Ethics and sustainability Flashcards
Ethical issues
Ethics forms an important part of the SBM syllabus and will make up 5 – 10% of your
exam.
In SBM, ethical issues are likely to be more subtle than those covered in your earlier
studies and may be embedded in questions.
1.1 Types of ethical issue
A wide range of different types of ethical issues are potentially examinable in SBM,
including:
Lack of professional independence
Conflict between the accountant’s professional obligations and their
responsibilities to the organisation
Attempts to intentionally mislead key stakeholders
Conflicts of interest among stakeholders or senior management
Doubtful accounting or commercial practice
Inappropriate pressure to achieve a reported result
Breaches of laws, regulations or standards
1.2 Ethics in the exam
It is likely that you will be expected to:
Identify relevant ethical issues and explain their implications
Discuss alternative courses of action to address the issues (if relevant)
Suggest practical recommendations to mitigate the issues
Ethics and sustainability 1.3 Exam technique
Identify issues from the scenario; you can use the following to generate ideas:
– Do we need to establish the facts
– Have there been breaches of laws/regulations
– Does the ICAEW code of ethics apply (only relevant if a professional
accountant is involved in the issue)
– Business ethics – has the company behaved in a way that has failed to
live up to society’s expectations
Explain the implications of the ethical issues – include ethical language (Section
1.5). You can use the following to help explain the implications:
– Effect – Is a certain group of stakeholders being hurt?
– Fairness – Would a reasonable third party consider it fair?
– Transparency – Is the company reluctant to let others know about it?/has
the company made misleading statements?
– Legality
Discuss alternative courses of action to address the issues (if relevant)
Suggest practical recommendations/safeguards
Note: Ethical issues can be positive or negative (particularly, when the question asks
you to discuss ethical issues).
Ethics and sustainability Generic issues relating to business ethics
Misleading statements/non-disclosure of information
Mistreatment of staff (poor pay, redundancies, discrimination, etc.)
Issues in the supply chain (breach of contract, abuse of power, unfair prices etc.)
Aggressive/misleading advertising
Unsafe or socially undesirable manufacturing processes
Product quality/safety
Corporate social responsibility/sustainability
Weak corporate governance
Ethics and sustainability 1.4 Ethics, data and Artificial Intelligence (AI)
Organisations are collecting and using increasing amounts of data. A company will
create an image of trust in order to collect the data and must act in an ethical manner
when securing and using the data provided.
One of the uses of big data is individualised marketing, but this potentially excludes
customers from offers, or price categories. A company must use the data they
collect fairly and without bias.
Currently the speed of updates in data analysis is faster than the regulations can be
produced. Some companies will adopt voluntary codes of conduct when processing
data, but handling the data in an ethical manner goes beyond this.
This can be extended to AI, which is based on algorithms written by humans. Any
bias included within the algorithm will be reflected in actions taken for the company.
This could lead to reputational damage.
Ethics and sustainability 1.5 The ICAEW Code of Ethics for members & Threats to the fundamental principles
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
Threats to the fundamental principles
Self-interest
Self-review
Advocacy
Intimidation
Familiarity
Bribery Act 2010 states that bribery is an intention to encourage or induce
improper performance by any person, in breach of a duty. See section 2.4
in chapter 19 of the ICAEW Workbook
Ethics and sustainability Potential conflicts between ethics and business
Cultivating and benefiting from relationships with legislators and governments
Fairness of labour contracts
Privacy of customers and employees
Capturing and storing data
Terms of trade with suppliers
Product and production problems
Supply chain – ethics v cost
Prices to customers
Managing cross-cultural businesses
Marketing
Tax strategy
Companies that focus on sustainability may have to compromise elsewhere
causing an ethical dilemma
Ethics and sustainability Corporate social responsibility Definition
Corporate social responsibility (CSR): Is a belief that a firm owes a responsibility
to society and stakeholders.
A firm with good CSR goes beyond its minimum contractual obligations to its
stakeholders.
This is also a wide concept, covering all stakeholder groups.
CSR issues could include:
Protecting the environment
Staff welfare
Customer welfare
Using fair trade suppliers
Charitable giving
Ethics and sustainability Ethics and sustainability Sustainability and ESG
Sustainability is becoming a much more important issue to societies as a whole.
This is a wide concept and is not limited to ‘green’ issues. There are three main types
of issues to consider (Triple Bottom Line):
Social (People) – e.g. negative impact on society due to low pay, lack of
diversity etc.
Environmental (Planet) – e.g. pollution and climate change etc.
Economic (Profit) – e.g. lack of economic growth, leading to fewer opportunities
in the future and lower taxes to fund public spending
These are also good headings to use if you are asked about measuring
sustainability. They are the criteria that the Dow Jones Sustainability Index uses to
assess sustainability.
Organisations should also consider how environmental, social and governance
(ESG) issues could affect their ability to create and maintain value.
The words sustainability and ESG are sometimes used interchangeably. However,
sustainability focuses on a world which nature can afford, whereas ESG focuses on
enterprise value.
Ethics and sustainability Ethics and sustainability Sustainability and ESG
Sustainability: The ability to meet the needs of the present without
compromising the ability of future generations to satisfy their own
needs.
Impacts: Considerations need to take place on the impact that a company has on
the environment, such as waste and pollution.
Dependencies: Considerations are also needed on how the environmental, social
and governance issues affect a company, such as minimum wage and climate
change.
It is important to recognise that a company both impacts and is dependent on the
environment.
Environmental cost: The cost of making sure that a company’s activities do not
damage the environment or that any such damage is put right. These include:
Conventional costs – such as the cost of raw materials
Potentially hidden costs – such as those included within general overheads
Contingent costs – costs to be incurred at a future date
Image and relationship costs – such as marketing costs.
Social cost: The total cost to society of a new venture or project. These may be
positive (creation of jobs) or negative (noise pollution). A social cost-benefit analysis
is recommended for new projects.
Environmental management accounting (EMA): EMA attempts to highlight the
costs associated with ESG for better reporting and decision making. This could be
analysed further into environmental activity based costing or some other technique to
identify the drivers of the costs.
Greenwashing: This occurs when a company makes false or misleading statements
about their environmental credentials. This may not be deliberate, or may not be
verifiable and could be an ethical dilemma within the exam.
Double materiality: Double materiality means considering the sustainability issues
that affect financial risks (financial materiality) as well as issues that affect people
and the environment (impact materiality).
Ethics and sustainability 3.2 ESG (Environmental, social and governance)
ESG considers the impact of environmental, social and governance issues on the
enterprise value.
Environmental issues relate to the natural environment and systems, including
biodiversity loss, greenhouse gas emissions (GHG) and climate change.
GHG emissions include direct emissions (Scope 1), indirect emissions (Scope 2) and
supply chain emissions (Scope 3). Data on these can be difficult to track. GHG
emissions need to be reduced to prevent the worst effects of climate change.
Climate change issues include the issues associated with transition to net zero.
Climate change can also affect future estimated cash flows or values of assets. For
example – new regulations can shorten the useful lives of assets.
Social issues relate to the rights, wellbeing and interests of people and
communities.
Governance issues relate to the governance of companies and other investee
entities, including board structure, pay and business ethics.
Investors are increasingly expecting the companies they invest in to adopt objectives
relating to ESG in addition to their financial objectives.
Ethics and sustainability 3.2 ESG (Environmental, social and governance) 3.3 Role of Chartered Accountants
Accountants can assist with ESG reporting in several ways:
Mandatory reporting requirements – climate related disclosures are mandated
for listed companies and accountants have a role in collecting and reporting this
information
Regulations – reviewing compliance with regulations
Taxes and tariffs – reviewing compliance with taxes
Grants – assist with applying for grants and compliance with any conditions
Assurance – compliance audits or audits of sustainability reports may be
required
Risk management – it is important to identify risks relating to sustainability when
reviewing a scenario
Strategy – when appraising strategies, it is important to assess the impact of the
strategy on ESG. The firm should aim to adopt strategies that will deliver a
long-term competitive advantage
Finance – investors prefer to invest in a company whose activities are
environmentally and socially sustainable. Green finance may be available for
some projects
Governance – the board has a key oversight role in ensuring that the
organisation effectively monitors and manages ESG factors. A social and
ethics committee should be set up, which recognises the critical role of
stakeholders in the governance process. It should have a strong focus on
opportunity management as well as risk management
Performance management – companies with strong ESG practices tend to be
lower risk and better financed long-term. Selecting important measures to
monitor ESG performance can play an important role in ensuring that an
organisation is complying with their targets.
Supply chain management – organisations should ensure that other members
of the supply chain adhere to the organisation’s ethical and ESG standards.
Whilst companies do not control their suppliers, they can choose whom to
transact with. Companies should perform supplier due diligence prior to
commencing supply chain transactions.
Ethics and sustainability ESG 3.4 Performance measurement
Accountants may need to advise on suitable metrics to measure performance and
provide assurance to check compliance. Materiality analysis is important to help a
company identify the most important sustainability related issues to focus on.
These metrics should be integrated with traditional KPIs and to promote them within
the organisation, ESG targets should be linked to remuneration packages.
Challenges:
Lack of comparability – as companies can choose which ESG metrics they want
to report on.
Difficult to measure outcomes – i.e. employee satisfaction
Lack of assurance – as it is not subject to a company’s normal assurance and
control processes
Greenwashing
Whilst ESG is important for all companies and can lower costs, these savings can
often be in the longer term. SMEs may struggle with the initial cost of implementing
these new strategies and may also struggle with the knowledge and skills required to
implement them as they typically have fewer resources than large rivals.
Ethics and sustainability ESG ratings
In recent years we have seen the emergence of ESG rating agencies. They
measure a company’s exposure to ESG risks and opportunities and determine its
long-term sustainability. These ratings can also influence finance and brand image.
One of the key players is MSCI who grade a company’s ESG risks within a range
from CCC to AAA, where AAA is regarded as a company leading its industry in
managing risks.
