10 Corporate Use Flashcards
(131 cards)
1
Q
What are six benefits the SASB standards offer companies?
A
1) a minimum set of cost-effective and industry specific disclosure topics that provide insight into how a company generates enterprise value
2) a methodology for disclosing those factors in a comparable way for investors
3) a method for understanding and improving performance on sustainability-related value drivers
4) a way to comply with increased demand toward voluntary sustainability disclosure and in relevant jurisdictions, regulatory requirements
5) disclosure preparation guidance for external sustainability and financial reporting
6) a tool for establishing and improving management of sustainability topics most likely to impact enterprise value
2
Q
What are factors that the financial services community are noticing about companies that lead them to survive and/or thrive?
A
Companies that innovate in the face of changing markets, effectively manage increasingly constrained natural resources, and best manage their workforce and long-term strategy will survive while other that don’t, won’t.
3
Q
What began as a niche practice among values-oriented, socially responsible investors, and was largely viewed by the financial community as an effort to create positive impact while ____ financial rerturns, is now a mainstream practice where __________ and _________ have a direct (and positive) relationship.
A
sacrificing
“value” and “values”
….as largely viewed by the financial community as an effort to create positive impact while sacrificing financial rerturns, is now a mainstream practice where “value” and “values” have a direct (and positive) relationship.
4
Q
What happens to companies as investors increasingly internalize sustainability information into core analysis and decision-making processes and adopt a longer-term view?
A
Companies are challenged to do the same
5
Q
In a global survey by FTSE Russell, __________ of asset owners say their organization is implementing or evaluating ESG in their investment strategy.
A
More than half
6
Q
A coalition of _____ investors representing $______ assets under management voiced their support for the Paris Climate Accord and urged global governments to enact policy to meet the goals in the agreement
A
631 investors
$37 trillion assets under management
7
Q
Where can the most visible signs of increasing investor demand for sustainability disclosure be attributed?
A
It started with buy-side investment firms and large institutional asset owners, and now is increasing across the board making it a critical factor in sell-side research, credit risk analysis.
In short, sustainability information is sought by nearly all entities allocating capital
8
Q
For example, most major _________ research firms, including _____, ______, ____, ______ (4 firm names) integrate ESG information into their research.
A
Sell-side research firms
Bank of America
Morgan Stanley
Goldman Sachs
Barclays
9
Q
In a global survey of about 200 credit analysts, _____ percent say that ESG factors are integral to what they do, and ____ percent say that their firms have an explicit ESG policy in place.
A
83 percent say that ESG factors are integral to what they do
89 percent say their firms have an explicit ESG policy in place
10
Q
What are 8 firms or jurisdictions that have explicitly advocated for the use of SASB standards?
A
–BlackRock 2020 Letter to Clients and CEOs
–Canada Pension Plan Investment Board (CPP Investments) Policy on Sustainable Investing
–Mexico’s Green Finance Advisory Council
–Morrow Sodali Institutional Investor Survey 2020
–Norges Bank Investment Management, Letter to Eumedion on non-financial reporting
–State Street Global Advisors, 2019 Letter from the President & CEO & “R-factor, Reinventing ESG Investing Through a Transparent Scoring System”
–Vanguard 2020 Letter from the Chairman & CEO, “An open letter to directors of public companies worldwide”
–The SASB Investor Advisory Group (IAG) Statement
11
Q
What are two ways that increasing demand for sustainability information is also related to a change in the way investors seek information altogether?
A
1) the growth of index funds
2) centrality to the global stewardship movement / the rise of sustainable investing
12
Q
Against the backdrop of growing investor interest in sustainability, assets are increasingly allocated with the goal of ____ the market, rather than the goal of _____ the market.
A
tracking
beating
“…with the goal of tracking the market, rather than the goal of beating the market.”
13
Q
Index funds continue to make up a ______ proportion of total market share as asset managers around the world move their dollars from ____ investment strategies to _____ or _____ investment strategies.
A
higher
active to
index or “passive”
“…a higher proportion of total market share as asset managers around the world move their dollars from active investment strategies (selecting specific assets in an attempt to outperform a benchmark) to index or “passive” strategies (choosing aggregated assets that replicate a benchmark).
14
Q
In fact, in 2019, passive funds including index funds and exchange-traded funds (ETFs), ______ active funds and now make up almost ____ percent of US equities. Index funds and ETFs are projected to reach ____ to___ percent of the European equities market by 2025.
A
surpassed
50 percent
25-28 percent
“…surpassed active funds and now make up almost 50 percent of US equities. Index funds and ETFs are projected to reach a 25 to 28 percent share of European equities market by 2025.
15
Q
With the growth of index funds, are index fund owners more or less responsive to signals from specific funds as their active fund counterparts?
A
Less responsive
16
Q
What is the “Wall Street Rule”?
A
Prior to the growth in index funds, the dominance of active management strategies meant that investors could apply the “Wall Street Rule” and sell shares when they had lost confidence in management, cherry-picking securities based upon their preferences and goals.
17
Q
In the past, how did asset managers vote on management for ballot items overall?
A
With management, they were reluctant to vote against management and decidedly going with the grain on both management and shareholder-initiated resolutions
18
Q
In the past, how did corporate management primarily receive feedback?
A
By observing when and how investors buy or sell their shares
19
Q
When investing in the index, the option to cherry-pick goes away and how do investors respond?
A
Investors no longer have discretion to select individual securities, and are bound to the performance of the index as a whole. Where they gain ease of entry, lower fees, and (usually) more reliable performance with index funds, they lose the option to respond directly to companies by selling their shares. Instead they must rely on alternative ways to communicate with the company in which they are invested and are incentivized to work with companies to meet common performance goals.
20
Q
The shift to passive management strategies can encourage what about investment stewardship?
A
Can encourage investment stewardship with a focus on longer-term investment horizons and business strategies
21
Q
What do the converging trends of the growth of index investing and the rise of sustainability investing mean in terms of asset managers?
A
They play a more important role in corporate governance than ever before.
22
Q
Beyond the opportunities that sustainability information presents to helping reduce risk and achieve higher returns, how does its use relate to investors?
A
It aligns with investors’ growing stewardship responsibilities, lending companies insight into the needs and expectations of investors today
23
Q
When and where were stewardship codes first introduced?
A
In 2010 in the UK
24
Q
What are stewardship codes based on and what do they offer?
A
They are based on the logic of fiduciary duty and they offer a framework of principles that investors can apply to their corporate stewardship activities.
25
Stewardship codes generally require institutional investors to be ___________ about their investment process, engage with investee companies and vote in shareholder meetings.
Transparent
26
How are stewardship codes and global investor demand for sustainability information shaping and broadening the new practice of asset managers?
Shaping a new practice that emphasizes fiduciary responsibility of asset managers to be stewards of capital markets, not just stewards of their own investments.
27
What is the relationship between stewardship codes and ESG-related risks and opportunities? (2)
Though rooted squarely in the goal of improved corporate governance, stewardship codes naturally promote stronger coordination among investors and investees in addressing ESG-related risks and opportunities.
In addition, stewardship codes often encourage better disclosure with more standardized metrics to make it easier for investors to understand the material ESG issues relevant to a company.
28
Asset managers increasingly expect strong management and disclosure of ESG matters and hold companies accountable through what mechanism?
A proxy vote.
29
Describe the example of what Blackrock did in 2020, before the announcement was made, regarding the integration of climate risk into business models or disclosures.
Blackrock voted against (or withheld) votes for 5,100 directors, 53 of whom were "making insufficient progress integrating climate risk into their business models or disclosures". There were mixed reviews about whether this was aggressive or progressive in its scale, complicated by the fact that BlackRock (like other asset managers) is delegated the authority to vote proxies on behalf of some but not all of its clients.
30
Describe the example of Green Century Capital Management's sharehold resolution with Tyson Foods and its impact.
Green Century Capital Management filed a shareholder resolution with Tyson (large meat processor) calling for the disclosure of adequate deforestation policy given the company's expansion into international markets including Brazil, China and Southeast Asia which have greater supply chain and deforestation risks. In response to the resolution, Tyson publicly committed to reporting on forest-risk commodities in its global supply chain and developing and implementing a forest policy that addresses "No Deforestation, No Peat, No Exploitation (NDPE)" as well as supplier monitoring. Satisfied with Tyson's response, Green Century withdrew their resolution.
31
Widespread investor voting behavior has changed significantly, perhaps revolutionarily, over the past two decades with voting surrounding environmental and social issues not only ____ but also earning ____ levels of support.
increasing
record
"...not only increasing but also earning record levels of support"
32
An analysis based on 516,788 votes cast across 1,033 individual ESG resolutions by more than 2,000 funds offered within 52 US fund groups found that asset manager proxy voting support for ESG-related shareholder resolutions ____ from ____ percent in 2015 to ____ percent in 2019.
rose
27
46
"...rose from 27 percent in 2015 to 46 percent in 2019."
33
As support for ESG proposals reaches an all time high, _____ votes also reached an all-time low, dropping to ___ percent in 2018 as more and more investors are "leaving the sidelines" to ________ on sustainability matters.
"abstain"
0.3
express their opinions
"....."abstain" votes reached an all-time low dropping to 0.3 percent in 2018 as more and more investors are "leaving the sidelines" to express their opinions on sustainability matters."
34
Why can shareholder resolutions draw mixed reactions?
because they can be time-consuming for investors to draft, propose and rally support for, while also demanding time and resources from companies to respond...so they can be perceived as an essential tool to make shareholders voices heard or as a distracting tool wielded only by the most vocal or activist-focused investors.
35
Meanwhile, _______ ____ lend more insight into how companies and their investors are working together because of a negotiated dialogue, which is reaching record levels.
Withdrawal rate
36
In a study, ____ percent of filed ESG proposals were withdrawn, while only ____ percent of filed proposals went to a vote in 2018, representing a _____ of the historical numbers, likely due to companies and investors working together to find solutions for ESG matters.
48
37
reversal
"...48 percent of filed ESG proposals were withdrawn, while only 37 percent of filed proposals went to a vote, representing a reversal of the historical numbers..."
37
Notably, today's ESG proposals focus more on _____, ____, and ____ than they do on requesting specific actions or policies.
disclosure, risk assessment, and oversight
38
Unlike equity, where ESG plays a significant role in ongoing stewardship activites, debt investors typically rely on sustainability information in _________ focusing their information insights towards ________.
up-front credit analysis
detailed risk analysis
"...rely on sustainability information in up-front credit analysis focusing their information insights towards detailed risk analysis."
39
Why do reporting companies increasingly integrate sustainability into their own engagement with investors with the goal of developing discourse around sustainability disclosure, risk assessment, peer benchmarking and oversight?
Due to raised investor, creditor, and lender expectations and how these issues factor into corporate strategy
40
Just as standards and frameworks support investors in articulating their information needs and informing engagement, so do they support companies in doing what?
Articulating progress, strategy, goals and outcomes on sustainability topics
41
What do the Board of Directors bring to the collection, management and/or disclosure of financially material sustainability information? (5)
-Optimize shareholder value and build investor confidence in the organization's long-term performance
-Oversee strategy and risk management including ESG-related risks and opportunities on the operating model and strategy
-Provide perspective on the financial materiality of sustainability information, important KPIs and how material risks and opportunities should be managed
-Oversee integrated reporting, including assessing adequacy of financial and sustainability disclosures
-Provide perspective on how ESG disclosure practices compare with those of direct competitors and industry peers, as well as provide oversight of the internal audit function and the external audit process
42
What do the CEO and CFO bring to the collection, management and/or disclosure of financially material sustainability information? (4)
-Provide perspective on the financial materiality of sustainability information, important KPIs and how material risks and opportunities should be managed
-Provide perspective on the ways ESG-related risks and opportunities impact a firm's operating model and business strategy
-Certify the accuracy and completeness of internal controls and disclosure controls
-Provide perspective on how, when, and what to communicate to board members, investors, and non-investor stakeholders on business-specific strategies for incorporating sustainability into core activites, decision-making, and performance evaluation
43
What does Legal Counsel bring to the collection, management and/or disclosure of financially material sustainability information? (2)
-Provide perspective on the legal risks related to the omission or inclusion of information in public documents, inform risk management, and inform decision-making to fulfill duties of care
-Advise on how to adhere to existing and emerging environmental and ESG related requirements, as well as the resources required to comply with external ESG-related policies
44
What does the Chief Sustainability Officer bring to the collection, management and/or disclosure of financially material sustainability information? (5)
-Provide perspective on the ways ESG-related risks and opportunities impact a firm's operating model and business strategy
-Provide perspective on necessary collaborative relationships, such as those with finance and internal audit teams
-Provide oversight and perspectives on how existing processes for collecting, managing and reporting data can be updated or improved to include sustainability data and where new data streams should be established
-Provide perspective on the financial materiality of sustainability information, important KPIs, and how material risks and opportunities should be managed
-Oversee best practices for ESG-related disclosures and stay informed on updates to existing frameworks and standards
45
What does Risk Management bring to the collection, management and/or disclosure of financially material sustainability information? (1)
-Provide company-wide perspective on the internal and external risks faced by a firm and the application of resources to minimize, monitor, and control potential impacts that negatively affect firm value and impact strategic planning
46
What does Compliance bring to the collection, management and/or disclosure of financially material sustainability information? (3)
-Provide perspective on how to comply with existing and emerging environmental and ESG regulatory requirements as well as the resources required to comply with external ESG-related policy
-Conduct ongoing monitoring of compliance with internal company policies and bylaws and integrity-related risks faced by a firm
-Provide perspective on the necessary controls, policies, and procedures companies must adhere to in order to comply with applicable laws and regulations
47
What does Investor Relations bring to the collection, management and/or disclosure of financially material sustainability information? (2)
-Provide perspective on the connections between sustainability performance and enterprise value creation, effectively communicating the value of sustainability actions to shareholders, and in turn, communicating and interpreting investors' opinions to management
-Engage with investors to understand their sustainability priorities, and educate company leadership on those priorities
48
What does Business Unit Managers bring to the collection, management and/or disclosure of financially material sustainability information? (1)
-Provide perspective on unit-specific knowledge and understanding to inform measurement, management, and reporting of sustainability data
49
What does Technology bring to the collection, management and/or disclosure of financially material sustainability information? (2)
-Provide perspective on the architecture (technology, platform, software, etc) that will support reliable, accurate and complete reporting that meets management's expectations for disclosure and/or offers insight to ensure data collection is timely, accurate, complete and secure
-Provide perspective on how data gathering and reporting processes can be effectively streamlined and scaled
50
What does HR bring to the collection, management and/or disclosure of financially material sustainability information? (1)
-Provide perspective on human capital metrics and how such practices as employee loyalty and engagement, diversity and inclusion, recruitment, and compensation can impact shareholder value
51
What does Independent Assurance Providers bring to the collection, management and/or disclosure of financially material sustainability information? (1)
Oversee data quality of sustainability disclosures, including the design and operation of the internal controls, to establish confidence in the information from management, investors, and other stakeholders that may use the data
52
What does Chief Audit Executive and Internal Audit bring to the collection, management and/or disclosure of financially material sustainability information? (4)
-Oversee risk management, controls, and governance processes / policies to the board of directors, audit committee and others
-Provide perspective on the information needs of independent assurance providers
-provide perspective into the level of data control and risk management oversight needed to inform management about the company's sustainability performance; support quality testing and quality review of controls for sustainability data
-Provide perspective on alignments between financial reporting and sustainability reporting to ensure consistency
53
How does the SASB Standards requirement of evidence of financial impact discussed in Chapter 8 relate to the conversation between finance and sustainability oriented specialists?
"Disclosure topis in each Standard describe how a company's management of the topic can impact financial performance. Many finance professionals find that SASB Standards and the information they yield resonate with their understanding of the company. Where sustainability professionals without extensive finance and accounting experience may find it difficult to communicate at the same wavelength as finance and investor relations teams, the SASB Standards offer a common language to connect the expertise of both groups."
54
What are 6 examples of how cross-functional groups must effectively cooperate to accomplish a wide-range of tasks for disclosing sustainability information in annual reports and financial filings?
-Collect data and analyze a company's performance
-Engage an independent auditor to review the data
-Assess legal requirements and implications concerning disclosure
-Present the statements to the board and management for approval
-Communicate the results to investors, creditors, and other users
-Use financial statements and market feedback to inform strategy and performance goals
55
What are two examples for existing processes for measuring and managing data expanding to include sustainability data?
1) a Real Estate Investment Trust (REIT) may need to coordinate between internal audit and local property managers to communciate energy and water collection procedures
2) A software company's sustainability committee may need to include representation from HR and Investor Relations to communicate to investors the outcomes of diversity and inclusion practices in recruitment
56
What are the benefits of collaborative companies that have an enhanced understanding of the ways sustainability affects operational and financial performance beyond disclosure?
they adapt faster
they innovate more
they engage more completely with the marketplace to understand and respond to customer needs and competitive pressures
57
What are four considerations as to why companies may specifically choose to report financially material sustainability information instead of sustainability reporting to help respond to key stakeholders?
1) Taking ownership of your sustainability story
2) Peer effects
3) Responding to investor interest
4) Improving Performance management
58
An MIT Sloan School of Management found the portion of assets invested that rely in some way on ESG ratings has increased / decreased _____ percent since 2016, reflecting what trend and enabling what kind of activity for companies and investors alike?
increased 34% since 2016
Reflects the rising demand for ESG performance data, which enables peer-to-peer comparison and spurs competition based on sustainaiblity performance as both companies and investors alike seek to understand sustainability performance.
59
What are the challenges that ESG ratings create for companies? (7)
1) the providers often define ESG topics differently depending upon their proprietary processes of aggregating data
2) the providers apply different modes of weighting and measurement to rating and ranking processes
3) third-party aggregators and raters may calculate performance where companies do not disclose sustainaiblity data, telling the story on their behalf
4) corporate disclosure must often serve both the purpose of telling the company's value creation story and providing data inputs to aggregators and raters
5) the range of rating and ranking methodologies means the information that decision-makers receive can be noisy
6) companies receive mixed signals about what actions are expected of them and which ones will be valued in the marketplace
7) as a result, ESG performance is neither reflected by the issues most material to company performance nor accurately reflected in share prices
60
Why are companies motivated to disclose to ESG ratings providers?
*Taking Ownership of Your Sustainability Story*
It may improve the data used by third parties
It is an opportunity to clearly tell their own value creation story as a way to counterbalance or reinforce the story told by ESG ratings and analytics providers
61
Explain the "double edged sword" related to Peer Effects
Companies can be and often are influenced by the disclosure behavior and performance of industry peers.
Peer effects can accelerate both disclosure and performance management when peers issue sustainability disclosures (i.e. a "race to the top") but can similarly delay or stifle those practices if no peers or only a few have started doing so which dampens motivation to disclose (i.e. "don't stick your neck out").
62
Explain the broader momentum of how investor interest influences a company's decisions for sustainability disclosure
Early adopters of sustainability reporting often focused on non-investor stakeholders, and by and large, investor's information needs were met through annual and quarterly financial reporting
As investor demand for consistent, comparable, and reliable sustainability informaiton increases, companies are orienting to meet investor audiences, motivated by their inquiries and public signals from the investment community
63
Provide two examples of how the long-standing practices of adapting outbound information to attract investors relates to sustainability disclosures
1) North American companies seeking to gain EU-based investors may voluntarily adapt their external reporting t meet EU requirements
2) companies in emerging markets may adapt their disclosures to meet the expectations of international investors
64
Explain the "Improving Performance Management" consideration in the decision to pursue sustainability reporting programs
It can help generate a more complete picture of risks and opportunities facing the company, driving insights into new risks and opportunities or shedding light on those already known and managed
e.g. high profile ESG related controversies have spotlighted the potential reputational harm and financial impact of ignoring ESG risks
65
What are four benefits that robust research (white papers / academic study) have demonstrated are true for companies focusing on sustainability issues?
1) reduces cost
2) improves worker productivity and engagement
3) mitigates risk potential
4) creates revenue-generating opportunities
66
What is true conceptually about companies that use sustainability information in service of performance management?
They more clearly connect sustainability information to enterprise value creation outcomes, and will focus more acutely on company-designated performance areas rather than on outcomes sought by external stakeholders
67
What are the three high level ways companies prepare for disclosure?
1) Understanding your reporting environment
2) creating organizational buy-in
3) determining your audience
68
In the early stages of the sustainability disclosure process, what can companies benefit from / observe to help understand their reporting environment? (4)
1) observe their peers
2) reviewing broader market trends such as investor statements
3) regulatory developments
4) adoption of voluntary standards and frameworks
69
What are the five questions to consider for both new and veteran disclosures when it comes to industry best practices and peer review? (6)
1) Through what channels do peer companies report investor-focused sustainability information?
2) what reporting standards and frameworks do they use?
3) which sustainability issues or specific performance metrics are most frequently included in peer reporting to investors?
4) what time periods are presented?
5) is information reported at the aggregate level for the company or by region or business segment?
6) do peers provide activity data that enables normalization metrics?
In short, how to disclose (which channels) and what to disclose (which metrics)
70
What does the acronym XBRL stand for and what does it do?
Is it ever required?
eXtensible Business Reporting Language
Provides a standardized system to improve the way data is communicated in the capital markets, enabling data tagging of specific elements to the XBRL taxonomy which enables users to compare data consistently across software and platforms.
In many jurisdictions, the use of XBRL is a regulatory mandate.
71
Surrounding market trends can help elucidate the sustainability issues that are financially material at a given time. What is an example in the real estate industry?
As certain geographies experience increased incidences of extreme weather, it becomes important for investors to know how real estate firms mitigate risks associated with the physical impacts of climate change across the portfolio.
72
How does the alignment of financially material sustainability information with strategic objectives create organizational buy-in?
Integrating sustainability is more likely to succeed when it is aligned with core strategic objectives since ESG adoption depends on effective collaboration across business units and hierarchies
73
Explain how company leadership plays an integral role in ESG adoption and creating organizational buy-in (4)
1) setting a tone from the top
2) by showing support for embedding financially material sustainability factors into the company's strategy, business model, and company culture
3) integrating sustainability information into core functions such as governance, strategy, risk, management and performance management
4) ensure the necessary resources are made available - board and management confidence in materiality can be instrumental in supporting internal resource allocation
74
Effectively embedding ESG into various roles and business units ultimately connects to brand identity and the company's culture, which is determined by the collective behavior of each individual. What are two examples of how culture influences ESG organizational buy-in.
1) if transparency is a core component of company culture, it may be easier for the organization to communicate cross-functionally and hierarchically
2) if a company identifies as a "risk avoider", ESG may be easier to integrate into risk management and compliance functions
75
What are three main categories or groupings of audiences or users of reported sustainability information?
1) Shareholders and other providers of capital
2) Lenders, credit ratings agencies, and insurance underwriters
3) Communities customers, employees, suppliers, civil society, governments and investors
76
What information do shareholders and other providers of capital seek?
Seek information about performance on the sustainability topics most relevant to a company's short, medium and long-term financial performance
77
What information do lenders, credit ratings agencies, and insurance underwriters seek?
Seek informationa bout how the company manages sustainability-related risks
78
What information do communities, customers, employees, suppliers, civil society, governments and investors seek?
Seek information about the organizations impacts on society and the environment
79
Variability exists within the broad audience groups and particular audiences for a given company may benefit from different information. For this reason, what are the two aspects companies should identify with regard to their audiences?
1) the *needs* of key audiences, the type of information they are looking for and how they plan to use such information
2) the *expectations* of these audiences, which are largely shaped by peer disclosure practices
80
Why is it important to keep monitoring investor policy statements, proxy voting guidelines, ESG disclosure expectations through public communications as well as general stakeholder and shareholder engagement and monitoring?
Lends insight into shifting shareholder expectations given disclosure expectations mature and evolve over time.
81
What are the two high level components of preparing quality sustainability data?
1) Establishing data needs and performing a gap analysis
2) Leveraging the three existing pillars of reliable information in the financial disclosures of Board Oversight / Audit Committee, the Internal Controls, and the Data Assurance processes
82
Explain what performing a gap analysis may help with for a company (3)
1) determining what data is already reported externally
2) what data is being reported internally
3) what information still needs to be collected
83
In performing a gap analysis, a company is likely to identify three categories of metrics. What are they, and explain the considerations for each of the three categories.
1) Metrics for which it is already collecting data aligned with disclosure objectives - in this case, a company may consider how strong internal controls are for the data, who is accountable for data accuracy, whether data is subject to oversight and whether it has been assured
2) Metrics for which it is collecting similar data - in this case, a company should work with internal subject matter experts or business units / advisors to evaluate whether the data could better align with disclosure objectives
3) Metrics for which the company is collecting no data - in this case, the company should figure out level of effort required, and for each metric identified, explore with its cross functional team who would be best equipped to gather data as well as the associated time, effort and cost
84
What are the two key impacts internally and externally if sustainability information is unreliable?
1) corporate managemetn will not be as comfortable making decisions based upon the information (internal)
2) investors and analysts will be less likely to include sustainability information in financial analysis
85
What are the three pillars of reliable information and explain the purpose of each pillar.
1) Appropriate board oversight - ensures accurace of ESG metrics and performance management, and institutes appropraite internal controls and assurance and audit committee oversight
2) Established internal controls - ensures the accuracy of sustainability data, from collection to preparation to disclosure
3) Data assurance - provides external stakeholders, company management, and the board with confidence in the reliability of disclosed information
86
What are two unique aspects of the board and/or audit committee in terms of why sustainability is now a board-level risk?
1) For investors, strong and transparent board oversight is essential to assessing the trustworthiness of a company,
2) sound governance of sustainability related to assessing risks, competitive position and surrounding market trends must be communicated to ensure they meet the needs of investors and stakeholders
87
How does audit committee involvement enhance sustainability metrics disclosure? (3)
1) ensures that sustainabilityi nformation is prepared with the appropriate level of scrutiny
2) is the entity with responsibility and expertise needed to oversee internal controls for financial reporting so can play an important oversight role
3) is the "front line" in determining if and how sustainability information will be assured
88
What is the narrow definition (purpose) of internal controls?
activities that help companies achieve their objectives by mitigating risks of incorrect data and disclosures to mitigate the risk of misstatement
89
What are six examples of internal controls?
1) calibration testing of measurement equipment such as electricity meters
2) establishing automated tolerance limits and trigger warnings when anomalies occur
3) protecting data access to minimize corruption
4) reconciling invoices to the general ledger
5) performing analytical reviews to follow up on unusual fluctuations, adjustments and the like
6) establishing independent reviews during the data entry process
90
What does the acronym COSO stand for, what is the name of its framework principles and what do they do?
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
Internal Control-Integrated Framework Principles
developed a framework to help companies integrate sustainability reporting objectives into their existing internal control framework, which mirrors the robustness and rigor of regulatory internal-controls requirements
91
Explain what a certification (by CEO / CFO) does and three benefits for sustainability disclosure
Certifications in financial information are regarding controls and procedures, information accuracy, and completeness.
1) Even where regulatory filings do not explicitly cover internal controls for non-financial information, it can place a higher standard of accountability in your voluntary CSR / ESG report
2) it can support regulatory certification requirements if companies report in regulatory filings
3) supports an external party's assurance of sustainability information
92
What is the relationship between assurance, audits and examinations?
Assurance is defined as the review by external, independent professionals on the credibility of the data in order to report an opinion on its findings to help users make a decision about its reliability.
Audits are likely the most well-known assurance services among public corporations and the investment community and involve examination of both financial statements and internal controls.
Examinations are defined as audit-level engagements designed to provide a high level of assurance on information other than historical financial statements.
93
What is it called when a company uses assurance to provide perspective on the effectiveness of internal control, internal audit, or other disclosure procedures for internal use?
Assurance readiness
94
Describe the difference between reasonable assurance versus limited assurance or a review?
REasonable assurance is the most rigorous assurance engagement to examine the reported information, the source data, and the organization's internal controls for protecting the integrity of the source data to gauge how effectively they mitigate the risk of misstated data
Limited assurance is a less rigorous assurance engagement which can be associated with a lower degree of confidence that the information is reliable.
95
Explain how suitable criteria relates to the SASB standards.
Suitable criteria are the basis for an assurance engagement.
SASB standards are designed to support independent third-party assurance, where the metrics and underlying technical protocols constitute the basis for suitable and available criteria for assurance.
96
What are two types of special disclosure situations and what are the typical reasons they happen?
1) Reporting across multiple industries
2) omissions, additions and modifications
They typically occur for structural complexities given the scale and scope of a company's operations when a firm is vertically or horizontally integrated or operates in a multinational context.
97
Explain the relationship of consolidated / unconsolidated entities and minority interest calculations on sustainability disclosure.
If a company's consolidated operations span multiple industries they may review multiple Standards to identify topics and metrics beyond their primary SICS that warrant disclosure.
To be most complete and accurate, companies may calculate metrics for the whole entity regardless of minority interest calculations.
Data from unconsolidated entities does not necessarily need to be included, except when it is relevant to investors to understand the effect of sustainability topics on the company's ability to generate enterprise value.
The general rule is communicating material information to investors.
98
The reading provided an example from the Internet Media & Services industry related to the disclosure topic Intellectual Property Protection and Competitive Behavior. How was it an example of special disclosure situations?
In certain markets, an internet company may have monopolistic or oligopolistic power and may face risks related to competitive behavior, however, other markets may be less concentrated and more competitive. A company that is only ever one of many players in a highly competitive market will have a different sustainability profile and may choose to omit disclosure related to competitive behavior.
99
Describe the tension created for sustainability and financial disclosures that deviate from standards, including the non-GAAP measure of EBITDA for a financial example.
The tension is between ifnormation that is comparable and information that is more fully representative of a company performance.
While more specific and non-standardized metrics may better capture performance, and thus better inform investor's decisions, it reduces the ability to compare performance over time and with other peers.
For the non-GAAP line item of EBITDA, while it allows investors to see company performance in the absence of non-cash expenses to more clearly communicate earnings, it may be used to intentionally misrepresent the facts of the company's performance.
100
What are the five aspects of reporting financially material sustainability data?
1) role of the disclosure committee
2) timeline
3) ongoing materiality assessment
4) telling your value creation story
5) assuring sustainability information
101
What is a practice that is not widespread with regard to the role of the disclosure committee?
Some companies may opt to create a comparable committee to the formal financial filings for sustainability, but it is not widespread (in a sample, only 22 companies adopted board committees for CSR and ESG out of 56).
Companies may choose to:
1) fully integrate sustainability reporting functions into existing disclosure committee structures
2) create ESG subcommittees
3) create a stand-alone sustainability committee, or
4) come up with a hybrid that works for their structure
102
What are the five key time periods in the timeline for annual sustainability reporting and activities for each?
1) start of fiscal year
-define performance goals and KPIs
-establish timeline and processes for data collection
-align with leadership, business units and key players ont he timeline itself
-establish process for internal review
2) three to seven months before publication
-adjust and refine report content and reporting processes
-collect and analyze data, including normalization
-evaluate performance and develop narrative
3) two months before publication
-seek external assurance if desired
4) one month before publication
-conduct internal reviews, finalize buy-in, and gain sign-offs from leadership
5) publishing sustainability disclosure
-publish disclosure through the desired channel, such as an integrated report, stand-alone report, website, regulatory filing, or other means
-when published outside of regulatory filings, sustainability information is typically reported four to six months after the close of the fiscal year
103
What is the controller's questionnaire and why can it be instrumental?
in financial reporting it gains additional information needed to support the accurate presentation of financial statements and can be instrumental in gathering information needed to assess the magnitude and probability of specific topics in future periods thus helping companies assess the financial materiality of issues over time.
104
What are two examples as to why it often makes sense to consider the materiality of sustainability topics on a regular basis, rather than in a one-off, ad hoc process?
1) the cross-functional team may also identify specific research and/or analysis that will better inform future evaluation of the materiality of sustainability events, trends, demands and uncertainties
2) the company may wish to engage directly with investors and/or shareholders to seek their input on sustainability disclosures
105
The reading provided an example from a Chemicals industry company for telling your value creation story. Explain how it was an example of the importance of context.
Air Products, disclosed using SASB's Workforce Health & Safety metric for total recordable incident rate (TRIR) for employees, contractors as well as fatality rate.
Also provided discussion and analysis of the efforts to assess, monitor and reduce exposure to long-term (chronic) health risks with guidance on annual performance, sets future goals and details how they will meet those goals which gains a better understanding of the company's progress over time, how management contextualizes its current performance and future goals and plans.
106
What are four examples of relevant contextual information that can help users understand a sustainability metric disclosed?
-governance, strategy and risk management
-activity metrics to facilitate normalization of reported metrics
-industry benchmarks
-discussion of uncertainty and estimates
107
How do the IFRS Management Commentary and the US SEC MD&A requirements as existing financial narrative directives exemplify telling your value creation story?
They are existing financial narrative directives that exemplify qualitative information being an integral part of financial reporting, and are explicit expectations to provide supporting context to assess trends expected to occur over the medium and long term, and the trajectory and speed of those trends.
108
When it comes to publishing third-party assurance on sustainability disclosures, a ______ of companies provide. A 2019 S&P 500 reporting practices found 90 percent of companies publish sustainability reports and ____ percent received assurance for sustainability information.
A minority of companies publish third party assurance on sustainability information.
Only 29 percent were found to do so by the S&P while 90 percent published sustainability reports.
109
Name two jurisdictions or member organizations where independent, third party assurance of reported sustainability information is required or common.
South Africa and the EU require it
The World Business Council for Sustainable Development found 82 percent of their members received external assurance
110
What does the finding that 67 percent of investors believe ESG reports should undergo a full audit similar to a financial audit indicate?
Future assurance levels for sustainability information will likely increase.
111
Research by Si2 found that only ___ percent of sustainability reports include an assurance statement and ____ percent of external assurance pertains to what selection of reported data?
36 percent include assurance
90 percent of assurance pertains to GHG emissions
112
Name five international and jurisdictional institutions that have published guidance to support companies in preparing for sustainability information to be assured
1) American Institute of Certified Public Accountants (AICPA) - focused on intepreting and applying U.S. clarified attestation standards
2) Center for Audit Quality (CAQ) - defines the role of auditors and includes questions to board members to facilitate discussion
3) Institute of Chartered Accountants in England and Wales - highlights issues in a Q&A format focused on professional accountants roles
4) International Federation of Accountants - outlines 11 key principles for seeking assurance and effective business reporting processes
5) World Business Council for Sustainability Development (WBCSD) - describes basic concepts of assurance and details when commissioning assurance
113
What are the five high level aspects in managing sustainability performance?
1) creating a sustainable business strategy
2) identifying the right KPIs and their purpose
3) connecting SASB metrics to strategy
4) performance management
5) the role of sustainability management in corporate risk management
114
As an understanding of the link between sustainability performance becomes more sophisticated, companies can progress from minimizing ____ and short-term _______ to maximizing _____ and the development of ______.
.....minimizing risks and short-term costs
to maximizing long-term value creation and the development of competitive advantage.
115
Describe the difference between a sustainability strategy and a sustainable business strategy and how they are the same / different.
A sustainability strategy is a company's approach for improving its performance on one or more sustainability topics, and are tactical, focused responses to a specific performance area such as reducing energy consumption or "no child labor"
A sustainable business strategy is a company's plan to proactively improve its performance by managing the financial and non-financial factors that impact its ability to create value over the long term.
In both cases it is necessary to have information about sustainability issues that can have a material impact on a company's ability to generate enterprise value, but sustainability strategies are often independent and do not necessarily translate into sustained long-term success like sustainable business strategies which results in value creation.
116
What does a look "under the hood" about ESG policies compared to ESG performance reveal, as found in a BlackRock Investment Institute study...and explain why it might be the case.
The practice of policy development does not necessarily lead to ESG performance, and the opposite might be true.
BlackRock found that firms with the most elaborate ESG policies were the worst actors, more likely to be ensnared in lawsuits and regulatory actions or controversies such as hiring discrimination, price fixing or tax fraud, whereas companies that disclosed the fewest ESG policies were the most trouble-free.
This might be due to ESG policies being written as a reaction to poor performance, and reflect the broader trend that policies do not provide information useful for decision-making while key metrics on performance do.
117
What are the three ways incorporating SASB metrics into the strategy process for sustaining competitive advantage can support a sustainable business strategy?
1) ESG metrics directly tied to financial materiality aligns sustainability with enterprise value creation
2) Analyses with financially material sustainability information are more complete, helping prevent unwelcome surprises for companies and investors
3) sustainability can support companies in differentiating themselves from their peers, helping to attract customers and investors
118
How does the Pirelli tire manufacturing company exemplify connecting a SASB metric to business strategy?
Their Green Performance strategy launched in 2009 produces tires exemplify the SASB metric Materials Efficiency that combine performance and environmental sustainability by producing high-performance silica from sustainable materials which reduced their costs, consumes less energy to manufacture, and reduces fuel consumption for customers due to low rolling resistance.
A secondary benefit of this program is it doubled the number of analysts covering the Pirelli stock from 12 to 25.
119
Describe management accounting's use of sustainability information.
Similar to their use of non-financial information to assess and measure the financial impacts of company actions and trends, they can use sustainabiltiy KPIs to interpret broader strategic objectives.
120
What are the four stages of value creation in sustainability performance management? And which two yield incremental value?
1) Minimizing cost
2) optimizing efficiencies
3) new products and/or technologies
4) new business models and differentiated value proposition
The first two stages yield incremental value while the next two stages deliver much more.
121
What are four examples / one for each of the four stages of value creation using environmental dimension?
1) 3M has saved $1.7 billion by changing products or processes and recycling or reusing materials which minimizes cost
2) DuPont's "zero waste" initiative weighed future earnings against business and environmental risks, eliminating divisions with significant waste products such as carpets and nylons
3) Dow's focus on sustainability innovation led to new products such as solar roof shingles and hybrid batteries which helped shift Dow's core business from commodity chemicals to advanced materials and high-tech energy
4) GE's Ecomagination generated $160 billion in revenue between 2005-2014 based upon $12 billion of R&D, emerging them as a differentiated energy and environmental solutions provider
122
What are the six questions from State Street Global Advisors to boards on sustainability issues and what do they exemplify?
1) Has the company identified the sustainability issues material to the business?
2) has the company analyzed and incorporated sustainability issues, where relevant, into its long-term strategy?
3) does the company consider long-term sustainability trends in capital allocation decisions?
4) is the board equipped to adequately evaluate and oversee the sustainability aspect of the company's long-term strategy?
5) does the company's reporting clearly articulate the influence of sustainability issues on strategy?
6) is the board incorporating key sustainability drivers into performance evaluation and compensation programs?
They exemplify that by effectively managing ESG performance, companies can attract and maintain investors with long-term orientation because they are seeking companies that can communicate the influence of sustainability on performance outcomes.
123
How does COSO define Enterprise Risk Management (ERM)?
the culture, capabilities and practices, integrated with strategy-setting and performance, that organizations rely on to manage risk in creating, preserving and realizing value
124
What are the five procedural aspects described by the COSO ERM Framework describes six?
1) established and implemented by the board of directors, management and other personnel
2) applied in a strategy setting and across the enterprise
3) designed to identify potential events that could negatively affect the entity
4) manages risks to contain them within the organization's risk appetite
5) provides reasonable assurance regarding the achievement of entity objectives
125
WBCSD's research on risk management show that ___ percent of sustainability practitioners agree that sustainability risks could lead to significant impact on business, while more than___ percent find that risk management practices are not adequately addressing sustainability risks.
89 percent agree ...
while more than 70 percent find they are not adequately addressing sustainability risks.
126
What are the five components detailed in the COSO and WBCSD joint guidance for integrating ESG-related risks and ERM? What are they directly connected / related to?
1) Governance and culture of ESG-related risks
2) Strategy and objective-setting for ESG-related risks
3) Performance for ESG-related risks
4) Review and revision of ESG-related risks
5) Information, communication and reporting for ESG-related risks
They are directly connected to the elements of sustainable business strategy.
127
Describe how SASB metrics can be useful in each phase of the risk management process:
Identification
Assessment
Response
Monitoring
Reporting
Identification - because of the focus on financial materiality, the Standards surface teh set of topics likely to represent business-critical risks and opportunities
Assessment- helps companies better assess their performance on key ESG issues, providing clarity on the likelihood, impact, and timing on a risk or opportunity should it materialize
Response - companies can better understand whether to accept, avoid, reduce or transfer a risk (or ignore, embrace, enhance or share an opportunity)
Monitoring - designed to support internal decision-making, including through integration into performance dashboards
Reporting - designed to support external decision-making by investors
128
[CHECK FOR UNDERSTANDING] In what ways do investors typically demonstrate demand for sustainability information to companies, and how has the growth of index funds shaped corporate-investor
communication?
Companies express demand for quality ESG
information in a variety of ways, including public calls for enhanced disclosure, direct engagement with companies, shareholder
proposals and proxy voting and, in some cases, through buy/sell decisions. Yet, under-pinning this wave of demand for quality ESG information is a shift in market paradigms. As levels of index investing outpace
individual holdings, investors are increasingly incentivized to work with companies to improve performance because they no longer have the discretion to select individual securities. In this way, the growth of index
investing leads to more active engagement
on ESG.
129
[CHECK FOR UNDERSTANDING]
How do SASB Standards support cross-functional communication?
Within companies, the SASB Standards can
serve as a bridge between professional roles for communicating sustainability information. The process of disclosing sustainability information is also inherently cross-functional, requiring data collection from various
business units, internal audit engagement, legal compliance, management approval, investor relations, and other functions to integrate sustainability information into their workflows. The Standards can help smooth internal communications by helping to identify a common set of metrics used to measure financially material sustainability topics that can integrate into existing information channels.
130
[CHECK FOR UNDERSTANDING]
Why do companies pursue sustainability disclosure?
Companies may issue sustainability disclosures for different reasons. By aligning on the “why,” internal stakeholders can benefit from a clearer understanding of informational and audience needs. Companies are often motivated to take ownership of their
“sustainability story” to counterbalance or reinforce the story told by third parties, and to clearly communicate the topics management identifies as most important to the
firm. A company’s decision to disclose may also be motivated by peer effects, may be a direct response to investor requests, and/or serve to maintain accountability while working to improve performance management
131
[CHECK FOR UNDERSTANDING] How do metrics/KPIs contribute to a successful sustainable business strategy?
Relevant KPIs can be the difference between effectively managing sustainability performance or experiencing performance declines. ESG metrics tied to financial
materiality can directly inform business strategy, where metrics help to identify key opportunities for value creation, identify
and mitigate ESG risks, and even contribute to achieving a sustained competitive advantage.
