Sustainable investing glossary

A

Active ownership – a form of stewardship whereby shareholder power is used to influence corporate behaviour through direct corporate engagement, filing or co-filing shareholder proposals, and proxy voting guided by comprehensive Environmental Social Governance (ESG) guidelines.

B

Best in class – an investment approach that is designed to identify companies in a particular sector or industry that have higher standards than their peers so that the fund manager can select better companies and reject companies with lower standards that don’t meet requirements. For example, a fund may choose to only invest in utility companies that generate the highest proportion of energy from renewables, relative to their peers. Strategies vary. Some funds set the bar very high, whereas others only avoid the worst performing companies in a sector.

C

Carbon footprint – a measure of the total amount of greenhouse gasses. This is typically measured in units of carbon dioxide. This means you may also see reference to ‘carbon dioxide equivalent’ which is used to describe the potency of other greenhouse gases, such as methane.

Carbon neutrality – where the sum of an individual or business’s carbon emissions cancel each other out, so that overall greenhouse gas emissions are neither positive nor negative. Companies may achieve this by offsetting emissions or eliminating their emissions altogether by, for example, sourcing renewable energy and carefully managing their supply chains. Methods and opinions on the pros and cons of different strategies vary.

Carbon offsetting – removing or offsetting an amount of carbon omitted by a certain activity. This can be through the purchase of carbon credits or through other actions such as planting trees. Methods and opinions on the pros and cons of different strategies vary.

Clean energy – energy that is derived from technologies that do not emit carbon dioxide of other greenhouse gasses, such as solar, wind and wave power.

Climate Action 100+ – an investment industry initiative aimed at reducing greenhouse gas emissions. Signatories to the Climate Action 100+ initiative engage with major polluting companies to encourage them to reduce their greenhouse gas emissions, improve related governance and strengthen climate-related financial disclosures.

Climate change – a term commonly used to describe the effects of global warming that are the result of the emission of certain harmful gases associated with human activity, such as carbon dioxide and methane that result from industrial activity. The impact of rising global temperatures varies by region and is changing over time, but has led to the increased occurrence and severity of extreme weather events (eg storms, floods and fires), changing rainfall patterns and sea level rises. Scientists predict this will continue to worsen over time, which has led most countries in the world to agree to reduce greenhouse gas emissions.

Climate risks – risks linked to climate change that have the potential to affect companies, industries and wider economies (and therefore people). As well as physical risks there are transition risks, which are the business risks associated with how companies chose to respond to climate change, this may include the risk of regulatory action, litigation and reputational damage.

Corporate engagement – using shareholder power to influence corporate behaviour through direct engagement with a company, which typically involves investors speaking with senior management and using the rights associated with share ownership to encourage positive change.

Corporate governance – the internal rules, practices, and processes used to direct and manage a company. A company’s board of directors is ultimately responsible for how a company is managed.

D

Divestment – the selling of company shares (or other assets) as a result of environmental, social or governance concerns. This is often considered the ultimate shareholder sanction if a company’s management fails to respond to other pressures to improve its ESG credentials (such as engagement).

E

Environmental issues or factors – the environmental issues considered by responsible investors when analysing investments. Examples include climate change, resource depletion, waste, pollution and deforestation.

Environmental, Social and Governance (ESG) investing – the incorporation of environmental, social and governance considerations, typically alongside other aspects like financial criteria, in the investment decision-making process. In other words, the ESG element is additional research an investment manager carries out into a company to understand the risks presented by environmental, social and governance factors.

ESG integration – the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions. ESG integration alone does not  prohibit any investments. Such strategies could invest in any business, sector or geography as long as the ESG risks of such investments are identified and taken into account.

Ethical investing – an investment approach that typically focuses on excluding investments on the basis of ethical, values-based or religious criteria, for example, gambling, alcohol or pork, often alongside the consideration of sustainability issues.

Exclusions – exclusions prohibit certain investments from a firm, fund or portfolio. They may be applied to any issue, but typically relate to environmental, social, governance of values-based avoidance. Fund managers may use exclusions to align with target client expectations, and they may be applied at different levels (sector; business activity, products or revenue stream; company; jurisdictions and countries).

F

Faith friendly – a fund or investment that has attributes that commonly suit the aims of investors of faith – although they may not be specifically marketed as being only for religious investors.

G

Glasgow Climate Pact – an agreement made at the COP26 climate change conference in Glasgow that aims to reduce the worst impacts of climate change and keep temperature rises within 1.5˚C. Countries agreed to speed up the pace of climate action and revisit and strengthen their current emissions targets to 2030.

Governance factors – the corporate governance issues considered by responsible investors when analysing investments. For example, a company may be assessed on its policies/approach to bribery and corruption, executive pay, board diversity and structure, political lobbying/donations and tax strategy.

Green bond – a fixed income instrument that is earmarked to raise funds for climate and environmental projects.

Green investing – an approach that considers investments based on their environmental credentials.

Greenwashing – The act or practice of making a product, policy and/or service appear to be more environmentally friendly or less environmentally damaging than it really is through the use of sustainability-related claims that may be exaggerated, misleading and unsubstantiated.

H

I

Impact investing – investments made with the intention of generating a positive, measurable social and environmental impact alongside a financial return. Strategies vary and can include both broad based funds and more specialised or specific investment such as social bond funds, private impact investing and funds that focus on the Sustainable Development Goals (SDG).

J

K

L

M

Modern slavery – the recruitment, movement, harbouring or receiving of people through the use of force, coercion, abuse of vulnerability, deception or other means for the purpose of exploitation.

N

Net zero – achieving an overall balance between emissions of greenhouse gases produced and those taken out of the atmosphere.

Net zero commitment – organisations or companies that have pledged to reduce the sum of their greenhouse gas emissions to ‘net zero’. Approaches vary.

O

P

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 and ideally below 1.5°C this century.

Principles for Responsible Investment (PRI) – a UNsupported body regarded as the world’s leading proponent of responsible investment. It encourages investors to use responsible investment to enhance returns and better manage risks. It has issued a set of voluntary and aspirational investment principles that all signatories must commit to.

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.

Q

R

Renewable energy – energy from a source that is not finite, such as solar, wind and wave power.

Responsible investing – a commonly used term, that is used in different ways. The term was initially used to refer to investment strategies that encourage investee assets to pay greater attention to longer term environmental, social and governance risks and opportunities with the aim of delivering both enhanced investment returns and real-world benefits, typically through stewardship and engagement activity. Some also use the term as a general description of ESG, sustainable and ethical fund strategies, which typically encompass this concept.

Responsible supply chain policy – funds or investments that have policies that relate to the responsible management of their supply chains. These may relate to employment issues, notably the people employed by their suppliers, as well as the sourcing of materials and products.

S

Screening – an approach that filters companies based on their involvement in either named business activities or behaviours. Strategies may focus on beneficial (positive) attributes, undesirable (negative) attributes or a combination of both. 

Shareholder advocacy – a form of investor stewardship whereby shareholder power is used to influence corporate behaviour through direct corporate engagement, filing or co-filing shareholder proposals, and proxy voting. In the context of sustainable or ESG investment, this normally indicates the aim of delivering a combination of both positive real-world outcomes and financial benefits for shareholders (typically longer term).

Sin stocks or sectors – companies or industries that are considered to be involved in unethical or immoral activities, often derived from a faith or religion. Common examples include companies involved in armaments, tobacco, alcohol, gambling and adult entertainment. Fund approaches vary and asset managers often differentiate between production, distribution and retail.

Social bonds – a fixed income instrument that is earmarked to raise funds for projects dedicated to beneficial social causes.

Social factors – the social, or people related, issues considered by investors when analysing investments. For example, a company may be assessed on its approach to human rights, modern slavery, child labour, working conditions and employee relations. Fund manager approaches vary.

Socially responsible investment or sustainable and responsible investment (SRI) – these terms are used differently by different organisations but both are used as broad descriptions of fund strategies that focus on responsible, sustainable or ethical issues. The term ‘socially responsible investment’ originates from the USA and has its roots in social issues and in particular the exclusion of assets with low standards. The term ‘sustainable and responsible investment’ has its roots in the UK and implies a greater focus on sustainability – however, they are often used interchangeably. 

Stewardship – the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. Typically, shareholder power is used to influence corporate behaviour through direct corporate engagement, filing or co-filing shareholder proposals, and proxy voting guided by comprehensive ESG guidelines aimed at raising standards.

Sustainability or sustainable – a term used to describe whether or not an activity is able to be continued over the longer term without either being exhausted or causing harm to others. The term originates from the United Nations Brundtland Commission in 1987 which defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”.

Sustainability Focus^TM (an FCA sustainable investment  label) – a fund that invests mainly in assets that focus on delivering positive sustainability outcomes for people or the planet, alongside financial returns.

Sustainability Improvers^TM (an FCA sustainable investment label) – a fund that invests mainly in assets that may not be sustainable now, with an aim to improve their environmental or social sustainability standards alongside financial returns.

Sustainability Impact^TM (an FCA sustainable investment label) – a fund that invests mainly in assets that provide solutions to environmental or social sustainability problems with an aim to achieve a positive impact for people or the planet alongside financial returns.

Sustainability Mixed Goals^TM (an FCA sustainable investment label) – a fund that invests mainly in a mix of assets that meet any combination of the other three FCA sustainable fund labels (where assets would have high sustainability standards, aim to improve assets sustainability standards over time, or aim to achieve a positive impact for people or the planet).

T

U

UK Stewardship Code – a code that sets high expectations of those investing money on behalf of UK savers. In particular, the code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.

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:
1 – No poverty: End poverty in all its forms everywhere.
2 – Zero hunger: To end hunger, achieve food security and improved nutrition and promote sustainable agriculture.
3 – Good health and wellbeing: Ensure healthy lives and promote wellbeing for everyone at all ages.
4 – Quality education: Ensure inclusive and quality education for all and promote lifelong learning.
5 – Gender equality: Achieve gender equality and empower all women and girls.
6 – Clean water and sanitation: Ensure access to water and sanitation for all.
7 – Affordable and clean energy: Ensure access to affordable, reliable, sustainable and modern energy.
8 – Decent work and economic growth: Promote inclusive and sustainable economic growth, employment and decent work for all.
9 – Industry, innovation and infrastructure: Build resilient infrastructure, promote sustainable industrialisation and foster innovation.
10 – Reduced inequalities: Reduce inequality within and among countries.
11 – Sustainable cities and communities: Make cities inclusive, safe, resilient and sustainable.
12 – Responsible consumption and production: Ensure sustainable consumption and production patterns.
13 – Climate action: Take urgent action to combat climate change and its impacts.
14 – Life below water: Conserve and sustainably use the oceans, seas and marine resources.
15 – Life on land: Sustainably manage forests, combat desertification, halt and reverse land degradation, halt biodiversity loss.
16 – Peace, justice and strong institutions: Promote just, peaceful and inclusive societies.
17 – Partnerships for the goals: Revitalise the global partnership for sustainable development.

V

Values-based investing – an investment approach that typically excludes investments on the basis of ethical, values-based or religious criteria, for example, gambling, alcohol, or pork.

W

X

Y

Z