Reference

A short glossary.

Sustainable finance runs on acronyms the way the military does, and it borrows terms of art from two fields at once: climate policy and capital markets. Neither vocabulary is self-explanatory, and a reader who is fluent in one is often stranded in the other. These are the terms that come up most often in our work, defined plainly.

A

AIFM / AIFMD: Alternative Investment Fund Manager and the corresponding EU Directive (Alternative Investment Fund Managers Directive); the regulated entity and framework that govern Luxembourg RAIFs and comparable structures.
Article 6 (Paris Agreement): Provisions governing voluntary international cooperation on emissions reductions, including Article 6.2 (bilateral ITMO transfers between sovereigns and to non-state actors) and Article 6.4 (the multilateral supervised mechanism).

B

Bankruptcy-remote custody: A holding structure designed so that the asset survives the insolvency of whichever entity is holding it. Standard in securities custody, and not automatic for carbon units, because raw carbon units are not securities. See also
Book-entry wrapper: A security whose ownership is recorded as an entry in a registry rather than by possession of a certificate. Wrapping a carbon unit in book-entry form lets an institution hold, custody and transfer it through the same infrastructure it already uses for other securities, without changing what sits underneath. See also

C

CA: Corresponding Adjustment; the accounting reconciliation under Article 6.2 by which a host country forgoes the use of an emission reduction toward its own NDC when the unit is transferred internationally. See also
Carbon intensity (portfolio): The emissions attributable to a portfolio per unit of revenue or per dollar invested, weighted across its holdings. It is the quantity portfolio decarbonization acts on, and the quantity that governs a portfolio's sensitivity to the carbon price. Distinct from financed emissions, which are absolute. See also
Carbon price: The cost of emitting a tonne of carbon, set directly by a carbon tax or a traded allowance, or indirectly by standards, border adjustments, and surrender obligations. It is the variable through which institutional climate models translate transition policy into portfolio repricing. See also
CBAM: Carbon Border Adjustment Mechanism; EU regulation imposing carbon costs on imports of cement, steel, aluminium, fertilizers, electricity, and hydrogen, with downstream-product scope expansion proposed.
Climate VaR: Climate Value-at-Risk; MSCI's framework for estimating the transition and physical risk exposure of a security or portfolio under climate scenarios. Like the other scenario tools in institutional use, it assumes a path for the carbon price and translates it into repricing.
CMIP6: Coupled Model Intercomparison Project Phase 6; the reference climate model output set used by the scientific community and by forward-looking physical-risk analytics.
Corresponding adjustment: The accounting entry by which a host country adds an emissions reduction back to its own national account when it authorises that reduction to be used by someone else. It is what prevents the same tonne being counted twice, and it is the reason an authorised unit prices differently from a voluntary credit. See also
CORSIA: Carbon Offsetting and Reduction Scheme for International Aviation; the ICAO-administered compliance regime requiring international aviation operators to offset growth in CO₂ emissions above the 2019 baseline. See also
CO₂e: Carbon dioxide equivalent; the standardised unit aggregating greenhouse gases by 100-year global warming potential.
CSRD: Corporate Sustainability Reporting Directive; the EU framework requiring in-scope companies to report sustainability information aligned with European Sustainability Reporting Standards.
CVaR / mCVaR: Conditional Value-at-Risk (and modified CVaR); the expected loss in worst-case tail scenarios beyond a given confidence threshold. See also

D

DCC-GARCH: Dynamic Conditional Correlation \-- Generalised Autoregressive Conditional Heteroskedasticity; an econometric model for time-varying correlations between asset returns.
Depositary receipt: A negotiable instrument issued in one jurisdiction that represents ownership of an asset held in another. First used in 1927 to let American investors hold foreign shares, and one of the existing legal forms available for holding an environmental asset governed by foreign law. See also
dMRV: Digital Measurement, Reporting and Verification; the data infrastructure layer used to monitor carbon project performance using geospatial and sensor inputs rather than developer self-reporting.

E

EEA: European Environment Agency; the EU agency responsible for environmental data, including the official greenhouse gas inventory.
Engagement: The use of shareholder ownership to push an investee company onto its own transition plan, through voting and direct dialogue. Also called stewardship or active ownership. A mitigation technique: it changes what a holding emits, over years, rather than offsetting the risk.
ERPA: Emission Reduction Purchase Agreement; bilateral contract structure for the purchase of carbon units to be delivered upon issuance and verification.
ESG: Environmental, Social, and Governance; framework for the integration of non-financial factors into investment analysis and portfolio construction.
ETS / EU ETS: Emissions Trading System; cap-and-trade carbon pricing structure. The EU ETS, operational since 2005, is the world's largest such market. ETS II, scheduled for 2028, will extend coverage to road transport, buildings, and small industry.
EUA: European Union Allowance; the compliance unit of the EU ETS.

F

Financed emissions: The absolute greenhouse gas emissions attributed to an investor's share of each holding, measured under the PCAF standard. Not the same as carbon intensity: financed emissions can fall because a book shrinks, and can rise with assets under management while intensity falls.
FPA: Forward Purchase Agreement; bilateral contract for the future delivery of carbon units against pre-agreed price, quantity, and quality terms.

H

Hedge: A position whose value moves in the opposite direction to an identified risk, in proportionate magnitude, so that a loss on one side of the portfolio is offset on the other. A structural hedge moves with the risk by construction, as a swap does with rates; a proxy hedge rests on a correlation observed in the data, and observed correlations break. See also

I

IATA: International Air Transport Association; trade association representing the world's airlines.
ICAO: International Civil Aviation Organization; UN specialized agency that administers CORSIA.
IEA: International Energy Agency; publishes the World Energy Outlook scenarios (Net Zero by 2050, Announced Pledges, Stated Policies) widely used in transition risk analysis.
Interest rate swap: A contract exchanging fixed for floating interest payments, used by pension funds and insurers to offset the rate sensitivity of long-dated liabilities. Interest rate derivatives are the largest derivatives market in the world, roughly $670 trillion in notional value outstanding at mid-2025 according to the Bank for International Settlements.
IPCC: Intergovernmental Panel on Climate Change; UN body responsible for assessing climate-change science.
ISSB: International Sustainability Standards Board; under the IFRS Foundation. ISSB Standard S1 covers general sustainability disclosure and S2 covers climate-related disclosure.
ITMO: Internationally Transferred Mitigation Outcome; the unit type generated under Article 6.2 of the Paris Agreement when a sovereign authorises and performs a corresponding adjustment. See also

L

Letter of Authorization (LoA): The document in which a host government states which uses of a unit it permits. Use toward the host country's own NDC is the default and needs no LoA; the LoA opens the other uses, including another country's target, CORSIA, and corporate claims. See also

M

Macro transition risk: The layer of transition risk that reprices an entire economy when a major jurisdiction tightens carbon policy at scale: input costs, growth, inflation, rates, sovereign bonds, real estate, and currencies. A property of the economy rather than of any holding, so it cannot be reduced by changing what a portfolio owns. See also
MSCI: Morgan Stanley Capital International; financial index and analytics provider, publisher of MSCI Climate Value-at-Risk.

N

Naked exposure: A risk that is borne in full with no offsetting position. An unhedged interest rate position is the standard example; macro transition risk sits in most institutional portfolios the same way. See also
NAV: Net Asset Value; the valuation of a fund's assets less liabilities, expressed per unit or in aggregate.
NDC: Nationally Determined Contribution; a country's quantified emissions-reduction commitment under the Paris Agreement, updated on a five-year cycle.
NDC headroom: The gap between a country's projected emissions trajectory and the target set in its Nationally Determined Contribution. Where headroom exists, mitigation outcomes can be authorised for international transfer without putting the country's own target at risk, which makes headroom a monetisable national asset. See also
NGFS: Network of Central Banks and Supervisors for Greening the Financial System; consortium publishing reference climate scenarios used for financial-stability analysis and institutional stress testing.
NiGEM: National Institute Global Econometric Model; macro-financial model developed by the UK National Institute of Economic and Social Research, used by central banks and finance ministries for scenario analysis.

P

PCAF: Partnership for Carbon Accounting Financials; the industry-led harmonised methodology for measuring and disclosing financed emissions.
Permanence: Whether an emissions reduction persists. A forest that stores carbon can burn; geological storage generally cannot be undone. Permanence risk is the possibility that a reduction already counted is later reversed, and the question every serious structure has to answer is who bears it.
Physical risk: The risk of direct economic damage from a changing climate, including extreme weather, sea-level rise and heat stress on labour and agriculture. Distinct from transition risk in timing, in how precisely it can be modelled, and in how directly it can be hedged. See also
Planetrics: Climate scenario analysis platform developed by Vivid Economics, now part of McKinsey Sustainability; provides bottom-up portfolio-level transition risk modelling.
Portfolio decarbonization: Reducing a portfolio's carbon intensity by changing its composition: excluding the heaviest emitters, tilting toward the cleaner companies within a sector, engaging investee companies, and allocating to renewables and grid. A mitigation strategy; it lowers sensitivity to the carbon price but creates no position that gains when the price rises. See also

Q

Qualified institutional buyer (QIB): A category of large, sophisticated institutional investor defined under United States securities law. Rule 144A permits resale of unregistered securities among QIBs, which is one of the established routes by which a novel asset reaches institutional portfolios.

R

RAIF: Reserved Alternative Investment Fund; Luxembourg fund vehicle structured under AIFMD oversight, suitable for institutional investors.
Reversal risk: The specific risk that a previously issued and counted emissions reduction is undone, for example by fire, disease, harvesting or policy change. Reversal risk can be allocated by contract, insured, or held in a buffer pool. What it cannot be is assumed away.
Risk mitigation: Reducing exposure to a risk by repositioning the portfolio away from it. Contrasted with risk transfer, which offsets the exposure rather than reducing it. See also
Risk transfer: Offsetting a risk by holding a position whose value moves the other way when the risk materializes, or by contracting a third party to bear it. Reinsurance and interest rate swaps are the everyday examples. Mitigation and transfer are used together for every material market risk an institution carries. See also

S

Settlement finality: The moment at which a transfer becomes irreversible under law rather than by agreement between the parties. Securities markets have well-defined finality; carbon registries generally reserve discretion to reverse movements, which is one of the gaps an instrument has to close. See also
SFDR: Sustainable Finance Disclosure Regulation; EU regulation requiring sustainability disclosure by financial market participants. Article 8 covers products promoting environmental or social characteristics; Article 9 covers products with sustainable investment as their objective.
Shadow carbon price: An internal carbon price an institution applies to its own holdings and underwriting to test their sensitivity to transition policy, independent of any price that currently applies in law.
SMA: Separately Managed Account; investment mandate structure in which the allocator retains direct ownership of underlying assets while delegating discretion to a manager.
Sovereign covenant: A promise made by a state, of the kind that debt and currency markets price every day. Treating a corresponding adjustment as a sovereign covenant rather than as registry paperwork is what allows the existing machinery of sovereign risk pricing to be applied to carbon. See also
Structural short: A position that loses value when a particular risk factor rises, held without any offsetting position. An allocator that models a rising carbon price and holds no carbon exposure is structurally short carbon, whether or not it describes the position that way. See also

T

Transition risk: The risk that decarbonization policy, technology and market shifts reprice assets. It is the channel through which most institutional climate models translate climate change into portfolio repricing, and it operates through the carbon price. See also See also

U

UNFCCC: United Nations Framework Convention on Climate Change; the international treaty under which the Paris Agreement was negotiated.
Utility-grade unit: A carbon unit that is verified, correspondingly adjusted under Article 6, and eligible for use within a binding compliance framework. The distinction matters because the hedge argument depends on regulatory demand, and regulatory demand depends on compliance eligibility. See also

V

VCM: Voluntary Carbon Market; the market for non-compliance carbon credits acquired voluntarily by corporates or individuals, typically lacking sovereign authorisation and corresponding adjustment.