The jargon of climate change can be hard to grasp. We have put together a glossary of key sustainable investing terms for investors who want to contribute to solutions needed to tackle the global warming challenge.
Sustainability or ESG investing, once a fringe consideration, has become core for many investors.
Impacts on the planet – such as climate change and biodiversity loss – and on people – are in the news every day.
We believe companies and countries that adapt to such issues and challenges should thrive. Those that don't will not.
But 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 climate change terms for investors to dip into. It will be updated over time.
A to C — active ownership, carbon neutral, corporate governance
2°C limit or “2 degrees”: It is widely agreed that limiting the average rise in global temperatures to less than 2 degrees Celsius 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 the companies we invest in are managed in a sustainable way. This helps to both protect and enhance the value of investments.
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 dollars 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 carbon dioxide (CO2) into the atmosphere, usually in the form of a fee per tonne of CO2 emitted, or limiting the total emissions that 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.
Circular economy: An economy in which there is no waste because resources are never disposed of — they are continually recycled or reused.
Clean technology: A range of products, services, and processes that reduce the use of natural resources, cut or eliminate emissions and waste, and improve environmental sustainability. Wind turbines and electric vehicles are two examples.
Climate Progress Dashboard: Schroders’ proprietary tool which tracks the progress being made to limit the rise in global temperatures to 2 degrees Celsius. 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 degrees Celsius. 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 that was 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 has committed to using 100% renewable electricity by 2025 and offers 15 hours’ paid volunteer leave to its employees every year.
D to L — decarbonisation, ESG, greenwashing
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.
Dialogue: Communication with investees to find out more about their sustainability practices and how prepared they are for the changing world.
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 also gives us the opportunity to share our expectations on corporate behaviour and to influence company interactions with their stakeholders, ensuring that the companies we invest 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.
ESG: Environmental, social and governance.
ESG integration: An investment approach that incorporates ESG considerations into the investment decision alongside traditional financial analysis. ESG integration is about understanding the most significant ESG factors that an investment is exposed to, and making sure that you’re compensated for any associated risk.
ESG fund ratings: A rating, most commonly provided by third-party commercial providers like MSCI and Morningstar, that looks at a fund’s underlying holdings and scores 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 Europe 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 CO2) are widely believed to be the leading cause of climate change.
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: 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 a product, service, or organisation, in order to make a company seem more environmentally friendly than it really is.
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.
Low-carbon economy: An economy that emits minimal carbon into the atmosphere. Typically, this means using low-carbon power sources rather than fossil fuels.
N to S — Paris Agreement, sin stocks, stranded assets
Net zero: See “carbon neutral”. Unlike “carbon neutral”, companies or countries that call themselves net zero usually have not 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”.
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 the increase in the global average temperature to below 2 degrees Celsius 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.
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 degrees Celsius from pre-industrial levels.
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 predefined criteria before investment. Negative screening deliberately excludes 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, typically at a transformational level.
Sin stocks: Investments associated with activities considered to be “unethical” or “immoral” according to an investor’s personal values or beliefs. Activities may include tobacco, alcohol, gambling, and adult entertainment.
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.
Sustainability factors: Any factor that can affect the value of an investment in the long-term. This includes ESG factors.
SustainEx: Schroders’ proprietary impact measurement tool. SustainEx quantifies the positive and negative impacts that companies have on the environment and society. It helps Schroders’ analysts, fund managers, and clients measure and manage social and environmental impacts and risks more effectively.
T to Z — thematic investing, UN PRI, zero carbon
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 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 promote responsible investment across the industry.
UN Sustainable Development Goals (SDG): 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”.
This article was originally published by Schroders.
As a global investment manager, Schroders recognises its role in shaping the futures of all its stakeholders. Commitment to delivering positive outcomes for clients, employees and wider society lies at the centre of the firm’s culture. Schroders actively and responsibly manages US$990.9 billion (as at 31 Dec 2021) of assets for a wide range of institutions and individuals to help meet their financial goals.
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