Certified B Corporations are for-profit companies that undergo a rigorous certification process on five categories: corporate governance, worker treatment, impact on the community, impact on the environment, and customer treatment. To be certified, companies must score over 80 on a 200-point B Impact Assessment administered by the B Lab, a nonprofit.
The process requires companies to submit a lot of documentation. All B Corps must renew their certification every two years, and some are randomly chosen for annual checks. Certifications are open to businesses in different industries, and well-known brands like Patagonia and Ben & Jerry’s are also B Corps.
Learn about B Corp banks.
Best-in-class investing is investing in companies that have done better than their peers according to environmental, social, and governance criteria. Best-in-class investing does not exclude industries that may be deemed environmentally unfriendly. For example, a best-in-class sustainable fund can invest in the least polluting oil company. Most large ESG exchange-traded funds (ETFs) are best-in-class funds.
A company’s carbon footprint measures its total greenhouse gas emissions, such as carbon dioxide and methane. It is measured in tons of carbon dioxide per year and can be compared among companies.
Carbon credits or allowances are permissions to pollute given by governments to polluting companies. Carbon credits let polluting businesses emit a certain amount of greenhouse gases each year. Polluters that are better at reducing their emissions can make money by selling residual permits to others.
Learn about investing in carbon credits.
Carbon neutrality means offsetting all greenhouse gas emissions produced by a business with carbon credits or carbon capture.
Carbon offsets are reductions in greenhouse gases made to compensate for emissions generated elsewhere. They are measured in tons of carbon dioxide equivalent. One way of creating carbon offsets is by planting forests.
CDFIs are government-accredited banks and credit unions that lend to small businesses and provide loans to those who are not served by traditional banks. They are deeply embedded in their communities. To be an accredited CDFI, a bank or credit union must give at least 60% of loans to low-income individuals or communities. According to the Opportunity Finance Network, 85% of CDFI clients are low-income, and nearly 60% are people of color.
CDP is an international nonprofit organization that promotes environmental impact disclosure. CDP gathers information to generate scores and sends questionnaires to participating companies. Its data is used by over 800 institutional investors.
Clean energy is energy that is not derived from fossil fuels. Clean energy sources include solar, wind, hydro, and geothermal.
Cleantech is an investment category of products and services that improve carbon efficiency and reduce negative environmental impacts.
Learn how you can invest in cleantech start-ups.
Community Investing is directing money to communities and businesses that are underserved by the traditional financial system.
Learn how you can participate.
Divestment is the sale of stocks, bonds, or other assets because they are not aligned with ESG criteria. Divestment gained prominence during the apartheid in South Africa when some funds chose to sell companies doing business there. Today, divestment frequently involves the sale of fossil fuel company stocks.
ESG stands for environmental, social, and governance. ESG investing adds factors like greenhouse gas emissions to financial metrics such as revenues or profits as part of the investment selection criteria. It is sometimes called socially responsible investing (SRI), sustainable investing, and impact investing.
Environmental factors measure a company’s impact on the planet, for example, through carbon emissions. Other environmental factors include pollution, energy efficiency, and sustainability initiatives like reducing plastic packaging.
Social factors refer to a company’s relationships with its employees, customers, suppliers, and local communities. ESG investors try to assess how well the company treats its workers and customers.
Governance factors measure corporate standards and shareholder rights. Unlike environmental and social metrics, governance has been on top of investors’ minds for a long time. Shareholders already vote on Board appointments and executive compensation each year.
Fossil fuels is a term used to describe coal, natural gas, oil, and other hydrocarbons used to generate energy.
FTSE Russell is a financial data provider that also offers ESG ratings. Their scoring methodology is used by several Vanguard ESG ETFs, including one of the largest, ESGV.
FTSE rates over 7,200 securities globally. To come up with the ratings, FTSE uses over 300 indicators, weighing them based on materiality for each company.
Governance indicators include corporate governance, risk management, anti-corruption, and tax transparency. Social indicators include labor standards, health and safety, and customer responsibility. Environmental indicators include climate change, pollution and resources, biodiversity, and water security.
A green bond is a fixed income instrument whose proceeds are used to finance sustainable or environmentally-friendly projects.
Learn about investing in green bonds.
The Global Reporting Initiative (GRI) is an Amsterdam-based, international non-profit organization that created the first guidelines for sustainability reporting in 2000. It is the most widely used tool for company reporting today. According to GRI, 82% of the world’s top 250 companies report on ESG using GRI standards. The framework helps investors assess the ESG impact of the companies’ activities. Examples of reported measures include carbon emissions, energy and water use, and labor practices.
Greenwashing is a form of marketing spin when some companies or funds try to get an edge by overstating their “green” practices. In effect, they are slapping a “green” label on a conventional investment. The SEC and other regulatory bodies around the world have recognized this problem and are working on regulations to address the issue.
Impact investing aims to generate measurable outcomes through direct investments. Impact investment firms, such as Al Gore’s Generation Investment Management, buy into companies solving climate change. Impact capital primarily goes to early-stage businesses in unproven markets. It can be extremely risky. Only private equity funds and other professional investors can access most impact opportunities. However, even retail investors now have options like equity seed funding.
Low carbon investing seeks to lower a portfolio’s carbon footprint by investing in companies with lower emissions relative to peers. However, low carbon does not necessarily mean fossil free. In fact, many low carbon funds invest in fossil fuel companies but seek those with lower carbon emissions vs. peers.
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking. Kiva is the most popular microlending institution in the U.S.
MSCI is a financial data provider that is also a market leader in ESG ratings. MSCI scores attempt to measure material environmental, social, and governance (ESG) risks for various companies. They seek to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers.
Their ESG Ratings range from leader (AAA, AA), average (A, BBB, BB) to laggard (B, CCC). They rate stocks and bonds, loans, mutual funds, ETFs, and countries. MSCI ratings are used by the largest ESG ETFs, such as ESGU and SUSA, and by many asset management firms.
MSCI focuses on 37 key issues for each industry. For example, the environmental bucket includes carbon emissions, product carbon footprint, climate change vulnerability, raw material sourcing, biodiversity & land use, toxic emissions and waste, and opportunities in renewable energy. The social bucket includes labor management, product safety, privacy, and data security. The governance bucket includes corporate governance – which carries weight in every industry – and corporate behavior, such as business ethics. MSCI also factors in opportunities – possible positive impacts – in ESG.
The term means that the amount of carbon emissions released is offset by an amount sequestered or canceled out using carbon credits.
The explosion of interest in ESG dates back to the 2015 Paris Agreement. The Agreement’s 195 signatories pledged to limit the increase in global temperature to under two degrees Celsius above pre-industrial levels.
Shareholder engagement seeks to put pressure on companies to operate more efficiently or abide by certain principles. Money managers work directly with management teams on ESG issues such as climate disclosure and submit and vote on proposals during annual meetings (shareholder resolutions).
Socially Responsible Investing (SRI) is exclusionary, meaning that it seeks to exclude companies in controversial industries, such as tobacco, from investor portfolios. In contrast, ESG investing is inclusionary – it seeks to add more companies with high ESG scores relative to their peers. At the same time, many ESG funds continue to ban tobacco, weapons, and gambling. Today the terms SRI and ESG are often used interchangeably.
ESG investing evolved out of SRI, popular in the 1970s. Initially, SRI followed religious principles: SRI funds excluded tobacco, weapons, gambling, and alcohol companies. Some SRI funds divested from companies doing business in South Africa during the apartheid in the 1970s and 1980s.
Stranded assets are oil and gas reserves that may never be extracted as the world transitions to cleaner sources of energy. In early 2021, The International Energy Agency (IEA) called to end all new oil and gas exploration starting in 2021 for the world is to reach net-zero emissions by 2050.
The Sustainability Accounting Standards Board (SASB) develops sustainability accounting standards for company reporting. SASB’s Materiality Map ranks 30 sustainability issues across 77 industries. The framework took ten years to develop and acknowledges that key sustainability issues vary a lot by industry.
Sustainability reports are voluntary reports produced by companies to inform shareholders about their performance and policies on ESG issues.
Sustainalytics is a provider of ESG ratings that is now owned by mutual fund research firm Morningstar. Scoring provided by Sustainalytics is often used by active fund managers. Robo-advisor Personal Capital also uses Sustainalytics ratings for their Socially Responsible Personal Strategy.
Sustainalytics ESG ratings are divided into three pillar scores (Environmental, Social, and Governance). The overall score is the average of the three pillar scores. Sustainalytics has over 200 analysts who use data including company reporting, external data such as greenhouse gas emissions, and third-party research. Company scores are updated annually. Analyst judgment can override some of the data-driven assessments.
The Task Force on Climate-Related Financial Disclosures (TCFD) is a voluntary set of reporting standards, which primarily applies to financial companies and focuses on climate risks. Its goal is to help companies assess the impact of climate change on operations.
TCFD has been endorsed by asset manager BlackRock and Japan’s pension fund.
The Sustainable Development Goals (SDG) is a set of 17 United Nations goals designed to “achieve a better and more sustainable future for all.” The goals were set in 2015 by the United Nations General Assembly and include ending poverty and protecting the planet.
The United Nations-backed Principles for Responsible Investment (PRI) is a voluntary initiative whose signatories agree to incorporate six responsible investing principles into their investment process.
The US SIF (formerly the Social Investment Forum) is a leading U.S. sustainable investing organization.