Get to know your pension better with our responsible investing jargon buster

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Responsible investing at Standard Life is first and foremost about helping you aim for a good retirement. Discover more today with our jargon buster. 

What’s the money in your pension pot up to? It doesn’t just sit there. It’s invested to help you aim for a lifetime of possibilities. And where it’s invested can help to make a difference – not just to your financial future, but also to the world we live in. 

But, with a wall of jargon in the way, it can be difficult to understand how it all works. So, let's simplify things with our jargon buster.

Sustainability: all eyes on the future

Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their own needs, as defined by the United Nations. It covers many issues including poverty, decent (fair and safe) work, climate action, gender equality, economic growth, access to clean water and quality education. 

In a nutshell, it means making better choices today to support the planet and its resources – for us, and our children’s children too. 

Sustainability can present long-term financial risks and opportunities, so it can make sense to consider this when it comes to your pension investments.

Environmental, social and governance (ESG): the bricks and mortar

When investors talk about ESG considerations, they’re looking at how companies manage these areas and what that could mean for their long-term performance. 

There’s a lot to think about: a company’s supply chains, its readiness to move to a low-carbon future, its waste disposal and energy use, along with how it treats its employees and local communities. These are just some of the areas where a company can fail or flourish.  

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That’s why investment managers may dig deep into the detail to look for potential ESG risks and opportunities on the horizon. This analysis – often called ESG integration – helps them to decide which companies to invest in and to aim to better manage performance over the long term. 

Investors will also encourage companies to improve their ESG standards as this could support effective management of risks and opportunities; you can find out more about this in ‘stewardship’.

Examples of ESG considerations

Environmental: How prepared a company is as we move to a low-carbon future; are they at risk of financial loss, or perhaps they’re in a growing sector of the future. Then there’s how environmental factors such as climate change affect a company’s ability to operate. This could include flood risk or resource scarcity. On the flipside, how is a company impacting the environment – for instance, its energy usage, waste disposal, land development and carbon footprint.

Social: A company’s relationship with its employees, suppliers and the community where it operates. Examples include labour practices, human rights, employee wellbeing, health schemes for staff and supplier relationships.

Governance: A company’s management and processes. These include who’s running the company, how the company and its finances are managed, and how it approaches salaries and strategy.

Responsible investing/investment: the umbrella term

Responsible investing means considering environmental, social and governance (ESG) risks and opportunities when deciding where to invest money. Why does this matter? We believe it leads to better financial outcomes for investors. You can find out more in ‘ESG considerations’.

At a high level, it’s looking at how a company is managing ESG risks and opportunities and how that could affect its performance over the long term. And, if needed, encouraging the company to do better, see ‘stewardship’. 

There are different types of responsible investor. But for most, responsible investing is about focusing on achieving financial value from the companies they invest in. So they’ll consider how ESG issues could affect that.

Stewardship: influencing companies to do better

Stewardship means using our power as investors to encourage companies to improve. 

When it comes to the money invested in your pension, it’s about talking to the companies we invest in (on your behalf) to manage risk, deliver value for you, as well as driving positive change. This is achieved using engagement and voting and in partnership with investment managers.

Engagement: talking to companies to understand how they’re run and the risks and opportunities they face. Also setting out standards we expect them to meet in working towards a more sustainable and financially successful future. An example would be talking to a company about its climate plans and how it sources certain products.

Voting: as shareholders in a company, our investment managers can vote for or against proposals at meetings. For example, it may be necessary to vote against management boards who lack independence, or where their salaries/rewards are not clearly linked to achieving the financial success of the company. 

Climate change: a burning issue

Climate change refers to long-term shifts in temperatures and weather patterns, as defined by the United Nations. While this can happen for natural reasons, the burning of fossil fuels, such as coal, oil and natural gas, since the 1800s has been the main driver of the climate change we’re currently witnessing.

Climate change presents long-term financial risks and opportunities. That’s why we consider these factors when we decide where to invest. And why we use our influence as a large investor to encourage companies to improve their environmental impacts and solutions – take a look at ‘stewardship’. 

Find out more about climate change in the BBC’s ‘What is climate change? A really simple guide’

Greenhouse gas emissions: fuelling the fire

There are lots of different types of greenhouse gases. Two key examples are carbon dioxide (CO2) and methane. The burning of fossil fuels, such as coal, gas and oil, releases CO2. Meanwhile, agriculture and landfill generate methane. 

Greenhouse gases trap energy in the Earth’s atmosphere and increase global temperatures. And with rapid deforestation across the world, there are fewer trees to absorb CO2. 

Carbon footprint: a measure of harmful emissions

A carbon footprint is the total greenhouse gas (GHG) emissions caused by an individual, event, organisation, service, place or product, expressed as carbon dioxide equivalent (CO2e).

Greenhouse gas emissions are categorised into three groups or ‘scopes’: 

Scope 1: emissions that a company makes directly, for example from running its boilers and company cars.

Scope 2: emissions that a company makes indirectly, for example from the electricity it uses to power its buildings. Essentially, these emissions are being produced on the company’s behalf. 

Scope 3: includes 15 other types of emissions that might be linked to a company but not directly – for example, from its supply chain and from its products when customers use them.

2015 Paris climate agreement: an international treaty on climate change

The 2015 Paris climate agreement is an international treaty on climate change, agreed to by most of the world’s nations, including the UK. 

At the 2015 UN Climate Change Conference (COP21) in Paris, 196 parties agreed to try to limit global temperature rises to 1.5C above pre-industrial (1800’s) levels. 

It was agreed that, to limit global temperature rises in this way, a long-term commitment was needed to achieve net zero emissions by 2050.

Find out more about The Paris Agreement 

Net Zero: reducing and removing CO2 to stop global warming

Net zero is a state where we no longer add to the total amount of greenhouse gases  in the atmosphere. Emissions output is balanced with removal of carbon from the atmosphere.

It involves organisations, individuals and countries taking steps to reduce their emissions in a sustainable manner. If we achieve this collectively, we can deliver the longer-term goals to stop global warming and, by doing so, limiting potential financial risks to investors. 

Offsetting: paying somebody else to compensate for your emissions

A company wanting to become net zero may pay somebody else to offset its remaining CO2 emissions after it has done everything it can to reduce its emissions. 

Planting trees, which remove CO2 from the atmosphere, is the most common example. Offsetting is only credible if it’s used as a measure of last resort and is verified through recognised schemes. 

Transition risk: ready or not for a low carbon future

As we move to a low-carbon economy, some companies could lose their value. This is known as transition risk. 

This may happen through a lack of demand for their products, as consumers make more environmentally friendly choices. There are potentially extra costs to adapting their business to a sustainable future – and possibly regulatory fines if they fail to do so.

An example is some types of coal producers. With demand for fossil fuels expected to reduce, investing into these companies may not be as financially beneficial in the future. It’s important that these companies adapt to the energy transition if they’re to remain profitable for the longer term. 

But where there are financial risks, there’s also opportunity. This might be companies building products and solutions that support a low-carbon future – alternative energy, ‘green’ buildings, pollution prevention, sustainable water and sustainable agriculture.

Greenwashing risk: companies overstating their commitment to sustainability

Greenwashing is when companies are making sustainability or green claims that aren’t factually true. Overstating a commitment to tackle climate change or the positive impact of a company’s products, services or operations are examples. 

Anti-greenwashing involves efforts to uncover unsubstantiated claims that could deceive customers and shareholders. 

There’s increasing regulatory focus on anti-greenwashing. Companies caught greenwashing could face significant regulatory, financial, and reputational risks.

Thematic investing/funds: specific environmental or social goals

The goal of a thematic fund is to grow the value of the investment while focused on a specific environmental or social goal. 

Examples include investing in renewable energy and climate solutions, social housing and education, or investing in companies with high levels of gender diversity and equality. 

Impact investing/funds: a measurable change

Impact funds aim to generate a positive, measurable social and/or environmental impact alongside a financial return. Impact funds may sacrifice financial return in favour of achieving their intended social and/or environmental impact. 

Examples include investing in companies solving problems through products, services and business operations, for example, renewable energy, affordable housing and accessible education. 

Screening: ruling certain investments in or out

Screening means applying filters to decide whether to consider investing in a particular company. These filters – or criteria – can be positive or negative. For example:

• positive criteria looking for companies which are involved in activities that benefit society and the environment.
• negative criteria looking to avoid investment in companies involved in certain industries and practices such as animal testing, climate change impacts and human rights issues – which also present financial risk to investors.

Ethical investing: investing according to your beliefs

Ethical investing dates back to the 1900s. As its name suggests, it’s all about ethics. 

An ethical investor is choosing where to invest based on their values, rather than aiming to achieve a financial result. They’re ruling out ‘harmful’ investments and therefore avoiding certain types of company or industry. 

Today’s ethical investments tend to exclude investment in companies involved in industries and practices such as tobacco, alcohol and gambling.

Ethical investing often refers to ‘screening’ out certain investments based on strict negative criteria. 

Find out more

There are lots of reasons to invest responsibly including aiming for better financial outcomes in the long term. And there are lots of ways to do it.   

If you’re enrolled in a company pension scheme, your employer will have selected an investment option for your company pension scheme. It’s best to check with your employer where to find information specific to your own scheme. If you’ve decided to choose your own investment option, you can log into your Standard Life accountto find out more.  

Along with the pensions industry, we’re on a journey to becoming a net zero business by 2050. Our first priority is to support a better financial future for our customers, but we want to support wider, impactful change at the same time. 

To do this, we’re taking actions we think can help to tackle the climate crisis and manage financial risk for our customers. We’re thinking carefully about where we invest in carbon-emitting sectors and engaging with those contributing the most to the climate crisis to encourage real change.

Find out more about our Net Zero Transition Plan It’s important to note that Standard Life is part of Phoenix Group, so the data shown is for all the Phoenix Group brands combined.

The value of investments can go down as well as up and may be worth less than what was paid in.

The information here is based on the understanding of Standard Life in March 2024 and shouldn’t be regarded as financial advice. Standard Life accepts no responsibility for information on external websites. These are provided for general information.