A

Active Ownership

Investors address concerns of environmental, social and governance (ESG) issues by voting on such topics or engaging corporate managers and boards of directors on them. Active ownership is utilized to address business strategy and decisions made by the corporation in an effort to reduce risk and enhance sustainable long-term shareholder value.

Asset Overlays

Exclusionary screens that do not just apply to a specific sustainable investment product, but instead to the whole asset base of an asset manager or institutional investor. Often such criteria apply to controversial weapons such as cluster bombs, land mines and nuclear weapons.

B

Best-in-class / Positive Screening

Assets or investments that are the best performers amongst their peer group in terms of environmental, social, and/or governance factors.

Blended Finance

Complementary use of grants (usually from public sources) and non-grant financing from private and/or public sources. Such structures are used to make infrastructure and sustainability projects that would otherwise not be financially sustainable attractive for private investors. The IFC uses the term blended finance to distinguish it from ‘concessional finance’, which requires a minimum 25% grant element. Although blended finance has a concessional component, the subsidy portion of the investment is minimised in order to avoid crowding out private financing.

C

Carbon Finance

Generic term for financial services related to mitigation of and adaptation to climate change. It specifically refers to investments in greenhouse gas emission reduction projects and the related creation of CO2-certificates, financial instruments that are tradable on carbon markets.

Carbon Footprint of a Portfolio

A carbon footprint refers to the entire greenhouse gas (GHG) emissions of a portfolio. It is calculated in tons of CO2 equivalents per million USD invested (tCO2e/mUSD). It expresses the amount of annual GHG emissions which can be allocated to the investor per million USD invested in a portfolio and is therefore probably the most intuitive carbon metric available at the portfolio level.

Carbon Neutral

This occurs when an organisation’s net carbon emissions is equal to zero. The process requires measuring total CO2 emissions, taking active steps to reduce emissions where the company can, and then purchasing CO2-certificates to offset CO2 emissions that cannot be eliminated from a company’s operations. The CO2-certificates contribute to financing projects reducing CO2-emissions (i.e. by replacing fossil power generation with renewable energy projects).

Climate-Alignment

The climate alignment of a portfolio refers to the reduction of the greenhouse gas emissions of a portfolio (i.e. of the issuers it contains) in line with global climate goals

Community Investment

Directing investment capital to communities that are underserved by traditional financial services institutions. Generally provides access to credit, equity, capital, housing, and basic banking products that these communities would otherwise lack. The term usually refers to investments in developed countries.

Corporate Social Responsibility (CSR) / Corporate Responsibility (CR)

This term refers to the commitment of an organisation, beyond what is required by law, to ensure that the social, economic and environmental impacts of their actions create a net benefit to communities and society. This is founded on the belief that all corporations have a ‘duty of care’ to all their stakeholders in every area of their business operations and that being a responsible citizen improves the long-term business success of a company.

D

Disclosure

Transparent way to review information about a company’s performance and its qualitative/quantitative data, which in turn may influence investor’s decision on whether to invest.

Divestment

In this context, ceasing to hold an investment on the basis of environmental, social, and/or governance considerations.

E

ESG – Environment, Social and Governance

The term is used to describe environmental, social and governance considerations. Environmental considerations may include climate change mitigation and adaptation, preservation of biodiversity, and prevention of carbon emissions among others. The social aspect could include investment in human capital and communities, human rights and labour issues to name a few. Governance considerations may include but is not limited to management structures, employee relations and executive remuneration and shareholder rights.

ESG Analysis

This analysis includes collecting information on how an investment target manages environmental, social and governance factors. When an investment institution wishes to track how potential investments (i.e. companies, countries and issuers) actively manage ESG risks and opportunities they carry out an ESG Analysis. There is growing evidence suggesting that companies with a strong performance in managing environmental, social and governance factors manage their risks and opportunities more effectively and have lower costs of capital. ESG factors, when integrated into investment analysis and decision-making, may therefore offer investors better insights into opportunities and risks.

ESG Engagement

Engagement is an activity performed by shareholders with the goal of convincing management to take account of environmental, social and governance criteria. This dialogue includes communicating with senior management and/or boards of companies and filing or co-filing shareholder proposals. Successful engagement can lead to changes in a company’s strategy and processes so as to improve ESG performance and reduce risks.

ESG Voting

Investors address concerns of environmental, social and governance (ESG) issues by actively exercising their voting rights based on ESG principles or an ESG policy.

Environmental Lending

The lending activities for environmental projects or companies which are often provided by multinational development banks. The term also covers lending activities with clear procedures to assess environmental risks of projects or companies. In some cases, banks provide preferential interest rates for environmental projects (i.e. environmental mortgages for low energy buildings).

Equator Principle

The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance and is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making.

Exclusions

An approach excluding companies, countries or other issuers based on activities considered not investable. Exclusion criteria (based on norms and values) can refer to product categories (e.g. weapons, tobacco), activities (e.g. animal testing), or business practices (e.g. severe violation of human rights, corruption).

Exclusion Criteria

Activities on the grounds of which a company, country or issuer is considered as not investable. Exclusion criteria can refer to product categories (i.e. weapons, tobacco) activities (i.e. animal testing) or practices (i.e. severe violation of human rights, corruption). They can also be based on personal values (i.e. gambling) or on risk considerations (i.e. nuclear power).

EU Taxonomy

A taxonomy refers to a comprehensive classification system related to sustainable finance, their scope and methodology as well as application to wider economy. The EU taxonomy is only one of many available taxonomies around the world, which provides companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable, based on scientific evidence.

F

Financial and Non-financial Information

A company’s financial performance tells investors about its general well-being. It’s a snapshot of its economic health and the job its management is doing—providing insight into the future: whether its operations and profits are on track to grow and the outlook for its stock. Non-financial information on the other hand is related to the impact of the company’s operations both on the planet as well as the revenue. This is often defined as Environmental, Social, and Corporate Governance (ESG) information, referring to the three central components in measuring the sustainability and societal impact of a company.

G

Green Bond

A fixed income instrument in which the proceeds raised from sale are used to fund green projects.

Green Investment

Investment activities that focus on companies or projects that are committed to the conservation of natural resources, the production and discovery of alternative energy sources, the implementation of clean air and water projects, or other environmentally conscious business practices.

Greenwashing

The practice of seeking to gain an unfair competitive advantage by overstating or overemphasising the extent to which an investment or business’s practices are “green” or “sustainable”.

Impact Investing

Investments made in order to deliberately create social goods. For example, investing in a for-profit company which makes affordable water purifiers for the developing world.

Integrated Reporting

An integrated report (IR) combines a company’s financial report and sustainability report in order to give a concise view about how an organisation’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term.

M

Materiality

In the sustainability context, information is material if there is a clear link to the financial performance of a company.

Microfinance

A range of financial tools (loans, savings, money transfers, etc.) provided by microfinance institutions and designed for people who do not have access to the traditional banking system.

Mission-based Investing

The incorporation of an organisation’s mission into its investment decision-making process. Most often used in reference to foundations and other non-governmental organisations working for social or environmental change. Mission-based investing ensures that organisations’ investments are aligned with the overall goals of the organisation itself and are helping, not hindering, the achievement of those goals.

P

Paris Agreement

An international agreement signed in December 2015 with the objective of combatting climate change and accelerating the investments needed for a sustainable low carbon future.

Responsible Investment (RI)

An umbrella term describing the formal integration of ethical, social, and/or sustainability considerations into investment decisions.

Positive Screening

Investment approach based on a sustainability rating in which a company’s or issuer’s environmental, social and governance (ESG) performance is compared with the ESG performance of its sector peers. All companies with a rating above a defined threshold are considered as investable. The threshold can be set at different levels (i.e. 30% best companies eligible).

Proxy Voting

One of the benefits of being a shareholder is the right to vote on certain corporate matters. Since most shareholders cannot, or do not want to, attend the annual and special meetings at which the voting occurs, corporations provide shareholders with the option to cast a proxy vote. Shareholders receive a proxy ballot in the mail along with an informational booklet called a proxy statement describing the issues to be voted on. Shareholders return a form by mail agreeing to have their vote cast by proxy.

S

Science-based Targets

The term “Science-based targets” is currently mostly applied in the context of climate targets. Such targets provide a clearly defined pathway for companies to reduce greenhouse gas (GHG) emissions. Such targets are considered “science- based” if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement —limiting global warming to below 2°C above pre- industrial levels and pursuing efforts to limit warming to 1.5°C.

Scope 1,2,3

• Scope 1: All direct Green House Gas emissions.
• Scope 2: Indirect Green House Gas emissions from consumption of purchased electricity, heat or steam.
• Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport- related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. T&D losses) not covered in Scope 2, outsourced activities, waste disposal, etc.

Shareholder Proposal / Resolution

A legal right of shareholders to create a proposal for change in corporate policies and actions. Shareholder proposals are tools of corporate engagement and shareholders reserve the right to circulate proposals, and vote on them at the company’s Annual General Meeting (AGM).

Social Factors

Social factors within ESG criteria in the context of investing include, but are not limited to, worker rights, safety, diversity, education, labour relations, supply chain standards, community relations, and human rights.

Social Loan

Social loans are any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible social projects. Potential social project areas include but are not limited to, affordable basic infrastructure, access to essential services and affordable housing.

Socially Responsive Investing

Socially Responsible Investing (SRI) is the term previously used for sustainable or responsible investing. SRI had its origin in the Anglo-Saxon investment world, where it originally referred to investments based on exclusionary screening and later to investments with a best-in-class approach and other forms of sustainable investments. Some players still use it as a generic term for sustainable investing.

Sustainability Index / Benchmark

A sustainability index / benchmark is a tool to measure the value of a section of the stock market. It is computed from the prices of stocks selected by applying a sustainable investment approach. Investors use this tool to describe the market and to compare the return on specific investments.

Sustainability-Linked Loan

Sustainability-linked loans are any type of loan instruments which incentivise the borrower’s achievement of ambitious, predetermined sustainability performance objectives. The borrower’s sustainability performance is measured using predefined sustainability performance targets (SPTs), as measured by predefined key performance indicators (KPIs), which may comprise or include external ratings and/or equivalent metrics, and which measure improvements in the borrower’s sustainability profile.

Sustainability Ratings

Ratings reflecting a company’s/country’s/fund’s performance with regards to environmental, social and governance (ESG) factors. Sustainability ratings enable investors to gain a quick overview of the sustainability performance of a company/country/fund and are the basis for a best-in-class investment approach.

Sustainable Assets Under Management

Widely applied key performance indicator referring to the total volume of sustainable investments of an investor, asset manager or country. Often expressed as a percentage of total assets under management.

Sustainable Development Goals (SDGs)

The SDGs are 17 goals aiming to catalyse sustainable development set by the UN in 2015. They include goals such as no poverty, gender equality, decent work, sustainable consumption, climate action and reduced inequalities. The goals were developed to replace the Millennium Development Goals (MDGs) which ended in 2015. Unlike the MDGs, the SDG framework does not distinguish between “developed” and “developing” nations.

Sustainable Finance

Sustainable finance refers to any form of financial service with the objective of supporting the transition to a sustainable economy and society by integrating environmental, social and governance (ESG) factors into business and investment decisions. Such finance aims for the lasting benefit to clients, society at large and the planet.

Sustainable Investment

Sustainable investment products (investment funds and discretionary mandates) with a written sustainability investment policy as part of the prospectus or contract are considered Core SI. Usually, such sustainable investment products apply multiple approaches (i.e. exclusion criteria in combination with a best-in-class approach or an ESG integration approach in combination with ESG voting and engagement).

T

Transition Planning and Transition Finance

A time-bound action plan that clearly outlines how an organization will achieve its strategy to pivot its existing assets, operations, and entire business model towards a trajectory that aligns with the latest and most ambitious climate science recommendations. Transition finance aims to transform high-emitting companies and shift their operations to a climate-neutral status.

U

United Nations Principles for Responsible Investment (UN PRI)

An organisation that promotes responsible investment through a set of six investment principles that offer actions for integrating responsible investment into investment decisions.

V

Values-based Exclusions

This refers to exclusions that are based on personal values (as opposed to exclusions based on risk considerations or the violation of international norms). Prominent examples are exclusions of companies involved in gambling, production of weapons or alcohol.

Sources:

https://betterfinance.eu/greencorner/knowledege-hub/glossary/

https://www.sustainablefinance.ch/en/resources/what-sustainable-finance/glossary.html

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