All the ESG Investing Terms, Explained

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B Corp.? Exclusionary screening? Stranded asset? Here is a look at what those and other key ESG terms and phrases mean

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B Corp.: A certification provided by the nonprofit B Lab, indicating that a company meets high social and environmental criteria standards, while exhibiting public transparency and committing to legal accountability. Companies go through a rigorous assessment process to be registered and then undergo a verification process every three years to be recertified.

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Carbon offset: An action that reduces carbon-dioxide or other greenhouse gases to compensate for emissions made elsewhere, helping companies meet their climate-driven goals.

Carbon footprint: A measure of greenhouse gases generated by a person, product or company’s actions.

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Carbon neutral: When a company has acquired enough carbon offsets to equal its operational emissions over a determined time frame.

Circular economy: A term for supply-chain and consumption strategies focused on recycling and reusing.

Climate shareholder resolutions: Proposals from corporate shareholders aimed at pushing management to implement more environmentally friendly policies and procedures. Activists may feel more empowered to bring forward these resolutions given recently revised Securities and Exchange Commission policies designed to streamline the process during proxy season.

Community development investing: Investment options from community development corporations (CDCs) and other organizations intended to generate new opportunities that help lower-income neighborhoods and populations. Such investments are generally related to affordable housing, small businesses and jobs.

Conscious capitalism: A philosophy that states businesses pursuing profits should operate in an ethical manner.

Corporate purpose: The concept that a company’s value proposition goes beyond profit, to include things such as societal impact, as well as the company’s culture and mission.

Decarbonization: The reduction of carbon-dioxide emissions, which is deemed critical for improving air quality and global temperature.

Divestment: The reducing or dumping of assets to serve financial, ethical or politicalobjectives.

Energy storage: Capturing energy for later use to reduce disparities between demand and production.

EEOC diversity disclosures: Private companies with 100 or more employees for decades have had to disclose to the US Equal Employment Opportunity Commission how many men and women of different ethnicities they employ across 10 job categories. Investors are increasingly pushing companies to make these disclosures public.

Green bond: A fixed-income investment that supports climate or environmental-related projects.

Greenwashing: When companies and investment funds give misleading claims about their ESG credentials or how environmentally friendly their products are. SEC Chairman Gary Gensler recently said he has asked staff to consider recommendations about whether fund managers should disclose details about the criteria and underlying data they use to define their so-called ESG investments.

Negative, or exclusionary, screening: An investment approach that seeks to avoid certain companies or sectors that engage in activities that are frowned upon or considered controversial. So-called sin stocks—such as adult entertainment, tobacco or weapons—are among those investors often seek to avoid. Other companies often screened out include those engaged in animal testing, military contracting or nuclear energy.

Net zero: When the amount of greenhouse gas emitted into the atmosphere equals the amount that is taken from the atmosphere. Similar to carbon neutral, the term refers to all greenhouse gases.

PET plastic: Shorthand for polyethylene terephthalate, which is a member of the polyester family. PET bottles are favored by some environmentalists and manufacturers over glass. They are seen as more durable, clear and lightweight—and they can be easily recycled into useful everyday items.

Public-benefit corporation: A type of for-profit company created to benefit thepublic in some way. Boards of such corporations are required to consider environmental and social factors, as well as shareholders’ financial interests.

Positive screening: An investing approach that actively seeks to invest in companies, industries or sectors that align with certain objectives and ethical proclivities.

Renewable energy: Energy obtained from ongoing natural sources that are constantly replenished, such as wind or solar.

Scope 1, 2 and 3: Three types of emissions, as defined by the Greenhouse Gas Protocol, which works with governments, industry associations and businesses to set standards to measure and manage emissions. Scope 1 (direct greenhouse-gas emissions) and Scope 2 (indirect emissions resulting from the energy that a company purchases) are required reporting for many businesses. Scope 3 (greenhouse gases related to a company’s products that fall outside its direct operational control) fall under an optional reporting category.

Stranded asset: An investment that has lost value prematurely due to environmental factors, such as climate change.

Sustainable aviation fuel: SAF is a clean replacement for fossil jet fuels. Airlines are increasingly experimenting with SAF to help them achieve emissions-reduction goals.

Sustainability-linked bond: A type of ESG-friendly bond tied to sustainabilitytargets.

Triple bottom line: A business concept that says companies should commit tocalculating their social and environmental impact, along with financial performance.

Voluntary carbon market: A mechanism that allows private investors, businesses, governments and others an option to purchase carbon offsets to reduce their net carbonemissions. This market operates alongside the mandatory carbon market, where national, regional or international authorities impose certain requirements.

Ms. Winokur Munk is a writer in West Orange, NJ Email her at [email protected]


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