Demystifying sustainability and ESG jargon
Updated: Nov 4, 2022
Here we explain ESG and sustainability industry jargon in practical terms. If you have a term or acronym you'd like explained, let us know at email@example.com
ESG rating schemes. ESG rating schemes are third party assessors of company environment, social and governance (ESG) approaches. Their assessments are used by investors to aid in their evaluation of potential investee companies. There are numerous ESG rating schemes, and different investors will use different ones, but the ones we hear of being most highly regarded are MSCI and Sustainalytics. Others include ISS, VE and BBG. Each rating scheme has their own assessment methodology but what they have in common is evaluating companies based on their publicly available ESG information. Most give companies an opportunity to engage in this process (i.e. point to missed public information, etc.) but often companies are assessed without them even knowing. If attracting investors supportive of ESG practices is important to your business we suggest you contact the main ESG Rating Schemes, ask for copies of any existing evaluations and ensure you actively try to engage and respond to their information requests throughout the year. For more tips on improving your scores see here.
UN Global Compact (UNGC). A global standard of baseline/minimum sustainability expectations for companies. Alignment with the UN Global Compact is commonly asked for by investors and ESG rating schemes. The compact includes 10 Principles covering human rights, labour, environment and anti-corruption. UK companies will align with many of these standards simply through abiding by UK law (e.g. forced and child labour will likely be covered in a Modern Slavery Statement). At a minimum companies should state their alignment to the Compact and explain how they meet the Principles. Larger or global operating companies in particular may benefit from becoming a signatory, where there are additional training, collaboration and networking benefits. The latter requires an annual ‘Communication on Progress’ to be published, which can form part of the company’s Annual Report.
Life cycle assessment (LCA). A holistic evaluation of a product’s environmental impacts, from raw material to product end of life (reuse/recycle/landfill, etc.). An Environmental Product Declaration (EPD) is a verified short-form version of an LCA for public use. LCAs are increasingly being used to demonstrate the low carbon credentials of a company’s products (as measured by ‘global warming potential’). LCAs follow strict and standard industry/product rules (e.g. EN 15804 for building products) which provide integrity to environmental claims and allow for comparison between products. LCAs do not need to be verified if they are for internal use but for external claims, i.e. through an EPD, they must be third party verified.
Net zero. In the context of carbon emissions, net zero has historically been poorly defined, leading to multiple interpretations and accusations of greenwashing. In response to this the Science-based target initiative (SBTi) introduced a Net Zero Standard in October 2021. This standard defines net zero as the achievement of both an emission reduction of 90% (and sometimes more for certain sectors), plus the removal of residual emissions from the atmosphere. Net zero claims should apply to all emission scopes, i.e. the company’s direct emissions and electricity (scopes 1 and 2) plus at least 90% of indirect up- and down-stream emissions (scope 3). For external recognition of net zero targets, look to the UN Race to Zero Campaign. The campaign cannot be joined directly but rather you can join one of the partner schemes tailored to different business types and aspirations. Look to the SME Climate Hub if your business is small or medium sized, and for larger companies The Climate Pledge is a good place to start.
Materiality. The process organisations go through to identify the material environment, social or governance issues to their business. Material issues are the ones which have high significance to organisation stakeholders i.e. are important to customers, employees, investors or other stakeholder groups AND have high significance to their business e.g. are a business risk/opportunity. Material issues vary between industries but also within industries. For example, an equity backed company may have specific expectations of their investor that they need to meet which could differ to those of a listed or privately owned company. A good sustainability strategy will be shaped around the organisation’s material issues.
UN Sustainable Development Goals (SDGs). These goals were adopted by the 193 member states of the UN in 2015. The 17 goals are global aspirations for a better world. Alignment to the goals has significantly built momentum over recent years. Historically they were thought of as governmental responsibilities but now there are expectations on businesses and other organisations to play a part in their achievement. Whilst corporate reporting on the SDGs is not a formal standard or certification, best practice is to identify your company’s most significant SDG impacts (typically only a handful at most) and drive improvements though targets (see guidance from the UN on this here). In practice, few companies do this and instead most align their ESG strategies to the SDGs in hindsight – noting the positive impact that their strategies will have on the goals. More mature companies will highlight both the positive and negative impacts that their business has on the SDGs, and the most advanced companies will proactively target a positive contributions to the SDGs. Alignment to the SDGs is particularly relevant to companies with or trying to attract investors, who often use the SDG themes to showcase the sustainability of their products. Further, best practice environmental, social and governance (ESG) standards such as SASB and Global Reporting Initiative (GRI) are all now advocating alignment to the SDGs.
Carbon neutral. Organisations that are carbon neutral have prevented future carbon emissions equivalent to those that they have generated. This is done by investing in schemes that prevent emissions elsewhere in the world, e.g. preventing deforestation or providing energy efficient cookstoves to people who otherwise would be cooking on open fires. Carbon offsets are an unregulated market and to ensure the veracity of the schemes we recommend that you only purchase those certified by a reputable third party, e.g. Gold Standard or Verra, and purchase from a reputable broker. We often use Plannet Zero for this (Plannet Zero | Guiding SMEs On Their Net Zero Carbon Journey). Note that carbon neutral is NOT the same as carbon net zero and organisations should not confuse these in their communications. Carbon net zero is much more challenging. It means that an organisation’s emissions have been reduced to a minimum (typically 90-95% of baseline) with equivalent residual emissions removed from the atmosphere, i.e. through carbon capture/tree planting. Carbon neutral in contrast is often thought of as a ‘plaster’ – a quick fix to mitigate climate change impacts but it doesn’t get to the root of the problem i.e. reducing energy consumption and generation of carbon emissions in the first place. To avoid accusations of greenwashing we only recommend that organisations seek carbon neutrality when it is alongside credible, and challenging emission reduction targets.
Sustainable Finance Disclosure Regulations (SFDR). Information correct as at 22/6/2022. This is EU legislation that applies to EU financial managers and puts obligations on them to disclose the company and product (i.e. investment fund) sustainability credentials. Precise disclosures (key performance indicators) will be prescribed in the “Mandatory Reporting Template” however this has not yet been finalised, albeit a draft and clarifications have been published. The final template will be published later this year and applicable from January 2023. The UK is developing similar legislation, the Sustainability Disclosure Requirements (SDF) applicable to UK financial institutions, and this is still at the consultation stage. Whilst these regulations may on face value seem unrelated to corporates, to enable investor reporting, investee companies will need to provide them with data. It’s most likely that there will be considerable overlap between the disclosure requirements and other ESG reporting legislation and/or best practice but additional corporate reporting obligations are likely nonetheless. For any listed or investor-backed companies these regulations are ones to watch.
Global Reporting Initiative (GRI). A best practice standard in multi-stakeholder sustainability reporting. The aim of GRI is to make sustainability reporting transparent and to meet the needs of a range of stakeholders – employees, NGOs, customers, suppliers, investors etc. This comprehensive standard is prescriptive and requires information to be labelled in a standard way that allows for easy comparison by stakeholders. Typically used by larger, or very impactful organisations with extensive sustainability/Annual Reports, there are two tiers of compliance, ‘GRI-Core’ or ‘GRI-Comprehensive’. Alternatively, ‘GRI-Referenced’ is also an option worth considering. This is where you cross-reference the sustainability information and data in your report to the relevant GRI code. For companies disclosing multiple sustainability metrics but not necessarily the full suite of GRI requirements this is a good quick-win. GRI - Standards (globalreporting.org)
Science-based target (SBT). A carbon reduction target set to a level that has been determined by scientists will limit global warming to 1.5 degrees celsius. SBTs should be verified by the Science-Based Target initiative (SBTi) and on their website you can view a database of all companies with such targets in place. For operational carbon emissions (scope 1 and 2), SBTi requires a reduction of 4.2% per annum over 5-10 years i.e. companies could have a 21% reduction target for 5 years’ time or a 42% reduction for 10 years’ time, or something in between. Indirect (scope 3) emission targets must also be set in most cases (where such emissions are >40% of the footprint), and these will require a c.2.5% reduction over the same timeframe or a supplier engagement target (e.g. X% of suppliers/customers with a science-based target in place). SBTs give credibility to emission reduction plans and can be used in conjunction with longer-term net zero targets. The latest SBTi criteria can be found here: Resources - Science Based Targets.