ESG Glossary

IASE ESG Glossary

Active ownership

Actively exercising your rights as a shareholder. The two main ways to do this are voting at shareholder meetings and engaging – having an active dialogue – with investee companies. Active shareholders discuss concerns with the company in which they invest, in order to preserve long-term shareholder value and enhance long-term returns. They can be very effective in influencing companies’ behavior, especially when they cooperate with other shareholders.

Best in class

Selecting issuers that perform better on ESG dimensions than their peers within a particular industry, sector or region.

Biodiversity

Biodiversity is the sum of life on Earth in all its forms, from simple genetic structures, plants and trees, to animals, sea creatures and humans. The interactions between these different biological elements have ensured that the planet has been habitable for millions of years.

Climate investing

The importance of protecting diversity can be seen in research which shows that two of the nine planetary boundaries which ultimately allow life on Earth have been breached. These are the boundary for biosphere integrity measured by the extinction rate (extinctions per million species/years (E/MSY) and the boundary for biogeochemical flows, which dictates the ability of living things to reproduce. Left unchecked, life on Earth would theoretically die out.

Circular economy

The circular economy is an economic model that places a greater reliance on reusing existing materials in a series of loops. It aims to replace the current linear economy, which is based on the take-make-waste system of extracting minerals, turning them into manufactured products and then disposing of them at the end of their useful life.

Carbon footprint

A carbon footprint is the amount of greenhouse gas emissions generated by an individual, company or country over a set time period. Although the term implies primarily the emission of carbon dioxide, it is now often taken to include all gases which cause global warming through the greenhouse effect. This includes the more common industrially emitted gases such as sulfur dioxide and nitrous oxide, and methane which is produced by farm animals. As such, the term can also be referred to as a greenhouse gas footprint.

Carbon Pricing

The cost of emitting CO2 into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive that’s offered for emitting less. Putting an economic cost on emissions is widely considered the most efficient way to encourage polluters to reduce what they release into the atmosphere.

Clean technology

A range of products, services and processes that reduce the use of natural resources, cut or eliminate emissions and waste. It was considered a niche area of investment two decades ago but has become a focus for most major companies.

Decarbonization

Decarbonization is the reduction in the carbon intensity of worldwide energy use.

The 21st United Nations Conference of the Parties (COP21), held in Paris in December 2015, came up with concrete targets to limit further global warming. Reducing global warming means cutting the world’s reliance on fossil fuels. This will require some large companies such as the oil majors and utilities to fundamentally change their business models. However, moving towards a global energy system based on renewable sources creates another problem: stranded assets. These are the vast reserves of coal and oil that probably cannot be used if the world is to limit global warming to 2°C or lower.

The Carbon Disclosure Project (CDP) encourages companies to disclose their greenhouse emissions and climate change strategies in order to set reduction targets and improve their environmental impact.

Engagement

The use of shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies). Engagement is an integral part of active ownership.

Environmental factors

It concerns issues related to resource use, pollution, climate change, energy use, waste management and other physical environmental challenges and opportunities.

ESG integration

The systematic and explicit inclusion of ESG factors into traditional financial analysis.

Ethical investing

An investment strategy in which you invest in line with your ethical principles and exclude companies that you deem to be unethical.

European Green Deal

The European Green Deal is a commitment by the European Union to meet the goals of the Paris Agreement, principally by making the 27-nation bloc carbon neutral by 2050. As such it contains a wide range of policy initiatives with the main aim of decarbonizing member states.

Its first target is to achieve a 55% reduction in greenhouse gas emissions compared to 1990’s levels by 2030. Such is its level of ambition that European Commission President Ursula von der Leyen has described it as Europe’s “man on the moon moment”, as Europe would become the world’s first carbon-neutral continent at the current projections if the 2050 target is met.

EU Taxonomy

The EU Taxonomy is a strategy to create a harmonized understanding of what actually constitutes sustainable activities across the European Union. It attempts to define ‘green activities’ for the first time, using minimum criteria that economic activities should comply with in order to be considered to be environmentally sustainable.

As such, it forms a key component of the Sustainable Finance Action Plan, which aims to promote sustainable investment across the 27-nation bloc, and the Sustainable Finance Disclosure Regulation, which aims to make the sustainability profile of funds more comparable and better understood by end-investors.

Exclusions / Negative Screening

The exclusion from a fund or portfolio of certain activities or practices based on specific ESG criteria. Excluded activities could be for example tobacco production or nuclear energy, while excluded practices generally refer to violation of international norms such as human rights or labour rights violations. The exclusion of practices is also referred to as Norm-based screening.

Food sustainability

Food sustainability aims to promote more sustainable food production and address problematic issues such as overfishing, deforestation and the loss of biodiversity. It also addresses some of the wider ESG issues in food production, including the use of forced labor on farms and fishing boats in emerging markets, and corruption that leads to illegal burning of rainforest to clear land for cattle.

Gender equality

Gender equality is the concept of providing the same opportunities for men and women in the workplace, and has become a major sustainability theme.

It has three main dimensions:

The first is trying to improve the number of women on corporate boards, which remains disproportionately low in developed economies and can be virtually non-existent in emerging markets.

Secondly, it aims to ensure that men and women who do the same job receive the same pay. This is now a legal requirement in many countries, but gender pay gaps remain prevalent in many areas, often in high-profile jobs.

Thirdly, gender equality seeks to improve female (or male) participation in sectors where one gender is dominant. For example, most airline pilots are male, whereas the majority of cabin crew are female, leading many airlines to try to redress the balance through targeted recruitment programs. Other sectoral biases are more cultural, such as the high proportion of men in mining and women in textiles.

Governance factors

It is about assessing how well a company is run.

Green bond

A bond in which proceeds are used to fund new and existing projects with environmental benefits such as renewable energy and energy efficiency projects.

Greenwashing

Falsely communicating the environmental benefits of a product, service or organisation in order to make a company seem more environmentally-friendly than it really is.

Human rights

Basic rights that belong to all human beings. They include the right to life, liberty, freedom from slavery and torture, and freedom of opinion and expression.

Impact investments

Impact investments are investments made into companies, organisations, and funds with the intention to generate an intentional and identifiable social and environmental impact alongside a financial return.

Integrated reporting

Communicating both sustainability and financial targets and results in one report, linking them to each other.

Paris Agreement

The Paris Agreement is an international accord that aims to limit the rise in global average temperatures to below 2 degrees Celsius above pre-industrial levels by the end of this century, and to pursue efforts to limit it to 1.5 degrees.

Principles of Responsible Investment (PRI)

These are the world’s leading proponent of responsible investment. The PRI is truly independent and 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 PRI is supported by the United Nations.

Renewable energy

Energy collected from resources that are naturally replenished such as sunlight, wind, water and geothermal heat.

Screening

An investment approach used to filter companies based on pre-defined criteria before investment. As an investor, you can use a negative screen (in which you deliberately exclude certain companies because of their involvement in undesirable activities or sectors) or a positive screen (in which you select companies based on their sustainability practices).

Social factors

Issues related to how a company interacts with the communities it operates in, its suppliers, employees and customers. These include, for example, labour standards, health and safety, supply chain management and nutrition and obesity.

Sustainable and Responsible Investing (SRI)

SRI funds seek to build a portfolio with an above average ESG quality; in practice most often use a combination of a positive and a negative screening.

Stewardship/Active Ownership

Stewardship, also referred to as Active Ownership, is defined as taking an active role as a shareowner to promote the long-term success of companies in such a way that society and the ultimate providers of capital also prosper. This can be done through engagement and proxy voting. Stewardship therefore benefits companies, investors and the economy as a whole.

Thematic investing

Investing in companies that can be classified under a particular investment theme such as renewable energy, waste and water management, education or healthcare innovation.

Transition risk

The financial risks that could result from significant policy, legal, technology and market changes as we transition to a lower-carbon global economy and climate resilient future.

UN Sustainable Development Goals (SDG)

A collection of 17 goals reflecting the biggest challenges facing global societies, environments and economies today.

Values-based investing

Investing that prioritises an investor’s ethical objectives, rather than simply maximising financial returns.

Voting rights

Equity investors typically have the right to vote at annual and extraordinary general meetings (AGMs and EGMs) on issues such as an individual director’s appointment, remuneration or mergers and acquisitions (depending on a country’s legal framework).