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Financial Accounting > ESG > Flashcards

ESG Flashcards

1
Q

Sources of pressure for ESG

A

▶Money flowing into sustainable investment funds.
▶ Shareholders sponsoring ESG-related proxy proposals.
▶ Institutional investor activism (e.g., BlackRock, Vanguard,
State Street).
▶ Employee activism.
▶ Third-party activism and NGOs.

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2
Q

Association btw CSR and cost of capital

A

Negative,
▶Investors respond strongly negatively to negative CSR
events
▶weakly negatively to positive (voluntary) CSR
events
▶ Financial analysts also downgrade their estimates in the
short- and long-run due to negative ESG news

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3
Q

Advantages of ESG

A

▶Reduce ESG risk
▶Increase cash flows in the future
▶Decrease cost of capital
▶Forecast Horizon: ESG is long term so benefits may exist not seen in an explicit forecast period
▶TV: Esg factors e.g. oil and gas could cause investors to believe a company will not exist forever

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4
Q

SRI Style: Positive screening

A

Pick stocks that perform well in ESG relative to peers

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5
Q

SRI Style: Engagement/active ownership

A

the use of shareholder power to influence corporate behavior through direct corporate engagement

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6
Q

SRI Style: Full Integration

A

is the explicit inclusion of ESG factors into traditional financial analysis of individual stocks (e.g., as inputs into cash flow forecasts and/or cost-of-capital estimates).

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7
Q

SRI Style: Negative Screening

A

the exclusion of certain sectors, companies, or practices from a fund or portfolio on the basis of specific ESG criteria.

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8
Q

SRI Style: Overlay / Portfolio tilt

A

tilting a portfolio towards a emissions goal or other ESG aspiration

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9
Q

SRI Style: Relative / Best in class screening

A

Pick stocks that perform well in ESG relative to peers

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10
Q

SRI Style: Thematic Investment

A

Invest in themes such as clean energy

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11
Q

SRI Style: Risk Factor/ Risk Premium Investing

A

Including ESG into risk analysis

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12
Q

How to integrate ESG into valuation

A

Sales: Integrate esg factors into forecasts by inc or dec company’s sales growth rate by an amount that reflects investment opportunities or risk

OPEX : Make assumptions about ESG effect on future operating costs and adjust them directly or before EBIT

Forecast horizon: ESG investments tend to be long, so longer forecast period

Terminal value: Esg factors could cause company to believe company or busines line will not exist forever

Beta or discount rate: Adjust when theres appearent ESG risk to company

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13
Q

Problems with board of directors?

A
  • Prioritize their own utility instead of shareholders
  • Agency Problem: take self-interested actions that are not in the interests of other stakeholders
  • Agency Costs: shareholders bear the cost of bad actions from the board
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14
Q

Board of Directors Mandate

A

Effective boards satisfy both

i. Advisory: consult with management regarding the strategic and operational direction of the company.
ii. Oversight: monitor company performance and reduce agency costs.

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15
Q

Board Independence

A
  1. Act solely in the interest of the firm.
  2. Free from conflicts that compromise judgment.
  3. Able to take positions in opposition to management
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16
Q

3 Board Committees

A

Audit, Compensation, Nominating

17
Q

Responsibilities of the auditing committee

A
  • Oversight of financial reporting and disclosure
  • Oversight of external auditors and regulatory compliance
  • At least 1 fin expert on committee
18
Q

Annual Election

A

Directors are elected to one-year terms.

19
Q

Staggered election

A

Directors are elected to three-year terms, with one-third of the board
standing for election each year.

20
Q

Why do boards use staggered boards

A
  1. Staggered boards are effective antitakeover protection.

2. Staggered boards may also insulate or entrench management.

21
Q

How do companies reduce director liability?

A

Exculpatory Provisions, Indemnification, Director and officer insurance

22
Q

Exculpatory provision

A

Company charter excuses director from liability for unintentional negligent acts.

23
Q

Indemnification

A

agreement that company will pay for costs associated with lawsuits (if director acted “in good faith”).

24
Q

Director and officers insurance (D&O)

A

insurance contract that covers litigation expenses, settlement payments, and in some cases damages.

25
Q

Audit Committee sets guidelines on (3)

A

Quality: Accuracy
Transparency: How free with procedures, data etc.
Internal Controls: Internal processes
They also hire external auditor

26
Q

Options for the board of the underperforming company

A
  1. Replace management

2. Sell the entire company to new owners

27
Q

Tender Offer

A

the acquirer makes an offer directly to the target shareholders to purchase their shares at a stated price.

28
Q

Proxy Contest

A

Acquirer asks target SH to elect a dissident slate of directors to approve the deal

Financial Accounting (5 decks)

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