The Green Lexicon: Your Ultimate Guide to ESG and Sustainability (D-F)

Decarbonisation: The process of reducing an organisation’s carbon footprint, primarily its greenhouse gas emissions, carbon dioxide (CO2) and methane (CH4). This is to reduce impact on the climate. Decarbonisation is achieved through several strategies such as

• Striving for energy efficiency in various aspects such as factory operations, building heating, and transportation, among others.
• Implementing a comprehensive strategy focused on reducing energy consumption and working towards achieving energy sufficiency.
• Utilizing renewable energy sources, where natural gas can replace more polluting fuels like coal and oil in the short and medium term. In the long run, green gases, biogas, and hydrogen (produced from organic waste) will replace natural gas.
• Developing methods to capture and store CO2, ensuring the preservation of carbon sinks. These carbon sinks refer to naturally occurring ecosystems such as soil and forests that naturally absorb carbon emissions.

Decent work: Decent work, as defined by the International Labour Organisation (ILO), encompasses several key elements. It entails:

• Providing opportunities for productive work that ensures a fair income.
• Ensuring workplace security and social protection for families.
• Offering enhanced prospects for personal development and social integration.
• Preserving freedom of expression, enabling individuals to voice their concerns and actively participate in decisions that impact their lives.
• Promoting equality of opportunity and fair treatment for all individuals, irrespective of their gender.

Divestment: Divestment is when shareholders sell a firm’s shares. In an ESG and sustainability context this can be ceasing to hold an investment based on ESG considerations and could be used to influence a firm’s behaviour to a satisfactory degree.

DJSI: The Dow Jones Sustainability Index, which was launched in 1999 and tracks the stock performance of the world’s leading companies in terms of economic, environmental and social criteria.

Double Bottom Line: Inclusion of both quantitative and qualitative analysis embraced by socially conscious investors. This extends the traditional bottom line measuring financial performance to include a “second” bottom line measuring non-financial performance measures (positive social impact)

Eco-footprint: Ecological footprint measures the extent of natural resources required by the human population to produce consumed products and absorb generated waste in the current context.

Embedded Carbon: The term used to depict the representation of a product’s carbon footprint, as determined by a comprehensive lifecycle assessment from ‘cradle to grave’. This is expressed as kilograms of CO2 emissions per kilogram of the product.

Embedded water, virtual water, embodied water or shadow water: Water footprint refers to the total amount of water utilized throughout the entire production process of a good, encompassing all the water consumed from its initiation to completion.

Emissions trading scheme (ETS): The government implements a system to allocate allowances to industrial businesses, permitting them to release a specific level of emissions. The EU Emissions Trading Scheme (EU ETS) has effectively imposed emission limits on more than 12,000 industrial sites throughout Europe. These allowances are tradeable, and each company is required to submit allowances to the government that are equal to its emissions.

Environmental Justice: Equitable treatment and active participation of individuals, irrespective of their race, color, national origin, or income, in the formulation, execution, and enforcement of environmental laws, regulations, and policies. Various organizations may have distinct definitions of this concept, but the core idea remains consistent.

Environmental, social, governance (ESG) factors: Environmental, social and governance (ESG) refers to the three central factors commonly used when assessing the sustainability of a business’s activities or an investment.

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

Escalation: The process by which investors can exert mounting pressure on companies before divestment. These escalation efforts must possess credibility and be perceived as potential steps leading to the ultimate consequence of divestment.

ESG Analysis: The process of assessing a company’s environmental, social, and governance policies and practices. This is aimed at identifying potential risks or opportunities related to these areas, including the impact of climate change. By taking into account ESG factors, businesses can make informed decisions that can benefit both the environment and their shareholders in the long term.

ESG rating:  Agencies / rating companies gather data from public information, third-party research, company reports, and direct engagement to provide ESG raring. Multiple agencies offer this service (often with no standardized approach) to scoring. Providers often lack transparency regarding their data collection methods, claiming that methods are commercially valuable and must remain confidential. As a result, there is limited insight into the research methodology and the significance given to each category, posing challenges for both investors and businesses.

Ethical investment: Ethical investing involves utilizing ethical principles as the primary criteria for selecting securities. The approach adopted by investors in ethical investing depends on their personal beliefs. Some may opt to completely exclude certain industries (negative screening), while others may choose to over-allocate investments to industries that align with their ethical principles.

European Union Non-Financial Reporting Directive: European Commission’s requirement for large companies to disclose certain non-financial matters as part of their annual public reporting obligations, including anti-corruption, human rights, diversity, and environmental concerns.

European Union Sustainable Finance Taxonomy: European Union Taxonomy Regulation establishes a uniform classification system to ensure that participants in financial markets have a shared language for assessing the environmental sustainability of various activities.

Ethical consumerism: Ethical consumption involves the procurement of products that prioritize the well-being and fair treatment of workers involved in their production while aiming to minimize adverse impacts on the environment.

FAIRTRADE Mark: Label that appears on UK products as a guarantee that they have been certified against internationally agreed Fairtrade standards.

Forest Stewardship Council (FSC): Independent, non-governmental, not-for-profit organisation setup to respond to concerns over global deforestation. It provides internationally recognised standard setting, trademark assurance and accreditation services for companies, organisations and communities interested in responsible forestry.

Fossil free: The fossil fuel economy encompasses not only the companies directly involved in coal, oil, and gas extraction but also those engaged in the sale, transportation, and utilization of these fuels. Fossil fuel-free funds / investing adopt varying definitions but typically employ screening mechanisms to exclude companies operating in significant sectors. Such exclusions may cover thermal coal, unconventional oil and gas, arctic oil and gas, conventional oil and gas, oil-fired electricity generation, gas-fired electricity generation. They may also include segments of the distribution chain such as retail, equipment & services, petrochemicals, pipelines & transportation, refining, and trading.