W2 - Voluntary ESG disclosures and ratings Flashcards
What is the Triple Bottom Line
People, Planet, Profits
broad definition of sustainability
corporate obligation to meet the needs of the present without compromising the resources available for future generations.
What is single and double materiality in ESG
Single materiality: An item is relevant to investors’ interests (entity focus)
Double-materiality: an action is relevant due to its impacts on both the entity and other stakeholders
Describe the Coase Theorem
Argued that market inefficiencies due to externalities can be mitigated by bargaining between those affected by externalities and those producing them
Only feasible if bargaining costs are low, property rights well defined and information is symmetrical
Measurement is necessary but challenging, especially for non-market goods like pollution
What are Pigouvian Taxes
Producers required to pay a tax amount equal to the negative externality caused by their production decisions
Incentivises behaviour change which reduces externalities
Measuring cost of the externality is crucial
Carbon emissions tax or tax on plastic bags are examples
Volumes of ESG disclosures have increased rapidly over the past two decades. What are some channels of disclosures?
Grewal et al., 2016
- Periodic corporate social responsibility reports
- Statements included within the main annual report
- Social media disclosures
Membership of particular organisations or certification (e.g. B- corp)
Grewal et al., 2016
Why do firms make voluntary financial accounting disclosures?
Disclose if benefits > cost e.g. improved access to capital markets, lower cost of capital, higher firm value, greater analyst following
What are Scope 1 emissions
What they are: Emissions released directly from sources your company owns or controls.
Examples:
- Company-owned vehicles burning fuel.
- Fuel combustion in manufacturing facilities.
- Chemical processes within your factories.
What are Scope 2 emissions
What they are: Emissions associated with the generation of the electricity, heat, or steam your company purchases and uses.
Examples:
- Electricity from the grid to power your office buildings.
- Purchased steam to heat your facilities.
What are Scope 3 emissions
All other indirect emissions that occur in your company’s value chain, both upstream and downstream from your own operations. This is often the largest source of emissions.
Examples:
- Emissions from raw materials your company purchases.
- Emissions from transportation of goods by third-party providers.
- Business travel (flights, hotels, etc.).
- The use and disposal of your products by customers.
Employee commuting.
Given an overview of the JetBlue case
- Founding Mission: JetBlue was founded in 1998 with a mission to “bring humanity back to air travel” by focusing on customer and employee satisfaction, quickly growing to account for over 5% of the U.S. domestic market share by 2017
- JetBlue’s Head of Sustainability, Sophia Mendelsohn, led initiatives to improve fuel efficiency, invest in renewable jet fuel, and consider adopting the SASB airline standard to disclose sustainability issues to the investment community
- JetBlue implemented initiatives to enhance customer experience, such as offering more legroom and increased entertainment options.
- JetBlue formed partnerships with international airlines, expanded its service offerings with initiatives like the “Mint” premium service, and focused on sustainability to drive market growth, brand reputation, and operational efficiency
What are the costs and benefits associated with voluntary ESG disclosure
Costs:
- Data collection and reporting
- Potential for Greenwashing
- Focus on short-term costs
Benefits:
- Improved Brand Reputation and Investor Confidence
- Access to Capital: Some investment funds and lenders prioritise companies with strong ESG practices
- Reduced Regulatory Risk:
What are the main factors leading to ESG divergence.
Which paper does this come from
Measurement divergence refers to the situation where rating agencies measure the same attribute using different indicators. This can lead to variations in ratings based on how specific aspects of ESG performance are assessed.
Scope divergence occurs when ratings are based on different sets of attributes, meaning that one agency may include certain factors in their assessment while another may not, leading to differences in ratings.
Weight divergence arises when rating agencies assign different levels of importance or weight to various attributes, impacting the final ESG rating given to a company .
Aggregate Confusion: The Divergence of
ESG Ratings (Berg et al. 2022)
What are 4 frameworks for standardising disclosures
- Global Reporting Initiative (GRI)
- Sustainability Standards Accounting Board (SASB)
- Task-force on Climate related Financial Disclosures (TCFD)
- Carbon Disclosure Project (CDP)
