Part I-1 How a Company’s Circumstances Influence Material Sustainability Issues

Question 1

What is an industry’s sustainability profile?

Answer 1

Defined by the combination of risks and opportunities likely to impact the financial performance of a company in a given industry

Question 2

To begin to understand the sustainability profile of a company, users can benefit from investigating three primary considerations:

Answer 2

Social license to operate
Use of common capitals
Costs to society, or externalities

Question 3

What is a social license to operate?

Answer 3

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

Question 4

Industries with an extensive social license to operate include those that:

Answer 4

Operate as quasi-public services (e.g. utilities, student loan providers, telephone and cable companies, transportation authorities)
Have access to exclusive use of a public good (utilities, healthcare)
Benefit from intellectual property protection (media, biotech, tech)
Have a fiduciary duty that extends beyond shareholders (finance and professional services)

Question 5

What is use of common capitals?

Answer 5

Non-financial capitals available to an industry as a source of value creation but not owned or controlled by the companies in that industry; for example, water and employees.

Question 6

Examples of common capital include:

Answer 6

Natural capital - forests, air, mineral deposits, water
Public infrastructure such as roads and wastewater systems
Human capital

Question 7

What are costs to society, or externalities?

Answer 7

Include a diverse range of impacts that results from a company’s operations - pollution, degradation of ecosystems, or loss of biodiversity

Question 8

Rather than affecting a company’s financial performance, externalities are (blank)…

Answer 8

internalized over time - depletion of key resources used in production, fines and penalties, lawsuits, additional regulations, depreciation of brand value, shifts in customer demand

Question 9

Examples of activities that can create negative externalities include:

Answer 9

Effluents and emissions that affect public health and reduce property value
High incidents of corruption that harm broader economic performance and efficiency resources allocation
Significant greenhouse gas emissions that contribute to atmospheric warming

Question 10

Examples of activities that can create positive externalities include:

Answer 10

Business operations that bolster the economic well-being of surrounding communities
Outsourcing and offshoring that economically impact surrounding communities

Question 11

A company’s differences from its SICS industry can arise from two general types of factors:

Answer 11

Operations (i.e. internal factors)
Operating environment (external factors)

Question 12

What is a regulated energy market?

Answer 12

Regulated - contain vertically integrated utilities that own and operate everything from the generation of power to its retail distribution

Question 13

What is a deregulated energy market?

Answer 13

Deregulated markets - encourage competition at the wholesale power level, commonly split generation from distribution

Question 14

Two main internal factors can help determine whether a company fits precisely within the scope of a SICS industry:

Answer 14

Major revenue streams (key products or services)

Main inputs for value creation (human capital, natural resources)

Question 15

Which external factors can influence what sustainability issues are likely to materially affect a company’s financial condition, operating performance, and future performance outlook, and therefore which industry Standards might apply?

Answer 15

Business Climate
Economic Climate
Regulatory Climate
Operating Location(s)

Question 16

A company’s (blank) policies and (blank) processes serve as the critical interface between internal operations and external environment

Answer 16

management practices and decision-making processes

Question 17

What are the four pillars of ESG management ?

Answer 17

Governance, Strategy, Risk Management, Performance Metric and Targets

Question 18

What is governance in the context of ESG?

Answer 18

Governance - level of accountability corporate governing bodies maintain related to ESG performance

Question 19

What is strategy?

Answer 19

Strategy - how company strives to create value - indication of how well it understands operating environment, internal operating factors and actions that generate long term success

Question 20

What is risk management?

Answer 20

Risk Management - company’s process for identifying, assessing and managing risks, including those related to sustainability, is a key operating function that dictates how well a company can capture the full spectrum of of risks facing a business and can inform a user’s understanding of the adequacy of RM practices

Question 21

What are performance metrics and targets?

Answer 21

Performance Metrics and Targets - used to assess a company’s progress and relative performance

Question 22

What two main internal operating factors can be used to evaluate the financial materiality of sustainability information?

Answer 22

Source of revenue

Inputs of capital

Question 23

What four factors of a company’s external operating context influence financial materiality of sustainability information?

Answer 23

Business Climate
Economic Climate
Regulatory Climate
Operating Location(s)

Question 24

What role does governance, strategy, and risk management play in ESG analysis?

Answer 24

Can be used to guide analysis of
how well a company manages, or is prepared to manage, sustainability-related risks and
opportunities that can create, erode, or protect value over time

Question 25

How does Business Climate influence topics applied to a given company?

Answer 25

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

Question 26

What are some examples of competitive forces and peer company behaviors?

Answer 26

Pricing power
Competition for resources
Technological innovation
Expectations of key stakeholders - customers, employees, NGOs, community members

Question 27

How does Economic Climate influence topics applied to a given company?

Answer 27

A company’s economic environment is defined by - regional conditions that influence a company’s economic performance such as taxes, inflation, interest rates, commodity prices, and other factors

Question 28

How is a company’s Regulatory Climate defined?

Answer 28

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

Question 29

Companies that operate in countries where workers’ rights are not well protected by law could face more/less predictable financial impacts from issues related to fair labor practices, where the absence of regulation creates a higher/lower risk of experiencing acute events

Answer 29

Less - Higher

Question 30

Companies operating in regions where workers’ rights are well protected could be more/less likely to face acute risks but more/less likely to face higher ongoing costs of companies

Answer 30

Less - More

Question 31

Companies that have a record of non-compliance with regulations could face higher/lower costs of capital due to a higher/lower higher risk premium

Answer 31

Higher - Higher