Glossary of terms

Glossary of Definitions and Common Terms

Term:Definition:
Active ownershipThe voting of company shares and/or the engaging of corporate managers and boards of directors in dialogue on environmental, social and corporate governance issues as well as on business strategy issues. This is increasingly pursued in an effort to reduce risk and enhance long-term shareholder value. See also Collaborative engagement and Shareholder engagement.
Best-in-classThe focusing of investments in companies that have historically performed better than their peers within a particular industry or sector on measures of environmental, social and corporate governance issues. This typically involves positive or negative screening or portfolio tilting.
CleantechA range of products, services and processes that either directly reduce or eliminate ecological impacts or have the potential to provide performance at least matching that of traditional alternatives whilst requiring lower resource inputs, or a different mix of inputs. Cleantech is an investment theme rather than an industrial sector as it may include investments in agriculture, energy, manufacturing, materials, technology, transportation, and water. In 005, cleantech was North America’s 5th largest venture capital investment category, attracting more than US$1.6 billion.
Climate changeA change of climate which is attributed to natural or anthropogenic activity that alters the composition of the global atmosphere and changes weather patterns on a global scale. There is compelling evidence that increasing concentrations of greenhouse gases in the atmosphere are attributable to human activity and are increasing the greenhouse effect and causing climate change.
Climate risksThe risks stemming from climate change that have the potential to affect companies, industries and whole economies. There are five key areas of business risk associated with climate change: regulatory, physical, litigation, competitiveness and reputational.
Climate resilienceIncorporate the terms Climate Mitigation and Climate Adaptation into the explanation.
Collaborative engagementThe engagement activities conducted collaboratively by multiple parties (for example, pension funds or fund managers) in order to gain leverage and minimize costs and risks. Collaborative engagement forms a subset of collaborative initiatives. See also Active ownership and Shareholder engagement.
Collaborative initiativesThe initiatives conducted collaboratively by multiple parties (for example, pension funds and/or fund managers) in order to gain leverage and minimise costs and risks. The Principles for Responsible Investment, the Carbon Disclosure Project, and the national and regional social investment organisations are examples of collaborative initiatives.
Community investmentThe capital from investors that is directed to communities underserved by traditional financial services. It provides access to credit, equity, capital and basic banking products that these communities would otherwise not have.
Corporate citizenshipSee also Corporate social responsibility.
Corporate governanceThe procedures and processes according to which an organisation (in this context, mainly a company) is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision making. There are both national and international best practice standards.
Corporate social responsibility (CSR)The approach to business which takes into account economic, social, environmental and ethical impacts for a variety of reasons, including mitigating risk, decreasing costs, and improving brand image and competitiveness. This approach is sometimes implemented by means of a comprehensive set of policies and procedures integrated throughout a company. Often the policies and procedures encompass a wide range of practices related to all levels of business activity, including corporate governance, employee relations, supply chain relationships, customer relationships, environmental management, philanthropy and community involvement. Investors in companies, including institutional investors like pension funds, can use their leverage (through responsible investment) to encourage companies to adopt CSR practices. CSR practices have been linked to improved financial performance.
Developmental investmentTargeted financial investment in which the investors intentionally prioritise the allocation of capital to investments and projects that achieve specified developmental outcomes.
DivestmentThe selling or disposing of shares or other assets. Changes in corporate behaviour or investment policies can lead investors to reduce or eliminate investments. Investors who practice active ownership often view divestment as the last resort. Divestment gained prominence during the boycott of companies doing business in South Africa, prior to the dismantling of apartheid. More recently, a campaign has begun to encourage divestment from companies doing business in Sudan.
Eco-efficiencyThe ratio between goods produced or services rendered and the resources consumed or waste produced.
Economically targeted investmentAn investment that aims to achieve a market rate of return while improving social conditions through, for example, investments that provide public housing or employment opportunities.
EngagementSee also Shareholder engagement.
Engagement overlay serviceA third-party service that engages investee companies on behalf of shareholder clients. Currently offered by a small number of investment fund managers and independent service providers.
ESG (environmental, social and corporate governance)The term that has emerged globally to describe the environmental, social and corporate governance issues that investors are considering in the context of corporate behaviour. No definitive list of ESG issues exists, but they typically display one or more of the following characteristics:
• Issues that have traditionally been considered non-financial or not material
• A medium or long-term time horizon
• Qualitative objectives that are not readily quantifiable in monetary terms
• Externalities (costs borne by other firms or by society at large) not well captured by market mechanisms
• A changing regulatory or policy framework
• Patterns arising throughout a company’s supply chain (and therefore susceptible to unknown risks)
• A public-concern focus
ESG integrationThe active investment management processes that include an analysis of environmental, social, and corporate governance risks and opportunities.
ESG research providerA firm that provides environmental, social, corporate governance or ethical research for use in investment decisions or shareholder engagement activities. Traditional sell-side researchers are increasingly offering environmental, social and corporate governance research.
Ethical investingThe investment philosophy guided by moral values, ethical codes or religious beliefs. Investment decisions include non-economic criteria. This practice has traditionally been associated with negative screening.
Extra-financial factorsThe factors that have the potential to have at least a long-term effect on financial performance but lie outside the usual span of variables that get integrated into investment decisions, irrespective of whether they are part of the research process. They include ESG factors (see above) but also traditional financial factors that are often ignored or under-utilised, at least in terms of the alignment of investments with the interests of beneficiaries.
Fiduciary dutiesThe duties imposed upon a person who exercises some discretionary power in the interests of another person in circumstances that give rise to a relationship of trust and confidence. Fiduciary duties are the key source of limits on the discretion of investment decision makers in common law jurisdictions. The most important fiduciary duties are the duty to act prudently and the duty to act in accordance with the purpose for which investment powers are granted (also known as the duty of loyalty). See also Prudent man rule.
Greenhouse gasesThe gases that contribute to the greenhouse effect and global warming. The gases are released into the atmosphere through the combustion of organic matter (including fossil fuels) and through natural processes. The Kyoto protocol deals with the following greenhouse gases: carbon dioxide, nitrous oxide, methane, sulphur hexafluoride, hydrofluorocarbons and perfluorocarbons. Focus of collaborative engagement initiatives such as the Carbon Disclosure Project.
Green financeFinancing of investments that provide environmental benefits in the broader context of environmentally sustainable development. It involves efforts to internalise environmental externalities and adjust risk perceptions to boost environmentally friendly investments and reduce environmentally harmful ones. It covers a wide range of financial institutions and asset classes, and includes both public and private finance.
Green investingAn investment philosophy that includes criteria relating to the environmental impact of the underlying investment.
Impact investingInvestments made into companies, organizations, and funds with the intention to generate positive, measureable E&S impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.
Minority and female owned and/or emerging manager (MFOE)Investment managers owned by minorities or females or have a relatively small amount of assets under management. The definition of “minority” manager can vary but commonly includes those firms majority owned by African American, Native American, Asian American, and Hispanic groups. In some cases, disabled or veteran owners also meet the definition for inclusion under an investor’s policy in this area. The definition of “emerging” also varies but generally connotes a manager with between zero and several hundred million dollars in assets under management or that has a performance record of less than three years. A firm can be minority or female owned without being considered emerging, or vice versa. These managers would not ordinarily be included in a manager search and would benefit from an affirmative action program.
Nationally Determined Contributions (NDCs) under the Paris AgreementNDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change. The Paris Agreement (Article 4, paragraph 2) requires each Party to prepare, communicate and maintain successive nationally determined contributions (NDCs) that it intends to achieve.
Negative screeningAn investment approach that excludes some companies or sectors from the investment universe based on criteria relating to their policies, actions, products or services. Investments that do not meet the minimum standards of the screen are not included in the investment portfolio. Criteria may include environmental, social, corporate governance or ethical issues. Common negative screens exclude investments in tobacco, alcohol and weapons manufacturers. Other negative screens aim to exclude companies that are considered poor executers in the areas of environmental and social management or corporate governance.
Portfolio tiltThe adoption of a particular view on a sector or issue by overweighting or underweighting the portfolio relative to the benchmark.
Positive screeningAn investment approach that includes non-traditional criteria relating to the policies, actions, products or services of securities issuers. Portfolios are tilted towards stocks that rate well on the nominated criteria. The criteria could include environmental, social, corporate governance or ethical issues. Common positive screens include measures of energy efficiency, environmental management or employment standards. Increasingly, these factors are deemed desirable attributes for both financial and non-financial measures. In this case, see also ESG integration.
Prescribed assetsA state requirement for a minimum proportion of a fund’s investments to be directed into government-selected assets, sectors and projects.
Proxy votingThe delegation of voting rights from entitled voters who do not attend shareholders’ meetings to delegates who vote on their behalf. Proxy voting allows shareholders to exercise their right to vote without committing the time involved in actually attending meetings.
Proxy voting policyThe written policy which articulates how proxy voting decisions are to be made and executed. Proxy voting policies can include specific guidance on environmental, social, corporate governance and ethical voting decisions.
Proxy voting advisory service providerA third party who provides background information and advice in relation to proxy issues.
Prudent man ruleA common rule pertaining to fiduciary duty in Anglo-Saxon countries. The OECD states the rule in terms of the following broad principle: “A fiduciary should discharge his or her duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims.” Applications vary by country. In the United States, The Employee Retirement Income Security Act of 19 (ERISA) outlines minimum standards for private pension plans that have since been adopted by many public pension plans. See also Fiduciary duties.
Responsible investment (RI)The integration of environmental, social and corporate governance (ESG) considerations into investment management processes and ownership practices in the belief that these factors can have an impact on financial performance. Responsible investment can be practiced across all asset classes.
Responsible investment policy statementA general (usually public) statement on responsible investment adopted by boards of trustees or directors that directs investment staff practices and decisions. This can be included within a broader investment policy statement and/or developed as a standalone RI policy statement.
Responsible insuranceA strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are conducted in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with ESG issues. Sustainable and responsible insurance aims to reduce risk, develop innovative solutions, improve business performance and contribute to
environmental, social and economic sustainability.
Responsible property investmentA property investment approach that includes the consideration of environmental, social and corporate governance issues. Energy and resource efficiency, both in construction and ongoing operations is a common consideration, as is social impact.
Restricted listA list of securities that are not to be included in a portfolio by an investment manager. Typically facilitates implementation of negative screening.
Retirement fundThe specifics of retirement plans (pension funds, provident funds) differ from region to region across the world.

In South Africa, retirement fund is the collective word for all types of pension funds. This tool uses the term retirement fund and pension fund interchangeably, and when doing so, the term pension funds means all retirement funds.
Social venture capitalA form of venture capital investing that provides capital to businesses that are deemed socially and environmentally responsible. See also Impact investing.
ScreeningAn investment approach that employs certain criteria (for example, environmental, social, corporate governance or ethical considerations) in investment decision making and portfolio construction. Only investments that meet certain criteria are included in investment portfolios. See also Negative screening and Positive screening.
ShareholderAn investor who holds preferred or common shares of a corporation.
Shareholder activismA public or confrontational approach to shareholder engagement. In addition to shareholder engagement, pressure can be exerted on companies through strategic divestment or attempts to influence public opinion. See also Active ownership.
Shareholder engagementThe practice of monitoring corporate behaviour and seeking changes where appropriate through dialogue with companies or through the use of share ownership rights, such as filing shareholder resolutions. Shareholder engagement i s often employed in attempts to improve a company’s performance on environmental, social and corporate governance issues.
Shareholder proposalA shareholder request that the company or its board of directors take particular action. Proposed by the shareholder, this request may be presented at a company’s general shareholders’ meeting and voted on by all shareholders. In some instances, shareholder proposals are withdrawn by shareholders or disallowed by regulators.
Shareholder resolutionSee also Shareholder proposal.
“Short-termism”The bias some investors demonstrate for near or immediate-term investment performance and share price appreciation instead of long-term investment performance. This bias may put pressure on corporate managers to make decisions that boost short-term accounting measures of profitability rather than long-term economic profitability.
“Sin stock”The stock of a company that provides goods or services that the investor has deemed unethical. Common examples include the stocks of companies that are involved in the production or provision of tobacco, alcohol, pornography or gaming facilities.
Socially responsible investment (SRI)An investment process that seeks to achieve social and environmental objectives alongside financial objectives.
StakeholdersThe individuals or organisations with an interest in the actions and impacts of an organisation. They may be customers, suppliers, shareholders, employees, communities, members of special interest groups, nongovernmental organisations, or regulators.
Stock lending
The temporary transfer of shares by an investor to a borrower in exchange for a fee, with agreement by the borrower to return equivalent shares to the lender at an agreed time. This may be done to enable hedging, arbitrage, or short-selling. When shares are lent, voting rights are passed to the borrower, the underlining owner may recall the shares to undertake proxy voting.
Stranded assets
Assets (eg a piece of equipment or resource) that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities, usually due to some kind of external change, including changes in technology, markets and societal habits. The term stranded assets has gained significant prominence in the areas of environment and climate change, where the focus has been on how environment-related factors (such as climate change policy) could strand assets in different sectors. In this context the term is most commonly used to describe oil and gas resources that haven’t yet been extracted, and which may become unviable to extract due to a need to limit global average temperature increase to 1.5 degrees celsius, but which appear as assets on companies’ ledgers.
SustainabilitySee also Sustainable development.
Sustainability reportA report produced by an organisation to inform stakeholders about its policies, programs and performance regarding environmental, social and economic issues. Sustainability reports, also known as corporate citizenship reports or CSR reports, are usually voluntary and relatively few are independently audited. Sustainability Reports are mostly understood to be stand-along reports, as opposed to an Integrated Report which integrates ESG factors into financial reporting. . Numerous corporations are now employing sustainability reports to expand public disclosure beyond financial metrics. The Global Reporting Initiative provides a framework for sustainability reporting.
Sustainable developmentThe concept of meeting present needs without compromising the ability of future generations to meet their needs. It encompasses social welfare, protection of the environment, efficient use of natural resources and economic wellbeing.
As defined in South African legislation: Sustainable development means the integration of social, economic and environmental factors into planning, implementation and decision-making so as to ensure that development serves present and future generations. (National Environmental Management Act (NEMA), (Act No. 107 of 1998).
Systemic risk
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. Climate change and other ESG issues are recognised as issues posing systemic risk, including to financial institutions.
Thematic investmentThe selected investment in companies with a commitment to chosen responsible business products and/or services, such as environmental technologies. See also Cleantech and Community investment.
Transition risk
Transition risks include policy changes, reputational impacts, and shifts in market preferences, norms and technology and can occur when moving towards a less polluting, greener economy. In the ESG context typically defined as the financial risk associated with the transition to a low- carbon economy.
Triple bottom lineA holistic approach to measuring a company’s performance on environmental, social and economic issues. The triple bottom line focuses companies not just on the economic value they add, but also on the environmental and social value they add or destroy. See also Sustainability report.
Universal ownerUniversal Owner is defined as a long‐term owner of a diversified investment portfolio that is spread across the entire market or markets. As a result, Universal Owners collectively own a share of the entire economy and are effectively tied into this share in the longer term and also own a large holding of corporate externalities which risk being internalized to the fund’s net cost, now or in the future. So, while investors are directly compensated by the current returns of their investment portfolios, they also indirectly own the externalities generated by companies, which may offset the portfolio return in future. Most long‐term investors have the fiduciary responsibility to ensure multi‐period sustainability of their investment portfolios.