Responsibleglossary of terms

investing

Responsible investing

At Architas, we believe in taking sustainability considerations into account in our fund selection and monitoring, whilst also delivering, good outcomes for our clients. We aim to make a difference over the long term by investing in managers who follow a responsible investment approach.

INTRODUCTION

Sustainable investing continues to rise in popularity and, once only a side concern, is now a key consideration for many investors. However with this increased interest can sometimes come a lack of education and explanation of the terminology used. Many of the acronyms and technical terms can leave investors confused, so we’ve created this glossary of terms that every sustainable investor should know.

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aActive ownershipActively exercising your shareholder rights and engaging with investee companies to encourage responsible corporate behaviour and improve long-term shareholder value.

Architas ESG ForumResponsibility for the development, implementation and monitoring of our ESG Policy sits within this Forum. It is responsible for reviewing and updating the ESG Policy as necessary. The nature of the Forum ensures that the impacts of any new ESG related activities and initiatives are adequately assessed, considered and managed and that ESG principles are effectively promoted and adopted within Architas.

Architas Responsible Investment Function At Architas we have a dedicated responsible investment team who are in charge of ESG integration within the investment team. It benefits from the input of key members of the investment team such as the CIO, the deputy CIO, senior investment managers and several analysts.

AXA’s Responsible Investment Centre of ExcellenceThe responsibility for the development, implementation and monitoring of AXA’s Responsible Investment policy sits here.

bBest-in-class investmentA comparative investment style that involves investing only in companies that lead their peer groups in respect of sustainability performance.

Board of directorsAppointed by shareholders to represent and protect their interests in decision-making and ensure the development and execution of a successful value-creating strategy.

cCarbon footprintA measure of a group, individual or a company’s total greenhouse gas emissions.

Carbon pricingThe cost of emitting CO2 into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive that’s offered for emitting less. Putting an economic cost on emissions is widely considered the most efficient way to encourage polluters to reduce what they release into the atmosphere.

Clean technology A range of products, services and processes that reduce the use of natural resources, cut or eliminate emissions and waste. It was considered a niche area of investment two

decades ago but has become a focus for most major companies, for example electric cars.

Conflicts of interestArchitas maintain a Conflicts of Interest Policy that includes in its scope potential conflicts relating to stewardship. We also expect our delegates to operate conflicts management in local requirements/legislation. As we do not directly invest into particular companies, we do not typically encounter specific conflicts relating to stewardship.

Corporate Social Responsibility (CSR) A company’s commitment to behave in an ethical and correct manner, going beyond mere compliance with the law, and enriching management choices with ethical, social and environmental considerations. The definition is provided in the European Commission Green Paper of 2001.

Climate changeThe rapid environmental change that’s attributed to the emission of carbon dioxide into the atmosphere from using fossil fuels.

Conference of the Parties The highest decision-making body of the United Nations Framework Convention on Climate Change (UNFCCC) which meets annually to implement the convention.

Corporate governanceThe system by which a company is managed, designed to ensure management acts in the best interests of its shareholders. Good corporate governance spans a wide range of factors from board independence and remuneration practices, to capital allocation and accounting practices.

RESPONSIBLE INVESTING GLOSSARY OF TERMS

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Corporate responsibilityA company’s responsibility to operate its business in a way that does not harm the environment or society as a whole.

CorruptionDishonest activities including bribery and fraud that can have a devastating effect on a company’s fortunes.

dDiversity and inclusionDiversity refers to the differences people may have in terms of their gender, age, race, sexual orientation, disability, religion, beliefs or other characteristics. Inclusion is about welcoming and celebrating diversity, calling out inequality and ensuring people feel valued and respected.

DivestmentThe sale of any investment related to controversial activities for social or political goals. For example, investors divested from South African assets during the apartheid era in protest against the regime.

eEngagementA purposeful dialogue between a company and its shareholders that aims to enhance and protect the value of investments. This might take place to seek additional information about a

company’s practices or to encourage improvements in performance and processes.

Environmental The “E” of “ESG” (environmental, social and governance) which concerns issues related to resource use, pollution, climate change, energy use, waste management and other physical environmental challenges and opportunities.

Environmental fundsFunds that are primarily exposed to sustainable environmental themes such as clean energy, water and waste, or invest in companies with positive environmental management.

Employee relationsThe policies and processes governing the relationship between an employer and its employers. Companies have a responsibility to treat employees fairly, with dignity and respect.

Ethical investingAn investment strategy in which you invest in line with your ethical principles and exclude companies that you deem to be unethical.

ESG - Environmental, Social and GovernanceThe generic term used by investors to evaluate corporate behaviour and to determine the future financial performance of companies. ESG factors are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing the company’s carbon footprint and ensuring there are systems in place to ensure accountability.

ESG analysisThe examination of a company’s environmental, social and governance performance, which could be designed and used in any of the approaches described here.

ESG due diligence Dedicated due diligence focused on the ESG practices of potential investments. Architas does this by adding a dedicated questionnaire in the fund rearch stage of their investment process followed by face-to-face due diligence meetings covering ESG policy and governance, integration in investment decision process, engagement and voting and monitoring and reporting.

ESG integrationAn investment approach that takes into consideration a range of sustainability and ESG-related risks and opportunities in addition to traditional financial analysis.

ESG fund ratingsA third party rating that looks at a fund’s underlying holdings and attempts to quantify its overall ESG credentials based on some specific metrics. The choice of metrics and therefore resulting rating may differ amongst different ESG ratings providers.

ESG indicesIndices traditionally track the performance of a basket of bonds or shares, such as the FTSE 100. A growing number of indices track investments by screening out certain industries or, more recently, by evaluating which companies qualify based on ESG measures.

ESG research providersFirms that conduct quantitative and qualitative analysis of a company’s ESG performance and provide a standardized measure (such as a company ESG rating). Approaches and results can vary significantly across providers.

ExclusionsAn investment approach that excludes specific investments or classes of investment from the investible universe such as specific companies, sectors, or countries. Common criteria include weapons, pornography, tobacco and animal testing.

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Responsible investing glossary of terms

fFiduciary dutyThe legal duty of one party (the fiduciary) to act in the best interests of another (the principle). In the investment chain there are a number of these relationships including the duty that boards have to shareholders, the duty between trustees and beneficiaries and the duty between asset managers and their clients.

Fossil fuelsA natural energy source, such as coal, oil and gas. The gases released from burning these fuels (such as carbon dioxide) are widely believed to be the leading cause of climate change.

gGlobal Reporting Initiative (GRI)An international organization that develops and publishes sustainability reporting standards and measures for global companies. It has become the closest thing to a global reporting standard for ESG measures; it reports that 92% of the world’s largest 250 corporations report on their sustainability performance (Source: Reuters).

Governance factorsThe “G” in “ESG” and is about assessing how well a company is run.

Green bondA bond in which proceeds are used to fund new and existing projects with environmental benefits such as renewable energy and energy efficiency projects.

Green investingInvesting in companies and technologies that are considered to be positive for the environment, such as companies offering alternative sources of energy or those that have demonstrated a track record of reducing their environmental impact.

GreenwashingFalsely communicating the environmental benefits of a product, service or organisation in order to make a company seem more environmentally-friendly than it really is.

hHuman rightsBasic rights that belong to all human beings. They include the right to life, liberty, freedom from slavery and torture, and freedom of opinion and expression. The UN Declaration on Human Rights is widely recognised as a benchmark of these basic standards.(https://www.un.org/en/universal-declaration-human-rights)

iImpact investingInvestments that are made with the primary goal of achieving specific, positive social benefits while also delivering a financial return. Impact investments create a direct link between portfolio investment and socially beneficial activities, and historically most of the activity has occurred in unlisted assets.

Impact measurementThis is not the same as impact investing. It is the measurement of how companies’ activities affect the world both positively and negatively. It measures the effect on companies’ profitability if their negative social or environmental impacts or benefits were recognised financially.

Integrated reportingCompany reporting that articulates the relationship between a company’s strategy, governance and performance, and how this creates value for a range of stakeholders. The International Integrated Reporting Council is widely recognised as the core standard in this area.

mModern slaveryAlthough no standard definition exists, modern slavery can broadly be thought of as the exploitation of

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people who are coerced into an activity by someone who “controls” them, often with violence. It can take many forms including forced or bonded labour, early or forced marriage or human and organ trafficking.

oOver-boardingWhen a board member takes on too many board roles such that his/her ability to appropriately distribute their time, and effectively discharge their responsibilities to each board, is questioned.

pParis AgreementA global commitment, agreed at COP 21 (Conference of Parties) in Paris in 2015, to limit global warming to below 2°C.

Physical risks of climate change The risk posed by climate events on a company’s physical assets such as supplies and equipment, its supply chain, operations, markets and customers.

Positive screeningAn investment strategy that aims to select companies that demonstrate leading sustainability practices and are better positioned to benefit from, and

build resilience to, long-term societal and economic trends.

Principles for Responsible Investment (PRI)A voluntary set of investment principles, backed by the UN, under which signatories commit to incorporating ESG factors into their investment decisions. They were developed by a group of institutional investors at the instigation of the UN Secretary-General in 2006 and are a prime example of how authorities and institutions recognise the key role finance can play in shifting the global economic system and society as a whole towards greater sustainability. (https://www.unpri.org/ )

qQuantitative ESG scoring The scoring methodologies that Architas uses to analyse how issuers are facing ESG trends to avoid risks and benefit from future opportunities. Funds are scored based on underlying securities’ ESG scores when inventories are available and methodology applicable.

rRenewable energyEnergy collected from resources that are naturally replenished

such as sunlight, wind, water and geothermal heat.

Responsible investment An investment approach that considers ESG-related risks and opportunities as part of its investment process and includes engagement and voting in order to generate sustainable, long-term financial returns with consideration for society and the environment.

sScreeningAn investment approach used to filter companies based on pre-defined criteria before investment. As an investor, you can use a negative screen (in which you deliberately exclude certain companies because of their involvement in undesirable activities or sectors) or a positive screen (in which you select companies based on their sustainability practices). This can also be known as “best-in-class investment” – where you only invest in companies that lead their peer groups in terms of sustainability practices and performance.

Shareholder activismA public form of engagement whereby investors use their shareholdings to promote change at a company, typically at a transformational level. It tends to be a more confrontational approach to bring about change.

Share blockingWhen restrictions are placed on the trading of shares which are to be voted on prior to an annual general meeting.

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Responsible investing glossary of terms

Sin stocksStocks of companies associated with activities considered to be unethical or immoral, such as tobacco, alcohol, gambling and adult entertainment.

Social factorsThe “S” in ESG. This covers issues related to how a company interacts with the communities it operates in, its suppliers, employees and customers. These include, for example, labour standards, health and safety, equal opportunities, management of human capital, supply chain management, nutrition and obesity.

Social impact bondsInvestments designed to improve the social outcomes of publicly funded services. Providers are typically charities that are often pioneering a new approach to a specific social problem. The investment is used to fund the working capital needs of the project.

Socially Responsible Investing (SRI)This is an investment approach that, alongside financial considerations, looks at the benefit an investment can deliver to society.

Social Return on Investment (SROI)Social return on investment is a way of measuring the non-financial value of resources invested. It can be used by any entity to assess the impact on persons concerned, to identify ways of improving services and to enhance investment performance.

StewardshipAn ongoing and purposeful dialogue between shareholders and boards that aims to ensure a company’s long-term strategy and day-to-day management is effective and aligned with shareholders’ interests. It includes monitoring a company’s practices and performance, engaging on areas of concern and voting on

shares held to ensure management is acting in the long-term best interests of its shareholders. Good stewardship should help to enhance and protect the value of investments.

Stewardship codesA set of standards that help set stewardship expectations for asset managers and asset owners. These codes are established by local regulators on a country by country basis.

Stranded assetsFossil fuel assets that risk being “stranded” or becoming uneconomic in a lower demand scenario created, for example, by lower emissions guidelines or regulation.

Sustainable Development Goals (SDG) A collection of 17 global goals reflecting the biggest challenges facing global societies, environments and economies today. The SDGs, set in 2015 by the UN, are intended to be achieved by 2030, as part of the 2030 Agenda for Sustainable Development. (https://sustainabledevelopment.un.org/)

Sustainable investingAn investment approach in which a company’s sustainability practices are paramount to the investment decision and in which ESG analysis forms a cornerstone of the investment process.

tThematic investingInvesting in companies that can be classified under a particular investment theme such as renewable

energy, waste and water management, education or healthcare innovation.

Transition riskThe financial risks that could result from significant policy, legal, technology and market changes as we transition to a lower-carbon global economy and climate resilient future.

Triple Bottom Line (TBL or 3BL)An accounting framework originally developed in an effort to measure sustainability. TBL goes beyond traditional measures to incorporate three additional dimensions of performance: social, environmental (or ecological) and economic.

uUN Development ProgrammeThe UN’s global development network partnering with people at all levels of society to help build nations that can withstand crisis, and drive and sustain the kind of growth that improves quality of life for everyone

UN Global Compact PrinciplesTen corporate sustainability principles for long-term success covering the areas of human rights, labor, the environment and anti-corruption.

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vValues-based investingInvesting that prioritises an investor’s ethical objectives, rather than simply maximising financial returns.

Voting policy and disclosure of voting activityArchitas controls the voting strategy for assets it holds directly, such as investment trusts. Records of our voting activity for these assets are available on request. Delegate asset managers exercise voting activities for underlying funds held by Architas. Voting records are not currently available for delegated assets.

Voting rightsEquity investors typically have the right to vote at annual and extraordinary general meetings (AGMs and EGMs) on issues such as an individual director’s appointment, remuneration or mergers and acquisitions.

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Responsible investing glossary of terms

IMPORTANT INFORMATIONThis material originates from Architas Limited (“Architas”). Architas is a company registered in England No. 02638607, registered office: 20 Gracechurch Street, London, EC3V 0BG. This material is for information purposes only and is intended to broaden readers’ awareness of financial markets and of the investment management industry. No part of the material should be construed to represent financial advice or an offer to buy, sell or otherwise participate in any investment activity or strategy. The content is based on information sources that are deemed reliable at the time of writing. The information presented can be changed without prior notice. Architas makes no express or implied warranty, guarantee or statement as to the accuracy, suitability or completeness of the information provided. All rights are reserved. Without the prior consent of the copyright holder, no part of this material in any form or by any means (mechanical, by photocopy, recording, or otherwise) is allowed to be published, copied or emailed or stored in an information system. This material is not intended for audiences in the United States of America.

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Responsible investing glossary of terms

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