What it means? - ESG dictionary
After serious articles on difficult regulations, it's time for something a little lighter. Something that should appear, as one of the first, run-up texts on this site, that is, a glossary of terms used in the context of sustainable development.
ESG - this acronym has been devoted to a whole one article, but to make our glossary complete we can't leave it out. It stands for three factors: environment, social responsibility and corporate governance. based on them, ratings and non-financial assessments of companies, countries and other organizations are created. The main purpose of ESG is to provide investors with the opportunity to compare alternative investment directions on a single level, by analyzing these 3 parameters.
Sustainability - this is another basic concept, which defines how to conduct business in such a way that meeting the needs of today's society does not reduce the chances of providing for the needs of future generations. This includes minimizing negative environmental impacts, protecting social capital and respecting human rights, promoting economic development, respecting diversity, and fighting poverty and inequality. A 1987 report by the World Commission on Environment and Development defined sustainable development as "development in which the needs of the present generation can be met without diminishing the chances of future generations to meet them."
Corporate governance - or our famous "G" - governance... It is a set of rules of conduct both for the bodies of companies, but also for the members of the bodies of these companies - the supervisory board, the management board and the shareholders. The principles of corporate governance relate to the company's management in the broadest sense. These are rules that govern a company's procedures and processes, as well as reporting and control systems, so that they are in line with best practices in the area of governance. Properly implemented corporate governance allows a company to operate responsibly and transparently, making it an important factor in its development.
CSR - corporate social responsibility. It is a concept according to which companies at the stage of building a business strategy should take into account social interests, environmental protection and care for relations with various stakeholder groups. According to it, all business activities of a company should be transparent, ethical and contribute to the development and well-being of society as a whole. It is an awareness of the responsibility of the company for all the consequences of its decisions, which has a great impact on its development, including by increasing the trust of employees, customers or investors.
Agenda 2030 - is the world development strategy until 2030. It contains 17 Sustainable Development Goals (SDGs). It was adopted in 2015, when all 193 UN member states unanimously adopted the resolution "Transforming our world: the 2030 Agenda for Sustainable Development."
SDGs - Sustainable Development Goals, established as part of the 2030 Agenda. It defined 17 Sustainable Development Goals and associated 169 tasks that the world should achieve by 2030. They address achievements in 5 areas - the so-called 5xP: people (people), planet (planet), prosperity (prosperity), peace (peace), partnership (partnership). The goals cover a wide range of challenges, such as poverty, hunger, health, education, gender equality, environmental protection, climate change, sustainable development, peace, social justice, among others.
The Paris Agreement - is an agreement reached at the 21st UN Climate Change Conference, held in Paris in 2015. It obliges all countries to submit long-term scenarios for reducing greenhouse gas emissions by 2020 in accordance with the methodology adopted by the IPCC (Intergovernmental Panel on Climate Change. The Paris Agreement recognizes that existing national targets are insufficient to limit warming below 2 °C and encourages the submission of new, more ambitious ones. As an additional result, the IPCC has begun work on a special report on limiting warming by1.5°C. The Agreement has been accepted by all 195 participating countries. The long-term goal of the Agreement, set forth in Article 2, is to strengthen the response to the threat of climate change, taking into account the SDGs (Sustainable Development Goals) by:
limiting global warming well below 2 °C and ultimately to 1.5 °C relative to the pre-industrial era in order to reduce the risks and damages caused by climate change.
Adapting and mitigating the effects of climate change, strengthening resilience and low-carbon development in a way that does not reduce food production.
Addressing the compatibility of financial sector actions with climate goals. Each country under the agreement has been required to submit or update voluntary national targets (INDCs). The targets are to be sent to the UN and updated every five years. In order to meet the requirements, countries are committed to efforts to quickly peak and then rapidly decrease global greenhouse gas emissions and achieve climate neutrality in the second half of the 21st century.
The European Green Deal - is a package of policy initiatives launched in 2019. Its goal is to put the European Union on the path of green transformation and ultimately achieve climate neutrality by 2050. It emphasizes the need for a holistic and cross-sectoral approach in which all relevant policy areas contribute to the overarching climate goal. The package includes initiatives in a number of closely related areas, such as climate, environment, energy, transportation, industry, agriculture and sustainable financing.
Fit for 55 - is a package of legislation introduced by the European Union in 2021 under the common banner of "Ready for 55." 55 refers to 55 percent, the European Union's new interim emissions reduction target for 2030. This target has recently been increased - previously the EU had a target to reduce greenhouse gas emissions by 40 percent relative to 1990.
Integrated Report or Integrated Report - An integrated report should be a concise but precise communication that presents how the organization's strategy, management model, financial performance of operations and future prospects, framed in the context of the external environment, lead to value creation in the short, medium and long term. An integrated report should include both financial and non-financial information.
IIRC - this acronym derives from the English name of the International Integrated Reporting Council and is inextricably linked to the concept described above. The purpose of this Council is to assist companies in presenting their financial and non-financial value creation process through integrated reporting.
Non-financial report - companies' non-financial reports publish information on their environmental, social and corporate governance activities. They allow managements, investors and other stakeholders to make decisions taking into account the principles of sustainable development. Non-financial reports of companies are an important source of information for potential employees, colleagues, administrative units, contractors, investors or non-governmental and social organizations, as well as for rating agencies.
GRI - stands for Global Reporting Initiative. It is an international independent standards organization that helps companies, governments and other organizations understand their impact of environmental, social and governance factor issues. To this end, it has established a set of sustainability reporting standards (GRI) to which companies and other organizations around the world adhere.
NFRD - stands for Non-Financial Reporting Directive on how to disclose non-financial information. It required large public interest entities to disclose non-financial data and diversity information.
CSRD - stands for Corporate Sustainability Reporting Directive. This is the directive that will replace the aforementioned NFRD from January 1, 2024. Among other things, the CSRD aims to harmonize European reporting standards. The CSRD is also expected to improve the quality of reported information and make auditing of sustainability reports mandatory (now only financial reports are audited).
ESRS - an acronym for European Sustainability Reporting Standards, the European standards for reporting non-financial data that the CSRD will introduce.
SIN (Standard for Non-Financial Information) - a Polish standard that supports companies in fulfilling their non-financial information reporting obligations as required by the NFRD. It is a much less popular standard and less frequently used by companies than GRI.
SASB - an acronym for Sustainability Accounting Standards Board, which was established to develop sustainability accounting standards. Investors, lenders, insurers and other providers of financial capital are increasingly sensitive to the impact of environmental, social and governance (ESG) factors on companies' financial performance, resulting in the need for standardized reporting of ESG data.
TCFD - stands for Task Force on Climate-related Financial Disclosures, which has published a list of 11 recommendations in this area for reporting on issues in the areas of corporate governance, corporate strategy and risk management, as well as specific climate targets and indicators.
CDSB - or Climate Disclosure Standards Board - is a nonprofit organization that aims to provide relevant information to investors and financial markets by integrating climate change-related information into mainstream financial reporting.
COP - (Communication on Progress) - is a reporting standard created by the United Nations Global Compact (UNGC). COP measures companies' progress in implementing the 10 principles of the Global Compact established by the UN.
UNGC - (United Nations Global Compact) - is the world's largest initiative bringing together sustainable business. Since its establishment in 2000, it has been working for the environment, human rights, anti-corruption and decent and legal work.
OECD - (Organization for Economic Co-operation and Development) - is an international economic organization of 37 highly developed and democratic countries. It was created by the Convention on the Organization for Economic Cooperation and Development signed in Paris by 20 countries on December 14, 1960. The headquarters of the OECD is the Château de la Muette in Paris. Within the OECD system is the International Energy Agency (IEA). Poland has been a member of the OECD since 1996.
EU Taxonomy Regulation - Regulation (EU) 2020/852 of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investments (the "Taxonomy Regulation"), effective January 1, 2022, is a tool to help companies and investors make investment decisions towards more sustainable economic activities. The mechanism provides uniform criteria for determining whether an economic activity is taxonomic, i.e. environmentally sustainable, and eliminate greenwashing.
SFDR - or Sustainable Finance Disclosure Regulation, i.e. Regulation (EU) 2019/2088 of the European Parliament and of the Council on Sustainability Disclosures in the Financial Services Sector, which is effective in Poland and the rest of the EU as of March 10, 2021. Financial institutions are given dual treatment by the regulation - they are required to disclose non-financial information at the entity and product level. This means that they should report on their ESG activities and strategy, just like companies in other sectors, but also, by their special role in the market, they should report on how risks related to ESG issues are taken into account in the investment decision-making process. The SFRD was amended by the Taxonomy Regulation and supplemented by the Commission Delegated Regulation (EU) 2022/1288 setting technical standards for its application.
IDD - (Insurance Distribution Directive) - The purpose of the IDD is to establish uniform rules on insurance distribution throughout the European Union. One of the primary objectives of the directive is to increase the level of protection for customers entering into an insurance contract, which is achieved, among other things, by providing adequate information about the product and the insurance distributor. In 2021, it was supplemented by the Commission's Delegated Regulation, which mandates the consideration of ESG factors at various levels of insurance distribution.
MiFID - (Markets in Financial Instruments Directive) - in force since April 30, 2004, a law that applies to 30 countries of the European Economic Area (27 members of the European Union plus Liechtenstein, Norway, Iceland), whose main objectives of establishment are to increase and regulate market competition and customer protection in European financial investment services markets. MiFID guidelines cover all banks, brokers, exchanges, investment advisors and most institutions providing financial services in the capital market.
MiFID II - (Markets in Financial Instruments Directive) - MiFID II significantly modifies MiFID requirements and introduces new rules in the context of investor protection, market structure, additional information requirements, new rules on investment advice, and technological requirements (e.g., related to algorithmic trading and reporting).
CAPEX - (capital expenditures, i.e., capital expenditures) - are capital expenditures for product development or system implementation - but only to the extent that the capital is used to sustain the company's existing ability to generate revenue. Expenses are from a financial perspective, not an accounting perspective.
OPEX - (operating expenditures, i.e., operating expenses) - are expenses related to maintaining a product, business or system (wages and running expenses - overheads). In Polish, the equivalents are maintenance expenses and (capital) expenditures.
(D&I) - (Diversity & inclusion) - is a theory about equal opportunity, diversity and inclusion of all employees in common activities.
Employee volunteering - is an activity that mainly involves the entrepreneur undertaking and supporting charitable activities for various people, social initiatives, NGOs. It helps support the concepts of corporate social responsibility by involving employees in charitable, socially engaged and environmentally supportive activities.
Standard SA 8000 - (Social Accountability 8000) - a standard prepared in 1998 by the International Organization for Standardization on the promotion of corporate social responsibility and the application of acceptable practices in the workplace. The main area of influence of the standard is labor issues, as well as elements related to human rights. SA 8000 certification covers issues such as forced or child labor, health and safety, freedom of association and collective bargaining, disciplinary practices, working hours, wages and management systems.
The AA 1000 - (AccountAbility 1000) standard was created in 1999 by the Institute for Social and Ethical Responsibility. According to the principles of the standard, a company operating in the market should be accountable for all activities it can influence. The AA 1000 standard refers to general standards that draw attention to responsibility in the context of sustainable business, but also addresses so-called corporate responsibility. It focuses primarily on the market area and includes principles such as regularity, quality assurance, accessibility, reliability, or comprehensiveness.
ISO 26000 - this standard was established in 2010 and is now one of the best known and most important standards. According to it, corporate social responsibility consists of the key and following areas: corporate governance, human rights, labor relations, environmental protection, consumer relations and community involvement. ISO 26000 is one of three documents recommended by the European Commission for European companies to implement social responsibility.
Respect Index - although it's history it's impossible to forget it. It was the first index of socially responsible companies of the Warsaw Stock Exchange in Central Europe. which was calculated by the Warsaw Stock Exchange for more than a decade and to get into which meant that companies had to fill out a special questionnaire and meet the required expectations. It covered Polish and foreign companies on the WSE's Main Market that operate in accordance with management standards for corporate and information governance and investor relations. It also took into account environmental, social and labor aspects. In 2019, it was replaced by WIG-ESG.
WIG-ESG - an index launched in September 2019 by the WSE, which includes all companies in the WIG20 and mWIG40, i.e. it includes the largest companies listed on the WSE, regardless of whether and to what extent they operate in accordance with ESG guidelines. It is worth noting that the WIG-ESG is not a continuation of the RESPECT Index. The way they are evaluated differs. Among other things, the element influencing the weights of WIG-ESG participants is the ESG rating created by the independent research agency Sustainalytics. In the ESG rating, companies can get from 0 to 100 points, and the fewer points they have, the better the company adheres to socially responsible business principles.
Socially Responsible Marketing (CRM) - Cause Related Marketing is the combination of a company's economic goals with the social goals of a venture. It is a combination of the business goals of a film with the activities typical of non-profit entities, i.e. solving social problems. An example would be allocating a certain portion of profit to a selected social cause, such as a meal for the poor.
Corporate community involvement (CCI) - social involvement of business, which focuses on the conditions of the immediate environment and operates according to the principle: "Think globally, act locally." CCI is the most visible part of programs implemented as part of corporate social responsibility. It includes financial and in-kind activities that support social goals.
Fundraising - the process of raising money to support a social cause or public interest organization. These funds can come directly from the funds of the company and its employees or from fundraising with specific individuals or entities.
Social involvement - the company's conscious participation in society to solve specific social problems. The company's social involvement is often expressed in charitable activities, education of children and adults, cooperation with universities or NGOs.
Non-governmental organizations (NGOs)- these are all entities that are not units or organs of public administration and whose activities are not aimed at making a profit. They focus on the realization of the chosen social interest and, through cooperation with business, help to achieve the goals, related to corporate social responsibility.
Scenario analysis of environmental issues / Climate scenario analysis - a method that helps analyze the long-term business strategy of companies, taking into account possible climate change and related challenges that companies will have to deal with in the future. The analyses should consider at least two climate scenarios, including the situation of an increase in the Earth's temperature of more than 1.5 degrees Celsius, which would have a significant impact on raw material availability and supply chains. Scenario analyses also should include an analysis of the opportunities and risks that may arise with climate change. Preparing scenario analyses of environmental issues is very important, as it shows that the company is prepared for the future and helps in gaining financing and investor confidence.
Greenhouse gas emissions / carbon footprint - this is the process of producing gases that contribute to the greenhouse effect. The activities of companies often involve the consumption of energy, during production processes or transportation, which is the result of burning fossil fuels, resulting in the emission of greenhouse gases into the atmosphere. The sum of a company's GHG emissions is also referred to as the company's carbon footprint.
Greenhouse gases - or greenhouse gas (GHG), are gases that float in the atmosphere and transmit most of the sun's (short-wave) radiation while absorbing infrared (long-wave) radiation. By hindering the release of energy into space, they contribute to the greenhouse effect and increase the temperature of the atmosphere and Earth's surface. Greenhouse gases include: water vapor, carbon dioxide CO2, methane CH4, freons (CFCs), halons, nitrous oxide (N2O), industrial gases (PFCs, SF6) and ozone (O3). The increased concentration of greenhouse gases in the atmosphere is largely caused by human activity, especially the burning of fossil fuels.
Calculation of CO2 emissions / Calculation of carbon footprint - is sometimes also referred to as calculation of GHG emissions. It refers to the process of calculating the amount of greenhouse gases produced by a company. Every company should monitor the carbon footprint of its operations. There are several methods and standards used to calculate the carbon footprint, for example, GHG Protocol, ISO 14064 and ISO 14067 . Carbon dioxide CO2, methane CH4 and nitrous oxide N2O, among others, are considered in the calculation of greenhouse gas emissions. Different greenhouse gases have different effects on creating the greenhouse effect, some greater than others. Therefore, gas emissions are measured in the universal unit of carbon dioxide equivalent mass.
Carbon offset/carbon offset - (carbon offset) refers to an offset in greenhouse gas emissions (e.g., through the implementation of technology) or an increase in the "storage" of greenhouse gases (e.g., through land reclamation or forest planting), which is used to compensate for gas emissions that have occurred elsewhere. Offsetting is done with so-called carbon offset credits, which are transferable, certified units equivalent to a reduction in emissions of one ton of carbon dioxide or its equivalent. By purchasing such a credit, a company that has failed to reduce its emissions can purchase carbon credits, redeem them and thus include them in the reduction of its carbon footprint. Carbon credits were created on the premise that greenhouse gases mix in the atmosphere, so it doesn't matter where the actual reduction in greenhouse gas emissions occurs, because the total amount of greenhouse gases accumulated in the atmosphere will actually be less. However, it is worth noting that offsets should not be the only method of reducing CO2 emissions, but only to compensate the environment for those emissions that we have failed to reduce by introducing other measures, such as changing the methods and technologies used so far to more environmentally friendly ones, or purchasing electricity from renewable sources. That is, first reduction and then, preferably residual, offset!
Greenwashing - is, in the most general terms, a company's marketing communications based on false or misleading statements regarding the environmental compliance of a product or its components.
Closed-cycle economy (closed loop economy, circular economy) - GOZ for short, is such a model of economy, which primarily uses renewable raw materials and reduces environmental pollution and energy consumption by creating a closed loop in which used materials and waste are reused. The concept of a closed-circuit economy is the opposite of the linear economy model, which uses mainly non-renewable raw materials, which risks rapidly running out of the raw materials needed for production and causing great environmental pollution. The concept of GOZ is to manage raw materials and production processes more rationally, taking into account the issue of the resilience of the economic system in the long term.
Stakeholder - means individuals, groups, companies, institutions and all those who are affected by the activities of a given company, and/or are involved in some way in these activities, including: customers, suppliers, employees, shareholders, the local community, NGOs and government authorities. For a company to be managed in an informed and responsible manner, it should identify its stakeholders and build good and strong relationships with them. Companies should be aware of different stakeholder groups and take their needs and requirements into account. It is very important to distinguish between stakeholders and shareholders, because caring only for the interests of shareholders results in focusing only on maximizing the company's profits, while caring for stakeholders means that the company pays attention to the broader interests of society.
Compliance - The English word "compliance" means "conformity" and often refers to the broad compliance of companies' activities with the rules - both internal and top-down regulations - to which a company should adhere. Compliance systems are very broad in scope, as they encompass both management and all company processes. Their purpose is not only to control and regularly audit the compliance of a company's procedures with legal regulations, but also to detect irregularities early and protect the company from costs associated with possible penalties. The compliance system also allows for the implementation of a code of ethical principles that should be followed by the company's employees.
Code of ethics - a set of company policies based on ethical values.
Supply chain - refers to the network of organizations or people, and the sequence of processes and activities that are needed to get the finished product to the end customer. Part of the supply chain are all those involved in the activities of sourcing raw materials, transporting, processing materials and delivering them to the customer.
Value chain - consists of the sequence of processes and activities of a given enterprise that leads to the delivery of the final product to the customer. The concept of the value chain was developed by Michael E. Porter and is often used as a strategic management concept, which sets as its goal the achievement of a company's competitive advantage through the creation of customer value. This model helps conduct an analysis of all the company's activities and isolate those that create the most value for the buyer.
Measuring social impact - involves examining what impact a company's CSR activities have on their intended beneficiaries and helps determine whether the company has achieved its goals. Studying social impact is often difficult because a company's activities can affect the environment in very different, often unquantifiable ways. That's why companies use a variety of impact study methods, both quantitative and qualitative (e.g., gathering stakeholder opinions).
Climate Policy / Environmental Policy - is a set of values, principles and an organization's action plan to reduce its negative impact on the climate. Companies' climate policies are very important because they lead to, among other things, reducing carbon dioxide emissions into the atmosphere and reducing the production of waste that pollutes the planet. Moreover, they enable companies to prepare for upcoming changes in the environment, such as rising average temperatures.
Carbon footprint reporting - its goal is to achieve transparency on companies' greenhouse gas emissions and impose requirements to reduce the production of gases that have a negative impact on climate change. Reporting requires companies to calculate their carbon footprint, implement optimization of their production process and set GHG reduction targets. GHG emissions are reported in 3 scopes:
Scope 1 (scope 1) - includes direct emissions that arise from the combustion of company-owned fuels and emissions from the company's technological processes.
Scope 2 (scope 2) - covers indirect emissions that arise during the production of energy that the company buys from an external supplier (emissions arise outside the company).
Scope 3 (scope 3) - includes other indirect emissions that arise at all stages of the supply chain, including raw material extraction, transportation, product manufacturing and employee travel.
Science Based Targets (SBT) - are guidelines developed by the Science Based Targets Initiative for corporate greenhouse gas reduction targets. Based on them, the SBTi initiative was created to show companies how much and how fast they need to reduce greenhouse gas emissions to prevent the worst effects of climate change.
Environmental footprint - (environmental footprint) measures the demand for natural resources and the rate at which these resources are being consumed in relation to the time it takes for the environment to regenerate and provide the raw materials people need anew. The ecological footprint is represented in the unit of hectares of land and sea area that is needed to re-produce the consumed resources. The areas that are taken into account in calculating the environmental footprint are: 1) arable land, 2) pastures, 3) fisheries, 4) built-up land, 5) forested areas, and 6)land carbon requirements.
ESG ratings - are used to assess companies' ESG activities. They assume that issues related to sustainability and responsible business can significantly affect the financial performance and growth of companies. For this reason, ESG ratings are increasingly playing an important role in the decision-making processes of investors and financial institutions. At present, there are more than 600 rating agencies on the market, which take into account a different range of data and their evaluation criteria, update the data at different frequencies, etc. Important ESG ratings include Bloomberg ESG Disclosure Score, S&P Global Ratings ESG Evaluation, MSCI ESG Ratings and Sustainalytics ESG Risk, among others.
Diversity - the concept that people of different ages, genders, skin colors, physical abilities, sexual orientations, etc. should be treated as equals, but at the same time respecting their differences in order to provide the same opportunities for all. Adherence to the principle of diversity is aimed at preventing discrimination and exclusion of marginalized groups and creating an open, inclusive environment. Diversity in companies is also extremely important because it leads to the exchange of different experiences and ideas, which often give rise to more original, valuable solutions, which contributes to the development of companies.
ESG strategy - part of an organization's business strategy or a separate business strategy that takes into account environmental, social impact and corporate governance issues. The ESG strategy systematically introduces ESG-based goals and management principles, and defines metrics to verify the progress of its implementation.
I assume that this dictionary will still grow and new issues will appear in it, so I invite you to look into it from time to time :)