CFA Sustainable Investing key terms

An environmental, social, or governance issue likely to affect a company's cash flows, cost of capital, or risk profile enough to influence an investment decision. Materiality differs by industry and can change over time.

The idea that a company should report both how sustainability issues affect its own financial performance and how its operations affect people and the environment. Widely used in European regulation.

Excluding companies or sectors from a portfolio because their products or conduct conflict with an investor's values or risk limits, for example tobacco, controversial weapons, or thermal coal.

Selecting the highest-rated companies on ESG criteria within each sector rather than excluding whole industries, so the portfolio keeps broad sector exposure while favouring stronger ESG performers.

Building a portfolio around a specific sustainability theme such as clean energy, water, or health, typically with concentrated exposure to companies whose revenues come from that theme.

Investing with the explicit aim of producing measurable positive social or environmental outcomes alongside a financial return, using defined metrics and reporting against the intended impact.

Presenting a product, fund, or company as more environmentally or socially responsible than it really is, through misleading labels, selective disclosure, or unsupported claims.

The legal obligation of an investment manager to act in the best interests of beneficiaries. Whether this requires considering ESG factors depends on materiality and on the governing law.

A UN-supported investor initiative with six voluntary principles for incorporating ESG issues into investment practice, plus a signatory framework with annual reporting requirements.

A bond whose proceeds are ring-fenced for eligible environmental projects such as renewable energy or clean transport, with use-of-proceeds reporting back to investors.

A bond whose financial terms, usually the coupon, change if the issuer meets or misses predefined sustainability performance targets. Proceeds are not restricted to green projects.

A provider's assessment of a company's ESG performance or risk, built from data and scoring methods that differ across providers and can produce materially different scores for the same company.

A framework recommending disclosure of climate governance, strategy, risk management, and metrics and targets, including scenario analysis of physical and transition risks.

Scope 1 covers direct emissions from sources a company owns or controls; Scope 2 covers indirect emissions from the purchased electricity, heat, or steam it consumes.

Indirect emissions across a company's value chain, from suppliers and purchased goods through to product use and disposal. Usually the largest share and the hardest to measure.

The potential financial loss from moving to a low-carbon economy, including policy changes, carbon pricing, technology shifts, and changing customer preferences.

Financial exposure to harm from climate hazards such as floods, heat stress, or drought, split into acute event-driven risks and chronic shifts in climate patterns.

Assets that lose value or become uneconomic before the end of their expected life, for example fossil fuel reserves that cannot be burned under carbon constraints.

How a company recruits, develops, pays, and retains employees, covering health and safety, turnover, training, and labour relations. Often the most material social issue for service businesses.

The principle that the shift to a low-carbon economy should be fair to the workers and communities affected, through retraining, social protection, and consultation rather than abrupt job losses.

The ongoing acceptance of a company's operations by local communities, employees, and other stakeholders. Losing it can delay projects, trigger protests, or halt production.

The share of directors with no material relationship to the company or its management. Higher independence is generally associated with stronger oversight of management and controlling shareholders.

A capital structure in which one class of shares carries more votes than another, letting founders or families control a company while holding a minority of the equity. It weakens minority shareholder influence.

Deals between a company and its directors, executives, or controlling shareholders. They need close scrutiny and independent approval because they can shift value away from minority investors.

The use of investor rights and influence, through voting, engagement, and escalation, to protect and enhance long-term value in investee companies. Also called active ownership.

Casting votes at shareholder meetings on behalf of clients, covering director elections, remuneration, and shareholder proposals. Managers often publish their voting policies and records.

A proposal filed by shareholders for a vote at a company meeting, often requesting new disclosure or a change in policy on environmental or social issues.

Investors working together, sometimes through investor networks, to raise issues with companies. Pooling influence can be more effective than acting alone, especially with large or cross-border firms.

A stepped sequence of actions taken when engagement fails to produce results, such as voting against directors, filing resolutions, requesting board meetings, or ultimately selling the holding.

Explicitly including material ESG factors in traditional financial analysis and investment decisions, alongside conventional factors, on the basis that they affect risk and return.

Testing a portfolio or company against a set of plausible future pathways, such as different carbon prices or warming levels, to estimate the range of possible financial outcomes.

A cost or benefit of a company's activity that falls on third parties and is not reflected in its market price, such as pollution. Regulation can turn externalities into financial costs.

The amount of deviation from a benchmark a manager is permitted. ESG exclusions and tilts consume part of this budget, so constraints must be set with the resulting active risk in mind.

Using quantitative techniques to build portfolios that maximise expected return for a given risk level while meeting ESG constraints, such as carbon reduction targets or minimum rating thresholds.

A written document setting out a client's objectives, constraints, risk tolerance, and permitted investments, including any ESG preferences or exclusions that will guide the mandate.

A regulated index label for benchmarks designed to align with the Paris Agreement, requiring a substantial initial cut in carbon intensity versus the parent index plus a set annual decarbonisation rate.

The EU Sustainable Finance Disclosure Regulation, which requires fund managers to classify products by sustainability objective and to disclose how sustainability risks and impacts are handled.

A portfolio metric that weights each holding's carbon emissions per unit of revenue by its portfolio weight, giving an intensity measure comparable across portfolios and against a benchmark.

Total emissions attributable to a portfolio, scaled by the amount invested, usually reported as tonnes of CO2 equivalent per million dollars. It may measure financed emissions or an ownership share.

Breaking down a portfolio's return relative to its benchmark into the contributions of sectors, securities, and factors, which can show whether ESG tilts helped or hurt performance.