Sustainability Risk
This refers to an environmental, social or governance (ESG) event or condition that, if it occurs, could have an actual or potential material negative impact on the value of an investment.
Key Concepts in Sustainability
Principal Adverse Impacts (PAIs)
PAIs refer to the negative effects of investment decisions and advice on sustainability factors. PAIs are listed in Delegated Regulation (EU) 2022/1288 and are categorised into environmental and social PAIs, further divided into mandatory and additional impacts.
Environmentally Sustainable and Social Investments
These are financial instruments that, in addition to environmental objectives, aim to achieve social objectives such as reducing inequalities, promoting social cohesion and inclusion, investing in human capital, or supporting economically or socially disadvantaged communities. Companies receiving such investments must adhere to good governance practices, including sound management structures, fair employee relations, and compliance with tax obligations.
Instruments that consider Principal Adverse Impacts (PAIs)
These investments seek to minimise the principal adverse impacts on sustainability (environmental, social and governance) factors. PAIs identify and address the negative effects that investments can have on the environment and society.
Transition Products
These are financial products that invest in economic activities or assets that are not yet sustainable, but support the transition towards net-zero emissions and a sustainable economy while avoiding carbon lock-in.
The investment strategies for these products may be based on a combination of EU taxonomy Key Performance Indicators (KPIs) to reflect the progressive improvement of environmental performance, transition plans communicated by the underlying assets and their assessment, the decarbonisation trajectories of products, and the mitigation of PAIs at the product level (provided that specific and relevant indicators are developed and that regulations establish a minimum mitigation threshold).
In addition, this category of products may include appropriate exclusions and criteria for a credible transition strategy.
ESG stands for:
- Environmental: Focuses on the protection and respect of the environment (e.g. reducing CO2 emissions, sustainable use of resources, preserving biodiversity);
- Social: Refers to the human and basic human rights of workers, social equity, working conditions, and the impact of a business on communities;
- Governance: Includes organisational structure, transparent management practices, regulatory compliance and anti-corruption measures.
These three key factors guide the investment choices of businesses towards sustainability.
E
Environmental: Focuses on the protection and respect of the environment (e.g. reducing CO2 emissions, sustainable use of resources, preserving biodiversity);
S
Social: Refers to the human and basic human rights of workers, social equity, working conditions, and the impact of a business on communities;
G
Governance: Includes organisational structure, transparent management practices, regulatory compliance and anti-corruption measures.