P1 Chp3: Evaluating Sustainability Issues

Question 1

The learning objective of Evaluating Sustainability Issues is how a sustainability issue can impact a company using the five factors. What are they?

Answer 1

1. Direct Financial Impacts and Risk
2. Legal, Regulatory and Policy Drivers
3. Industry Norms, Best Practices and Competitive Drivers
4. Stakeholder Concerns and Social Trends
5. Opportunities for Innovation

Question 2

What type of impact can be linked when applying the five factors and systematically evaluating how they relate to a sustainability topic

Answer 2

Financial impact

an individual can gain deeper insight into how the topic can be linked to different types of financial impact

Question 3

Define the factor Direct Financial Impacts and Risk

Answer 3

This factor relates to the likelihood that a sustainability issue will impact the financial performance of a company in the short-, medium-, or long-term, where mismanagement of a sustainability topic may affect the company’s ability to create value

Question 4

Because sustainability issues tend to impact the financial condition or operating performance of companies in very specific ways, the SASB Standard disclosure topics are tied to specific types of financial impact under three broad categories. name the three categories

Answer 4

-revenue and costs
-assets and liabilities
-cost of capital

Question 5

Name four examples of sustainability issues associated with Direct Financial Impacts

Answer 5

energy management
waste management
sustainable products
competitive behavior

Question 6

Direct Financial Impacts and Risk are priced in some way, name how this factors is typically priced in

Answer 6

Direct expenses such as fines or settlements or payroll expenses

Question 7

Direct Financial Impacts are usually amplified by one or more other factors. Explain

Answer 7

Direct financial impacts usually arise in combination with other factors, such as reputation, long-term competitive position or corporate governance. Often, these other factors will result in indirect financial impacts that amplify the direct impacts

Question 8

When commercial bank Nomura was fined by the European Commission for violating antitrust rules given their involvement in foreign exchange cartels and then reported a subsequent decrease in earnings of about 23 percent compared to the same reporting period…what is this an example of?

Answer 8

Suggesting that reputational harm, an indirect impact - from antitrust litigation contributed to additional indirect financial impacts, amplifying the Direct Financial Impacts of the fine itself

Question 9

Describe the circular nature of the Direct Financial Impacts factor alongside the other four factors

Answer 9

Direct Financial Impacts and Risk generally can be found alongside each of the other four factors, which in turn provide further context to direct financial impacts

Question 10

What is a good question for analysis related to Factor: Direct Financial Impacts and Risk

Answer 10

Is the financial impact captured by existing line items in a company’s financial statements?

If yes, then it is a Direct Financial Impact and Risk.

Question 11

Define the factor Legal, Regulatory and Policy Drivers and how operating location plays a role

Answer 11

This factor relates to existing, emerging, or evolving regulations and policies, which have the potential to create risks or opportunities for companies. Operating location plays a role in determining the extent to which industires and the companies within them are affected

Question 12

What type of sustainability disclosure topics stand out in the Legal, Regulatory and Policy Driver? Name three examples.

Answer 12

Topics with a history of regulation stand out here.

Consumer health & safety related (nutrition, product safety, vehicle and airline safety)
Emissions
Corruption& Bribery

Question 13

Certain industries tend to be more closely associated with the factor Legal Regulatory and Policy Drivers. Name three of them

Answer 13

Financials
Extractives & Minerals Processing
Health Care

Question 14

For Legal, Regulatory, and Policy Drivers, there can be indirect financial impacts and direct financial impacts. Which one tends to be much greater?

Answer 14

Indirect impacts

Question 15

Describe an example from the Airline Industry related to fuel spend / prices and Carbon Offsetting and Reduction Scheme for International Aviation as an example of direct compared to indirect impacts from Legal, Regulatory and Policy Drivers factor.

Answer 15

Fuel spend accounts for more than 20 percent of industry costs and fuel prices also tend to be volatile, as a result, fuel as a share of costs often directly determines whether a company is profitable.

Given the fuel intensity of the industry, it is subject to emissions global regulation such as the Carbon Offsetting and Reduction Scheme for INternational Aviation instituted by the UN in 2019, requiring companies to meet specific industry efficiency standards under a set timeline.

This presents a risk of industry facing capital costs to upgrade fleets or face fines and legal penalties when unable to comply, where the increasing cost of carbon offsets my additionally result in significantly lower operating income for companies.

Companies that are currently high emitters are likely to face increased costs related to the regulation (indirect) as well as higher fuel costs (direct).

Question 16

What are two good questions for analysis for factor Legal, Regulatory, and Policy Drivers?

Answer 16

Is the industry a company operates in heavily regulated?

How likely is it that a company will be subject to new or emerging regulations?

If yes, this gives deeper insight into how the topic can be linked to different types of financial impact

Question 17

Define the factor Industry Norms, Best Practices, and Competitive Drivers

Answer 17

Relates to current and best practices by peer firms in addressing a sustainability issue or in disclosing information on a sustainability topic.

Question 18

Peer companies within an industry tend to face ______ issues because of the ______ way they use resources to produce the goods and services they bring to market, and therefore the ways in which they impact society. They are also subject to the ______ regulations, tax structures, incentives, societal concerns, and pricing pressures that shape the evolution of industries.

Answer 18

similar
similar
same

Question 19

Peer performance and practices (including disclosure) on sustainability topics may ultimately lead to ________
standards of performance or competitive threats to the business.

Answer 19

normative

Question 20

Describe how companies in the Engineering & Construction Services industry responding to regulatory and market forces for the lifecycle impacts of their buildings and infrastructure has led to the green building segment outpacing overall construction growth globally in the Factor: Industry Norms, Best Practices and Competitive Drivers.

Answer 20

Competitive advantage.

The benefits of “green” building includes positive environmental outcomes such as resource savings, energy efficiency, water conservation and greenhouse gas emissions reduction and decarbonization, as well as social benefits such as reduced negative impacts on human health. Companies that take advantage of this trend are likely to gain a competitive advantage over peers as the industry continues to transform, leading to more and more firm adoption of sustainable building practices.

Question 21

What factor is typically associated with sustainability topics that have a high degree of disclosure - including publicly available, benchmarked data - and name four example topics.

Answer 21

Factor: Industry Norms, Best Practices and Competitive Drivers

Example topics:
-emissions
-workplace injury rates
-employee diversity
-product innovation

Question 22

What are two good questions for analysis for factor Industry Norms, Best Practices, and Competitive Drivers?

Answer 22

-What sustainability issues do companies in an industry actively manage that are not regulated?
-What sustainability issues do companies commonly report?

Question 23

Define the factor Stakeholder Concerns and Social Trends

Answer 23

Stakeholders, employees, communities, NGOs and the general public all can have an interest in a company’s operations, and those interests can impact business outcomes.

Question 24

Name seven ways stakeholder concerns can be material to investors when they affect a company

Answer 24

-brand reputation
-license to operate
-result in legal challenges
-change demand for products or services
-impact long-term growth
-impair the value of tangible or intangible assets
-create contingent liabilities

Question 25

Describe how the global increase in demand for plant-based foods which led to Restaurant Brands International reporting its plant-based burger drove 6 percent sales growth for the Burger King brand is an example of Factor: Stakeholder Concerns and Social Trends

Answer 25

As consumers become more mindful of the environmental impacts of Meat, Poultry, & Dairy Industry, the healthfulness of eating meat products, and the potential for animal cruelty as party of farming operations, the number of companies providing meat-based alternatives has correspondingly grown. Today, plant-based items appear on the menus of vegan and non-vegan restaurants alike, presenting an opportunity for some companies in the Restaurant industry.

Question 26

What factor tends to be consumer-facing and/or require a social license to operate. Several sustainability topics are typically linked to this factor, name three categories / examples of topics.

Answer 26

Factor 4: Stakeholder Concerns and Social Trends

Product-related topics tend to be influenced by consumers and their interactions with products (health and nutrition, product environmental efficiency, product safety)

Operations-related topics involve the health, safety, well-being and prosperity of stakeholders (community impacts from the effects of noise, water quality, air quality)

Supply-chain-related topics and sourcing practices are tied to brand value (supply chain management)

Question 27

What are four good questions for analysis for factor Stakeholder Concerns and Social Trends?

Answer 27

-Are social trends shifting consumer demand?
-Is an industry characterized by the presence of NGO monitoring and pressure?
-Can company practices harm the welfare of customers or employees?
-Is it likely that environment and social issues that attract consumer attention appear in company’s supply chains?

Question 28

Define the factor Opportunities for Innovation

Answer 28

This factor relates to the potential for competitive advantage from innovation and can be tied to the emergence of new technologies or research on new technologies and how they can help companies capture market share.

Question 29

In Factor: Opportunities for Innovation, define the reflexive nature of innovation and demand

Answer 29

In some cases innovation might be spurred by demand. In others, innovation might itself spur demand

Question 30

What does the factor Opportunities for Innovation directly relate to and name them (four)

Answer 30

Stages of sustainability-driven value creation

-mimizing costs
-optimizing efficiencies
-developing new products or services
-building new business models)

Question 31

Industries most closely linked to Opportunities for Innovation are those who are in what position related to environmental or social trends / considerations.

Answer 31

They are in a position to benefit from or respond to changes in the economy related to those trends, such as electronics, smart grid technologies, automobile manufacturing, engineering and construction, real estate services

Question 32

A key example for Opportunities for Innovation relates to regulatory trends, consumer demand, and technological innovation evolving concurrently to produce a rapidly growing market for which product?

Answer 32

Electric Vehicles

Automobile manufacturers that invest in R&D to meet regulatory requirements and evolving consumer demands are likely to improve their revenue and market share. Companies that produce zero-emission vehicles over their regulatory quotas can generate additional revenue and are likely to improve their reputation and brand value, contributing to long-term market share and revenue growth

Question 33

What are three good questions for analysis for factor Opportunities for Innovation?

Answer 33

-Are there emerging or best-in-class technologies or business practices that would allow a company to improve performance on a topic by minimizing risks or capturing value?
-Is there R&D within a company or externally that could result in disruptive technologies, processes, products or services and would these developments support new markets or help reach new customer segments?
-Are such innovations currently cost-effective to implement?

Question 34

The five factors provide a useful framework for evaluating _____ to better understand sustainability impacts and ____ sustainability performance data more effectively.

Answer 34

context
interpret

Question 35

When the five factors help contextualize sustainability topics they can help frame a user’s understanding in two ways. Name the two ways.

Answer 35

Performance on a topic based on which of the five factors are relevant

What resources should be allocated to managing a topic

Question 36

Describe an example of how “performance on a topic based on which of the five factors are relevant” shows up across two factors for issue: air quality.

Answer 36

If an industry faces a new air quality regulation on the horizon, then current air quality data would be interpreted differently from an industry facing no new (or loose) regulations. For the industry facing a new regulation, the data should be compared to pending restriction levels (Factor: Regulatory Drivers). For unregulated industries, interpretation should be in the context of the external costs born to the community in terms of health concerns (Factor: Stakeholder Concerns)

Question 37

The five factors are separated on the basis of _____ and _____ financial impacts.

Answer 37

Direct and indirect

Question 38

For chocolate companies on the issue Supply Chain Management and disclosure topic Environmental & Social Impacts of Ingredient Supply Chain, assess the applicability of the Factor: Direct Financial Impacts and Risk

Answer 38

You might conclude that direct financial impacts and risks do not apply.

Cocoa is an essential raw material for this industry, where chocolate can be a significant portion of revenue. Companies have efforts to commit millions of dollars towards addressing environmental and social issues from cocoa farming such as child labor…but ultimately while that is a direct cost associated with the risk covered by the topic it is relatively immaterial so you might conclude that direct financial impacts and risks do not apply.

Question 39

For chocolate companies on the issue Supply Chain Management and disclosure topic Environmental & Social Impacts of Ingredient Supply Chain, assess the applicability of the Factor: Legal Regulatory & Policy Drivers

Answer 39

You may conclude this factor does not apply

Most of the world’s cocoa is farmed in West African nations that typically lack child labor regulations of comparable rigor, or may have limited effective enforcement. Because chocolate companies do not directly farm in these regions but rather source the cocoa, and so would not be subject to regulations even if there were enforcement, you may conclude this factor does not apply

Question 40

For chocolate companies on the issue Supply Chain Management and disclosure topic Environmental & Social Impacts of Ingredient Supply Chain, assess the applicability of the Factor: Industry Norms, Best Practices, and Competitive Drivers

Answer 40

Ensuring a reliable cocoa supply chain is essential for this industry and companies invest research, time and money into building relationships with suppliers. Because West Africa is the primary source of this raw material, child labor is likely to occur. Company initiatives to address this issue have increased transparency on management, including targets and timelines for sourcing goals. The extent of disclosure and competitive implications for companies based upon performance can lead you to conslude Industry Norms, Best Practices, and Competitive Drivers is applicable.

Question 41

For chocolate companies on the issue Supply Chain Management and disclosure topic Environmental & Social Impacts of Ingredient Supply Chain, assess the applicability of the Factor: Stakeholder Concerns and Social Trends

Answer 41

You could likely conclude this factor is applicable.

Considerable stakeholder activity on child labor in the cocoa supply chain has taken place, including the Fair Labor Association reporting, child slavery lawsuits for companies “knowingly profiting from the illegal work of children”, and the rise of product certifications such as Fair Trade. Mismanagement can have a potential for legal risk and reputational damage resulting in widespread stakeholder concern, likely concluding that this factor is applicable.

Question 42

For chocolate companies on the issue Supply Chain Management and disclosure topic Environmental & Social Impacts of Ingredient Supply Chain, assess the applicability of the Factor: Opportunities for Innovation

Answer 42

May be monitored for future.

Managing child labor in the cocoa supply chain has more downside risk than upside potential. Small-scale business-model innovations and emerging tracing technologies may evolve to address this issue.

Question 43

What is useful in evaluating if, how, and to what extent the topics and metrics identified in the SASB Standards are relevant for a particular company?

Answer 43

The five factors

Question 44

What are two ways to make use of the findings of applying the five factors?

Answer 44

-assessing risks and opportunities
-dialogue with management

Question 45

Assessing Risks and Opportunities:
The five factors can be viewed as a tool for analyzing the variety of ways in which ______ or _______ of a sustainability topic may present a material risk or opportunity.

Answer 45

management or mismanagement

Question 46

Describe how a Telecommunications Services industry company would have their performance interpreted differently depending upon the five factors for developing unique products and pricing structures to help ensure high quality of service for previously underserved rural areas.

Answer 46

The company’s performance would be interpreted differently if the firm faced ore stringent regulation than it would if these activiteis were a response to market forces or social pressure.

Question 47

When making use of the findings associated with evaluating the five factors, what are two questions for analysis for Assessing Risks and Opportunities?

Answer 47

-Do the disclosure topics align with key risks in a company’s enterprise risk management (ERM) processes? Are there risks in the ERM not in SASB?
-Do the disclosure topics align with the key risks in a company’s existing risk factor disclosures to investors? Are there risks identified among these factors that are not in SASB?

Question 48

The five factors can also be used to support crucial dialogue within _______ , between ______, and with ____________.

Answer 48

within companies
between leadership, and
with investors

Question 49

Name two examples of how in an investor-company engagement, the five factors can enhance dialogue

Answer 49

-can facilitate a more robust, clearer understanding of the non-financial information companies have reported
-can expose a relevant issue that a company is not yet disclosing information on, or if management of the topic raises questions

Question 50

Describe how an Automobile industry company would have their performance interpreted differently depending upon the five factors for fuel efficient vehicles.

Answer 50

If the company’s disclosure indicates that it manages fuel efficiency as a compliance issue, versus an opportunity for innovation, could lead to investors asking questions why the former and not the latter.

Question 51

When making use of the findings associated with evaluating the five factors, what are three questions for analysis for Dialogue with Management related to corporate manager, asset manager, analyst?

Answer 51

-How can a corporate manager employ the five factors to inform strategic decisions and internal communications?
-How can an asset manager employ the five factors to better understand disclosed sustainability data?
-How can an analyst use the five factors to compare peer companies’ performance and differing strategies?

Question 52

On top of the foundation of identifying the sustainability topics that are financially material to a company in a given industry, the SASB Standards must also be able to assess performance on the topics in the context of a company’s unique operating circumstances. What are the two helpful tools in this task?

Answer 52

-the five factors
-assessing a firm’s management of performance on those topics

Question 53

What are three specific questions that the five factors can help provide answers to?

Answer 53

-For each sustainability topic, which of the five factors could lead to a material impact on a company’s financial condition or operating performance?
-Which, if any, of the disclosure topics identified in the SASB Standard for the company’s industry are not relevant to its operations?
-Which topics may present a risk to the company if their disclosure is omitted?

Question 54

[CHP 3 CHECK FOR UNDERSTANDING] How can each of the five factors lend insight into the nature of financial
impacts associated with a sustainability issue?

Answer 54

The five factors offer a framework for systematically evaluating how a specific sustainability issue impacts a business at a given point in time. By considering each factor in relation to a sustainability issue and a company’s internal operations, a user can gain valuable insight into the nature of associated financial risk and opportunity.
* Factor 1, direct financial impacts and risk, lends insight into the likelihood that a sustainability issue will impact financial performance in the short-, medium-, or long-term.
* Factor 2, legal, regulatory, and policy drivers, lends insight into if and how existing, emerging, or evolving regulations and policies create risks or opportunities for companies.
* Factor 3, industry norms, best practices, and competitive drivers, lends insight into how current and best practices by peer firms in managing and disclosing information related to a sustainability issue impacts a company’s relative performance on that issue.
Factor 4, stakeholder concerns and social trends, lends insight into how the interests of non-investor stakeholders and broader social/societal trends can impact business outcomes.
* Factor 5, opportunities for innovation, lends insight into opportunities to achieve competitive advantage through innovation in an industry

Question 55

[CHP 3 CHECK FOR UNDERSTANDING] How can the five factors be used to evaluate company context?

Answer 55

In addition to using the five factors to more meaningfully interpret the nature of financial impacts associated with a given sustainability issue, the five factors also provide a useful framework for evaluating the elements of a company’s external environment to interpret sustainability performance data more effectively.
By identifying which of the five factors are relevant to company performance, users can contextualize performance to improve analysis and managerial decision-making. In addition to the example related to air quality regulation (factor 2) in Section 3.2., consider the following example. A company in the Asset Management & Custody Activities industry operates in a market where clients increasingly demand investment products and services that reflect their social and environmental values (e.g., low-carbon portfolios or screening to eliminate exposure to companies with human rights violations). The SASB Standard for this industry includes the metric, “Amount of assets under management, by asset class, that employ (1) integration of environmental, social, and governance (ESG) issues (2) sustainability themed investing, and (3) screening.” A user would interpret a company’s performance on this metric differently if it operated in a market where customers did not demonstrate demand for these products and services (factor 4).
Market demand for ESG-integrated products and services presents an opportunity to capture market share. In the absence of such demand, performance on this topic
may be less heavily weighted by users or interpreted as mitigating downside risk rather than maximizing upside potential

Question 56

[CHP 3 CHECK FOR UNDERSTANDING] How can the five factors support meaningful dialogue between company leadership and with investors?

Answer 56

Because the five factors are useful for evaluating if, how, and to what extent the topics identified by the SASB Standards are relevant for a particular company, they can support effective dialogues between company management and its investors. This includes:
* exposing relevant issues to discuss; and
* understanding and contextualizing the nature of sustainability-related financial impacts to gain a deeper understanding of how a company’s strategy and business planning is likely to impact financial performance

Question 57

[Part I Test Your Understanding] Read the Practice Case 1: Chemicals Industry specific to two companies in the agricultural chemicals sub-industry where Company A has developed a biopesticide derived from natural materials and Company B has developed genetically modified seed products page 69 and then answer the following multiple choice question:
1. Which of the following external factors related to operating environment
presents a risk to Company B but not Company A?
a. Business climate
b. Operating location(s)
c. Regulatory climate
d. Economic climate

Answer 57

C Regulatory Climate

1. This question evaluates Learning Objective 2.
   A. This is incorrect. The first paragraph of the case describes components of the business climate in the Chemicals industry: “Companies within the industry compete on
   efficiencies, economies of scale, and the evelopment of innovative products.” While business climate may influence the materiality of certain sustainability issues for companies in this industry, the information provided in the case does not indicate that analyzing business climate specifically reveals differentiated risk
   between Company A and Company B. It can be assumed that the companies operate in
   the same/similar business climate.
   B. This is incorrect. The case does not provide information related to each company’s operating location(s). Therefore, analyzing operating location does not specifically reveal differentiated risk between Company A and Company B. For more information
   related to operating location(s).
   C. This is CORRECT. Company B sells genetically modified crops, which are inconsistently regulated across jurisdictions (as covered in paragraph two of the case, introducing a unique risk that Company A does not face.
   D. This is incorrect. Paragraph one of the case specifically mentions that demand in this industry is driven by economic conditions, however, no detail is provided to suggest that Company A and B operate in different economic climates. Therefore, one cannot
   reasonably conclude that an analysis of the economic climate reveals differentiated risks between the two companies.

Question 58

[Part I Test Your Understanding] Read the Practice Case 1: Chemicals Industry specific to two companies in the agricultural chemicals sub-industry where Company A has developed a biopesticide derived from natural materials and Company B has developed genetically modified seed products page 69 and then answer the following multiple choice question:
2. Which two of the following sustainability issues are likely relevant to both Company A and Company B? (Choose two)
a. Product Design & Lifecycle Management
b. Air Quality
c. Business Ethics
d. Management of the Legal & Regulatory Environment

Answer 58

2. This question evaluates Learning Objective 3.
   A. This is CORRECT. The issue of product design and lifecycle management relates to opportunities associated with demand for more sustainable products and services and, in some cases, a company’s ability to meet evolving regulations. The second and third paragraphs of the case describe both elements at play at the industry level, as both companies provide innovative solutions to customers to enhance their competitive positions and grow market share.
   B. This is incorrect. The issue of air quality relates to the management of airborne pollutants from mobile, stationary, or industrial sources that harm the health of humans or other living organisms. No information provided in the case
   indicates that the financial performance of Company A and B is impacted by air quality.
   C. This is incorrect. Business ethics relates to the conduct of businesses, including matters related to fraud, corruption, bribery, and other behaviors that may have ethical implications. No information provided in the case indicates that the
   financial performance of Company A and B is impacted by unethical conduct.
   D. This is CORRECT. Management of the legal and regulatory environment, as a sustainability issue, is often relevant to companies that rely on favorable regulation for business competitiveness. In an industry where regulation can significantly influence the cost of production and demand, both companies are likely to experience material effects related to this issue. Both Company A and B rely on agrichemical sales as a primary source of revenue, compete for market share, and operate in the same regulatory climate, all of which influence the materiality of this issue.

Question 59

[Part I Test Your Understanding] Read the Practice Case 1: Chemicals Industry specific to two companies in the agricultural chemicals sub-industry where Company A has developed a biopesticide derived from natural materials and Company B has developed genetically modified seed products page 69 and then answer the following multiple choice question:
3. An investor is evaluating the strategies of Company A and B related to Product
Design & Lifecycle Management. Which two of the five factors would most inform a dialogue with management? (Choose three.)
a. Direct financial impacts and risk
b. Legal, regulatory, and policy drivers
c. Industry norms, best practices, and competitive drivers
d. Stakeholder concerns and social trends
e. Opportunities for innovation

Answer 59

3. This question evaluates Learning Objective 4.
   A. This is CORRECT. This factor relates to the likelihood that a sustainability issue will impact the financial performance of a company (see Section 3.1.). The issue of product design and lifecycle management, in this case, can “have implications for long-term revenue growth, market share, R&D investment, contingent liabilities, and cost of capital.” It is therefore reasonable to assume that direct financial impacts related to product design and lifecycle management could inform investor-company dialogue where management of the topic is reflected in financial statements.
   B. This is CORRECT. Companies A and B sell products that generate significant externalities and are innovating to drive value through product design and lifecycle management. In some cases, the cost of negative externalities may be internalized over time in the form of regulation. As discussed in the case, financial performance is influenced by a company’s ability to meet evolving regulations related to this issue. Engagement on legal, regulatory, and policy drivers can lend additional insight into how well each company is positioned to mitigate regulatory risk related to externalities generated by chemicals products within their respective jurisdictions.
   C. This is incorrect. This factor relates to current and best practices by peer firms in addressing a sustainability issue or in disclosing information on a sustainability topic (see Section 3.1.). The disclosure of product design and lifecycle management metrics is not directly addressed in the case; therefore, no evidence exists to support this answer.
   D. This is incorrect. This factor relates to the interests and concerns of stakeholders such as employees, NGOs, and the public which can impact business outcomes. This typically affects companies in the form of brand reputation, a company’s license to operate, or legal challenges. No evidence in the case suggests that Company A and B are experiencing financial impacts related to stakeholder concerns or are likely to in the future. Therefore, it likely would not inform investor company dialogue.
   E. This is CORRECT. This factor relates to the potential to achieve a competitive advantage from innovation. It can be tied to the emergence or development of new technologies and often relates to the development of new products and services, such as the development of biopesticides by Company A and the development of GM seed products by Company B. Industries linked to this factor are often in a position to benefit from or respond to changes in the economy related to environmental and social trends – such as increased regulation of and demand for safe and healthy products. In this case, Company A and Company B are both innovating their chemicals products, but in different ways.