Climate Investing key terms

Direct greenhouse gas emissions from sources a company owns or controls, such as fuel burned in its own boilers, furnaces, and vehicles, reported in tonnes of CO2 equivalent.

Indirect emissions from purchased electricity, steam, heat, or cooling a company consumes. They can be reported using location-based or market-based methods, which often produce materially different figures.

All other indirect emissions across a company's value chain, including purchased goods, business travel, use of sold products, and end-of-life treatment. Usually the largest share for most sectors.

The most widely used accounting standard for corporate greenhouse gas inventories, defining scopes, boundaries, and calculation guidance. It underpins most disclosure regimes and investor data requests.

Emissions attributable to a financial institution's loans and investments, calculated by allocating a borrower's or investee's emissions in proportion to the capital provided. A category of Scope 3 emissions for banks and investors.

The Partnership for Carbon Accounting Financials, an industry standard setting methods to measure and disclose financed emissions across asset classes such as listed equity, corporate bonds, mortgages, and project finance.

Emissions attributed to holdings, usually normalised by portfolio value or revenue, expressed as tonnes of CO2 equivalent per million dollars invested. Enables comparison across portfolios but is sensitive to methodology.

A portfolio metric that weights each holding's emissions per unit of revenue by its portfolio weight. Widely used in reporting because it requires only revenue data and is less distorted by enterprise value swings.

An estimate of the global warming consistent with a portfolio's or company's projected emissions pathway, expressed in degrees Celsius. Depends heavily on assumptions about future decarbonisation and coverage.

The degree to which a company's or portfolio's emissions trajectory and capital plans are consistent with reaching net zero emissions by a specified date, typically 2050, under a stated scenario.

A body that validates corporate emissions reduction targets against climate science, requiring near-term and often long-term net zero commitments. Validation signals credibility but does not guarantee delivery.

A company's documented strategy, actions, and capital allocation for moving its business to a low-carbon model, including interim targets, governance, and spending. Investors use it to assess credibility of climate commitments.

The potential for harm from climate hazards such as floods, heatwaves, wildfires, and sea-level rise, affecting assets, operations, and supply chains. Can be acute, from events, or chronic, from gradual shifts.

The financial risk from moving to a low-carbon economy, including policy changes, carbon pricing, technology shifts, and reputational or litigation effects that can reprice assets.

Assets that lose value ahead of schedule because of the low-carbon transition, such as fossil fuel reserves that cannot be burned under climate policy or demand shifts.

A method of exploring how physical and transition risks could affect a portfolio or firm under plausible future pathways, such as orderly, disorderly, and hot-house worlds. Outputs are conditional, not forecasts.

Reference climate scenarios published by the Network for Greening the Financial System, spanning orderly, disorderly, and hot-house pathways. Widely used by banks, insurers, and supervisors for risk assessment.

The cost per tonne of carbon dioxide equivalent imposed by a tax or emissions trading system, or the shadow price a firm uses internally to evaluate investments and risk.

A cap-and-trade market in which a limit on total emissions is set and allowances are traded, creating a carbon price. Examples include the EU ETS and California's programme.

A levy on carbon-intensive imports designed to prevent carbon leakage and level the playing field between domestic producers facing carbon costs and foreign competitors that do not.

A shadow price a company applies in capital budgeting or strategy to reflect future carbon costs, encouraging low-carbon investment decisions before regulation or markets fully price emissions.

The principle that decarbonisation should be fair to workers and communities dependent on high-carbon industries, addressing employment, regional economic impacts, and social equity.

Misrepresenting or overstating the environmental credentials of a product, fund, or company, for example through misleading labels, vague claims, or selective disclosure of favourable data.

The EU Sustainable Finance Disclosure Regulation, which requires financial market participants to classify products as Article 6, 8, or 9 and disclose sustainability risks, adverse impacts, and related policies.

A classification system defining which economic activities qualify as environmentally sustainable, based on substantial contribution and do-no-significant-harm criteria. Used for reporting and green fund labelling.

Mandatory indicators under SFDR showing how investment decisions negatively affect sustainability factors, covering emissions, biodiversity, water, waste, and social and governance matters.

A framework for disclosing climate-related financial risks across four pillars: governance, strategy, risk management, and metrics and targets. Now widely embedded in regulation and standards.

The International Sustainability Standards Board, which issued IFRS S1 and S2, global baseline standards for sustainability and climate-related disclosure, including Scope 1, 2, and 3 emissions requirements.

Adjustments to physical assets, operations, and planning to reduce harm from climate hazards, such as flood defences, cooling systems, or supply chain diversification. Complements mitigation.

Actions that reduce greenhouse gas emissions or enhance sinks, such as efficiency improvements, renewable energy deployment, and avoided deforestation. Distinct from adaptation to impacts.

A credit representing one tonne of emissions avoided or removed, purchased to compensate for emissions elsewhere. Quality varies widely, and offsets do not substitute for reducing a company's own emissions.

A fixed income instrument whose proceeds fund eligible environmental projects, governed by voluntary principles such as ICMA's Green Bond Principles. Allocation and impact reporting are key to credibility.

A bond whose interest terms adjust if the issuer meets or misses defined sustainability performance targets, such as emissions reductions, rather than ring-fencing proceeds for specific projects.

The pricing premium, reflected as a lower yield, that green bonds sometimes command versus comparable conventional bonds, reflecting investor demand or perceived risk benefits.

An estimate of the potential financial loss to a portfolio from climate-related risks over a given horizon and confidence level, combining transition and physical exposures under scenario assumptions.

The share of a portfolio's value tied to assets that could lose value under transition scenarios, such as fossil fuel reserves, high-carbon infrastructure, or carbon-intensive real estate.

The responsible use of investor influence over investee companies, through voting, engagement, and escalation, to protect and enhance long-term value, including on climate strategy.

Direct dialogue between investors and companies or policymakers to encourage improved climate disclosure, strategy, and performance. Effectiveness depends on escalation and clear objectives.

The exercise of voting rights on shareholder resolutions and management proposals, including climate-related items such as transition plans and lobbying disclosure. A core stewardship tool.