What is ESG?
Environmental, social, and corporate governance is an approach to evaluating the extent to which a corporation works on behalf of social goals that go beyond the role of a corporation to maximize profits on behalf of the corporation's shareholders.
What are environmental, social, and governance (ESG) criteria?
Environmental criteria focuses on topics such as nature, carbon neutrality, waste, pollution, and animal treatment. GHG reporting and sustainability reporting are now at the top of the list that investors acknowledge.
Social criteria may include with whom businesses have relationships whether they are sustainable vendors or if they help build up the community with their resources. This also includes human rights of employees, communities and others in the supply chain.
Governance criteria include keeping transparent accounting records, avoiding conflicts of interest between board members, and that stockholders are able to vote on important matters. Other concerns would be management structure, employee relations and retention, and compensation of wages.
Carbon dioxide equivalent (tCO2e)
Carbon dioxide equivalent or CO2e means the number of metric tons of CO2 emissions with the same global warming potential as one metric ton of another greenhouse gas
The EU taxonomy
The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It could play an important role helping the EU scale up sustainable investment and implement the European green deal. The EU taxonomy would provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable
Green Asset Ratio (GAR) key performance indicator (KPI) under the Taxonomy Regulation shows the proportion of exposures related to Taxonomy-aligned activities compared to the total assets of those credit institutions
Greenhouse gases, or GHGs, are compound gases that trap heat or longwave radiation in the atmosphere. Their presence in the atmosphere makes the Earth's surface warmer. Sunlight or shortwave radiation easily passes through these gases and the atmosphere.
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The Network for Greening the Financial System (NGFS) is a network of 114 central banks and financial supervisors that aims to accelerate the scaling up of green finance and develop recommendations for central banks' role for climate change
Principal Adverse Impacts (PAIs) – Negative, material, or potentially material effects on sustainability factors that result from, worsen, or are directly related to investment choices or advice performed by a legal entity
Physical risk (climate change stress testing)
Physical risk refers to the financial impact of a changing climate, including more frequent extreme weather events and gradual changes in climate, as well as of environmental degradation, such as air, water, and land pollution, water stress, biodiversity loss and deforestation, and more
Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants
leased climate-related ﬁnancial disclosure recommendations designed to help companies provide better information to support informed capital allocation
Transitional risk (climate change stress testing)
Scenario for physical and transition-risk levels (ECB economy-wide climate stress test | Source: https://www2.deloitte.com/ch/en/pages/risk/articles/tcfd-and-why-does-it-matter.html
Transition risk refers to the negative impact that the introduction of climate policies to reduce CO2e emissions could have on certain high-emitting firms. Yet policies to limit carbon emissions, such as a carbon tax, could increase the costs of raw materials and energy, or require businesses to carry out a costly and large-scale overhaul of their production processes to eliminate the use of carbon.
Share of firms exposed to physical and transition risk by European Country (ECB economy-wide climate stress test)