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ESG Terminology

“ESG” describes a set of environmental, social and governance factors used to evaluate investment and company impacts beyond traditional financial measures.

ESG topics are now the subject of significant focus by asset managers, asset owners such as pension funds and insurance companies, and other investors, as well as by proxy advisory firms, index providers, regulators and rating agencies. We highlight below the topics commonly covered within the three categories of ESG and provide definitions of some of the key terms used in ESG disclosures, reports and regulations.

Topics Commonly Covered within E‑S‑G
  • Environmental
  • GHG emission
  • Biodiversity
  • Climate change
  • Renewable energy
  • Energy efficiency
  • Air quality
  • Water depletion or pollution
  • Resource depletion
  • Waste management
  • Ozone depletion
  • Changes in land use
  • Ocean acidification
  • Change to nitrogen and phosphorous cycles
  • Raw materials usage
  • Social
  • Human rights
  • Community relations
  • Labor relations
  • Diversity
  • Product quality and safety
  • Customer privacy
  • Data security
  • Employee health and safety
  • Supply chain management
  • Responsible sourcing
  • Employee engagement
  • Employee diversity/inclusion
  • Child, slave and bonded laborv
  • Pay equity
  • Racial justice
  • Governance
  • Business ethics
  • Corporate culture
  • Board diversity/composition
  • Shareholder rights
  • Executive compensation
  • Competitive behavior
  • Stakeholder interaction
  • Internal controls
  • Reporting practices
  • Response to legal/regulator landscape
  • Competitive behavior
  • Enterprise risk management
  • Crisis management
  • Political contributions and lobbying
  • Anti-bribery and anti-corruption measures
 
General Investment Considerations
  • Active ownership: An investment process that entails engaging with portfolio companies on ESG issues (e.g., by voting) to prompt changes in corporate action and/or policies. Also known as stewardship.
  • Corporate social responsibility (CSR)/corporate responsibility: A company’s commitment to ESG over and above that which is mandated by law. CSR is generally thought to flow from a “duty of care,” as a responsible corporate citizen to the full range of stakeholders.
  • ESG integration: The addition of ESG factors to traditional financial analysis on a systematic basis.
  • ESG investing: The consideration of ESG factors (typically pre-determined) alongside financial factors in investment decisions, which often includes screening (typically exclusionary screening). Also known as sustainable investing, responsible investing or socially responsible investing.
  • Ethical investing: Investment that is motivated not by broader ESG considerations (and the expectation that active management of ESG risks and opportunities will improve the long-term return of an investment in a company), but rather by alignment with a set of ethical values. Ethical investing is often considered a type of sustainable investing.
  • Exclusion: The intentional avoidance of investment in a company or business interest. Also known as negative screening.
  • Externality: A consequence (positive or negative) of an economic activity, which is experienced by an uninvolved third party.
  • Impact investing: Investments in companies, funds or organizations, the purpose of which is to solve social or environmental problems (by having a positive impact in ESG terms that is measurable).
  • Negative screening: Affirmatively excluding entire sectors, companies or countries from a portfolio based on moral considerations of a defined set of investors or standards relating to human rights, labor practices and the environment. Also known as exclusionary screening.
  • Positive screening: Investment in companies that demonstrate positive ESG performance relative to peers.
  • Product life cycle management: Refers to the all-encompassing process of managing a product as it moves through each stage of its product life from inception, through engineering design and manufacture, to service and disposal of manufactured products.
  • Public Benefits Corporation (PBC): A corporation organized to produce a public benefit(s) and to operate in a responsible and sustainable manner, balancing among: maximizing profit for shareholders, operating in the best interests of stakeholders, and the public benefit or public benefits identified in its charter. Under the Delaware General Corporation Law, for example, public benefits corporations are those “intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”
  • Resource efficiency: Refers to the efficient and sustainable use of resources, particularly natural resources.
  • Shareholder primacy: A theory in corporate governance holding that the primary focus of a for-profit corporation should be to maximize shareholder value (e.g., shareholder profits).
  • Stakeholder: A stakeholder is any person, organization, social group or society at large that is impacted by a business, a project or a particular business decision. Stakeholders can include shareholders, employees, surrounding communities, creditors, investors, customers, governments, suppliers, labor unions and trade groups.
  • Sustainable finance: Any form of financial service that embeds ESG criteria into investment decision-making to benefit both the investor and society more broadly. The term can cover green bonds, impact investing, active ownership and microfinance, among other initiatives and activities.
  • Sustainable investing: See ESG investing.
  • Sustainability: There is no single definition of the term, and many may use it interchangeably with ESG. According to the UN World Commission on Environment and Development as set forth in its 1987 report (also known as the Brundtland Commission), sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The SASB, in its 2017 Conceptual Framework, starts with this definition and then notes that for purposes of its standards, “sustainability refers to corporate activities that maintain or enhance the ability of the company to create value over the long term.” SASB sustainability accounting “reflects the management of a corporation’s environmental and social impacts arising from production of goods and services, as well as its management of the environmental and social capitals necessary to create long-term value. It also includes the impacts that sustainability challenges have on innovation, business models, and corporate governance and vice versa.”
 
Environmental Terms
  • Carbon finance: Finance and resources provided to projects that are generating or are expected to GHG emission reductions in the form of the purchase of such emission reductions, which are tradable on the carbon market.
  • Carbon footprint: A measure of GHG emissions.
  • Carbon neutral: The state of making no net release of carbon dioxide to the atmosphere, especially through offsetting emissions by planting trees.
  • Carbon offset: An action intended to compensate for the emission of carbon dioxide into the atmosphere as a result of industrial or other human activity, especially when quantified and traded as part of a commercial program.
  • Carbon pricing: Costs associated with the emission of carbon dioxide, measured as a fee per ton of carbon dioxide emitted or an incentive for reducing emissions.
  • Cleantech/greentech: Environmentally friendly technologies and practices. The term co-exists with terms such as “green energy” and “eco-technology.”
  • Conference of the Parties (COP): An annual conference of countries (and in the case of the European Union, a block) that joined the UN Framework Convention on Climate Change UNFCCC, which was adopted in 1992 and entered into force in 1994. The 2020 COP will be COP26.
  • Decarbonization: Relates to the reduction of greenhouse gas emissions (particularly emissions of carbon dioxide).
  • Financial risks: Financial risks depend on the extent to which the transition/migration to a lower carbon future occurs. The principal financial risk arises from stranded assets; financial risks can also capture a range of risks flowing from changing expectations not only of consumers and customers, but also of shareholders. Financial (or liability) risks also can arise as a result of liability claims seeking compensation for damages due to climate-change driven events.
  • GHG: Acronym for greenhouse gas, which encompasses any gas that absorbs infrared radiation in the atmosphere, trapping heat and contributing to the so-called “greenhouse effect.” These gases include water vapor, carbon dioxide, methane, nitrous oxide, ozone, chlorofluorocarbons, ozone, hydrofluorocarbons, sulfur hexafluoride and perfluorocarbons.
  • Green bonds: Debt instruments created to fund existing or new projects with environmental and/or climate benefits.
  • Green investing: Investments in businesses that contribute to sustainable solutions, such as renewable energy, energy efficiency, clean technology, water treatment and resource efficiency, or low-carbon infrastructure.
  • Greenwashing: Overstating the extent to which an investment, enterprise, business practice, or product or service is sustainable for competitive or other reasons.
  • Intangibles: Costs of natural hazards which are not, or at least not easily, quantifiable or measurable in monetary terms. Often expressed as “intangible costs” or “intangible assets.”
  • Low-carbon economy: Economy based on low-carbon power sources with lower output of GHG emissions. SeeParis Agreement.”
  • Net zero emissions: The point at which a country produces no GHG emissions, either because it has phased out all GHG emissions or has removed a sufficient level of carbon from the atmosphere to offset the GHG emissions it releases. Also referred to as net zero carbon or carbon neutrality.
  • Paris Agreement: The agreement reached at COP-21 (in 2015) in which parties agreed to limit warming to well below 2°C above pre-industrial levels and ideally 1.5°C. A plan by a party to take climate action (emission-reduction targets and plans, adaptation plans or other climate action goals) is known as a nationally determined contribution (or NDC); initially these NDCs were known as intended nationally determined contributions (or INDCs), but the “intended” was dropped as part of the Paris Agreement.
  • Physical risks: Physical risks encompass the consequences of an increase in both the frequency and the severity of extreme weather conditions that can damage assets, both physical as well as natural. Physical risks also affect humans through loss of life or injury. Physical risks can be triggered, for example, by specific weather events, such as hurricanes, tornadoes, wildfires, droughts and flooding. Physical risks can also be triggered by longer-term shifts in climate, such as changes in precipitation, extreme weather variability and sustained higher temperatures, leading to retreat of glaciers, rise in sea levels and chronic heatwaves.
  • Renewables: A source of energy that is not depleted by use, such as water, wind or solar power.
  • Scope 1-3 GHG Emissions: The three types of GHG emissions categorized by the GHG Protocol. Scope 1 emissions are direct emissions from sources that are owned or controlled by the reporting company, which includes on-site fossil fuel combustion and fleet fuel consumption. Scope 2 emissions are indirect emissions from the generation of electricity, heat, steam or cooling purchased by the reporting company. Scope 3 emissions cover all other indirect emissions that arise in a reporting company’s value chain, such as business travel, purchased goods and services, employee commuting, transportation and distribution of products, solid waste disposal and wastewater treatment.
  • Stranded assets: Assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities and can also refer to an asset that has become obsolete or non-performing.
  • Transition: A shift in policy, legal requirements, technology, business models, societal preferences or market forces targeted at a lower-carbon and more resilient economy. Often used in connection when assessing the risks and costs (transition risks and costs) associated with any such shift.
  • True cost: The concept of capturing the full cost of a good or service by factoring in the difference between the market price of such good or service and its comprehensive societal cost (e.g., factoring the cost of negative (and theoretically positive) externalities into the pricing of such good or service).
 
Social
  • Circular economy: An economy based on principles of keeping products, resources and other materials in use as long as possible, extracting the greatest value from them while in use, and then regenerating products, resources and other materials at the end of serviceable life. The ultimate goal is to eliminate waste and break the traditional (linear) cycle of make, use and dispose.
  • Civil society: Encompasses a spectrum of non-governmental actors (individuals and organizations) focused on social action. These actors can include, among others, non-governmental organizations (NGOs), online groups, social movements, women’s groups, indigenous groups, faith-based groups, labor unions, social entrepreneurs, research organizations, and community-based and other grassroots groups. Civil society organizations are also referred to as “CSOs.”
  • Conflict minerals: Minerals that are mined where armed conflict and human rights abuses are rife. Tin, tantalum and tungsten (derivatives of cassiterite, columbite-tantalite (coltan) and wolframite) as well as gold (also known as “3TG”) sourced from the Democratic Republic of Congo and surrounding countries, which are not deemed “DRC conflict-free.” To be DRC conflict-free the extraction of the minerals cannot directly or indirectly have benefitted armed groups in the covered countries.
  • D&I and DEI: Diversity and inclusion or diversity, equity and inclusion broadly outlines the efforts—programs and policies—that companies and organizations adopt to create a more welcoming environment and encourage representation and participation from a diverse group of people. Diversity and inclusion efforts generally focus on increasing the representation of women, people of color and members of the LGBTQ community, among others.
  • Fair trade: Arrangements designed to promote concerns for social, economic and environmental well-being of marginalized small producers, while not profiting at the expense of these producers. The World Fair Trade Organization (one of various international labelling organizations) lists 10 principles of fair trade: opportunities for disadvantaged producers; transparency and accountability; fair trade practices; fair payment; no child labor/forced labor; no discrimination/gender equality/freedom of association; good working conditions; capacity building; promote fair trade; and respect for the environment.
  • Kimberly process: A commitment to reduce the flow of “conflict diamonds” in the global supply chain. Conflict diamonds are rough diamonds used to finance wars against governments.
  • Modern slavery: Exploitation of people who are coerced into service or other form of servitude, often with the threat of violence. Examples include bonded labor, forced marriage, human trafficking and organ trafficking.
  • Responsible supply chains: A term that broadly covers supply chain management, responsible procurement and supply chain engagement.
  • Social bonds: Debt instruments created to fund existing or new projects with positive social benefits; the “use of proceeds” of a social bond issuance are used for pre-specified social projects. Social bonds are sometimes also referred to as social impact bonds.
  • Social equity: Issues relating to the provisions of equal opportunities for minorities, LGBTQ, women, individuals with disabilities and potentially other identifiable groups such as veterans.
  • Social washing: Statements or policies that make a company appear more socially responsible than it actually is.
  • Supply chain diversity: Broadening the sources of supply and manufacturing to reduce the dependence on a single supplier or manufacturer, or dependence on suppliers or manufacturers in a particular country.
  • Sustainability bonds: Debt instruments, the proceeds of which are earmarked to exclusively fund eligible projects, processes and technologies that have a positive environmental and/or social impact.
  • Trafficking: Recruitment, transportation, transfer, harboring or receipt of individuals by means of force, threat of force, coercion, or abuse of power or position of vulnerability, for the purpose of exploitation. Exploitation can include prostitution or other forms of sexual exploitation, forced labor or services, slavery or practices similar to slavery, servitude or the removal of human organs.
 
Measuring ESG
  • B Corporation: A global non-profit organization that provides private certification to for-profit companies that meet certain social and environmental performance standards. The certification assessment examines, for example, how a company’s operations and business model impacts its workers, community, environment and customers by looking at a range of issues, such as the company’s supply chain, input materials, charitable giving and employee benefits.
  • CDP: Formerly the Carbon Disclosure Project, an NGO that supports companies and cities in disclosure of environmental impacts.
  • Coalition for Environmentally Responsible Economies/CERES: A non-profit organization based in the United States that comprises investors and environmental, religious and public interest groups. The coalition's purpose is to promote investment policies that are environmentally, socially and financially sound.
  • Equator Principles: A risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects. The framework is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making.
  • GIIN: Global Impact Investing Network, an NGO that works with impact investors to accelerate the scale and effectiveness of their investments.
  • GRI: Global Reporting Initiative, an NGO focused on sustainability reporting. GRI publishes the GRI Standards.
  • IIRC: International Integrated Reporting Council, which established the International Integrated Reporting Framework.
  • IIPC: Intergovernmental Panel on Climate Change, established by the United Nations Environment Programme and the World Meteorological Organization.
  • SASB: Sustainability Accounting Standards Board, whose mission is to help companies report on the sustainability topics that matter most to their investors. SASB states that it identifies financially material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.
  • SDGs: Sustainable Development Goals, which describe a set of 17 goals (together with 169 targets) adopted in 2015 by the UN General Assembly as part of the 2030 Agenda for Sustainable Development, which build on the Millennium Development Goals. As noted in the Agenda, the SDGs “seek to realize the human rights of all and to achieve gender equality and the empowerment of all women and girls. They are integrated and indivisible and balance the three dimensions of sustainable development: the economic, social and environmental.”
  • TCFD: Task Force on Climate-related Financial Disclosures, created by the Financial Stability Board (FSB) to establish uniformity to climate-related risk disclosures by companies. In 2017, the TCFD published a set of recommendations for global companies on how to disclose climate-related financial risks aimed at promoting more informed investment, credit and insurance underwriting decision by companies and their investors. In February 2020, the TCFD announced that it had signed up more than 1,000 supporters of its recommendations, in its words, “signifying a major shift among market participants in acknowledging that climate change presents a financial risk.”
  • UNEP Finance Initiative: A global partnership established between the United Nations Environment Program and the financial sector to draw up a global sustainability framework.
  • UNGC: United Nations Global Compact, which encourages businesses to adopt socially responsible and sustainable policies based on 10 principles, and to report on them.
  • UN PRI: United Nations Principles for Responsible Investment, consisting of six investment principles for integrating ESG principles into investment decisions. The PRI is also an independent NGO that is a leading proponent of responsible investing, based on the principles; it currently has over 3,000 signatories.
 

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