An A-Z of sustainability terms for investors
- Shunil Roy-Chaudhuri
- 27 September 2022
- 15 mins reading time
Sustainability has become a core consideration for many investors. Impacts on the planet, such as climate change and biodiversity loss, and on people, for example through the treatment of workers, are in the news every day. We believe companies and countries that adapt to such issues and challenges should thrive, while those that don’t will not.
While the principles are fairly simple, we recognise that the field of sustainability has become a sea of acronyms and technical terms. That’s where we can help. We’ve put together an A-Z of key terms for you to dip into. It will be updated over time.
2°C limit or ‘2 degrees’: It is widely agreed that limiting the average rise in global temperatures to less than 2°C above pre-industrial levels by the end of this century may help stave off the worst of the natural disasters associated with global warming. See also ‘Paris Agreement’.
Active ownership: Actively influencing corporate behaviour to ensure companies in which shareholdings are held are managed in a sustainable way.
Avoided emissions: Avoided emissions quantify the emissions saved by products and services that can substitute high carbon activities with low carbon alternatives. For example, replacing fossil fuel power generation with wind power reduces emissions. Conventional carbon footprint analysis (such as Scope 1, 2 and 3; see separate glossary entries for explanations of these terms) attributes relatively high emissions to the companies that manufacture wind turbines. But it doesn’t recognise their contribution to the savings created when they are deployed to displace fossil fuel-based generating capacity.
Carbon capture and storage (CCS): The process of capturing CO2, transporting it and permanently depositing it in an underground geological formation. This is carried out to reduce the emissions of CO2 by heavy industries in areas such as utilities, oil and gas, cement, steel, chemicals, manufacturing and heating.
Carbon footprint: A measure of a group, individual, company or country’s greenhouse gas emissions. Common metrics include total carbon emissions or carbon intensity.
Carbon intensity: A group, individual, company or country’s carbon emissions per $million of sales.
Carbon negative: An entity whose activity removes more carbon emissions from the atmosphere than it adds.
Carbon neutral: Achieving net zero carbon emissions by balancing existing emissions with carbon offsets. Unlike ‘net zero’, carbon neutrality is often (but not always) validated or certified by a third party. Use of these terms varies by region.
Carbon offsetting: Compensating your total carbon emissions by funding carbon negative activities elsewhere. Companies often offset their existing emissions by investing in projects such as tree-planting.
Carbon pricing: Assigning a cost to emitting CO2 into the atmosphere (usually in the form of a fee per tonne of CO2 emitted) or limiting the total emissions firms can produce and issuing emissions permits. Putting an economic cost on emissions is widely considered to be the most efficient way to encourage polluters to reduce what they release into the atmosphere.
Carbon Value-at-Risk (VaR): A model developed by Schroders to measure how carbon pricing may affect a company’s profits. It estimates the impact on companies’ earnings of raising carbon prices to $100 per tonne.
Carbon Disclosure Project (CDP): CDP runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. As a signatory of CDP, we have access to its extensive research and database on climate change, water and forestry. We also submit to their climate change questionnaire annually.
Circular economy: An economy in which there is no waste because resources are never disposed of: they are continually recycled or re-used.
Clean technology: A range of products, services and processes that reduces the use of natural resources, cuts or eliminates emissions and waste, and improves environmental sustainability. Wind turbines and electric vehicles are two examples.
Climate Action 100+: A five-year collaborative engagement project to engage more than 100 of the world’s largest corporate greenhouse gas emitters to do the following: improve governance on climate change; curb emissions consistent with a 2°C scenario; and strengthen climate related financial disclosures in line with TCFD recommendations.
Climate Progress Dashboard: Schroders’ proprietary tool, which tracks the progress being made to limit the rise in global temperatures to 2°C. The dashboard includes 12 objective indicators, from political action through to carbon prices and fossil fuel use, and currently points to a rise closer to 4°C. The information can help investors to understand the scale of change required and to identify areas of investment risk and opportunity.
Climate change: The changing nature of our global climate, such as warming temperatures and rising sea levels, as a result of both natural weather patterns and human activity. Not to be mistaken for global warming, which focuses solely on rising temperatures due to human activity.
Climate neutral: Achieving zero total emissions of all greenhouse gases, such as methane and nitrous oxide, not just carbon dioxide. Once carbon neutrality commitments become commonplace, we expect commitments to become more stringent by progressing towards climate neutrality.
Collective or collaborative engagement: Working together with other institutional shareholders to influence company management and effect positive change. Collective engagement may involve meeting companies jointly with other shareholders, via membership organisations or other more informal groupings. Climate Action 100+ is one example.
Conference of the Parties (COP): The highest decision-making body of the United Nations Framework Convention on Climate Change (UNFCCC), which meets annually to implement the Convention. The Convention’s ultimate aim is to stabilise greenhouse gases at an acceptable level. The Paris Agreement was born at COP21.
Corporate governance: An oversight framework initially designed to ensure company management acted in the best interests of shareholders. In more recent years there has been a broader recognition of the value in considering all stakeholders.
Corporate responsibility: A company’s responsibility to operate its business in a way that positively impacts, or at least does not negatively impact, the environment or society. For example, Schroders Personal Wealth has committed to achieving net zero carbon operations by 2030 and offers 14 hours’ paid volunteering leave to its employees every year.
Decarbonisation: The process of reducing a company, industry or country’s carbon emissions. Decarbonisation is a critical component of the world’s transition to a low-carbon economy.
Diversity and inclusion: Diversity refers to the differences people have in terms of their gender, age, ethnicity, sexual orientation, disability, religion, beliefs or other characteristics. Inclusion is about embracing and promoting diversity, addressing inequality and ensuring people feel valued and respected, irrespective of their background or beliefs.
Divestment: The sale of an investment. Divestment may occur when the investee company consistently fails to meet investor expectations, often after attempts to engage with the company. Divestment may also be used to achieve social or political goals. For example, investors divested from South African assets during the apartheid era in protest against the regime.
Engagement: Engagement is more than just meeting with company management: it’s an opportunity to gain insight into a company’s approach to sustainability. It could also give investors with significant shareholdings in individual companies the opportunity to share their expectations on corporate behaviour and to influence company interactions with their stakeholders. This could ensure that the companies invested in are treating their employees, customers and communities in a responsible way.
Environmental factors: This is the ‘E’ of the term ‘ESG’ (environmental, social and governance) and concerns issues related to pollution, climate change, energy use, natural resource use, waste management, biodiversity and other environmental challenges and opportunities.
Ethical investing: Using ethical principles as the main basis for the selection of investments. This approach is dependent on the individual investor’s views. Also known as ‘values-based investing’.
ESG: Environmental, social and governance.
ESG integration: An investment approach that incorporates ESG considerations into the investment decision alongside traditional financial analysis. ESG integration involves understanding the most significant ESG factors that investments are exposed to.
ESG fund ratings: Ratings, most commonly provided by third-party commercial providers such as MSCI and Morningstar, that look at a fund’s underlying holdings and score its overall ESG risk, based on specific metrics. The choice of metrics and the resulting rating vary among different providers.
ESG indices: Indices traditionally track the performance of a basket of bonds or shares, such as the FTSE 100. A growing number of indices track investments by screening out certain industries or, more recently, by evaluating which companies qualify based on ESG measures. FTSE4Good indices, for example, exclude companies that do not meet specific ESG criteria.
EU Green Deal: A policy framework and package of measures that aim to make the EU climate neutral by 2050, boosting the economy through green technology, creating sustainable industry and transport, and cutting pollution.
Fossil fuels: A natural, non-renewable energy source, such as coal, oil and gas. These are naturally high in carbon and the gases released from burning these fuels (such as carbon dioxide) are widely believed to be the leading cause of climate change.
Gender pay gap: A gender equality measure that shows the difference in average or median earnings between men and women.
Governance factors: See ‘corporate governance’. This is the ‘G’ in ‘ESG’ and is about assessing how well a company is run. Governance factors include remuneration, board structure and corporate strategy.
Green bond: A bond in which the proceeds are used by the issuing company or government specifically to fund new and existing projects with environmental benefits, such as renewable energy and energy efficiency projects.
Greenhouse gases (GHG): Carbon dioxide, methane, nitrous oxide and fluorinated gases. These gases trap heat close to the surface of the earth and are a key cause of climate change.
Greenwashing: Falsely communicating the environmental credentials of products, services or organisations in order to make them seem more environmentally-friendly than they really are.
Human capital management: This refers to people working within the direct operations of a company and includes the practices to recruit, retain and develop human capital.
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. The UN Declaration on Human Rights is widely recognised as a benchmark of these basic standards.
Impact investing: Investments that are made with the primary goal of achieving specific, positive social and environmental benefits while also delivering a financial return. Impact investments create a direct link between portfolio investment and socially beneficial activities. Not to be confused with impact measurement (see below).
impactIQ: This refers to Schroders’ set of award-winning tools, which measure the impact companies have on society and the environment. Schroders developed these tools based on more than 20 years of ESG investing experience. Used as part of Schroders’ investment process, impactIQ examines the risks that unsustainable practices pose to companies’ business, as well the overall alignment of companies with the UN SDGs (Sustainable Development Goals).
Impact measurement: The measurement of how companies’ activities affect the world, both positively and negatively. Schroders developed SustainEx for this purpose (see SustainEx definition).
Integrated reporting: Company reporting that articulates the relationship between a company’s strategy, governance and performance, and how this creates value for a range of stakeholders. The framework set by the International Integrated Reporting Council is widely recognised as the core standard in this area.
Intergovernmental Panel on Climate Change (IPCC): The United Nations body for assessing the science related to climate change.
Low-carbon economy: An economy that emits minimal carbon into the atmosphere. Typically this means using low-carbon power sources rather than fossil fuels.
Microfinance: Financial services typically offered to those traditionally excluded from the formal banking sector, such as entrepreneurs, small business owners, the unemployed, or low-income groups or individuals.
Modern slavery: Although no standard definition exists, modern slavery can broadly be thought of as the exploitation of people who are coerced into an activity by someone who controls them. It can take many forms, including forced or bonded labour, human trafficking or child labour.
Natural capital: The term is used to describe elements of nature that provide important benefits called ‘ecosystem services’. These include CO2 removal, protection from soil erosion and flood risk, habitats for wildlife, pollination and spaces for recreation and wellbeing.
Natural Capital Investment Alliance (NCIA): An initiative of the Sustainable Markets Initiative that aims to accelerate the development of natural capital as a mainstream investment theme. The alliance will engage the investment management industry to mobilise private capital efficiently and effectively for natural capital opportunities.
Net zero: See ‘carbon neutral’. Unlike ‘carbon neutral’, companies or countries using the description of ‘net zero’ have not usually had this validated or certified by a third party. Use of ‘carbon neutral’ and ‘net zero’ may vary by region. Not to be confused with ‘zero carbon’.
Net Zero Asset Managers (NZAM): Schroders was a founding member of NZAM. This is an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner (in line with global efforts to limit warming to 1.5°C) and to supporting investing aligned with net zero emissions by 2050 or sooner.
Over-boarding: When a board member takes on too many board roles, hindering their ability to appropriately distribute their time and discharge their responsibilities to each board effectively.
Paris Agreement: A global commitment, agreed at COP 21 in Paris in 2015, to limit increase in the global average temperature to below 2°C above pre-industrial levels. See also ‘2 degrees’.
Physical risks of climate change: The risk posed by climate events on a company’s physical assets (such as supplies and equipment), its supply chain, operations, markets and customs. Schroders’ physical risk framework calculates what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption.
Proxy voting: When a shareholder delegates their vote to another who votes on their behalf at company meetings. This allows the shareholder to exercise their right to vote without being physically present. Most institutional investors vote by proxy online, via phone or via email, often with the help of a third party to process voting instructions.
Renewable energy: Energy collected from resources that are naturally replenished, such as sunlight, wind, water and geothermal heat.
Responsible investing: An investment approach that considers ESG risks and opportunities as part of the investment process and uses engagement and voting in order to generate sustainable, long-term financial returns. See also sustainable investing.
Science-based targets: Carbon emissions reduction targets that are consistent with what the latest climate science says is necessary to keep global warming well below 2°C from pre-industrial levels.
Science-Based Targets initiative: This initiative defines and promotes best practice in science-based emissions reduction target-setting. Offering a range of target-setting resources and guidance, the SBTi independently assesses and approves companies’ targets in line with its criteria.
Scope 1 emissions: Direct emissions that come from sources owned or controlled by the emitter, such as emissions from company vehicles.
Scope 2 emissions: Indirect emissions from sources owned or controlled by the emitter, such as emissions from the electricity used in a company’s office.
Scope 3 emissions: Indirect emissions from sources not owned or controlled by the emitter, but which indirectly impact the emitter’s supply chain, such as emissions from a company’s employees commuting to work.
Screening: An investment approach that filters companies, based on pre-defined criteria, prior to potential investment. Negative screening deliberately excludes investing in certain companies, because of their involvement in undesirable activities or sectors. Positive screening deliberately includes companies that lead their peer groups in terms of sustainability practices and performance. Positive screening is also known as a ‘best-in-class investment’.
Shareholder activism: A form of engagement where investors use their shareholder rights to promote change at a company.
Shareholder resolution: A proposal submitted by a shareholder for consideration at a company’s general meeting, requesting that the company takes particular action.
Share blocking: When restrictions are placed on the trading of voting shares, whose owners intend to use them to make a vote, prior to an annual general meeting.
Sin stocks: Investments associated with activities considered to be ‘unethical’ or ‘immoral’ according to an investor’s personal values or beliefs. Activities may include involvement in tobacco, alcohol, gambling and adult entertainment.
Social bonds: A bond in which the proceeds are used by the issuing company or government specifically to fund new and existing projects with social benefits, such as affordable healthcare and housing.
Social factors: This is the ‘S’ of ‘ESG’. Social issues relate to how a company interacts with the communities it operates in, its suppliers, employees, customers, governments and regulators. These include, for example, labour standards, health and safety issues, supply chain management, and nutrition and obesity issues.
Stakeholder: A group, entity or individual impacted by a company or country’s activity. Shareholders have historically been the priority stakeholder. More recently, however, companies and investors are realising the importance of their relationships with employees, suppliers, customers, the environment, communities, and the governments and regulators with which it deals.
Stewardship: Actively influencing the responsible allocation, management and oversight of an investee’s capital in a way that creates long-term, sustainable value. See also ‘active ownership’.
Stewardship codes: A set of standards that help set stewardship expectations and best practice for asset managers and asset owners. These codes are established on a country-by-country basis.
Stranded assets: Assets that already exist but risk being ‘stranded’ or unable to deliver a return in the longer term. Fossil fuels are the most commonly-known stranded assets.
Sustainability: The ability to adapt to changing pressures and responsibilities in order to survive and add value in the long term. This ability is strongly linked to a company or country maintaining strong relationships with its stakeholders. In environmental terms, sustainability seeks to prevent the over-consumption of physical or natural resources, to help ensure their long-term availability.
Sustainability Accounting Standards Board (SASB): A non-profit organisation started in 2011 to establish sustainability standards that are used worldwide. SASB is well known for its materiality map.
Sustainable investing: Sustainable investing involves ESG integration, but it takes things further by focusing on the most sustainable companies that lead their sector when it comes to ESG practices. Both the ESG integration and sustainable investing approaches are about engaging with company management to make sure the firm is being run in the best possible way.
Task Force on Climate-related Financial Disclosures (TCFD): A voluntary standard for climate-focused disclosures that aims to create consistent and comparable reporting of climate-related risks. TCFD is widely used by companies, banks and investors.
Thematic investing: Investing in companies that align to 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.
Triple bottom line accounting: An accounting approach that considers a company’s social (people) and environment (planet) impacts, in addition to its bottom line (profits), to understand the full cost of doing business.
UN Global Compact: A voluntary pact of the United Nations to promote responsible business through its 10 universally accepted principles, and to encourage action to advance broader societal goals, such as the UN Sustainable Development Goals (SDGs).
UN Principles for Responsible Investing (PRI): A set of six principles under which asset owners and asset managers voluntarily commit to incorporating ESG issues into their investment processes, active ownership and reporting, and to promote responsible investment across the industry.
UN Sustainable Development Goals (SDGs): A collection of 17 goals reflecting the biggest challenges facing global societies, environments and economies today. The United Nations describes the SDGs as a ‘blueprint to achieve a better and more sustainable future for all’.
Voting: Public equity investors typically have the right to vote on company and shareholder resolutions at annual and extraordinary general meetings (AGMs and EGMs) on issues such as electing directors, authorising remuneration or requests for the company to set emissions targets.
Vote against management: Shareholders may vote ‘for’ or ‘against’ proposals. Shareholders whose votes do not align with the outcome preferred by management would be classified as a vote against management.
Zero carbon: A company whose emissions are zero, not achieved through carbon offsetting, but simply because they do not generate any carbon emissions. Not to be confused with net zero.
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