P3 Chp 7 Characterizing Financial Impact

Question 1

The data yielded by SASB metrics can be used in _________ analysis to provide useful and important insights into a company’s performance on the sustainability issues that are relevant to its position, performance, and outlook, which can help a management team identify and resolve issues believed to be central to a company’s _______ _________ , among other things.

Answer 1

The data yielded by SASB metrics can be used in comparative analysis to provide useful and important insights into a company’s performance on the sustainability issues that are relevant to its position, performance, and outlook, which can help a management team identify and resolve issues believed to be central to a company’s competitive advantage , among other things.

Question 2

By design, the same information from SASB metrics can also be used in _________ _______ analysis, shedding light on sustainability’s impacts to a firm’s _____ ____, ______ of _______, and ________ projections, as well as providing other insights.

Answer 2

By design, the same information from SASB metrics can also be used in fundamental financial analysis, shedding light on sustainability’s impacts to a firm’s cash flows, cost of capital, and growth projections, as well as providing other insights.

Question 3

The learning objective of chapter 7 Characterizing Financial Impact is:
Associate sustainability accounting metrics with the type of _______ impact they are designed to illuminate (e.g. ______ and _______, ______ or _______ impacts with varying likelihood, timing, and magnitude)

Answer 3

Associate sustainability accounting metrics with the type of financial impact they are designed to illuminate (e.g. risk and opportunities; acute or progressive impacts with varying likelihood, timing, and magnitude)

Question 4

SASB metrics are powerful tools in financial analysis because they help users better understand the _____ _____ of a sustainability impacts, the _______ an impact will occur, and the ______ of impact on a company.

Answer 4

SASB metrics are powerful tools in financial analysis because they help users better understand the time frame of a sustainability impacts, the likelihood an impact will occur, and the magnitude of impact on a company.

Question 5

What are the three categories (five total) specific channels of financial impact that may be used for each industry-specific sustainability topic?

Answer 5

• Revenues and expenses
• Assets and liabilities
• Cost of capital

Question 6

Define how the impacts are categorized for Revenues and Expenses, Assets and Liabilities, and Cost of Capital.

Answer 6

• Revenues and Expenses: demand for core products and services shows up directly in revenue and growth, as well as intangible assets among other areas and line items. Impacts on cost are typically related to operational efficiency and cost structure.
• Assets and Liabilities: impacts along these channels affect core assets and liabilities
• Cost of Capital: impacts to a firm’s cost of capital broadly address risk. Impacts in other channels (such as lower revenue and higher costs) can also capture changing risk profiles. Issues that affect a firm’s cost of capital often (though not always) impact other channels of financial impact as well.

Question 7

Name the types of financial drivers and channel of impact for the following disclosure topics:
-Management of Chemicals in Products
-Employee Engagement, Diversity & Inclusion

Answer 7

Channel of Impact is REVENUE

Type of financial driver is different for each topic:
Management of Chemicals in Products = Demand for Core Products and services

Employee Engagement, D&I = Market share and long-term growth

Question 8

Name the types of financial drivers and channel of impact for the following disclosure topics:
-Energy efficiency

Answer 8

Channel of Impact is EXPENSES

Financial Driver:
Energy Efficiency = Operational efficiency and cost structure

Question 9

Name the types of financial drivers and channel of impact for the following disclosure topics:
-Reserves Valuation & Capital Expenditures

Answer 9

Channel of Impact is ASSETS AND LIABILITIES

Financial Driver:
Reserves Valuation and Capital Expenditures = Tangible and intangible assets and liabilities

Question 10

Name the types of financial drivers and channel of impact for the following disclosure topics:
-Operational Safety, Emergency Preparedness & Response

Answer 10

Channel of Impact is COST OF CAPITAL

Financial Driver:
Operational Safety, Emergency Preparedness & Response = Governance, volatility and risk factors

Question 11

Because the conversation around sustainability tends to emphasize ESG _____ and externalities, inherent _______ in sustainability are often overlooked. After all, material impacts on a company’s financial condition or operating performance can either be _____ or _______.

Answer 11

Because the conversation around sustainability tends to emphasize ESG risks and externalities, inherent opportunities in sustainability are often overlooked. After all, material impacts on a company’s financial condition or operating performance can either be positive or negative.

Question 12

What do the following two examples of disclosure topics and accounting metrics from the reading exemplify?

MULTILINE AND SPECIALTY RETAILERS & DISTRIBUTORS INDUSTRY CONSUMER GOODS SECTOR
CATEGORY: PRODUCT DESIGN & LIFECYCLE
Disclosure Topic Sustainability Accounting Metric(s) Product Sourcing, Packaging, and Marketing
CG-MR-410a.1: Revenue from products third-party certified to
environmental and/or social sustainability standards

FORESTRY MANAGEMENT INDUSTRY RENEWABLE RESOURCES & ALTERNATIVE ENERGY SECTOR
CATEGORY: ECOLOGICAL IMPACTS
Sustainability Accounting Metric(s)
Ecosystem Services & Impacts RR-FM-160a.3: Area of forestland in endangered species habitat

Answer 12

The first metric measures a sustainability opportunity. It captures information regarding a company’s product innovation, revenue growth, ability to attract
customers, and ability to command premiums for products that meet third-party certification standards. Where revenues are driven by consumer demand for products certified to third-party sustainability standards, these products can drive company growth.

The second metric measures a (potential) risk. Forestry and logging companies that operate on a higher amount of forestland in or near sites with endangered species habitat can experience increased expenses associated with forest management practices, legal compliance, and permitting requirements. This creates a risk for Forestry & Logging operations in these areas, as the mismanagement of local ecosystem services and impacts can result in site closures, fines, or lawsuits

Question 13

What are two questions for analysis when identifying risks and opportunities to characterize financial impact?

Answer 13

1. Do higher metric values indicate improved economic performance, such as revenues, product sales, or employee engagement? If so, the metric likely measures an opportunity.
2. Do higher metric values indicate threats to economic performance, such as number of recalls, employee turnover, or total energy consumed? If so, the metric likely measures a risk.

Question 14

Not all sustainability impacts are created equal. What do the following two examples exemplify about impacts?

A data security breach happens infrequently but when they do occur have a severe impact through fines, litigation and reputational harm related to diminshed customer trust.
A company using energy or fuel inefficiently can erode value over time through accrued incremental costs, potential effects of price volatility, supply disruptions, and regulatory risk.

Answer 14

As these two examples show, sustainability issues can have impacts on companies that vary widely in likelihood, timing, and magnitude.

Question 15

When evaluating performance on ESG metrics, a user should understand these differences and the potential impact on a company’s _____ ________ and, ultimately, its ________,
whether measured in relative terms or absolute terms, or both.

Answer 15

When evaluating performance
on ESG metrics, a user should understand these differences and the potential impact on a company’s operating performance and, ultimately, its valuation,
whether measured in relative terms or absolute terms, or both.

Question 16

Define the key characteristic of sustainability impact:
Likelihood

Answer 16

The likelihood that sustainability impacts will occur can vary widely even though they may be impacted in specific ways. A company may have already experienced the financial impacts of sustainability issues. Others may happen in the future.

Question 17

Define the following categories of impacts related to Likelihood and confirm which are the main two types and which are subsets:
* Actual impacts
* Potential impacts
* Low-likelihood impacts
* High-likelihood impacts

Answer 17

• Actual impacts include those that currently affect a company. They have a
  100 percent likelihood of occurring because they are already taking place.
• Potential impacts are latent and are not guaranteed to happen. Users can categorize potential impacts as low or high likelihood (or somewhere in between).
• Low-likelihood impacts are those that are less likely to occur or that are likely to occur infrequently. When they do occur, they may create minor, inconsequential financial impacts or have a major impact on a company’s financial condition or operating performance.
• High-likelihood impacts are those more likely to occur based on historical evidence and current and future conditions. It is important to assess whether a company’s current conditions differ from those in the past, and if future conditions are likely to be different. This inquiry can help determine
  whether impacts have a high likelihood of occurring and if they will manifest in the near, medium, or long term.

Question 18

What are three high level types (examples) of Actual Impacts?

Answer 18

For example, observed changes in consumer demand, existing regulation, or active litigation constitute actual impacts.

Question 19

What are two high level types or examples of Potential Impacts?

Answer 19

They include pending trends, regulation, competitive threats, and other issues that are not guaranteed to happen.

Question 20

________ evidence can indicate whether a given disclosure topic is associated with low-likelihood or high-likelihood impacts to a company, including evidence of a company’s approach to managing _____ and ________ risk.

Answer 20

Historical evidence can indicate whether a given disclosure topic is associated with low-likelihood or high-likelihood impacts to a company, including evidence of a company’s approach to managing systemic and idiosyncratic risk.

Question 21

Shifting _____ _______, pending _______ , _______ _______, or other external factors may increase or decrease the likelihood that a company will experience associated impacts.

Answer 21

Shifting societal trends, pending regulation, competitor behavior, or other external factors may increase or decrease the likelihood that a company will experience associated impacts.

Question 22

Name an example of a low-likelihood event that may create major impact on a company’s financial condition through fines, litigation, remediation costs, lost revenue from production disruption and reputational damage.

Answer 22

A major oil spill, for example

Question 23

What is the following an example of?

Increasing water scarcity will lead to price volatility and supply disruptions in water-stressed regions.

Answer 23

High Likelihood Impacts (within Potential Impact)

Question 24

Like all ESG analysis, evaluating the likelihood of sustainability impacts requires an undestanding of the nature of the issue within the _______ of a company’s ______ and _______ operating environment.

Answer 24

Like all ESG analysis, evaluating the likelihood of sustainability impacts requires an undestanding of the nature of the issue within the context of a company’s internal and external operating environment.

Question 25

SASB metrics that measure operating efficiency will nearly always be associated with actual impacts—they affect company performance now. Name three examples.

Answer 25

• Total energy consumed, percentage grid electricity, percentage renewable: Across many industries, information about a company’s energy consumption, reliance on the grid, and energy efficiency tell a user the extent to which energy management practices currently impact operating costs and margins.
• Total fresh water withdrawn, percentage recycled, percentage in regions with High or Extremely High Baseline Water Stress: Similarly, information about the efficiency of a company’s water use and consumption indicate the extent to which water management practices are currently helping or harming operating margins.
• Percentage of gender and racial/ethnic group representation for management, technical staff, and all other employees: Information yielded through this
  metric tells a user how well a workforce is contributing to the productivity of a company and can be used alongside other data to assess the level of resources efficiently committed to managing the workforce at present.

Question 26

Other SASB metrics yield information relevant for interpreting the likelihood of an impact’s occurrence, such as those that capture compliance with existing laws and regulations, the frequency of anomalous adverse events, or crucial risk management and governance factors. Name three examples.

Answer 26

• Total recordable incident rate (TRIR) and fatality rate for direct employees and contract employees: Information produced using this metric tells a user how often adverse events have occurred in the past, thus providing information to estimate the likelihood of future occurrences.
• Description of strategy to manage opportunities for and risks to forest management and timber production presented by climate change: For companies in the Forestry industry, evaluating how well management handles risks related to the physical impacts of climate change, which can greatly affect timber production, can help a user interpret how likely the company is to capitalize on opportunities or experience identified risks.
• Number of data breaches experienced by a company combined with a description of the firm’s approach to identifying and addressing data security risks: This information helps interpret the likelihood of future breaches. For example, if a company has a history of infrequent breaches and a robust system for identifying security risks, a user might infer that there is a low likelihood of future breaches.

Question 27

What are three questions for analysis related to Likelihood as a key characteristic of impact?

Answer 27

• How frequently have impacts occurred in the past?
• Are there any changes to a company’s external operating environment that would influence the likelihood of sustainability impacts?
• How does the company manage systemic and idiosyncratic risks?

Question 28

When evaluating the timing of financial impacts of sustainability issues, it is helpful to ask two question. What are they?

Answer 28

• When will a sustainability related impact take place?
• For how long will the impact(s) occur?

Question 29

In general, users will want to know if imapcts will hit in the near term or the medium-to-long term. Discuss the differences between near versus medium-to-long term including how they relate to impacts on the company.

Answer 29

• Near-term impacts are those that are currently occurring or that can occur at any time. They usually have direct (financial or reputational) and immediate impacts on the company, usually in less than one year.
• Medium- to long-term impacts include those that are currently occurring with an expected duration of over one year, and can also include known trends that are reasonably likely to have material impacts in the future.

Question 30

What is the following an example of?

For example, a foodborne-illness outbreak is likely to have impacts on a restaurant company’s revenue, as negative media attention can lead to reduced sales and, in some cases, severe violations can result in restaurant closure.

Answer 30

Near term impact

Question 31

What is the following an example of?

For example, emissions regulations related to climate change are emerging globally and
are likely to become more stringent over time, which could impose significant
costs on a company depending on its exposure to emissions-focused regulations.

Answer 31

Medium-to-long term impacts

Question 32

What are two questions for analysis related to Timing key characteristic of impact?

Answer 32

• Does a sustainability issue cause direct financial impacts that can occur at any time?
• Are financial impacts related to a sustainability issue expected to last longer than one year?

Question 33

Some SASB metrics will nearly always manifest in long-term impacts, including topics that measure ______ ________, those related to _______ risk, and those related to ESG “_____ _____”.

Name three examples

Answer 33

Some SASB metrics will nearly always manifest in long-term impacts, including topics that measure operating performance, those related to systemic risk, and those related to ESG “mega trends.”

For example:
* Revenue from products third-party certified to environmental and/or social sustainability standards: For some companies in the Consumer Goods sector, information regarding revenue from products that are certified by third-party environmental or social sustainability standards or information about reduced packaging waste indicate how well the company captures market share (increase revenue) and reduce waste (decrease costs) over a multi-year period.
* Gross global Scope 1 emissions, percentage covered under emissions-limiting regulation; discussion of long-term and short-term strategy or plan to manage Scope 1 emissions: Companies across many industries face pressure to reduce emissions (from regulators as well as from other key stakeholders). Information regarding the company’s gross emissions and long-term strategy to manage emissions and meet emissions reduction targets indicates how
well the company is able to adhere to emissions-limiting regulation and meet global demands for emissions reduction.
* Global Systemically Important Bank (G-SIB) Score; results from stress tests in capital adequacy planning, long-term strategy, and other business activities: For commercial banks, this metric provides users with information about how well a bank can withstand financial stress, thereby protecting shareholder value and preventing market disruptions. The better the bank understands its systemic importance and prepares for systemic risk, the less likely financial stress will lead to major adverse events for the bank and its stakeholders.

Question 34

Disclosure topics and metrics that capture past adverse events almost always manifest in the ____ term.

Name two examples.

Answer 34

Disclosure topics and metrics that capture past adverse events almost always manifest in the near term.

• Total amount of monetary losses as a result of legal proceedings associated with charges of bribery or corruption and anti-competitive behavior: This metric captures current, nonoperating losses. While performance on this metric captures near-term impacts, performance on this metric over time may also provide insight into the level of risk the company may face related to these types of losses into the future.
• Recalls issued and customer fatality rates: This metric captures events with associated costs related to product safety that are reflected in current financial statements.

Question 35

Note that while these disclosure topics and metrics capture current impacts, ________ trends and a description of risk management practices may signal the likelihood that these events are _______ or _______.

Answer 35

Note that while these disclosure topics and metrics capture current impacts, historical trends and a description of risk management practices may signal the likelihood that these events are anomalous or chronic.

Question 36

The impacts from a sustainability issue can range in magnitude from ____ to ____ in their positive or negative effects on a company.

Describe these two types of magnitude.

Answer 36

The impacts from a sustainability issue can range in magnitude from low to high in their positive or negative effects on a company.

• Low-magnitude impacts have less severe effects on a company’s financial statements or cost of capital at a given time, but these effects may accrue over time. In addition to having a low financial impact in the near term, low-magnitude events also are less likely to significantly affect a company’s reputation or its stock price in the near term, reducing market signals.
• High-magnitude impacts have more significant effects on a company’s
  finances or its cost of capital.

Question 37

Issues related to _______
________ most often manifest in low-magnitude impacts.

Name an example

Answer 37

Issues related to operating efficiency (i.e., those that impact a company’s operating margins) most often manifest in low-magnitude impacts. For example, the weight of e-waste recovered by hardware companies in the Technology & Communications sector can help a user interpret the extent to which cost
savings are incurred by avoiding e-waste disposal permits.

Question 38

Events associated with high magnitude impacts, such as a major recall due to food-borne illness, may be highly _______, and the impacts may include high _____ ______ such as fines and litigation as well as _______
_______. There may also be a market reaction that affects a company’s _____
______.

Answer 38

Events associated with high magnitude impacts,
such as a major recall due to food-borne illness, may be highly publicized, and the impacts may include high financial costs such as fines and litigation as well as reputational damage. There may also be a market reaction that affects a company’s stock price.

Question 39

Issues that impact business as a going concern, such as stranded assets, the physical impacts of climate change, or events that impact a social license to operate can also typically be characterized as high or low magnitude?

Answer 39

High magnitude

Question 40

SASB metrics related to everyday operations nearly always capture performance on
____ magnitude impacts.

Name two examples

Answer 40

SASB metrics related to everyday operations nearly always capture performance on
lower-magnitude impacts.

For example:
* Revenue from renewable energy-related and energy efficiency-related products: Performance on this metric indicates the extent to which a company may expect to accrue revenues over time.
* Total amount of waste from manufacturing, percentage hazardous, and percentage recycled: Performance on this metric provides insight into the costliness of waste disposal—a recurring operating cost.

Question 41

Meanwhile, SASB metrics that capture less-frequent events and incidents yield
information that is relevant for interpreting the _____ of impact.

Name two examples.

Answer 41

Meanwhile, SASB metrics that capture less-frequent events and incidents yield
information that is relevant for interpreting the magnitude of impact.

For example:
* Number and aggregate volume of hydrocarbon spills, volume in Arctic, volume in unusually sensitive areas, and volume recovered: Hydrocarbon, a chief component of petroleum and natural gas, tends to be associated with high-magnitude impacts. However, the actual magnitude can only be interpreted using performance data. If a company reports a few, small hydrocarbon spills that do not take place in the Arctic, do not impact a shoreline, and are successfully recovered, the spill(s) may be perceived as low magnitude.
* Number of actions that led to raids, seizures, arrests, and/or filing of criminal charges related to counterfeit products: For pharmaceutical firms, counterfeit products in the supply chain can pose serious risks. A large number of actions disclosed using this metric may indicate a high-magnitude impact, where the company faces significant supply disruptions, legal penalties, and reputational harm.

Question 42

What are four questions for analysis for Magnitude as a key characteristic of impact?

Answer 42

• Does the issue affect a company’s everyday operations?
• Does the issue impact demand for a company’s products or services?
• Does it result in major unplanned losses or capital expenses?
• Does the issue threaten the business as a going concern?

Question 43

Material sustainability impacts will exhibit some combination of ______, ______ and ________. Understanding these combinations can help users more effectively factor the impacts into their analysis. Some of these types of impact tend to go hand in hand and are not _____ _______.

Answer 43

Material sustainability impacts will exhibit some combination of likelihood, timing, and magnitude. Understanding these combinations can help users more effectively factor the impacts into their analysis. Some of these types of impact tend to go hand in hand and are not mutually exclusive

Question 44

As an example of how the impacts tend to go hand in hand and are not mutually exclusive:

Actual impacts tend to be _____ magnitude, and low-likelihood impacts tend to be _____ magnitude.

Answer 44

Actual impacts tend to be low magnitude, and low-likelihood impacts tend to be high magnitude.

Question 45

To simplify the inherent interrelatedness of ESG issues, it can be helpful to think of their associated financial impacts as either _____ or _______.

Define these two according to likelihood, timing and magnitude.

Answer 45

To simplify the inherent interrelatedness of ESG issues, it can also be helpful to think of their associated financial impacts as either acute or progressive.

ACUTE
* Likelihood = Low
* Timing= Short term, with potential for lasting medium- to long-term side effects
* Magnitude = High

PROGRESSIVE
* Likelihood = High
* Timing = Short, medium, and/or long term
* Magnitude = Low to high

Question 46

Define acute impacts and complete the following:

These impacts are typically ____ magnitude and _____ likelihood, have direct and _______ impacts on a company’s financial statements, result in short- and long-term impacts on its market value, and may indicate a ______ risk of similar events.

Answer 46

Acute impacts tend to be one-time events, such as cleanup costs for an oil spill. These impacts are typically high magnitude and low likelihood, have direct and immediate impacts on a company’s financial statements, result in short- and long-term impacts on its market value, and may indicate a future risk of similar events.

Question 47

Acute impacts can show up in a change to a company’s ___ ________, either ________ (e.g. operating) or _______ (e.g., future litigation), or carry a less _____ and less _______ characteristic such as a reputational impact, which can lead to diminished market share, lower revenues, or difficulty obtaining permits and/or community buy-in to operate in a certain region.

Answer 47

Acute impacts can show up in a change to a company’s cost structure, either immediate (e.g., operating) or anticipated (e.g., future litigation), or carry a less immediate and less tangible characteristic such as a reputational impact, which can lead to diminished market share, lower revenues, or difficulty obtaining permits and/or community buy-in to operate in a certain region.

Question 48

Define progressive impacts and complete the following:

Positive impacts may slowly ______ the financial value of a company, while negative impacts may slowly _____value. Because these impacts are often _____ likelihood and ____ to ____ term, they are commonly considered operational costs of doing business.

Answer 48

Progressive impacts occur gradually over time. Positive impacts may slowly increase the financial value of a company, while negative impacts may slowly erode value. Because these impacts are often high likelihood and medium to long term, they are commonly considered operational costs of doing business. Typically, there is no large event that causes the impact. The impact is generally—though not
always—one of lower magnitude on an annual basis than an acute impact.

Question 49

For example, an innovative aerospace company that launches a highly successful new product line of all-electric jets that, over five years, quadruples its profits would be considered a high-magnitude ______ impact.

Answer 49

Progressive

Question 50

Since progressive impact tends to accrue over time, it can have a large, ______ impact over the long run.

Answer 50

Since progressive impact tends to accrue over time, it can have a large, compounded impact over the long run.

Question 51

What are three questions for analysis related to acute and progressive impacts?

Answer 51

• Are financial impacts due to a single incident or small number of incidents?
• Is a company currently affected financially?
• Does an issue represent an ongoing cost to or revenue opportunity for a company?

Question 52

Recall the example from the reading related to the data breach at Twitter in 2020 of 130 high-profile accounts targeted by hackers of a cryptocurrency scam.

Data security breaches involving PII can result in _____ events involving fines and remediation costs like those reported by Twitter. However, highly publicized data breaches can also cause reputational damage and loss of sales and market share - a more _______ impact - further impacting financial value.

Answer 52

Data security breaches involving PII can result in acute events involving fines and remediation costs like those reported by Twitter. However, highly publicized data breaches can also cause reputational damage and loss of sales and market share - a more progressive impact - further impacting financial value.

Question 53

Interpret the following four companies in the Internet Media & Services industry on the following quantitative metrics related to Data Security, including the magnitude, frequency and whether they are acute or progressive.

NUMBER OF DATA SECURITY BREACHES (YEARS 1¬–3)
PERCENTAGE INVOLVING CUSTOMERS’ PII (YEARS 1–3)
NUMBER OF CUSTOMERS AFFECTED (YEARS 1–3)
TOTAL SIZE OF CUSTOMER BASE

Company A 4 75% 4,020,016 201,000,800
Company B 4 50% 18,480,000 33,600,000
Company C 1 100% 42,702,000 93,300,000
Company D 1 0% 45,100 44,200,000

Answer 53

Company A: More frequent breaches of low magnitude. Each of Company A’s breaches has affected a low number of customers, but they have occurred relatively often. This can be damaging to value over the long term, and it indicates progressive impacts—particularly because a high percentage of the breaches involve customers’ PII. These impacts are progressive, as relatively frequent breaches indicates recurring costs and likely causes reputational damage, which may affect market share. The information provides insight into the company’s risk management related to the issue.

Company B: More frequent breaches of high magnitude. Company B’s breaches have affected a large number of customers, which can indicate progressive impacts like those facing Company A, only of a larger magnitude. In this case, again, the metric provides information to a user regarding the company’s risk management and exposure to progressive cost increases over time as attacks get more sophisticated.

Company C: Infrequent breaches of high magnitude. Company C is facing acute impacts. The high number of customers and high percentage of PII involved in the breach results in significant remediation costs, a higher probability of a class-action lawsuit, and greater media and publicity that could strongly damage the firm’s reputation and thus lower sales in the immediate future. Although a user
cannot predict when such acute incidents are likely to occur, a company’s qualitative disclosure (TC-IM-230a.2) may indicate risk exposure to such acute events if the company’s follow-up actions after the incident are not seen as being strong enough.

Company D: Infrequent breaches of low magnitude. At first glance, a user could determine that Company D has performed well. However, without further information it is impossible to tell why Company D’s performance appears to be significantly better than the other companies. A user of the Standards will want to consider contextual factors and the firm’s qualitative disclosure for further insight into its future risk exposure.

Question 54

Describe why the following disclosure topic and associated data from a hypothetical grocery chain exemplifies progressive impact.

Energy Management
FB-FR-130a.1: Operational energy consumed, percentage grid electricity, percentage renewable energy
Fleet Fuel Management FB-FR-110a.1: Fleet fuel consumed, percentage renewable

FB-FR-130A.1 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
Gross profit (million $) $22.86 $23.24 $25.30 $25.88 $26.34
Operating expense (million $) $19.22 $19.10 $18.26 $17.99 $16.89
Operational energy consumed (million GJ) 34.45 29.35 26.00 22.78 20.67
Percentage grid electricity 69% 61% 53% 46% 40%
Percentage renewable energy 31% 39% 47% 54% 60%

Answer 54

This is a gradual operational impact with no associated high-profile event. The impact yields steady benefits over time. Hence, the impact of this sustainability topic on the grocery chain is progressive. The SASB metric for this topic is made up of distinct components that give users a sense of how well large energy consumers are positioned to manage energy cost increases as well as energy supply risks.
* Disclosure on operational energy consumed provides users with the ability to assess improvements in company performance over time and, when normalized, can provide a comparative measure of energy efficiency
* Companies leading in energy efficiency will likely face lower current operating costs—a progressive impact, associated with energy use compared with less-efficient peers—and will be better positioned to absorb electricity price
increases. However, their potential for significant cost savings in the future may be limited without further innovation in energy efficiency.
* On the other hand, companies with relatively high current energy intensity but programs in place to improve efficiency could be positioned to achieve significant cost savings in the future. Companies with relatively high energy intensity and no plans for energy efficiency investments will likely have relatively low current or potential operational efficiency and, holding everything else constant, would likely have relatively lower profits.
* Disclosure on percentage grid electricity indicates exposure to risks from grid disruptions (due to poor infrastructure, increasing incidence of extreme weather events related to climate change, etc.) and electricity price increases as utilities internalize the costs of carbon.
* Disclosure on percentage renewable energy indicates how well a company is positioned to capture possible cost savings and ensure more stable energy prices from the use of renewables. The percentage of energy obtained independently from the grid that is generated from renewable resources could indicate how well companies are protected from high energy costs and energy price and supply volatility associated with the use of fossil fuels for captive power generation.

Question 55

SASB metrics for a given topic are intended to work ______ to provide a complete picture of a company’s performance on the issue. Although the metrics may be associated with either progressive or acute impacts, they may also indicate _____. The entire set of metrics provided for a topic should be considered together as a _____ to measure the primary value impact of the topic.

Answer 55

SASB metrics for a given topic are intended to work together to provide a complete picture of a company’s performance on the issue. Although the metrics may be associated with either progressive or acute impacts, they may also indicate both. The entire set of metrics provided for a topic should be considered together as a group to measure the primary value impact of the topic.

Question 56

Consider and discuss the issue of labor relations, which is a disclosure topic in a variety of industries. The topic has a variety of associated sustainability accounting metrics, each designed to capture a different aspect of the issue’s potential material impacts on a company and why they should be considered as a “set” or group:
1. Voluntary and involuntary employee turnover rate
2. Average hourly wage and percentage of employees earing minimum wage
3. Percentage of active workforce under collective bargaining agreements
4. Number and total duration of work stoppages
5. Amount of legal and regulatory fines and settlements associated with labor law violations and employment discrimination

Answer 56

A user of the SASB Standards will want to consider these metrics—and their associated impacts—as a set, rather than in isolation, when analyzing a company’s performance.

Employee wages and related expenses can make up a significant share of operating costs, so employers must balance the need to keep payroll costs low—to be able to offer competitive prices—with ethical human capital management to minimize workplace disruptions, litigation, and employee turnover and/or an unengaged workforce that can come from poor labor practices and uncompetitive wages, or poor company culture. Companies that manage this risk well can decrease their total costs over the medium to long-term and garner positive consumer sentiment. Looked at independently, one might perceive low hourly wages (metric 2) as a cost-reducing advantage. However, when considered alongside metrics 1 and 5 above, one can evaluate whether or not the benefits of a company’s labor management practices outweigh the costs and risks.

To explore this concept further, with poorly managed labor relations, contract negotiations can lead to labor disputes and operational disruptions if workers are not satisfied with their wages or working conditions (metrics 3 and 4 above), which can have a near-term impact on reputation, brand value, and, ultimately, market share. Companies that proactively address concerns around wages and benefits can minimize operational disruptions or unanticipated cost increases related to labor issues. Such companies
would also see lower employee turnover (metric 1) compared with that of their peers, further protecting operating expenses in the long term. Lawsuits related to working conditions, discrimination, or violations of labor laws (metric 5) can create significant, near-term extraordinary expenses and contingent liabilities that have lasting effects on
company reputation. Therefore, the likelihood, timing, and magnitude of impacts related to a disclosure topic can be fully realized only with complete disclosure.

Question 57

For the following question regarding the process of identifying metric types / categories, answer Yes / No / Maybe and which one is Acute or Progressive:

Is there a direct or an indirect link to financial statements?

Answer 57

Yes = Is evidence appearing in large fines, settlements, or other losses occurring within one year? If yes, this issue is acute.

Maybe = Are there frequent but low-intensity fines, settlements, or savings over a long period of time? This issue is progressive.

Question 58

For the following question regarding the process of identifying metric types / categories, answer Yes / No / Maybe and which one is Acute or Progressive:

Is managing this topic a regular cost of doing business (i.e. does this show up on regular financial statements for this company)?

Answer 58

Yes = This issue is progressive

No = Do these impacts occur in one-off events?They are likely acute.

Question 59

For the following question regarding the process of identifying metric types / categories, answer Large / Small and the type of magnitude:

How large is the impact on a company when these occurrences do happen (i.e. how large is the impact on financial statements, stock price, or the company’s reputation)?

Answer 59

Large = If there is a large financial impact after issues occur relative to the size of the business, or if there is potential for an occurrence to have large implications for a company, this is a high magnitude impact.

Question 60

For the following question regarding the process of identifying metric types / categories, answer Sometimes / Often / Not Often and the likelihood:

How often do these impact(s) occur?

Answer 60

Sometimes = If a handful of times per year, this may be a low- to moderate-likelihood and near-term impact

Often = If multiple times per year or per month, this may be a high-likelihood occurrence.

Not often = If not expected to occur during this year, this may be a medium- to long-term impact.

Question 61

Answer the following question as Yes / No related to Timing of impact:

Is the discussion asking for current management’s actions or strategy to improve a process or its policies and practices to manage a certain issue?

Answer 61

Yes = This is a near-term topic (i.e. , this is occurring right now)

No = Is the discussion on potential future risks and/or opportunities, the likelihood of these impacts occurring, and what the company is doing to manage them? This is an indicator of a medium- to long-term topic

Question 62

Energy management, water management, and food-waste management topics all tend to illustrate _______, ____-term impacts.

Answer 62

to illustrate progressive, near-term impacts.

Question 63

_____, _____-magnitude incidents with one-time costs are generally associated with topics such as data security and food safety.

Answer 63

Acute, high-magnitude incidents

Question 64

The variety of impacts from sustainability performance—_____ or ____, ____or ____ magnitude, ____ or ____ likelihood, ____ or ______ or _____ term, ___ or ______ —can all affect a company’s operating performance and, ultimately, its valuation, whether captured in its financials, growth rate, and/or cost of capital, among other metrics.

Answer 64

The variety of impacts from sustainability performance—progressive or acute, high or low magnitude, high or low likelihood, near or medium or long term, risk or opportunity—can all affect a company’s operating performance and, ultimately, its valuation, whether captured in its financials, growth rate, and/or cost of capital, among other metrics.

Question 65

[CHECK FOR UNDERSTANDING] What indicates that a SASB metric measures a risk versus an opportunity?

Answer 65

In general, metrics that capture issues that negatively impact performance are associated with risks, while metrics that capture issues that positively impact performance are associated with opportunities. The Questions for Analysis at the end of Section 7.1. offer simple but helpful heuristics for identifying metrics that measure risks versus opportunities. In general, if higher values indicate improved economic performance for a company, it likely measures an opportunity. In general, if higher values indicate threats or declines to economic performance, it likely measures a risk.
Keep in mind, however, that when determining risks vs. opportunities, performance and context are incredibly important. For example, consider a company in the Fuel Cells & Industrial Batteries industry reporting on the metric, “percentage of products sold that are recyclable or reusable.” Normally this metric captures an opportunity. Innovations to improve recyclability or reuse of products can drive competitiveness and revenue growth and help manufacturers achieve significant cost savings. However, if the company reports a very low percentage of products sold that are recyclable or reusable and it operates in a jurisdiction that is subject to increasingly strict regulation around end-of-life management, the metric will capture a risk because regulations can affect demand and increase compliance costs. Just as with every facet of ESG analysis, determining risks versus opportunities cannot be done without considering both performance and context (see Section 7.1).

Question 66

[CHECK FOR UNDERSTANDING] What are the three key characteristics of financial impacts? How can they
enhance a financial analysis?

Answer 66

When characterizing the financial impacts associated with sustainability issues, users can benefit from considering:
1. The likelihood that impacts will occur;
2. The timing of those impacts to company performance; and
3. The magnitude of the specific impact. When assessing likelihood, financial impacts of ESG issues can be either actual
(they are already occurring) or potential (they might occur in the future). Potential impacts can be either low-likelihood or high-likelihood. The timing of impacts can be determined by assessing when an impact is likely to take place and for how long it will occur. For analysis it can be beneficial to determine if the timing of impacts likely to occur in the near, medium, or long-term. Magnitude refers to the severity of financial impact on a company and can be either high or low- magnitude (or somewhere in between) (see Section 7.2.1). By characterizing the nature of financial impacts, users can more accurately understand how the issue will impact the financial performance of a company.
This understanding can translate to valuation model adjustments or inform other tools for valuation and analysis. For example, if an analyst determines that an
issue represents a risk associated with high-likelihood, long-term, low-magnitude impacts, they may adjust revenue projections down in a DCF analysis (see Section 8.2.1.1.) or apply that rationale to their scenario analysis (see Section 9.1.).

Question 67

[CHECK FOR UNDERSTANDING] What is the difference between acute and progressive impacts?

Answer 67

Acute impacts tend to be low-likelihood, near-term, high-magnitude events that have direct and immediate impacts on a company’s financial statements.
Progressive impacts, on the other hand, tend to be high-likelihood, medium- to long-term, low-magnitude events that directly or indirectly impact a company’s financial statements gradually over time. These two characterizations – acute and progressive – offer a more succinct way to conceptualize the likelihood, timing, and magnitude of financial impacts associated with a sustainability issue.
These characterizations can similarly be applied to forward-looking analysis to
understand the impact a sustainability issue will have on the financial performance of a company (see Section 7.2.2.)

Question 68

[PUTTING IT INTO PRACTICE] Read the following case study and answer the following question:
1. How would you characterize the financial impact of minimum-wage regulation for Company A and Company B?

Companies in the Hotels & Lodging industry provide overnight accommodations to business and leisure travelers through hotels, motels, inns, and other lodgings. The industry plays an important role in the global and domestic business and tourism markets. It is primarily made up of large hotel chains that compete on factors such as quality and consistency of service, availability of locations, price, loyalty
program offers, and amenities.

The industry relies heavily on human capital for guest services and daily operations. Many of the staff are part-time, seasonal, or immigrant workers. Globally, it is among the top job creators, and often serves as a workforce entry point for youths, women, and migrant workers. As such, the industry faces significant risks related to fair labor practices. Workers are commonly mistreated and discriminated against when it comes to wages and advancement opportunities, which can lead to burdensome lawsuits and low job satisfaction. The issue in turn contributes to high levels of turnover and low employee morale, which is a key component of guest experience and quality of service. The difficulty, seasonality, and part-time nature of the work also contribute to a high average turnover rate, which adds to the already large cost of wages for the industry.

While overall turnover is high in the industry, companies’ voluntary and involuntary staff turnover rates indicate how well they are managing their workforce compared to their peers. Involuntary turnover serves as a proxy for staff engagement and a company’s ability to maximize customer experience. The amount of legal and regulatory fines and settlements from labor law violations is a lagging indicator of how well hotel and lodging companies have been managing this issue.

Around the globe, failure at the industry level to address fair compensation can lead to increased minimum wage regulation. In the UK, national minimum-wage rates are adjusted each year, with a maximum fine of £20,000 per worker for non-payment. Employers in violation can be named publicly and, where individual culpability exists, company directors can be banned from serving as company director for up to 15 years.

Companies A and B are both hotel chains that service the UK and have reported the following data:

COMPANY A COMPANY B
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
METRIC
Total revenue (million GBP) £8.22 £8.31 £8.29 £1,620.00 £1,440.00 £1,010.00
Total labor costs as a percent of revenue 45% 46% 48% 55% 57% 59%
(1) Voluntary and (2) involuntary turnover rate for lodging facility employees
45% 50% 49% 20% 33% 23%
15% 18% 18% 9% 8.8% 10.3%
Total amount of monetary losses as a result of legal proceedings associated with labor law violations
£40,000 £0.00 £40,000 £0 £540,000 £0
National minimum wage £7.05 £7.38 £7.70 £7.05 £7.38 £7.70
(1) Average hourly wage and (2) percentage of lodging facility employees earning minimum wage, by region £7.20 £7.65 £7.90 £10.60 £11.10 £11.20
25% 21% 26% 11% 15% 17%

Answer 68

This constitutes an actual, long-term, lower-magnitude, progressive impact for both companies. As identified by the yellow “A” and highlighted italicized text, several key pieces of information in the case support this conclusion. First, price is identified as one of the primary competitive factors for companies in the industry, and labor costs significantly drive overall cost structure. Since cost structure directly dictates the price of service, and price directly influences a company’s ability to attract customers, one can deduce that this is a long-term impact because it relates to the management of everyday inputs and contributes to both companies’ ability to
capture market share where price is a differentiator (see Section 7.2.1.1.). Based on
three years of national minimum-wage data, rates are adjusted incrementally and, based on how each company manages labor costs, have the potential to create or erode value progressively (see Section 7.2.2.). As an existing regulation, this constitutes and actual impact (see Section 7.2.1.2.).

However, though these impacts can be characterized in the same way for both companies, company performance is certainly not the same. Consider each company’s average hourly wage relative to the national minimum wage. Company B has an average hourly wage that is significantly higher than Company A’s. As a result, an analyst might interpret Company B to be better insulated from future increases
to the national minimum wage—it is less likely to have to change its labor costs in relation to regulatory requirements and may therefore face lower levels of regulatory
risk.

Question 69

[PUTTING IT INTO PRACTICE] Read the following case study and answer the following question:
2. How would you characterize the financial impact of labor law violations for Company A and Company B?

Companies in the Hotels & Lodging industry provide overnight accommodations to business and leisure travelers through hotels, motels, inns, and other lodgings. The industry plays an important role in the global and domestic business and tourism markets. It is primarily made up of large hotel chains that compete on factors such as quality and consistency of service, availability of locations, price, loyalty
program offers, and amenities.

The industry relies heavily on human capital for guest services and daily operations. Many of the staff are part-time, seasonal, or immigrant workers. Globally, it is among the top job creators, and often serves as a workforce entry point for youths, women, and migrant workers. As such, the industry faces significant risks related to fair labor practices. Workers are commonly mistreated and discriminated against when it comes to wages and advancement opportunities, which can lead to burdensome lawsuits and low job satisfaction. The issue in turn contributes to high levels of turnover and low employee morale, which is a key component of guest experience and quality of service. The difficulty, seasonality, and part-time nature of the work also contribute to a high average turnover rate, which adds to the already large cost of wages for the industry.

While overall turnover is high in the industry, companies’ voluntary and involuntary staff turnover rates indicate how well they are managing their workforce compared to their peers. Involuntary turnover serves as a proxy for staff engagement and a company’s ability to maximize customer experience. The amount of legal and regulatory fines and settlements from labor law violations is a lagging indicator of how well hotel and lodging companies have been managing this issue.

Around the globe, failure at the industry level to address fair compensation can lead to increased minimum wage regulation. In the UK, national minimum-wage rates are adjusted each year, with a maximum fine of £20,000 per worker for non-payment. Employers in violation can be named publicly and, where individual culpability exists, company directors can be banned from serving as company director for up to 15 years.

Companies A and B are both hotel chains that service the UK and have reported the following data:

COMPANY A COMPANY B
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
METRIC
Total revenue (million GBP) £8.22 £8.31 £8.29 £1,620.00 £1,440.00 £1,010.00
Total labor costs as a percent of revenue 45% 46% 48% 55% 57% 59%
(1) Voluntary and (2) involuntary turnover rate for lodging facility employees
45% 50% 49% 20% 33% 23%
15% 18% 18% 9% 8.8% 10.3%
Total amount of monetary losses as a result of legal proceedings associated with labor law violations
£40,000 £0.00 £40,000 £0 £540,000 £0
National minimum wage £7.05 £7.38 £7.70 £7.05 £7.38 £7.70
(1) Average hourly wage and (2) percentage of lodging facility employees earning minimum wage, by region £7.20 £7.65 £7.90 £10.60 £11.10 £11.20
25% 21% 26% 11% 15% 17%

Answer 69

Based on contextual information and performance data in the case, one may characterize the impacts differently for Companies A and B. As identified by the blue “B” and highlighted italicized text, the user knows that non-compliance can result in fines and reputational damage. Performance captured by the total amount of monetary losses as a result of legal proceedings associated with labor law violations
indicates the probability and magnitude of the direct costs associated with large penalties and fines and remediation activities.
Over the past three years, Company A has incurred relatively low fines for two of the three years—a low-magnitude occurrence that is likely to result in small incurred costs over time (see Sections 7.2.1.1. and 7.2.1.3.). In the same period, total revenue
levels marginally decreased. While overall trends can be better defined with more time-series data, and correlation can be determined only with more analysis, one may deduce that for Company A, financial impacts related to this issue are near term, actual (occurring now), low magnitude, and progressive.
Company B operates in the same legal and business environment, however its monetary losses as a result of legal proceeding associated with labor law violations look very different. Company B experienced losses for only one of three reporting periods, but those losses were of considerably larger magnitude. Still, total losses as a percent of revenue are quite small, just 0.03 percent. Therefore, a user may interpret performance on this topic to manifest in a near-term, actual, and low-magnitude impact, and therefore be unlikely to represent material information. However, in Year 3, Company B experienced a noticeable dip in total revenue—it was down by nearly 30 percent. It may be the case that the incident experienced in Year 2 led to public reputational impacts with lasting effects that led to declines in booking rates. If the user can attribute declines in total revenue to public, labor-related litigation, one may conclude this to be a medium- to long-term, higher-magnitude impact.