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
what used to be the main goal of business operations
making profit
what is Corporate Social Responsibility (CSR)
Concept that considers all stakeholders when making decisions and goes beyond just making profit while complying with laws and regulations
what does it mean when a business is implementing CSR (what do they do)
- 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
what become the new purpose of businesses
- 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)
how/why has CSR evolved over the years
there is more awareness and understanding of environmental issues and global social injustice problems
what are the levels in Carroll’s Pyramid
- economic responsibility
- legal responsibility
- ethical responsibility
- philanthropic responsibility
what is philanthropic responsibility in carroll’s pyramid
- Responsibility to give back to society
- Discretionary but still important
- Can be good marketing for the company
- Ex. charitable donations, staff time on projects
what is economic responsibility in carroll’s pyramid
- Responsibility of business to be profitable
- Only way to service and benefit society in the long-term
what is legal responsibility in carroll’s pyramid
- Responsibility to obey laws and other regulations
- Ex. employment, competition, healthy & safety
what is ethical responsibility in carroll’s pyramid
- Responsibility to act morally and ethically
- Go beyond narrow requirements of the law
- Ex. treatment of suppliers & employees
what is the triple bottom line (definition)
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)
what does the triple bottom line suggest
Business performance should be assessed based on: people, planet, and profit
what does it mean to assess the people of a business (TBL)
- Measures the extent to which business is socially responsible
- Hard to calculate & report reliably & consistently
what does it mean to assess the planet of a business (TBL)
- Measures impact of business on environment
- More tangible - ex. Amount of emissions, use of sustainable inputs
what does it mean to assess the profit of a business (TBL)
- Identified from the income statement
- Reliable figure; larger public businesses have the number audited
what does the triple bottom line measure
measures financial, social, and environmental performance of the business over a period of time
what are the benefits of adopting TBL
- Encourages businesses to think beyond narrow measure of performance (profit)
- Encourages CSR reporting
- Supports measurement of environmental impact & extent of sustainability
what are the drawbacks of TBL
- 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
what is the one bottom line
- 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
what are some things that are being measured in the social aspect of ESG
- Human rights
- work force
- Health and safety
- Corporate responsibility
what are some things that are being measured in the governance aspect of ESG
- Shareholder rights
- Board structure
what is Environmental, Social, and Governance (ESG)
3 key factors when measuring the sustainability and ethical impact of business:
- environmental
- social
- governance
what are some things that are being measured in the environmental aspect of ESG
- Environmental innovation
- Resource usage
- emissions
even though ESG reporting isnt mandatory in Canada, why should companies have ESG practices
- 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
how is ESG measured
- 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
how does ESG influence decision making
think how their decision would affect their ESG score & initiatives
how can having sustainable operations be beneficial for companies
gives them a competitive advantage
why is ESG an important topic in modern day business
- 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
how does ESG create value
- 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
what does it mean to be net zero
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
what is climate change
Long-term shift in global or regional climate patterns
what caused climate change
- 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
what is the Paris Agreement
- 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
what is net zero
A state in which greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere
how can net zero be accomplished
- Cutting output of greenhouse gas emissions
- Take emissions out of the air
what does IKEA do
- 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
what has LEGO done
- 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
what does Patagoina do
- “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
what did TELUS agriculture do
- 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
what is greenwashing
- 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
what happens when companies cause enormous damage to the environment
ruined their reputation, brand, customer loyalty, and company value
what was the Deepwater Horizon oil spill
- 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
what are the benefits of the social aspect
- enhances productivity, recruitment, & retention
- Doing this customers will care and like companies more
what is a provision
A liability with uncertainty about the timing of amount of future expenditure required
what did Volkswagen do
- 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
what are the requirements of a provision
- An entity has a present obligation as a result of a past event
- High probability that an outflow or resources (like cash) will be required to settle the obligation
- Reliable estimate can be made to understand the amount of the obligation
what happens when a provision is recognized
then it is recognized as a liability
what happens if any of the conditions of the provisions is not met
- no provision is recognized
- is a contingent liability instead
what is a contingent liability
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
where are contingent liabilities recorded
- Are not recognized as liabilities on the company’s financial statements
- Are disclosed in the notes to financial statements
what is the journal entry to set up a provision
DR expense
CR liability (the account it affects)
what is the journal entry to decrease a provision
DR liability
CR revenue/other income account/expense
*the opposite of increasing
what is the journal entry to increase a provision
DR Expense
CR liability (the account it affects
*by the amount it needs to increase by (same thing as setting up provision)
what is an example of a provision
warranties
what is the social aspect of ESG
Developing good relationships with ALL stakeholders
why is it important to have good relationships with stakeholders
- 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
what are examples of good “social”
- Supporting physical & mental health of staff
- Ensuring working conditions of suppliers
- Boosting diversity & inclusion; supporting minorities equally and supporting LGBTQ+ rights
what does diversity in a workplace do
brings together those that have different experiences, backgrounds, insights, philosophies, and can be more creative, producing better ideas
why is it important to have a good organizational culture
- 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
what is organizational culture
Collection of values, expectations, and practices that guide and inform the actions of all team members
what does it mean to have inclusion in the workplace
- celebrating the differences of others
- having people feel comfortable in the workplace
what should companies do about mental health
- support employees through mental health issues
- Should encourage a work environment that listens to, understands, and supports those that are going through tough times
why is strong corporate governance important
- 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
why is tone at the top important
If board members, CEOs, and top executive members lead, talk, and care able environmental and social issues, the rest of the company will follow
what is corporate governance about
- 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
why are people trying to make sustainability reporting frameworks
so companies can:
- Measure their progress towards ESG goals
- Have transparent reporting to shareholders
- Be able to compare ESG reporting
is sustainability reporting mandatory for a public company
no, but expected
what happens because there is no requirement & frameworks for sustainability reporting
- 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
what is an accounting framework many people follow
Global Reporting Initiative (GRI)’s GRI Standards
what is the current progress on sustainability reporting framework
- 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)
what has the IFRS Foundation made so far
- 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
