Glossary

The Australian Accounting Standards Board (AASB) is the independent statutory body responsible for developing, issuing and maintaining Australian Accounting Standards. In response to global sustainability reporting trends, the AASB has expanded its role to include the development of Australian Sustainability Reporting Standards (ASRS). The AASB aims to align Australian reporting practices with international standards while considering local market needs and regulatory requirements. Its work on sustainability reporting is part of a broader effort to enhance corporate transparency and support Australia's transition to a low-carbon economy.

Learn more about how we can help at Climate Reporting.

The Australian Sustainability Reporting Standards (ASRS) are being developed by the AASB to guide climate-related disclosures by Australian companies. The standards are largely derived from the ISSB standards, with some Australia-specific modifications. Key elements include a requirement to analyse climate resilience under at least two scenarios (one Paris-aligned), disclosure of executive remuneration linked to climate considerations, phased inclusion of market-based scope 2 emissions, and some flexibility around scope 3 and financed emissions. The AASB aims to finalize the ASRS by August 2024, with a phased implementation for different company groups starting from January 2025. Companies should start preparing now by increasing internal understanding, developing scenario analysis and transition planning capabilities, and assessing their value chain exposure.

Learn more about how we can help at Climate Reporting.

Active ownership is the proactive use of shareholder rights and position to influence the activities and behavior of investee companies. It involves engaging in dialogue with companies, voting shares, filing resolutions, and escalating concerns to drive positive change and protect long-term value (see PRI). Active ownership differs from passive investing by seeking to actively influence corporate behavior rather than simply tracking market indices. Engagement is a key component of active ownership and refers to communicating with companies to express concerns, seek information, and advocate for change. Active ownership prioritizes real-world outcomes, focuses on common goals benefiting the economy and society, and emphasizes collaborative action. It can be practiced across asset classes, including equities, fixed income, and private markets.

The Carbon Border Adjustment Mechanism (CBAM) is a climate policy tool developed by the European Union to address carbon leakage and encourage global decarbonization. It aims to level the playing field between EU producers subject to stringent climate regulations and non-EU importers by imposing a carbon price on certain imported goods. CBAM initially covers carbon-intensive sectors such as cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The mechanism is being phased in gradually, with a transitional reporting period from 2023 to 2025, followed by full implementation from 2026. During the definitive phase, importers will need to purchase CBAM certificates corresponding to the embedded emissions in their imports. CBAM is designed to complement the EU Emissions Trading System (EU ETS) and support the EU's climate objectives while encouraging international partners to adopt similar carbon pricing measures.

The Corporate Sustainability Due Diligence Directive (CSDDD) is an EU regulation that requires companies to identify, prevent, mitigate and account for adverse human rights and environmental impacts in their operations and value chains. It applies to large EU and non-EU companies operating in the EU, with phased implementation from 2027 based on employee and revenue thresholds. The CSDDD mandates the adoption of climate transition plans aligned with the Paris Agreement and establishes enforcement mechanisms, including penalties of up to 5% of worldwide turnover for non-compliance.

The Corporate Sustainability Reporting Directive (CSRD) is a European Union regulation that requires a broad range of companies to disclose detailed sustainability information on their environmental and social impacts, risks, and opportunities. It introduces mandatory European Sustainability Reporting Standards (ESRS) and extends reporting requirements to more companies, including listed SMEs and non-EU companies with significant EU activity. Disclosures cover governance, strategy, metrics and targets across various ESG topics like climate change, biodiversity, social issues, and business conduct. The CSRD also mandates limited assurance on reported information, with a transition to reasonable assurance over time. Implementation is phased, with large public-interest companies starting from FY2024 and other groups following in subsequent years.

A carbon budget is the cumulative amount of carbon dioxide (CO2) emissions permitted over a period of time to keep within a certain temperature threshold, such as the 1.5°C or 2°C goals set by the Paris Agreement. This global budget is often translated into annual budgets, which can be allocated among countries, sectors, or individual entities to guide climate policies and emissions reduction targets. According to the Intergovernmental Panel on Climate Change (IPCC), to have a 50% chance of limiting global warming to 1.5°C, the world can emit no more than 580 gigatonnes of CO2 from 2018 onwards.

Carbon neutrality refers to the state of achieving a balance between the carbon emissions produced by an entity (such as a company, organization, or country) and the carbon emissions removed from the atmosphere or offset through various means. This can be achieved through a combination of reducing emissions, investing in renewable energy, and offsetting remaining emissions through practices like reforestation or carbon capture and storage.

The key difference between carbon neutrality and net zero is that carbon neutrality can be achieved at any point in time by offsetting emissions, while net zero requires actual emission reductions over time, with any remaining emissions balanced by removals. Net zero is a science-based target, aligned with the goals of the Paris Agreement to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.

Carbon pricing is a policy approach that puts a monetary value on greenhouse gas emissions, usually in the form of a price per tonne of carbon dioxide equivalent (CO2e). The two main types of carbon pricing are carbon taxes and emissions trading systems (ETS). As of 2021, there are 64 carbon pricing instruments in operation worldwide, covering about 21.5% of global greenhouse gas emissions (World Bank).

Climate scenario analysis involves exploring multiple potential futures related to climate change and carbon constraints. It allows organizations to assess how their portfolios might perform under different scenarios, such as those outlined by the IPCC, NGFS, or PRI. Each scenario represents a different forecast for the future, with variations in global carbon budgets, allocations, and other economic factors. Climate scenarios typically describe annual carbon budgets and carbon price points over a period leading up to and beyond 2050. Emmi's Carbon Diagnostics tool enables users to run transition risk analyses against their portfolio's financed emissions using a range of templated scenarios. See Climate Scenario Analysis for more information.

Divestment refers to the act of selling off assets, investments, or divisions of a company. While divestment can be a tool for companies to streamline operations and focus on core competencies, it may not always be the most effective approach for driving long-term positive change on sustainability issues like climate change. Divesting from carbon-intensive assets may reduce a company's own emissions, but it does little to support the broader transition to a low-carbon economy if those assets continue operating under different ownership. Active ownership and engagement are often seen as more impactful strategies, allowing investors to use their influence to drive positive changes in investee companies. However, divestment can still play a role as an escalation tactic when engagement efforts have failed.

ESG stands for Environmental, Social, and Governance. ESG factors are a set of standards for a company's operations that investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company's leadership, executive pay, audits, internal controls, and shareholder rights.

The EU ETS is the cornerstone of the European Union's climate policy and the world's largest carbon market. Established in 2005, it operates on a cap-and-trade principle, covering approximately 40% of the EU's greenhouse gas emissions. The system sets a cap on total emissions from covered sectors, which decreases over time to ensure emission reductions. Entities within the system must surrender allowances equal to their emissions, which can be traded to provide flexibility. The EU ETS covers emissions from power generation, energy-intensive industries, and aviation within the European Economic Area, with maritime transport included from 2024. A separate system for buildings and road transport is planned for 2027. The EU ETS is a key instrument in achieving the EU's 2030 climate target and 2050 climate neutrality goal, driving cost-effective emission reductions and fostering innovation in low-carbon technologies.

Financed emissions, or owned emissions, measure the greenhouse gas (GHG) emissions associated with a financial institution's financing activities, such as its investment portfolio or loan book. They are calculated by determining the emissions generated by the holdings that are invested in and attributing those emissions to the financial institution based on the amount and proportion of the investment. The Partnership for Carbon Accounting Financials (PCAF) provides a global standard for measuring and disclosing financed emissions. See the full explanation of our Financed Emissions methodology.

The Greenhouse Gas Protocol (GHG Protocol) is a widely used international accounting tool for understanding, quantifying, and managing greenhouse gas emissions. It provides a framework for businesses, governments, and other entities to measure and report their greenhouse gas emissions in a standardized manner. The GHG Protocol was developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD).

Greenwashing is the practice of making misleading or unsubstantiated claims about the environmental benefits of a company's products, services, or operations. It can also apply to the exaggeration of a company's sustainability targets or the environmental credentials of a country's policies. Greenwashing can lead to misallocated capital or resources and undermine genuine sustainability efforts.

The Intergovernmental Panel on Climate Change (IPCC) is the UN entity responsible for evaluating the scientific basis of climate change. It delivers regular assessments to policymakers, outlining the potential impacts, risks, and response options related to climate change. The IPCC has created a series of scenarios, the Shared Socioeconomic Pathways (SSPs), which outline various potential future development trajectories and the corresponding warming outcomes, spanning from 1.5°C to 5°C.

The International Sustainability Standards Board (ISSB) was established in 2021 by the IFRS Foundation to develop a comprehensive global baseline of sustainability disclosure standards. The ISSB has issued two main standards:

1. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, which creates a universal structure for sustainability disclosures and incorporates industry-based disclosure requirements derived from the SASB standards.

2. IFRS S2 Climate-related Disclosures, which is largely consistent with the TCFD recommendations.

As of June 2024, several jurisdictions have formally adopted or announced plans to adopt ISSB standards:

Adopted:

• Türkiye (mandatory for listed companies from 2024)

• Bangladesh (phased adoption for banks and financial institutions from 2024)

• Brazil (mandatory for listed companies for fiscal years after 2026)

• Costa Rica (mandatory from 2025)

In process of adoption or consultation:

• Australia (phased adoption planned from Jan 2025)

• Canada (Canadian Sustainability Standards Board consulting on voluntary adoption from Jan 2025)

• China

• Hong Kong (mandatory for listed companies from 2025)

• Japan (Sustainability Standards Board of Japan consulting on adoption)

• Malaysia (consultation recently closed)

• Nigeria

• Singapore (SGX RegCo consulting on adoption from 2025)

• South Africa

• South Korea

• Sri Lanka

• United Kingdom (planning to align TCFD-based disclosure requirements with ISSB)

These developments demonstrate the growing momentum towards a global baseline of sustainability-related disclosures based on the ISSB standards.

Learn more about how we can help with our Climate Reporting product.

The Kyoto Protocol is an international treaty adopted in 1997 and entered into force in 2005, serving as a predecessor to the Paris Agreement. It was the first legally binding global agreement to reduce greenhouse gas emissions. The Protocol set emission reduction targets for developed countries (Annex I countries), aiming to reduce their collective emissions by 5.2% below 1990 levels during the first commitment period (2008-2012). It introduced flexible mechanisms such as emissions trading, the Clean Development Mechanism (CDM), and Joint Implementation (JI) to help countries meet their targets. While the Kyoto Protocol marked a significant step in global climate action, it was criticized for not including major emitters like the United States and China in binding commitments. The protocol's second commitment period (2013-2020) was superseded by the more inclusive Paris Agreement, which took effect in 2016.

Machine learning involves using mathematical algorithms to 'learn' by classifying patterns in data for a given set of inputs and predictor variables. At Emmi, machine learning is used to estimate carbon emissions (Scope 1, 2, and 3) for listed equities, private equity and corporate fixed income securities. The models are trained using a large dataset of reported emissions and financial information, and they can predict emissions for the latest calendar year with high accuracy, achieving a PCAF score of 3.5 or higher. See How do we estimate the carbon footprint for companies for more details on Emmi's machine learning approach.

In the context of sustainability reporting, materiality refers to the significance of an ESG issue to a company's financial performance and its stakeholders. Material ESG issues are those that could substantively influence the decisions of investors and other stakeholders. The concept of double materiality expands this to consider both financial materiality (the impact of ESG issues on the company) and environmental and social materiality (the company's impact on the environment and society). Double materiality provides a comprehensive view of sustainability performance and is central to frameworks like CSRD, GRI, and SASB.

Maximum Downside Loss is a specific case of PCL (Potential Carbon Liability) that represents the worst-case scenario, where no emission reductions are achieved and the most stringent carbon scenarios play out. It indicates the maximum potential financial impact on a company or fund under the most adverse climate transition conditions.

The Network for Greening the Financial System (NGFS) is a global coalition of central banks and financial supervisors committed to addressing climate-related risks in the financial sector. Established in 2017, the NGFS develops climate scenarios and provides guidance on integrating climate considerations into financial decision-making. Its scenarios, updated regularly, explore various climate pathways and their economic impacts, ranging from orderly transitions to disorderly and "hot house world" scenarios. These scenarios have become a key reference for climate risk assessment and are widely used in regulatory stress tests and corporate climate scenario analysis. The NGFS scenarios play a crucial role in helping financial institutions and companies meet climate reporting requirements under frameworks like the ISSB standards.

For a detailed analysis of how NGFS scenarios translate into financial risk for companies, see our article on Climate Scenario Analysis for the ASX300.

The Aotearoa New Zealand Climate Standards (NZ CS) are a set of standards based on the recommendations of the TCFD, developed by the External Reporting Board (XRB), to guide climate-related disclosures by entities in New Zealand.

The NZ CS consists of three main standards:

1. NZ CS 1: Climate-related Disclosures, which outlines the specific disclosures required under the TCFD's four thematic areas of governance, strategy, risk management, and metrics and targets. NZ CS 1 requires entities to conduct scenario analysis, including consideration of a 1.5°C scenario, to assess their climate-related risks and opportunities.

2. NZ CS 2: Adoption of Aotearoa New Zealand Climate Standards, which provides first-time adoption provisions and transitional relief for certain disclosures.

3. NZ CS 3: General Requirements for Climate-related Disclosures, which establishes principles and general requirements for climate reporting, including materiality assessments and disclosure of methodologies and assumptions.

Learn more about how we can help with our Climate Reporting product.

The National Greenhouse and Energy Reporting (NGER) scheme is a national framework that requires companies meeting certain thresholds to report their greenhouse gas emissions, energy production, and energy consumption data to the Clean Energy Regulator. The NGER scheme provides the emissions data underpinning the Safeguard Mechanism, but covers a broader range of facilities. Unlike the Safeguard Mechanism, which focuses on limiting emissions from large facilities, and the AASB's sustainability reporting standards (ASRS), which guide climate-related financial disclosures, NGER is primarily a data collection and reporting framework.

Net zero refers to the balance between the amount of greenhouse gas emissions produced and the amount removed from the atmosphere. To achieve net zero, emissions must be reduced as much as possible, with any remaining emissions offset by carbon removal techniques such as reforestation or carbon capture and storage. The Paris Agreement calls for global net zero emissions by the second half of this century to limit global warming to well below 2°C.

Unlike carbon neutrality, which can be achieved through offsetting at any given time, net zero requires significant emission reductions over time, with a focus on decarbonising the economy. Net zero targets are often set with a specific timeline in mind, such as 2050, and require detailed plans and strategies to achieve deep emission cuts across all sectors.

Now-casting, a portmanteau of ‘now’ and ‘forecasting', is a way of predicting data for the recent past, present, and immediate future, and is most often used in the economic modeling of specific economic indicators. When applied to emissions, now-casting refers to predicting near-real-time estimates of a company's greenhouse gas emissions, which Emmi does by using unique machine learning models. Unlike traditional methods that rely on reported historical data, now-casting offers a more current and dynamic view of a company's carbon footprint. This approach can help companies track their emissions more accurately and make more informed decisions about how to reduce their environmental impact.

The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas emissions associated with their loans and investments. PCAF provides a global standard for the measurement and disclosure of financed emissions, which can help financial institutions align their portfolios with the goals of the Paris Agreement.

PCAF data quality scores are used to assess the reliability and accuracy of the reported financed emissions data. The scores range from 1 to 5, with 1 indicating the highest quality (verified, reported emissions) and 5 representing the lowest quality (estimation models). These scores help stakeholders gauge the credibility of financed emissions disclosures and encourage continuous improvement in data quality over time.

The Principles for Responsible Investment (PRI) is an international network of investors, supported by the UN, collaborating to apply six principles for integrating environmental, social, and governance (ESG) considerations into investment choices and stewardship activities. The PRI offers a structure for investors to support a more sustainable financial ecosystem and has issued advice on employing scenario analysis to evaluate climate-related risks and opportunities.

The Paris Agreement is a legally binding international treaty on climate change adopted by 196 Parties at COP 21 in Paris on 12 December 2015. Its goal is to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. The Paris Agreement requires all Parties to put forward their best efforts through "nationally determined contributions" (NDCs) and to strengthen these efforts in the years ahead.

Physical risks from climate change come from direct damage to assets and infrastructure due to acute, fast-acting impacts like extreme weather events (e.g., hurricanes, floods) that cause localized damage, or chronic, slow-acting impacts such as gradual sea-level rise and long-term changes in climate patterns. While acute events can lead to significant damage in the short term, chronic impacts occur slowly and can have widespread, long-lasting consequences. However, for investors, physical risks tend to be less immediately disruptive to markets compared to transition risks, as their effects are often felt over longer time horizons. See Glaciers melt slowly but humans act quickly. for more on why physical climate risk is currently less material for investors than transition risk.

Potential Carbon Liability (PCL) represents the potential economic impact on a holding or fund if a particular climate scenario plays out and a carbon price is imposed to penalize emissions exceeding the allocated budget. PCL is calculated by applying projected carbon prices of a given scenario (which vary across 1.5°C, 2°C, and 4°C scenarios) to the amount of emissions that overshoot the budget. This metric allows for a consistent assessment of transition risk across different asset classes and provides a foundation for scenario analysis.

See a full explanation of our PCL methodology.

The Sustainability Accounting Standards Board (SASB) develops industry-specific sustainability accounting standards that help companies disclose financially material ESG information to investors. SASB standards identify the subset of ESG issues most relevant to financial performance in each of 77 industries. These standards were developed through evidence-based research, broad and balanced stakeholder participation, and oversight from an independent Standards Board. As of August 2022, the International Sustainability Standards Board (ISSB) assumed responsibility for SASB standards and has committed to maintain and enhance them. The SASB standards play a key role in supporting the application of IFRS S1 and S2, the first two IFRS Sustainability Disclosure Standards issued by the ISSB.

Learn more about how we can help with our Climate Reporting product.

In March 2024, the U.S. Securities and Exchange Commission (SEC) issued a rule requiring publicly traded companies to disclose detailed information about their climate-related risks, greenhouse gas (GHG) emissions, and net-zero transition plans (U.S. Securities and Exchange Commission Press Release, March 6, 2024). The rule mandates qualitative disclosures on climate risk management, quantitative disclosures of Scope 1 and 2 GHG emissions (subject to assurance for large companies), and climate-related financial statement metrics. The goal is to provide investors with consistent, comparable, and reliable information on the financial impacts of climate change. The rule takes effect in phases starting with fiscal year 2025 for large accelerated filers. As of June 2024

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that aims to improve transparency on sustainability in financial markets. It requires financial market participants and advisers, such as fund managers, insurers, and investment firms, to disclose how they integrate sustainability risks and consider adverse sustainability impacts in their investment decisions and financial products. The SFDR classifies funds into three categories - Article 6 (no sustainability focus), Article 8 (promoting environmental/social characteristics), and Article 9 (sustainable investment objective). Disclosure requirements apply at both entity and product level, covering aspects like sustainability risk policies, principal adverse impact assessments, and alignment with the EU Taxonomy. The SFDR is closely linked with the CSRD, as the CSRD's expanded sustainability reporting directly feeds into the data needs of financial market participants under the SFDR.

The Safeguard Mechanism is an Australian Government policy that requires large greenhouse gas emitting facilities (exceeding 100,000 tonnes CO2-e per year) to keep their emissions below a baseline level. It operates alongside the Emissions Reduction Fund to drive emissions reductions in line with Australia's climate targets. Under the reformed Safeguard Mechanism, baselines will decline in line with trajectory to net zero by 2050. Facilities that exceed their baseline must purchase and surrender carbon credits (ACCUs or SMCs) to allow the excess emissions above their baseline to be emitted without financial penalty under the mechanism. This compliance system differs from voluntary offsetting. The Safeguard Mechanism differs from the AASB's sustainability reporting standards (ASRS) in that it is a compliance scheme focused specifically on reducing emissions from large industrial facilities, while the ASRS provides a framework for disclosure of climate-related financial information by reporting entities more broadly.

Scope 1 emissions: direct emissions from sources that are owned or controlled by the company, such as emissions from burning fossil fuels.

Scope 2 emissions: indirect emissions from the generation of purchased energy consumed by the company.

Scope 3 emissions: all other indirect emissions in the company’s value chain, both upstream and downstream. Common categories include purchased goods and services, business travel, employee commuting, waste generated, use of sold products, leased assets, and investments (including financed emissions).

For financial institutions, scope 1 and 2 emissions (e.g., from corporate offices) are likely to be small compared to financed emissions (part of scope 3), which are the emissions associated with lending and investment activities.

Measuring and reporting scope 3 emissions can be challenging due to data gaps and the complexity of value chain emissions. This is particularly true for financed emissions, as many companies struggle to obtain reliable emissions data from their investees and borrowers across various asset classes. At Emmi, we bridge this data gap by providing comprehensive scope 1, 2, and 3 emissions data, including financed emissions, across all major asset classes. Our solutions help clients measure, report, and manage their full emissions footprint in line with best practices and emerging disclosure standards.

Learn more about our Carbon Diagnostics tool and how it can help you accurately measure and report your emissions. 

Stewardship, also known as active ownership, refers to the use of influence and rights by investors to protect and enhance the long-term value for their clients and beneficiaries, including the overall economic, social, and environmental conditions on which their interests rely. Stewardship involves engaging with investee companies and issuers, exercising voting rights, and collaborating with other investors to drive positive changes that lead to better financial returns and improved real-world outcomes (see PRI). Motivations for stewardship include enhancing risk-adjusted returns, meeting regulatory expectations, fulfilling fiduciary duties, and contributing to sustainable development goals.

The Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led initiative that provides recommendations for voluntary, consistent climate-related financial risk disclosures. The TCFD recommendations are structured around four thematic areas: governance, strategy, risk management, and metrics and targets. These recommendations have been widely adopted and have formed the basis for many regulatory disclosure requirements in jurisdictions. The TCFD has now evolved into the International Sustainability Standards Board (ISSB), which builds upon the TCFD recommendations to develop a comprehensive global baseline of sustainability-related disclosure standards.

Temperature alignment indicates the global warming scenario that a company or fund's current carbon footprint is consistent with. It captures whether the entity's emissions trajectory aligns with the Paris Agreement's goal of limiting warming to well below 2°C, or with higher warming scenarios. Temperature alignment assessments help investors understand the climate-related risks and opportunities in their portfolios and make informed decisions to drive the transition to a low-carbon economy.

See a full explanation of our Temperature Alignment methodology.

Transition risk refers to the financial risks that could result from the process of adjusting to a low-carbon economy. These risks arise from changes in policy, technology, and market sentiment as the world takes action to mitigate climate change. The ISSB and other mandatory climate disclosure frameworks require companies to assess and report on the transition risks and opportunities that could materially impact their business prospects.

Transition risk can manifest in five main subcategories:

1. Policy Risk: Potential financial impacts from changes in laws, regulations, or government policies.

2. Legal Risk: Exposure to lawsuits related to climate inaction or misrepresentation of climate efforts.

3. Technology Risk: Financial implications of innovations that support the transition to a low-carbon economy.

4. Market Risk: Changes in supply and demand for certain commodities, products, and services.

5. Reputational Risk: Potential damage to a company's image due to stakeholder perceptions of its climate action or inaction.

The most critical factor in assessing transition risk magnitude is the interplay between carbon budgets and carbon pricing. As carbon budgets tighten over time, carbon prices are expected to rise, creating increasing financial pressures for high-emitting assets and activities.

WACI is a metric used to measure the carbon intensity of an investment portfolio. It is calculated by taking the weighted average of the carbon intensity (emissions per unit of revenue) of each company in the portfolio, based on the proportion of the portfolio invested in each company. WACI provides a measure of a portfolio's exposure to carbon-intensive companies and can be used to compare the carbon intensity of different portfolios or benchmarks.

Learn more at Carbon metrics: Is WACI enough?.