Sample Questions Flashcards
For the following question, refer to Practice Case 4: Electric Utilities & Power Generators Industry.
1. What two types of financial impact does the metric, “customer electricity savings from
efficiency measures by market,” have on Company A? (Choose two.)
A. Increase in revenue
B. Decrease in revenue
C. Neutral impact on revenue
D. Increase in expenses
E. Decrease in expenses
F. Neutral impact on expenses
PRACTICE CASE 4: ELECTRIC UTILITIES & POWER
GENERATORS INDUSTRY
Companies in the Electric Utilities & Power Generators industry generate electricity, operate electricity transmission and distribution networks, and/or sell electricity to end-users, including households, businesses, and industrial plants. Electricity generation represents the largest source of GHG emissions in the world. Fuel combustion in electricity-generation operations produce both GHG emissions and hazardous air pollutants such as nitrogen oxides. Companies that provide
transmission and distribution services often source electricity from third parties in addition to distributing energy from owned fuel-combustion operations.
Regulated utilities accept comprehensive oversight from regulators on their pricing
mechanisms and their allowed return on equity in exchange for their license to operate as a monopoly. The cost of supplying electricity is highest during periods of high demand. To accommodate this, utilities may request rate increases. However, they may
be impacted to the extent that a requested rate increase exceeds the rate approved by regulators (regulatory lag). Utilities can also encourage consumers to efficiently use energy via education programs and/or implement demand response program, which allow consumers to reduce electricity use during periods of high demand.
Companies A and B are regulated utilities that generate electricity, then distribute and sell the electricity to residential and commercial customers. Company A operates in a region with aggressive GHG emissions reduction requirements, including a requirement for renewable energy sources to supply a minimum of 40% of the electricity distributed to customers and participation in a cap-and-trade scheme limiting carbon emissions. Company A is aware that GHG emissions regulation will likely become increasingly stringent in the future. Additionally, the revenue Company A earns is decoupled from the amount of electricity its customers consume, so revenues are not directly tied to the quantity of electricity sold.
Company B operates in a region currently without GHG emissions reduction
requirements, but is anticipating new regulation to be implemented in the near future. The revenue Company B earns is a direct product of the amount of electricity it sells to its customers (i.e., it is not “decoupled”). Company B recently expanded its operations to a new region to develop a new electricity generation plant. Both companies use smart grid technology to various extents, which enables greater opportunities to
increase end-user energy efficiency, thus reducing peak energy demand.
Below is operating and sustainability data for Companies A and B:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Number of residential customers
served
500,000 550,000 1,000,000 1,000,000
Total electricity generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Percentage non-renewable
70% 65% 50% 60%
Percentage renewable
30% 35% 50% 40%
Gross global Scope 1 emissions
(metric tons)
6,000,000 6,000,000 9,00,000 9,000,000
Percentage covered under
emissions-limiting regulation
100% 100% 0% 10%
Percentage covered under
emissions reporting regulation
100% 100% 50% 60%
Percentage of electric load served
by smart grid technology
30% 40% 20% 20%
Customer electricity savings from
efficiency measures by market
10% 12% 0% 0%
C & E
C. Neutral impact on revenue
E. Decrease in expenses
- This question evaluates Learning Objective 8.
A. This is incorrect. The metric “Customer electricity savings from efficiency measures by market,” captures the extent to which efficiency measures contribute to customer energy savings, or the extent to which customers can perform the same tasks while using less electricity. For Company A, revenue is decoupled from energy
sales. Therefore, a decrease in overall electricity consumption would not lead to an
increase in revenue.
B. This is incorrect for the same reason Option A is incorrect. Revenue for Company A will not decrease because revenues are not directly tied to the quantity of electricity sold.
C. This is CORRECT. Company A experienced a year-over-year increase in “Customer electricity savings from efficiency measures by market,” representing a decrease in the amount of energy needed for consumers to perform the same tasks. Within conventional rate structures where revenues are dictated by electricity sales quantities, such a performance improvement would be interpreted as having a negative effect on revenue. However, for Company A the effect on revenues will be neutral (neither positive nor negative) because a decoupled rate structure ensures that lower electricity consumption does not directly translate to lower sales. For more information, see Section 4.3.1. and 8.2.1.1.
D. This is incorrect. The case specifies that the cost of supplying electricity (an operating expense) is highest during periods of high demand. Efficiency measures that reduce customer electricity consumption would therefore have the opposite effect.
E. This is CORRECT. As detailed in Option D above, the case specifies that the cost of supplying electricity is highest during periods of high demand. In other words, higher demand for electricity translates to higher costs for companies. Customer
electricity savings measure the extent to which customers reduced their overall energy consumption. Company A reported that customers saved 10 percent and 12 percent in Years 1 and 2 respectively, which translates to lower demand and lower expenses associated with supplying electricity. As discussed in Section
8.2.1.2., expenses incurred related to sustainability issues often come in the form of operating expenses. The “Questions for Analysis” at the end of this section provide helpful heuristics for identifying sustainability-related expense impacts. In this case, the company can reduce costs by managing end-use efficiency.
F. This is incorrect. Given the logic defined in Option E above, an increase in customer electricity savings would result in a reduction to expenses associated with supplying electricity, which is not a neutral impact.
For the following question, refer to Practice Case 4: Electric Utilities & Power Generators Industry.
2. Which two sustainability issues have interrelated impacts for Company A and B?
(Choose two.)
A. Access and affordability
B. Energy management
C. GHG emissions
D. Air quality
E. Customer welfare
PRACTICE CASE 4: ELECTRIC UTILITIES & POWER
GENERATORS INDUSTRY
Companies in the Electric Utilities & Power Generators industry generate electricity, operate electricity transmission and distribution networks, and/or sell electricity to end-users, including households, businesses, and industrial plants. Electricity generation represents the largest source of GHG emissions in the world. Fuel combustion in electricity-generation operations produce both GHG emissions and hazardous air pollutants such as nitrogen oxides. Companies that provide transmission and distribution services often source electricity from third parties in addition to distributing energy from owned fuel-combustion operations.
Regulated utilities accept comprehensive oversight from regulators on their pricing
mechanisms and their allowed return on equity in exchange for their license to operate as a monopoly. The cost of supplying electricity is highest during periods of high demand. To accommodate this, utilities may request rate increases. However, they may be impacted to the extent that a requested rate increase exceeds the rate approved by regulators (regulatory lag). Utilities can also encourage consumers to efficiently use energy via education programs and/or implement demand response program, which allow consumers to reduce electricity use during periods of high demand.
Companies A and B are regulated utilities that generate electricity, then distribute and sell the electricity to residential and commercial customers. Company A operates in a region with aggressive GHG emissions reduction requirements, including a requirement for renewable energy sources to supply a minimum of 40% of the electricity distributed to customers and participation in a cap-and-trade scheme limiting carbon emissions. Company A is aware that GHG emissions regulation will likely become increasingly stringent in the future. Additionally, the revenue Company A earns is decoupled from the amount of electricity its customers consume, so revenues are not directly tied to the quantity of electricity sold.
Company B operates in a region currently without GHG emissions reduction
requirements, but is anticipating new regulation to be implemented in the near future. The revenue Company B earns is a direct product of the amount of electricity it sells to its customers (i.e., it is not “decoupled”). Company B recently expanded its operations to a new region to develop a new electricity generation plant. Both companies use smart grid technology to various extents, which enables greater opportunities to increase end-user energy efficiency, thus reducing peak energy demand.
Below is operating and sustainability data for Companies A and B:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Number of residential customers
served
500,000 550,000 1,000,000 1,000,000
Total electricity generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Percentage non-renewable
70% 65% 50% 60%
Percentage renewable
30% 35% 50% 40%
Gross global Scope 1 emissions
(metric tons)
6,000,000 6,000,000 9,00,000 9,000,000
Percentage covered under
emissions-limiting regulation
100% 100% 0% 10%
Percentage covered under
emissions reporting regulation
100% 100% 50% 60%
Percentage of electric load served
by smart grid technology
30% 40% 20% 20%
Customer electricity savings from
efficiency measures by market
10% 12% 0% 0%
C & D
C. GHG emissions
D. Air quality
- This question evaluates Learning Objective 3.
A. This is incorrect. As companies that provides services that meet a universal need – access to electricity – the issue of Access & Affordability is likely relevant to the financial performance of companies in the Electric Utilities & Power Generators industry. However, performance on this issue cannot be linked with performance on another issue based on the information provided in the case. See Section 2.1.2. and 2.2.
B. This is incorrect. The issue of Energy Management addresses environmental impacts associated with energy consumption. In other words, it captures a company’s management of energy as a key input. Companies in the Electric Utilities & Power Generators industry produce, distribute, and sell energy. This issue is not relevant to the financial performance of companies in this industry. For more information, see “Energy Management” in Section 2.1.1.
C. This is CORRECT. The issue of GHG Emissions addresses emissions that contribute to global warming. SASB Standards that include this issue focus on capturing direct Scope 1 emissions generated through company’s primary operations. Fuel combustion for energy production is a key activity of companies in this industry, as described in the first paragraph of the case. Fuel combustion produces both GHG emissions and airborne pollutants. Due to this common source, GHG emissions performance is interrelated with Air Quality performance. By addressing the performance of one, companies are likely to influence the performance of the other. See “GHG Emissions” in Section 2.1.1.
D. This is CORRECT. The issue of Air Quality relates to air pollution from human activities and captures performance data related to the management of airborne pollutants. As described in Option C above, both GHG emissions and airborne pollutants are a byproduct of energy production operations that rely on fuel combustion. As a result, efforts to manage (i.e. reduce) the production of airborne pollutants will likely influence a company’s GHG emissions performance as well. See “Air Quality” in Section 2.1.1.
E. This is incorrect. The issue of Customer Welfare is related to the benefits and risks customers experience when using a company’s products or services, such as food safety risk from restaurants. Based on the information provided, Customer Welfare is not relevant to the financial performance of the electric utility companies in this case. See “Customer Welfare” in Section 2.1.2.
For the following question, refer to Practice Case 4: Electric Utilities & Power Generators Industry.
3. Both Company A and Company B experienced the same level of GHG emissions from
Year 1 to Year 2. Which metric should be used to normalize “gross global Scope 1 emissions” to compare the companies’ GHG Emissions performance?
A. Number of residential customers served
B. Percent covered under emissions-reporting regulations
C. Total electricity generated (MWh)
D. Percent of electric load served by smart grid technology
PRACTICE CASE 4: ELECTRIC UTILITIES & POWER
GENERATORS INDUSTRY
Companies in the Electric Utilities & Power Generators industry generate electricity, operate electricity transmission and distribution networks, and/or sell electricity to end-users, including households, businesses, and industrial plants. Electricity generation represents the largest source of GHG emissions in the world. Fuel combustion in electricity-generation operations produce both GHG emissions and hazardous air pollutants such as nitrogen oxides. Companies that provide
transmission and distribution services often source electricity from third parties in addition to distributing energy from owned fuel-combustion operations.
Regulated utilities accept comprehensive oversight from regulators on their pricing mechanisms and their allowed return on equity in exchange for their license to operate as a monopoly. The cost of supplying electricity is highest during periods of high demand. To accommodate this, utilities may request rate increases. However, they may be impacted to the extent that a requested rate increase exceeds the rate approved by regulators (regulatory lag). Utilities can also encourage consumers to efficiently use energy via education programs and/or implement demand response program, which allow consumers to reduce electricity use during periods of high demand.
Companies A and B are regulated utilities that generate electricity, then distribute and sell the electricity to residential and commercial customers. Company A operates in a region with aggressive GHG emissions reduction requirements, including a requirement for renewable energy sources to supply a minimum of 40% of the electricity distributed to customers and participation in a cap-and-trade scheme limiting carbon emissions. Company A is aware that GHG emissions regulation will likely become increasingly stringent in the future. Additionally, the revenue Company A earns is decoupled from the amount of electricity its customers consume, so revenues are not directly tied to the quantity of electricity sold.
Company B operates in a region currently without GHG emissions reduction
requirements, but is anticipating new regulation to be implemented in the near future. The revenue Company B earns is a direct product of the amount of electricity it sells to its customers (i.e., it is not “decoupled”). Company B recently expanded its operations to a new region to develop a new electricity generation plant. Both companies use smart grid technology to various extents, which enables greater opportunities to
increase end-user energy efficiency, thus reducing peak energy demand.
Below is operating and sustainability data for Companies A and B:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Number of residential customers
served
500,000 550,000 1,000,000 1,000,000
Total electricity generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Percentage non-renewable
70% 65% 50% 60%
Percentage renewable
30% 35% 50% 40%
Gross global Scope 1 emissions
(metric tons)
6,000,000 6,000,000 9,00,000 9,000,000
Percentage covered under
emissions-limiting regulation
100% 100% 0% 10%
Percentage covered under
emissions reporting regulation
100% 100% 50% 60%
Percentage of electric load served
by smart grid technology
30% 40% 20% 20%
Customer electricity savings from
efficiency measures by market
10% 12% 0% 0%
C
C. Total electricity generated (MWh)
- This question evaluates Learning Objective 5.
A. This is incorrect. As detailed in the case, Company A and B serve a range of both residential and commercial customers. Normalizing by “number of residential customers served” is not the most useful metric to use in this instance because it does not capture the full scale of the company’s operations. As discussed in Section 4.2., normalization is useful as a means to take into account company scale during analysis, which helps to put performance data into meaningful context. Where scale is not appropriately reflected in metrics used for normalization, its usefulness is diminished.
B. This is incorrect. As a percent, the metric “percent covered under emissions-reporting
regulations” is already normalized and should not be used for normalization. If one were to normalize by this metric, they would calculate metric tons of emissions per one percent of emissions covered under emissions-reporting regulation – a number that does not produce any additional performance insight. See Section 4.1
C. This is CORRECT. Generally speaking, environmental metrics such as GHG emissions
are best normalized on a revenue or production basis. “Total electricity generated” is a production-focused metric, as both companies produce electricity as a primary source of revenue. When normalized, a user is able to compare metric tons of Scope 1 emissions generated per megawatt hour (MWh) of electricity produced:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Gross global Scope
1 emissions (metric
tons)
6,000,000 6,000,000 9,00,000 9,000,000
Total electricity
generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Gross global Scope
1 emissions / total
electricity generated
0.86 0.86 0.6 0.53
This metric allows the user to compare the relative emissions intensity of each company on a scale that is relatively easy to interpret. When normalized, the user gains the additional insight that although Company B generates more total emissions, it generates fewer emissions per MWh of electricity generated (i.e., has lower emissions intensity) and has improved its emissions intensity from Year 1 to Year 2.
See Section 4.2.
D. This is incorrect. As a percent, the metric “percent of electric load served by smart
grid technology” is already normalized and should not be used for normalization. If one were to normalize by this metric, they would calculate metric tons of emissions per one percent of electric load served by smart grid technology – a number that does not produce additional performance insight. See Section 4.1. and 4.2.2.
For the following question, refer to Practice Case 4: Electric Utilities & Power Generators Industry.
4. In the context of each company’s regulatory climate, which normalized metric indicates that Company B faces less near-term risk than Company A?
A. Percentage of electric load served by smart grid technology
B. Gross global Scope 1 emissions per total electricity generated
C. Total electricity generated per number of residential customers served
D. Percentage covered under emissions reporting regulations
PRACTICE CASE 4: ELECTRIC UTILITIES & POWER
GENERATORS INDUSTRY
Companies in the Electric Utilities & Power Generators industry generate electricity, operate electricity transmission and distribution networks, and/or sell electricity to end-users, including households, businesses, and industrial plants. Electricity generation represents the largest source of GHG emissions in the world. Fuel combustion in electricity-generation operations produce both GHG emissions and hazardous air pollutants such as nitrogen oxides. Companies that provide transmission and distribution services often source electricity from third parties in addition to distributing energy from owned fuel-combustion operations.
Regulated utilities accept comprehensive oversight from regulators on their pricing
mechanisms and their allowed return on equity in exchange for their license to operate as a monopoly. The cost of supplying electricity is highest during periods of high demand. To accommodate this, utilities may request rate increases. However, they may be impacted to the extent that a requested rate increase exceeds the rate approved by regulators (regulatory lag). Utilities can also encourage consumers to efficiently use energy via education programs and/or implement demand response program, which allow consumers to reduce electricity use during periods of high demand.
Companies A and B are regulated utilities that generate electricity, then distribute and sell the electricity to residential and commercial customers. Company A operates in a region with aggressive GHG emissions reduction requirements, including a requirement for renewable energy sources to supply a minimum of 40% of the electricity distributed to customers and participation in a cap-and-trade scheme limiting carbon emissions. Company A is aware that GHG emissions regulation will likely become increasingly stringent in the future. Additionally, the revenue Company A earns is decoupled from the amount of electricity its customers consume, so revenues are not directly tied to the quantity of electricity sold.
Company B operates in a region currently without GHG emissions reduction
requirements, but is anticipating new regulation to be implemented in the near future. The revenue Company B earns is a direct product of the amount of electricity it sells to its customers (i.e., it is not “decoupled”). Company B recently expanded its operations to a new region to develop a new electricity generation plant. Both companies use smart grid technology to various extents, which enables greater opportunities to increase end-user energy efficiency, thus reducing peak energy demand.
Below is operating and sustainability data for Companies A and B:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Number of residential customers
served 500,000 550,000 1,000,000 1,000,000
Total electricity generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Percentage non-renewable 70% 65% 50% 60%
Percentage renewable 30% 35% 50% 40%
Gross global Scope 1 emissions
(metric tons) 6,000,000 6,000,000 9,00,000 9,000,000
Percentage covered under emissions-limiting regulation 100% 100% 0% 10%
Percentage covered under emissions reporting regulation 100% 100% 50% 60%
Percentage of electric load served by smart grid technology 30% 40% 20% 20%
Customer electricity savings from efficiency measures by market 10% 12% 0% 0%
B
B. Gross global Scope 1 emissions per total electricity generated
- This question evaluates Learning Objective 7.
A. This is incorrect. The case defines the company’s regulatory climate by the presence of emissions reduction requirements, renewable portfolio standards, and a cap-andtrade scheme for carbon emissions. While this answer is indeed a normalized metric, and greater loads served by smart grid technology are associated with reduced GHG emissions via end-use efficiency and demand, it does not lend insight into the level of risk each company faces relative to the constraints enforced by regulators. Rather, it lends insight into the opportunity each company is able to capture associated with end-use efficiency. Furthermore, Company B performs worse than Company A on this metric.
B. This is CORRECT. When normalized, this metric reveals that Company B emits fewer GHG emissions than Company A per MWh of electricity generated.
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Gross global Scope
1 emissions (metric
tons)
6,000,000 6,000,000 9,00,000 9,000,000
Total electricity
generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Gross global Scope
1 emissions / total
electricity gener- ated
0.86 0.86 0.6 0.53
Considered in context, one also knows that Company B is likely to face new GHG emissions reduction regulation in the near future. While the extent of pending regulation is unknown, one can interpret Company B’s superior emissions performance as an indicator of preparedness amid a changing regulatory landscape when compared to Company A, which emits more emissions per MWh of electricity generated within a more-aggressive regulatory climate.
C. This is incorrect. As detailed in the case, the regulatory climate of Company A and B is characterized by increasingly stringent GHG emissions regulation. Total electricity generated per residential customer is a measure that captures energy production, which is not a direct indicator of GHG emissions performance. For example, a company with highly efficient operations that supplies primarily renewable energy may still deliver a high amount of electricity per customer while producing few GHG emissions. In addition, as discussed in Question 3, Option A above, “number of residential customers served” is not an ideal metric for use in normalization because
it does not capture the scale of each company’s business. See Section 4.2.
D. This is incorrect. The percentage of emissions covered under emissions reporting regulation is primarily associated with medium to long-term costs rather than nearterm risks. While the case data indicates that Company B is subject to lower levels
of emissions-reporting regulation, the user would need more information to evaluate any risks associated with noncompliance. For example, since Company A operates in a regulatory climate with high levels of emissions-reporting regulation, it is possible that Company A has effectively operationalized costs associated with emissions reporting and therefore faces less risk than Company B, since compliance costs are
less likely to erode value. See Section 7.2.1.2.
For the following question, refer to Practice Case 4: Electric Utilities & Power Generators Industry.
5. A user comparing the two companies concludes that Company A faces greater risk than Company B related to electricity generation. What evidence supports this conclusion?
A. Company A’s percentage renewable energy falls below current regulatory standards
B. Company A’s percentage non-renewable energy is decreasing at a slower rate
C. Company B faces more uncertainty related to emissions-limiting regulation
D. Company B generates more total electricity, indicating greater economic efficienc
PRACTICE CASE 4: ELECTRIC UTILITIES & POWER GENERATORS INDUSTRY
Companies in the Electric Utilities & Power Generators industry generate electricity, operate electricity transmission and distribution networks, and/or sell electricity to end-users, including households, businesses, and industrial plants. Electricity generation represents the largest source of GHG emissions in the world. Fuel combustion in electricity-generation operations produce both GHG emissions and hazardous air pollutants such as nitrogen oxides. Companies that provide transmission and distribution services often source electricity from third parties in addition to distributing energy from owned fuel-combustion operations.
Regulated utilities accept comprehensive oversight from regulators on their pricing
mechanisms and their allowed return on equity in exchange for their license to operate as a monopoly. The cost of supplying electricity is highest during periods of high demand. To accommodate this, utilities may request rate increases. However, they may be impacted to the extent that a requested rate increase exceeds the rate approved by regulators (regulatory lag). Utilities can also encourage consumers to efficiently use energy via education programs and/or implement demand response program, which allow consumers to reduce electricity use during periods of high demand.
Companies A and B are regulated utilities that generate electricity, then distribute and sell the electricity to residential and commercial customers. Company A operates in a region with aggressive GHG emissions reduction requirements, including a requirement for renewable energy sources to supply a minimum of 40% of the electricity distributed to customers and participation in a cap-and-trade scheme limiting carbon emissions. Company A is aware that GHG emissions regulation will likely become increasingly stringent in the future. Additionally, the revenue Company A earns is decoupled from the amount of electricity its customers consume, so revenues are not directly tied to the quantity of electricity sold.
Company B operates in a region currently without GHG emissions reduction
requirements, but is anticipating new regulation to be implemented in the near future. The revenue Company B earns is a direct product of the amount of electricity it sells to its customers (i.e., it is not “decoupled”). Company B recently expanded its operations to a new region to develop a new electricity generation plant. Both companies use smart grid technology to various extents, which enables greater opportunities to increase end-user energy efficiency, thus reducing peak energy demand.
Below is operating and sustainability data for Companies A and B:
COMPANY A COMPANY B
YEAR 1 YEAR 2 YEAR 1 YEAR 2
Number of residential customers served 500,000 550,000 1,000,000 1,000,000
Total electricity generated (MWh) 7,000,000 7,000,000 15,000,000 17,000,000
Percentage non-renewable 70% 65% 50% 60%
Percentage renewable 30% 35% 50% 40%
Gross global Scope 1 emissions (metric tons) 6,000,000 6,000,000 9,00,000 9,000,000
Percentage covered under emissions-limiting regulation 100% 100% 0% 10%
Percentage covered under emissions reporting regulation 100% 100% 50% 60%
Percentage of electric load served by smart grid technology 30% 40% 20% 20%
Customer electricity savings from efficiency measures by market 10% 12% 0% 0%
A
A. Company A’s percentage renewable energy falls below current regulatory standards
- This question evaluates Learning Objective 7.
A. This is CORRECT. Several competencies are required to answer this question. First, one must also be able to distinguish metrics that capture a risk from those that capture opportunity (see Section 7.1.). One must also compare the performance of each company in context. According to the case, Company A operates in a strictly regulated environment that currently requires 40 percent of electricity distributed to customers to come from renewable sources. While Company A’s percentage renewable electricity generation increased, it still falls below the minimum requirement by 5 percent in Year 2. This indicates that Company A is at significant risk of penalties and/or
regulatory action. Meanwhile, Company B operates in a regulatory environment that does not impose renewable portfolio standards and therefore faces less risk than Company A.
B. This is incorrect. As indicated by the data, Company A’s percentage non-renewable energy is indeed decreasing. However, Company B’s percentage non-renewable energy is increasing. It is therefore logically inaccurate to say Company A’s percentage non-renewable energy is decreasing at a slower
rate.
C. This is incorrect. While it is true that Company B faces more uncertainty
related to emissions-limiting regulation, that uncertainty does not necessarily translate to greater risk than Company A. In other words, there is not enough information about Company B to definitively compare relative risk associated with future regulation.
D. This is incorrect. While it is true that Company B generates more total
electricity, absolute “total electricity generated” values on their own are not enough to compare risk related to electricity production. If the companies were subject to an emissions cap, such as 10 million metric tons CO2
-e emitted annually, absolute numbers could be used to assess relative risk. See Section 4.3.
For the following question, refer to Practice Case 5: Non-Alcoholic Beverages Industry.
6. Which company faces the lowest level of risk related to water management?
A. Company A
B. Company B
C. Company C
D. Company D
PRACTICE CASE 5: NON-ALCOHOLIC BEVERAGES INDUSTRY
Companies in the Non-Alcoholic Beverage industry produce a variety of beverage products for personal consumption, such as juices, soft drinks, coffee and tea products, energy drink products, and others. Generally, the industry is not considered to be highly regulated. However, trends related to consumer health and environmental responsibility have become increasingly important to management teams.
Widely publicized medical research has linked the consumption of high-calorie,
high-sugar beverages to the growth in global obesity rates, increased risk of
heath disease, and other acute health impacts. As such, the nutritional content of products increasingly shapes the industry’s competitive landscape as consumers demand healthier products and greater transparency in product labeling. In some jurisdictions, concerns regarding the accuracy and truthfulness of product labelling and marketing have prompted labeling regulation, with scrutiny targeted toward products marketed to children. Companies that adapt to changing consumer preferences and an evolving regulatory environment by offering more healthful alternatives can capture additional market share and limit their exposure to regulation and litigation.
The Non-Alcoholic Beverages industry is a leading global consumer of fresh water. Water is the primary ingredient in substantially all of the industry’s products. Given companies’ heavy reliance on large volumes of clean water and the fact that water stress is increasing in different regions globally, companies may be exposed to supply disruptions that could significantly impact operations and add to costs and, in extreme cases, risk business as a going concern. As the industry is one of the
most exposed to water risk in direct and indirect operations, local governments in
regions facing increasing water stress have also instituted regulations mandating that manufacturing operations achieve certain efficiency thresholds and do not exceed total allowable limits on water withdrawal.
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions)
$11.6 $9.2 $14.4 $10.3
Number of production facilities
22 17 13 14
Revenue from low-calorie
drinks (billions)
$2.9 $4.6 $1.4 $3.0
Total water consumed (billion liters)
200 190 125 150
Percent of water consumed in regions with High Baseline Water Stress
10% 30% 20% 25%
Percent of water replenished
90% 70% 50% 60%
A
A. Company A
- This question evaluates Learning Objective 7.
A. This is CORRECT. To answer this question, one must identify the source of material risk for companies in the industry, then identify comparable metrics that lend insight into risk exposure for each company. The information in the case indicates that
water-related risk manifests in the form of potential supply disruptions. Two metrics lend insight into water supply and are provided as percentages, indicating they are already normalized and can be compared: “percent of water consumed in regions with High Baseline Water Stress,” and “percent water replenished.” Here, we see that Company A has the lowest “percent of water consumed in regions with High Baseline Water Stress” and the highest “percent of water replenished,” both indicators of positive performance and better performance than peer companies. See Section 4.3.2.
B. This is incorrect. Using the same logic described in Option A, one observes that Company B has the highest relative “percent of water consumed in regions with High Baseline Water Stress,” and replenishes less water than Company A. Therefore, Company B does not face the lowest level of risk.
C. This is incorrect. Using the same logic defined in Option A, one observes that Company C has a higher “percent of water consumed in regions with High Baseline Water Stress” than Company A and has the lowest rate of water replenished. Therefore, Company C does not face the lowest level of risk.
D. This is incorrect. Using the same logic defined in Option A, Company D has the second highest “percent of water consumed in regions with High Baseline Water Stress,” and the second lowest “percent of water replenished.” Therefore, Company D does not face the lowest level of risk.
For the following question, refer to Practice Case 5: Non-Alcoholic Beverages Industry.
- An analyst is comparing the operating efficiency of the four companies. What metric should they use to normalize “total water consumed”?
A. Number of production facilities
B. Total revenue
C. Revenue from low-calories drinks
D. Total fleet road miles traveled
PRACTICE CASE 5: NON-ALCOHOLIC BEVERAGES INDUSTRY
Companies in the Non-Alcoholic Beverage industry produce a variety of beverage products for personal consumption, such as juices, soft drinks, coffee and tea products, energy drink products, and others. Generally, the industry is not considered to be highly regulated. However, trends related to consumer health and environmental responsibility have become increasingly important to management teams.
Widely publicized medical research has linked the consumption of high-calorie, high-sugar beverages to the growth in global obesity rates, increased risk of heath disease, and other acute health impacts. As such, the nutritional content of products increasingly shapes the industry’s competitive landscape as consumers demand healthier products and greater transparency in product labeling. In some jurisdictions, concerns regarding the accuracy and truthfulness of product labelling and marketing have prompted labeling regulation, with scrutiny targeted toward products marketed to children. Companies that adapt to changing consumer preferences and an evolving regulatory environment by offering more healthful alternatives can capture additional market share and limit their exposure to regulation and litigation.
The Non-Alcoholic Beverages industry is a leading global consumer of fresh water. Water is the primary ingredient in substantially all of the industry’s products. Given companies’ heavy reliance on large volumes of clean water and the fact that water stress is increasing in different regions globally, companies may be exposed to supply disruptions that could significantly impact operations and add to costs and, in extreme cases, risk business as a going concern. As the industry is one of the
most exposed to water risk in direct and indirect operations, local governments in
regions facing increasing water stress have also instituted regulations mandating that manufacturing operations achieve certain efficiency thresholds and do not exceed total allowable limits on water withdrawal.
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions) $11.6 $9.2 $14.4 $10.3
Number of production facilities 22 17 13 14
Revenue from low-calorie drinks (billions)
$2.9 $4.6 $1.4 $3.0
Total water consumed (billion liters) 200 190 125 150
Percent of water consumed in regions with High Baseline Water Stress10% 30% 20% 25%
Percent of water replenished 90% 70% 50% 60%
A
A. Number of production facilities
- This question evaluates Learning Objective 5.
A. This is CORRECT. The metric “total water consumed” is not comparable on a stand-alone basis, as it is not normalized for scale and is not being compared to a performance benchmark expressed as an absolute value. To gain insight into relative levels of operating efficiency, one must normalize by a metric related to production capacity. See Section 4.2. In this case, “number of production facilities” serves as an appropriate metric, allowing the user to compare the amount of water consumed per
production facility on average:
COMPANY A COMPANY B COMPANY C COMPANY D
Number of production facilities 22 17 13 14
Total water consumed (billion liters) 200 190 125 150
Water consumed per production facility (billion liters/facility) 9.09 11.18 9.62 10.71
B. This is incorrect. While revenue may be a good metric to use to normalize “total water consumed” for other purposes, it does not lend direct insight into operating efficiency. The efficiency of a company’s operations is concerned with a company’s ability to produce the same goods with fewer inputs throughout the industrial processes required to produce beverage products. Were a user to normalize by total revenue, they would calculate the amount of revenue earned per liter of water consumed. This would be helpful in comparing economic efficiency, or how effectively the company generates revenue using current levels of water consumption. However, it lends little to no insight into how efficiently the company operates on a production basis. See Section 4.2.
C. This is incorrect. The metric “revenue from low-calorie drinks” does not lend insight into operating efficiency for the same reasons described in Option B. In addition, low calorie drinks are only a subset of companies’ total product portfolio. Therefore, the metric does not adequately capture the scale of company operations required for useful normalization. See Section 4.2.
D. This is incorrect. “Total fleet road miles traveled” does not put the metric “total water consumed” into meaningful context. No evidence in the case suggests that fleet
travel is relevant to water performance or companies’ overall operating efficiency. See Section 4.2.
For the following question, refer to Practice Case 5: Non-Alcoholic Beverages Industry.
- All else equal, how should Company B’s performance on the health and nutrition
sustainability topic be factored in to discounted cash flow analysis?
A. Increase cost of capital
B. Increase growth projections
C. Decrease expense projections
D. Decrease book value of assets
PRACTICE CASE 5: NON-ALCOHOLIC BEVERAGES INDUSTRY
Companies in the Non-Alcoholic Beverage industry produce a variety of beverage products for personal consumption, such as juices, soft drinks, coffee and tea products, energy drink products, and others. Generally, the industry is not considered to be highly regulated. However, trends related to consumer health and environmental responsibility have become increasingly important to management teams.
Widely publicized medical research has linked the consumption of high-calorie,
high-sugar beverages to the growth in global obesity rates, increased risk of
heath disease, and other acute health impacts. As such, the nutritional content of products increasingly shapes the industry’s competitive landscape as consumers demand healthier products and greater transparency in product labeling. In some jurisdictions, concerns regarding the accuracy and truthfulness of product labelling and marketing have prompted labeling regulation, with scrutiny targeted toward products marketed to children. Companies that adapt to changing consumer preferences and an evolving regulatory environment by offering more healthful alternatives can capture additional market share and limit their exposure to regulation and litigation.
The Non-Alcoholic Beverages industry is a leading global consumer of fresh water. Water is the primary ingredient in substantially all of the industry’s products. Given companies’ heavy reliance on large volumes of clean water and the fact that water stress is increasing in different regions globally, companies may be exposed to supply disruptions that could significantly impact operations and add to costs and, in extreme cases, risk business as a going concern. As the industry is one of the
most exposed to water risk in direct and indirect operations, local governments in
regions facing increasing water stress have also instituted regulations mandating that manufacturing operations achieve certain efficiency thresholds and do not exceed total allowable limits on water withdrawal.
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions)
$11.6 $9.2 $14.4 $10.3
Number of production facilities
22 17 13 14
Revenue from low-calorie
drinks (billions)
$2.9 $4.6 $1.4 $3.0
Total water consumed (billion liters)
200 190 125 150
Percent of water consumed in regions with High Baseline Water Stress
10% 30% 20% 25%
Percent of water replenished
90% 70% 50% 60%
B
B. Increase growth projections
- This question evaluates Learning Objective 10.
A. This is incorrect. To answer this question, one must consider both business climate and regulatory climate, which provide the important context that companies that adapt to changing consumer preferences for healthier products can capture market share and limit exposure to regulatory and legal risk. Generally, cost of capital may increase where ESG performance indicates greater financial risk. When compared to peer companies, one observes that Company B has both the greatest revenue from low-calorie drinks and generates the greatest percent of total revenue from low-calories drinks. Since no information provided indicates that Company B specifically faces regulatory and legal risk, it can be deduced that cost of capital will not increase. See Section 6.1.
B. This is CORRECT. As discussed in Section 8.2.3., a company’s growth projections reflect its position vis-à-vis its competitors to capture new and expanding markets. As discussed in Option A above, one observes in the data that Company B generates the greatest revenue from low-calorie drinks and the greatest percent of total
revenue from low-calories drinks:
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions) $11.6 $9.2 $14.4 $10.3
Revenue from
low-calorie drinks
(billions) $2.9 $4.6 $1.4 $3.0
Revenue from low-calorie drinks as a percent of total
revenue 25% 50% 10% 29% This indicates that, relative to peers, Company B is best positioned to capture growing consumer demand for healthier beverages, thereby suggesting an increase in growth projections may be warranted.
C. This is incorrect. The metric “revenue from low-calorie drinks” is the only metric provided related to health and nutrition. It explicitly captures revenues and does not lend insight into related expenses or cost savings. See Section 8.2.1.2.
D. This is incorrect. The metric “revenue from low-calorie drinks” is the only metric provided related to health and nutrition. It explicitly
For the following question, refer to Practice Case 5: Non-Alcoholic Beverages Industry.
- A user is applying the five factors to understand how water management effects the financial performance of companies in this industry. Which three of the five factors lend insight into the nature of financial impact? (Choose three.)
A. Direct financial impacts and risks
B. Legal, regulatory, and policy drivers
C. Industry norms, best practices, and competitive drivers
D. Classification of supplier quality by water use intensity
E. Management focus on license to operate
PRACTICE CASE 5: NON-ALCOHOLIC BEVERAGES INDUSTRY
Companies in the Non-Alcoholic Beverage industry produce a variety of beverage products for personal consumption, such as juices, soft drinks, coffee and tea products, energy drink products, and others. Generally, the industry is not considered to be highly regulated. However, trends related to consumer health and environmental responsibility have become increasingly important to management teams.
Widely publicized medical research has linked the consumption of high-calorie, high-sugar beverages to the growth in global obesity rates, increased risk of
heath disease, and other acute health impacts. As such, the nutritional content of products increasingly shapes the industry’s competitive landscape as consumers demand healthier products and greater transparency in product labeling. In some jurisdictions, concerns regarding the accuracy and truthfulness of product labelling and marketing have prompted labeling regulation, with scrutiny targeted toward products marketed to children. Companies that adapt to changing consumer preferences and an evolving regulatory environment by offering more healthful alternatives can capture additional market share and limit their exposure to regulation and litigation.
The Non-Alcoholic Beverages industry is a leading global consumer of fresh water. Water is the primary ingredient in substantially all of the industry’s products. Given companies’ heavy reliance on large volumes of clean water and the fact that water stress is increasing in different regions globally, companies may be exposed to supply disruptions that could significantly impact operations and add to costs and, in extreme cases, risk business as a going concern. As the industry is one of the
most exposed to water risk in direct and indirect operations, local governments in
regions facing increasing water stress have also instituted regulations mandating that manufacturing operations achieve certain efficiency thresholds and do not exceed total allowable limits on water withdrawal.
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions)
$11.6 $9.2 $14.4 $10.3
Number of production facilities
22 17 13 14
Revenue from low-calorie
drinks (billions)
$2.9 $4.6 $1.4 $3.0
Total water consumed (billion liters)
200 190 125 150
Percent of water consumed in regions with High Baseline Water Stress
10% 30% 20% 25%
Percent of water replenished
90% 70% 50% 60%
A, B & C
A. Direct financial impacts and risks
B. Legal, regulatory, and policy drivers
C. Industry norms, best practices, and competitive drivers
- This question evaluates Learning Objective 4.
A. This is CORRECT. This factor lends insight into the nature of financial impact associated with a sustainability issue when it is, or can be, captured by existing line items on a company’s financial statements. Water management is reflected in financial statements in expenses (water is a key input that must be paid for, and the cost of water can change over time). As indicated in the case, supply disruptions can also lead to increased costs, which would be directly captured in financial statements. See Section 3.1.
B. This is CORRECT. This factor is relevant where an ESG issue is regulated or may be subject to new or emerging regulation. As indicated in the case, regulatory limits are being imposed in regions subject to increasing water stress. Financial impacts associated with this factor may include capital expenditures for manufacturing efficiency improvements or penalties for noncompliance. See Section 3.1.
C. This is CORRECT. This factor relates to the practices of peer firms as competitive drivers for sustainability performance. Consistent disclosure of water use data across companies as well as the fact that investors increasingly take interest in company water use performance indicates that companies compete on water performance in this industry. See Section 3.1.
D. This is incorrect. “Classification of supplier quality by water use intensity” is not one of the five factors. See Section 3.1.
E. This is incorrect. “Management focus on license to operate” is not one of the five factors. See Section 3.1.
For the following question, refer to Practice Case 5: Non-Alcoholic Beverages Industry.
- Assuming each company operates in regions where consumers demonstrate an
increasingly high willingness to pay for healthy, low-calories products, which company
is best positioned to capture market share?
A. Company A
B. Company B
C. Company C
D. Company D
PRACTICE CASE 5: NON-ALCOHOLIC BEVERAGES INDUSTRY
Companies in the Non-Alcoholic Beverage industry produce a variety of beverage products for personal consumption, such as juices, soft drinks, coffee and tea products, energy drink products, and others. Generally, the industry is not considered to be highly regulated. However, trends related to consumer health and environmental responsibility have become increasingly important to management teams.
Widely publicized medical research has linked the consumption of high-calorie,
high-sugar beverages to the growth in global obesity rates, increased risk of
heath disease, and other acute health impacts. As such, the nutritional content of products increasingly shapes the industry’s competitive landscape as consumers demand healthier products and greater transparency in product labeling. In some jurisdictions, concerns regarding the accuracy and truthfulness of product labelling and marketing have prompted labeling regulation, with scrutiny targeted toward products marketed to children. Companies that adapt to changing consumer preferences and an evolving regulatory environment by offering more healthful alternatives can capture additional market share and limit their exposure to regulation and litigation.
The Non-Alcoholic Beverages industry is a leading global consumer of fresh water. Water is the primary ingredient in substantially all of the industry’s products. Given companies’ heavy reliance on large volumes of clean water and the fact that water stress is increasing in different regions globally, companies may be exposed to supply disruptions that could significantly impact operations and add to costs and, in extreme cases, risk business as a going concern. As the industry is one of the
most exposed to water risk in direct and indirect operations, local governments in
regions facing increasing water stress have also instituted regulations mandating that manufacturing operations achieve certain efficiency thresholds and do not exceed total allowable limits on water withdrawal.
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions)
$11.6 $9.2 $14.4 $10.3
Number of production facilities
22 17 13 14
Revenue from low-calorie
drinks (billions)
$2.9 $4.6 $1.4 $3.0
Total water consumed (billion liters)
200 190 125 150
Percent of water consumed in regions with High Baseline Water Stress
10% 30% 20% 25%
Percent of water replenished
90% 70% 50% 60%
B
B. Company B
- This question evaluates Learning Objective 7.
A. This is incorrect. Companies are positioned to capture market share related to ESG when ESG performance contributes to increased revenue related to innovation and/or the ability to capture demand related to market trends. The company best positioned to capture market share is the one which demonstrates the best ability to grow revenues accordingly. See Section 3.1., 8.2.1.1., and 8.2.3. In the absence of time series data, one can assume that the company with the best ability to capture market share is the one that demonstrates the best performance in this regard. To compare performance, revenue from low-calorie drinks must be normalized:
COMPANY A COMPANY B COMPANY C COMPANY D
Total revenue (billions) $11.6 $9.2 $14.4 $10.3
Revenue from
low-calorie drinks
(billions)
$2.9 $4.6 $1.4 $3.0
Revenue from
low-calorie drinks
as a percent of total
revenue 25% 50% 10% 29%
Once normalized, one observes that Company A has both the third lowest total revenue from low-calorie drinks and the third lowest percent of total revenue from low calorie drinks, and is therefore not best positioned to capture market share.
B. This is CORRECT. Using the logic outlined in Option A above, one observes that Company B has both the highest revenue from low-calorie drinks and the highest percent of revenue from low-calorie drinks, and is therefore best positioned to capture additional market share.
C. This is incorrect. Using the logic outlined in Option A above, one observes that Company C has both the lowest revenue from low-calorie drinks and the lowest percent of revenue from low-calorie drinks, and is therefore worst positioned among peers to capture market share.
D. This is incorrect. Using the logic outlined in Option A above, one observes that Company D has significantly lower revenue from low-calorie drinks (both as an absolute value and as a percent of total revenue) than Company B, and therefore is not best positioned to capture market share.
Answer the following question for Case Study Hotels & Lodging Industry
1 If an analyst determines that Company A is less likely than Company B to face material impacts from environmental and climate risks, what piece of information would likely lead to that conclusion?
A. The percent of revenue from coastal regions
B. The percent of revenue from business customers
C. The reclaim rate of plastic hotel room keys
D. The amount of energy needed to generate $1 of revenue
CASE STUDY 1 - HOTELS & LODGING INDUSTRY
Key revenue drivers in the Hotels & Lodging industry include consumer and business discretionary spending, domestic and international travel, and consumers’ sense of financial security. Major costs include wages and purchases (room supplies, food, and beverages), which together account for over 60% of revenue. Since the industry is very capital-intensive for hotel owners, some companies have transitioned their business models away from direct property ownership to hotel management via franchising and third party property ownership.
Hotel and lodging companies have relatively large consumption of, and dependence on, energy and water resources though they are not the industry’s greatest source of operating
costs. Variability in energy prices or water availability impacts financial results or even the ability to operate. In the U.S., the average retail price of electricity for the commercial end-use sector was 7.25 cents per kilowatt-hour (kWh) in 2001 and is projected to increase to 18.5
cents per kWh by 2040, representing a 2.4% increase annually.
The industry also relies heavily on human capital for guest services and daily operations.
These jobs typically require long working hours and are filled by a large percentage of women and immigrants. Furthermore, as approximately 80% of all tourism takes place in coastal areas, the industry faces challenges from shifting weather patterns and rising sea levels.
Below is information from two companies in the Hotels & Lodging industry, which may or may not be material. Note that determining the average number of occupied rooms requires multiplying the average occupancy rate by the number of hotel rooms.
Company A Company B
Revenue (in millions) $1,840 $6,420
Number of Hotel Rooms 92,896 128,234
Average occupancy rate 71% 82%
% Locations owned (as opposed to leased) 65% 30%
% of revenue from leisure/tourism customers 35% 72%
Percent of revenue from:
Mountain regions 30% 15%
Landlocked, non-mountain regions 60% 45%
Coastal regions 10% 40%
Total energy consumed (in thousands of gigajoules) 5,132 3,725
Reclaim rate of hotel room keys 79% 31%
Total water withdrawn (in thousands of cubic meters) 12,120 8,478
Water withdrawn in regions with high/extremely high
water stress (in thousands of cubic meters)
2,545 2,296
Voluntary employee turnover rate for hotel employees 60% 95%
Total employee workplace injury rate (incidents per
thousand hours worked)
1.2 0.4
A
A. The percent of revenue from coastal regions
Answer the following question for Case Study Hotels & Lodging Industry
2 An analyst comparing the two companies’ ,anagement of water use found that, on a normalized basis, Company A was actually outperforming Company B. Which normalization did the analyst use?
A. Revenue generated per cubic meter of water withdrawn
B. Cubic meters of water withdrawn per total number of rooms
C. Cubic meters of water withdrawn per average number of occupied rooms
D. Percent of water withdrawn from regions with high/extremely high water stress
CASE STUDY 1 - HOTELS & LODGING INDUSTRY
Key revenue drivers in the Hotels & Lodging industry include consumer and business discretionary spending, domestic and international travel, and consumers’ sense of financial security. Major costs include wages and purchases (room supplies, food, and beverages), which together account for over 60% of revenue. Since the industry is very capital-intensive for hotel owners, some companies have transitioned their business models away from direct property ownership to hotel management via franchising and third party property ownership.
Hotel and lodging companies have relatively large consumption of, and dependence on, energy and water resources though they are not the industry’s greatest source of operating
costs. Variability in energy prices or water availability impacts financial results or even the ability to operate. In the U.S., the average retail price of electricity for the commercial end-use sector was 7.25 cents per kilowatt-hour (kWh) in 2001 and is projected to increase to 18.5
cents per kWh by 2040, representing a 2.4% increase annually.
The industry also relies heavily on human capital for guest services and daily operations.
These jobs typically require long working hours and are filled by a large percentage of women and immigrants. Furthermore, as approximately 80% of all tourism takes place in coastal areas, the industry faces challenges from shifting weather patterns and rising sea levels.
Below is information from two companies in the Hotels & Lodging industry, which may or may not be material. Note that determining the average number of occupied rooms requires multiplying the average occupancy rate by the number of hotel rooms.
Company A Company B
Revenue (in millions) $1,840 $6,420
Number of Hotel Rooms 92,896 128,234
Average occupancy rate 71% 82%
% Locations owned (as opposed to leased) 65% 30%
% of revenue from leisure/tourism customers 35% 72%
Percent of revenue from:
Mountain regions 30% 15%
Landlocked, non-mountain regions 60% 45%
Coastal regions 10% 40%
Total energy consumed (in thousands of gigajoules) 5,132 3,725
Reclaim rate of hotel room keys 79% 31%
Total water withdrawn (in thousands of cubic meters) 12,120 8,478
Water withdrawn in regions with high/extremely high water stress (in thousands of cubic meters) 2,545 2,296
Voluntary employee turnover rate for hotel employees 60% 95%
Total employee workplace injury rate (incidents per thousand hours worked) 1.2 0.4
D
D. Percent of water withdrawn from regions with high/extremely high water stress
Answer the following question for Case Study Hotels & Lodging Industry
3 As compared to Company A, how would Company B’s performance on energy management predominantly impact the valuation model?
A. Decrease cost of capital
B. Increase growth projections
C. Decrease expense projections
D. Increase book value of assets
CASE STUDY 1 - HOTELS & LODGING INDUSTRY
Key revenue drivers in the Hotels & Lodging industry include consumer and business discretionary spending, domestic and international travel, and consumers’ sense of financial security. Major costs include wages and purchases (room supplies, food, and beverages), which together account for over 60% of revenue. Since the industry is very capital-intensive for hotel owners, some companies have transitioned their business models away from direct property ownership to hotel management via franchising and third party property ownership.
Hotel and lodging companies have relatively large consumption of, and dependence on, energy and water resources though they are not the industry’s greatest source of operating
costs. Variability in energy prices or water availability impacts financial results or even the ability to operate. In the U.S., the average retail price of electricity for the commercial end-use sector was 7.25 cents per kilowatt-hour (kWh) in 2001 and is projected to increase to 18.5
cents per kWh by 2040, representing a 2.4% increase annually.
The industry also relies heavily on human capital for guest services and daily operations.
These jobs typically require long working hours and are filled by a large percentage of women and immigrants. Furthermore, as approximately 80% of all tourism takes place in coastal areas, the industry faces challenges from shifting weather patterns and rising sea levels.
Below is information from two companies in the Hotels & Lodging industry, which may or may not be material. Note that determining the average number of occupied rooms requires multiplying the average occupancy rate by the number of hotel rooms.
Company A Company B
Revenue (in millions) $1,840 $6,420
Number of Hotel Rooms 92,896 128,234
Average occupancy rate 71% 82%
% Locations owned (as opposed to leased) 65% 30%
% of revenue from leisure/tourism customers 35% 72%
Percent of revenue from:
Mountain regions 30% 15%
Landlocked, non-mountain regions 60% 45%
Coastal regions 10% 40%
Total energy consumed (in thousands of gigajoules) 5,132 3,725
Reclaim rate of hotel room keys 79% 31%
Total water withdrawn (in thousands of cubic meters) 12,120 8,478
Water withdrawn in regions with high/extremely high
water stress (in thousands of cubic meters)
2,545 2,296
Voluntary employee turnover rate for hotel employees 60% 95%
Total employee workplace injury rate (incidents per
thousand hours worked)
1.2 0.4
C
C. Decrease expense projections
Answer the following question for Case Study Hotels & Lodging Industry
4 How will performance on SASB metrics impact Company A’s valuation as compared to Company B?
A. Company B’s higher percentage of revenue from leisure customers will likely decrease valuation.
B. Company B’s lower reclamation rate of hotel room keys will likely increase valuation.
C. Company A’s lower percentage of revenue from coastal regions will likely decrease valuation.
D. Company A’s lower voluntary employee turnover rate will likely increase valuation.
CASE STUDY 1 - HOTELS & LODGING INDUSTRY
Key revenue drivers in the Hotels & Lodging industry include consumer and business discretionary spending, domestic and international travel, and consumers’ sense of financial security. Major costs include wages and purchases (room supplies, food, and beverages), which together account for over 60% of revenue. Since the industry is very capital-intensive for hotel owners, some companies have transitioned their business models away from direct property ownership to hotel management via franchising and third party property ownership.
Hotel and lodging companies have relatively large consumption of, and dependence on, energy and water resources though they are not the industry’s greatest source of operating costs. Variability in energy prices or water availability impacts financial results or even the ability to operate. In the U.S., the average retail price of electricity for the commercial end-use sector was 7.25 cents per kilowatt-hour (kWh) in 2001 and is projected to increase to 18.5 cents per kWh by 2040, representing a 2.4% increase annually.
The industry also relies heavily on human capital for guest services and daily operations.
These jobs typically require long working hours and are filled by a large percentage of women and immigrants. Furthermore, as approximately 80% of all tourism takes place in coastal areas, the industry faces challenges from shifting weather patterns and rising sea levels.
Below is information from two companies in the Hotels & Lodging industry, which may or may not be material. Note that determining the average number of occupied rooms requires multiplying the average occupancy rate by the number of hotel rooms.
Company A Company B
Revenue (in millions) $1,840 $6,420
Number of Hotel Rooms 92,896 128,234
Average occupancy rate 71% 82%
% Locations owned (as opposed to leased) 65% 30%
% of revenue from leisure/tourism customers 35% 72%
Percent of revenue from:
Mountain regions 30% 15%
Landlocked, non-mountain regions 60% 45%
Coastal regions 10% 40%
Total energy consumed (in thousands of gigajoules) 5,132 3,725
Reclaim rate of hotel room keys 79% 31%
Total water withdrawn (in thousands of cubic meters) 12,120 8,478
Water withdrawn in regions with high/extremely high water stress (in thousands of cubic meters)
2,545 2,296
Voluntary employee turnover rate for hotel employees 60% 95%
Total employee workplace injury rate (incidents per thousand hours worked) 1.2 0.4
D
D. Company A’s lower voluntary employee turnover rate will likely increase valuation.
5 Due to the differences in revenue streams, management of which sustainability topic(s) will likely have more material impacts for Company B than for Company A?
A. Data privacy
B. Affordability and fair pricing
C. Systemic risks from technology disruptions
D. Recruitment and retention of a diverse workforce
CASE STUDY 2 - TELECOMMUNICATIONS INDUSTRY
The Telecommunications industry is the foundation of modern communications and information sharing, fueled by the growth of the Internet economy. The U.S. is the largest telecom market in the
world, expected to grow by 3.7% per year in the next 5 years. Meanwhile, emerging markets are averaging growth rates closer to 12% per year.
Telecom companies work in partnership with phone manufacturers to bundle services and devices, such as mobile phones. This carries a shared responsibility for device end-of–life management. Mobile phones are a target for developing legislation related to electronic waste (e-waste) since these devices are typically replaced every two to five years. Improper disposal can lead to hazardous substances leaching into the environment, threatening human health. Telecom companies’ customer relationships provide an opportunity for cost savings for materials via product recycling and re-use.
Similarly, telecom companies can pursue various strategies to achieve cost savings through energy efficiency efforts, including purchasing more efficient equipment, optimizing the locations for network equipment and data centers, and implementing server virtualization. In addition, long-term power purchase agreements with renewable energy providers or on-site generation can provide a hedge against volatile energy prices.
Companies A and B are two telecom companies. Company A is a market leader in North America, which is its largest geographic source of revenue. In a networked industry with high, fixed
infrastructure costs, market leaders benefit from network effects and economies of scale. This, in turn,
allows for infrastructure upgrades to deliver better services. On the other hand, telecom companies face risks from anti-trust regulation aimed at fostering competition.
Company B recently acquired a software company, which had revenues last year equivalent to 18% of Company’s B’s revenues. In the Software industry, the number of job openings continues to grow but companies are finding it difficult to recruit qualified employees, especially as other firms compete for highly-skilled employees. The industry is characterized by relatively low representation from women and minority groups so efforts to recruit from and develop diverse talent pools can mitigate the talent shortage. Moreover, a workforce that reflects a company’s customer base can help companies better understand their customers’ needs.
Below is information about companies A and B from the most recent fiscal year.
Company A Company B
Revenue (in millions) $66,840 $65,428
Wireless subscribers (in millions) 69,632 68,327
Wireless network bandwidth capacity (in megabits per second)
12.78 12.23
Distribution of network infrastructure
% in North and South America 50% 35%
% in Europe and Russia 25% 15%
% in Africa 10% 30%
% in Asia and Oceania 15% 20%
Total energy consumed (in thousands of megawatt-hours) 8,150 7,980
percentage grid electricity 85% 88%
percentage renewable energy 15% 12%
% of customers’ personally identifiable information compromised in data security breaches last year
0.5% 6%
Materials recovered through take back programs, percentage of recovered materials that are:
reused, 22% 8%
recycled, and 8% 22%
landfilled 70% 70%
Amount of legal and regulatory fines and settlements associated with anti-competitive practices (in thousands)
N/A N/A
D
D. Recruitment and retention of a diverse workforce
6 When comparing Company A’s performance to Company B’s, what external factor(s) provides relevant insight into differences in near-term forecasts for the two companies?
A. Rising costs and legislative focus on energy use
B. Growth in emerging markets
C. Growth in wireless data use
D. Legislation to increase product reclamation
CASE STUDY 2 - TELECOMMUNICATIONS INDUSTRY
The Telecommunications industry is the foundation of modern communications and information sharing, fueled by the growth of the Internet economy. The U.S. is the largest telecom market in the world, expected to grow by 3.7% per year in the next 5 years. Meanwhile, emerging markets are averaging growth rates closer to 12% per year. Telecom companies work in partnership with phone manufacturers to bundle services and devices, such as mobile phones. This carries a shared responsibility for device end-of–life management. Mobile phones are a target for developing legislation related to electronic waste (e-waste) since these devices are typically replaced every two to five years. Improper disposal can lead to hazardous substances leaching into the environment, threatening human health. Telecom companies’ customer relationships provide an opportunity for cost savings for materials via product recycling and re-use.
Similarly, telecom companies can pursue various strategies to achieve cost savings through energy efficiency efforts, including purchasing more efficient equipment, optimizing the locations for network equipment and data centers, and implementing server virtualization. In addition, long-term power purchase agreements with renewable energy providers or on-site generation can provide a hedge against volatile energy prices.
Companies A and B are two telecom companies. Company A is a market leader in North America, which is its largest geographic source of revenue. In a networked industry with high, fixed infrastructure costs, market leaders benefit from network effects and economies of scale. This, in turn, allows for infrastructure upgrades to deliver better services. On the other hand, telecom companies face risks from anti-trust regulation aimed at fostering competition.
Company B recently acquired a software company, which had revenues last year equivalent to 18% of Company’s B’s revenues. In the Software industry, the number of job openings continues to grow but companies are finding it difficult to recruit qualified employees, especially as other firms compete for highly-skilled employees. The industry is characterized by relatively low representation from women and minority groups so efforts to recruit from and develop diverse talent pools can mitigate the talent shortage. Moreover, a workforce that reflects a company’s customer base can help companies better understand their customers’ needs.
Below is information about companies A and B from the most recent fiscal year.
Company A Company B
Revenue (in millions) $66,840 $65,428
Wireless subscribers (in millions) 69,632 68,327
Wireless network bandwidth capacity (in megabits per second) 12.78 12.23
Distribution of network infrastructure
% in North and South America 50% 35%
% in Europe and Russia 25% 15%
% in Africa 10% 30%
% in Asia and Oceania 15% 20%
Total energy consumed (in thousands of megawatt-hours) 8,150 7,980
percentage grid electricity 85% 88%
percentage renewable energy 15% 12%
% of customers’ personally identifiable information compromised in data security breaches last year 0.5% 6%
Materials recovered through take back programs, percentage of recovered materials that are:
reused, 22% 8%
recycled, and 8% 22%
landfilled 70% 70%
Amount of legal and regulatory fines and settlements associated with anti-competitive practices (in thousands) N/A N/A
B
B. Growth in emerging markets
