ESG Fundamentals
ESG Environmental, Social, and Governance — three pillars used to assess a company's sustainability and ethical practices.
Sustainability Meeting present needs without compromising ability of future generations to meet their needs. In business context, practices that can continue long-term without depleting resources or causing harm.
Corporate Social Responsibility (CSR) Predecessor concept to ESG focusing on voluntary business practices that contribute to societal welfare. Often used interchangeably with ESG but generally less structured.
Stakeholder Any party with an interest in a company's activities — investors, employees, customers, suppliers, communities, regulators, etc.
Materiality The significance of an ESG topic to a company's business. Financially material topics affect enterprise value; impact materiality refers to a company's effect on people and planet.
Double Materiality Assessment of both financial materiality (how ESG issues affect the company) and impact materiality (how the company affects ESG issues). Required under EU CSRD.
Environmental
Carbon Footprint Total greenhouse gas emissions caused by an organization, product, or activity, usually expressed in tonnes of CO2 equivalent.
CO2 Equivalent (CO2e) Standard unit for measuring carbon footprint that expresses all greenhouse gases in terms of the amount of CO2 with equivalent warming potential.
Scope 1 Emissions Direct GHG emissions from sources owned or controlled by a company (vehicles, facilities, manufacturing processes).
Scope 2 Emissions Indirect GHG emissions from purchased electricity, heat, or steam consumed by the company.
Scope 3 Emissions All other indirect emissions in a company's value chain, including both upstream (supply chain) and downstream (product use, disposal).
Greenhouse Gas (GHG) Gases that trap heat in the atmosphere, contributing to climate change. Main ones: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), fluorinated gases.
GHG Protocol The most widely used international accounting standard for measuring and managing greenhouse gas emissions.
Carbon Neutral State where net carbon emissions equal zero, typically achieved through reduction and offsetting. Increasingly scrutinized if relying heavily on offsets.
Net Zero Similar to carbon neutral but with expectation of deep actual emission reductions with only residual emissions offset. Science-based targets define specific pathways.
Science-Based Target (SBT) Emission reduction target aligned with what climate science says is needed to limit warming to 1.5°C or well below 2°C. Validated by Science Based Targets initiative (SBTi).
Carbon Offset Reduction or removal of GHG emissions used to compensate for emissions elsewhere. Quality and credibility vary widely.
Renewable Energy Energy from sources that naturally replenish: solar, wind, hydroelectric, geothermal, biomass.
Circular Economy Economic model aimed at eliminating waste through continued use, reuse, recycling, and regeneration of materials.
Life Cycle Assessment (LCA) Analysis of environmental impact of a product or service throughout its entire life cycle, from raw material extraction to disposal.
Climate Risk Risks arising from climate change. Physical risks (extreme weather, sea level rise) and transition risks (policy changes, technology shifts, market changes).
TCFD Task Force on Climate-related Financial Disclosures — framework for climate risk disclosure covering governance, strategy, risk management, and metrics.
CDP Formerly Carbon Disclosure Project — global disclosure system for environmental information. Runs climate, water, and forests questionnaires.
Social
Human Capital The skills, knowledge, and experience of an organization's workforce, viewed as an asset.
Diversity, Equity, and Inclusion (DEI) Practices promoting representation (diversity), fair treatment (equity), and belonging (inclusion) for all groups in the workforce.
Living Wage Wage sufficient to meet basic needs including food, housing, healthcare, and education. Higher than minimum wage in most jurisdictions.
Human Rights Basic rights and freedoms to which all people are entitled. Businesses are expected to respect human rights throughout their operations and value chains.
UN Guiding Principles (UNGPs) UN Guiding Principles on Business and Human Rights — the authoritative global standard on business and human rights responsibilities.
Modern Slavery Severe exploitation including forced labor, human trafficking, and debt bondage. Subject to disclosure laws in several jurisdictions.
Supply Chain Due Diligence Process of identifying, preventing, and mitigating adverse human rights and environmental impacts in supply chains.
Occupational Health and Safety (OHS) Practices and programs to protect employee health and prevent workplace injuries and illnesses.
TRIR (Total Recordable Incident Rate) Standard safety metric measuring work-related injuries per 100 full-time employees per year.
Employee Engagement The emotional commitment and connection employees have to their organization, affecting productivity, retention, and performance.
Community Investment Corporate contributions to communities through donations, volunteering, partnerships, and other support.
Stakeholder Engagement Process of involving stakeholders in organizational decisions that affect them.
Governance
Corporate Governance System of rules, practices, and processes by which a company is directed and controlled.
Board of Directors Group elected to represent shareholders and oversee company management. Responsible for major decisions and accountability.
Independent Director Board member with no material relationship with the company beyond board service, able to exercise independent judgment.
Board Diversity Variety in board composition including gender, ethnicity, background, skills, and perspectives.
Executive Compensation Pay and benefits for senior executives. Governance concern relates to alignment with performance and fairness.
ESG-Linked Compensation Tying executive pay to achievement of ESG metrics alongside financial metrics.
Business Ethics Application of ethical principles to business activities and decisions.
Code of Conduct/Ethics Written standards governing employee and organizational behavior.
Anti-Corruption Practices to prevent bribery, fraud, and other corrupt practices. Subject to laws like FCPA and UK Bribery Act.
Whistleblowing Reporting of wrongdoing within an organization. Effective programs protect whistleblowers from retaliation.
Risk Management Process of identifying, assessing, and managing risks that could affect an organization.
Internal Controls Processes and procedures to ensure accuracy of reporting and compliance with policies.
Data Privacy Protection of personal information. Subject to laws like GDPR, CCPA.
Cybersecurity Protection of computer systems and networks from threats. Governance includes oversight and incident response.
Reporting and Disclosure
Sustainability Report Document disclosing an organization's ESG strategy, performance, and impacts. Also called ESG report or CSR report.
Integrated Reporting Combining financial and sustainability information in a single report showing connections between them.
GRI (Global Reporting Initiative) Most widely used sustainability reporting framework. Standards cover universal topics and specific environmental, social, and economic topics.
SASB (Sustainability Accounting Standards Board) Industry-specific sustainability disclosure standards focused on financially material issues. Now part of ISSB.
ISSB (International Sustainability Standards Board) Body developing global baseline sustainability disclosure standards (IFRS S1 and S2). Created by IFRS Foundation.
CSRD (Corporate Sustainability Reporting Directive) EU regulation requiring detailed sustainability reporting from large companies and those operating in EU.
ESRS (European Sustainability Reporting Standards) Detailed standards for sustainability reporting under CSRD.
Assurance Independent verification of reported information. Limited assurance is less rigorous than reasonable assurance.
Materiality Assessment Process of identifying and prioritizing ESG topics most relevant to an organization and its stakeholders.
ESG Rating Third-party assessment of a company's ESG performance. Major providers include MSCI, Sustainalytics, S&P Global.
Investment and Finance
ESG Integration Systematic consideration of ESG factors alongside financial factors in investment decisions.
Sustainable Investing Investment approach that considers ESG factors. Umbrella term covering various strategies.
Impact Investing Investments made with intention to generate measurable positive social or environmental impact alongside financial return.
Negative Screening Excluding investments in certain sectors or companies based on ESG criteria (e.g., excluding fossil fuels).
Positive Screening Actively selecting investments based on positive ESG characteristics.
Shareholder Engagement Dialogue between investors and companies to influence corporate behavior on ESG issues.
Proxy Voting Shareholder voting on company matters, including ESG-related proposals.
Green Bond Bond specifically earmarked to raise money for climate and environmental projects.
Sustainability-Linked Loan Loan with terms (typically interest rate) tied to achievement of sustainability targets.
Stranded Assets Assets that lose value due to changes related to sustainability, particularly fossil fuel reserves that may become uneconomic.
Standards and Certifications
ISO 14001 International standard for environmental management systems.
B Corp Certification for businesses meeting high standards of social and environmental performance, accountability, and transparency.
SA8000 Social accountability standard for decent working conditions.
Fair Trade Certification ensuring better trading conditions and rights for producers in developing countries.
LEED Leadership in Energy and Environmental Design — green building certification.
Science Based Targets initiative (SBTi) Organization that validates corporate emission reduction targets against climate science.
Emerging Terms
Greenwashing Misleading claims about environmental practices or benefits. Increasingly subject to regulatory action.
Social Washing Misleading claims about social practices or impact.
Just Transition Ensuring the shift to a sustainable economy is fair to workers and communities affected by the transition.
Nature-Based Solutions Actions that protect, manage, or restore ecosystems to address societal challenges like climate change.
Biodiversity Variety of life on Earth. Increasingly recognized as material ESG issue alongside climate.
TNFD Taskforce on Nature-related Financial Disclosures — developing framework for nature-related risks and opportunities.
Scope 3+ or Value Chain Emissions Evolving focus on emissions throughout entire value chains and product lifecycles.
Climate Justice Recognition that climate change disproportionately affects vulnerable communities and countries.