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The Green Lexicon: Your Ultimate Guide to ESG and Sustainability (O-Z)

ESG and sustainability are complex areas with a multitude of terms and concepts. Navigating these topics can be challenging due to the diverse nature of environmental, social, and governance aspects. To facilitate understanding, a glossary of common ESG and sustainability terms is essential. It provides concise definitions and explanations, enabling individuals and organizations to navigate and engage effectively in these important areas and drive ESG action through knowledge.

We previously covered terminologies from A to N (here, here and here). This covers terms from O to Z.

Paris Agreement: The international treaty on climate change adopted at the 2015 United Nations Climate Change Conference (COP21) in Paris. Its objective is to restrict global warming to well below 2 degrees Celsius, preferably 1.5 degrees Celsius, compared to pre-industrial levels. Unlike previous binding agreements, the Paris Agreement relies on voluntary national commitments called Nationally Determined Contributions (NDCs) and emphasizes the periodic revision of these pledges to foster increased ambition in climate action.

Responsible investment (RI): A comprehensive approach to investment decision-making that incorporates ethical, social, and sustainability factors into the process.

Science-Based Targets Initiative (SBTi): A collaborative effort between the United Nations Global Compact, CDP, the World Resources Institute, and the World-Wide Fund for Nature. The SBTi sets and promotes best practices for establishing science-based targets aligned with the goals of the Paris Agreement. It provides resources and guidance for companies to define targets consistent with limiting global warming.

Scope 1, 2, and 3 emissions: Greenhouse gas emissions are categorized into three scopes. Scope 1 covers direct emissions from sources owned or controlled by an entity, such as burning natural gas or emissions from company vehicles. Scope 2 includes indirect emissions resulting from the generation of purchased electricity, heat, or steam. Scope 3 encompasses other indirect emissions associated with an organization’s value chain, including emissions from the use of its products by customers and emissions in its supply chain.

Social bonds: Bonds issued to finance or refinance projects exclusively focused on social initiatives, as defined by the Social Bond Principles.

Social infrastructure: The construction and maintenance of facilities that provide essential social services, such as healthcare, education, and transportation.

Social taxonomy: A classification system that establishes a list of economically viable activities aligned with social sustainability. The European Commission has formed a working group to develop a Social Taxonomy, which has released a preliminary report.

Socially responsible investment (SRI): An investment approach that involves excluding certain securities from a portfolio based on their perceived ethical value, environmental impact, or other non-financial considerations.

Stewardship: According to the UK Stewardship Code 2020, stewardship is the responsible management, allocation, and oversight of capital with the aim of creating long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, environment, and society.

Stranded assets: A stranded asset refers to any equipment or resource that used to have value or generate income but has lost its worth. This typically occurs due to external factors such as technological advancements, market changes, or shifts in societal habits. Stranded assets are a significant concern, particularly in the context of climate change, as government regulations, carbon pricing, clean technologies, litigation, and evolving norms can render certain assets obsolete. Coal mines serve as a typical example of stranded assets.

Sustainability: Sustainability encompasses all activities that consider the triple bottom line, which includes profit, people, and the planet. The United Nations provides a formal definition, stating that sustainability involves meeting the needs of the present generation without compromising the ability of future generations to meet their own needs.

Sustainability bonds: Sustainability bonds are financial instruments where the proceeds are exclusively used to finance or refinance a combination of green and social projects. These bonds align with both the Green Bond Principles and the Social Bond Principles.

Sustainability risks: Sustainability risks refer to the potential risks faced by an asset due to environmental, social, and/or governance issues. For example, the value of an equity may decline if fines are imposed on the issuer for environmental damages.

Sustainable Development Goals (SDGs): The Sustainable Development Goals are a set of 17 global goals established by the United Nations in 2015. These goals serve as a blueprint to achieve a better and more sustainable future for all. They primarily address environmental and social issues and are intended to be achieved by 2030. Many companies use the SDGs as a framework to guide their sustainability initiatives.

Sustainable Finance Disclosure Regulation (SFDR): The Sustainable Finance Disclosure Regulation is a set of rules implemented by the European Union on March 10, 2021. The regulation aims to enhance comparability and understanding of the sustainability profiles of funds for investors. It categorizes products into specific types and includes metrics for evaluating the environmental, social, and governance (ESG) impacts of fund investments.

Sustainable investment: Sustainable investment refers to an investment approach that takes into account environmental, social, and/or governance (ESG) factors when selecting and managing investment portfolios.

Sustainable Taxonomy: A sustainable taxonomy is a classification system that establishes a list of economic activities considered sustainable. The European Union is developing a taxonomy, starting with climate and other key environmental issues, to support sustainable investment by providing clarity on which economic activities contribute the most to achieving the EU’s environmental objectives.

Tar sands: Tar sands, also known more accurately as oil sands, are a type of unconventional fossil fuel. They consist of sand, bitumen (dense crude oil), clay, minerals, and water. Tar sands are heavy and often require significant amounts of water and energy for extraction and refining. According to Greenpeace, the amount of greenhouse gases emitted per barrel of tar sands oil can be up to 30% higher than conventional oil.

TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board to improve reporting of climate-related financial information. Governments encourage companies to disclose information aligned with the TCFD framework to enable investors to compare and allocate capital effectively. In the UK, TCFD reporting will be mandatory for all listed companies and large asset owners starting in 2022.

Thermal coal: Also commonly known as “coal,” thermal coal is currently utilized as the primary heat source for approximately 40% of electricity generation. It should be distinguished from coking/metallurgical coal, which possesses higher energy content and is employed in the production of iron and steel. Both types of coal contribute to high emissions, but investor focus has predominantly targeted thermal coal due to the limited availability of viable alternatives for metallurgical coal.

UN Global Compact (UNGC): The UN Global Compact is a corporate sustainability initiative that urges businesses to align with universal principles related to corruption, human rights, labor, and environmental issues. It encourages strategic actions that advance broader societal goals, such as the UN Sustainable Development Goals. The UNGC is a collaborative effort involving a growing number of companies (currently around 13,000). Investors can utilize the UNGC to assess companies’ adherence to these principles or identify any violations. Data providers offer relevant data and analysis to aid this evaluation, but investors should conduct additional due diligence to ensure alignment of firm behaviors with the principles.

UN Guiding Principles on Business and Human Rights (UNGP): The UN Guiding Principles on Business and Human Rights, also known as the Ruggie Principles, are a set of guidelines for both states and companies to prevent, address, and remedy human rights abuses associated with business operations. These principles were established to encourage practical implementation of the Universal Declaration of Human Rights and its related conventions by countries and companies. Investors can utilize these principles as a criterion for investment decisions by assessing whether companies comply with them or breach them. Data providers offer relevant data and analysis for this purpose. However, investors should conduct additional due diligence to ensure that company behaviors align with these principles. The UN Human Rights Council endorsed these principles in 2011, and they are divided into three sections: 1) The state’s duty to protect human rights, 2) Corporate responsibility to respect human rights, and 3) Access to remedy.

United Nations Principles for Responsible Investment (UN PRI): The United Nations Principles for Responsible Investment is an organization that promotes responsible investment practices through a set of six investment principles. These principles provide guidance on integrating responsible investment considerations into investment decisions. You can read more about UN PRI here.

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