One problem faced by anyone seeking to invest their money in companies or funds that factor in environmental, social and governance (ESG) measures, is navigating the complex jargon and impenetrable acronyms.
This is partly due to the number of different organisations that are attempting to measure emissions and oversee corporate disclosures. “I explain it by saying that ESG is in its teenage years,” says Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management. “It’s that period of rapid growth, rapid change, a proliferation of activity, experimenting and boundary testing. And I think you can see that play out in the kind of alphabet soup of ESG. Now we’re seeing the standard setters and the regulators come in to set house rules. It won’t settle the debate or eradicate confusion immediately, but it’s going to help.”
Luckily, it doesn’t need to be daunting, thanks to this handy guide to some common terms and acronyms.
Net zero/carbon neutral
These are two similar but by no means interchangeable goals.
Net zero involves reducing greenhouse gas emissions and then balancing any remaining emissions with an appropriate amount of carbon removal – for instance, through tree planting. However, there are differing measures of net zero criteria and attempts are currently being made to standardise them.
Carbon neutral is a much less exacting standard. It allows the purchasing of carbon-reduction credits equivalent to emissions released, without the need for a reduction in emissions to have taken place. The Carbon Trust and other similar bodies help set international standards on what it takes to claim you are carbon neutral.
Scope 1, scope 2 and scope 3 emissions
The three scopes are the basis for mandatory greenhouse gas reporting in the UK. There are three categories of emissions.
Scope 1 These represent a company’s direct greenhouse gas emissions from assets that it owns – for example, heating its premises and running vehicles.
Scope 2 These are the indirect emissions generated elsewhere for the energy or power that a company uses.
Scope 3 These are all the other indirect emissions that occur up and down a company’s value chain that are created by other companies – including the emissions from its raw material suppliers and also from the use of its end products by consumers. For example, the emissions coming out of the tailpipe of cars would be considered the scope 3 emissions of the UK’s major oil producers – Shell and BP. Scope 3 emissions can account for more than 70% of a business’s carbon footprint.
The Task Force on Climate-related Financial Disclosures (TCFD) was set up in 2015 by the Financial Stability Board (FSB) of the G20 countries to develop voluntary guidelines for companies, banks and investors to use when disclosing climate-related financial risks and opportunities to their stakeholders. It was designed to help financial markets, including lenders, insurers and investors, better assess and price those risks and opportunities.
Launched in 2006, the Principles for Responsible Investment is a UN-supported, independent network aimed at promoting sustainable investment through the incorporation of six key principles relating to environmental, social and governance issues. Its mission statement says: “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation.”
The Institutional Investors Group on Climate Change is a European membership body set up to enable the investment community to achieve net zero goals. It provides investors with a collaborative platform to encourage public policies, investment practices and corporate behaviour that address long-term risks and opportunities associated with climate change.
Sustainable development goals (SDGs)
At the 1992 Earth Summit in Brazil, hundreds of countries agreed a plan to improve people’s lives and protect the environment. The ultimate product of this was the UN’s sustainable development goals, a collection of 17 interlinked global goals designed to “achieve a better and more sustainable future for all” that were set up in 2015 and since adopted by 193 countries. The goals intend to end poverty and other hardships by improving global health and education systems, which in turn will reduce inequality and encourage economic growth. Tackling the climate emergency and working to protect the natural environment are also key aspects of the goals.
Transition Pathway Initiative (TPI)
Conceived in 2017 by various major asset owners, including the Church of England Pensions Board and the Environment Agency Pension Fund, the TPI provides open access data assessing companies’ preparedness for a low-carbon economy in line with international climate goals. This enables investors to make informed decisions. To date, more than 108 global investors, with about $39tn (£29tn) in assets under management or advice officially support the TPI.
The big five
A term used to describe the five key global corporate sustainability disclosure and reporting frameworks and standards organisations – the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Carbon Disclosure Project (CDP), and the Carbon Disclosure Standards Board (CDSB).
Founded in 2011, the Sustainability Accounting Standards Board is a non-profit organisation designed to develop sustainability accounting standards. It provides a set of industry-specific standards to help measure and communicate performance on ESG topics. This year it merged with the IIRC to become the Value Reporting Foundation (VRF), in order to work towards a comprehensive reporting framework for investors.
One of the pioneers, established in 1997, the Global Reporting Initiative is a non-profit organisation that promotes transparent disclosure through comprehensive sustainability reporting. The most widely used voluntary reporting protocol in the world, it consists of universally accepted standards that measure a business’s “triple bottom line” – its environmental and social impact in addition to its financial performance.
The Carbon Disclosure Project is a UK-based non-profit charity that runs a global disclosure system for investors, companies, cities, states and regions to help manage their environmental impacts. Each year, the CDP uses the information obtained through its annual reporting process to score companies and cities on their environmental performance. More than 13,000 companies and 1,100 cities, states and regions have so far reported to it on climate change, water security and deforestation.
The Climate Disclosure Standards Board is an international consortium of business and environmental NGOs that sets out a framework for businesses to report information related to environmental and climate change in their corporate financial reporting. The aim is to enable companies to report environmental information with the same rigour as with their financial data, so investors can make accurate decisions, ensuring the resilience of capital markets.
One last abbreviation, and possibly the most important. Announced at COP26, the International Sustainability Standards Board replaces a patchwork of voluntary guidance with a single set of global norms for firms reporting the impact of climate change on their business. The ISSB has been developed by the International Financial Reporting Standards Foundation (IFRSF), the body that promotes international accounting standards, and the International Organization of Securities Commissions (IOSCO), the umbrella group for global markets watchdogs. With the volume of investment in companies touting their green credentials increasing, it should mean greater transparency.
Royal London and its asset management company, RLAM, offers a wide variety of investment funds to suit investors preferences around sustainability, responsible investing, and ESG considerations. RLAM is a signatory to the PRI, a member of IIGCC, and has published a TCFD report and annual Stewardship and Sustainability report
Learn more about responsible investing by heading to Royal London – The Invested Generation