The Official ESG Dictionary

Information meant to encourage us to buy one product over another is all around us. The use of feel-good language, influencers, and celebrity endorsements by businesses, convey a modern attitude that understands and even champions today’s most pressing social and environmental issues. But how do these messages hold up against business practices, and how do you tell the difference? Understanding what you’re looking for in a company can make a huge difference in what you choose to purchase, so we’ve compiled the ultimate list of must-know terminology for intelligent shoppers looking to support ESG conscious businesses.

Today we use the term ESG (Environmental, social, and corporate governance) to refer to the most critical factors in measuring the impact an institution or business has on the world at large. It is a relatively modern notion that companies can and should invest their time and dollars into these components. For decades the prevailing theory, known as the Friedman doctrine, instructed companies to focus on return, or gains, for their shareholders. 

Namely, make as much money for your shareholders as you possibly can. 

A sort of turning point occurred with the introduction of social capital, the notion that a group can utilize their collective power to affect change. Groups of environmentally conscious investors were able to use their collective leveraging power to alter the decision-making process of businesses. Supporting evidence furthered the movement when the Freshfields Report concluded that companies could perform better if they chose to engage in corporate social responsibility. 

This concept has evolved over time and is now most commonly called ESG, although you may see the terms socially responsible investment (SRI) or long-horizon investment (LHI) to convey the same meaning. It is remarkable how expectations have changed in a relatively short period. Nowadays, appearing socially responsible is integral to success for many businesses across a vast range of industries. Unfortunately, much of the language used is not regulated or standardized, meaning that some companies abuse terminology to their benefit. 

Environmental

The E in ESG is the most consistently talked about and the most widely understood. Thanks to the widespread environmental movement, many companies have been forced to espouse their beliefs, and more importantly, change their practices to create earth-friendly business models. 

Greenwashing

When the marketing language used does not match day-to-day business practices, a company may be greenwashing its brand. A familiar example is fast-fashion companies who describe their clothing as sustainable or as having a low impact. Without diligent monitoring, there is no way to know the actual effect, and since the industry, as a rule, lacks environmental monitoring, these claims tend to fall short.

Circular Economy

In the ESG world, a circular economy is a market where there are no, or extremely limited, quantities of waste. The focus here is threefold. On intelligent design, which eliminates the necessity of waste in production. The promotion of alternative lifecycle consumption, where you’re more open to the use of second-hand goods. And finally, on practical and productive recycling programs that make use of recycled materials.

Upcycled

If you’re a DIYer, then you are very familiar with this term. Remember your grandmother’s old coffee table? Sand it down, slap on a coat of fresh paint, and you’ve got yourself a one-of-a-kind upcycled gem. Although it requires a bit of work, these products are as transparent as it gets in the ESG world because you know what it was, what you put into it to alter it, and what purpose it serves in the end.

Sustainably Sourced

There are two factors in defining something as sustainably sourced, 1. depletion of natural resources, and 2. pollution into the environment. For example, suppose a clothing company sources its fibers in an agriculturally sound way and allows for crop regeneration. But, during the production of their t-shirts, they drop pollutants into the nearby river. They should not then claim the product is sustainably sourced.

100% Recyclable

Products are recyclable if they can be processed or broken down into components and then reused in a new way. Thus how recyclable something is, is entirely dependent on the capabilities of your local recycling center. Meaning, some things can be more recyclable in one location than another. While in theory, some products are 100% recyclable, in practice, they seldom are. Proper programs are costly to build and maintain, and therefore, we tend to have an inflated opinion about what our local systems can handle.

Biodegradable

The good news is that many things are biodegradable, meaning they break down into smaller elements like water vapor over time. However, this process still has a lot to do with the capabilities of the facility. Factors such as temperature, bacteria, and air circulation need to be optimal for the process to be effective. Otherwise, these items may not degrade or take an extended amount of time to do so and can emit methane, entirely offsetting the positive benefits of biodegradable materials.

Compostable

More akin to recycling than biodegrading, the process of composting is breaking down materials to create byproducts for future use. At the end of the composting process, the resulting product of nutrient-rich soil is available for agriculture. This process returns carbon to the earth and reduces methane emissions. Even though everyone nowadays seems to have a compost bin, it is essential to note that not all items can compost effectively at home. Some still need to be sent to a professional facility with proper conditions, so always read the label!

Plant-based

Agricultural scraps from crops, such as sugarcane, used to produce everyday materials, like plastic, make something plant-based. With people increasingly turning away from plastics, this might seem like the perfect solution; however, plastic only needs to be 20% plant-based to be certified in the U.S. This means that the rest of the material can be made from fossil fuels, and it can still be classified as plant-based or bio-plastic.

Non-toxic or Toxin-free

The truth is that this term is complicated. There is no single regulated definition (like many things on this list) for either of these terms. Instead, the Consumer Product Safety Commission (CPSC) has defined what it means to be toxic, stating that if the product kills 50% or more of animal test subjects in 14 days, then it is considered toxic. Below that bar, anything can be called non-toxic. Yes, we agree, that is terrifying.

Earth-friendly

A clever marketing term with nearly zero standardization, saying something is earth-friendly, is as informative as saying, “I live on planet earth.” If you’re looking at a product that claims it is earth-friendly, definitely seek out further information.

In the U.S., the EPA has developed ecolabels to help consumers easily identify products that meet environmental criteria. Still, these programs are entirely voluntary, and particular industries have bought more into the program than others.

Carbon-neutral

In the context of business, being carbon-neutral means the company has worked to lower overall emissions, measure total output, and invest in carbon offset programs at an equal measure to its emissions. There are private organizations around the globe that hand out certifications based on various criteria, some more strict than others.

Traditionally carbon offsetting programs were based on planting trees and typically took place in developing countries. Nowadays, they tend to revolve around clean-energy projects and are more long-term in their impact (i.e., they don’t literally pull carbon from the atmosphere but intend to have a total reduction of x amount over time).

Defeat devices

If you’ve made it this far down the list and you’re not yet feeling defeated or cynical, we’re really proud of you. This one, though, might do you in. Simply put, it is software meant to fool emissions testing equipment, in the auto industry, into thinking that the vehicle is producing fewer emissions than it is. Volkswagen famously spent millions of dollars buying back and fixing its cars when it got caught cheating in the U.S. just a few years ago.

Social

The S in ESG covers a broad scope of issues, from internal HR policies to manufacturing practices, to sourcing materials. As our understanding of social justice transforms, terminology within this category becomes increasingly tied to the environmental terms above.

Conflict-free minerals

Typically referring to tin, tungsten, tantalum, and gold (also called 3TG), these minerals are used in everyday products and are in very high demand. Issues arise when the high demand for these minerals takes place in a country experiencing political instability. In these instances, the funds received tend to exacerbate human rights abuses within the region and extend or create conflicts.

In the last decade, legislation worldwide has increased awareness of conflict minerals and decreased the prolific purchase of them. As a result, there has been a decrease in militia funding through these sources.

Ethical supply chain, ethical supply network, or ethically-sourced

Often used interchangeably, these terms describe the working conditions at factories along each step of the supply chain, most frequently discussed within the textile industry. Demand for transparency on the supply side began to skyrocket after the tragic collapse of the Rana Plaza garment factory in 2013. It claimed the lives of thousands of people and sent shockwaves through the industry as it exposed the conditions in these factories to the mass population in a meaningful way.

Diversity and inclusion

Most often referring to domestic business practices, these terms most effective together. Diversity means the representation of different peoples within an organization, while inclusion refers to fair and equal opportunities for those peoples. Therefore, a company can be diverse but not inclusive, as in reserving promotions for people of a certain race while hiring individuals of all backgrounds.

Rainbow or pinkwashing

Every June, the U.S. is treated to a beautiful display of rainbow flags, heart-warming signs, and city-wide parades celebrating the LGBTQ+ community. You see companies sell pride t-shirts, rainbow-colored burgers, and wristbands. The issue arises when companies turn a profit on these items but do no actual work throughout the year to support the community. 

Governance

The G in ESG refers to existing policies within the geographic locations a company operates. It does not relate to what the laws could or should be. 

Compliance

The choice to make business decisions within the bounds of the law determines whether or not a company is compliant. A great example of this is emissions regulations within the auto industry. While a maker may be compliant with today’s standards, the product will have to evolve to remain compliant. If the maker does not make the necessary changes, they might lose the opportunity to sell within that market.

Transparency

In the past, this term referred to how open and honest a business was with its investors. While it still holds that connotation, it has expanded to include consumers. Rightly so, we have seen a drastic increase in demand for transparency from companies along all steps of their production process.

Have something you’d like defined? Email us at jada@ethically.life and we’ll get to work!

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