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From asset classes to equities, finance terminology can often seem like a language of its own. Yet as the field of sustainable finance grows, expect this vocabulary to become ever more embedded into that of sustainability. Courtesy of the Stockholm Sustainable Finance Centre, the Global Environment Facility (GEF) and Investopedia, here’s a list of the most important green finance terms to know.
Active ownership: when investors address concerns over environmental, social and governance (ESG) issues through voting or by engaging corporate managers and directors on them
Asset class: a group of securities (see below) with similar characteristics and subject to the same laws and regulations. There are three main asset classes: equities (stocks), fixed income (bonds), and cash or cash equivalents. Other asset classes can include real estate, commodities, futures, other financial derivatives and even cryptocurrencies.
Best in class: in the context of sustainable finance, this refers to the assets or investments that are leaders in their sector in terms of ESG criteria
Blue bond: a bond (see below) that is issued to finance the protection and conservation of marine ecosystems
Bond: a debt investment in which an investor loans money to an entity for a defined period of time at a variable or fixed interest rate
Broad sustainable investing: a sustainable investing strategy that uses a general sustainability policy or approach rather than a product-specific policy, such as the seven strategies listed by GSIA, or a combination of themCarbon finance: resources provided to a project to purchase reductions in greenhouse gases
Carbon market: a market created from the trading of carbon emission allowances to encourage or help countries and companies to limit their carbon emissions, known as carbon trading
Carbon neutrality: achieving net-zero carbon dioxide emissions, which can be achieved by either balancing emissions with the removal of carbon from the atmosphere, or eliminating carbon emissions entirely
Carbon offsetting: the purchasing of credits through carbon trading schemes or emissions reductions projects in order to reduce carbon emissions
Carbon tax: a tax on the carbon content of fossil fuels to directly set a price on carbon
Circular economy: an economic model based on sharing, leasing, reusing, repairing, refurbishing and recycling goods for as long as possible, thus creating a closed-loop system that minimizes waste
Climate finance: financing that aims to build humanity’s resilience to the impacts of the climate crisis, mainly achieved by reducing emissions and supporting adaptation measures
Climate fund: financial resources at the multilateral, bilateral or national levels aimed at addressing climate change, such as the Green Climate Fund, Adaptation Fund, Least Developed Countries Fund and Climate Investment Funds
Climate risk: the assessed risk of the probabilities and consequences of climate change impacts (e.g. the risk of potential financial losses caused by climate hazards)
Climate transition: a pathway to a climate-resilient economy, supported by policies and initiative
Crowdfunding: a joint effort by individuals to pool money to support a wide range of activities, including social and environmental activities
Crowdsourcing: the obtainment of services, ideas or content from a large group of people, which also includes crowdfunding
Double materiality: the notion that information that should be disclosed if a reasonable person would consider it important
Decarbonization: the process of removing or reducing carbon dioxide emissions from an entity. In sustainable finance, this can include decarbonizing an investment portfolio
Ecosystem services: the benefits derived by humans from ecosystems, such as the air, carbon storage and pollination
Environmental, social, and corporate governance (ESG): the three elements that are commonly assessed when judging the sustainability of a business or investment
European Green Deal: a set of policy initiatives from the European Commission that aim to make the European Union climate-neutral by 2050
Equity: a stock or other security representing a share of ownership in a company
Green bond: a financial instrument (bond) whose proceeds are invested exclusively in projects that generate climate or other environmental benefits
Green loan: credit that is given to finance green projects, generally in line with the Green Loan Principles as outlined by the global Loan Market Associations
Impact investment: an investment that aims to generate substantial investment returns while also generating a positive environmental or socioeconomic outcome, both of which are measured and disclosed.
Leverage: public finance (e.g. from international finance institutions) in the form of loans, risk guarantees, insurance or private equity, used to encourage private investors to back a project by reducing its perceived risk
Microfinance: a source of financial services for individuals or small businesses that lack access to traditional banking services
Natural capital: elements of nature that produce direct or indirect value to people, such as forests, rivers, oceans and land
Security: a tradable financial instrument with some type of monetary value; includes bonds, stocks and options
Social finance: financing that supports actions that mitigate or address a social issue (e.g. affordable basic infrastructure)
Socially responsible investing (SRI): an investment strategy that attempts to screen out investments in companies or industries that do not align with a client’s values (i.e. a negative screening process)
Sustainable finance: financing that supports environmental objectives, such as biodiversity conservation (as compared with climate finance, which is narrower in scope)
Taxonomy: a classification system to help understand whether an economic activity is environmentally sustainable, such as the E.U. taxonomy for sustainable activities
Triple bottom line: an accounting framework that measures not only financial but also social and environmental performance, designed for companies to value their social and environmental profits and losses as well as financial ones
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