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10 sustainability terms every investor should understand

Our commitment to responsible investing is growing and we would all do well to brush up on our sustainability jargon.
Image: Shutterstock

In a world first, New Zealand lawmakers announced this week that the country will be introducing a law that will require banks, insurers and investment managers to report the impacts of climate change on their business. While we aren’t quite there yet in South Africa, our commitment to responsible investing is growing and we would all do well to brush up on our sustainability jargon.

According to the most recent Schroders Global Investor Study – an annual survey that canvasses the views of more than 23 000 wealth investors from 32 locations around the world – almost three-quarters (73%) of local investors refuse to compromise on their personal beliefs when investing, even if higher returns were on offer.

The results support the growing trends that returns are not the only aspect that influences our investment decisions. People want their values reflected in the way they invest, and are increasingly looking to contribute to a more sustainable society through their investments.

But even if the principles are fairly simple, the field has become a sea of acronyms and technical terms, which can leave investors confused. That’s where we can help. We’ve pulled together the 10 key terms every sustainable investor, or anyone new to the topic, needs to know.

2°C limit or “2 degrees”:

It is widely agreed that limiting the average rise in global temperatures to less than 2°C above pre-industrial levels by the end of this century may help stave off the worst of the natural disasters associated with global warming. Although there is some disagreement as to whether this limit is sufficient or even possible, the idea of restricting global warming to less than a 2°C rise has consistently been a major part of the debate. Schroders has been tracking progress being made to limit the rise in global temperatures to 2°C with its Climate Change Progress Dashboard tool.

Active ownership:

Actively exercising your shareholder rights, such as general meeting voting rights, and engaging with investee companies to encourage responsible corporate behaviour and improve long-term shareholder value. This applies to both individual investors and fund managers.

Carbon pricing:

The cost of emitting carbon dioxide, or CO2, into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive (money) that’s offered for emitting less. Putting an economic cost on emissions is usually said to be the best way to encourage polluters to reduce what they release into the atmosphere.

South Africa is the world’s 14th-largest emitter of greenhouse gases, thanks largely to its heavy reliance on coal. In an attempt to meet our commitment to the Paris Climate Accord, the government has created a framework for the transition to a low-carbon economy. The Carbon Tax Act came into effect on June 1, 2019 and compels carbon emitters to pay for their manmade greenhouse gas (GHG) emissions – the deadline for the carbon tax returns is the end of June 2021.

ESG integration:

Environmental, social and governance (ESG) factors are the sustainability considerations a lot of us are very passionate about, and they’re relevant to the ongoing performance of companies we’re invested in too.

ESG integration is an investment approach that takes into account ESG-related risks and opportunities in addition to traditional financial analysis.

Broadly speaking, while environmental issues are self-explanatory, social factors could be about treatment of workers or community relations, and governance factors are things such as the composition of the board and its performance.

Schroders announced earlier this year that it fully integrates ESG into financial analysis of all its investments. Schroders’ investors are now integrating ESG factors into their decision-making across all investments the firm manages, fulfilling our intention announced in November 2019.

Ethical investing:

An investment strategy where you invest in line with your ethical principles and exclude (or you might hear some people say “screen out”) companies that you consider unethical.

Impact investing:

Investments that are made with the primary goal of achieving specific, positive social benefits while also delivering a financial return. Impact investments create a direct link between portfolio investment and socially beneficial activities, and historically most of the examples of impact investing have been in unlisted assets (i.e. privately not publicly-owned, as firms listed on a stock market are).

Schroders recently announced that it has joined the influential Global Impact Investing Network (GIIN), a leading non-profit organisation dedicated to increasing the scale and effectiveness of impact investing. This is a further step in our commitment to building a leading position in sustainability and impact investing.

GIIN focuses on reducing barriers to impact investment to enable more capital to be directed to fund solutions in this space. It has 350 members globally, including impact investment pioneer BlueOrchard, part of the Schroders Group, which has generated lasting positive impact for communities and the environment across the globe, while providing attractive returns to investors since 2001.

Physical risks of climate change:

The risk posed by climate change on a company’s physical assets such as equipment, its supply chain, operations, markets and customers. Schroders analyses what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption, for example flooding.

Stewardship:

An ongoing dialogue between shareholders and boards that aims to make sure a company’s long-term strategy and day-to-day management are effective and aligned with shareholders’ interests. This means monitoring a company’s practices and performance, engaging on areas of concern and voting on shares held to ensure management is acting in the long-term best interests of its shareholders. Good stewardship should help to enhance and protect the value of investments.

Sustainable investing:

An investment approach in which a company’s sustainability practices are paramount to the investment decision and in which ESG analysis forms a cornerstone of the investment process.

Transition risk:

The financial risks that could result from significant policy, legal, technology and market changes as we move to a lower-carbon global economy and climate-resilient future.  “This is especially relevant in developing nations such as South Africa, where the majority of our primarily poor population relies on jobs and communities centred on carbon-heavy industries such as coal production.

Ebeth van Heerden, Schroders head of Intermediary South Africa.

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I think many people are either oblivious or ignorant about the reasons for climate change.

Climate change happens in cycles. There is very little people can do to change that cycle.

Before every previous ice age, earth experienced a phase of earth warming. This is probably why we are seeing temperatures worldwide on average, rising. Earth is preparing itself for the next ice age. This may still be some 10000 years off, but its due to happen.

Investors in my opinion, van carry on with business as usual. Nothing we do will change nature, unless we disturb the balance in the ecology – which is not necessarily the amount of carbon dioxide or other ozone depleting gasses, produced by humans.

You are spot on henry666. So much of this is media driven claptrap. The world has experienced periods of solar induced warming and cooling since Earth began. The last major ice-age took place about 10,000 years ago and the world has been warming ever since – long before man’s burning of fossil fuels. I for one am very sceptical about man’s activities having any influence at all on global warming.

Honestly don’t care about this farce.

There is no way that humans are going to slow climate change cycles that have been happening on earth for 4 500 000 000 years!

NZ is also a bad example. Convenient that they passed a law along the lines of this article, but their government has other serious issues to address such as their splitting of families for 18 months+ due to their Covid restrictions, their economy reaching unsustainable levels and a bubble will likely burst shortly, rampant diabetes, and high incidences of cancer linked to the extensive uses of pesticides such as glyphosate.

Hog wash. Nothing about climate change is ‘widely agreed’.
There is no such thing as ‘ethical investing’. Investing is about getting good returns. The more the better.

I understand the populist motives behind these prescriptive violations of property rights. Investors follow entrepreneurs, who in turn are guided by the commands of consumers. Investors have zero influence over consumer behavior. The investor that forces an unpopular product or service down the throats of consumers will be punished with bankruptcy.

Instead of targeting investors with so-called sustainability measures, the regulations should target the consumers. Consumer demand determines the need, value, and availability of products. Consumer preferences determine the production processes and which raw materials are used in the process. The consumer is king in a free market environment. If the consumer does not like the way a product is manufactured he will not spend his money on it.

If these sustainability measures offer any value to consumers, they will vote for it with their money and the investors will follow their commands like a slave. There is no need for regulations and laws if the consumer is free to make up his own mind.

Every voter is also a consumer. The socialist voter creates a negative, self-reinforcing feedback loop where he suffers under, and is enslaved by, the set of rules that he made for others.

Not sure if this an advertorial by Schroders,or a plea by the greenies. The reality of life is that in RSA we have a rampant population growth and the economy can’t keep pace. If population growth was slowed considerable the economy may just catch up and the country may just become self sufficient

More hyped up B%$#t by the lamestream media. Unfortunately, in this day and age, type it, post it and it will (mostly) be accepted as gospel.

Snowflakes, millennials et al should all be removed.

Wanted. Climate change wash mungers.

The problem is the number of people on this earth and all that are trying to increase their consumption. The anthropocene. Big problem. We are not looking at this correctly, if at all.

“Jargon” indeed. This is activist-speak used by movements like the wokes, cultural marxists, blm and the like. The msm simply love to give these movements / cults oxygen. What we need to see are facts. Proven facts. Not opinions by groups of scientists more interested in having their research grants sustained. But that would be oh so boring and so much more work.

Woke nonsense from someone who has an invented job that adds no value to society.

I really don’t know what to believe. The newspaper I read, have news bits of what happened 50 years ago to the day. At the height of the drought in the WC exactly 50 years ago was a terrible drought in the WC as well although people were saying the present drought is because of climate change. I think weather happens in cycles and in the WC we will see some cycles of extreme wet weather and cycles of extreme hot and dry weather.

End of comments.

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