ESG jargon buster
People often talk about the "alphabet soup" of ESG. There are a large number of different terms and acronyms relating to ESG and sustainable finance which can seem like a minefield to get your head around. We have put together a 'jargon buster' to help with deciphering their various meanings.
Blended Finance – Blended finance is the strategic use of development finance and philanthropic funds to mobilize private capital cash flows to fund sustainable infrastructure and new and emerging markets.
Environmental, Social and Governance (ESG) – ESG stands for environmental, social and governance.
ESG Metrics - ESG metrics are metrics set by a company which are used to assess how said organisation is managing its risks and opportunities across the areas of environmental, social and governance.
ESG Rating Agencies – organisations which can evaluate or assess a company's key ESG activities and policies to determine its sustainability/social value scores as benchmarked against a set of criteria or using an established scoring or rating methodology. Examples include S&P Global, Sustainable Fitch and FTSE Russell.
Green Bonds/Loans - bonds and loans where the proceeds are exclusively used to fund projects that have a positive environmental impact.
Greenwashing - describes unsubstantiated claims made about products or by companies which may deceive customers into believing that their products, services or policies are more environmentally friendly than they actually are, but according to Bloomberg, 'the term has morphed in the past year to also include issues when organisations overhype their ESG commitments' Care must be taken by organisations not to inadvertently fall foul of greenwashing by, for example, signing up to loan arrangements with very lenient ESG metrics.
Impact Investment - Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Net Zero - For an organisation, achieving net zero means balancing the amount of greenhouse gases it emits with the amount it removes. When what you add is no more than what you take, then this state is net zero (also known as carbon neutral).
Responsible business - a responsible business is a business that benefits society and addresses any negative impacts it might have. It exceeds the statutory requirements it is bound by and cares about its staff, the environment and benefits society as part of its core values and focus.
Scope 1, 2 and 3 emissions - Scope 1, 2 and 3 is a way of categorising the different kinds of carbon emissions an organisation creates in its own operations and in its wider supply/value chain:
- Scope 1 – Green House Gas emissions that an organisation makes directly (e.g. from boilers)
- Scope 2 – emissions an organisation makes indirectly (e.g. when energy it buys for heating its buildings is being produced on its behalf)
- Scope 3 – all emissions that an organisation is indirectly responsible for (e.g. from buying products from its suppliers and from its products when customers use them).
SDGs - United Nations Sustainable Development Goals – a collection of 17 interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all". These include goals such as No Poverty, Sustainable Cities and Communities, Industry, Innovation and Infrastructure.
Second Party Opinion - A second party opinion on the ESG aspects/social value of a financing deal provided by an independent institution with environmental, social and/or sustainability expertise. The second party opinion can provide investors with assurance than an ESG framework embraced by a borrower is aligned to agreed market principles and that the proceeds of a bond or loan are aligned to ESG market practices.
Social value - This refers to the benefits to the community that are created by the activities of an organisation. A company that works to provide social value will try to make sure that its community receives a range of positive benefits from its operations.
Sustainability - Sustainability is an umbrella term that includes all of an organisation's efforts to reduce its impact on the world around it. This involves making decisions about environmental and social issues in a way that safeguard or maintain the quality of life of those that may be affected by their operations (either today or in the future).
Sustainability Linked Bonds/Loans – bonds/loans where the margin or coupon is linked to ESG metrics set by the borrower.
Sustainability Reporting Frameworks – These frameworks standardise the reporting and disclosure of ESG metrics. There is no single universally agreed reporting framework for ESG. These frameworks are put together by non-profit organisations, NGOs, business groups, and others. Examples include the EU Taxonomy, the Sustainability Reporting Standard for UK Social Housing (SRS), the United Nations Sustainable Development Goals, the Global ESG Benchmark for Real Assets (GRESB), the Global Reporting Initiative etc.
TCFD – Taskforce for Climate Related Financial Disclosures –an important part of the roadmap to net zero TCFD provides a framework of recommendations which large organisations can use as the basis of disclosures against climate related risks and opportunities.
We know that navigating the world of ESG and sustainability can be a confusing one. Our highly skilled teams in Green, Social and Sustainable Finance, Impact Investment and Blended Finance, Governance and Energy can help you to find the best ESG or Social Value strategy for your organisation. We can advise on the best ESG financing structures, help you with your ESG metrics and overall strategy and guide you to the correct solution for your company.