For fund distributors and professional investors only.
Best-in-Class / Positive Screening: Selecting issuers that perform better on ESG dimensions than their peers within a particular industry, sector or region.
Carbon footprint: A measure of a group, individual or a company’s total greenhouse gas emissions.
Carbon pricing: The cost of emitting CO2 into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive that’s offered for emitting less. Putting an economic cost on emissions is widely considered the most efficient way to encourage polluters to reduce what they release into the atmosphere.
Clean technology: A range of products, services and processes that reduce the use of natural resources, cut or eliminate emissions and waste. It was considered a niche area of investment two decades ago but has become a focus for most major companies.
Engagement: The use of shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies) is guided by comprehensive ESG guidelines. Engagement is an integral part of active ownership.
Environmental factors: This is the “E” of the term “ESG” (environmental, social and governance) and concerns issues related to resource use, pollution, climate change, energy use, waste management and other physical environmental challenges and opportunities.
Ethical investing: An investment strategy in which you invest in line with your ethical principles and exclude companies that you deem to be unethical.
ESG integration: The systematic and explicit inclusion of ESG factors into traditional financial analysis. The integration of ES&G factors is used to enhance the traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of the evaluation remains financial performance.
ESG Rating or Score: An ESG rating or score is an opinion on ESG strength of a corporate or sovereign issuer which is usually based on an aggregation of scores across numerous ES&G factors.
ESG Risk: This refers to the concept of utilising ES&G factors to identify the overall risk considerations for an individual company, relating to intangible features.
Exclusions / Negative Screening: The exclusion from a fund or portfolio of certain activities or practices based on specific ESG criteria. Excluded activities could be for example tobacco production or nuclear energy, while excluded practices generally refer to violation of international norms such as human rights or labour rights violations. The exclusion of practices is also referred to as Norm-based screening.
Governance factors: This is the “G” in “ESG” and is about assessing how well a company is run.
Green bond: A bond in which proceeds are used to fund new and existing projects with environmental benefits such as renewable energy and energy efficiency projects.
Green-washing: Falsely communicating the environmental benefits of a product, service or organisation in order to make a company seem more environmentally-friendly than it really is.
Human rights: Basic rights that belong to all human beings. They include the right to life, liberty, freedom from slavery and torture, and freedom of opinion and expression.
Integrated Reporting (IR): This aims to communicate corporate value-creating activities, both financial and non-financial performance, to investors. It is a succinct way of communication of the company’s business model and strategy, principal risks and uncertainties, governance and actions, including ES&G factors, in the short- medium- and long-term. IR is considered to deliver a broader picture of a company instead of only reporting on financial performance.
Impact investments: Impact investments are investments made into companies, organisations, and funds with the intention to generate an intentional and identifiable social and environmental impact alongside a financial return. Examples of impact investments are:
Modern slavery: Although no standard definition exists, modern slavery can broadly be thought of as the exploitation of people who are coerced into an activity by someone who “controls” them, often with violence. It can take many forms including forced or bonded labour, early or forced marriage or human and organ trafficking.
Principles of Responsible Investment (PRI): These are the world’s leading proponent of responsible investment. The PRI is truly independent and acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The PRI is supported by the United Nations. Proxy voting: A proxy vote is a ballot cast by one person or firm on behalf of a shareholder of a corporation who may not be able or have the desire to attend a shareholder meeting, or who otherwise desires not to vote on an issue. Shareholders vote on issues such as electing directors to the board, mergers & acquisitions, board remuneration and capital measures. Shareholder can approve but also vote against management proposals. Exercising voting rights via proxy voting is an integral part of active stewardship. Renewable energy: Energy collected from resources that are naturally replenished such as sunlight, wind, water and geothermal heat.
Screening: An investment approach used to filter companies based on pre-defined criteria before investment. As an investor, you can use a negative screen (in which you deliberately exclude certain companies because of their involvement in undesirable activities or sectors) or a positive screen (in which you select companies based on their sustainability practices). In the jargon, this can also be a “best-in-class investment” – where you only invest in companies that lead their peer groups in terms of sustainability practices and performance.
Social factors: Issues related to how a company interacts with the communities it operates in, its suppliers, employees and customers. These include, for example, labour standards, health and safety, supply chain management and nutrition and obesity.
Sustainable and Responsible Investing (SRI): SRI funds seek to build a portfolio with an above average ESG quality; in practice most often use a combination of a positive and a negative screening. Unlike ESG analysis which shapes valuations, SRI uses ES&G factors to apply negative or positive screens on the investment universe.
For example, an investor may wish to avoid carbon-intensive industries; while another investor may opt to allocate a fixed portion of their portfolio to companies that contribute towards charitable causes. SRI strategies are often managed against SRI specific benchmarks that deviate materially from comparable traditional benchmarks in terms of structure and composition.
In order to construct SRI portfolios, several approaches are being adopted by asset managers, including:
Stewardship/Active Ownership: Stewardship, also referred to as Active Ownership, is defined as taking an active role as a share owner to promote the long-term success of companies in such a way that society and the ultimate providers of capital also prosper. This can be done through engagement and proxy voting. Stewardship therefore benefits companies, investors and the economy as a whole.
Sustainability: The most commonly used definition is the one from the Brundtland Report for the World Commission on Environment and Development (1992): “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
At AllianzGI, ‘Sustainable Investing’ refers to the umbrella category of investing that emphasises the incorporation of ES&G factors into investment decisions with the objective, to better manage risk and generate sustainable, long-term returns for investors.
Thematic investing: Investing in companies that can be classified under a particular investment theme such as renewable energy, waste and water management, education or healthcare innovation.
Transition risk: The financial risks that could result from significant policy, legal, technology and market changes as we transition to a lower-carbon global economy and climate resilient future.
UN Sustainable Development Goals (SDG): A collection of 17 goals reflecting the biggest challenges facing global societies, environments and economies today.
Values-based investing: Investing that prioritises an investor’s ethical objectives, rather than simply maximising financial returns.
Voting rights: Equity investors typically have the right to vote at annual and extraordinary general meetings (AGMs and EGMs) on issues such as an individual director’s appointment, remuneration or mergers and acquisitions (depending on a country’s legal framework).