A starters guide to ESG terminology

We've researched many of these topics in our blogs published over the last couple of years, covering developments in the environmental (E) and social (S) sustainability landscape relevant to organisations. In a fast-changing space, it is useful to recalibrate and consider the terminology used, and to enable shared understanding of these issues.

We've created a starter list below that covers a number of interrelated themes. This includes measuring greenhouse gases (expressed as carbon dioxide equivalents, CO2-e) to mitigate and adapt to climate change, managing freshwater use and optimising blue carbon stores in coastal areas, and how to link sustainability targets to the real world (through science-based targets) for both carbon and nature. 

———————————

Australian Carbon Credit Unit (ACCU). Each ACCU issued represents one tonne of carbon dioxide equivalent (tCO2-e) stored or avoided by a project.

Blue Carbon is the carbon stored in coastal wetlands, such as mangroves, tidal marshes, and seagrasses. Blue carbon ecosystems capture carbon 30 – 50 times faster than forests, which they lock away in the sediment for thousands of years. They act as natural carbon sinks, offset carbon emissions, and contribute to climate change mitigation – as well as protecting fisheries habitat.

Carbon Accounting is the process of measuring and reporting on greenhouse gas (GHG) emissions and removals. It includes determining the emissions boundary (i.e., activities that will be included), quantifying the tCO2-e emitted by each source, identifying emission reduction strategies, offsetting residual emissions where necessary, and improving greenhouse gas management through auditing, verification and public reporting.

One carbon credit is issued per tCO2-e avoided, removed, or captured (and stored) from the atmosphere. Carbon credit units are tradeable e.g., see About Carbon Markets by Australia’s Clean Energy Regulator.

Carbon Footprint is a measure of the total carbon dioxide equivalent (CO2-e) emissions that are attributable to an activity. A carbon footprint can relate to the emissions of an individual, household, organisation, product, service, event, building or precinct. It is a way of describing the total carbon inventory or account. 

Carbon Neutral. Carbon neutrality is achieved when greenhouse gas emissions have been reduced to as low as possible and residual emissions offset (carbon offsets) through the purchase of eligible carbon credit units (e.g., Australian Carbon Credit Units, ACCUs). A carbon credit represents a reduction in emissions generated by a project, such as reforestation or renewable energy, to compensate for emissions made elsewhere. This helps achieve carbon neutrality by balancing out the net emissions from an entity’s activities.

Carbon offsets, as described by Climate Active, are used to compensate for emissions a business produces and to bring their carbon footprint down to zero. To determine the residual quantity of emissions that needs to be offset, businesses must complete a greenhouse gas emissions inventory and reduce their emissions as much as possible. Carbon offset units, such as Australian Carbon Credit Units (ACCUs), are generated through emissions reductions from eligible projects including reforestation, blue carbon and improving soil carbon storage.

Carbon Positive means reducing and offsetting more greenhouse gas emissions than are released, which also results in environmental co-benefits from strategies such as halting deforestation, eliminating fossil fuel use, 100% renewable energy and offsetting carbon beyond neutrality.

CDP celebrated the 20th anniversary of its global environmental disclosure system in 2020. The organisation supports companies, cities, states, and regions in measuring and managing their risks and opportunities related to climate change, water security and deforestation. The CDP platform holds the most comprehensive dataset on how companies and cities measure, understand and address their environmental impacts.

Circular Economy. The circular economy is driven by design around three principles: to eliminate waste and pollution, circulate products and materials at their highest value, and regenerate nature. It aims to decouple economic activity from the consumption of finite resources or ecosystem parts and is underpinned by a transition to renewable energy and materials. By stopping waste from being produced in the first place, the circular economy supplants our current linear model of take-make-dispose.

CO2-e is the standard measure for reporting emissions of all greenhouse gases (GHG's). CO2-e (also written as carbon dioxide equivalent, CO2e, CO2 equivalent or CO2eq) allows analysts to add up emission estimates of different gases. It is calculated by multiplying the quantity of the greenhouse gas emitted by its individual global warming potential (GWP). 

Corporate Social Responsibility (CSR) relates to a company’s ambition to serve all stakeholders, such as customers, employees, suppliers and supporting communities, in addition to shareholders, by implementing social and environmental initiatives beneficial to society. Its goal is often to improve social welfare or environmental protection. CSR includes an expectation to report activities publicly, and in this way, shares objectives with other forms of non-financial disclosures, such as sustainability reporting and ESG reporting.

Diversity, Equity, and Inclusion (DEI) in a corporation relate to the benefits of attracting, retaining and motivating people from the widest possible pool of available talent, particularly for corporations in a competitive labour market. It also involves addressing accessibility, disability inclusion, First Nations representation, gender and people identifying as culturally and linguistically different (CALD).

Emissions Reporting refers to voluntary or compliance-based reporting and dissemination of company information about greenhouse gas emissions (e.g., tCO2-e/year). This may also include related energy production (TJ/year) and energy consumption (TJ/year).

Equity is the fair distribution of resources according to each person’s individual needs. Equity recognises that people have diverse attributes and circumstances that affect their individual needs, and these needs should be proactively met to address imbalances and inequalities. For example, providing additional resources to students from disadvantaged backgrounds to ensure they have the same opportunities for academic success as their peers is an example of equity. “Diversity is a fact, equity is a choice, inclusion is an action, belonging is an outcome” (Arthur Chan, DEI Advisor).

ESG stands for Environmental, Social and Governance. It is a framework for evaluating, managing and mitigating risk exposure from adverse environmental effects, negative social impacts, and unethical governance practices. 

"In addition to external pressures to address ESG issues, more businesses are also realising the benefits of embedding ESG criteria in business practices to reduce their risk exposure, improve their baseline performance, and to create sustainable businesses or positive impact" ESG and Technology: Impacts and Implications, Marsh, C and Robinson, S (2021).

GHGs include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and nitrogen trifluoride (NF3).

A Greenhouse Gas (GHG) is a gaseous constituent of the atmosphere, both natural and anthropogenic (i.e., caused by human activities), that absorbs and emits radiation within the spectrum of infrared radiation emitted by the Earth’s surface, atmosphere, and clouds. This property causes the greenhouse effect, which is responsible for trapping heat in the Earth’s atmosphere and regulating the planet’s temperature.

Greenhouse Gas Protocol (GHG Protocol) establishes global standardised frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions. The first edition of the Corporate Standard was published in 2001, with expanded guidance on measuring emissions throughout the value chain (scope 3) in 2011 and from electricity use (scope 2) in 2015.

Green-hushing is the term used to describe the company practice of saying less about sustainability and climate risk reduction practices and targets, to avoid scrutiny. Green-hushing is less likely to be used by organisations that are committed to a sustainability reporting framework (such as the Global Reporting Initiative) with required disclosures.

Greenwashing is the term used to describe company practices that give the impression the company is doing more to protect the environment than it really is. This includes overstatements or exaggerated claims relating to goals and performance, such as climate-related statements, and offering/promoting sustainability-related financial products. Greenwashing should be considered in the ESG framework, particularly in the governance dimension.

The Global Reporting Initiative (GRI) provides a framework and common language for impact reporting and has a long history of championing sustainability reporting for many years. Founded in Boston USA in 1997, it launched its first guideline in 2000. In 2016, it transitioned to setting the first global standards for sustainability reporting - the GRI standards. The GRI standards promote transparency and comparability of disclosures about a business’ environmental, economic, and social impacts. Companies reporting in accordance with the GRI standards typically respond to a GRI Content Index covering universal disclosures, sector standards and/or material topic standards.

Global Warming Potential (GWP) - each greenhouse gas is unique and has its own global warming potential (GWP) for a specific time horizon (e.g.,100 yr.) based on its duration in the atmosphere and effectiveness at radiative forcing. A summary of the GWPs for individual greenhouse gases recommended by the Intergovernmental Panel on Climate Change (IPCC) is provided by the Greenhouse Gas Protocol website here.

Impact may be positive or negative. Positive impact is the value created or preserved for the environment, society, and the organisation. Negative impact erodes value. Positive impact also refers to the intended long-term environmental or social change sought through implementation of specific programs, projects or business practices.

The creation of the International Sustainability Standards Board (ISSB) was announced by the International Financial Reporting Standards (IFRS) Foundation Trustees on the 3 November 2021. The intention is to “deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions” i.e., investor-oriented sustainability disclosures.

Materiality and Double Materiality. The Global Reporting Initiative (GRI)’s definition of material topics is “topics that represent the organisation’s most significant impacts on the economy, environment, and people, including impacts on human rights”, which are determined through multi-stakeholder engagement. The double materiality principle offers a two-way perspective, to evaluate the impact of the company on people and planet (impact materiality) and the impact of external factors on the value of the company (financial materiality).

Modern Slavery describes situations where offenders use coercion, threat, or deception to exploit victims and undermine their freedom. This can include practices such as human trafficking, slavery, servitude, forced labour, debt bondage, forced marriage, and the worst forms of child labour. Modern slavery is a form of serious exploitation and is distinct from substandard working conditions or underpayment of workers, although these practices can be present in some forms of modern slavery.

Memorandum of Understanding (MoU) The GRI and ISSB are developing a MoU, or collaboration agreement, announced in March 2022. The MoU commits the organisations to coordinate their work programs and standard-setting activities to connect capital market and multi-stakeholder standards.

Reporting standards - Global sustainability reporting (and GHG accounting) standards are constantly evolving to meet the changing needs of stakeholders. The Global Reporting Initiative (GRI) and the Greenhouse Gas (GHG) Protocol two of the most well-known reporting standards, have been around for two decades and continuously update and add to their guidance in response to better information and stakeholder engagement. They have played a vital role in promoting transparency and comparability of disclosures related to an organisation’s environmental, economic, and social impacts. New collaborations are emerging that signal tailoring of sustainability reporting to specific audiences. On example is the formation of the International Sustainability Standards Board (ISSB) for investor-related ESG disclosures. These collaborations represent a response to the growing demand for more standardised and consistent reporting.

Science-based Targets (SBTs) are grounded in an objective scientific evaluation of what is needed for global GHG emissions reduction determined by relevant carbon budgets (i.e., to limit global warming to 1.5 degrees C), rather than what is achievable by any one company. The Science-based Targets initiative (SBTi) enables organisations to set science-based emission reduction targets and has also launched the world's first Corporate Net-Zero Standard.

Science-based Targets for Nature describes the ambition to expand the SBT for climate to both the loss of nature and climate. It recognises that climate and nature are biophysically, politically and economically intertwined. Initial guidance for business is provided here. The first release of science-based targets for nature is expected in the first-half of 2023.

Social return on investment (SROI) is a framework and a type of cost-benefit analysis that assesses the social, environmental, and economic outcomes of an intervention or project, using monetary values to quantify and communicate the social value created.

The SROI ratio describes the value created for all stakeholders compared to the financial cost of the investment. For example, a ratio of 3:1 indicates that an investment of $1 delivers $3 of social value. The methodology for accounting for social value is described by Social Value International.

The SROI calculation takes into account deadweight, attribution, displacement, and the duration of changes, which is usually measured in years. Deadweight is the amount of outcome that would have happened even if the activity had not taken place. Attribution is how much of the outcome was a result of other activities by organisations and people. Displacement is how much of the outcome has displaced other outcomes.

Sustainability for a corporation can be thought of as the state in which economic activity and the way it operates are maintained within sustainable limits. This means the balance between environmental and human resource use, the planetary limits for drawdown of these ecosystem components, and the requirements of healthy societies.

The Sustainable Development Goals (SDGs) are a global call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. There are 17 integrated goals that recognise that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability. The creativity, knowhow, technology, and financial resources from all of society can contribute to achieving the SDGs in every context.

Sustainability Reporting is the practice of sharing information about a company’s past environmental, social and governance performance with the public, shareholders, and other stakeholders. This is typically done on an annual basis and focuses on material topics that outline progress towards sustainability-related goals. There are established voluntary global reporting frameworks, but there’s also a move towards mandatory corporate sustainability reporting in Europe.

The definition of stakeholder has been revised by the Global Reporting Initiative (GRI) in its Universal Standards 2021. The new definition is an “individual or group that has an interest that is affected or could be affected by the organization’s activities”. This updated definition aligns with the OECD Due Diligence Guidance for Responsible Business Conduct. Examples of stakeholders are business partners, consumers, customers, employees, governments, local communities, suppliers, and vulnerable groups.

Stakeholder engagement is the systematic identification, analysis, planning and implementation of actions designed to influence stakeholders (Association for Project Management). Whereas stakeholder management focuses on process and organisation, stakeholder engagement focuses on relationship and influence.

Water Neutrality is a similar concept to carbon neutrality. It refers to reducing the water footprint of all activities as much as possible and offsetting any remaining negative externalities (e.g., environmental, and social impacts) of water consumption. It can be applied to various organisational units, such as companies, buildings, urban developments, products, and can be achieved by investing in sustainable water usage.

The Value Reporting Foundation (VRF) (and stewardship of the SASB standards) consolidated into the IFRS Foundation. These arrangements inform the work of the IFRS Foundation through the industry-based approach of the SASB Standards and the Integrated Reporting Framework.