Sustainable Investing Glossary
The process of directly trading individual stocks or bonds in the hope of making a profit by ‘beating the market’. This can be achieved when either an individual chooses where to put their money themselves e.g. day trading or when they invest money in a fund where the investment manager makes active investment decisions on their behalf.
Actively managed fund
A fund where a management team or investment manager actively decides how to invest an investor’s money in order to meet predefined investment goals.
The variety of life found in a single location, ranging from animals and plants to fungi and viruses. Biodiversity encompasses genetic variation within species depending on the ecosystem they are part of e.g. African vs Indian elephants
The reason a brand exists beyond making a profit e.g. Unilever’s Lifebuoy soap aims to reduce the spread of disease caused by lack of sanitation in developing countries by actively encouraging people to make handwashing part of their daily routine.
Carbon capture and storage (CCS)
Also known as carbon capture and sequestration. The process of permanently removing carbon dioxide from the atmosphere at source and then storing it, typically underground. The source of the carbon is usually a factory or power plant. (Our view is this is a controversial approach both in terms of cost and safety).
The total sum of greenhouse gases produced by a group, individual or company to support human activity both directly and indirectly. Often measured over a given timeframe.
Also known as climate positive. An activity or company that is removing more greenhouse gases from the atmosphere than it is emitting.
An activity or company that is removing the same amount of greenhouse gases from the atmosphere as it is emitting or one that does not emit any greenhouse gases at all (though in our experience, there are very few examples of the latter). This only applies to Scope 1 and 2 (definition below). They are generally said to be releasing net zero carbon emissions.
The process of a company placing funds into certified and tradable carbon removal schemes in order to counteract their carbon emissions output. Carbon offsetting is typically split into two categories:
- Avoidance – projects that avoid emissions from being released from the outset e.g. forest conservation prevents deforestation and provision of clean stoves in developing worlds prevents wood being burnt for cooking.
- Removal – projects that remove emissions from the atmosphere after they have been released e.g. planting trees.
Also known as climate negative. An activity or company that is removing less greenhouse gases from the atmosphere than it is emitting.
The cost applied to carbon emitted into the atmosphere. Pricing is typically determined in two ways:
- A carbon tax – a set price allocated per tonne of CO2 emitted.
- An incentive to emit less – usually the purchase of a limited number of permits (known as carbon emissions trading).
CDP (formerly known as the Carbon Disclosure Project)
The CDP is an independent not-for-profit charity that set up and now manages the global disclosure system which aims to help investors, cities, regions and companies handle their environmental impact. It houses large databases of company environmental information including in depth insights on carbon emissions and environmental strategies.
Center for International Climate and Environmental Research (CICERO)
CICERO is a climate research institute based in Oslo, Norway that works with governments and organisations worldwide, providing insight on how to solve climate change challenges. The institute is particularly well-known for the research it did on the effects of man-made emissions on the climate, the management of international agreements and civil society’s response to climate change.
An economic system that eliminates waste and aims to ensure materials and products are continually kept in use whilst retaining their total value. The system focuses on removing pollution and regenerating natural systems.
Climate change is the long-term alteration in the planet’s average weather patterns. Although climate change has occurred several times throughout Earth’s history, the term specifically refers to the change in weather systems and rise of average temperatures experienced since the mid-1800s (the beginning of the Industrial Revolution). High levels of carbon dioxide have subsequently been released into the atmosphere causing unprecedented changes in weather systems, never seen before in history.
Climate disclosures standards board (CDSB)
An international group of environmental Non-Governmental Organisations (NGOs) and businesses that have united to form a non-profit organisation. The CDSB is committed to changing today’s global corporate reporting model to one that equates natural capital (see Natural capital for definition) with financial capital.
Companies are provided with a framework that aims to enable them to report on environmental information with similar or substantially the same rigour as financial information. This degree of transparency is intended to provide financial institutions and investors with the level of detail required to analyse the risks and opportunities associated with climate change.
Conference of the Parties (COP) is the major decision making body of the UNFCCC (see below for definition). All 197 nations (known as parties), bar a few failed states1 signed the UNFCCC treaty in 1992. The parties meet annually to vote on the latest decisions for implementation.
COP is the only climate crisis forum in the world where the poorest countries’ opinions carry equal weight to the richest countries’ opinions. No agreements can be made unless there is a full consensus. The next COP meeting, COP26, will take place in Glasgow, UK in 2021.
1 states that cannot perform the two fundamental functions of the sovereign nation state in the modern world system
Corporate governance factor
Also known as governance or governance factors, it makes up the G in ESG (see below for definition). Corporate governance is a toolkit of rules, processes and practices that dictate how a company is governed and to what purpose. It spans a wide range of factors from outlining the distribution of responsibilities and rights amongst different stakeholders to rules on how decisions are made.
This structure aims to enable the governing body (typically the Board) to deal more effectively with the daily challenges of running a company. Company laws are designed to ensure companies are operated and managed in a way that is in their shareholders’ best interests and that conflicts of interest are appropriately mitigated.
Corporate social responsibility (CSR)
Also known as corporate responsibility or corporate citizenship. Corporate social responsibility is when a company consolidates social and environmental issues into its planning and operations. It is a self-regulating model that shows company employees, external stakeholders and the public that businesses can be a force for good.
The transition of an economy from one that relies heavily on burning fossil fuels to one that uses advanced methodologies to sustainably reduce and compensate greenhouse gas emissions.
Diversity and Inclusion
Also known as social justice. Diversity refers to the characteristics and traits that make individuals unique such as gender, race, age, orientation, disability, religion, beliefs etc. whilst inclusion refers to the social norms and behaviours that ensure people feel welcome in their surrounding environment.
When applied to the workplace, diversity implies that the group of people employed by an organisation directly reflects the diversity of society in which it operates. Whereas inclusion infers that every individual is treated fairly, able to contribute to the organisation’s success and has equal access to resources and opportunities.
Also known as divestiture. Divestment is the opposite of investment. The process of selling an asset such as equipment, real estate or a subsidiary for moral, political, social or environmental reasons e.g. Fossil fuel divestment means selling off investments in the fossil fuel industry.
Environmental factors refer to the E in ESG (look below for definition). This includes all the physical and non-physical influences that affect the organisms living in that area. When applied to a company framework, these factors pertain to all environmental elements in the political, regulatory, technological, economical and demographic landscape affecting how a company survives, grows and operates e.g. waste management, energy use, greenhouse gas emissions, treatment of animals, climate change, biodiversity, natural resource use.
ESG stands for Environmental, Social and Governance – three key factors required to measure and evaluate the ethical and sustainable impact of an organisation. Commonly used to gauge a company’s future financial performance and its behaviour against other companies.
Method of investing focused on delivering ESG criteria and impact when building portfolios or selecting which company to invest.
Investors that are actively avoiding putting money into companies that have a negative impact on society e.g. tobacco, arms and gambling.
A non renewable source of energy that releases carbon dioxide and other greenhouse gases when burnt. Sources include coal, petroleum, oil shales, bitumens, natural gas, tar sands and heavy oils and are generally found beneath several layers of sediment and rock. These contain carbon and derive from the remains of organic matter produced by photosynthesis; a process that began over 2.5 billions years ago.
Loan issued by a company or government to finance new and existing environmentally focused projects such as renewable energy. Investors put money into this loan in return for green bonds.
A type of marketing that uses inaccurate or misleading messaging to imply a product, service or organisation is more environmentally-friendly than it actually is. (Learn more in our Greenwashing guide)
Hydrogen Fuel (H2)
A zero-emission fuel, otherwise known as a clean fuel, that when burnt with oxygen in a fuel cell only produces water. Hydrogen can be sourced from a variety of domestic resources including nuclear power, biomass, natural gas and solar power, using extraction methods such as biological processes or electrolysis. Hydrogen is currently very expensive and is still not produced at industrial levels but many Governments have committed vast amounts of subsidies that should help costs reduce to a level that could make H2 competitive within 10 years.
Different types of hydrogen fuel exist:
- Grey hydrogen – the most common and dirtiest hydrogen fuel. Grey hydrogen is made from fossil fuels using an energy-intensive process called steam methane reformation. 11 tonnes of carbon dioxide is emitted for every tonne of hydrogen produced.
- Blue hydrogen – same process as grey hydrogen but carbon is captured and buried underground.
- Green hydrogen – the cleanest and most expensive hydrogen fuel. Pure hydrogen is extracted from water using electrolysis (a powerful electric current runs through water separating hydrogen from oxygen), powered by renewable energy sources (definition below).
The basic rights and freedoms that every human on this planet from birth until death is entitled to without discrimination and regardless of nationality, ethnicity, religion, sex, race or any other status. Human rights include the right to work, education, life and liberty, and freedom of expression and opinion.
Investments are made based on the level of environmental and/or social impact achieved as well as financial return. Investors base decisions on impact evidence rather than where their values lie.
An evaluation of how an organisation’s activities affect the planet both positively and negatively through calculating how a company’s profitability would be affected if their social and environmental impacts were monetised.
An international treaty that entrusts state parties to reduce their nations’ carbon emissions. It was established in 1997 in Kyoto, Japan at COP3 (see definition above) though only enforced on 16 February 2005.
The severe exploitation of people for commercial, criminal or personal gain. These people are ‘controlled’ and forced to do an activity against their will. They are often unable to leave the situation because of threats, coercion, violence, deception or abuse of power. Modern slavery comes in a variety of forms including bonded or forced labour, forced marriage and human trafficking.
The world’s stocks of air, land, water, renewable and non-renewable resources (plants, animals, forests and minerals). These stocks are considered capital because they provide goods and services to humans and other species and are the basis for all economic activity.
The process of deliberately excluding companies in investment decisions that are involved in objectionable activities or sectors such as fossil fuel production and arms.
Net zero carbon
Net zero is reached when a company’s carbon emission rate equals its carbon absorption rate throughout its full value-chain i.e. Scope 1, 2 and 3 (see definitions below). In order to achieve this, companies find ways to improve operational efficiency and subsequently reduce carbon emissions in line with a predetermined science-based target (see definition below) of 1.5°C.
Any remaining emissions that cannot be removed will be reconciled by allocating funds to certified greenhouse gas removal schemes.
A source of energy that cannot be replenished in our lifetime and will eventually run out e.g. Oil, Coal.
Also known as Paris Climate Agreement or Paris Climate Accord. The Paris Agreement is short for the Paris Agreement Under the United Nations Framework Convention on Climate Change and is a legally binding international treaty on climate change adopted by 195 countries and the European Union.
It was established at COP21 (see definition above) in Paris, France in 2015 and requires that every state party does everything in its power to limit global warming to 1.5°C. The treaty sets out to improve on what was agreed in the Kyoto Protocol (see definition above).
A fund that replicates an index. The most famous type of passive investment is Exchange Traded Funds. In passive investment, the involvement from fund managers is minimal and, as a result, costs are usually much lower than those of actively managed funds.
An investor buys and holds a diversified mix of assets for long periods of time with minimal trading efforts. The most common form is index investing when investors buy assets that mirror the market index.
Physical risks of climate change
Risks associated with climatic events such as hurricanes and droughts that will affect a company’s physical assets i.e. supply chain, markets, customers and operations.
A set of investments in any kind of securities (listed or not), selected along specific strategies or criteria.
Actively looking for companies to invest in that have sustainability practices embedded in their core structure such as socially responsible business practices or environmentally friendly products.
Product carbon footprint
Also known as life cycle product carbon footprint. It is the climate impact of a product and is measured in carbon dioxide equivalents (CO2e). The footprint is calculated by measuring the total greenhouse gas emissions throughout the product life cycle, from extraction of raw-materials to end of life.
A purpose-driven company focuses not only on profit but takes a stance on issues beyond their products and services.
Something that can be restored, regrown or renewed.
Also known as alternative energy. Renewable energy is a source of energy that never runs out e.g. Solar, Wind, Tidal
When an investor considers ESG (see definition above) risks and opportunities in the decision-making process.
Science-based targets (SBT)
A set of goals, informed by independent climate science, that provide a company with a clear pathway to reducing their greenhouse gas emissions. Targets are required to be in line with the Paris Agreement (see definition above).
Scope emissions (1, 2 & 3)
Company greenhouse gas emissions are split into three scopes:
- Scope 1 – also known as direct emissions. Emissions generated from company activity that can be directly controlled by the company e.g. heating, fleet vehicles, refrigeration
- Scope 2 – also known as indirect emissions – owned. Emissions created during energy production prior to the company purchasing it and when energy is consumed by a company.
- Scope 3 – also known as indirect emissions – not owned. Emissions generated from every other activity throughout a company’s value chain outside Scope 1 and 2. They include both upstream and downstream emissions.
A financial instrument issued by a company that is bought, owned and traded by other enterprises and individuals. Examples include stocks and bonds.
A single unit of equity ownership in a financial asset or company. It ranks lower than debt in case of company liquidation. The rise in value of a company is best encapsulated in shares rather than debt (see above).
Social factors refer to the S in ESG (look below for definition). The company’s attitude towards social issues including human rights, labour standards, adherence to workplace health and safety, diversity and consumer protection. They also include how the company interacts with suppliers, the local community, customers and other businesses.
Socially responsible investing (SRI)
Also known as social investment or sustainable investing. Actively seeking out companies to invest in that generate financial returns and make a positive contribution to society. This approach allows for companies that are not inherently sustainable but are investing in clean technologies e.g. a fossil fuel company investing in renewable energy.
A share of ownership in one or more companies.
Identifying and choosing stocks to invest in based on a particular set of criteria.
Assets that have been prematurely devalued and no longer able to earn an economic return. Many fossil fuel assets risk being ‘stranded’ soon.
Any form of financial process including capital flows and risk management activities that integrates ESG criteria (see definition above) into decision-making processes and strategies.
The process of maintaining change in a balanced environment so needs are met today whilst not compromising future generations.
A classification system developed by TEG (see definition below) that provides businesses and investors with a set of criteria detailing which economic activities are deemed sustainable.
Technical Expert Group on Sustainable Finance (TEG)
A group of 35 international finance experts founded in 2018 to assist the European Commission in developing the following areas:
- Taxonomy regulation (see definition above)
- EU Green Bond Standard
- EU climate benchmark and disclosure methodologies
- Guidance on corporate disclosure of climate-related information.
The financial risks associated with the transition to a low-carbon and more climate-resilient global economy deriving from substantial technology, legal policy and market changes.
United Nations Framework Convention on Climate Change (UNFCCC)
The UNFCCC was the first international environment treaty to tackle climate change. Founded in 1994 and ratified by 197 countries, the original objectives were to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system and prevent human damage and interference with the climate system.”
The UNFCCC is the parent treaty of the 1997 Kyoto Protocol and 2015 Paris Agreement (see definitions above).
United Nations Global Compact
The UN Global Compact is the world’s largest corporate sustainability initiative. Businesses are encouraged to sign up and commit to sustainable and socially responsible practices. The initiative is based on 10 guiding principles covering environment, labour, human rights and anti-corruption that organisations should embed in their value systems and their approach to doing business.
United Nations Principles for Responsible Investing (PRI)
A network of international investors founded by the UN, created a voluntary set of six principles. These principles encourage investors to commit to incorporating ESG factors into their investment processes.
United Nations Sustainable Development Goals (SDGs)
Also known as the Global Goals. A set of 17 goals that were adopted by every United Nations member state in 2015 to tackle the planet’s greatest challenges across society, environment and economy today. They are a universal call to action to protect the planet, end poverty and improve human lives worldwide by 2030.
Values based investing
Investing in companies that align with not only gain financial return but align with personal values.
All activities and actions, from collection of waste through to recycling, that are required to manage waste.
With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice