ESG Terms You Need to Know

If you are new to the world of Environmental, Social, and governance (ESG), you’ll be confronted with a dizzying array of acronyms and terms. CDP, GRI, SASB, and TCFD, are just some of the alphabet soup of names you’ll have to wade through to ensure your ESG performance metrics are collected and disclosed correctly.

As pressure grows for companies to make ESG disclosures in line with their financial disclosures, companies must get up to speed with this quickly evolving nascent field. To help with this, here are a few essential ESG terms, bodies, and frameworks to get acquainted with to streamline your ESG journey.

The ABCs of ESG

Benchmarking  

Benchmarking is the practice of measuring and comparing ESG performance with other companies in your sector or geography to understand where your company fits among your competitors. For accurate benchmarking, alignment with ESG frameworks, standards, and measurement methodologies is essential. Learn how to make data-driven decisions with Persefoni's Climate Impact Benchmarking module.

Carbon Accounting

Carbon accounting involves quantifying and tracking the greenhouse gas (GHG) emissions produced by private and public organizations. It is a systematic process that measures the carbon emissions associated with an organization's operations, helping to identify the sources and amount of emissions they generate. Carbon accounting is essential for organizations to assess their environmental impact, communicate their sustainability and environmental strategies, comply with regulatory requirements, and make informed decisions to reduce emissions and work towards achieving net-zero carbon emissions. It typically involves measuring emissions across different scopes, such as scope 1 (direct emissions from on-site operations), scope 2 (indirect emissions from purchased energy), and scope 3 (other indirect emissions across the value chain, including suppliers and customer-related emissions). Organizations can use various standards and tools to gather and report carbon accounting data, helping them manage and reduce their carbon footprint.

Carbon Credits

Carbon credits, also known as carbon allowances, are tradable permits or certificates that represent the offset of one tonne of carbon dioxide equivalent (CO2e) emissions. They are used in carbon markets to encourage and enable organizations to offset their greenhouse gas emissions. These credits can be bought and sold, with the goal of balancing emissions by supporting projects or activities that reduce, remove, or avoid an equivalent amount of emissions elsewhere. Carbon credits are used in both voluntary and mandatory markets, allowing entities to comply with emissions reduction targets and support sustainable initiatives. However, they are also subject to controversy, as they can sometimes be seen as a means for companies to continue emitting carbon without taking substantial steps towards decarbonization.

Carbon Neutral vs Net Zero

Carbon neutral and net zero are two distinct approaches to addressing greenhouse gas (GHG) emissions. Carbon neutrality focuses on balancing an entity's carbon emissions with carbon removals, typically achieved through sustainable carbon offset programs. It aims to ensure that the carbon emissions produced are offset by an equivalent amount of carbon removed from the atmosphere. In contrast, net zero initiatives go beyond carbon neutrality by targeting the neutralization of all types of greenhouse gases, not just carbon dioxide. Net zero efforts focus on reducing emissions within the entity's operations and value chain, alongside carbon removal projects. While these terms are sometimes used interchangeably, they have different scopes and objectives, and understanding the differences is crucial for informed environmental and sustainability decisions. Net zero represents a more comprehensive and ambitious approach to combatting climate change by addressing all GHGs.

Carbon Footprint

Carbon footprint is an estimate of how much carbon dioxide is produced to support your lifestyle or organization. Essentially, it measures your impact on the climate based on how much carbon dioxide is produced. Factors that contribute to your carbon footprint include your travel methods and general energy usage. Carbon footprints can also be applied on a larger scale, to companies, businesses, and even countries.

Carbon Offsets

Carbon offsets are used to offset the amount of carbon that an individual or institution emits into the atmosphere. Carbon offsets work in a financial system where, instead of reducing its own carbon use, a company can comply with emissions caps by purchasing carbon credits from an independent organization. The organization will then use that money to fund a project that reduces carbon in the atmosphere. An individual can also engage with this system and similarly pay to offset his or her own personal carbon usage instead of, or in addition to, taking direct measures such as driving less or recycling.

Companies or institutions most often use carbon offsets to reduce their carbon footprint without polluting less. Most offsets involve renewable energy. For example, a company in Massachusetts can pay to build a wind turbine off the coast. By using its money to create renewable energy, that company thereby offsets its own carbon use.

CDP 

CDP is a not-for-profit charity founded in 2000 that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. CDP offers reports and resources around three focus areas: climate change, water, and forests. Organizations complete a questionnaire and with that information, CDP assigns each a score (A+, B, C, etc.) The scored questionnaire can be exported and shared with key stakeholders. With the world’s most comprehensive collection of self-reported data, the world’s economy looks to CDP as the gold standard of environmental reporting.

Climate

Climate refers to the average weather and patterns measured over a defined period of time, such as a number of years, decades, or centuries. For an analogy, if the weather were individual meals, the climate would be the overall, long-term diet.

Climate Risk

Climate risks encompass both physical risks, which are tangible consequences like flooding and extreme weather events that affect an organization's infrastructure and supply chains, and transition risks, which are related to the shift from reliance on fossil fuels and toward a low-carbon economy. Transition risks can include factors like carbon taxes, mandates for carbon disclosure, and the shift to renewable energy sources. While all companies are susceptible to climate risks, some industries, such as oil and gas and automotive, face more significant challenges due to their carbon-intensive nature. Assessing and addressing climate risks is essential for cost reduction, meeting sustainability expectations, enhancing reputation, and capitalizing on climate-related opportunities in areas like renewable energy and sustainable solutions.

CMAP - Climate Management and Accounting Platform  

A CMAP is a software platform that simplifies the carbon accounting process, so calculations are done in days rather than months. These platforms utilize codified guidelines like the GHGP and PCAF to calculate carbon emissions and thus deliver solutions based on organizational data. CMAPs allow companies to track their emissions, set carbon reduction targets, measure progress, and benchmark against peers. This means organizations can gauge their emissions reduction progress over time and accurately track their progress toward science-based and net zero commitments using the latest data available. CMAPs are just one of a growing number of ESG software that helps collect and report ESG data.

Consolidation

The combining of GHG emissions data from separate operations that belong to one or a group of companies.

CSR - Corporate Social Responsibility

CSR is a voluntary way for companies to commit to ethical business practices and improve their environmental, economic, and social sustainability. ESG is a way for companies to measure their CSR. This leads us to...

CSRD

The CSRD affects over 50,000 companies in Europe, encompassing large public and private entities, listed companies on European regulated markets, and around 10,000 non-EU firms, including roughly 3,000 U.S. companies with significant European operations, showcasing its global reach. Introduced under the "European Green Deal," its goal is to address investor, civil society, consumer, and stakeholder informational needs on sustainability. The directive mandates reporting on 10 sustainability topics, including climate-related aspects like mitigation, adaptation policies, energy use, and GHG emissions (including Scope 3), with external assurance gradually phasing in. It requires adherence to European Sustainability Reporting Standards, determined by a materiality assessment, ensuring disclosure on crucial aspects while emphasizing that materiality doesn't make the reporting voluntary. Commencing from the financial year 2024, it's slated for phased implementation until 2028, with reasonable assurance expected by that time, necessitating reporting in Annual Reports, with additional specifics determined through Member State processes.

Decarbonization

Decarbonization is the process of reducing or completely eliminating carbon emissions. In this case, we refer to decarbonization when talking about the efforts to lower carbon emissions on a global scale. Total decarbonization requires eliminating the production of carbon and removing carbon currently in the atmosphere.

Emission Factors

GHG emissions are released into the atmosphere through economic activities or processes that emit hydrocarbons. To measure these, a carbon dioxide equivalent (CO2e) value is given relative to the activity associated with the release of the GHG; this is known as an emission factor.

Emission factors are how activity data is converted into GHG emissions. The number of activities that necessitate EFs to measure their GHG emissions is huge, these activities include things like fuel combustion, waste landfilling, electricity consumption, vehicle travel, purchased heat and steam, animal agriculture, etc.

EPA - Environmental Protection Agency

An independent executive agency of the United States federal government tasked with environmental protection matters. President Richard Nixon proposed the establishment of the EPA on July 9, 1970. It began operation on December 2, 1970, after Nixon signed an executive order. The EPA publishes emission factor sets that we maintain in the Persefoni platform.

ESG - Environmental, Social, and Governance

ESG are the three overarching pillars through which an organization’s effect on the environment and society can be measured. Initially used as a tool for investors to understand a company's long-term financial performance, ESG is now central to business strategies. It assesses a company's ability to deal with the defining issues of our time, the climate crisis, environmental degradation, social injustice, and inequality.

Financed Emissions

Financed emissions are GHG emissions that are indirectly generated as a result of investments and loans. The GHG Protocol categorizes financed emissions as "investments" in scope 3, category 15. For example, when an investor finances an oil and gas company, they are indirectly supporting that company's operations and subsequent emissions.

As of August 2022, over 300 financial institutions have committed to measure and disclose their emissions in accordance with PCAF's Standard, totaling an estimated $79 trillion in total assets.

Fossil Fuel

Fossil fuel is a generic term for organic material (from decayed plants and animals) that has been exposed to heat and pressure from the earth’s crust for hundreds of millions of years and converted into oil, coal, or natural gasses.

Fugitive Emissions

Fugitive emissions are emissions that are not physically controlled but result from the intentional or unintentional releases of GHGs. They commonly arise from the production, processing, transmission, storage, and use of fuels and other chemicals, often through joints, seals, packing, gaskets, etc.

Geothermal Energy

Geothermal energy is electricity generated by harnessing hot water or steam from within the earth.

GHG Sink

GHG Sink - or Carbon Sink - is any physical unit or process that stores greenhouse gases. This usually refers to forests and underground or deep sea reservoirs of CO2.

GHG Source

Any physical unit or process that releases GHG into the atmosphere.

GHGP - Greenhouse Gas Protocol  

Created in 1997, the GHGP is the original carbon accounting standard. It provides guidelines for organizations to develop greenhouse gas (GHG) emissions inventories. Under the GHGP, all emissions are broken down into three scopes. Scopes 1 and 2 are required to be measured, whereas Scope 3 is currently optional.

• Scope 1 refers to the direct emissions from an organization's operations, including company vehicles and buildings.
• Scope 2 categorizes indirect emissions from purchased electricity, heating, and cooling.
• Scope 3 comprises all other indirect emissions in a company's value chain.

Global Warming

An average increase in the temperature of the atmosphere near the Earth’s surface and in the troposphere can contribute to changes in global climate patterns. Global warming can occur from a variety of causes, both natural and human-induced. In common usage, “global warming” often refers to the warming that can occur as a result of increased emissions of greenhouse gases from human activities.

Greenwashing

Greenwashing refers to the act of companies portraying a more sustainable, ethical, or “green” image of themselves for marketing purposes. Acts of greenwash occur when a company misinforms or makes unsubstantiated claims for a competitive advantage. Some jurisdictions have begun to legislate to combat greenwash. The EU’s taxonomy regulation is one example of a piece of legislation designed to prevent greenwashing behavior.

Green Finance

Green finance refers to financing environmentally sustainable projects and activities that combat climate change and reduce emissions. It involves investments in initiatives like renewable energy, energy efficiency, and conservation efforts, promoting a shift to a low-carbon economy while offering financial benefits and supporting climate goals.

GRI - The Global Reporting Initiative

Founded in 1997 following public outcry over the Exxon Valdez oil spill, the GRI created the first global standards for sustainability reporting (the GRI Standards) and is today one of the most commonly used reporting frameworks, helping businesses, governments, and other organizations understand and communicate the impact of companies on critical sustainability issues.

GWP - Global Warming Potential

Each GHG has a GWP which is a factor referring to its heat-trapping ability relative to that of CO2. Because GHGs vary in their ability to trap heat in the atmosphere, some are more harmful to the climate than others. For example, methane is 25 times more potent than CO2, so methane has a GWP of 25.

Insured Emissions

In the context of insurance, insured emissions refers to the greenhouse gas (GHG) emissions linked to insurance and reinsurance underwriting activities. These emissions are associated with the risks covered by insurance products, and a standardized approach for measuring and reporting them is crucial to empower insurers to understand their climate impact and develop decarbonization strategies. The recent publication of the Partnership for Carbon Accounting Financials (PCAF) standard on insurance-related emissions offers a holistic methodology to address these emissions, enabling the insurance industry to transparently measure, manage, and disclose its impact, promote sustainable growth, and align with net-zero goals. This standard helps bridge the gap between the commitments to net zero across various insurance activities, such as operations, investments, and underwriting portfolios, leading to credible and actionable decarbonization plans.

Investor-Grade Reporting

Investor-grade reporting, similar to financial reporting, ensures that ESG (Environmental, Social, and Governance) data is accurate, timely, auditable, and comparable, and it's becoming essential as regulators and investors demand reliable ESG information to assess climate and sustainability risks. Collecting high-quality ESG data can be challenging due to its varied sources and decentralization within organizations. To achieve investor-grade reporting, companies must engage cross-functional teams, leverage the right technology solutions, adhere to appropriate reporting standards, and integrate ESG considerations into their business strategies. This approach supports better decision-making, compliance, and competitiveness while reducing risks associated with climate change and sustainability.

IPCC - Intergovernmental Panel on Climate Change

The IPCC is an intergovernmental body of the United Nations responsible for advancing knowledge on human-induced climate change. It provides policymakers with regular scientific assessments of climate change, its implications, and potential future risks and puts forward adaptation and mitigation options.

ISSB

The International Sustainability Standards Board (ISSB) is a body established by the International Financial Reporting Standards (IFRS) Foundation in November 2021. It aims to create high-quality sustainability standards that address investors’ informational needs. These standards, including IFRS S1 for general sustainability disclosures and IFRS S2 for climate-related disclosures, enhance transparency in reporting by outlining guidelines for identifying, measuring, and disclosing sustainability-related financial information, building upon the TCFD framework. It requires disclosures on greenhouse gas emissions (scopes 1, 2, and 3) and specific information on methodologies used. The ISSB's standards, available for voluntary use since June 2023, will be formally effective from January 1, 2024, impacting companies globally as they seek more consistent and reliable sustainability reporting. Adoption by jurisdictions like Nigeria, Ghana, and others indicates a growing trend toward the ISSB standards for transparent and comparable sustainability reporting within General Purpose Financial Reporting.

ISO 14064

Created in 2006, ISO 14064 is an international standard for measuring and reporting greenhouse gas emissions. The standard is part of the International Standardization Organization environmental management standards and is broken into three parts, each with a different technical approach. Part 1 refers to the guidance of quantifying a greenhouse gas inventory for organizations using a bottom-up data collection approach. Part 2 addresses the quantification and reporting of emissions from individual project activities. Part 3 establishes a process to verify the validity of an organization’s emissions.

The ISO 14064 is continually being developed with new iterations improving and fine-tuning the standard. The ISO 14064 is consistent with and derived from the GHGP. The two documents differ in that the GHGP focuses on the provisions of best practices for making GHG inventories. At the same time, ISO14064 establishes minimum levels of compliance against the GHGP best practices. Although only slightly different, the two standards complement each other.

Kyoto Protocol

An extension of the UNFCCC, the Kyoto Protocol applies to seven greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3).

While the Convention asks industrialized countries to adopt policies to reduce GHG emissions, the Kyoto Protocol commits nations to take a specific action – limiting and reducing GHG emissions in accordance with agreed-upon individual targets.

Materiality  

ESG issues or information are considered material if they need to be accounted for when considering an organization's risks and opportunities. Material issues are those that cannot be ignored when assessing the sustainability of a company. Materiality has now evolved to be a concept of  “double materiality.” Double materiality speaks to the fact that ESG issues or information can be material from both financial and non-financial perspectives.

Net Zero  

Net zero is a common target for organizations to commit to by 2050 as prescribed by the IPCC. It means to negate the amount of carbon your company emits by withdrawing the same amount of carbon through offsets and having it stored permanently in carbon sinks.

Organizational and Operational Boundaries

Organizational boundaries in carbon accounting involve determining whether an organization is a part of a larger entity or subsidiary, impacting their control over company assets and the share of emissions they're responsible for. Operational boundaries define the scope of direct and indirect emissions within these organizational boundaries. Direct emissions are those from sources owned or controlled by the company, while indirect emissions result from the company's activities but occur at sources controlled by other entities. Operational boundaries are further categorized into Scope 1 (direct emissions), Scope 2 (indirect emissions from purchased energy), and Scope 3 (other indirect emissions in the value chain). Automated carbon accounting software can assist in defining and calculating these boundaries, aiding organizations in complying with reporting requirements and sharing data with relevant stakeholders.

(The) Paris Agreement

The Paris Agreement is a legally binding international treaty on climate change. It aims to limit global warming to well below 1.5°C, compared to pre-industrial levels. The long-term goal is to achieve a climate neutral world by mid-century. The Paris Agreement is a landmark for climate change because, for the first time, a binding agreement was enacted to bring all nations together to combat the climate crisis. It is estimated that in order to achieve the 1.5°C limit, the world will have to cut GHG emissions by 55% by 2030.

PCAF - Partnership for Carbon Accounting Financials

Published in 2020 as a response to industry demand for a global standard, PCAF is a standardized approach to measure and report financed emissions, PCAF was created to add further guidance to the GHGP’s Scope 3, Category 15 (investment activities). The standard provides detailed methodological guidance to measure and disclose GHG emissions associated with six asset classes: Listed equity and corporate bonds, Business loans and unlisted equity, Project finance, Commercial real estate, Mortgages, and Motor vehicle loans.

PCAF Asset Classes

The Standard currently provides guidance for the measurement and disclosure of financed emissions encompassing six asset classes. These current asset classes include:

• Listed equity and corporate bonds: All listed corporate bonds and all listed equity for general corporate purposes (e.g., unknown use of proceeds) that are traded on a market and are on the balance sheet of a financial institution.
  
  Example: Common stock

• Business loans and unlisted equity: All business loans and equity investments in private companies (e.g., unlisted equity)
  
  Example: Lines of credit used for capital expenditures

• Project finance: Loans or equity to projects for specific purposes (e.g. with known use of proceeds) that are on the balance sheet of the financial institution.
  
  Example: Loans used to build a bridge

• Commercial real estate: On-balance sheet loans for the purchase and refinance of commercial real estate (CRE), and on-balance sheet investments in CRE. This implies the properties are used for income-generating activities and commercial activities, such as retail, hotels, office space, industrial, or large multifamily rentals.
  
  Example: Loans used to purchase a new office building

• Mortgages: On-balance sheet loans for specific consumer purposes (e.g. the purchase and refinance of residential property), including individual homes and multifamily housing with a small number of units. This definition implies that the property is used only for residential purposes and not for income-generating activities.
  
  Example: Loans for a new house

• Motor vehicle loans: On-balance sheet loans and lines of credit for specific (corporate or consumer) purposes to businesses and consumers that are used to finance one or several motor vehicles. This methodology does not prescribe a specific list of vehicle types falling within this asset class; instead, it leaves it open for financial institutions to decide and define what vehicle types to include in their inventory of financed emissions.
  
  Example: Loans to purchase a new car

PCAF intends to add more asset classes in the future as the Standard evolves. Soon, it will expand to cover sovereign bonds, green bonds, and insurance.

Physical Risk

A type of risk caused by climate change that refers to the economic costs and financial implications resulting from climate change, such as increasing extreme weather events, severe climate shifts, and other indirect effects of climate change (e.g. water shortage). An example of a physical risk would be the destruction of real estate, infrastructure, or land during a storm or flood event.

SASB - Sustainability Accounting Standards Board

The SASB is a not-for-profit organization formed to create industry-based standards that help companies identify and disclose financially material sustainability information.

SASB’s standards identify which ESG standards are relevant to 77 industries. SASB defines “sustainability” as corporate activities that amplify or sustain a company’s capacity to create shareholder value in the long term.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have long been responsible for creating financial accounting and reporting standards. SASB aims to specifically create standards to help companies manage and disclose sustainability information that impacts a company’s enterprise value. It was established to mirror the FASB’s and other financial standards to align with SASB’s goals.

SEC Climate Disclosure

The SEC Climate Rule impacts U.S. Public Companies and Foreign Private Issuers, aiming to fulfill investor demands for more consistent, comparable, and reliable climate-related disclosures. The proposal, inspired by the TCFD framework, requires narrative disclosures, Scopes 1 and 2 GHG emissions reporting, and Scope 3 if material or included in reduction targets (except for Smaller Reporting Companies). Larger companies would need external assurance over Scopes 1 and 2 GHG emissions, with phased implementation. Additionally, a financial statement note on climate-related impacts is required unless the impact is under 1% of the line item. If adopted, reporting is expected to begin in FY2025 based on FY2024 data, impacting Form 10-K, 20-F, and registration statements.

Science-Based Targets

Science-Based Targets (SBTs) are emission reduction goals that align with the decarbonization needed to limit global temperature increases, as defined in the Paris Agreement. They aim to keep global temperature increases below 2°C above pre-industrial levels, with an encouragement to limit increases to below 1.5°C. The Science-Based Targets Initiative (SBTi) provides guidance and validation for companies setting SBTs, enabling them to align their emissions reduction goals with global climate objectives.

Scope 1, 2, and 3 Emissions

Scope 1, 2, and 3 emissions are categories used to classify different types of emissions within an organization:

1. Scope 1 emissions refer to direct e