10 sustainability terms every investor should understand

10 sustainability terms every investor should understand

The basics of sustainable investing are relatively simple. It’s really about investing your money in a responsible way and considering the impact your investment has on society and the environment.

The best way for investors to do this is by actively engaging with the companies they invest in and holding them to account, to ensure they’re doing the right thing.

Although the idea has been around for decades, it’s becoming an increasingly popular area of investing. As a result, the subject has become a sea of acronyms and technical terms, which can leave investors confused.

That’s where we can help. We’ve pulled together the 10 key terms every sustainable investor, or anyone new to the topic, needs to know.

Globe in desert wasteland

2°C limit or “2 degrees”:

It is widely agreed that limiting the average rise in global temperatures to less than 2°C above pre-industrial levels by the end of this century may help stave off the worst of the natural disasters associated with global warming. Although there is some disagreement as to whether this limit is sufficient or even possible, the idea of restricting global warming to less than a 2°C rise has consistently been a major part of the debate. Our employer, Schroders, has been tracking progress being made to limit the rise in global temperatures to 2°C with its Climate Change Progress Dashboard tool.

Active ownership:

Act­ively exercising your shareholder rights, such as general meeting voting rights, and engaging with investee companies to encourage responsible corporate behaviour and improve long-term shareholder value. This applies to both individual investors and fund managers.

Carbon pricing:

The cost of emitting carbon dioxide, or CO2, into the atmosphere, either in the form of a fee per tonne of CO2  emitted, or an incentive (money) that’s offered for emitting less. Putting an economic cost on emissions is usually said to be thebest way to encourage polluters to reduce what they release into the atmosphere.

ESG integration:

Sounds dull on the face of it, but environmental, social and governance (ESG) factors are the sustainability considerations a lot of us are very passionate about, and they’re relevant to the ongoing performance of companies we’re invested in too. ESG integration is an investment approach that takes into account ESG-related risks and opportunities in addition to traditional financial analysis.

Broadly speaking, while environmental issues are self-explanatory, social factors could be about treatment of workers or community relations, and governance factors are things such as the composition of the board and its performance.

Ethical investing:

An investment strategy where you invest in line with your ethical principles and exclude (or you might hear some people say “screen out”) companies that you consider unethical.

Impact investing:

Investments that are made with the primary main goal of achieving specific, positive social benefits while also delivering a financial return. So far Impact investments create a direct link between portfolio investment and socially beneficial activities, and historically most of the examples of impact investing have been in unlisted assets (i.e. privately not publicly-owned, as firms listed on a stock market are).

Physical risks of climate change:

The risk posed by climate change on a company’s physical assets such as equipment, its supply chain, operations, markets and customers. Our employer, Schroders, analyses what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption, for example flooding.

Stewardship:

An ongoing dialogue between shareholders and boards that aims to make sure a company’s long-term strategy and day-to-day management are effective and aligned with shareholders’ interests. This means monitoring a company’s practices and performance, engaging on areas of concern and voting on shares held to ensure management is acting in the long-term best interests of its shareholders. Good stewardship should help to enhance and protect the value of investments.

Sustainable investing:

An investment approach in which a company’s sustainability practices are paramount to the investment decision and in which ESG analysis forms a cornerstone of the investment process.

Transition risk:

The financial risks that could result from significant policy, legal, technology and market changes as we move to a lower-carbon global economy and climate-resilient future.  

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