A short glossary.

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

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.

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.

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

FPA

Forward Purchase Agreement; bilateral contract for the future delivery of carbon units against pre-agreed price, quantity, and quality terms.

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.

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

MSCI

Morgan Stanley Capital International; financial index and analytics provider, publisher of MSCI Climate Value-at-Risk.

N

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.

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.

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.

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 decarbonisation policy, technology and market shifts reprice assets. It is the channel through which most institutional climate models translate climate change into portfolio losses, and it operates through the carbon price. 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.