Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Absolute Emissions: Absolute emissions refer to the total amount of greenhouse gas emissions produced by a company or portfolio, typically measured in tons of CO2 equivalent. This indicator takes into account the value of assets under management and can be compared with carbon budgets. It is an important metric for assessing a company’s or portfolio’s environmental impact and tracking progress towards emissions reduction goals. For more details.

Absolute Return: Absolute return refers to the total return of a portfolio or investment, calculated separately without comparison to a reference or benchmark. It represents the actual return achieved by an investment, regardless of how it performs relative to others. Absolute returns are used to evaluate the performance of a portfolio or investment on its own merit, rather than in relation to a benchmark or index. For more details.

Active Risk: Active risk refers to the risk that arises from the difference between an instrument’s performance and that of its benchmark. It represents the potential for an instrument to deviate from the market or benchmark, and is a key component in managing risk in financial portfolios. Active risk is typically measured by decomposing it into individual factor-based contributions, which can help identify areas of concentration and opportunities for diversification. For more details.

Active Risk Diversification (ARD): Active Risk Diversification (ARD) measures the effective number of active risk contributions. A low ARD indicates that active risk is concentrated into few factors, while a high ARD suggests that active risk is well-spread across several risk factors. The maximum ARD is reached when active risk is equally spread among all risk factors (risk parity). ARD is computed after removing the typically large contribution from the regional benchmark, which would bias the diversification measurement. For more details.

Alpha Generation: Alpha generation refers to a portfolio’s ability to deliver returns above what would be expected based on its exposure to market risks or common factors. It reflects the manager’s skill in identifying mispriced opportunities or adding value through active decisions. Consistent alpha generation indicates effective active management beyond general market movements. For more details.

Arbitrage Opportunity: An arbitrage opportunity refers to a situation where an investor can earn a risk-free profit by exploiting price differences between two or more markets. This occurs when the same asset or security is traded at different prices in different markets, allowing the investor to buy at the lower price and sell at the higher price. In the context of financial markets, arbitrage opportunities are often short-lived, as they are quickly exploited by investors, leading to price adjustments that eliminate the opportunity. For more details.

Asset Allocation: Asset allocation refers to the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and other investments, to achieve a desired balance of risk and return. It involves assigning a percentage of the portfolio to each asset class based on an investor’s financial goals, risk tolerance, and time horizon. Effective asset allocation is crucial for managing risk and maximizing returns in a financial portfolio. For more details.

Asset Pricing: Asset pricing refers to the process of determining the value of a financial asset, such as a stock or bond, based on its expected return and risk. It involves analyzing the relationship between the asset’s return and various factors that affect its value, such as market conditions and economic indicators. The goal of asset pricing is to provide a framework for understanding and predicting the behavior of financial assets, which is essential for making informed investment decisions. For more details.

Brown Stocks: Brown stocks refer to the stocks of companies that are heavily involved in activities that contribute to environmental pollution or climate change. These stocks are considered riskier due to their larger exposures to climate risk, which can lead to unexpected losses in value, such as from new government regulations. As a result, brown stocks typically offer higher expected returns to investors as compensation for this increased risk. For more details.

Beta Coefficient: The beta coefficient refers to the sensitivity of a financial instrument’s return to a particular risk factor. It represents the exposure of an instrument to a systematic factor, which is a common force or factor that drives returns and affects financial instruments. A beta coefficient is a key component in factor models, which are used to analyze and manage risk in financial portfolios. For more details.

Book-To-Market Ratio: The book-to-market ratio refers to a financial metric that compares a company’s book value to its market value. It is used to assess the value of a company, with a higher ratio indicating that a company’s stock may be undervalued. The book-to-market ratio is often used as a “value” factor in finance, helping investors identify potentially undervalued stocks with higher average returns. For more details.

Climate Active Ratio: The Climate Active Ratio measures the emissions reduction potential of a portfolio by comparing its decarbonization efforts to its active risk. It quantifies the risk-adjusted efficiency of a portfolio’s decarbonization efforts, providing insight into the potential for further emissions reduction. A low Climate Active Ratio suggests that a portfolio has greater potential for further decarbonization, indicating inefficiencies in its current efforts. For more details.

Climate Policy Relevant Sectors: Climate Policy Relevant Sectors (CPRS) refer to industries whose primary economic activities could be significantly impacted by a low-carbon transition, considering their contribution to greenhouse gas emissions, relevance to climate policy implementation, and role in the energy value chain. CPRS sectors include energy-intensive, utility/electricity, buildings, fossil fuel, and transportation, among others. These sectors are identified as being potentially affected, either positively or negatively, by the transition to a low-carbon economy. For more details.

Climate Transition Risk Factor: A Climate Transition Risk Factor refers to the exposure of a financial instrument or portfolio to the risks associated with the transition to a low-carbon economy. This factor captures the potential impact of climate change on companies, with a focus on those that may suffer or benefit from the energy transition. The Climate Transition Risk Factor is designed to help financial institutions assess and manage their exposure to transition risks, which are a key component of climate-related risks. For more details.

Completion Approach: The completion approach refers to a method of adjusting a portfolio’s capital allocation by acquiring new instruments to add to the portfolio. This process, also known as portfolio completion, involves finding new instruments that will improve a specific investment objective, such as reducing risk or improving factor quality, while keeping the weights of the current portfolio fixed. The goal of completion is to enhance the portfolio’s overall performance by adding new instruments that meet the specified investment objectives. For more details.

Conditional Probability Of Outperformance: Conditional Probability of Outperformance (CPO) refers to the likelihood of a portfolio performing better than a reference or risk-free rate in a specific macroeconomic state. It assesses the probability of positive performance in different economic conditions, considering both upward and downward surprises. CPO is a measure used to evaluate the potential outperformance of a portfolio in various macroeconomic scenarios. For more details.

Conditional Return: Conditional return refers to the average return of a portfolio during specific periods of upward or downward surprises in macroeconomic states. It is calculated for both upward and downward surprises and is used to analyze the portfolio’s performance in different economic conditions. This measure helps finance professionals understand how a portfolio is likely to perform during times of economic surprise or shock. For more details.

Conditional Risk: Conditional risk refers to the potential loss or uncertainty that an investor may face, given certain conditions or circumstances. It is a type of risk that is dependent on specific factors or events, and its impact can be measured using metrics such as Conditional Value at Risk (CVaR). Conditional risk is an important consideration in finance, as it can help investors and financial professionals to better understand and manage potential losses. For more details.

Conditional Sharpe Ratio: The Conditional Sharpe Ratio is a risk-adjusted measure that evaluates the performance of a portfolio based on its expected return and volatility, considering specific conditions or scenarios. It provides a more nuanced assessment of a portfolio’s risk-adjusted return, taking into account potential future outcomes or market conditions. This allows investors to better understand the potential risks and rewards of their investment decisions. For more details.

Consensus Screen: The Consensus Screen refers to a set of criteria used to evaluate companies based on their involvement in certain industries or activities that are considered controversial or unethical. The screen is based on an analysis of the exclusion policies of the 100 largest global asset owners and includes criteria such as involvement in tobacco, coal, controversial weapons, and violations of the UN Global Compact. The Consensus Screen is used to identify companies that do not meet certain standards of social and environmental responsibility. For more details.

Constraints: Constraints in finance refer to limitations or restrictions imposed on a portfolio or investment strategy. Linear constraints are a common type, which can be used to set budget constraints, limit turnover, or restrict capital invested in a particular region or instrument. These constraints play a crucial role in portfolio optimization, but their interaction with objectives can be complex and require careful management to avoid unintended side effects. For more details.

Country Allocation: Country allocation refers to the distribution of capital within a portfolio across different countries. It involves assigning weights to each country based on the weight of stocks within that country, allowing for the identification of concentrated positions or countries with little exposure. This allocation is typically displayed in both absolute and relative terms, providing a comprehensive view of a portfolio’s country exposure. For more details.

Credit Spread: A credit spread refers to the difference in yield between two debt securities with different credit ratings, such as between a Baa corporate bond and an Aaa corporate bond. It signals the market’s perception of the relative creditworthiness of the issuers and the risk of default. An increasing credit spread indicates rising risk aversion and can adversely affect economic activity. For more details.

Currency Allocation: Currency allocation refers to the way that capital within a portfolio is distributed across different currencies. It involves assigning weights to each currency based on the weight of stocks in that currency, allowing investors to assess their currency exposures. The distribution of currency weights can be viewed in both absolute and relative terms, enabling investors to identify concentrated positions or differences compared to a reference. For more details.

Capital Efficiency: Capital efficiency refers to a company’s ability to generate profits from its investments, essentially getting the most out of its capital. It involves managing and allocating resources effectively to maximize returns. A company with high capital efficiency is able to produce more output or revenue with the same amount of capital, making it a desirable trait in finance. For more details.

Capital Structure: Capital structure refers to the composition of a company’s financing, including debt and equity. It represents the way a company funds its operations and investments, and can affect its cost of capital and overall financial performance. A company’s capital structure is influenced by various factors, including its industry, growth prospects, and risk profile, and can impact its ability to invest and generate returns. For more details.

Cash Flow Yield: Cash flow yield refers to the ratio of a company’s cash flow to its market value, indicating the amount of cash generated by a investment. It is a measure of a company’s ability to generate cash and is often used to evaluate its financial health and potential for future growth. The cash flow yield is an important metric for investors, as it helps them assess the attractiveness of an investment opportunity. For more details.

Correlation Matrix: A correlation matrix refers to a table showing correlation coefficients between different characteristics or variables, used to analyze and understand the relationships between them. In finance, correlation matrices are used to identify the correlations between different financial instruments or risk factors, helping to manage risk and make informed investment decisions. The correlation matrix is an essential tool in factor models, which aim to analyze and manage risk in financial portfolios by identifying systematic factors that drive returns. For more details.

Cost Of Equity: The cost of equity refers to the return that shareholders expect to earn from their investment in a company. It represents the minimum return that a company must generate to satisfy its shareholders and is a key component in determining the company’s overall cost of capital. The cost of equity is essentially the rate of return that a company must pay to its shareholders to compensate them for the risk of investing in the company. For more details.

Cross-Sectional Return: Cross-Sectional Return refers to the return of a financial instrument or portfolio in relation to the overall market or a specific group of assets at a given point in time. It is often analyzed using cross-sectional regressions, which estimate the relationship between the returns of different assets or portfolios and various factors such as size, value, or profitability. The goal of cross-sectional return analysis is to understand the factors that drive returns and to identify patterns or anomalies in the data that can inform investment decisions. For more details.

Cumulative Return: Cumulative return refers to the total gain or loss of a portfolio over a specified period of time. It represents the aggregate return of an investment, taking into account the compounding effect of returns over time. The cumulative return provides a comprehensive picture of an investment’s performance, allowing for comparisons across different portfolios and investment horizons. For more details.

Diversification Of Fundamental Risk Exposures: Diversification of fundamental risk exposures refers to the process of managing and reducing the risks that arise from the underlying factors that drive returns and affect financial instruments. This involves spreading investments across different assets to minimize exposure to specific risk factors, thereby reducing the overall risk of a portfolio. By diversifying fundamental risk exposures, investors can potentially reduce their exposure to systematic risks that cannot be eliminated entirely. For more details.

Dividend Discount Model: The Dividend Discount Model refers to the concept that the market value of a share of stock is the discounted value of expected dividends per share. This model suggests that the price of a stock is determined by the expected future dividends it will pay, and that the expected return on a stock is related to its expected dividends and risk. The model is used to estimate the intrinsic value of a stock by discounting its expected future dividends to their present value. For more details.

Expected Inflation: Expected inflation refers to the anticipated rate of increase in prices of goods and services over a certain period. It is a key factor in economic decision-making, as it affects the purchasing power of consumers and the profitability of businesses. In finance, expected inflation is considered when making investment decisions, as it can impact the returns on investments and the overall performance of financial portfolios. For more details.

Effective Number Of Partitions: The Effective Number of Partitions (ENP) measures the level of concentration of a specific partition within a portfolio, explaining how dollars are distributed across it. It evaluates how weights within a portfolio are distributed, providing a better measure of diversification than simply counting the number of positions held. The ENP helps account for the dominant effect of large holdings compared to small holdings, allowing for a more accurate assessment of portfolio diversification. For more details.

Eu Paris-Aligned Benchmark: The EU Paris-Aligned Benchmark (PAB) is a series of regulations designed to redirect capital toward climate-friendly investments and enhance transparency. To receive the EU PAB label, portfolios must meet specific criteria outlined in the EU PAB regulations, indicating their compliance with established standards. The PAB aims to prevent greenwashing and promote investments that align with the Paris Agreement goals, by excluding companies with significant revenues related to coal, oil, and gas industries, among other criteria. For more details.

Extreme Losses And Conditional Value At Risk: Extreme Losses and Conditional Value at Risk refer to the potential losses that can occur in extreme scenarios, typically defined as the worst week of the year. Conditional Value at Risk (CVaR) is a measure of extreme risk that corresponds to the average of the losses experienced during the worst percentage of all returns. It provides a conservative assessment of portfolio risk, offering insight into the worst week of losses to be expected in a given year. For more details.

Expected Volatility: Expected volatility refers to the anticipated level of uncertainty or fluctuation in the value of a financial instrument over a specific period. It represents the potential risk or unpredictability of an investment’s returns, which can be influenced by various market and economic factors. In finance, expected volatility is a key consideration for investors and risk managers seeking to make informed decisions about portfolio allocation and risk management. For more details.

Factor Intensity: Factor intensity refers to the strength of a portfolio’s or instrument’s exposures to fundamental risk factors. It measures the aggregate exposure to these factors, with a high factor intensity indicating a high magnitude of exposure and a low factor intensity indicating a low aggregate exposure. A portfolio with high factor intensity has a high level of exposure to fundamental risk factors, which can impact its performance and risk profile. For more details.

Factor Quality: Factor quality reflects how strongly and how broadly a portfolio is exposed to key underlying drivers of risk and return, while also considering how well these exposures are diversified. A low value suggests weak or overly concentrated exposures, whereas a high value indicates strong and well-balanced exposure across multiple factors, suggesting long-term performance potential. Factor quality obtains combining factor intensity with diversification of fundamental risk exposures. For more details.

Fundamental Risk Factors: Fundamental risk factors refer to sources of common risk that cannot be fully diversified away and are persistent drivers of long-term performance in equity portfolios. The seven generally accepted fundamental risk factors are Market, Value, Size, Momentum, Low Risk, Investment, and Profitability, which are designed to be orthogonal to the market factor. These risk factors represent sources of risk that hurt a portfolio mostly in bad times, leading to a compensating risk premium. For more details.

Green Revenues – Enabling: Enabling activities in the context of green revenues refer to those that facilitate other activities to make a substantial contribution to one or more of the six environmental objectives. These objectives include climate change mitigation, sustainable use of water and marine resources, and protection of biodiversity, among others. Enabling activities do not directly contribute to these objectives but support other activities that do, as defined by the EU taxonomy. For more details.

Green Revenues: Green revenues refer to the income generated by activities that contribute substantially to one or more of the six environmental objectives, such as climate change mitigation and pollution prevention. These activities can be either “green” or “enabling”, with green activities directly contributing to environmental objectives and enabling activities supporting other activities that make a substantial contribution. The EU taxonomy definition provides a framework for identifying and categorizing green revenues, helping firms and investors to make informed decisions about sustainable investments.For more details.

Green Revenues – Transition: In terms of green revenues, transition activities refer to those for which there are not yet technologically and economically viable low-carbon alternatives. These activities are part of the transition to a more sustainable economy, but currently, rely on high-carbon technologies. The concept of transition activities is important in assessing transition risks and opportunities in the context of climate change and the energy transition. For more details.

Green Stocks: Green stocks refer to the stocks of companies that are considered environmentally friendly or sustainable. These stocks have been found to have negative alphas, meaning they tend to underperform brown stocks, which are companies with lower environmental standards. Green stocks are also seen as a hedge against climate risk, as they tend to outperform brown stocks during periods of negative climate news or abnormal weather events. For more details.

Investment Risk Factor: The Investment Risk Factor measures the excess return of instruments with low levels of investment compared to those with high levels of investment. It represents the returns of a portfolio that is long on low-investment stocks and short on high-investment stocks, sorted by total asset growth over a two-year period. This factor helps to capture the risk associated with investment levels in financial instruments. For more details.

Low Volatility Risk Factor: The Low Volatility Risk Factor measures the excess return of lower volatility instruments compared to those with higher volatility. It represents the returns of a portfolio that is long low-volatility stocks and short high-volatility stocks, with the portfolio being market beta neutralized on a quarterly basis. This risk factor captures the returns of an investment strategy that favors less volatile stocks over more volatile ones. For more details.

Macroeconomic State Variables: Macroeconomic State Variables are derived from tradeable instruments that reflect characteristics of the economy, such as monetary policy, business cycle, and forward interest rates. These variables are forward-looking, reflect investor expectations, and are well-documented in quantitative finance literature. They are used to capture critical aspects of the economy and provide a link to factors established through academic literature and empirical studies. For more details.

Market Beta: Market beta, also known as risk exposure, measures the sensitivity of a portfolio to the market risk factor. It signifies how much a portfolio is expected to move in line with the market, with a beta value of 1 indicating alignment with the market and values below 1 implying less volatility. A portfolio with a beta value above 1 is expected to be more volatile than the market. For more details.

Market Risk Factor: A market risk factor refers to a source of risk that affects the overall performance of a financial market, such as the market factor in a factor model. This type of risk is inherent in the market or economy as a whole and cannot be diversified away. The market risk factor is a key component in evaluating the characteristics of financial instruments and portfolios, particularly in the context of equities. For more details.

Maximum Drawdown: Maximum drawdown refers to the maximum observed loss experienced by a portfolio, measuring the largest drop from peak to trough before a new peak is achieved. It is a risk measure that calculates the maximum loss, and its construction can be problematic when instruments have different periods of data. Maximum drawdown is a simple, yet popular measure of extreme risk, widely used in adjusted performance measures to assess portfolio losses. For more details.

Momentum Risk Factor: Momentum Risk Factor refers to the risk associated with investing in stocks that have shown high cumulative returns over a certain period, typically the last 12 months, excluding the most recent month. This factor is used to capture the effect of momentum on stock prices, where stocks with high past returns tend to continue performing well. The momentum risk factor is a key component in factor models, which help analyze and manage risk in financial portfolios. For more details.

Objective: The objective refers to a goal or target in finance, often related to maximizing returns or minimizing risk. In the context of financial instruments and portfolios, an objective function is used to optimize performance, such as maximizing a sum of Rayleigh quotients. The specific objective function can vary depending on the problem, but it is typically designed to achieve a particular financial goal, such as maximizing returns or minimizing risk. For more detail.

Peer Group: A peer group refers to a group of financial instruments that are comparable to a portfolio being analyzed. The peer group is typically composed of instruments with similar risk factor exposures and behavior, and can be generated automatically or defined manually. The peer group is used as a benchmark to evaluate the performance of the portfolio, with peer group figures representing the average of its members. For more details.

Portfolio: A portfolio refers to a collection of financial assets, such as stocks, bonds, and other investments, held by an individual or institution. It represents a diversified mix of assets designed to achieve specific investment goals, such as growth, income, or capital preservation. The composition of a portfolio can vary depending on factors like risk tolerance, investment horizon, and financial objectives. For more details.

Position Turnover: Position turnover refers to the rate at which securities or holdings are replaced or changed within a portfolio. It is considered a trading limit constraint in portfolio allocation, used to limit the amount of capital traded in or out of any position to a given percentage of the portfolio value. This helps to prevent changes from being concentrated in any single position, thereby managing trading costs and potential risks. For more details.

Profitability Risk Factor: The Profitability Risk Factor measures the excess return of higher profitability instruments compared to those with lower profitability. It represents the returns of a portfolio that is long high profitability stocks and short low profitability stocks, with profitability determined by past gross profit to total assets. This factor captures the risk associated with the difference in returns between more profitable and less profitable investments. For more details.

Ranking: Ranking refers to the process of assigning a position or order to financial instruments, such as funds, based on their performance or sustainability scores. In finance, ranking is often used to evaluate and compare the relative standing of investments within a particular category or market. The percentile rank, for example, provides a continuous measure of a fund’s rank within its category, making it easier for investors to interpret and make informed decisions. For more details.

Reference: Reference, in the context of finance, refers to a standard or benchmark used to evaluate the performance of a financial instrument or portfolio. It can also refer to a citation or credit given to a source, such as a research paper or academic article, that has contributed to the understanding of a particular financial concept or theory. In the provided context, the term “reference” is not explicitly defined, but it appears to be related to the notation and terminology used in the paper to describe financial models and optimization programs. For more details.

Relative Conditional Value At Risk: Relative Conditional Value at Risk refers to a measure of extreme risk that captures the average of losses experienced during the worst scenarios. It is an extension of Value at Risk and provides insight into potential losses that, although rare, are significant and must be withstood by investors. This measure helps investors understand what a really bad outcome could look like, making it a useful tool in risk management. For more details.

Relative Maximum Drawdown: Relative Maximum Drawdown refers to the maximum loss experienced by a portfolio in comparison to a reference point. It is calculated by creating a new price series based on the daily ratio between the portfolio’s price and the reference’s price. This measure helps assess the portfolio’s risk relative to the reference, providing a more nuanced understanding of its performance. For more details.

Relative Return: Relative return represents a portfolio’s return in comparison to a reference for a given period. It is calculated by finding the difference between the total returns of the portfolio and the total returns of the reference. This allows for a comparison of the portfolio’s performance to a benchmark or reference point, providing insight into its relative success. For more details.

Relative Time Under Water: Relative Time Under Water refers to the length of time of the relative maximum drawdown, measuring the amount of time it takes to recover the relative loss with respect to a reference. It represents the time it takes for a portfolio to surpass its previous peak relative to a benchmark or reference. This metric helps investors understand the recovery period of a portfolio’s losses compared to a reference point. For more details.

Reshuffle: Reshuffling refers to the process of adjusting a portfolio’s capital allocation by modifying the weights assigned to existing instruments within the portfolio. This process involves applying adjustments to existing positions, which may result in some weights being reduced to zero, effectively leading to divestment. The goal of reshuffling is to optimize the portfolio’s characteristics, such as reducing risk or improving factor quality, while considering user-defined constraints. For more details.

Return: Return refers to the gain or loss of a portfolio, calculated by compounding weekly portfolio returns over a set time period and annualizing them. The returns are presented in annualized form to enable comparisons across different portfolios and investment horizons. This allows finance professionals to evaluate and analyze the performance of their investments over time. For more details.

Risk Analysis: Risk analysis refers to the process of identifying, assessing, and prioritizing potential risks in a financial context. It involves evaluating the likelihood and potential impact of various risk factors, such as market volatility, credit risk, and operational risk, to determine their potential effect on a portfolio or investment. By conducting risk analysis, financial professionals can better understand and manage risk, making more informed investment decisions. For more details.

Risk Decomposition: Risk decomposition refers to the process of breaking down the total risk of a financial instrument or portfolio into its individual components. This decomposition provides insight into what drives the risk, allowing for a better understanding of the factors contributing to it. By attributing risk to specific exposures, risk decomposition helps financial professionals identify and manage potential risks within their portfolios. For more details.

Robust Active Risk Diversification: Robust Active Risk Diversification refers to the adjusted active risk diversification (ARD) to account for the uncertainty of the characteristics that define it. It is calculated by adjusting the metric downward to the lower confidence limit, to ensure that the most conservative figure is used. This adjustment makes the factor quality more robust to different return realizations, providing a more reliable measure of risk diversification. For more details.

Robust Factor Quality: Robust Factor Quality refers to the adjusted factor quality that takes into account the uncertainty of the characteristics that define it. It is calculated by adjusting the metric downward to the lower confidence limit, ensuring that the most conservative figure is used. This adjustment makes the factor quality more robust to different realizations of returns, providing a more reliable measure of factor quality. For more details.

Robust Sharpe Ratio: The Robust Sharpe Ratio is an enhanced version of the traditional Sharpe Ratio, designed to provide a more reliable measure of risk-adjusted return by accounting for estimation errors and variability over time. It uses techniques such as heteroskedasticity and autocorrelation robust kernel estimation to estimate the confidence interval around the Sharpe Ratio, allowing for a more accurate assessment of a portfolio’s performance. This approach helps to determine the statistical significance of a portfolio’s Sharpe Ratio, providing assurance that the realized risk-adjusted return is likely to persist over time. For more details

Short-Term Rate: A short-term rate refers to the interest rate for a short period of time, typically less than a year. It reflects monetary policy and is related to the business cycle, with changes in short rates often influenced by economic conditions. In the context of financial markets, short-term rates are often represented by government bill yields, such as the US 3 Month Government Bills (GB3:GOV). For more details.

Science-Based Targets: Committed:
Science-Based Targets: Committed refers to an organization’s intention to develop and submit science-based targets for validation within 24 months. This commitment demonstrates the organization’s willingness to set emissions reduction targets in line with the Science-Based Targets Initiative’s (SBTi) criteria. The commitment is indicated by the word “committed” in the platform and marks the first step in the process of setting science-based targets. For more details.

Science-Based Targets: Long-Term Targets: Long-term targets refer to the degree of emission reductions that organizations need to achieve to reach net-zero, as defined by the Science-Based Targets Initiative’s Corporate Net-Zero Standard criteria. These targets must be achieved by 2050, or 2040 for the power sector, and indicate the level of reduction required to meet net-zero emissions. They are a key component of a company’s net-zero strategy, outlining the necessary emissions reductions to achieve net-zero in the long term. For more details.

Science-Based Targets: Near-Term Targets:
Near-term targets refer to the specific goals that organizations set to reduce their emissions over the next 5-10 years, typically with the aim of achieving significant emissions reductions by 2030. These targets are a requirement for companies wishing to set net-zero targets and are validated by the Science-Based Targets Initiative (SBTi) to ensure compliance with their criteria. By setting near-term targets, companies can galvanize action and outline the necessary steps to reduce their emissions and contribute to a low-carbon future. For more details.

Science-Based Targets: Neutral Before 2050:
Science-Based Targets: Neutral before 2050 refers to a company’s commitment to achieve net-zero emissions by 2050 or earlier, with a focus on minimizing scope 1, 2, and 3 emissions and offsetting any remaining emissions. This target is part of the Science-Based Targets Initiative (SBTi) and is aligned with the Corporate Net-Zero Standard. Companies with this target aim to reduce their emissions significantly by 2030 and achieve net-zero emissions by 2050, with some sectors having earlier deadlines, such as the power sector by 2040. For more details.

Science-Based Targets: Target Set
Science-Based Targets: Target set refers to a company’s emissions reduction goal that has been validated by the Science-Based Targets Initiative (SBTi) as compliant with their criteria and aligned with climate science. To achieve a “Targets set” status, a company must submit a target that encompasses at least 95% of its scope 1 and 2 emissions, and include scope 3 emissions if they account for 40% or more of total emissions. The target is then thoroughly assessed by the SBTi and marked as “Targets set” on the Climate alignment page if it meets the necessary criteria. For more details.

Systematic Risk: Systematic risk refers to the risk that arises from common forces or factors that drive returns and affect financial instruments. These factors are often represented by systematic factors, to which financial instruments are exposed. Systematic risk is a type of risk that cannot be diversified away and is inherent in the market or economy as a whole. For more details.

Scope 1 Emissions: Scope 1 Emissions refer to the direct emissions from sources owned or controlled by a company, resulting from the manufacture of its products and/or the production of its services. These emissions are directly related to the company’s operations and are a key component of its overall greenhouse gas emissions. Scope 1 emissions are considered direct emissions, as opposed to indirect emissions, which are categorized as Scope 2 or Scope 3 emissions. For more details.

Scope 2 Emissions: Scope 2 Emissions refer to indirect emissions linked to the consumption of purchased energy. This type of emission is associated with a company’s energy usage, rather than direct emissions from its own operations. Scope 2 emissions are an important consideration in assessing a company’s overall environmental impact, particularly in industries with high energy consumption. For more details.

Scope 3 Emissions: Scope 3 Emissions refer to other indirect emissions in the corporate value chain, including both upstream and downstream emissions. These emissions are not directly owned or controlled by the company, but are rather a result of the company’s activities and operations. Scope 3 emissions are often estimated, as companies may not directly report them, and can include emissions from sources such as supply chains and product use. For more details.

Screened Equities: Screened equities refer to a selection of stocks that have been filtered or screened based on certain criteria, such as financial performance, industry, or risk profile. This process helps investors to identify potential investment opportunities that meet their specific requirements or goals. By screening equities, investors can narrow down their investment options and make more informed decisions about where to allocate their resources. For more details.

Sector Allocation: Sector allocation refers to the way that capital within a portfolio is distributed across different sectors. The weight assigned to each sector is determined by the sum of weights of all stocks in that sector. This allocation is a key factor in analyzing and controlling equity portfolio emissions, as it influences the overall emissions intensity of the portfolio. For more details.

Sector-Based Risk Factors: Sector-based risk factors refer to the risks associated with a specific industry or sector, such as Basic Materials or Technology. These risk factors represent the returns of a portfolio that is long the sector index and short the market index, allowing for the isolation of sector-specific risks. Sector-based risk factors are used to explain the risks to which an instrument is exposed and are included in models to analyze and manage risk in financial portfolios. For more details.

Sharpe Ratio: The Sharpe Ratio is a measure used to help investors understand the return of an investment compared to its risk. It represents the average return earned in excess of the risk-free rate per unit of risk, providing a way to evaluate the risk-adjusted return of a portfolio. The Sharpe Ratio is a widely reported indicator of performance, but its value can vary significantly between time periods, making it important to consider its statistical significance and potential persistence over time. For more details.

Size Risk Factor: Size risk factor refers to the exposure of a financial instrument to the risk associated with its size, typically measured by market capitalization. This factor is often represented by the Size factor, denoted as SMB, which captures the difference in returns between small and large stocks. The Size factor is used to control for the effects of size on stock returns, allowing for a more nuanced understanding of other risk factors, such as value, profitability, and investment. For more details.

Surprises: Surprises refer to unexpected changes in macroeconomic variables, measured as the difference between the actual value and its predicted value. These surprises can be either upward, representing an increase in the macro series, or downward, representing a decrease. In finance, surprises are used to explain asset returns and are identified through a methodology that extracts the unexpected component of a macroeconomic indicator based on its history. For more details.

Sustainable Development Goals: Sustainable Development Goals refer to the 17 goals set by the United Nations in 2016, which cover social, environmental, and economic issues, and are to be completed by 2030. These goals are used by institutional investors to manage, monitor, and report on their extra-financial impact, and are increasingly important in the design of sustainable investment portfolios. The SDG framework includes 169 targets and 232 indicators to monitor progress towards achieving these goals. For more details

Term Spread: Term spread refers to the difference in yields between two bonds with different maturity dates, typically a short-term and a long-term bond. It is an indicator of the market’s expectations for future interest rates and economic activity. A widening term spread can signal increasing uncertainty and risk aversion in the market, while a narrowing term spread can indicate decreasing uncertainty and improving economic conditions. For more details.

Trading Constraints: Trading constraints refer to the limits placed on the amount of capital that can be taken in or out of a particular financial instrument. These constraints are used in portfolio optimization to control the impact of the optimization process on a portfolio’s weight changes and risk profile. They help to limit trading costs and prevent excessive changes in any single position. For more details.

Time Under Water: Time Under Water refers to the amount of time it takes for a portfolio to achieve a new peak that surpasses the previous peak. A short period of time under water indicates a short recovery period, while a long period of time under water indicates that it takes longer to recover losses. This concept is related to maximum drawdown and is used to measure the recovery time of a portfolio. For more details.

Total Turnover: Total Turnover refers to the overall trading activity of a fund or portfolio, including both buying and selling of securities. It represents the rate at which a fund replaces its holdings with new ones, and is often used as a measure of a fund’s trading frequency and associated costs. Total Turnover is typically calculated by adding reported turnover to adjustments for changes in total net assets, investment returns, and mergers. For more details.

Tracking Error: Tracking error refers to the difference in returns between a portfolio and a reference benchmark, measuring how closely a portfolio tracks the benchmark. A low tracking error indicates that a portfolio’s performance is closely aligned with the reference, while a high tracking error indicates that a portfolio’s performance is not closely aligned. It is used to measure the consistency of a portfolio’s tracking performance over time, with annualized tracking error providing a measure of this consistency. For more details.

Unconditional Simulations: Unconditional simulations refer to a type of simulation used to simulate out-of-sample performances, helping to inform investment decisions by providing a broader view of potential outcomes. This type of simulation is offered by Scientific Portfolio, alongside conditional simulations, which are used for stress scenarios. Unconditional simulations provide a way to assess potential performance without being confined to observed returns. For more details.

Value Risk Factor: The Value Risk Factor measures the excess return of instruments with high intangible-adjusted book-to-market values compared to those with low intangible-adjusted book-to-market values. This factor captures the performance difference between stocks with high and low book-to-market ratios, providing insight into the value premium. It is one of the various risk factors used to evaluate fund characteristics and analyze portfolio returns. For more details.

Volatility: Volatility refers to the degree of uncertainty or fluctuation in the value of a financial instrument over time. It is a measure of the risk or instability of an investment, and is often used to describe the tendency of an asset’s price to change rapidly or unpredictably. In the context of finance, volatility is not stable over time and tends to cluster around its long-term average, making it a key consideration in decision-making and risk management. For more details.

Weighted Average Carbon Intensity: The Weighted Average Carbon Intensity (WACI) is a portfolio metric that measures the level of exposure to carbon-intensive companies. It takes into account the weight of each company in a portfolio and their emissions, normalized by company revenues or enterprise value. The WACI provides a way to assess the carbon footprint of a portfolio, giving investors insight into their exposure to carbon-intensive companies. For more details.

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