ESG and carbon market glossary

The most common ESG and carbon market terms, explained in a few plain lines each. Click any term for the full definition.

• What are Scope 1, 2 and 3 emissions
• What is CBAM
• What is REDD+
• What is a carbon credit
• What is a carbon footprint
• What is a carbon offset
• What is double materiality
• What is greenwashing
• What is net zero
• What is the CSDDD
• What is the CSRD
• What is the GHG Protocol
• What is the SBCE (Brazil’s emissions trading system)
• What is the TCFD
• What is the voluntary carbon market

How these terms connect in practice

The glossary above is not a random list. Each term sits inside a chain that starts with measurement (GHG Protocol, Scope 1, 2 and 3, carbon footprint), moves to disclosure (CSRD, TCFD, double materiality), passes through target-setting (net zero), and ends with action instruments (carbon credits, offsets, CBAM, the voluntary carbon market, REDD+). Understanding where each concept falls in that chain prevents a common mistake: companies that jump straight to buying offsets before measuring their own emissions, which is the sequence most often flagged as greenwashing.

Measurement: where everything begins

The three scopes under the GHG Protocol

The GHG Protocol, maintained by the World Resources Institute and the World Business Council for Sustainable Development, splits a company’s greenhouse gas emissions into three scopes. Scope 1 covers direct emissions from sources the company owns or controls (factory furnaces, company vehicles). Scope 2 covers indirect emissions from purchased electricity, heat or steam. Scope 3 covers everything else in the value chain, from raw-material extraction to end-of-life treatment of sold products. For most companies, Scope 3 represents the largest share of total emissions, yet it is also the hardest to measure because the data depends on suppliers and customers.

The most frequent error practitioners make is treating Scope 2 as a single number. The GHG Protocol requires two Scope 2 figures: one calculated with the location-based method (using average grid emission factors) and one with the market-based method (reflecting specific energy contracts or renewable energy certificates). Reporting only one of the two does not comply with the standard.

Carbon footprint versus carbon inventory

A carbon footprint applies the GHG Protocol framework to a defined boundary (a product, an event, or an entire organization) and produces a single figure in tonnes of CO₂ equivalent. When that boundary is corporate, the exercise is often called a carbon inventory or GHG inventory. The distinction matters because product-level footprints follow ISO 14067, while organizational inventories follow ISO 14064-1 or the GHG Protocol Corporate Standard, and each standard carries different verification requirements.

Disclosure: who must report and how

CSRD and double materiality

The Corporate Sustainability Reporting Directive (CSRD) replaced the older EU Non-Financial Reporting Directive and expanded the number of companies required to publish sustainability reports. Under the CSRD, companies must apply double materiality, which means they assess both how sustainability issues affect the company (financial materiality) and how the company affects people and the environment (impact materiality). A topic is reportable if it is material under either lens. The first CSRD reports, covering fiscal year 2024, were due from companies that were already subject to the previous directive.

TCFD and its successor

The Task Force on Climate-related Financial Disclosures (TCFD) introduced four pillars for climate reporting: governance, strategy, risk management, and metrics and targets. After the International Sustainability Standards Board (ISSB) published its own standards (IFRS S1 and IFRS S2), the Financial Stability Board disbanded the TCFD in late 2023 and transferred monitoring responsibilities to the ISSB. Companies that previously followed TCFD recommendations now transition to IFRS S2, which incorporates the same four-pillar structure but adds more detailed requirements on scenario analysis and transition plans.

CSDDD

The Corporate Sustainability Due Diligence Directive (CSDDD) sits alongside the CSRD but covers a different obligation. While the CSRD is about disclosure, the CSDDD requires companies to identify, prevent and mitigate adverse human rights and environmental impacts across their value chains. After the Omnibus I amendments (Directive (EU) 2026/470), the obligation to adopt a climate transition plan was deleted and the directive applies from 26 July 2029 to companies with more than 5,000 employees and more than EUR 1.5 billion in net worldwide turnover.

Action instruments: credits, offsets and regulated markets

Carbon credits and carbon offsets

A carbon credit is a tradable certificate representing one tonne of CO₂ equivalent either removed from or prevented from entering the atmosphere. In compliance markets (such as the EU Emissions Trading System), credits are called allowances and are issued or auctioned by governments. In the voluntary market, credits are issued by independent standards such as Verra (which manages the Verified Carbon Standard) or Gold Standard. A carbon offset is the act of using a credit to compensate for emissions elsewhere. The distinction is practical: the credit is the instrument, and the offset is the transaction.

One unresolved challenge in the voluntary carbon market is the permanence of nature-based credits. A forest preservation project can reverse if the forest burns or is logged after the credit is issued. Registries address this with buffer pools (a percentage of credits held in reserve), but there is no universal rule on how large the buffer should be.

REDD+

REDD+ (Reducing Emissions from Deforestation and Forest Degradation, plus conservation, sustainable management of forests, and enhancement of forest carbon stocks) is a United Nations framework that creates financial incentives for developing countries to keep forests standing. REDD+ projects generate carbon credits that can be sold on the voluntary market. The plus sign in the name distinguishes the expanded scope (conservation and carbon-stock enhancement) from the original REDD concept, which covered only avoided deforestation.

CBAM

The Carbon Border Adjustment Mechanism (CBAM) is the EU’s tool to prevent carbon leakage, the risk that companies relocate production to countries with weaker carbon pricing. CBAM requires importers of certain goods (cement, iron, steel, aluminium, fertilisers, electricity, hydrogen) to purchase certificates matching the embedded emissions of those goods. Its transitional phase, during which importers report emissions without paying, started in October 2023. The definitive regime, with financial obligations, follows. For exporters outside the EU, CBAM means that the carbon cost of production now travels with the product across the border.

Net zero and greenwashing

Net zero means reducing greenhouse gas emissions as close to zero as feasible and balancing any residual emissions with permanent removals. The Science Based Targets initiative (SBTi) requires companies to cut value-chain emissions before using offsets for what remains, and limits the use of offsets to residual emissions only. Companies that claim net zero while relying primarily on offset purchases, without deep cuts to their own emissions, face greenwashing accusations. Greenwashing is not limited to climate claims; it covers any misleading representation of environmental credentials, and regulators in the EU and elsewhere have begun enforcing rules against unsubstantiated green claims.

Brazil: the SBCE and local context

Brazil established its own emissions trading system, the Sistema Brasileiro de Comércio de Emissões (SBCE), through Law 15.042, signed in December 2024. The system creates a regulated carbon market: under Article 30 of the law, operators emitting more than 10,000 tCO2e per year must monitor and report their emissions, and those above 25,000 tCO2e per year must also surrender allowances. Until the regulated market is fully operational, Brazil’s carbon market activity remains concentrated in the voluntary market, where the country is one of the largest global suppliers of REDD+ credits due to its tropical forest cover, particularly in the Amazon basin.

For operators in Brazil, the practical consequence is dual exposure. Companies that export to the EU must account for CBAM obligations on covered goods, while domestically they will need to comply with the SBCE once its cap, allocation rules, and registry are defined by the implementing regulations still under development. Companies that begin measuring and reporting their GHG inventories now, rather than waiting for the final SBCE rules, will be better positioned when compliance deadlines arrive.

Primary sources: GHG Protocol Corporate Standard, revised edition (WRI/WBCSD, 2004); Directive (EU) 2022/2464, Corporate Sustainability Reporting Directive (EUR-Lex, 2022); Directive (EU) 2026/470, Omnibus I amendments to the CSRD and CSDDD (EUR-Lex, 2026); Regulation (EU) 2023/956 establishing the CBAM (EUR-Lex, 2023); Law 15,042 of 11 December 2024, creating the SBCE (Planalto, 2024).