Understanding sustainable investment and ESG terms - Schroders
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Understanding sustainable investment and ESG terms
Contents
In this brochure, we lay out Schroders’ view
of the landscape of activities, strategies that fall
under the broad umbrella of ESG and sustainability,
and our assessment of the terms most commonly
associated with each.
3
Introduction
5
Sustainability terms
1. I ntegration 5
2. G
overnance & active ownership 6
4
3. S
creened investments 7
(ethical investing)
4. Thematic investing 8
5. I mpact investing 9
6. Industry organisations 10
and initiatives
Overarching view:
Schroders ESG roadmap
2 Understanding sustainable investment and ESG terms
Introduction
Over the last decade, sustainability has become an
increasingly crucial aspect of investing. Institutional
asset owners began to ask about managers’ credentials
in integrating environmental, social and governance (ESG)
considerations a decade ago and these discussions have
now become a standard feature of our interactions. Retail
investors have also shown an appetite for products that
recognise and reflect the relationship between their
investments and an ever more challenging social and
environmental backdrop.
Limited industry Rapid rise in awareness, Ubiquitous recognition, focus
penetration limited differentiation on differentiating strategies
600 250
500
200
400
Indexed, 2007=100
150
300
100
200
50
100
0 0
2000 2004 2008 2012 2016 2020
Sustainable investing news articles (RHS) PRI signatories
European responsible investment AUM (EUR mn)
Source: Hightail (news search for articles containing “sustainable investing” relative to all articles referring to “investing”, Principles for Responsible
investment (number of signatories) and EuroSIF (combined AUM invested in different ESG strategies, adjusted for double-counting)
Today, almost all large asset managers trumpet their allowed investors to infer their own expectations
commitment to sustainable investing. Nine in every of what constitutes sustainability. As a result, the market
10 of the world’s largest fund managers have signed now has an eclectic mix of strategies sitting under
the UN’s Principles for Responsible Investment (PRI), the sustainable investments banner. As much effort
demonstrating a public commitment to ESG appears to have gone into labelling and positioning
integration1. As the number of investors focusing on as into developing more effective tools, frameworks
sustainability and ESG issues has expanded, so has or strategies to integrate sustainability and ESG
the volume of terms applied and the field has become considerations.
saturated with confusing nomenclature and a lack of
clarity on the various approaches. With investor attention turning increasingly to the
details of how companies conduct their businesses
For most of the last decade, much of our industry and why, we set out to provide a clear overview of
appeared content focusing on rhetoric over substance. the landscape of issues, acronyms and approaches
Keeping details, definitions and methodologies vague commonly used across the industry.
1 91 of the 100 largest active asset managers listed by Pensions & Investments are shown as signatories on the PRI website
Understanding sustainable investment and ESG terms 3Overarching view:
Schroders sustainability roadmap
The most commonly used terms include “sustainable”,
“responsible”, “impact” and “ESG investing”. These are often
used interchangeably to cover a wide spectrum of goals and
strategies. At one end of the scale, ethical screens eliminate
companies engaged in controversial activities, reflecting asset
owners’ values and should have little expectation of improved
investment returns. At the other end, sustainability analysis
can, when approached thoughtfully and integrated with more
traditional analysis, improve insights and enhance performance.
Each approach has different objectives, requires different skills
and demands different tools.
To illustrate this point, the chart below Every approach plotted above covers a wide
broadly maps the main approaches we have spectrum of distinct activities, and an even
identified in terms of expected performance wider range of terms (many of which were
benefits relative to social benefits, as well intentionally left off for the sake of simplicity).
as the top-down thematic or bottom-up, The next several sections offer our
company-driven starting points. assessment of the various areas of activity
encompassed by each broad category. This
The X axis runs from Values (which is is intended as a roadmap to help investors
based on clients’ ethics), to Value (which understand the different approaches
is more focused on financial outcomes). used across the industry, and common
interpretations of each.
The Y axis identifies whether the
investment approach is grounded in This brochure is not intended to offer any
a macro view of cross-sector challenges views or recommendations on what might
and opportunities or in a micro view of a be the most effective or intelligent choices
company’s business models or activities. as such decisions vary greatly depending
on investors’ goals and investment
strategies.
Top down, issues driven
Thematic investing
Screened ESG Integration
investments
Governance
Values & active Value
ownership
Sustainability
Impact investing
Bottom up, company driven
Source: Schroders. For illustrative purposes only.
4 Understanding sustainable investment and ESG termsSustainability terms
I. Integration
Divestment: The sale of an asset for social ESG research providers: Firms that Responsible Investment: a term
or political goals. Examples of divestment conduct quantitative and qualitative widely used to cover a broad range of
include the selling of South African analysis of a company’s ESG performance activities and approaches, including ESG
assets during the apartheid era or, more and provide a standardised measure (such integration, Engagement and Active
recently, investments in fossil fuel-related as a company ESG rating). Approaches Ownership.
assets. In many regions, local legislation and results can vary significantly across
drives divestment guidelines, which can providers. MSCI and Sustainalytics are Social factors: Issues related to social
influence the extent to which public funds widely used ESG research providers. trends such as demographic changes,
can or cannot invest in certain regions. social attitudes, social trust and other
Divestment is also sometimes known as Extra-financial factors (sometimes beliefs or behaviours. Investors may use
divestiture. known as non-financial factors): Factors the analysis of these factors to gauge the
that are not the usual, financial variables contribution a company makes to society
Environmental factors: Issues considered in investment analysis and (as responsible corporate citizens) or to
related to resource use, pollution, whose monetary impacts are typically assess a company’s ability to adapt to the
climate change, energy use and other hard to quantify. The term can be applied pressures those social trends exert on
physical environmental challenges and to any measure whose unit of measurement business models and profitability.
opportunities. Investors will typically is not monetary.
consider a company’s environmental Socially Responsible Investment (SRI):
performance either in terms of the Fund ESG ratings score: A third party This is considered the oldest and most
company’s impact on the environment or rating that attempts to indicate the ESG established term relating to sustainable
the impact of natural capital constraints on credentials of a particular fund relative to investing, and is grounded in more
its profitability. Common measures include an investment category or peer group, ethically and values-focused approaches
carbon emissions, water and energy based on an assessment of the ESG to investment.
consumption, waste management and credentials of a fund’s underlying holdings.
pollution. Typically combines the ratings ESG Sustainability: Describes the features
research providers publish with portfolio which ensure companies, industries or
ESG analysis: The examination of a holdings. markets can operate within their means
company’s environmental, social and and maintain stability over the long
governance performance, which could Governance factors: Factors that measure term. Although sometimes interpreted
be designed and used in any of the the quality and robustness of a company’s through more of an environmental lens,
approaches described here. internal structure and practices, its it is applicable across the spectrum of
consideration for shareholder rights, its ESG issues and requires societies’ and
ESG integration: An investment approach accountability and wider transparency stakeholders’ expectations are met.
in which a range of sustainability and framework. Measures of governance
ESG-related risks and opportunities are can include board structure, board Triple Bottom Line (TBL or 3BL): An
considered in addition to traditional independence, executive compensation or accounting framework originally developed
financial analysis. In principle, this can auditor independence. in an effort to measure sustainability.
lead to a more fundamental assessment TBL goes beyond traditional measures to
of the environment in which a company Integrated reporting: Company reporting incorporate three additional dimensions
operates and its performance in managing that communicates the relationship of performance: social, environmental
different stakeholders. It should therefore between a company’s strategy and its (or ecological) and economic. Michael
provide a more complete understanding of financial, governance and sustainability Porter has more recently popularised a
future opportunities and risks compared performance. Shared Value framework that has similar
to traditional fundamental analysis. elements and emphasises the importance
In practice, its effectiveness in doing of expanding the value created for
so hinges on how that integration is shareholders to all stakeholders.
approached and implemented.
Economic
Performance
Sustainability
Environmental Social
Performance Performance
For illustrative purposes only.
Understanding sustainable investment and ESG terms 5Sustainability terms
(continued)
2. Governance & active ownership
Active ownership: Actively engaging with Fiduciary duty: The legal duty of one Shareblocking: A practice whereby
the managers and boards of directors of party (the fiduciary) to act in the best restrictions are placed on the trading
investee companies on business strategy interests of another (the principle). In of shares which are to be voted upon
and execution, including specific sustainability the investment chain there are a number prior to an annual general meeting.
issues and policies. It is seen as a means of of these relationships including the duty
reducing investment risk, enhancing long- that boards have to shareholders, the duty Shareholder activism (or advocacy):
term shareowner value, or both. between trustees and beneficiaries and A public form of engagement whereby
the duty between asset managers and investors use their shareholdings to
Board of directors: Appointed by their clients. engender change at a company. This can
shareholders to represent and protect be done through submitting shareholder
their interests in decision-making and Independent directors: Neither past resolutions or a public media campaign
ensure the development and execution nor present employees of the company against a company. Shareholder activism
of a successful value-creating strategy. or affiliated with it in any other way. In tends to be a more confrontational
some jurisdictions those who serve on approach to promoting change.
Corporate governance: The system of boards for a set period of time are no
rules, practices and processes by which longer considered independent, even if Stewardship: A purposeful dialogue
a company is directed and controlled, they began their tenure in that category. between shareholders and boards with
designed to ensure management acts the aim of ensuring a company’s long-term
in the best interests of its shareholders. Lead director/senior independent strategy and day-to-day management is
Corporate governance covers a wide director: Acts as an independent effective and aligned with shareholders’
scope from reviewing board independence, leader among directors and provides interest. Good stewardship should
remuneration and risk practices, to capital an independent point of view to the help protect and increase the value
allocation and accounting practices. chairperson.. The lead director can also of investments.
act as chairperson if the chairperson is
Corporate governance codes: A set conflicted or unavailable, and can be an Stewardship codes: A set of standards
of standards detailing good practice effective conduit for shareholder concerns. that help set expectations for asset
in relation to board leadership and managers and asset owners on oversight
effectiveness, remuneration, accountability Non-executive board members: and engagement with investee companies.
and relations with shareholders. These Sit on the board but do not form part These codes are established by local
are established by local regulators on a of the management team. regulators on a country by country basis.
country by country basis.
Organisation for Economic Co-operation Voting rights: Equity investors typically
Engagement: A dialogue between and Development (OECD) Principles enjoy rights to vote at annual and
a company and its shareholders. This can of Corporate Governance: A regularly extraordinary general meetings (AGMs
take the form of “change facilitation” or reviewed set of principles that set down and EGMs). The resolutions on which
“fact finding”. An engagement may take the guidelines on how to create a sound shareholders vote will vary according
place via face-to-face meetings with executive corporate governance system. Principles to individual countries’ legal frameworks.
or non-executive board members as well include transparency, accountability, They may include voting on an individual
as with other managers. More formal board oversight, and respect for the director’s appointment, remuneration or
requests may be submitted in writing. rights of shareholders and the role mergers and acquisitions.
of key stakeholders.
6 Understanding sustainable investment and ESG terms3. Screened investments (ethical investing)
Best-in-class investment: A comparative Positive screening: An investment
investment style that involves investing strategy that aims to select companies
only in companies that lead their peer that demonstrate leading sustainability
groups in respect of sustainability practices and are better positioned to
performance. benefit from, and build resilience to,
long-term societal and economic trends.
Cluster munitions and anti-personnel
mines (APMs): Cluster munitions are Sin stocks (or vice stocks): Stocks of
weapons designed to disperse multiple companies either directly or indirectly
explosive sub-munitions. Anti-personnel associated with activities considered to
mines are explosive devices designed be unethical or immoral, such as tobacco,
to harm or kill civilians. Schroders fully alcohol, gambling and adult entertainment.
supports the international conventions on
cluster munitions and APMs. Consistent Values-based investing: Investing
with this support, and in line with our that prioritises investors’ sustainability
commitment to responsible investment, objectives, rather than maximising
we will not knowingly hold any security returns in isolation.
that derives revenue from or provides
funding for either.
Negative/exclusionary/ethical
screening: An investment approach that
incorporates an investor’s moral principles
by excluding companies involved in certain
activities or industries (e.g. alcohol, gambling
and adult entertainment).
Norms-based investing: Investing that
excludes companies (or government debt)
from a portfolio on account of any failure
by the issuer to meet internationally
accepted norms such as the UN Global
Compact, the Kyoto Protocol or the UN
Declaration of Human Rights etc.
Understanding sustainable investment and ESG terms 7Sustainability terms
(continued)
4. Thematic investing
Carbon footprint: A measure of the total Climate risk: The investment risk resulting Low carbon funds: Funds that invest
greenhouse gas emissions, expressed in from a failure to keep global temperature in companies with a low carbon strategy
tonnes of carbon dioxide. It is one way rises to below 2°C above pre-industrial or low carbon emissions.
to assess the potential impact of climate levels.
change on a portfolio. It will measure Stranded assets: Assets that suffer from
at least one of the following: Circular economy: An economic system unanticipated or premature write-downs
designed to produce no waste or pollution. and are unable to operate to the end of
ȂȂ Scope 1 emissions: direct emissions
their economic lives due to changes in the
from owned or controlled sources Environmental funds: Funds that market and regulatory environment. Most
ȂȂ Scope 2 emissions: indirect emissions are primarily exposed to sustainable focus on regulation relating to climate
from the generation of purchased energy environmental themes such as clean change, but could include other changes
ȂȂ Scope 3 emissions: all indirect emissions energy, water and waste, or invest in that cause assets to become uneconomic.
(not included in scope 2) that occur in the companies with positive environmental
value chain of the reporting company, management. Renewable energy: Energy collected from
including both upstream and resources that are naturally replenished
downstream emissions Green investing: Investing in companies such as sunlight, wind, water and
and technologies that are considered to geothermal heat.
Clean technology: A range of products, be positive for the environment, such as
services and processes that reduce the companies offering alternative sources Water funds: Funds that invest in companies
use of natural resources, cut or eliminate of energy or those that have demonstrated providing technology, products and services
emissions and waste, or have the potential a track record of reducing their relating to the water value chain, such
to provide performance competitive with environmental impact. as water distribution, management,
traditional alternatives. treatment and analysis or irrigation.
Carbon footprint scope and emissions across the value chain
CH4 SF4
N2O HFCs PFCs
CO2
Scope 1
Direct
Scope 2
Indirect
Scope 3 Scope 3
Indirect Company Indirect
facilities
Purchased goods
Company Transportation
and services
Vehicles and distribution
Purchased Leased Investments
electricity, assets
heating and
cooling for End-of-life
own use treatment of
Capital goods Processing of solid products
Business Franchises
travel solid products
Fuel and energy Use of solid
related activities Waste generated Leased assets
products
Transportation in operations
and distribution
Upstream activities Reporting company Downstream activities
Source: The Greenhouse Gas Protocol, 2011 cited in: “Portfolio Carbon” UNEP FI Investor Briefing July 2013.
8 Understanding sustainable investment and ESG terms5. Impact investing
Community investing: Investments made Mission-related investing: Investments
directly into low-income or disadvantaged made to further the philanthropic goals,
communities, small businesses or community mission and values of an organisation that
services (for example child care, affordable are expected to deliver financial as well
housing and healthcare). as social or environmental returns.
Economically targeted investing: Social impact bonds: Investments
Investments that seek to promote economic designed to improve the social outcomes
development in local communities and of publicly funded services. Providers are
organisations, in addition to competitive typically charities that are often pioneering
financial returns. The investments may a new approach to a specific social problem.
be targeted at job creation, generating The investment is used to fund the working
small business loans, improvement in the capital needs of the project.
affordable housing stock or enhancing
infrastructure.
Green bonds: A bond in which proceeds
are used to fund new and existing projects
with environmental benefits. For example,
renewable energy and energy efficiency
projects.
Impact investing: Investments made
with the primary goal of achieving specific,
positive social benefits while also delivering
a financial return. Typically, these are
investments in small companies or projects
with clear social goals, providing them
with capital they may not otherwise have
accessed.
Understanding sustainable investment and ESG terms 9Sustainability terms
(continued)
6. Industry organisations and initiatives
Asian Corporate Governance Association Global Reporting Initiative (GRI): An Task Force on Climate-related Financial
(ACGA): An independent, non-profit international organisation that develops Disclosures (TCFD): A task force established
membership organisation dedicated and publishes sustainability reporting by the Financial Stability Board to develop
to working with investors, companies standards and measures for global voluntary, consistent climate-related financial
and regulators in the implementation companies. It has become the closest risk disclosures for use by companies when
of effective corporate governance thing to a global reporting standard for providing information to investors, lenders,
practices throughout Asia. See more ESG measures; it reports that 92% of the insurers and other stakeholders. See more
at the ACGA website world’s largest 250 corporations report on at the TCFD website
their sustainability performance. See more
Carbon Tracker: An initiative working at the GRI website UK Sustainable Investment and Finance
to align capital markets with climate Association (UKSIF): The membership
change objectives. See more at the International Corporate Governance network for sustainable and responsible
Carbon Tracker website Network (ICGN): An investor-led organisation financial services in the UK. See more at
of governance professionals, ICGN’s mission the UKSIF website
CDP (formerly the Carbon Disclosure is to inspire and promote effective standards
Project): A global not-for-profit organisation, of corporate governance to advance UN Development Programme: The UN’s
founded in 2000 that provides the world’s efficient markets and economies world- global development network partnering
only global natural capital disclosure wide. See more at the ICGN website with people at all levels of society to help
system. See more at the CDP website build nations that can withstand crisis,
International Integrated Reporting and drive and sustain the kind of growth
Climate Disclosure Standards Board Council (IIRC): A global coalition that improves quality of life for everyone.
(CDSB): An international consortium of regulators, investors, companies, See more at the UN Development
of business and environmental NGOs, standard-setters, the accounting profession Programme website
set up to promote greater alignment and non-governmental organisations (NGOs)
between natural and financial capital that helps businesses and investors adopt UN Global Compact Principles:
through disclosure standards, research integrated reporting. See more at the Ten corporate sustainability principles
and advocacy. See more at the CDSB website IIRC website for long-term success covering the areas
of human rights, labour, the environment
Council of Institutional Investors: Principles for Responsible Investment and anti-corruption. See more at the
An organisation of asset managers (PRI): An investor initiative in partnership UN Global Compact’s website
and asset owners promoting effective with the UN Environmental Programme
US corporate governance practice. Finance Initiative and the UN Global UN Sustainable Development Goals:
See more at the Council of Institutional Compact. Founded in 2006, the PRI has A set of 17 goals adopted by world
Investors website become the leading network for investors leaders in September 2015, aimed at
demonstrating their commitment to ending poverty, preserving the planet and
European Sustainable Investment responsible ownership and long-term, ensuring prosperity for all. See more at the
Forum (EuroSIF): The leading European sustainable returns. See more at the UN Sustainable Development Goals website
sustainable and responsible investment UN PRI website
organisation whose mission is to promote
sustainability through European financial Sustainability Accounting Standards
markets. Different regions have their own Board (SASB): A US non-profit organisation
local SIF e.g. US SIF, UKSIF, SWESIF. See started in 2011 to establish sustainability
more at the EuroSIF website standards for companies traded on US
exchanges. See more at the SASB website
2 GRI website
10 Understanding sustainable investment and ESG termsSchroder Investment Management Limited
31 Gresham Street, London EC2V 7QA, United Kingdom
Tel: +44 (0) 20 7658 6000
schroders.com
@schroders
Important information: The views and opinions contained herein are those of the responsibility can be accepted for errors of fact obtained from third parties, and this
Sustainable Investment team, and may not necessarily represent views expressed data may change with market conditions. This does not exclude any duty or liability
or reflected in other Schroders communications, strategies or funds. This material that Schroders has to its customers under any regulatory system. Regions/sectors
is intended to be for information purposes only and is not intended as promotional shown for illustrative purposes only and should not be viewed as a recommendation
material in any respect. The material is not intended as an offer or solicitation for to buy/sell. The opinions in this document include some forecasted views. We believe
the purchase or sale of any financial instrument. The material is not intended to we are basing our expectations and beliefs on reasonable assumptions within the
provide and should not be relied on for accounting, legal or tax advice, or investment bounds of what we currently know. However, there is no guarantee than any forecasts
recommendations. Reliance should not be placed on the views and information in or opinions will be realised. These views and opinions may change. To the extent that
this document when taking individual investment and/or strategic decisions. Past you are in North America, this content is issued by Schroder Investment Management
performance is not a guide to future performance and may not be repeated. The North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC
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