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AFM 182 > Chapter 5: Environmental, Social, & Governance (ESG) > Flashcards

Chapter 5: Environmental, Social, & Governance (ESG) Flashcards

Describe Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) Explain the concept of the triple bottom line Explain why companies should adopt environmentally friendly and social practices Provide examples of what companies are doing when it comes to ESG Communicate what is happening with sustainability reporting now and in the future Communicate key challenges to adopt ESG best practices

1
Q

what used to be the main goal of business operations

A

making profit

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2
Q

what is Corporate Social Responsibility (CSR)

A

Concept that considers all stakeholders when making decisions and goes beyond just making profit while complying with laws and regulations

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2
Q

what does it mean when a business is implementing CSR (what do they do)

A
  • When businesses address concerns and obligations to all possible stakeholders
  • They are doing more than what is required by law, and address societal needs and wants
  • Those that implement CSR consider all of their stakeholders, give back to the communities they operate in, and consider social & environmental issues when doing business
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2
Q

what become the new purpose of businesses

A
  • What can they do to make money in the most ethical way possible
  • provide value to their shareholders
  • do what is best for the people (employees, customers, communities)
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3
Q

how/why has CSR evolved over the years

A

there is more awareness and understanding of environmental issues and global social injustice problems

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3
Q

what are the levels in Carroll’s Pyramid

A
  • economic responsibility
  • legal responsibility
  • ethical responsibility
  • philanthropic responsibility
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3
Q

what is philanthropic responsibility in carroll’s pyramid

A
  • Responsibility to give back to society
  • Discretionary but still important
  • Can be good marketing for the company
  • Ex. charitable donations, staff time on projects
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4
Q

what is economic responsibility in carroll’s pyramid

A
  • Responsibility of business to be profitable
  • Only way to service and benefit society in the long-term
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5
Q

what is legal responsibility in carroll’s pyramid

A
  • Responsibility to obey laws and other regulations
  • Ex. employment, competition, healthy & safety
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5
Q

what is ethical responsibility in carroll’s pyramid

A
  • Responsibility to act morally and ethically
  • Go beyond narrow requirements of the law
  • Ex. treatment of suppliers & employees
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6
Q

what is the triple bottom line (definition)

A

A model that outlines that companies should commit to focusing as much on social and environmental concerns as they do on profits instead of one bottom line (profit/net income)

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6
Q

what does the triple bottom line suggest

A

Business performance should be assessed based on: people, planet, and profit

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7
Q

what does it mean to assess the people of a business (TBL)

A
  • Measures the extent to which business is socially responsible
  • Hard to calculate & report reliably & consistently
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7
Q

what does it mean to assess the planet of a business (TBL)

A
  • Measures impact of business on environment
  • More tangible - ex. Amount of emissions, use of sustainable inputs
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8
Q

what does it mean to assess the profit of a business (TBL)

A
  • Identified from the income statement
  • Reliable figure; larger public businesses have the number audited
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9
Q

what does the triple bottom line measure

A

measures financial, social, and environmental performance of the business over a period of time

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10
Q

what are the benefits of adopting TBL

A
  • Encourages businesses to think beyond narrow measure of performance (profit)
  • Encourages CSR reporting
  • Supports measurement of environmental impact & extent of sustainability
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10
Q

what are the drawbacks of TBL

A
  • Not very useful as an overall measure of business performance
  • Hard to reliably and consistently measure people & planet bottom lines
  • No legal requirement to report it
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11
Q

what is the one bottom line

A
  • Businesses try to maximize their profit
  • More profit = more business success
  • Share price is closely linked with business value
  • Bonuses employees get, or their work environment, is dependent on profit of the company
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11
Q

what are some things that are being measured in the social aspect of ESG

A
  • Human rights
  • work force
  • Health and safety
  • Corporate responsibility
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12
Q

what are some things that are being measured in the governance aspect of ESG

A
  • Shareholder rights
  • Board structure
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12
Q

what is Environmental, Social, and Governance (ESG)

A

3 key factors when measuring the sustainability and ethical impact of business:
- environmental
- social
- governance

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12
Q

what are some things that are being measured in the environmental aspect of ESG

A
  • Environmental innovation
  • Resource usage
  • emissions
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12
Q

even though ESG reporting isnt mandatory in Canada, why should companies have ESG practices

A
  • Businesses need to comply with the rules, regulations, and laws that governments, regulators, and policymakers, who made ESG commitments
  • Businesses need financing (through debt and equity) to grow into the future, and more lenders and investors are considering a company’s ESG strategy and performance before making investing decisions
  • Businesses need customers to generate revenue, and more customers are buying and demanding sustainable and ethically sourced products and services - they also expect great customer service to stay as a customer of the company
  • Businesses need to attract and retain talented employees, who are looking for purpose driven companies that care about social and environmental issues
  • Businesses need to work with suppliers that require social relationship building and fair trade
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13
Q

how is ESG measured

A
  • Those that implement ESG measure their sustainability performance through quantifiable metrics that can be monitored over time
  • Each company can be ranked based on what they are doing in terms of ESG, to get a ESG score
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13
Q

how does ESG influence decision making

A

think how their decision would affect their ESG score & initiatives

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14
Q

how can having sustainable operations be beneficial for companies

A

gives them a competitive advantage

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14
Q

why is ESG an important topic in modern day business

A
  • Climate change needs to be addressed; governments & businesses are making commitments to reduce negative impacts on the environment
  • Shareholders & investors expect companies to have long-term sustainability & transparent ESG reporting
  • Customers are demanding sustainable products/services
  • Talented employees are looking to work for purpose-driven companies
  • Sustainability reporting will be a requirement for public companies in the future
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15
Q

how does ESG create value

A
  • Achieves stronger revenue growth by offering customers sustainable products/services and achieving better access to resources
  • Drives cost reduction from lower energy consumption, reduction in waste & resources needed in a company’s value chain
  • Can get subsidies and support from the government
  • Increases employee productivity and attracts top talent
  • Enhances returns by allocating capital (money) to investments that are more sustainable in the long term
16
Q

what does it mean to be net zero

A

Means reducing greenhouse gas emissions and/or make sure that the amount of emissions going out in the atmosphere is balanced with the same amount being removed

16
Q

what is climate change

A

Long-term shift in global or regional climate patterns

17
Q

what caused climate change

A
  • Consumed a lot of natural resources that end up emitting greenhouse gases into the atmosphere
  • Greenhouse gases trap heat from the sun in the planet, making it hotter
17
Q

what is the Paris Agreement

A
  • An international treaty on climate change
  • Commitments countries made to minimize long-term temperature increases
  • Many governments made goals to be net-zero by 2050
  • Companies have the same goal
18
Q

what is net zero

A

A state in which greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere

18
Q

how can net zero be accomplished

A
  • Cutting output of greenhouse gas emissions
  • Take emissions out of the air
19
Q

what does IKEA do

A
  • Inspires other furniture retailers to take action toward doing business in a way that is planet and people positive
  • Being circular & climate positive: Design products to be repurposed, repaired, reused, resold, and recycled, Using more sustainable resources like cotton and wood, Offering plant based foods
  • Healthy & sustainable living: Developing new products, A product that attaches to taps and can reduce the amount of water you’re using when you’re washing your hands, Textiles and other devices that can help clean the air in the home, Products to help people grow vegetables in their own home
  • People & planet positive: Empowering and engaging employees to share their lives at home to inspire and enable others to be more sustainable in their life
19
Q

what has LEGO done

A
  • Already has gone net-zero
  • Invested in renewable energy to offset energy consumed by their manufacturing process
  • Want to make a positive impact on the planet
  • Reduced the energy they used to make each LEGO by 10%
  • Plan for energy consumption to be 100% balanced by renewable energy by 2020
  • Built 2 offshore wind farms that allows them to generate as much renewable energy as they consume when manufacturing their LEGO
  • wind farms provides clean power for more than 500,000 households
20
Q

what does Patagoina do

A
  • “In business to save our home planet”
  • Gave grants in 2018 to different environmental groups
  • Donated more than 13,000 hours of skilled volunteering
  • Worn Wear; Repaired 100,288 pieces of clothing in 2018
  • Recycled 6,797 pounds of clothing
  • Offers fair trade products
  • Supports fair trade programs
21
Q

what did TELUS agriculture do

A
  • With partnership of Persephone Pilsner
  • Using technology to brew more sustainable, tech-traceable beer
  • Mission: to improve the flow of information across the food value to enable a safer, more sustainable food system
  • Ensure all steps in the creation of the beer is sustainably produced and traceable
  • Dedicated to farming and brewing sustainably
  • Helping farmers find profitable, traceable, and sustainable practices
21
Q

what is greenwashing

A
  • When a company spends resources to market themselves as environmentally friendly rather than actually minimizing their environmental impact
  • Can mislead consumers that don’t do enough research before buying products/services
22
Q

what happens when companies cause enormous damage to the environment

A

ruined their reputation, brand, customer loyalty, and company value

22
Q

what was the Deepwater Horizon oil spill

A
  • largest offshore oil spill caused by BP, an oil and gas company
  • happened in April 2010
  • Oil spread throughout the Gulf, and affected the entire Gulf ecosystem; whatever lived in the Gulf, and those that use the natural resources of the Gulf
  • Had to pay ~$60B in criminal and civil penalties, natural resource damages, economic claims, and cleanup costs
  • Gulf still not restored
22
Q

what are the benefits of the social aspect

A
  • enhances productivity, recruitment, & retention
  • Doing this customers will care and like companies more
23
Q

what is a provision

A

A liability with uncertainty about the timing of amount of future expenditure required

23
Q

what did Volkswagen do

A
  • Used software to manipulate results from emission testing to avoid the pollution standards
  • Has to recall their vehicles that they manipulated the results for
  • Had negative environmental impacts
  • Destroyed company value and customer loyalty
  • Share prices fell when scandal broke out
23
Q

what are the requirements of a provision

A
  1. An entity has a present obligation as a result of a past event
  2. High probability that an outflow or resources (like cash) will be required to settle the obligation
  3. Reliable estimate can be made to understand the amount of the obligation
24
Q

what happens when a provision is recognized

A

then it is recognized as a liability

25
Q

what happens if any of the conditions of the provisions is not met

A
  • no provision is recognized
  • is a contingent liability instead
25
Q

what is a contingent liability

A

A possible obligation that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events, which are outside of management’s control

26
Q

where are contingent liabilities recorded

A
  • Are not recognized as liabilities on the company’s financial statements
  • Are disclosed in the notes to financial statements
26
Q

what is the journal entry to set up a provision

A

DR expense
CR liability (the account it affects)

27
Q

what is the journal entry to decrease a provision

A

DR liability
CR revenue/other income account/expense
*the opposite of increasing

27
Q

what is the journal entry to increase a provision

A

DR Expense
CR liability (the account it affects
*by the amount it needs to increase by (same thing as setting up provision)

27
Q

what is an example of a provision

A

warranties

28
Q

what is the social aspect of ESG

A

Developing good relationships with ALL stakeholders

28
Q

why is it important to have good relationships with stakeholders

A
  • These relationships can make or break business because society expects a lot from them - how they are treating the stakeholders
  • About company’s impact on society (good & bad)
  • Bad “social” = bad company image
  • can affect their performance and damage value chains
  • Boycotts and social media can affect sales, reputation, and recruitment
28
Q

what are examples of good “social”

A
  • Supporting physical & mental health of staff
  • Ensuring working conditions of suppliers
  • Boosting diversity & inclusion; supporting minorities equally and supporting LGBTQ+ rights
29
Q

what does diversity in a workplace do

A

brings together those that have different experiences, backgrounds, insights, philosophies, and can be more creative, producing better ideas

30
Q

why is it important to have a good organizational culture

A
  • encourages employees to be themselves and feel valued, appreciated, respected, and included
  • Culture helps companies differentiate from competitors
  • Unique culture = unique business that stands out
30
Q

what is organizational culture

A

Collection of values, expectations, and practices that guide and inform the actions of all team members

30
Q

what does it mean to have inclusion in the workplace

A
  • celebrating the differences of others
  • having people feel comfortable in the workplace
31
Q

what should companies do about mental health

A
  • support employees through mental health issues
  • Should encourage a work environment that listens to, understands, and supports those that are going through tough times
31
Q

why is strong corporate governance important

A
  • Strong corporate governance needs to be put in place for a company to successfully adopt the best environmental and social practices
  • turns good environmental and social intentions into good practice
  • Provides structure, accountability, transparency, making sure business is ethical
32
Q

why is tone at the top important

A

If board members, CEOs, and top executive members lead, talk, and care able environmental and social issues, the rest of the company will follow

32
Q

what is corporate governance about

A
  • how are companies directed, operate, and make their decisions
  • doing business ethically while protecting the planet and considering all stakeholders in the decision-making process
  • Important for long-term success
33
Q

why are people trying to make sustainability reporting frameworks

A

so companies can:
- Measure their progress towards ESG goals
- Have transparent reporting to shareholders
- Be able to compare ESG reporting

33
Q

is sustainability reporting mandatory for a public company

A

no, but expected

33
Q

what happens because there is no requirement & frameworks for sustainability reporting

A
  • Companies are doing sustainability reporting differently
  • Some are thorough, transparent, and accurate in their reports
  • Others have none or are low quality reporting and disclosures
  • Companies can choose what to include and what to exclude in their reporting making their initiatives look good
33
Q

what is an accounting framework many people follow

A

Global Reporting Initiative (GRI)’s GRI Standards

34
Q

what is the current progress on sustainability reporting framework

A
  • IFRS Foundation made a board called the International Sustainability Standards Board (ISSB)
  • ISSB consists of Climate Disclosure Standards Board (CDSB) & Value Reporting Foundation
  • Value Reporting Foundation is made up of International Integrated Reporting Framework (IIRF) and Sustainability Accounting Standards Board (SASB)
  • IFRS is collaborating with Global Reporting Initiative (GRI)
34
Q

what has the IFRS Foundation made so far

A
  • exposure drafts of framework
  • not mandatory as its not linked to IFRS accounting standards
  • identifies key stakeholders of the reporting
  • fair presentation of sustainability related risks and opportunities

AFM 182 (11 decks)

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