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26 August, 2022 / Comment

An A-Z of ESG: Part three

By Mollie Thornton, senior investment manager, Parmenion

In the final part of this series, Parmenion's Mollie Thornton looks at the letters R-to-Z of ESG investing

An A-Z of ESG: Part three

The world of sustainable investing is relatively immature and there is much to still to learn, but a myriad of acronyms, new definitions and what some would call ‘jargon’ are not helping investors navigate the intricacies of ESG.

In this three-part guide, Parmenion’s senior investment manager Mollie Thornton provides a glossary of terms and what they mean. In this final instalment, Thornton takes a look at R-to-Z.

R-Z

R is for Responsible

Responsible investing reflects the behaviour of businesses as ‘corporate citizens’, considering their ability to meet legal and regulatory obligations and the extent to which they act as leaders in establishing best practice.

S is for Social (and Sustainability)

Social

The “S” in ESG. A social issue is one that impacts people or society as a whole. This includes issues like human rights, employment practices, health, welfare and diversity.

Sustainability

Sustainability is the principle that everything we need for our survival and wellbeing depends, either directly or indirectly, on our natural environment. Sustainable investing seeks to balance the drive for economic growth with minimising the negative impact of that growth on future generations. Sustainable investments look at how businesses help with the management of resources and how they contribute to wider health and wellbeing. Funds which specifically aim to fight climate change are a sub-set of sustainable funds.

T is for Task Force on Climate-related Financial Disclosures (TFCD)

The TFCD was established in 2015 by the Financial Stability Board, to help investors assess and quantify climate risks and opportunities. By developing a voluntary, consistent framework for climate-related financial risks, it aims to help investors better manage those risks.

As of 2021, it consists of 32 representatives from a range of organisations from large banks to pension funds – with over 1,000 global organisations declaring their support for TFCD and its recommendations.

U is for UN Sustainable Development Goals

The UN Sustainable Development Goals were established in 2015. They consist of 17 goals designed to be the “blueprint to achieve a better and more sustainable future for all”.

They are:

  1. No Poverty
  2. Zero Hunger
  3. Good Health and Well-being
  4. Quality Education
  5. Gender Equality
  6. Clean Water and Sanitation
  7. Affordable and Clean Energy
  8. Decent Work and Economic Growth
  9. Industry, Innovation and Infrastructure
  10. Reducing Inequality
  11. Sustainable Cities and Communities
  12. Responsible Consumption and Production
  13. Climate Action
  14. Life Below Water
  15. Life On Land
  16. Peace, Justice, and Strong Institutions
  17. Partnerships for the Goals

The aim is to have achieved these goals by 2030.

V is for Voting practices

When you invest in equities you get voting rights. Underlying investors often delegate voting to their appointed fund managers. Listed companies hold annual general meetings (AGMs) where shareholders vote on proposals on a range of topics, including for example executive remuneration and a company’s carbon emissions strategy.

In the context of ESG investing, fund manager votes are expected on all of the shares they hold, and to vote responsibly, in line the expectations of the underlying investors. This can be very nuanced as the mix of underlying investors can be broad.

See also: – Parmenion Q&A: We want evidence fund managers are voting

W is for Water intensity

Water intensity is the rate at which water is used in a given area or process. It’s a useful indicator of how efficiently water resource is being used over time.

This is particularly important in areas where water is scarce or prone to fluctuations in supply, or where water is used for industrial processes and could risk depletion of water table levels.

When it comes to ESG, ethical and sustainable investing, this is typically covered under the “Environmental” element of ESG due diligence.

X is for eXclusions (i.e., negative screening)

This is a more traditional approach to ethical investment that emphasises avoiding controversial businesses and activities.

Common exclusionary or negative screens include:

  • Armaments
  • Pornography production
  • Animal testing (non-medical)
  • Human rights abuse
  • Tobacco production
  • Environmental damage
  • Gambling
  • Alcohol production
  • Nuclear power

It can be difficult to fully eliminate all negative elements from an investment portfolio without limiting your investment options, which can reduce diversification.  But it doesn’t have to be all or nothing. Maximum limits can be set on the revenue allowed from controversial sectors e.g. no more than 10%.

Y is for Your client’s personal values

A strong majority of consumers now consider their personal ethics in their buying decisions, according to research by the lang cat, and ethical considerations are increasingly part of deciding on the suitability of an investment.

This means clients’ values may influence what they invest in more than advisers think. That’s why it’s important that advisers ask the right questions when discussing clients’ financial planning needs.

Z is for Zero waste

According to the Zero Waste International Alliance, zero waste is: “The conservation of all resources by means of responsible production, consumption, reuse and recovery of all products, packaging, and materials, without burning them, and without discharges to land, water or air that threaten the environment or human health.”

In a nutshell, it means making sure that nothing is sent to landfills, incinerators, or the environment.

And it’s not just about ‘Reduce, Reuse and Recycle’. Zero waste means fundamentally restructuring production and supply chains to minimise waste.

For example, according to research by the UN, we’ve only recycled 9% of the 8.3billion tonnes of plastic that’s been produced since the 1950s. A zero waste world for plastic would see innovations such as biodegradable alternatives reduce our reliance on plastic, and help us reuse and recycle it more efficiently.

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