P1 Chp1: How a company's circumstances influence material sustainability issues

Question 1

How does the example of two analysts interpreting the same debt-to-equity ratio for a given company and arriving at different conclusions relate to SASB reported data?

Answer 1

How a company, an investor, or another interested party ultimately uses or interprets SASB reported data can, and likely will, vary. Viewpoint and outlook can determine not only how sustainability data are interpreted and used, but also which data are deemed most relevant.

Question 2

What does the fact that characteristics that define safe products in food retail being very different from the characteristics that define safe products in health care exemploy as it relates to pervasive sustainability matters?

Answer 2

It’s not possible to fully understand a company’s performance in the absence of knowing its industry-level risks and opportunities.
The impacts of these can be highly nuanced, affecting different industries in unique ways. Understanding these unique profiles can help a company better manage the issues most likely to present material risks and opportunities to their business.

Question 3

Explain how companies experience with climate change impacts will vary by industry using the oil-and-gas industry compared to the commercial banking sector.

Answer 3

Oil-and-gas will have to consider how the transition to a low-carbon economy will affect the value of their reserves

Commercial banks must respond to mounting investor and regulatory pressure to monitor and manage financed emissions, which indirectly expose them to climate-related risks that could deminish returns and reduce enterprise value

Question 4

Describe the pure play operating model and why it matters for SASB

Answer 4

Each disclosure topic within a given SASB Standard is likely to apply to companies whose characteristics and operating environment are typical for the industry, which is “pure play”.

Companies may operate using a model that deviates from that of the typical company, so not all sustainability topics within a Standard may apply, and topics from more than one industry standard may apply.

Question 5

Describe an example in the Electric Utilities & Power Generation industry related to “pure play” operating model

Answer 5

This SASB standard covers generation and transmission of electricity, but a company may provide only transmission services, in which case disclosure topics aimed at capturing electric generation likely will not apply.

Question 6

Describe the complexity of hotel casinos as it relates to “pure play” operating model

Answer 6

There are SASB standards separately for Casinos & Gaming, and for Hotels & Lodging. Hotel casinos that provide both services will likely find disclosure topics from both industry Standards to capture the financially material impacts of sustainability issues.

Question 7

What are the five things one must do to fully assess the financial impacts of sustainability on a company?

Answer 7

1) Understand a company’s sustainability profile
2) Evaluate the internal operating factors that influence material sustainability issues
3) Evaluate how external operating context influences material sustainability issues
4) Understand all relevant sustainability topics
5) Assess the materiality of said sustainability topics in context

Question 8

What are the two learning objectives tied to “How a Company’s Circumstances Influence Material Sustainability Issues”? (Chapter 1)

Answer 8

1) Evaluating a company’s internal operating factors to determine userful changes to the sustainability topics identified in the company’s industry standard
2) Evaluating a company’s external operating context to determine useful changes to the sustainability topics identified in the company’s industry standard

Question 8

To begin to understand the sustainability profile of a company, we can benefit from investigating which three primary considerations?

Answer 8

1) Social license to operate
2) Use of common capitals
3) Costs to society, or externalities

Question 9

What are four characteristics of industries that have an extensive social license to operate? And name 1-2 industries that exemplify each characteristic.

Answer 9

1) operate as quasi public services (utilities, student loan providers, telephone and cable companies, transportation authorities)

2) have access to exclusive use of a public good (e.g. utilities, health care)

3) benefit from intellectual property protection (e.g. media, biotech, technology

4) have a fiduciary duty that extends beyond shareholders (e.g. finance and professional services)

Question 9

(two part answer) There is in effect a “social contract” that companies must fulfill or maintain. A company’s financial performance depends on both its ability to _______________ and the cost of ___________.

Answer 9

[A company’s financial performance depends on both…]
ability to make socially impactful activities profitable
and
the cost of regulation should it fail to address social issues

Question 9

What is an example of social license to operate for utilities and telecom companies?

Answer 9

They can be granted monopoly status with the understanding that they will provide universal access and/or face regulated rates

Question 9

What is the definition for “social license to operate”?

Answer 9

the ongoing acceptance of a business from the local, regional, or national community.

Question 9

In return for an extensive license to operate or for certain concessions that other industries do not receive, firms in specific industries are expected to do what?

Answer 9

Fulfill certain social goals or else to have restrictions placed on some aspect of their operations

Question 10

What is the definition of “Use of common capitals”?

Answer 10

Use of common capitals includes elements as varied as water and employees. These are non-financial capitals available to an industry as a source of value creation but not owned or controlled by the companies in that industry.

Question 11

What are common capitals particularly susceptible to?

Answer 11

mismanagement

Question 12

To continue to derive long-term value from sources of common capital, a company may need to do what?

Answer 12

dedicate resources to the management of related sustainability issues

Question 13

Describe two examples for the use of common capitals in the electric utilities industry related to water and technology industry related to workforce

Answer 13

1) A company that generates electricity and needs water for cooling might come with an obligation to manage the water in a way that mitigates environmental impacts
2) a technology company relying on a highly skilled workforce will need to manage its human capital effectively to attract and retain talent

Question 14

What are three kinds / examples of common capitals?

Answer 14

1) natural capital such as forests, air, mineral deposits and water - note that local / regional / national authorities can lease or allow access
2) public infrastructure such as roads and waste water systems
3) human capital such as workforce

Question 15

What is the definition of costs to society or externalities?

Answer 15

Costs to society, also called externalities, are a diverse range of impacts that result from a company’s operations; they are costs that do not currently affect a company’s financial performance but tend to be internalized over time, such as through the depletion of key resources used in production, fines and penalties, lawsuits, additional regulations, depreciation of brand value, and/or shifts in consumer demand.

Question 16

What is an example of a positive externality?

Answer 16

Pharmaceutical companies produce vaccines that benefit public health - not just the consumer - and thus result in positive impacts on society. In addition, governments often subsidize vaccines to gain high levels of consumption and thus spread the benefits more widely throughout society.

Question 17

What are five examples of activities that can create externalities?

Answer 17

1) effluents and emissions that affect public health and reduce property value

2) business operations that bolster the economic well-being of surrounding communities

3) outsourcing and offshoring that economically impact surrounding communities

4) high incidents of corruption that harm broader economic performance and efficiency resources allocation

5) significant greenhouse gas (GHG) emissions that contribute to atmospheric warming

Question 18

How did SASB use the three considerations that shape each industry’s sustainability profile historically and what do they serve as today?

Answer 18

Social license to operate
Use of common capitals
Costs to society / externalities

Historically the research team relied on these thress as part of the process of defining industries into the Sustainable Industry Classification System (SICS), and now they are a helpful entry point for understanding the sustainability profile of an industry and to work more effectively with the SASB Standards

Question 19

Although firms in the same industry may share commonalities, what are three ways they can vary?

Answer 19

1) operating in different regions
2) employing different factors of production
3) integrating differently such as vertically within supply chain or horizontally across product markets

Question 20

If a company is pure play, what do you know about its SASB Standards?

Answer 20

The topics and metrics fit the busienss neatly

Question 21

If a company is not pure play, what do you hae to consider regarding the industry norms reflected in the SASB Standards?

Answer 21

you must closely examine the company’s circumstances to identify whether some disclosure topics are not relevant and/or whether additioanl disclosure topics might be relevant to provide a complete picture of its performance on key sustainability factors;

it is important to identify the distinguishing features that indicate how a company might differ from the typical company in its industry and how to interpret those features.

Question 22

What are the two general types of factors a company’s differences from the SICS industry can arise from?

Answer 22

1) Operations (internal factors)
2) Operating environment (external factors)

Question 23

What are the two main internal (operations) factors that can help determine whether a company fits precisely within the scope of a SICS industry?

Answer 23

1) Major revenue streams (i.e. the key products and/or services that provide sources of revenue)

2) Main inputs for value creation (i.e. key inputs, such as human capital or natural resources)

Question 24

What can you determine by looking at a company’s major revenue streams related to the SASB standards?

Answer 24

Can determine whether or not disclosure topics within an industry are applicable and whether it may be beneficial to reference more than one industry standard

Question 25

When looking for whether to refer to multiple industry Standards to fully capture a company’s performance on the sustainability issues that are relevant to the business, where do you look?

Answer 25

Revenue streams, specifically when a company has significant revenue not normally associated with the industry such as a horizontally integrated business beyond traditional industry bounds

Question 26

What is true regarding a company that relies on atypical inputs for value creation? Describe an example for human capital / automation?

Answer 26

It may find it is less relevant to disclose the topic related to that input; for example a firm that relies on human capital in an industry where automation is the norm may find it less relevant to disclose the efficiency of automated activities

Question 27

Describe Royal Dutch Shell as it relates to the Extractives & Minerals Processing sector and what is notable about any related SASB Standards.

Answer 27

SASB maintains three standards for Oil & Gas:
1) Exploration & Production,
2) Midstream
3) Refining & Marketing

Shell’s operations include aspects of all three SICS industries as visible from its revenue streams.

Question 28

In the Electric Utilities & Power Generators industry, the industry is divided across regulated and deregulated markets. What is typical of regulated markets compared to deregulated markets regarding generation and distribution?

Answer 28

Regulated markets typically contain vertically integrated utilities that own and operate everything from generation to distribution.

Deregulated markets, designed to encourage competition, commonly split generation from distribution.

Question 29

What are three questions for analysis when looking at a company’s revenue for the SASB standards applicability?

Answer 29

1) What are a company’s primary sources of revenue?
2) Does a company generate additional revenue from activities atypical to industry, potentially warranting disclosure of topics from additional industry standards?
3) Does a company’s revenue come from activities outside those typical of its industry, potentially warranting omission of a disclosure topic within the SASB Standard for its industry?

Question 30

For the influence “main inputs for value creation”, please describe the SASB Semiconductors Standard relative to Employee Health & Safety and owned or outsourced manufacturing example.

Answer 30

The Standard assumes that companies operate their own manufacturing facilities as many of the largest companies do, and therefore because the chemicals posed to the workers are a risk and healthy workers are a key input for value creation, the Employee Health & Safety disclosure topic is included with metrics.

Semiconductor companies that outsource manufacturing and do not directly control factory working conditions, that topic may not apply. In this case, a different topic might be relevant: Labor Conditions in the Supply Chain, which often appears in the SASB standards for industries with outsourced manufacturing facilities.

Question 31

Name five topics that may be related to manufacturing that may not be relevant for a company that does not have direct control over a manufacturing facility.

Answer 31

1) GHG emissions
2) energy
3) water
4) waste
5) employee health & safety

Question 32

What are four questions for analysis when looking at a company’s main inputs for value creation for the SASB standards applicability?

Answer 32

1) What primary resources does a company rely on to produce and deliver its goods and services, including common capitals?

2) What inputs for value creation does a company directly control or influence?

3) Does a company rely on inputs atypical to the industry, potentially warranting disclosure of topics from additional industry standards?

4) Does a company rely on atypical inputs for its industry, potentially warranting omission of a disclsoure topic within the SASB Standard for its industry?

Question 33

What is the “Time and Dynamic Materiality” principle related to the internal operational topics (revenue and inputs for value creation)? And why does it matter for interpreting the SASB Standards?

Answer 33

As these change over time, some topics may no longer apply while others may come into play, such as when an industry moves towards outsourcing instead of manufacturing directly.

The SASB Standards are updated regularly, but there may be a lag so it should be assessed on an ongoing basis.

Question 34

What are the three factors of the company that are likely to be materially affected under the influence of operating environment (external factors)?

Answer 34

1) a company’s financial condition
2) operating performance
3) future performance outlook

Question 35

For the influence of operating environment (external factors), what are the three items you can evaluate to help determine which sustainability issues are relevant to performance?

Answer 35

1) business climate
2) economic climate
3) regulatory environment

Question 36

Define “business climate” from the influences of operating environment (external factors)

Answer 36

A company’s business landscape is defined by competitive forces and peer company behaviors

Question 37

What are the four factors included in the competitive forces and peer company behaviors within a company’s business climate?

Answer 37

1) pricing power
2) competition for resources
3) technological innovation
4) expectations of key stakeholders including customers, employees, NGOs and community members

Question 38

Describe how for Internet Media & Services Industry, the Technology & Communications Sector, the general issue category “Competitive Behavior” may vary based upon business climate?

Answer 38

In certain markets, a company may have monopolistic or oligopolistic power and may face risks related to competitive behavior, which is why this disclosure topic is “Intellectual Property Protection & Competitive Behavior” for measuring the amount of monetary losses as a result of legal proceedings associated with anti-competitive behavior regulations.

A company that is one of many players in a highly competitive market will have a different sustainability profile from that outlined in the industry standard, which is characterized by companies that play a dominant role in one or more markets.

Question 39

What are five questions for analysis when looking at a company’s business climate for the SASB standards applicability?

Answer 39

1) Are stakeholder concerns creating pressure to respond to specific sustainability issues?

2) Are significant technological advances shaping demand or supply characteristics?

3) Does a company experience unique pricing power advantages or disadvantages?

4) Do peer companies compete on specific sustainability performance factors?

5) Does a company have differentiated access to resources than the typical company in its industry?

Question 40

Define “economic climate” and how it varies from the influences of operating environment (external factors)

Answer 40

The economic climate in which companies operate can exhibit regional and global differences that may affect the appropriateness of SASB disclosure topics for certain companies in an industry. A company’s economic environment is defined by regional conditions that influence a company’s economic performance.

Question 41

What are four examples of regional conditions that influence a company’s economic performance / climate?

Answer 41

taxes, inflation, interest rates, commodity prices

Question 42

Describe how for Hotel & Lodging Industry Services Sector, the general issue category of Energy Management may vary based upon economic climate for a highly dispersed versus highly concentrated company?

Answer 42

These companies depend on and consume large amounts of energy, and so companies that can maintain a high standard of service while improving energy efficiency can reduce operating costs and lower risks presented by long-term resource availability constraints.

However, a company basing all of its operations in a region with the overwhelming majority of electricity produced by hydroelectric power and the price of that energy source remaining low over the long term may be less likely to have energy management as material to the business.

Question 43

What are three questions for analysis when looking at a company’s economic climate for the SASB standards applicability?

Answer 43

1) Do the economic factors that affect a company differ based upon its location?

2) Do “mega trends” such as population growth or climate change influence a company’s operations?

3) Is consumer discretionary spending influenced by one or more sustainability issues?

Question 44

Define “regulatory climate” from the influences of operating environment (external factors)

Answer 44

A company’s regulatory climate is defined by the presence of current regulation, possible future regulation, and the enforceability and severity of legal actions and penalties for non-compliance.

Question 45

Describe how for the general issue category of Workforce Health & Safety may vary based upon regulatory climate, such as for Agricultural Products or Food & Beverage Industries?

Answer 45

In many countries, only some categories of agricultural workers are protected by national legislation, insurance or workplace injury benefits. Companies that operate in countries where workers’ rights are not well protected by law could face less predictable financial impacts from issues related to fair labor practices, where the absence of regulation creates a higher risk of experiencing acute events (e.g. fatalities, lawsuits, and work disruptions).

Companies operating in countries with more workers’ rights and protections could be less likely to face those acute risks but more likely to face higher ongoing costs of compliance.

Question 46

Describe how for Aerospace & Defense Industry Resource Transformation Sector, the general issue category of Workforce Health & Safety may vary based upon regulatory climate?

Answer 46

The global nature of this industry makes it especially prone to violations of anti-corruption and anti-bribery regulations. Violations can result in substantial fines, sanctions, civil and criminal penalties…creating extraordinary expenses and contingent liabilities such as curtailing operations in certain jurisditions, affecting reputation and ability to do business, affecting revenue and long-term growth prospects. Companies with a record of non-compliance could face higher cost of capital due to higher risk premium.

Companies with operations only in regions with low corruption are likely to face differentiated risk.

Question 47

What are four questions for analysis when looking at a company’s regulatory climate for the SASB standards applicability?

Answer 47

1) Does the company comply with existing regulation related to one or more sustainability issues?

2) Does the primary industry in which the company operates face pending regulation that might apply in the future?

3) Does the company have a history of penalties for non-compliance?

4) Is corruption a common risk within a company’s primary industry (or industries) of operation?

Question 48

When a company’s physical location differs from that of a typical firm in an industry, what becomes important and how does that influence the material sustainability factors?

Answer 48

Sustainability issues can become increasingly relevant to performance while others can be deemphasized since the location of a company’s operations can influence its exposure to changes in the natural environment, including changes in the availability of common capitals, particularly natural capital, and exposure to the physical impacts of climate change.

Question 49

For the Hotel & Lodging Services Industry Sector, the general issue category and disclosure topic Ecological Impacts, how can the location influence the material sustainability factors?

Answer 49

Hotels & Lodging industry frequently operate in regions that provide natural tourist attractions (beaches, mountains, forests). Poor environmental protection practices may preclude hotels from obtaining new construction licenses in these sensitive areas and could, in the long term, diminish natural attractions that help generate tourism revenue.

However, a company in this industry oriented to business travelers and operating exclusively in dense urban areas away from protected conservation areas, where local ecology plays no role in the company’s services package, may find Ecological Impacts disclosure topic to be less relevant to financial performance.

Question 50

What are two questions for analysis when looking at a company’s operating locations for the SASB standards applicability? (natural capitals)

Answer 50

1) Does a company operate in a region (or regions) with unusually high risks or opportunities related to the availability of natural resources?

2) Does a company’s location(s) cause differentiated exposure to the physical risks of climate change?

Question 51

What is the “Time and Dynamic Materiality” principle related to the external operating environment topics (business, economic, regulatory climate)? And why does it matter for interpreting the SASB Standards?

Answer 51

A company’s operating environment can shift over time, and although SASB Standards are updated regularly to reflect an evolving market, you should consider how a company’s external environment is shifting and how those changes make the company’s unique circumstances differ from those of the typical company that’s the basis for the SASB Standard for the industry.

Question 52

What is the additional analytical lens that should be applied after identifying what internal operations and external operating environment aspects influence material sustainability topics?

Answer 52

ESG Management / how the company is managing material sustainability issues

Question 53

Define “ESG Management”

Answer 53

the company’s management practices and decision-making processes serving at the critical interface between operations and the external environment, with an understanding of how a company thinks about, prepares for, and manages the issues most relevant to financial performance

Question 54

What are the four pillars of ESG Management?

Answer 54

Governance
Strategy
Risk Management
Performance Metrics and Targets

Question 55

From where are the four pillars of ESG Management - this prototype - derived?

Answer 55

General requirements for disclosure of sustainability related financial information jointly developed by:
–Climate Disclosure Standards Board (CDSB)
–International Financial Reporting Standards (IFRS) Foundation
–The Task-force for Climate-related Financial Disclosure (TCFD)
–Value Reporting Foundation
–World Economic Forum (WEF)

Question 56

What are the five aspects you can use to assess the level of accountability corporate governing bodies maintain related to ESG performance?
(Governance)

Answer 56

1) a description of the board’s oversight related to ESG risks and opportunities
2) a description of management’s role in assessing and managing ESG-related risks and opportunities
3) the identity of the board member, senior executive, or committee responsible for ESG risks and opportunities
4) board skills and competencies to govern and manage strategies designed to respond to ESG risks and opportunities
5) description of how the board holds management accountable for the implementation of ESG policies, strategies, and targets, including whether its related to performance metrics

Question 57

What are the four aspects you can use to assess the strategic efficacy of a company related to ESG performance?
(Strategy)

Answer 57

1) a description of the ESG related risks and opportunities that enhance, threaten, or may change the entity’s business model and strategy over the short, medium and long term

2) a description of the impact of identified ESG related risks and opportunities on the business model and strategy

3) details of whether and how ESG risks and opportunities and the associated impacts serve as an input to decision-making, strategy formulation, and financial planning process including decisions and plans

4) an analysis of whether and how the resilience of the entity’s strategy and business model may be affected by ESG risks and opportunities

Question 58

What are the five aspects you can use to assess the quality of risk management related to ESG performance?
(Risk Management)

Answer 58

1) how risks are identified and prioritized, typically within ERM systems

2) the extent of ESG risk exposures that are managed (and whether or how it is linked to the risk appetite statement)

3) policies, objectives, activities, and processes used for managing the risk

4) how risk is measured

5) whether and how the processes used for identifying, assessing and managing ESG risks are integrated into the overall risk management

Question 59

What are the three aspects you can rely on related to ESG Performance Metrics and Targets?

Answer 59

1) targets that are set by management to mitigate or adapt to ESG risks, maximize ESG opportunities, and achieve strategic goals, including details on the target (year it was set, baseline, year to achieve)

2) plans for achieving the target, including how those plans will be resourced

3) key performance indicators (KPIs) used to assess performance against targets and strategic goals

Question 60

To identify and begin to understand the sustainability topics that are relevant to enterprise value, you can start with disclosure topics in the SASB Standard for a company’s primary SICS industry, then ____ or ____ topics based on the company’s unique ______ and ________.

Answer 60

add or remove
…topics based upon company’s unique
internal operations and
external operating environment.

Question 61

To fully assess corporate value and performance beyond just data (or scores from that data), look at ______, _______, _______, and ______ in additional to performance metrics.

Answer 61

governance
strategy
risk management practices
targets

Question 62

[Graphic] After identifying the financially sustainability issues starting with the SASB Standards, what do you evalute next?

Answer 62

The company context

Question 63

[Graphic] What are the two kinds of company context to evalute?

Answer 63

1) if topics within an industry standard are not relevant to financial performance

2) if topics with a different industry standard are relevant to financial performance

Question 64

[Graphic] After evaluating company context, what do you do next?

Answer 64

Include and evaluate contextual factors

Question 65

[Graphic] What are the two contextual factors and the types / categories under each one?

Answer 65

Internal operating factors:
–primary revenue streams,
–main inputs for value creation

External operating environment:
–business climate,
–geographic footprint, which determines regulatory environment and economic environment

Question 66

[Graphic] After evaluting the contextual factors, what do you do next?

Answer 66

Analyze the performance and corporate value using:
–qualitative and quantitative data
–company governance, strategy, and risk management practices

Question 67

[CHECK FOR UNDERSTANDING] What two main internal operating factors can be used to evaluate the financial materiality of sustainability information?

Answer 67

Major revenue streams and main inputs for value creation.

The former refers to the core products or services that provide sources of revenue
for a company.

The latter refers to the resources (natural resources, human capital, etc.) that
companies rely on to produce or deliver its products or services.

By identifying major revenue streams and inputs for value creation, a user can gain an understanding of the sustainability issues that are relevant to financial performance and the information needed to interpret an individual company’s performance of that issue. If, for example, a company in Building Products & Furnishings does not generate significant revenue from wood products and instead generates revenue from cement products, the topic of wood supply chain management is unlikely to be relevant to financial performance. In this instance, a user may omit that information from their disclosure or choose to not incorporate it into fundamental analysis. The same logic applies to the reverse scenario, where a company generates significant revenue or relies on inputs for value creation atypical to its industry. For example, if a company in Engineering & Construction Services owns and operates its own fleet of construction equipment (rather than contracting it out), the issue of fleet fuel management is likely relevant to financial performance (see Section 1.2.1)

Question 68

[CHECK FOR UNDERSTANDING] What four components of a company’s external operating context influence the
financial materiality of sustainability information?

Answer 68

Business climate, economic climate, regulatory climate, and operating location(s).

A company’s business climate (or business landscape) is defined by the
competitive forces and behaviors of peer companies that influence the firm. This
includes things such as pricing power, competition for resources, technological
innovation, and the expectations of key non-investor stakeholders such as
customers, community members, or NGOs.

A company’s economic climate is defined by the regional conditions that shape
financial performance such as taxes, inflation, interest rates, and commodity
prices.

A company’s regulatory climate is defined by the presence (or lack of) regulation, possible future regulation, the cost of complying with current and future regulation, and the enforceability and severity of legal actions and penalties for non-compliance.

A company’s operating location(s) is simply defined by the physical location(s) of operations, which can influence its exposure to changes in the natural environment (such as natural resource constraints or the physical impacts of climate change), and otherwise influence the level of risk the company is exposed to related to sustainability.

By evaluating each of these four factors, a user can gain a deeper understanding of the relevance of sustainability issues to the financial performance of an individual company (see Section 1.2.2.

Question 69

[CHECK FOR UNDERSTANDING] What role does governance, strategy, and risk management information play in
ESG analysis?

Answer 69

Governance, strategy, and risk management – i.e., the decisions a company’s leadership makes to manage material sustainability issues – serve as the critical interface between internal operations and external environment. By understanding how leadership thinks about, prepares for, and manages the issues relevant to financial performance, users can gain a clearer understanding of how a company compares to peers and is likely to perform over time (see Section 1.3).