What does ESG stand for? The starter’s ESG glossary

Refers to the release of greenhouse gas emissions in the atmosphere, created by burning fuel for power or heat. Carbon emissions are categorised into Scope 1, 2, 3, or 4 to describe where in the value chain these emissions are being produced.

The amount of greenhouse gas emissions generated by a corporation in the course of producing goods or providing services.

Refers to products and services using renewable energy to reduce waste and minimise the use of natural resources.

Fund managers who are significant shareholders of a company are encouraged to evaluate ESG factors that are not current being addressed, and proactively communicate with these companies with a view to drive positive change.

Bonds that are issued to fund environmental or climate change projects. This can include projects designed to prevent or reduce pollution, improve the sustainable use of natural resources, or help in the transition to cleaner, non fossil fuel-based technologies.

From a financial services perspective, this is includes the act of misrepresenting the ethical credentials of a fund – for example, if an Australian equity fund markets itself is marketed as being free of armaments exposure, when in reality there are no armaments companies in Australia.

Investing with the goal of making a positive, measurable contribution to society or the environment, while also generating a financial gain.

Encompasses the exploitation of people who are employed by a company. This can include forced labour, underpayment of wages, and human trafficking. Modern slavery is a qualitative negative screen and as such, industry and agency reports are used as a means to evaluate company conduct.

Process of excluding companies that have exposure to certain industries or sectors that are deemed to have a negative impact on society. Negative screens are often used to exclude companies involved in the production of tobacco, fossil fuel exposure, armaments and other ethically questionable activities.

The process of including companies that perform well or make an impact on certain ESG metrics or values compared to industry peers.

Stands for Principles for Responsible Investment. The PRI, which are supported by the United Nations, comprises six investment principles that can act as a guide for incorporating ESG incorporation issues for investment managers into investment practice. Investment managers can become signatories to the PRI which indicates their commitment to the Principles.

Voting on behalf of a shareholder. Fund managers who are large shareholders in a company can use their votes to influence companies on ESG matters and are increasingly encouraged by their investors to do so.

Refers to energy produced from natural resources that can be constantly renewed without concerns about depletion. Examples of renewable energy include solar, wind and hydropower.

Direct emissions produced by companies in the course of their day-to-day activities, e.g. by company vehicles and facilities.

Indirect emissions generated by the company from using energy, e.g. the emissions from burning coal produced as the result of the company’s use of electricity.

Indirect emissions by the company from the wider value chain. The assets in the value chain are not owned or controlled by the company, e.g. franchise businesses, waste, usage of sold products.

Defined as being avoided emissions from a company that occur outside of the value chain but as a result of using the end product, e.g. a company that provides teleconferencing services results in avoided emissions from workers staying at home instead of commuting into an office or traveling to meet clients.

Refers to the risks facing companies as they move towards less pollution and the adoption of more renewable energies – in the course of this transition, some assets currently held by these companies could potentially lose their value. For example, if governments move to ban the burning of fossil fuels, energy companies with exposure to coal and gas facilities may face asset devaluations.