1 Demand for Sustainability Information

Question 1

What is a common language required for such a broad and diverse group of professionals to communicate?

Answer 1

Accounting

Question 2

As non-financial value drivers have grown in significance, what are the two opposing challenges?

Answer 2

1) often more than enough information is available from large companies but it lacks comparability, reliability and usefulness for investor decision-making and
2) yet, there is also not enough investor-grade information from companies beyond large multinationals to be able to fully assess sustainability opportunities and risks

Question 3

SASB addresses this need by developing industry-specific standards that help companies disclose what three types of information to bring companies and investors around to what is material?

Answer 3

1) financially material
2) decision-useful
3) cost-effective

Question 4

What are three ways the history of financial disclosure illuminates and underpins the need for sustainability disclosure in capital markets?

Answer 4

1) core objectives
2) defining developments
3) past shortcomings

Question 5

What is the definition of sustainability from 1987 Brundtland Report?

Answer 5

“make development sustainable to meet the needs of the present without compromising the ability of future generations to meet their own needs”

Question 6

Companies and investors have come to a shared realization that financial returns and value creation can be sustained only if companies are: (2 things)

Answer 6

1) well governed
2) social and environmental assets underlying returns are not depleted

Question 7

What are three ways investors use sustainability information?

Answer 7

1) improve their ability to achieve above-market returns
2) reduce risk and volatility, and protect against diminished returns,
3) improve environmental and social investment outcomes with financial returns as an equivalent or secondary consideration

Question 8

What is the relationship found in the research of ESG to stock price?

Answer 8

Research demonstrates companies committed to sustainability out perform in the marketplace.
For example, in a Harvard study, $1 in 1993 for value-weighted portfolio outperformed the control

Question 9

What are four types of influences sustainability has on profitability?

Answer 9

Sustainability improves profitability by:
1) reducing costs
2) improving worker productivity
3) mitigating risk potential
4) creating revenue-generating opportunities

Question 10

What is the relationship of sustainability to price and earnings per share volatility?

Answer 10

High sustainability firms lowers volatility. Companies with lower ESG averaged 92% more volatility in a study, versus the higher ESG companies were the lowest volatility

Question 11

What is the only reliable predictor of earnings per share volatility?

Answer 11

Sustainability (or ESG)

Question 12

What is an additional benefit that reseach found for investors who bought only above-average ESG stocks?

Answer 12

Avoided losses. They would have avoided 90 percent of the bankruptcies that occurred in the S&P 500. Likewise, poor ESG performers have a higher likelihood of major credit events.

Question 13

What are three ways that Equity and Fixed Income Investors rely on sustainability information?

Answer 13

1) support risk analysis
2) identify signals of future volatility and value declines
3) protect portfolio value

Question 14

What are three ways that Private Equity Investors rely on sustainability information?

Answer 14

1) improve portfolio performance
2) mitigate risk
3) generate alpha

Note: the research here is weaker given private markets are more opaque

Question 15

A 2015 meta analysis showed a positive correlation of what?

Answer 15

sustainability performance and financial performance

sustainability enhances companies’ ability to achieve financial objectives

Question 16

What are two reasons that there is a demand for sustainability information within companies?

Answer 16

1) can help provide insight into financial performance
2) contributes to success

Question 17

What do 94% of CEOs believe with regard to sustainability issues?

Answer 17

They are important to the future success of their business and drive a competitive advantage

Question 18

What percent of companies are seeing business value from sustainability through revenue growth?

Answer 18

40

Question 19

90 percent of the studies on the cost of capital show sound sustainability standards do what?

Answer 19

Lower the cost of capital

Question 20

What are two examples of policy-based initiatives that stimulate sustainability disclosure in order to foster more stable, sustainable economies?

Answer 20

enacting national recommendations or

enacting national requirements

Question 21

The European Commission has an Action Plan with what three core categories?

Answer 21

1) reorienting capital flow towards a more sustainable economy
2) mainstreaming sustainability into risk management
3) fostering transparency and long-termism

Question 22

Name five examples of individual nations that have already taken up policy on sustainability disclosure

Answer 22

Australia, India, Japan, South Africa, United Kingdom

Question 23

What is the focus of Sustainable Stock Exchanges?

Answer 23

A global platform for exploring how exchanges in collaboration with investors, companies, regulators and policymakers can enhance ESG performance and encourage sustainable investment

Question 24

Name four international industry bodies that are making statement that contribute to the growing demand for sustainable information in the market

Answer 24

Accountancy Europe

Global Asset Owner Forum

Global Financial Markets Association

International Corporate Governance Network

Question 25

What do the realized benefits of sustainability information represent in the evolution of capital markets?

Answer 25

A natural continuation in the evolution of disclosure expectations

Question 26

CHECK FOR UNDERSTANDING:
Why are investors demanding quality sustainability information?

Answer 26

Investors source quality sustainability information to meet their investment goals. While investors are generally defined as people or organizations that allocate
financial capital with the goal of achieving a profit, investors are not a monolith. Investment goals and accompanying strategies may include using the information to achieve above-market returns, assessing risk to protect against diminished returns and
major losses, or evaluating the predictability of investment outcomes. Whether operating
in public or private markets, the ability of investors to use financially material sustainability information to achieve enhanced outcomes is evidenced by an increasingly
robust body of independent research. The channels through which investors demonstrate demand for sustainability information from companies vary, as discussed in Chapter 10.

Question 27

CHECK FOR UNDERSTANDING: What factors drive demand for quality sustainability information within companies?

Answer 27

Sustainability data, both qualitative and quantitative, can contribute to company success in the near, medium, and long term by improving the management of sustainability-related risks and opportunities. Where key performance indicators (KPIs) are measured and managed, companies may be better equipped to identify and mitigate risks, reduce costs, optimize efficiencies, and even increase market share and revenue growth through new products and services. Indeed, by demonstrating an ability to manage sustainability-related risks and opportunities to bolster company performance, companies can leverage sustainability disclosure to effectively communicate with investors and improve cost of capital. Simply put, demand for sustainability information within companies is often (though not always) driven by the goal to improve bottom-line performance.

Question 28

CHECK FOR UNDERSTANDING: Besides companies and their investors, what other institutions influence demand for sustainability information?

Answer 28

Other organizations, both public and private, influence the global ESG dialogue. International, national, and local policy-based initiatives stimulate sustainability disclosure by passing recommendations and guidance, as well as regulatory requirements, for the disclosure of sustainability information from publicly-listed companies. Non-policy efforts, particularly those initiated by securities exchanges and industry associations, increasingly encourage sustainability disclosure among listees and members.