Investors who want to use their investments to invest for a better world, will be confronted by an array of confusing terms in the search for the right investment.
Here’s an easy guide to the key ones you need to understand.
Active stewardship or active ownership: These terms are used to describe an investor who uses their ownership of shares to vote at a company’s annual general meetings, to engage with company management and challenge it on its practices and their effect on the environment, society and the governance of the company.
If you use a fund manager to invest on your behalf, they hold proxy votes and have the ability to engage management much more than you as an individual investor. The fund manager should tell you what it is doing to be an active shareholder - letting you know how it voted on climate-related issues or executive remuneration, for example.
Actively influencing corporate behaviour can help to protect the value of investments.
Carbon footprint: This is a measure of the greenhouse gas emissions of a person, group, company or country. The carbon footprint may be determined using greenhouse gas emissions or carbon intensity – a measure of carbon emissions per sales made.
Carbon neutral: A carbon neutral position can be achieved when an entity minimises and offsets is carbon emissions or footprint by, for example, investing in clean energy, reforestation or by buying carbon credits in an emissions trading scheme. An emissions trading scheme may be engaged in activities such as distributing energy efficient stoves to low income households or capturing methane gas at a landfill. Usually carbon neutrality is validated or certified another entity but not always.
Climate change: The change in the climate globally brought about by changing weather and human activity. This has resulted in temperatures and sea levels rising as well as extreme weather events.
Climate investing: Climate investors support companies and technologies that are aiding the transition from away from fossil fuels and carbon-intensive industries.
Code for Responsible Investing South Africa (CRISA): A code for institutional investors, such as retirement funds, which is aligned with the international Principles for Responsible Investment (PRI) and encourages the inclusions of ESG principles in investment decisions. It was developed by the CRISA committee in 2010/11. Stakeholders representing industry, retirement funds, the regulators, the JSE and others were represented on the committee. A second version of the code was launched in 2022.
Decarbonisation: The process of reducing the carbon emissions of a company, industry or country.
ESG: ESG stands for environmental, social, and governance – the three factors that have been identified as a suitable framework to measure investments for risks and opportunities in the transition to a better world.
Investments should reduce harm to the environment, uplift and protect society and have good corporate governance.
ESG factors are used to create criteria on which investments are scored.
ESG integration: This is the incorporation of ESG considerations into the process of analysing and selecting shares or other securities in which to invest. The relevant ESG factors need to be identified and their risks assessed.
Ethical investing: Ethical investing involves avoiding investments goods or services that harm the environment, a community or individuals. It may also include avoiding in investments that do not meet certain personal values such as avoiding gambling or pornography.
Faith-based investing: Faith based investments are those adhere to the principles of certain religions. Shariah investments, for example, avoid tobacco, gambling and pornography as well as investments that earn interest.
Fossil fuels: Fossil fuels are natural sources of energy such as coal, oil and gas that were formed from the decomposition of carbon-based organisms. They release carbon into the atmosphere when burned to create energy. This is widely believed to be the leading cause of climate change. Fossil fuels are also used for plastic, steel and many other products.
Green bonds: Green bonds are issued by governments, local governments, state owned entities or companies to raise capital for projects that benefit the environment such as renewable energy projects or water recycling.
Greenhouse gases: Gases, including carbon dioxide and methane, that trap heat close to the surface of the earth causing climate change
Green investments: Investments that focus on improving the environment or avoiding those that damage it. These could include a green bond or green building that recycles, reduces power and water consumption.
Global warming: The rising temperatures due to human activity around the world and its impact.
Impact investing: Investing in a specific project or projects in order to have positive and measurable impact on society or the environment and to earn a return. These projects are typically not listed. For example, an investment in education, affordable housing or renewable power generation.
Net zero: Net zero is another term for carbon neutral or reducing greenhouse gas emissions to an effective zero. The Paris Agreement set net zero as the goal for parties to the agreement to achieve by 2050 in order to reduce global warming to 1.5°C.
Paris Agreement: The binding international treaty to limit global warming to below 2°C that was adopted by 196 parties in Paris in 2015 and entered into force in 2016.
Responsible investing: Including ESG risks and opportunities in the investment process and practising active ownership to ensure returns are sustainable.
Sustainable investing: Investing with a focus on ensuring businesses are sustainable into the future because they promote environmental, social and governance (ESG) factors. A sustainable investment may seek out investments that are leaders on ESG factors.
Screening: Some fund managers filter out certain shares, bonds or other investments to ensure their funds bring about change for good or comply with faith-based rules. This is known as screening and common examples include screening out the shares of companies involved in weapons, coal, tobacco or pornography.
Task Force on Climate-Related Financial Disclosures: Known as the TCFD this task force was created by the international Financial Stability Board to develop standardised climate-related financial risk disclosures that can be used by companies, banks and investors.
Thematic investing: Some managers choose a theme for their fund or exchange traded fund. ESG thematic funds may have a sustainable investing, climate change or social impact theme.
The sustainable development goals: The 17 goals for global peace and prosperity adopted by the 193 members of the United Nations in 2015. Each goal can be classified as one of the ESG factors.
The 2°C limit: This refers to keeping the rise in global temperatures below 2°C above pre-industrial levels by the end of this century in order to stave off the worst natural disasters that global warming could bring.
