Week 1 and 2

Question 1

What is the the company’s integrated value (IV) equation?

Answer 1

Max IV: FV + SV + EV
The traditional goal is maximising financial value for shareholders. The goal function is broadened toward steering on financial value (FV), social value (SV), and environmental value (EV) in an integrated way.

Question 2

What are the four driving forces behind the internalisation of SV and EV into FV:

Answer 2

License to operate
Regulation and taxation
Technological advancement
Customer preferences

Dynamic perspective, but timing is uncertain

Question 3

Why is it in companies’ interest to manage for integrated value?

Two reasons

Answer 3

If company management neglects SV or EV, that will hurt long-term FV as well. Two reasons:

• Ethical case - license to operate -> corporate responsibility (case for SV and EV)
• Business case – long-term value creation (case for FV)
  Companies that create value on SV and EV are more likely to be value creative on FV in the long run
  As external impacts are being internalised, they affect FV

Question 4

I. Planetary Boundaries
What is the purpose of the planetary boundaries?
A. Defines the limits in nine areas of the planet which humanity must not exceed to maintain a liveable planet.
B. Outlines the maximum GDP levels beyond which climate change will be irreversible.
C. Shows the amount of import / export that a country should not exceed, to protect domestic companies.
D. Indicates the annual date when the earth’s yearly resources have been exhausted.

Answer 4

A. Defines the limits in nine areas of the planet which humanity must not exceed to maintain a liveable planet.

Question 5

II. Integrated shareholder model
How does the integrated stakeholder model differ from the traditional version?

Answer 5

It recognises that good relations with stakeholders might boost financial firm value.

Question 6

III. Social and ecological value creation
A company that generates economic profits, will likely…
A. Create social and ecological value.
B. Destroy social and ecological value.
C. Create social value but destroy ecological value.
D. Destroy social value but create ecological value.
E. All of the above are possible.

Answer 6

E. All of the above are possible.

Question 7

IV. Price Internalisation
If the negative externalities of a product are internalised into the price, but the cost of sales remains the same, how does a firm’s gross profit margin change?
A. Increase
B. Decrease
C. Remain
D. Not possible to say based on the provided information.

Answer 7

A. Increase

Question 8

V. Corporate Governance
Which of the following broad statements about corporate governance issues is false?
A. The two core problems of corporate governance aggravate one another.
B. Information asymmetry can be broken by social and ecological reporting.
C. Amount of debt does not impact the main corporate governance problems.
D. Corporate governance must consider non-financial factors.

Answer 8

B. Information asymmetry can be broken by social and ecological reporting.

Question 9

VI. Governance and company value
How does governance impact the valuation of a company?

Answer 9

Strong governance reduces the risk of a firm and accordingly its cost of capital.

Question 10

Why are EV and SV necessary when there is already FV

Answer 10

EV and SV focus on externalities that are not priced in FV but are necessary. Regulation will not be perfect
* Record unpriced positive externalities as assets
* Record unpriced negative externalities as debt
* Residual value is equity = net externality

Question 11

What are examples of priced E and S externalities that are financially materialised

Answer 11

• (Expected) carbon pricing and other regulations
• Consumers’ higher willingness to pay for environmentally friendly products
• Positive reputational effects on marketing and brand
• Technological risks associated with operating carbon-intensive assets

Question 12

What is value creation? And what is the difference in value creation for a responsible company and “irresponsible” company

Answer 12

In financial terms, value creation is defined as an increase in the net present value (NPV) of a company’s projects
Currently, FV is often generated at the expense of SV and EV as resources are depleted without sufficient investments in maintaining them
Responsible companies manage for integrated value creation (profit and impact) rather than merely shareholder value (profit)

Question 13

What is the the planetary boundaries framework? How would integrating SV and EV for companies around to world help manage this framework?

Answer 13

It is defined a safe operating space for humanity within the boundaries of 9 productive ecological capacities of the planet
The planetary boundary lies at the intersection of the green and orange zones
Currently, many companies are value destructive on SV or EV. For society and the economy to operate within social and planetary boundaries, we need companies on aggregate to stop being value destructive on SV and EV

Question 14

What are external impacts (also called externalities)?

Answer 14

They are costs or benefits that are created by organisations or persons but whose costs are borne by society as a whole

Question 15

What is the difference between a succesful and unsuccesful transition

Answer 15

Question 16

What is the formula to calculate expected transitionloss

Answer 16

Expected transition loss =
B = between 0 and 1. if b is very small the industry is not in transaction, 1 whole sector is moving
PT = how likely will it happen
LGT = if it happens, how quick is your loss
(1-a) = a: 0, not prepared at all (working in an old economy), fully prepared a = 1

Question 17

What does the societal discount rate consist of?

Answer 17

Question 18

How do we measure SV and EV?

*Value flow formula and dcf formula

Answer 18

Question 19

Example: What are the steps of calculating the value flow of a carbon emission project?

* from CF to VF

Answer 19

Question 20

Example: What are the steps of calculating the IV of a project?

Answer 20

Question 21

What are the three steps in the value calculation for SV and EV

Answer 21

1. Materiality assessment - determine important SV and EV factors;
2. Quantification - express these factors in their own units Q; and
3. Monetisation - express these factors in money with shadow prices SP

Question 22

What are three core set of factors which should always be included in the materiality assessments to determine which S and E factors are important

Answer 22

Greenhouse gas emissions - including carbon emissions
Labour practices - including discrimination and inclusion
Business ethics - including corruption and fraud

Question 23

How do you calculate the consumer surplus? and what is it used for?

Answer 23

Well-being of customers – calculated as consumer surplus, which is the difference between the price of a product and what consumers want to pay

Question 24

How do you define shadow prices

Answer 24

• Shadow prices reflect the ‘true scarcity’ of resources to stay within planetary boundaries
• Organisations such as the Impact Economy Foundation and True Price provide regularly updated lists of impact and shadow prices (see Appendix of Chapter 5)
  True prices are based on two welfare categories:
• Rights (human, labour and environmental rights)
• Well-being

Question 25

perpetuity formula

Answer 25

Question 26

What are the responsibilities of the General Partner (GP), Investment Manager and Limited Partners (LPs) within a PE

Answer 26

Question 27

Answer 27

Question 28

Answer 28

Question 29

What is the cost of capital of each company

Answer 29

a) The WACC of A: 5% - calculated as 90/1503% + 60/1508%
b) The integrated cost of capital of B: 4.5% - calculated as 90/1803% + 60/1808% + 30/1802%
c) The integrated cost of capital of C: 6.5% - calculated as 90/1003% + 60/1008% + -50/1002%

Question 30

How do you calculate customer wellbeing value flow?

Answer 30

(sales/price-elasticity)*0.5 50% attribution

Question 31

How do you calculate empoyee wellbeing value flow?

Answer 31

Well-being of employees – additional to the salary received, measured by life satisfaction points (on a scale of 0 to 100)

number of employeespointsSP

Question 32

How do you calculate carbon emission value flow?

Answer 32

mn metric of tons * quantity

Question 33

I. Materiality
What is NOT true regarding materiality?
A. Materiality looks at all potential impacts on people and environment
B. Materiality changes over time
C. Materiality differs per country and industry
D. Labour practices and business ethics are always material

Answer 33

A. Materiality looks at all potential impacts on people and environment

Materiality assessments aim to determine which S and E factors are sufficiently important for consideration in SV and EV. Material social and environmental topics are those that reflect a company’s most significant impacts (positive or negative) on people and environment. This is the outward impact of Fig. 2.5 in Chap. 2. Given the impact on a company’s stakeholders and wider society, stakeholder engagement is crucial for companies to understand and determine materiality.

Question 34

II. Consumer surplus
Assuming a company has a revenue of €200 million and a price elasticity of demand of 1.67. What would be the estimated consumer surplus?

Answer 34