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ESG Glossary

ESG Investing Glossary

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ESG Investing Glossary

This glossary defines the core vocabulary of ESG and sustainable investing. Terms appear in alphabetical order. Each entry gives a concise definition followed by context and a concrete example to anchor the concept.

Additionality​

The requirement that an impact investment produces outcomes that would not have occurred without the investment capital.

Additionality is what separates genuine impact investing from conventional investing with a positive narrative attached. Buying shares in a solar energy company on a public exchange provides no additionality — the company receives no new capital and your purchase changes nothing about its operations. By contrast, providing equity to a pre-revenue climate-tech startup that cannot access bank lending is additive: the company would not exist, or would not grow, without the investment. Additionality is notoriously difficult to prove with certainty, which is why it remains one of the most contested concepts in impact finance.

Article 8 / Article 9 Funds​

Classifications under the EU's Sustainable Finance Disclosure Regulation (SFDR) describing the degree of sustainability integration in investment products.

Article 8 funds "promote" environmental or social characteristics but do not have sustainable investment as their primary objective. Article 9 funds have sustainable investment as their explicit objective and must demonstrate how they achieve it. In practice, Article 9 (sometimes called "dark green") carries the most demanding disclosure requirements. A wave of fund reclassifications from Article 9 to Article 8 in 2022–2023 demonstrated that many managers had initially claimed Article 9 status without the rigor the rules required.

Best-in-Class Screening​

An ESG investment approach that selects the highest-ESG-scoring companies within each industry sector, rather than excluding entire sectors.

Best-in-class screening keeps sector diversification intact by retaining all industries but overweighting their leaders on ESG metrics. A best-in-class energy fund would hold oil-and-gas companies with the highest environmental and governance scores rather than excluding the sector entirely. The approach accepts that capital allocation within polluting industries — directing it toward the better operators — may reduce harm more effectively than wholesale exclusion.

Blended Finance​

A structure that uses concessionary or public capital (grants, first-loss equity, guarantees) to de-risk investments and attract commercial capital to markets it would otherwise not enter.

Blended finance is most commonly used in emerging markets and in high-impact sectors like affordable housing, clean water, and smallholder agriculture, where the risk-return profile is unattractive to purely commercial investors. A development finance institution might provide a 10% first-loss tranche in a $100 million infrastructure fund, absorbing the first losses and thereby making the remaining 90% investable at commercial rates. Without the first-loss cushion, the fund would not be viable.

Carbon Intensity​

A measure of greenhouse gas emissions normalized by an economic output metric, typically revenue or enterprise value.

Portfolio managers use carbon intensity rather than absolute emissions to compare companies of different sizes. Weighted Average Carbon Intensity (WACI) — the sum of each holding's carbon intensity, weighted by its portfolio weight — is the most common portfolio-level climate metric. For example, a company emitting 500,000 tonnes of CO₂ on $1 billion in revenue has a carbon intensity of 500 tonnes per million dollars of revenue. A more carbon-intensive competitor emitting 1 million tonnes on the same revenue would score 1,000 — twice as carbon-intensive.

CDP (formerly Carbon Disclosure Project)​

A non-profit organization that runs the world's largest environmental disclosure system, collecting self-reported climate, water, and deforestation data from thousands of companies annually.

CDP data is the primary source for many ESG raters' environmental scores. Companies submit detailed questionnaires on emissions, climate governance, and transition plans; CDP scores responses from A (leadership) to D- (disclosure only). The key limitation is that CDP data is self-reported and unaudited, so its accuracy depends on company goodwill and internal data-management quality. The SEC's climate disclosure rules would, when fully implemented, create a mandatory US equivalent.

Climate Value-at-Risk (Climate VaR)​

A risk metric estimating the potential financial loss in a portfolio attributable to climate-related risks under a specified scenario and time horizon.

Climate VaR attempts to translate climate science into portfolio monetary terms. A 2°C warming scenario might imply a 5% loss in the value of an energy-heavy portfolio over 30 years due to transition costs, while a 4°C scenario might imply a smaller transition hit but larger physical damage costs. Major providers including MSCI and Carbon Delta (now part of MSCI) publish climate VaR models. The figures are scenario-dependent and inherently uncertain over multi-decade horizons, so they function better as relative comparison tools than as precise loss forecasts.

Corporate Sustainability Reporting Directive (CSRD)​

An EU law requiring approximately 50,000 companies operating in the EU to report detailed sustainability information using mandatory European Sustainability Reporting Standards (ESRS).

CSRD replaced the earlier Non-Financial Reporting Directive and dramatically expanded scope and rigor. Covered companies must report under a double-materiality lens — both the impact of sustainability risks on the company (financial materiality) and the company's impact on society and environment (impact materiality). Third-party limited assurance on CSRD reports is required, with reasonable assurance the eventual goal.

Double Materiality​

The principle that sustainability reporting should cover both how ESG risks affect the company financially and how the company's activities affect society and the environment.

Single materiality focuses only on what affects investors. Double materiality adds an outside-in perspective: what is the company doing to the world? The EU's CSRD mandates double-materiality disclosure. The ISSB's standards, by contrast, use a single financial-materiality lens. This fundamental difference in philosophical approach is why EU and global disclosure frameworks do not yet fully converge, creating compliance complexity for multinational companies.

Engagement​

The practice of investors communicating directly with company management and boards to influence corporate behavior on ESG issues, as an alternative to or alongside divestment.

Engagement ranges from private letters and calls with management to public statements, shareholder resolutions at annual meetings, and coordinated campaigns through coalitions like Climate Action 100+. Proponents argue engagement is more effective than divestment because it keeps influence inside the room; critics argue companies often engage performatively without meaningful behavior change. The evidence on engagement effectiveness is mixed but shows the largest impact when multiple large institutional investors coordinate their messaging.

ESG Integration​

The systematic incorporation of environmental, social, and governance factors into investment analysis and portfolio-construction processes.

ESG integration is distinct from ethical screening. An ESG integration approach does not necessarily exclude any company; instead, it adjusts valuations, risk assessments, and position sizing based on ESG data. A portfolio manager might reduce the position in a company with high climate transition risk or apply a lower valuation multiple to a company with governance red flags, without excluding either entirely. ESG integration has become the dominant approach among institutional investors in the mid-2020s.

Financed Emissions​

The greenhouse gas emissions attributable to a financial institution's loans and investments, calculated in proportion to the institution's exposure relative to the total capitalization of each investee company.

Financed emissions quantify banks' and asset managers' indirect climate impact through the capital they provide. For most financial institutions, financed emissions dwarf operational emissions — a bank's corporate loan book finances heavy-industry operations that emit orders of magnitude more carbon than the bank's own offices and servers. The Partnership for Carbon Accounting Financials (PCAF) has developed the primary standard for financed-emissions calculation.

GIIN (Global Impact Investing Network)​

The leading non-profit organization promoting and researching impact investing, publisher of the IRIS+ impact-measurement standards taxonomy.

GIIN's annual impact investor survey is the most comprehensive data source on the size and composition of the global impact-investing market. IRIS+ (Impact Reporting and Investment Standards) is a catalog of over 1,000 metrics covering social, environmental, and financial performance, organized around the UN Sustainable Development Goals and the Impact Management Project framework. GIIN membership includes development finance institutions, foundations, banks, and private equity funds.

Green Bond​

A fixed-income security whose proceeds are earmarked for projects with defined environmental benefits, governed by use-of-proceeds standards and third-party verification.

The green bond market grew from near zero in 2008 to over $500 billion in annual issuance by the mid-2020s. Green bond proceeds fund projects including renewable energy, energy efficiency, sustainable water management, and clean transportation. The ICMA Green Bond Principles provide voluntary guidelines; the EU Green Bond Standard, once fully implemented, will require full alignment with the EU Taxonomy. Green bonds typically trade at a modest "greenium" — a slightly lower yield than comparable conventional bonds — reflecting investor demand.

Greenwashing​

The practice of making misleading or unsubstantiated claims about the environmental or social credentials of a product, service, or investment.

In finance, greenwashing occurs at the corporate level (overstating emissions reductions or net-zero commitment credibility), fund level (mislabeling portfolio ESG quality), and bond level (misusing green-bond proceeds). The DWS scandal of 2022, in which a former chief sustainability officer alleged that the firm overstated ESG integration in its funds, illustrates fund-level greenwashing. Regulatory crackdowns from the SEC and EU are increasing the legal risk associated with greenwashing.

IRIS+​

The standardized impact-measurement taxonomy published by the Global Impact Investing Network, providing over 1,000 metrics for quantifying social, environmental, and financial performance.

IRIS+ organizes metrics around the UN SDGs and the five dimensions of the Impact Management Project (what, who, how much, contribution, risk). Impact investors use IRIS+ to standardize reporting across portfolios, enabling comparison between investments targeting similar outcomes. For example, a clean-water fund and a sanitation fund both targeting SDG 6 can use IRIS+ metrics like "number of people gaining access to safe water" to report outcomes on a comparable basis.

Materiality​

In ESG contexts, the concept that certain ESG factors are financially significant for specific industries and companies while others are not.

Financial materiality determines which ESG risks and opportunities are large enough to affect a company's financial condition. The Sustainability Accounting Standards Board (SASB) identifies material ESG issues by industry — water management is material for semiconductor manufacturers (who use enormous amounts of ultrapure water) but largely immaterial for software companies. Harvard Business School research found that companies performing well on material ESG issues significantly outperformed those performing well only on immaterial ones, suggesting that generic ESG scores dilute signal with noise.

Net-Zero Alignment​

A portfolio or company strategy consistent with achieving net-zero greenhouse gas emissions by 2050, in line with a 1.5°C global-warming pathway.

Net-zero alignment is assessed through portfolio temperature metrics, science-based target verification, and forward-looking scenario analysis. A portfolio is "net-zero aligned" if the companies it holds have credible, verified plans to reduce their emissions in line with a 1.5°C pathway. The Net Zero Asset Managers Initiative and the Glasgow Financial Alliance for Net Zero provide frameworks and commitments for institutional investors pursuing this goal. As of the mid-2020s, measuring true alignment remains methodologically contested.

Negative Screening (Exclusion)​

An ESG investment approach that excludes companies or industries whose activities conflict with specified ethical, environmental, or social criteria.

Negative screening is the oldest form of ESG investing, rooted in the religious exclusion screens of the 17th century. Common exclusion categories include tobacco, weapons (conventional and controversial), gambling, adult entertainment, and increasingly fossil fuels. Exclusions are typically defined by revenue thresholds: a fund might exclude any company deriving more than 5% of revenue from tobacco manufacturing. Revenue thresholds, rather than binary screens, allow for nuance — a diversified retailer selling some tobacco products would typically not be excluded.

Paris Agreement​

The 2015 international treaty under the UN Framework Convention on Climate Change, committing signatory nations to limiting global warming to well below 2°C above pre-industrial levels, with efforts toward 1.5°C.

The Paris Agreement created the political architecture for global decarbonization and directly shaped the ESG investment landscape. Paris-aligned investment strategies aim to hold portfolios consistent with the warming pathways defined in the agreement. The EU's Paris-Aligned Benchmark regulation translates this commitment into specific portfolio-construction requirements for benchmark providers and investors using those benchmarks.

PRI (Principles for Responsible Investment)​

A UN-supported international network of investors that have committed to incorporating ESG factors into investment practice, governed by six principles.

The PRI was launched in 2006 with 63 founding signatories. By the mid-2020s, over 5,000 signatories managing more than $120 trillion had signed the six principles, which include: incorporating ESG issues into investment analysis, being active owners promoting ESG in investees, seeking appropriate ESG disclosure from investees, promoting acceptance of PRI principles in the industry, collaborating to enhance implementation effectiveness, and reporting on activities and progress. Signatories submit annual transparency reports; the PRI publishes signatories' scores.

SASB (Sustainability Accounting Standards Board)​

A non-profit organization that developed industry-specific sustainability accounting standards identifying the financially material ESG topics for 77 industries.

SASB standards, now maintained under the IFRS Foundation alongside ISSB standards, tell companies in each industry which sustainability metrics are most likely to be material to investors. For example, SASB's semiconductor standard identifies water management, energy management, and hazardous waste as the three most material environmental topics — reflecting that chipmakers consume vast quantities of ultrapure water and energy in fabrication plants. SASB-aligned reporting is voluntary but increasingly common in corporate sustainability disclosures.

Science Based Targets initiative (SBTi)​

An independent body that validates whether corporate greenhouse gas reduction targets are consistent with the level of decarbonization required to meet Paris Agreement goals.

Companies submit emissions-reduction targets to the SBTi for verification. Targets deemed consistent with limiting warming to 1.5°C or well below 2°C receive SBTi approval, providing investors with third-party confirmation that a corporate net-zero or emissions-reduction pledge has scientific credibility. As of the mid-2020s, over 7,000 companies had approved or committed to science-based targets. The SBTi's Corporate Net-Zero Standard, published in 2021, provides the most rigorous framework for net-zero claims.

SFDR (Sustainable Finance Disclosure Regulation)​

The EU regulation requiring investment managers to disclose how they integrate sustainability risks and provide standardized, comparable ESG information at both entity and product levels.

SFDR introduced the Article 6/8/9 fund classification system (see Article 8 / Article 9 above), principal-adverse-impact (PAI) indicators for entity-level disclosure, and product-level pre-contractual and periodic reporting templates. SFDR applies to investment managers marketing products in the EU. Its implementation has been iterative — Level 1 (high-level rules) applied from March 2021; Level 2 (detailed technical standards) from January 2023 — with ongoing refinements as the European Commission reviews the framework.

Scope 1, 2, and 3 Emissions​

The three categories of corporate greenhouse gas emissions defined by the Greenhouse Gas Protocol: direct emissions (Scope 1), indirect emissions from purchased energy (Scope 2), and all other value-chain emissions (Scope 3).

Scope 1 includes emissions from facilities and vehicles a company directly owns or controls — the boiler, the company car fleet, the on-site furnace. Scope 2 covers the emissions associated with electricity, steam, or heat purchased from third parties. Scope 3 covers 15 distinct categories of upstream and downstream value-chain emissions, from purchased goods and services to product use and end-of-life treatment. For most consumer-goods, financial, and technology companies, Scope 3 is the largest emissions category by far, yet it is also the hardest to measure accurately.

Social Impact Bond (SIB)​

A pay-for-success contract in which private investors fund social programs; if the program achieves pre-agreed outcomes, government repays investors with a return; if not, investors lose capital.

SIBs (also called pay-for-success contracts in the US) transfer the performance risk of social programs from government to private investors. In a typical structure, a government agrees to pay up to $10 million if a homelessness-reduction program achieves a 30% reduction in shelter use; a philanthropic investor provides the upfront capital; an independent evaluator measures outcomes; and if targets are hit, government repays with a modest return. The UK's Peterborough Prison SIB (2010) was the world's first; hundreds have since been launched globally.

Stewardship​

The responsible management of assets on behalf of beneficial owners, including engagement with investee companies on ESG issues and the exercise of shareholder rights such as proxy voting.

Stewardship codes in the UK, Japan, South Korea, and other markets formalize expectations for how institutional investors manage their ownership responsibilities. The UK Stewardship Code (updated in 2020) sets the global benchmark, requiring signatories to publish annual reports detailing their engagement activities, voting policies, and outcomes. Stewardship is distinct from passive ESG investing: a stewardship-focused investor does not merely screen portfolios but actively seeks to improve the ESG behavior of investee companies through ongoing dialogue.

An industry-led framework for voluntary climate risk disclosure, organized around four themes: governance, strategy, risk management, and metrics and targets.

The TCFD was established by the Financial Stability Board in 2015 and published its recommendations in 2017. It quickly became the de facto global standard for climate financial reporting, with thousands of companies and investors adopting it voluntarily. The UK made TCFD-aligned reporting mandatory for large companies and financial institutions in 2022. The framework's scenario-analysis requirements — asking companies to assess their strategy under multiple climate futures — represented a significant step beyond simple carbon-footprint disclosure. The TCFD framework was incorporated into the ISSB's IFRS S2 standard in 2023.

UN Global Compact​

A United Nations initiative launched in 2000 calling on companies to align their operations with ten principles covering human rights, labor, environment, and anti-corruption.

The UN Global Compact is the world's largest corporate sustainability initiative, with over 20,000 signatories from more than 160 countries. The ten principles derive from the Universal Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the Rio Declaration on Environment and Development. Signatories commit to annual Communication on Progress reports. Many ESG screening methodologies use UN Global Compact adherence as a binary governance check: companies found in serious, ongoing violation of the principles are excluded from some "norms-based" ESG strategies.

Weighted Average Carbon Intensity (WACI)​

A portfolio-level climate metric that aggregates each holding's carbon intensity, weighted by its share of the portfolio.

WACI formula: for each holding, multiply its carbon intensity (tonnes CO₂e per million dollars of revenue) by its portfolio weight; sum across all holdings. A portfolio with 60% in low-carbon technology companies and 40% in a diversified industrial firm might have a WACI of 120 tonnes per million revenue-dollars, versus a conventional benchmark WACI of 280 tonnes. The EU's Climate Transition Benchmark standard requires a WACI at least 30% below the parent index; the Paris-Aligned Benchmark standard requires at least 50%.