Responsible Investment Terms

Engagement with companies by asset owners with the intention of influencing their policies and practices, including on ESG issues.

One way for traditional active equity managers to get involved is through a two-way discourse, which brings outside perspectives that help companies to improve. At its core, positive active behavior is about enhancing shareholder value and helping companies to achieve their potential.

Voting at shareholder meetings is another means of having your voice heard and bringing about positive change.

An approach to equity investing that aims to bring about changes in corporate behavior with a view to enhancing shareholder returns.

There are many different flavors of activism or engagement – from antagonistic, public debates that play to the media, to more benign, behind-the-scenes negotiations.

Activist investors are more outspoken in their approach than active investors, typically buying a large shareholding in a company and aggressively advocating change, generally by sponsoring campaigns to change board composition, influence M&A, and other restructuring. Ethical, Social and Governance (ESG) issues are becoming more common in activist campaigns.

A term used to describe a company that is a leader in its sector. Within the context of responsible investing, it refers to companies that excel in meeting ESG criteria relative to their peers.

Adopting a best-in-class investment strategy typically means investing in companies that are highly rated in terms of their ESG credentials.

A portfolio's carbon footprint is the sum of a proportional amount of each portfolio company's emissions (proportional to the amount of stock held in the portfolio).*

A carbon footprint is a useful quantitative tool that can inform the creation and implementation of a broader climate change strategy.

Assessing a carbon footprint can be used for a variety of purposes, for example, to identify which activities contribute the most to a footprint, and for setting a target for reducing emissions.

The Greenhouse Gas (GHG) Protocol Corporate Standard classifies a company's GHG emissions into three "scopes".
Scope 1 emissions are direct emissions from owned or controlled sources.
Scope 2 emissions are indirect emissions from the generation of purchased energy.
Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

*Source: PRI Principles for Responsible Investment

By reducing a carbon footprint to zero, an individual, organization, event or product would become carbon neutral.

A carbon neutral footprint means the sum of the GHG (CO2e) produced is offset by natural carbon sinks and/or carbon credits. Carbon Trust Certification certifies organizations and products to PAS 2060 – the internationally recognised certification standard for the demonstration of carbon neutrality.

Natural environments with the ability to absorb more carbon dioxide from the atmosphere than they release.

The principal carbon sinks, which help to lower the greenhouse gas levels in the atmosphere, are oceans, plants, forests, grasslands and soil. Oceans are a major storage system for carbon dioxide (CO2), and by absorbing CO2 from the atmosphere to use in photosynthesis, plants and trees are able to transfer some carbon to soil as they die and decompose.

According to a study published in The Nature Research Journal, 93% of carbon dioxide is stored in algae, vegetation and coral under the sea, but oceans are not able to absorb all of the carbon dioxide released from the burning of fossil fuels. The study suggests that the oceans have absorbed a smaller proportion of fossil-fuel emissions, nearly 10% less, since 2000.
*Source: Worldwatch Institute: http://www.worldwatch.org/node/6323
Nature Research Journal Research abstract "Reconstruction of the history of anthropogenic CO2 concentrations in the ocean" www.nature.com/articles/nature08526#

The Carbon Trust is an independent, global certification body for carbon footprints and certifies organizations and products to PAS 2060.

PAS 2060 requires robust measurement and a plan for achieving reductions and offsetting using high quality carbon credits. The Carbon Trust recognises only Gold Standard carbon credits.

Carbon Neutral footprint certification enables companies to gain an internationally recognized, fully independent measurement that can be used to communicate a product's resource efficiency, to drive sales, reduce costs and increase brand loyalty.

Energy sources that are not derived from fossil fuels (such as coal, oil and natural gas). These include biomass, geothermal, hydroelectric, solar, and wind.

These are also described as 'renewable' sources of energy. Unlike fossil fuels, a renewable resource can be used repeatedly and replaced naturally.

Nuclear energy is sometimes described as a clean energy source because it generates zero emissions and uses much less land than solar power systems and wind farms. However, a by-product of nuclear energy from uranium-fuelled nuclear cycles is highly toxic radioactive fission waste, which is dense in comparison to other forms of waste and can be recycled, but is potentially very harmful to health and the environment.

The growth in demand for clean and renewable energy is expected to continue as the world recognizes that fossil fuels will eventually run out and moves towards a zero-carbon economy. New technologies are leading to new and efficient means of producing and storing clean energy to meet rising demand. Ongoing innovation should continue to push down costs and make traditional fuel sources increasingly uncompetitive. Companies are also increasingly realizing that a better environment provides healthier societies and bottom lines.

The risk relating to the impact on natural and human systems from the negative effects of climate change.

Curbing rising temperature levels is a primary focus in addressing climate risk. Concerns are mounting that a failure to prevent global temperatures from rising more than two degrees Celsius above pre-industrial levels this century could have catastrophic consequences.

In December 2015 in Paris, parties to the United Nations Framework Convention on Climate Change (UNFCCC) reached an agreement to combat climate change and accelerate actions and investments needed to transition to a sustainable low carbon future. The Paris Agreement’s main goal is to keep global temperature well below two degrees Celsius above pre-industrial levels, while pursuing efforts to limit the temperature increase even further to 1.5 degrees Celsius.*

The United Nations Intergovernmental Panel on Climate Change (IPCC) was established by the World Meteorological Organization (WMO) and United Nations Environment Programme to provide an objective source of scientific information. The IPCC provided more clarity about the role of human activities in climate change when it released its Fifth Assessment Report. According to the UN, the report "is categorical in its conclusion: climate change is real and human activities are the main cause." The IPCC Sixth Assessment Report is planned for publication in 2022.

Unless investors pay close attention to how companies are preparing for the direct and indirect effects of climate change, the long-term impact on operations could be significant and could present risks, and opportunities, in investment portfolios.

*Source: UNFCCC: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

The procedures, processes and practices by which a company is controlled and directed.

The governance framework should make clear who is in authority as well as how decisions are made and acted upon. Most companies are governed by a board of directors, which sets the company's strategic aims and is responsible for overseeing a management team tasked with implementing the strategy.

An effective governance structure takes into account the interests of all stakeholders, for example, customers, employees, suppliers, shareholders, investors, regulators, auditors and the wider community affected by the company's activities.

Corporate and system failures such as the Enron Corporation scandal in 2001, and the global financial crisis in 2008, combined with an increasingly complex regulatory environment, have sharpened the focus on good governance in recent years. Good corporate governance, alongside adherence to environmental and social criteria, can be a significant factor in contributing to the long-term value of a company.