Sustainability - Vocabulary

It is a known problem that the different understanding of expressions used when discussing sustainability creates almost impossible exchanges and wrong conclusions. For instance far too many think that sustainability only means “green”.

Hereunder we have gathered some frequently used terms and explained what they mean.

The responsibility of companies for their impacts on society and stakeholders. (European Commission in 2011).

The capacity of companies and organisations to remain productive over time and safeguard their potential for long term maintenance of profitability. Being sustainable means that companies actively pursue goals such as responsible use of natural resources, both in their own operation and the operations of their clients, as well as respecting social rights in their markets of operation and those markets where their products and services are in use and being accountable to providers of equity and debt capital. (EFFAS)

Environmental, Social and Governance factors.

Directive 2014/95/EU – also called the non-financial reporting directive (NFRD) – lays down the rules on disclosure of non-financial and diversity information by large companies. This directive amends the accounting directive 2013/34/EU. Companies are required to include non-financial statements in their annual reports from 2018 onwards.

The NFDR is currently under review.

Responsible business conduct (RBC) entails above all compliance with laws, such as those on respecting human rights, environmental protection, labour relations and financial accountability, even where these are poorly enforced.

It also involves responding to societal expectations communicated by channels other than the law, e.g. inter-governmental organisations, within the workplace, by local communities and trade unions, or via the press.

Private voluntary initiatives addressing this latter aspect of RBC are often referred to as corporate social responsibility (CSR). (OECD)

There are some varying definition of this expression. The earlier Socially Responsible Investment that was also abbreviated SRI has been recycled for more specialised Impact investing strategies.

  • Ethical investments, Responsible Investments (RI), sustainable investments, and any other investment process that combines investors’ financial objectives with their concern about environmental, social and governance (ESG) issues. (EUROSIF in 2008).
  • Investments that take into account environmental, social and governance factors, with other words ESG factors. (Scholten/Dam in 2012).
  • Responsible investment is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long term returns. (PRI in 2019).

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. (World Commission on Environment and Development in 1997)

The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by all United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.

The 17 SDGs are integrated—that is, they recognize that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability.

Through the pledge to Leave No One Behind, countries have committed to fast-track progress for those furthest behind first. That is why the SDGs are designed to bring the world to several life-changing ‘zeros’, including zero poverty, hunger, AIDS and discrimination against women and girls.

Everyone is needed to reach these ambitious targets. The creativity, knowhow, technology and financial resources from all of society is necessary to achieve the SDGs in every context.

More info here.

This Regulation aims to reduce information asymmetries in principal‐agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and sustainable investment, by requiring financial market participants and financial advisers to make pre‐contractual and ongoing disclosures to end investors when they act as agents of those end investors (principals).

The SFDR level 1 regulation has a dead line on 10 March 2021.

Link to the EU document here!

The SFDR level 2 – RTS proposal was published on 2 February 2021 and is expected to be in place by 1 January 2022.

This is interesting as it is more constrained than the way the expression is used among specialists today. But as this is an SFDR – EU definition it is important to be aware of it.

An investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance. (SFDR – EU in 2020).

An environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment. (SFDR – EU 2020)

This can be directly translated to ESG factor risks.

To take into account not only the economic value a company adds or destroys, but also the environmental and social value they add or destroy. (Elkington in 2004).

Let us know if you’d like us to add an explanation of the Sustainability vocabulary!