CFA Sustainable Investing flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Responsible investment

Umbrella term for strategies that incorporate ESG factors into investment decisions and ownership practices, including screening, ESG integration, thematic investing, impact investing and stewardship.

Double materiality

EU concept requiring companies to report both how sustainability issues affect their financial performance (financial materiality) and how their activities affect people and the environment (impact materiality).

ESG integration

The explicit and systematic inclusion of financially material environmental, social and governance factors into investment analysis and decisions, alongside traditional financial analysis, to improve risk-adjusted returns.

PRI

Principles for Responsible Investment, launched in 2006 and backed by the UN, comprising six voluntary principles that signatories pledge to apply and report on annually.

Green bond

A fixed-income instrument whose proceeds are exclusively earmarked for eligible environmental projects, typically issued under the ICMA Green Bond Principles covering use of proceeds, evaluation, proceeds management and reporting.

SFDR Article 8

An EU classification for funds that promote environmental or social characteristics, provided investee companies follow good governance practices; such funds need not have sustainable investment as their objective.

Scope 3 emissions

All indirect greenhouse gas emissions in a company's value chain not covered by Scope 1 (direct) or Scope 2 (purchased energy), including upstream suppliers and downstream use of products.

Transition risk

The risk of financial loss arising from the shift to a low-carbon economy, driven by policy and legal changes, technology shifts, market preferences and reputational damage.

WACI

Weighted Average Carbon Intensity: the sum over holdings of portfolio weight multiplied by the holding's Scope 1 and 2 emissions divided by its revenue, in tonnes CO2e per million dollars of revenue.

Just transition

The principle that the shift to a low-carbon economy should be managed fairly, addressing employment, community and social inclusion impacts on workers and regions affected by decarbonisation.

UN Guiding Principles

The UN Guiding Principles on Business and Human Rights set out the state duty to protect human rights, the corporate responsibility to respect them, and the need for access to remedy.

Social bond

A bond whose proceeds finance or refinance projects with positive social outcomes, such as affordable housing, healthcare or education, typically issued under the ICMA Social Bond Principles.

Say on pay

A shareholder vote, often advisory and held annually, on a company's executive remuneration report or policy; a significant dissent level signals governance concerns to the board.

Dual-class share structure

A capital structure with two or more share classes carrying different voting rights, often letting founders retain control disproportionate to economic ownership and weakening minority shareholder influence.

Related-party transaction

A deal between a company and a party connected to it, such as a director or major shareholder; scrutiny of pricing and approval procedures tests protection of minority shareholders.

Stewardship

The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, exercised mainly through monitoring, engagement and voting at investee companies.

Escalation

The staged process of increasing pressure on an investee company when engagement objectives are unmet, moving from private dialogue to voting against directors, public statements, resolutions or divestment.

Collaborative engagement

Investors acting jointly, often through investor coalitions, to engage companies on shared ESG concerns, which increases leverage and reduces duplication of effort and cost.

Materiality map

A framework, such as the SASB industry standards, identifying which ESG issues are likely to be financially material for companies in a given sector and guiding analyst research.

Best-in-class

A portfolio construction approach that selects, within each sector or industry, the issuers with the strongest ESG performance, retaining sector exposure while improving average ESG characteristics.

ESG rating divergence

Differences in ESG ratings assigned to the same company by different providers, arising from varying scope, indicator choice, weights, normalisation and qualitative judgement in their methodologies.

Tracking error

The annualised standard deviation of the difference between portfolio and benchmark returns; ESG constraints and exclusions typically raise it relative to an unconstrained portfolio.

Negative screening

Excluding sectors, companies or activities from an investable universe on ESG grounds, such as tobacco, controversial weapons or thermal coal, applied during portfolio construction.

Thematic investing

Investing in companies tied to a specific sustainability theme such as renewable energy, water or clean technology, typically producing concentrated exposures and higher tracking error to broad benchmarks.

Investment policy statement

A written document setting out a portfolio's objectives, risk tolerance, constraints, time horizon, benchmark and any ESG preferences or exclusions that shape the mandate.

Segregated mandate

A mandate in which the client's assets sit in a dedicated account managed to bespoke guidelines, allowing customised ESG restrictions and reporting rather than standardised pooled fund terms.

Fiduciary duty

The obligation to act in beneficiaries' best interests; financially material ESG factors may fall within this duty, while non-financial preferences require explicit client instruction and disclosure.

Implied temperature rise

A forward-looking metric translating a portfolio's projected emissions and alignment with decarbonisation pathways into a single temperature figure, such as 1.5°C or 3°C.

Financed emissions

Emissions attributed to a financial institution's loans and investments, calculated by multiplying the investee's emissions by an attribution factor reflecting the share of the investee's capital provided.

Ex-ante tracking error

A forward-looking estimate of portfolio risk relative to a benchmark, derived from a risk model and current holdings and used before trading to size active ESG positions.

Taxonomy alignment

The proportion of a fund's underlying activities that qualify as environmentally sustainable under the EU Taxonomy, computed on turnover or capital expenditure and disclosed to clients.

Stewardship reporting

Disclosure to clients of how engagement and voting responsibilities were exercised, including priorities, activities, escalation and outcomes, often aligned with codes such as the UK Stewardship Code.