P3 Chp 8 Using Sustainability Data in Financial Valuation

Question 1

The following are the two learning objectives of Using Sustainability Data in Financial Evaluation:

Evaluate the connection between a company’s _______ on a SASB metric and its associated _______ of financial impact (e.g. revenue / expenses, assets / liabilities, cost of capital)

Translate a company’s _______ on a SASB metric to valuation model adjustments

Answer 1

Evaluate the connection between a company’s performance on a SASB metric and its associated channel(s) of financial impact (e.g. revenue / expenses, assets / liabilities, cost of capital)

Translate a company’s performance on a SASB metric to valuation model adjustments

Question 2

Companies and investors use a variety of approaches. Indeed, different investment professionals employ different techniques based on their objectives. However, it is important to remember that all ESG-informed analysis relies on the same levers that apply to all investment decision-making: _______, _______, and _______.

Answer 2

Companies and investors use a variety of approaches. Indeed, different investment professionals employ different techniques based on their objectives. However, it is important to remember that all ESG-informed analysis relies on the same levers that apply to all investment decision-making: profitability, growth, and risk.

Question 3

When valuing a business, where does both of the following flow into the valuation model?
* Profit (by how much revenue exceeds expenses) and
* Growth (i.e. is the company capturing market share or operating in a growing market? and how efficiently does it deploy resources (capital)?

Answer 3

Projected Cash Flows

Question 4

When valuing a business, where does the following flow into the valuation model?
* Risk (i.e. how much does it cost to obtain capital)

Answer 4

Risk-adjusted discount rate

Question 5

What two (four total) channels of financial impact are input to the discounted model as cash flows?

Answer 5

• Revenues
• Expenses
• Assets
• Liabilities

Question 6

Which channel of financial impact is not in the cash flows and is an input of the same name as its channel of financial impact?

Answer 6

Cost of capital

Question 7

The discounted cash flow approach revolves around the concept of ____ _____ of ______ which said another way is a dollar today is worth more than a dollar tomorrow.

Answer 7

The discounted cash flow approach revolves around the concept of time value of money

Question 8

Explain the relationship between discount rate and interest rate

Answer 8

the term “discount rate” is used when discounting future cash flows to their present value; the term “interest rate” is used when going from the present to the future value.

Question 9

All of a company’s _____ ______ _____ - the cash left over after the company spends what is necessary to keep growing at its current rate - are discounted to arrive at the ____ _______ ______ or the value an investment generates above its cost.

Answer 9

All of a company’s free cash flows (FCF) - the cash left over after the company spends what is necessary to keep growing at its current rate - are discounted to arrive at the net present value (NPV) or the value an investment generates above its cost.

Question 10

Return and risk go hand in hand. The more unpredictable a company’s free cash flows are, the _______ its cost of capital.

Answer 10

higher

Question 11

When applied with the goal of valuing an entire enterprise, the DCF assumes the business will operate in perpetuity and continue to generate cash flows beyond the forecast period of the investment in question. What is the value of a company beyond the period in which future cash flows can be estimated?

Answer 11

The terminal value

Question 12

What are the three key inputs of the Discounted Cash Flows and describe their components

Answer 12

1. Components of cash flows—both present value and projections—during a forecast period (e.g., five years):
   a. Revenues (an estimate of cash received)
   b. Expenses (an estimate of cash expended)
   c. Change in working capital (the difference between assets and liabilities)
   d. Taxes
2. Calculation of the discount rate (the weighted average cost of capital [WACC])
3. Prediction of the long-term growth rate to estimate the terminal value discounted to its present value
   a. Typically based on industry or company cash flow growth
   b. Assumes the cash flows will continue in perpetuity

Question 13

Users can evaluate cash flow impacts using sustainability metrics with clear links to ______, ______, ______ and/or ______.

Answer 13

Users can evaluate cash flow impacts using sustainability metrics with clear links to revenues, costs, assets and/or liabilities.

Question 14

Company revenue can be _______ by outperformance on certain sustainability topics or ______ by underperformance.

Answer 14

Company revenue can be enhanced by outperformance on certain sustainability topics or harmed by underperformance.

Question 15

Companies that develop cost-effective solutions to address customer desires for more efficient products may benefit through ________ revenue, as such products are likely to allow for price premiums and higher sales. This represents a _______
impact that can have near-, medium-, and long-term implications. If a company reports a large amount of revenue relative to industry peers (indicating large market share) or a rapidly increasing amount of revenue relative to peers (indicating growing market share), a user may consider adjusting cash flow projections [up / down?] during the forecast period of a DCF.

Answer 15

Companies that develop cost-effective solutions to address customer desires for more efficient products may benefit through increased revenue, as such products are likely to allow for price premiums and higher sales. This represents a progressive
impact that can have near-, medium-, and long-term implications. If a company reports a large amount of revenue relative to industry peers (indicating large market share) or a rapidly increasing amount of revenue relative to peers (indicating growing market share), a user may consider adjusting cash flow projections up during the forecast period of a DCF.

Question 16

In addition to expanding market share or developing new products and services, companies can _______ revenues by ________ productivity, which is associated with several disclosure topics in the Human Capital dimension, such as employee engagement and workforce health
and safety.

Answer 16

companies can increase revenues by increase productivity,

Question 17

Which aspect of cash flows are associated with the following questions for analysis?

• Do sustainable attributes of products or services command price premiums?
• Has the sale of products or services increased (or decreased) due to sustainability attributes (or risks)?
• Is a company able to increase market share or capture a new market for it products or services with sustainability attributes?
• Has a company improved productivity related to a sustainability topic?

Answer 17

Revenue

Question 18

The Energy Management in Retail & Distribution metric provides information regarding a company’s energy efficiency and its ability to capture potential cost savings from the use of renewables, and can lend insight into its exposure to risks from grid disruptions and price volatility (especially compared with companies with on-site renewable energy generation). If a company
is an increasingly efficient consumer of energy, it is likely to incur _____ operating expenses—a ______ , _____-likelihood, ___- or _____-term impact—that may [increase / decrease?] estimates of projected net cash flows.

Answer 18

The Energy Management in Retail & Distribution metric provides information regarding a company’s energy efficiency and its ability to capture potential cost savings from the use of renewables, and can lend insight into its exposure to risks from grid disruptions and price volatility (especially compared with companies with on-site renewable energy generation). If a company
is an increasingly efficient consumer of energy, it is likely to incur lower operating expenses—a progressive, high -likelihood, near- or medium -term impact—that may increase estimates of projected net cash flows.

Question 19

In cases where a company decreases its reliance on a grid subject to possible disruptions (an _____ , ____-probability, _____-magnitude impact) as well as price increases (a _____, ____-probability, ____-magnitude impact), a user may consider [increasing / reducing?] expected expenses associated with the cost of outages and increased prices.

Answer 19

In cases where a company decreases its reliance on a grid subject to possible disruptions (an acute, low -probability, high -magnitude impact) as well as price increases (a progressive, high -probability, lower -magnitude impact), a user may consider reducing expected expenses associated with the cost of outages and increased prices.

Question 20

In addition to everyday operating costs, the SASB Standards often lend insight into additional expenses that cause losses in the future, where cash flows may be impacted. What are three examples?

Answer 20

• Fines and settlements
• Crucial commodities such as water or rare earth minerals becoming increasingly scarce or increase in price
• Operational disruptions such as those related to human capital (e.g. strikes or worktime lost due to injury or illness) or those related to the physical impacts of climate change.

Question 21

Which aspect of cash flows are associated with the following questions for analysis?

• Is a company able to reduce costs by managing its product lifecycle or
  operating efficiency?
• Are a company’s main inputs for value creation, particularly natural resources, subject to scarcity and supply disruption?
• Does a company have a history of litigation?
• Is a company exposed to operating disruptions related to human capital or the physical impacts of climate change?

Answer 21

Expenses

Question 22

A company’s assets—a resource that it buys or creates to increase its economic value—can be impacted by _____ and ______ performance on certain sustainability topics. When an asset is less useful for generating revenues, it ______ expected cash flows.

Answer 22

A company’s assets—a resource that it buys or creates to increase its economic value—can be impacted by positive and negative performance on certain sustainability topics. When an asset is less useful for generating revenues, it reduces expected cash flows.

Question 23

Taken together, these metrics in the Solar Industry for Ecological Impacts of Project Development can help a user assess both current impact on company assets from community and ecological issues as well as the likelihood of future impacts based on the company’s efforts to address any problems. If asset impairment delays project development, for example (a ________, ______-term impact), this assessment may result in a _______ adjustment to cash flows during the forecast period of a DCF because of delayed revenues and potential increased costs. Additionally, if the company’s qualitative disclosure (RR-ST-160a.2) indicates a strategic failure to effectively manage the risks related to the issue, a user may consider an ______ adjustment to the DCF’s discount rate to account for the increased likelihood of future impairments.

Answer 23

Taken together, these metrics in the Solar Industry for Ecological Impacts of Project Development can help a user assess both current impact on company assets from community and ecological issues as well as the likelihood of future impacts based on the company’s efforts to address any problems. If asset impairment delays project development, for example (a progressive, near -term impact), this assessment may result in a downward adjustment to cash flows during the forecast period of a DCF because of delayed revenues and potential increased costs. Additionally, if the company’s qualitative disclosure (RR-ST-160a.2) indicates a strategic failure to effectively manage the risks related to the issue, a user may consider an upward adjustment to the DCF’s discount rate to account for the increased likelihood of future impairments.

Question 24

Capital expenditures are considered investments and are recorded as _____ in a company’s balance sheet and as investments in the statement of cash flows. Payments for capital expenditures [reduce / increase?] immediate net cash flows. However, the underlying rationale for making the investment is because the new or improved asset will [decrease / increase?] net operating cash flows in the medium to long term.

Answer 24

Capital expenditures are considered investments and are recorded as assets in a company’s balance sheet and as investments in the statement of cash flows. Payments for capital expenditures reduce immediate net cash flows. However, the underlying rationale for making the investment is because the new or improved asset will increase net operating cash flows in the medium to long term.

Question 25

If, for example, the company plans to transition some of its coal-fired generators to accommodate other, less carbon-intensive fuel sources in the face of increasingly stringent regulation and falling coal prices over the next five years, an analyst may adjust CapEx forecasts [down / up?] and assume [lower / higher?] depreciation rates than the analyst would if the company used strictly coal-fired generators.

Answer 25

…an analyst may adjust CapEx forecasts up and assume lower depreciation rates than the analyst would if the company used strictly coal-fired generators.

Question 26

Business models in many industries have evolved to increasingly create economic value from investments in things such as brands and reputation, research for new technology, community and customer relationships, data, and
intellectual property. What is this called?

Answer 26

Intangible assets

Question 27

The Kraft Heinz $15 billion dollar write down is an example of an intangible asset signal [on / off?] the balance sheet that indicates ______ management or governance quality related to ESG that can result in major ______ in company value.

Answer 27

…example of an intangible asset signal on the balance sheet that indicates poor management or governance quality related to ESG that can result in major declines in company value.

Question 28

A holistic understanding of the ESG risks and opportunities faced by a company in addition to a coherent understanding of the factors that drive company value can help users identify ESG-related risks ______ losses of intangible value hit the balance sheet.

Answer 28

A holistic understanding of the ESG risks and opportunities faced by a company in addition to a coherent understanding of the factors that drive company value can help users identify ESG-related risks before losses of intangible value hit the balance sheet.

Question 29

While intangible value can be reflected in company revenues, it is often traditionally _______ for on the balance sheet. Here, intangibles essentially represent the _______ between the book value and the market value of a firm.

Answer 29

While intangible value can be reflected in company revenues, it is often traditionally unaccounted for on the balance sheet. Here, intangibles essentially represent the difference between the book value and the market value of a firm.

Question 30

In the Solar Technology & Project Development industry example for community relationships, companies with sound, proactive engagements with communities and regulators can significantly ______ corresponding risks, which would likely be reflected in an improved ______ _____.

Answer 30

…. can significantly reduce corresponding risks, which would likely be reflected in an improved discount rate .

Question 31

SASB Standards typically account for off-balance-sheet intangibles with a _____ (_____ and ______) metric.

Answer 31

… with a qualitative (discussion and analysis) metric.

Question 32

To help accounting standards evolve with the market, sustainability accounting offers a comparable, consistent, reliable way to capture some of the ______ value ______ for with financial accounting standards.

Answer 32

To help accounting standards evolve with the market, sustainability accounting offers a comparable, consistent, reliable way to capture some of the intangible value unaccounted for with financial accounting standards.

Question 33

Which aspect of cash flows is exemplified by the following questions for analysis?

• Does performance on an ESG issue impair an asset’s ability to generate cash flows?
• Do potential ESG-related impacts reduce the useful life of property and equipment or cause operational disruptions?
• Does a company’s value creation model identify sources of value that are not captured on the balance sheet?
• Does a company own intellectual property (IP) associated with efficient manufacturing methods, innovative technologies, products with sustainability-related attributes, or other related ESG factors?
• How is brand value affected by material ESG issues?

Answer 33

Assets

Question 34

What are future financial obligations and legal risks for companies that can be understood by examining data reported using SASB Standards?

Answer 34

Liabilities

Question 35

Which cash flow type is exemplified by the Oil & Gas—Midstream industry transports oil and gas through pipelines and other means, a mode of transport that comes with
ecological risks from spills?

Answer 35

Those spills can lead to sizable litigation liabilities.

Question 36

All else being equal, increases in ESG-related liabilities [decrease / increase] a company’s net working capital, thus [reducing / increasing] future cash flows.

Answer 36

All else being equal, increases in ESG-related liabilities decrease a company’s net working capital, thus reducing future cash flows.

Question 37

What does the following exemplify?

In this example the number of spills reported might prompt a user to perceive the company as risky and to increase the discount rate in a DCF analysis. Additionally, such a company may incur added operating expenses, such as for pipeline maintenance, to manage its operational risk. As a result, this progressive, near- or mid-term impact might call for an adjustment, in some cases, to expense projections during the forecast period, ultimately lowering the company’s projected near-term cash flows. The combination of lower cash flows and a higher
discount rate reduces the value of the company

Answer 37

It is important to remember that a single issue can be associated with multiple channels of financial impact.
The combination of lower cash flows and a higher discount rate reduces the value of the company.

Question 38

The incorporation of ESG information can illuminate risks that have previously not been captured in analysis. In DCF, increased risk equates to [decreased / increased?] discount rate and, all else being equal, [lower / higher?] valuation. ESG-related liabilities may also impact future net cash flows when they involve financial _______ (such as fines), increased ______ (such as repairs or legal fees), or operational _______ .

Answer 38

The incorporation of ESG information can illuminate risks that have previously not been captured in analysis. In DCF, increased risk equates to increased discount rate and, all else being equal, lower valuation. ESG-related liabilities may also impact future net cash flows when they involve financial losses (such as fines), increased expenses (such as repairs or legal fees), or operational disruptions.

Question 39

Which type of cash flows do the following questions for analysis exemplify?

• Has a company reported incidences of non-compliance, such as those related to environmental standards and labor laws?
• Has a company incurred significant fines or legal penalties? Or is it engaged in a legal dispute or litigation?
• Do current risk management practices adequately address material sustainability risks?
• Does an ESG-related incident harm a company’s ability to deliver goods or services, representing unearned revenue?

Answer 39

Liabilities

Question 40

Name the following rule of thumb exemplified by the following three example metrics:

• Total energy consumed, percentage grid electricity, percent renewable
• Revenue from products labeled and/ or marketed to promote health and nutrition attributes
• Amount of total waste from manufacturing, percentage recycled

Answer 40

Disclosure provides operational performance data that has clear and direct impacts on expenses and/or revenues

Question 41

Name the following rule of thumb exemplified by the following two example metrics:

• Project development asset impairment associated with community ecological impacts
• Number and aggregate volume of spills and releases to the environment:

Answer 41

Disclosure provides information on current financial position that has clear and direct impacts on assets and liabilities

Question 42

Companies have to finance their operations, and they do so through a variety of sources, including through equity, debt, and the company’s own cash. Each of these requires a certain level of return to offset the risk involved in the equity or debt investment, loan, or capital budgeting allocation. This return—typically calculated as a ______ ________ across the various sources of financing— represents the company’s ____ __ _________.

Answer 42

Companies have to finance their operations, and they do so through a variety of sources, including through equity, debt, and the company’s own cash. Each of these requires a certain level of return to offset the risk involved in the equity or debt investment, loan, or capital budgeting allocation. This return—typically calculated as a weighted average across the various sources of financing— represents the company’s cost of capital.

Question 43

A user can generally assume that the higher a company’s risk, the [lower / greater?] the rate of return expected by investors and other providers of capital for absorbing the risk associated with their investment.

Answer 43

A user can generally assume that the higher a company’s risk, the greater the rate of return expected by investors and other providers of capital for absorbing the risk associated with their investment.

Question 44

Cost of equity and cost of debt are calculated in different ways. For investments in both public and private companies, the cost of ____ is calculated using the risk-free rate of return plus a risk premium, which is based on the beta of that company (or security). When lenders determine the interest rate (their required rate of return) as the cost of ____ , they use the risk-free rate of return and the company’s _____ spread.

Answer 44

Cost of equity and cost of debt are calculated in different ways. For investments in both public and private companies, the cost of equity is calculated using the risk-free rate of return plus a risk premium, which is based on the beta of that company (or security). When lenders determine the interest rate (their required rate of return) as the cost of debt, they use the risk-free rate of return and the company’s credit spread.

Question 45

• A beta >1 indicates the company’s stock price is [less / more?] volatile than the market. [Less / More?] volatility suggests [lower / higher?] risk.
• A beta <1 indicates the company’s stock price is [less/ more?] volatile than the market. [Less / More?] volatility suggests [lower / higher?] risk.

Answer 45

• A beta >1 indicates the company’s stock price is more volatile than the market. More volatility suggests higher risk.
• A beta <1 indicates the company’s stock price is less volatile than the market. Less volatility suggests lower risk.

Question 46

Similar to an equity risk premium, a ____ _____ is the difference between the yield of a security at the risk-free rate of capital and that of another debt security with the same time to maturity but different, riskier credit quality.

Answer 46

Similar to an equity risk premium, a credit spread is the difference between the yield of a security at the risk-free rate of capital and that of another debt security with the same time to maturity but different, riskier credit quality.

Question 47

Sustainability performance can give rise to ____ ______ related to issues such as labor relations, lawsuits, exposure to certain markets, corporate governance, and exposure to other sustainability hazards that may increase risk.

Answer 47

Sustainability performance can give rise to risk premiums related to issues such as labor relations, lawsuits, exposure to certain markets, corporate governance, and exposure to other sustainability hazards that may increase risk.

Question 48

The Automobiles Industry Materials Sourcing metric related to the use of critical materials and conflict minerals provides narrative information related to a firm’s risk management practices, which may be factored into a _____ _____ adjustment. As a result of the timing being unpredictable of supply chain disruptions, the firm’s exposure to these possibilities influences its risk profile and therefore its _____ __ _______.

Answer 48

The Automobiles Industry Materials Sourcing metric related to the use of critical materials and conflict minerals provides narrative information related to a firm’s risk management practices, which may be factored into a discount rate adjustment. As a result of the timing being unpredictable of supply chain disruptions, the firm’s exposure to these possibilities influences its risk profile and therefore its cost of capital .

Question 49

As in this example, cost of capital impacts will almost always be reflected in an adjustment to the _____ _____.

Answer 49

As in this example, cost of capital impacts will almost always be reflected in an adjustment to the discount rate .

Question 50

Amid the multiple types of risk relevant to different industries that may be factored into a valuation model (operational risk, systemic risk, regulatory risk, etc.), it is important to note that the level of ____ and _____ of disclosure may also impact investors’ interpretation of a company’s risk profile.

Answer 50

… it is important to note that the level of detail and quality of disclosure may also impact investors’ interpretation of a company’s risk profile.

Question 51

In other words, greater transparency lends itself to [less / greater?] confidence in a company’s future performance, and [less
/ greater?] confidence can be [lost / gained?] through quality ESG disclosure.

Answer 51

In other words, greater transparency lends itself to greater confidence in a company’s future performance, and greater confidence can be gained through quality ESG disclosure.

Question 52

What do the following metrics exemplify?

Metric examples:
* Number of tailings impoundments, broken down by Mine Safety and Health Administration (MSHA) hazard potential
* Percentage of ingredients sourced from supplier facilities certified to Global Food Safety Initiative
* Description of processes to manage business ethics risks throughout the value chain
* Probable maximum loss (PML) of insured products from weather-related natural catastrophes

Answer 52

Cost of Capital impacts.
Disclosure of SASB metrics that measure risk can be helpful in calibrating risk premiums as well as providing insight into the likelihood of tail risk events.

Question 53

Suppose a company discloses that a high percentage of total fresh water withdrawn is ultimately recycled and that no operations exist in regions with high baseline water stress. All else being equal, an analyst may consider the company’s operations related to this issue to be stable and adjust forward-looking asset beta [down / up?] ([lower / higher?] adjusted beta indicates lower volatility), ultimately contributing to a [lower / higher?] cost of equity.

Answer 53

All else being equal, an
analyst may consider the company’s operations related to this issue to be stable and adjust forward-looking asset beta down (lower adjusted beta indicates lower volatility), ultimately contributing to a lower cost of equity.

Question 54

A company’s aggregate ESG performance may serve as a type of proxy for volatility and risk. Indeed, some equity and debt investors alike rely on ESG scores to adjust beta and risk premium variables. Evidence supports the assumption that companies with higher levels of ESG disclosure and higher ESG performance generally have a [lower / higher?] cost of debt

Answer 54

A company’s aggregate ESG performance may serve as a type of proxy for volatility and risk. Indeed, some equity and debt investors alike rely on ESG scores to adjust beta and risk premium variables. Evidence supports the assumption that companies with higher levels of ESG disclosure and higher ESG performance generally have a lower cost of debt

Question 55

In the case of a sustainability-linked bond, the borrower’s cost of debt is ______ tied to performance on a specific ESG issue chosen for its connection to the borrower’s overall financial performance

Answer 55

In the case of a sustainability-linked bond, the borrower’s cost of debt is overtly tied to performance on a specific ESG issue chosen for its connection to the borrower’s overall financial performance

Question 56

Which aspect of inputs to DCF analysis do the following questions for analysis exemplify?

• Does a company’s performance on ESG issues raise or lower its risk profile?
• Do risk management practices adequately address material sustainability risks?
• Does a company use debt instruments that are specifically advertised as sustainable?
• Do ESG issues contribute (or are likely to contribute) to significant fluctuations in financial performance?

Answer 56

Cost of Capital

Question 57

Indeed, as a tool for disclosure designed to help companies and investors capture long-term value creation, the SASB Standards are uniquely capable of informing ____ ____ assumptions.

Answer 57

Indeed, as a tool for disclosure designed to help companies and investors capture long-term value creation, the SASB Standards are uniquely capable of informing growth rate assumptions.

Question 58

All else being equal, the higher the long-term growth rate, the [lower / higher?] the terminal value of the company.

Answer 58

All else being equal, the higher the long-term growth rate, the higher the terminal value of the company.

Question 59

The Automobiles Industry Design for Fuel Efficiency metric for the auto parts sector supplies users with information to help assess how a company is currently positioned for this expanding market. Firms that outperform on this metric over time may enjoy a boost to long-term revenue growth and cash flows as a result. This would represent a _____ , _____-likelihood, _____-term impact for such a firm, and would increase its value.

Answer 59

The Automobiles Industry Design for Fuel Efficiency metric for the auto parts sector supplies users with information to help assess how a company is currently positioned for this expanding market. Firms that outperform on this metric over time may enjoy a boost to long-term revenue growth and cash flows as a result. This would represent a progressive, high -likelihood, long -term impact for such a firm, and would increase its value.

Question 60

However, it is important to remember that growth projections apply to ____ cash flows—not just to _____ —and therefore they may also factor in any changes to a company’s _____.

Answer 60

However, it is important to remember that growth projections apply to net cash flows—not just to revenues —and therefore they may also factor in any changes to a company’s expenses.

Question 61

To the extent that companies can manage material shortages, supply disruptions, price volatility, and reputational damage related to the use of critical materials, they can [reduce / increase?] expense growth projections.

Answer 61

To the extent that companies can manage material shortages, supply disruptions, price volatility, and reputational damage related to the use of critical materials, they can reduce expense growth projections.

Question 62

Which aspect of the DCF analysis and rule of thumb do the following metrics exemplify?

• Number of (1) zero emission vehicles (ZEV), (2) hybrid vehicles, and (3) plug-in hybrid vehicles sold
• Number of lodging facilities in or near areas of protected status or endangered species habitat, in combination with a description of environmental management policies and practices to preserve ecosystem services
• Description of efforts to manage product lifecycle impacts and meet demand for sustainable products
• Average energy efficiency of fuel cells by product application and technology type

Answer 62

Growth Projection Impacts.
Disclosure provides information on a company’s ability to generate growth, including through efficiently deploying capital or through capturing market share.

Question 63

Where performance on material sustainability issues indicates that a company is positioned to increase profits and capture market share, users may adjust ____ ____ assumptions, ultimately resulting in [lower / higher?] valuation.

Answer 63

Where performance on material sustainability issues indicates that a company is positioned to increase profits and capture market share, users may adjust growth rate assumptions, ultimately resulting in higher valuation.

Question 64

Which aspect of the DCF analysis do the following questions for analysis exemplify?

• Does a company’s performance on ESG issues increase or decrease operating expenses? Does this constitute a cost advantage relative to industry peers and competitors?
• Does a company’s performance on ESG issues lead to increased revenues? Or does it lead to decreased revenues if industry innovations render its existing products obsolete? If so, does a revenue increase constitute market capture relative to its industry peers?
• Do a company’s assets (brand, reputation, patents, etc.) signal an ability to achieve a sustainable competitive advantage?

Answer 64

Growth Projections

Question 65

Though different from fundamental analysis, which includes the analysis of a company’s financial statements along with its business environment, economic environment, and other contextual factors, ____-based _____ such as PE and PB and enterprise multiples can also be influenced by ESG performance.

Answer 65

Though different from fundamental analysis, which includes the analysis of a company’s financial statements along with its business environment, economic environment, and other contextual factors, market-based ratios such as PE and PB and enterprise multiples can also be influenced by ESG performance.

Question 66

The following are Types of Financial Impact, Typical Characteristics, Example Metrics, and How Metrics Support Financial Impacts for which financial driver and channel of impact?

For example:
Customer demand for products and services (e.g., healthy and nutritious foods)
Regulations/ standards targeting customers (use-phase or B2B; e.g., energy efficiency standards, or regulations affecting customers’ operations)
Constraints in production or supplies (e.g., limited water supply for products that need large quantities of water to be produced could reduce supply and therefore revenues)

Impact on revenue through market share and pricing power. Often
* Progressive
* High probability
* Near to medium term
* Direct

Quantitative and qualitative measures of product features that are sought by customers or required by law (e.g., revenue from products designed for use-phase resource efficiency)

Fundamental analysis: Performance on metrics drives market share and can be used to adjust revenue forecast
Market ratio analysis: Metrics allow for analysis of growth in the context of price-based ratios (PE or PEG ratios)

Answer 66

Revenue: Demand Drivers and Supply Constraints for Core Products & Services

Question 67

The following are Types of Financial Impact, Typical Characteristics, Example Metrics, and How Metrics Support Financial Impacts for which financial driver and channel of impact?

For example: Reputation among customers, regulators, suppliers, and other stakeholders (e.g., violations of codes of ethics)
Business model resiliency (e.g., developing and maintaining employee talent)
License to operate (e.g., gross violations of stakeholder expectations)

Impact on intangible assets (brand) and ultimately revenue growth potential. Often
* Progressive
* High probability
* Long term
* Indirect

Quantitative and qualitative measures of factors and actions that drive reputation and brand value such as diversity numbers (e.g., percentage of gender and racial/ethnic group representation for (1) executives and (2) all others)

Fundamental analysis:
Performance on metrics drives intangible value and ultimately long-term revenue growth assumptions behind revenue forecast and terminal value in DCF
Market ratio analysis:
Metrics allow for analysis of growth in the context of price-based ratios (PE or PEG ratios)

Answer 67

Revenue: Intangible Assets & Long-Term Growth

Question 68

The following are Types of Financial Impact, Typical Characteristics, Example Metrics, and How Metrics Support Financial Impacts for which financial driver and channel of impact?

For example: Maintaining
compliance with regulations/standards targeting industry (water-quality violations)
Generation of waste and/or inefficient use of resources (GHG emissions)
Impact on operational efficiency and costs.
Often
* Progressive
* High probability
* Near term
* Direct

Direct/quantitative measure of operational efficiency and regulatory compliance (e.g., overall process mass intensity [PMI] and PMI broken down for water and organic solvents, where PMI = quantity of raw materials input [kg] quantity of active pharmaceutical product [API] output)

Fundamental analysis:
Metrics allow for analysis of current cost drivers and estimates of future costs
Market ratio analysis:
Direct: Metrics allow for direct comparison of operational performance
Indirect: Metrics allow for analysis of current costs as part of profitability and return on investment (ROI) ratios

Answer 68

Expenses: Operational Efficiency / Cost Structure

Question 69

The following are Types of Financial Impact, Typical Characteristics, Example Metrics, and How Metrics Support Financial Impacts for which financial driver and channel of impact?

For example:
Direct impact on tangible assets, financial assets, or liabilities (e.g., asset impairment or write-downs or litigation likely to result in payouts)

Impact on valuation of asset and liabilities. Often
* Progressive
* Low to high probability
* Long term
* Direct

Direct/quantitative measure of factors that
affect the valuation of asset and liabilities
(e.g., carbon embedded in reserves, or number of settlements of abbreviated new drug application [ANDA] litigation that involved payments and/ or provisions to delay bringing an authorized generic product to market for a defined time period)

Fundamental analysis: Metrics provide information that impacts valuation methods for assets (mortgage properties, credit risk, oil and gas reserves) and liabilities (insurance payout)
Market ratio analysis: Impact on asset and liabilities valuation is relevant for asset-based
ratio (ROI, reserves-to production, liquidity and solvency ratios)

Answer 69

Assets & Liabilities:
Valuation of Core Assets & Liabilities

Question 70

The following are Types of Financial Impact, Typical Characteristics, Example Metrics, and How Metrics Support Financial Impacts for which financial driver and channel of impact?

For example:
Operations in a risky environment (e.g., operating in countries with high rates of corruption)
Externalities produced and/or resource scarcity faced by company (risks associated with sensitivity of corporate value to regulations or externalities)

Impact on (i) operational risks/cost of capital and (ii) one-time costs and contingent liabilities. Often
* Acute
* Low probability
* Near to medium term
* Direct

Quantitative measure of risk (e.g., VaR) or number of incidents (e.g., accidents or fines);
qualitative measure of risk management procedures and implementation (e.g., number and aggregate quantity of reportable spills of hazardous waste)

Fundamental analysis:
Metrics enable quantification of risk to projected profits and therefore adjustment of cost of capital; disclosure of actual incidents also enables analysis of contingent liabilities
Market ratio analysis: N/A

Answer 70

Cost of Capital: Governance, License to Operate & Risk

Question 71

[CHECK FOR UNDERSTANDING] How can sustainability performance influence revenue projections?

Answer 71

Sustainability performance influences revenues where management of a sustainability issue affects the sale of goods and services. Revenues can be enhanced by outperformance or harmed by underperformance on specific issues, and impacts can be direct or indirect. Depending on the sustainability issue at hand, sustainability performance can affect revenues via the price of products or services, changes in sales volume, market capture, or enhance productivity/output
The Questions for Analysis at the end of Section 8.2.1.1. offer helpful heuristics for identifying if an ESG metric is associated with revenues (See Section 8.2.1.1.).

Question 72

[CHECK FOR UNDERSTANDING] How can sustainability performance influence expenses?

Answer 72

Sustainability performance influences expenses where management of a
sustainability issue affects the amount of money a company spends to generate revenue. When it comes to sustainability, expenses are often associated with ongoing costs of operations (i.e. operating expenses), but can also impact performance in the form of litigation or unplanned events (i.e. extraordinary expenses). The Questions for Analysis at the end of Section 8.2.1.2. offer helpful heuristics for identifying if an ESG metric is associated with expenses. Depending
on the sustainability issue at hand, performance can affect expenses via the cost of producing a good or service, changes in the price of key inputs, and exposure to legal or operating risk (see Section 8.2.1.2.)

Question 73

[CHECK FOR UNDERSTANDING] In what ways might performance on material sustainability issues influence assets and liabilities, including CapEx?

Answer 73

Sustainability performance influences financial performance via assets where the management of an ESG issue affects the economic value that a resource provides to a company. Assets can be either tangible or intangible. For example, a fleet of fuel-efficient trucks is a tangible asset that helps deliver value through lower operating expenses in the form of lower fuel costs. Company reputation related to strong ethical behavior is an intangible asset that can deliver value in the form of improved customer retention, higher price premiums, and other avenues.
Capital expenditures are considered investments and are recorded as assets on a company’s balance sheet. By nature, capital investments are made to increase operating cash flows in the future. So, although they’re associated with (often major) cash outflows in the near-term, they are often associated with added value over time. The Questions for Analysis on at the end of Section 8.2.1.3 offer helpful heuristics for identifying if an ESG metric is associated with asset value. In general, performance can affect assets where negative events reduce an asset’s ability to generate cash flows, reduce the useful life of PP&E, or drive the value of intangible asset value (see Section 8.2.1.3.).
Sustainability performance can create or reduce a company’s liabilities where management of the issue impacts the amount of money a company owes. When it comes to sustainability, liabilities often manifest in the form of fines or penalties imposed for breaking the law or regulatory nonconformance. Amid changing regulatory climates, liabilities are often considered to be contingent in that they are associated with a sum of money owed depending on the outcome of future events.
The Questions for Analysis at the end of Section 8.2.1.4. offer helpful heuristics for identifying if an ESG issue impacts company value via liabilities. In general, performance affects liabilities where it operates in a strict regulatory environment, has a history of incurring fines or penalties, or operates in an industry that must manage the risk of major accidents/incidents (see Section 8.2.1.4.)

Question 74

[CHECK FOR UNDERSTANDING] How can a company’s management or mismanagement of material sustainability issues influence a firm’s cost of capital?

Answer 74

A company’s cost of capital can be impacted where the management of a material sustainability issue changes the risk profile of the company in the eyes of investors and/or lenders. Recall that weighted average cost of capital (WACC) is calculated using both a company’s cost of equity and cost of debt. All else equal, cost of capital will increase where ESG issues are linked to volatile performance or reduce a company’s ability to pay investors or repay lenders. In general, performance on a sustainability issue can be linked to cost of capital if a company’s risk profile changes in relation to the issue (factoring in the efficacy of a company’s risk management) or if the ESG issue contributes to significant fluctuations in financial performance (see Section 8.2.2.2.).

Question 75

PUTTING IT INTO PRACTICE

Question 1: When normalized, what is Company A’s percentage of total revenue from
products that are reusable, recyclable, and/or compostable in Year 1 and Year 2?

The Containers & Packaging industry converts raw materials, including metal, plastic, paper, and glass, into semi-finished or finished packaging products.
Companies produce a wide range of products, including corrugated cardboard packaging, food and beverage containers, bottles for household products, aluminum cans, steel drums, and other forms of packaging. Companies in the industry typically function as business-to-business entities and many operate globally. The SASB Standard for the Containers & Packaging industry includes the topic of Product & Lifecycle Management.
Stakeholder concerns of the environmental impacts of packaging waste and increased regulatory scrutiny are influencing how companies manage packaging materials throughout the packaging lifecycle. Indeed, large consumer products companies increasingly set public targets to achieve 100 percent recyclable packaging and to increase the percent of recycled content in packaging.
Consumers also demonstrate a higher willingness to pay for products that minimize harmful waste. These factors influencing supply and demand are
expected to continue, with reusable and sustainable packaging expected to grow at a compound annual growth rate (CAGR) of 9.2 percent over the next five years.
Company A reports the following data:

YEAR 1 YEAR 2
RT-CP-410a.1: Percentage of raw materials from:
(1)recycled content
(2)renewable resources
28%
21%
33%
22%
RT-CP-410a.2: Revenue from products that are reusable, recyclable, and/or compostable (in million €)
€1,230 €1,680
Total revenue €8,978
€9,882

Observe the increases in the percentage of raw materials from both recycled content and renewable resources, as well as revenue increases from products that are reusable, recyclable, and/or compostable.

Recognizing the increasing demand forecasted for sustainable packaging and that packaging providers can charge a price premium for sustainable products, Company A has invested significantly in R&D to enhance product redesign and is dedicating part of its workforce to building relationships with customers to develop recycling and take-back programs, all of which will launch this year.
In the jurisdiction where Company A operates, the local regulatory authority
announced that it will require all products to contain at least 35 percent recycled content within the next three years. This regulatory change prompts a review of how Company A is currently performing relative to that standard and how it compares in the periods ahead.

Peer companies report the following data:

PERCENTAGE OF TOTAL REVENUE FROM PRODUCTS THAT ARE REUSABLE, RECYCLABLE, AND/OR COMPOSTABLE
YEAR 1 YEAR 2
Company A ? ?
Company B 24.1% 24.8%
Company C 6.6% 7.9%
Company D 94.2% 98.1%
Company E 14.2% 16.1%
Mean 30.6% 32.8%
Median 14.2% 17.0%

There are four competitors, Company B, C, D, and E. Each competitor exhibits sequential increases in percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some companies showing greater gains than others. In Year 2, performance among this group of companies ranges from 7.9% to 98.1% (not including Company A).

Answer 75

Year 1: 13.7%
Year 2: 17%

Question 76

PUTTING IT INTO PRACTICE

Question 2: Compared to a base case where no information is reported using the above SASB metrics, how might Company A’s performance on Product & Lifecycle Management impact projected cash flows?

The Containers & Packaging industry converts raw materials, including metal, plastic, paper, and glass, into semi-finished or finished packaging products.
Companies produce a wide range of products, including corrugated cardboard packaging, food and beverage containers, bottles for household products, aluminum cans, steel drums, and other forms of packaging. Companies in the industry typically function as business-to-business entities and many operate globally. The SASB Standard for the Containers & Packaging industry includes the topic of Product & Lifecycle Management.
Stakeholder concerns of the environmental impacts of packaging waste and increased regulatory scrutiny are influencing how companies manage packaging materials throughout the packaging lifecycle. Indeed, large consumer products companies increasingly set public targets to achieve 100 percent recyclable packaging and to increase the percent of recycled content in packaging.
Consumers also demonstrate a higher willingness to pay for products that minimize harmful waste. These factors influencing supply and demand are
expected to continue, with reusable and sustainable packaging expected to grow at a compound annual growth rate (CAGR) of 9.2 percent over the next five years.
Company A reports the following data:

YEAR 1 YEAR 2
RT-CP-410a.1: Percentage of raw materials from:
(1)recycled content
(2)renewable resources
28%
21%
33%
22%
RT-CP-410a.2: Revenue from products that are reusable, recyclable, and/or compostable (in million €)
€1,230 €1,680
Total revenue €8,978
€9,882

Observe the increases in the percentage of raw materials from both recycled content and renewable resources, as well as revenue increases from products that are reusable, recyclable, and/or compostable.

Recognizing the increasing demand forecasted for sustainable packaging and that packaging providers can charge a price premium for sustainable products, Company A has invested significantly in R&D to enhance product redesign and is dedicating part of its workforce to building relationships with customers to develop recycling and take-back programs, all of which will launch this year.
In the jurisdiction where Company A operates, the local regulatory authority
announced that it will require all products to contain at least 35 percent recycled content within the next three years. This regulatory change prompts a review of how Company A is currently performing relative to that standard and how it compares in the periods ahead.

Peer companies report the following data:

PERCENTAGE OF TOTAL REVENUE FROM PRODUCTS THAT ARE REUSABLE, RECYCLABLE, AND/OR COMPOSTABLE
YEAR 1 YEAR 2
Company A ? ?
Company B 24.1% 24.8%
Company C 6.6% 7.9%
Company D 94.2% 98.1%
Company E 14.2% 16.1%
Mean 30.6% 32.8%
Median 14.2% 17.0%

There are four competitors, Company B, C, D, and E. Each competitor exhibits sequential increases in percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some companies showing greater gains than others. In Year 2, performance among this group of companies ranges from 7.9% to 98.1% (not including Company A).

Answer 76

• Revenues (cash inflows) are directly impacted via the sale of products that are reusable, recyclable, and/or compostable.
• Expenses (cash outflows) are impacted via investment expenses in R&D.
• As an investment, assets created as a result of R&D expenditures for sustainable product design likely lead to an increase in total asset value
• The company’s regulatory environment may represent a liability if the company is unable to meet recycled content requirements.

Question 77

PUTTING IT INTO PRACTICE

Question 3: Compared to a base case where no information is reported using the above SASB metrics, how might Company A’s performance on Product & Lifecycle Management impact projected growth rate?

The Containers & Packaging industry converts raw materials, including metal, plastic, paper, and glass, into semi-finished or finished packaging products.
Companies produce a wide range of products, including corrugated cardboard packaging, food and beverage containers, bottles for household products, aluminum cans, steel drums, and other forms of packaging. Companies in the industry typically function as business-to-business entities and many operate globally. The SASB Standard for the Containers & Packaging industry includes the topic of Product & Lifecycle Management.
Stakeholder concerns of the environmental impacts of packaging waste and increased regulatory scrutiny are influencing how companies manage packaging materials throughout the packaging lifecycle. Indeed, large consumer products companies increasingly set public targets to achieve 100 percent recyclable packaging and to increase the percent of recycled content in packaging.
Consumers also demonstrate a higher willingness to pay for products that minimize harmful waste. These factors influencing supply and demand are
expected to continue, with reusable and sustainable packaging expected to grow at a compound annual growth rate (CAGR) of 9.2 percent over the next five years.
Company A reports the following data:

YEAR 1 YEAR 2
RT-CP-410a.1: Percentage of raw materials from:
(1)recycled content
(2)renewable resources
28%
21%
33%
22%
RT-CP-410a.2: Revenue from products that are reusable, recyclable, and/or compostable (in million €)
€1,230 €1,680
Total revenue €8,978
€9,882

Observe the increases in the percentage of raw materials from both recycled content and renewable resources, as well as revenue increases from products that are reusable, recyclable, and/or compostable.

Recognizing the increasing demand forecasted for sustainable packaging and that packaging providers can charge a price premium for sustainable products, Company A has invested significantly in R&D to enhance product redesign and is dedicating part of its workforce to building relationships with customers to develop recycling and take-back programs, all of which will launch this year.
In the jurisdiction where Company A operates, the local regulatory authority
announced that it will require all products to contain at least 35 percent recycled content within the next three years. This regulatory change prompts a review of how Company A is currently performing relative to that standard and how it compares in the periods ahead.

Peer companies report the following data:

PERCENTAGE OF TOTAL REVENUE FROM PRODUCTS THAT ARE REUSABLE, RECYCLABLE, AND/OR COMPOSTABLE
YEAR 1 YEAR 2
Company A ? ?
Company B 24.1% 24.8%
Company C 6.6% 7.9%
Company D 94.2% 98.1%
Company E 14.2% 16.1%
Mean 30.6% 32.8%
Median 14.2% 17.0%

There are four competitors, Company B, C, D, and E. Each competitor exhibits sequential increases in percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some companies showing greater gains than others. In Year 2, performance among this group of companies ranges from 7.9% to 98.1% (not including Company A).

Answer 77

Growth rate supplies users with information to help assess how a company is
currently positioned within an expanding market (see Section 8.2.3.). By evaluating the company’s normalized sales relative to its industry peers, it appears that revenues have noticeably increased, though they still fall within an average range.
Understanding the company’s business landscape, where the market for reusable and sustainable packaging products is growing significantly, a user would likely assume that the company will experience growth commensurate to current increases in sales and broader market growth. However, with the added context that management has decided to invest significant resources into sustainable packaging products, a user could also reasonably assume that the company is positioned to experience a greater rate of growth in the near future

Question 78

PUTTING IT INTO PRACTICE

Question 4: Compared to a base case where no information is reported using the above SASB metrics, how might Company A’s performance on Product & Lifecycle Management impact cost of capital?

The Containers & Packaging industry converts raw materials, including metal, plastic, paper, and glass, into semi-finished or finished packaging products.
Companies produce a wide range of products, including corrugated cardboard packaging, food and beverage containers, bottles for household products, aluminum cans, steel drums, and other forms of packaging. Companies in the industry typically function as business-to-business entities and many operate globally. The SASB Standard for the Containers & Packaging industry includes the topic of Product & Lifecycle Management.
Stakeholder concerns of the environmental impacts of packaging waste and increased regulatory scrutiny are influencing how companies manage packaging materials throughout the packaging lifecycle. Indeed, large consumer products companies increasingly set public targets to achieve 100 percent recyclable packaging and to increase the percent of recycled content in packaging.
Consumers also demonstrate a higher willingness to pay for products that minimize harmful waste. These factors influencing supply and demand are
expected to continue, with reusable and sustainable packaging expected to grow at a compound annual growth rate (CAGR) of 9.2 percent over the next five years.
Company A reports the following data:

YEAR 1 YEAR 2
RT-CP-410a.1: Percentage of raw materials from:
(1)recycled content
(2)renewable resources
28%
21%
33%
22%
RT-CP-410a.2: Revenue from products that are reusable, recyclable, and/or compostable (in million €)
€1,230 €1,680
Total revenue €8,978
€9,882

Observe the increases in the percentage of raw materials from both recycled content and renewable resources, as well as revenue increases from products that are reusable, recyclable, and/or compostable.

Recognizing the increasing demand forecasted for sustainable packaging and that packaging providers can charge a price premium for sustainable products, Company A has invested significantly in R&D to enhance product redesign and is dedicating part of its workforce to building relationships with customers to develop recycling and take-back programs, all of which will launch this year.
In the jurisdiction where Company A operates, the local regulatory authority
announced that it will require all products to contain at least 35 percent recycled content within the next three years. This regulatory change prompts a review of how Company A is currently performing relative to that standard and how it compares in the periods ahead.

Peer companies report the following data:

PERCENTAGE OF TOTAL REVENUE FROM PRODUCTS THAT ARE REUSABLE, RECYCLABLE, AND/OR COMPOSTABLE
YEAR 1 YEAR 2
Company A ? ?
Company B 24.1% 24.8%
Company C 6.6% 7.9%
Company D 94.2% 98.1%
Company E 14.2% 16.1%
Mean 30.6% 32.8%
Median 14.2% 17.0%

There are four competitors, Company B, C, D, and E. Each competitor exhibits sequential increases in percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some companies showing greater gains than others. In Year 2, performance among this group of companies ranges from 7.9% to 98.1% (not including Company A).

Answer 78

In the context of Company A’s regulatory environment, metric RT-CP-410a.1 provides
insight into the company exposure to regulatory risk, where a mandatory 35 percent recycled content floor will be enforced in the near-term (in Year 3). Based on Year 2 performance, the company does not meet recycled content requirements and
may face related financial penalties. However, the decision to invest in sustainable packaging product development with clearly defined goals is a positive indication that the company is managing performance with the intent to meet regulatory
requirements.

Question 79

PUTTING IT INTO PRACTICE

Question 5: What does a review of the peer group data – Company A excluded - reveal about the individual competitors and/or about trends in the industry itself, also considering the expected changes to the regulatory environment?

The Containers & Packaging industry converts raw materials, including metal, plastic, paper, and glass, into semi-finished or finished packaging products.
Companies produce a wide range of products, including corrugated cardboard packaging, food and beverage containers, bottles for household products, aluminum cans, steel drums, and other forms of packaging. Companies in the industry typically function as business-to-business entities and many operate globally. The SASB Standard for the Containers & Packaging industry includes the topic of Product & Lifecycle Management.
Stakeholder concerns of the environmental impacts of packaging waste and increased regulatory scrutiny are influencing how companies manage packaging materials throughout the packaging lifecycle. Indeed, large consumer products companies increasingly set public targets to achieve 100 percent recyclable packaging and to increase the percent of recycled content in packaging.
Consumers also demonstrate a higher willingness to pay for products that minimize harmful waste. These factors influencing supply and demand are
expected to continue, with reusable and sustainable packaging expected to grow at a compound annual growth rate (CAGR) of 9.2 percent over the next five years.
Company A reports the following data:

YEAR 1 YEAR 2
RT-CP-410a.1: Percentage of raw materials from:
(1)recycled content
(2)renewable resources
28%
21%
33%
22%
RT-CP-410a.2: Revenue from products that are reusable, recyclable, and/or compostable (in million €)
€1,230 €1,680
Total revenue €8,978
€9,882

Observe the increases in the percentage of raw materials from both recycled content and renewable resources, as well as revenue increases from products that are reusable, recyclable, and/or compostable.

Recognizing the increasing demand forecasted for sustainable packaging and that packaging providers can charge a price premium for sustainable products, Company A has invested significantly in R&D to enhance product redesign and is dedicating part of its workforce to building relationships with customers to develop recycling and take-back programs, all of which will launch this year.
In the jurisdiction where Company A operates, the local regulatory authority
announced that it will require all products to contain at least 35 percent recycled content within the next three years. This regulatory change prompts a review of how Company A is currently performing relative to that standard and how it compares in the periods ahead.

Peer companies report the following data:

PERCENTAGE OF TOTAL REVENUE FROM PRODUCTS THAT ARE REUSABLE, RECYCLABLE, AND/OR COMPOSTABLE
YEAR 1 YEAR 2
Company A ? ?
Company B 24.1% 24.8%
Company C 6.6% 7.9%
Company D 94.2% 98.1%
Company E 14.2% 16.1%
Mean 30.6% 32.8%
Median 14.2% 17.0%

There are four competitors, Company B, C, D, and E. Each competitor exhibits sequential increases in percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some companies showing greater gains than others. In Year 2, performance among this group of companies ranges from 7.9% to 98.1% (not including Company A).

Answer 79

As noted in the case, peer group data showed sequential increases in the percentage of total revenue from products that are reusable, recyclable, and/or compostable, with some competitors exhibiting greater gains than others. The dataset is also widely dispersed, with Company D representing the highest performance in the range and Company C representing the lowest performance in the range. Wide dispersion of results is evidenced by the large difference in the peer group mean and median in both years. This observation may prompt further analysis of Company’s C and D to understand why performance stands out so significantly from the peer group (see Sections 5.2 and 5.3). At the industry level, this data supports the assumption that companies continue to compete on Product & Lifecycle Management, which may represent opportunities to leaders or risks to laggards on the topic.