11 August, 2022 / Research
An A-Z of ESG: Part two
By Mollie Thornton, senior investment manager, Parmenion
In the second of a three-part series, Parmenion's Mollie Thornton looks at the letters J-to-Q of ESG investing
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 second instalment, Thornton takes a look at J to Q.
J is for just transition
To limit the worse effects of the climate crisis, the world needs to rapidly transition to a green economy. This will present new economic opportunities but mustn’t be at the expense of the most vulnerable in society.
A just transition aims to avoid this by making sure no one is left behind or disadvantaged by the transition to a more sustainable future.
In fact, the concept of a just transition is a key part of the EU’s Green Deal which aims to ensure “a fair transition to a climate-neutral economy, leaving no one behind” and aims to mobilise at least €150bn over the period 2021-2027”.
K is for Kofi Annan
Kofi Annan was the Secretary-General of the United Nations (UN) between 1997 and 2006 and was instrumental in the development of the UN’s Principles for Responsible Investment (PRI). In 2005 he invited some of the world’s largest institutional investors to help develop the principles which were launched at the New York Stock Exchange in 2006.
The six principles are:
1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the principles.
6. We will each report on our activities and progress towards implementing the principles.
L is for light (and dark) green
Light green investments take a positive approach to engaging with companies. Where they see a company moving in the right direction, although further change is needed, they might continue to invest in the company and use their influence to enact or speed up change (see “P” for more on this).
Dark green investments, on the other hand, tend to be stricter and take a more exclusionary stance. This means avoiding companies that engage in certain controversial activities, such as fossil fuels, tobacco, and armaments.
M is for mitigation
Mitigation is the reduction and stabilisation of CO2 and other greenhouse gas levels in the atmosphere. This could be through:
- reducing the release of these gases in the first place, for example reducing the burning of fossil fuels
- removing them from the atmosphere by enhancing “sinks” that exist already, such as forests and oceans
- carbon capture and storage – using technology solutions to suck CO2 out of the atmosphere, then store it in an inert state
An additional approach is adaptation – adjusting to the current and expected harmful effects of climate change. This could include building defences against rising sea levels or cultivating more drought-resistant crops.
N is for net zero
If a company or country gets to net zero, its greenhouse gas emissions are balanced by emissions removed from the atmosphere. This can be achieved by reducing greenhouse emissions from its activities – for example, by switching to renewable power sources and adopting more efficient manufacturing processes.
For certain companies and sectors it’s more difficult to reduce emissions to zero, so achieving net zero will require removing emissions from the atmosphere through carbon sinks – primarily forests – and developing new technology for carbon capture and storage.
O is for (carbon) offsetting
Carbon offsetting is the mechanism whereby an individual or business can purchase CO2 savings from elsewhere to compensate for or offset their own emissions. Savings typically come from funding decarbonisation initiatives such as renewable energy projects, tree planting or carbon capture and storage.
It’s not without its critics though. Offsetting doesn’t incentivise buyers to reduce their own emissions or stop them going into the atmosphere in the first place. Measuring the CO2 savings of these projects is challenging.
Supporters, however, argue that it enables rapid expansion of green projects as well as allowing individuals and businesses to reduce their emissions indirectly much quicker than they would otherwise.
Efforts are being made to standardise the carbon offsets market and improve trust. This is an evolving area.
P is for Paris Climate Agreement (and positive engagement)
Paris Climate Agreement
The Paris Climate Agreement (also known as the Paris Agreement or Paris Climate Accords) is a landmark treaty on climate change, that was negotiated by 196 countries in Paris in 2015.
It’s a legally binding treaty that covers climate change mitigation, adaptation, and finance. Its ultimate aim is to keep the average rise in global temperatures to well below 2°C above pre-industrial levels, ideally limiting the increase to 1.5°C. These thresholds are considered to be the limits at which the worst effects of climate change can be avoided.
To achieve this, emissions must be reduced as quickly as possible, reaching net zero emissions by 2050.
Positive engagement, or stewardship, encourages positive company behaviour through responsible voting practices and engagement with senior management to effect positive changes in their environmental, social and governance (ESG) policies.
Q is for asking the right questions
When it comes to incorporating ethics into financial advice, it’s all about asking the right questions.
Prospective clients are more and more likely, if prompted, to express interest in how their money will be invested and whether it will be invested in an environmentally and socially responsible way, according to Morgan Stanley’s Sustainable Signals research.
By incorporating ethical investment into the advice process, advisers can broaden their client base and strengthen their business as younger generations come through.
Our Ethical Investing with Parmenion guide has a handy six-stage approach for advisers to help take them from introducing ethics to selecting the right ethical portfolio for their client.
See also:- An A-Z of ESG: Part one
Part of the Bonhill Group.