Investment (PRI)
The PRI is the world’s leading proponent of responsible investment.
- 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.
SEC Climate & ESG Task Force
The Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) has announced the creation of a Task Force on Climate and ESG. This new task group will aim to create programmes that will proactively find wrongdoing connected to ESG.
Sustainability Accounting Standards Board (SASB)
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.
Sustainable Development Goals (SDGs)
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.
Sustainable Finance Disclosure Regulation (SFDR)
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.
Task Force on Climate-Related Financial Disclosures (TCFD)
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.
The Paris Agreement
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”.
United Nations Framework Convention on Climate Change (UNFCCC)
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.
Value Reporting Foundation (VRF)
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.