ESG Glossary

The Federal Financial Supervisory Authority is a German institution under public law with regulatory functions. As the financial market supervisory authority, BaFin is responsible for all areas of the German financial system. In addition, BaFin provides information on good practice in sustainable corporate governance and makes recommendations on how companies should deal with sustainability risks. 

Corporate Social Responsibility (CSR) is socially and ecologically responsible entrepreneurial activity on a voluntary basis. This relates to ethical investment as well as to a company’s core business

Environmental, Social, Governance – ESG – stands for a holistic business practice. In addition to economic parameters, it measures and evaluates the effects of economic activity on the environment, on society, and on corporate management. In this way, ESG minimizes future risks and creates incentives for strategies that will be successful over the long-term. Drees & Sommer is guided by the ESG regulations and helps customers introduce and comply with them.

ESG encompasses a system of criteria that can be used to measure and compare developments and progress in the areas of environment, social issues, and governance. The aim is to assess the three areas E, S and G for possible future risks and opportunities. Traditionally, companies have undertaken the systematic assessment of opportunities and risks based solely on such economic factors as their capital resources or market value.

‘Environmental’ encompasses all environmental aspects of sustainability, such as climate change and biodiversity. ‘Social’ is concerned with the rights, well-being and interests of people and groups – including labor standards, for example. ‘Governance’ relates to the way in which leadership and management roles are carried out. This includes, for example, a company’s management structure and corporate culture.

ESG ratings are based on ESG criteria. They are objective assessments of a company’s commitment to sustainable business practices. The ESG rating applies different weightings to environmental, social and governance factors depending on the sector involved.

The European Securities and Markets Authority (ESMA) protects the public interest by contributing to the short-, medium- and long-term stability and effectiveness of the financial system for the European Union economy, its citizens and companies. Its roles include submitting proposals for regulations to the EU Commission and taking direct action against national authorities or, in special cases, individual market players. ESMA is also responsible for the licensing of credit rating agencies. It is further responsible for ensuring that the financial market supports the transition towards a more sustainable economy in the EU by getting financial market players to integrate ESG criteria into their core business.

The Green Deal presented by the European Union at the end of 2019 sets the goal of making Europe the first continent to become climate-neutral. Sustainable ecological change is necessary to achieve this transformation. It covers the energy, transport, trade, industry, agriculture and forestry sectors.

The EU taxonomy is a classification system that allows economic activities, types of investment and revenue segments to be assessed as to whether they are compatible with the sustainability targets defined by the EU.

Governance factors (the G in ESG) are factors that influence good corporate governance.

Greenwashing, also known as ‘green sheen’, means making something or a process appear more ecological than it really is. The aim of greenwashing is to misrepresent the environmental impact – for example of products, services or companies.

A form of security that enables financial investment in ecological and/or sustainable projects. Examples include technology bonds for types of renewable energy such as wind and solar power.

Impact investments involve the investment of capital to achieve positive social and environmental impacts in addition to the financial return. The borrowers may be organizations, funds, but also individual companies. Green bonds are one type of impact investment.

The United Nations member states have adopted 17 Sustainable Development Goals. These provide responses to the major global challenges of the coming decades, including climate change, global poverty, hunger and inequality of education. The goals call upon economic players and societies as a whole to act.

Social factors (the S in ESG) relate to the fact that companies are embedded in a social context, for example through their constant interactions with customers, business partners, employees and the public. There are legal standards and agreements that have existed for decades in this area, such as directives on occupational health & safety and dealing with suppliers.

Portfolios with an excellent ESG rating are those that engage in sustainable and responsible investment. SRI aims to promote such portfolios and uses tools including special screening filters to encourage such investment.

The SBTi is an association of the CDP UN Global Compact, the World Resources Institute (WRI) and the World Wildlife Fund (WWF). Its aim is to promote transformation of the economy compatible with the 1.5°C target set in the Paris Climate Agreement. To this end, the participants design development paths for the individual sectors based on scientific findings. Individual companies can also receive extensive support in setting their own goals.

This is a classification system for greenhouse gas emissions according to where in the value chain they originate. Scope 1 refers to emissions that can be directly attributed to own sources, such as from company vehicles. Scope 2 refers to indirect emissions resulting, for example, from the purchase of electricity for the company. Scope 3 covers all other indirect emissions – and importantly, not only past emissions but also future emissions (for example resulting from transport and the future use of products).

The non-profit SASB develops sustainability accounting standards for companies, enabling them to align their future activities and publish structured sustainability reports accordingly.

In its broadest sense, the term refers to a financial system that leverages investment to promote and control the transformation to a sustainable economy and society. More narrowly, it refers to individual financial products that aim to achieve social and ecological goals.

The E in ESG refers to the positive or negative impacts of economic activity on the physical world, so it focuses on aspects such as climate change, species loss and pollution, the production and use of energy, and access to resources.

The independent UN PRI initiative is a global pioneer in encouraging social and sustainable investment. Members commit to the responsible and long-term sustainability of their activities and to making their activities transparent in accordance with ESG rules.

The UN Agenda for Sustainable Development was adopted in the context of the 2015 Paris Climate Agreement. It contains the 17 UN Sustainable Development Goals (SDGs). As the name indicates, the aim is to implement the goals by 2030.