ESG Glossary for Green Minds

Do you ever find yourself reading an article or analysis on ESG, and get confused with all the industry jargon? Sometimes, it feels like you spend the entire time trying to figure out what is actually being said and find yourself taking a deep sigh over all the abbreviations and initials people throw around.

The concept of CSR or Corporate Social Responsibility has been around for many years. Initially, CSR developed from the recognition that on top of providing products and services, businesses should consider the impact of their activity on society too. A business should aim at being a good “corporate citizen”. As CSR has become a more mainstream concept and has triggered a high level of interest in the last decade, this naturally brought an unexpected side effect: a mixture of different and confusing terms and definitions. For that reason, we dedicated our first blog to deciphering and translating some of the key terms into plain comprehensible language, to help you think and act more consciously when embedding ESG into your investment decisions.

“ESG Investing is a term that is often used synonymously with sustainable investing, socially responsible investing, mission-related investing, or screening. We define it as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.” – MSCI

If we look at these three main components:

Environmental, the E in ESG concerns issues related to resource use, pollution, climate change, energy use, waste management, and other physical environmental challenges and opportunities.

Social, the S in ESG includes human rights, labor standards in the supply chain, any exposure to illegal child labor, and more routine issues such as adherence to workplace health and safety.

Governance, finally the G in ESG refers to a set of rules or principles defining rights, responsibilities, and expectations between different stakeholders in the governance of corporations. In other words, it assesses how well a company is run.

Now that we deciphered the ESG in broader terms, let’s dig a bit deeper by going through more ESG related terms together.

ESG Integration: The structural integration of information on ESG into investment analysis and investment decision-making process.

Climate Change: Means in the broader sense the changes seen in weather patterns due to the heating of the Earth’s atmosphere. In the financial sense, climate finance, in a 2011 paper prepared for the G20 Finance Ministers, was defined as a term that ‘broadly refers to resources that catalyze low-carbon and climate-resilient development.’

Climate Action 100+: an initiative taken by the investment industry to ensure the world’s largest corporate greenhouse gas emitters take the necessary action on climate change. Signatories engage with companies to curb emissions, improve governance and strengthen climate-related financial disclosures.

Carbon Footprint: The amount of greenhouse gases and specifically carbon dioxide emitted by something (such as a person’s activities or a product’s manufacture and transport) during a given period.

Decarbonization: Decarbonization is the reduction in the carbon intensity of worldwide energy use. In line with this development, investment portfolios can also be decarbonized. The simplest way to do this would appear to be by divesting fossil fuel companies from portfolios. Another way to reduce the carbon footprint of the portfolios is by impact investing. This can be achieved by, for example, underweighting the industry groups that account for over 80% of the global environmental footprint, i.e. energy, materials, utilities, and transportation.

Impact Investing: Impact investing attempts to generate solid investment returns but also generate a desired and identifiable socio-economic, environmental, or behavioral outcome. “Socially responsible investing” and “sustainable, responsible, impact investing” are similar concepts with identical abbreviations (SRI). These categories also overlap with “Impact Investing”.

Ethical Investing: an investment approach that excludes investments on the basis of ethical, values-based, or religious criteria, for example, gambling, alcohol, or pork.

Green Investing: an approach that considers investments based on their environmental credentials. By the same token, green bonds are the fixed income instruments investing in this theme.

Modern Slavery: the recruitment, movement, harboring, or receiving of people through the use of force, coercion, abuse of vulnerability, deception, or other means for the purpose of exploitation.

Paris Agreement: the international treaty that came into force in November 2016. The agreement is to limit the global rise in temperature from pre-industrial levels to below 2°C this century and ideally below 1.5°C

Greenwashing: this is falsely giving the impression that a company’s products and services provide greater environmental or ‘green’ benefits than in reality.

Screening: the approach which specifically filters companies based on their involvement in either beneficial (positive) or undesirable (negative) activities.

ESG Ratings: While dozens of companies evaluate ESG factors, several major rating agencies dominate this market: Sustainalytics, Vigeo-Eiris, Asset4 (Refinitiv), MSCI, SAM (now part of S&P Global), and ISS-ESG. For instance, while the ESG risks and opportunities can vary by industry and company, MSCI ESG ratings are designed to measure a company’s resilience in the long term with regards to industry material environmental, social and governance (ESG) risks. They use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers.

Private impact investing: Investing directly in unlisted projects, companies or initiatives that have the intention to generate positive, measurable social and environmental impact alongside a financial return, for example, one or more of the UN Sustainable Developments Goals (an ‘SDG fund’).

UN Social Development Goals (SDGs): 17 high-level goals forming the blueprint to achieve a better and more sustainable future for all. The aim is to achieve them all by 2030: No poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry & innovation and infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice and strong organizations, and partnerships for the goal.

Hope you found the compilation of these terms useful. Instead of throwing hundreds of terms at you from other glossaries, we have done thorough research to narrow it down to the most relevant key terms that we believe to be imperative to anyone wanting to dip their toes in the ESG world. We hope you can bookmark this blog post and come back to it whenever you need to as a quick reference.