Part 1: Foundations of Sustainable Finance and the role of disclosures Flashcards
(48 cards)
What is Milton Friedman’s (1962) view on the role of business in society, and how is it challenged by proponents of Corporate Social Responsibility (CSR)?
Session 1.1 The Rise of corporate social responsibility (CSR)
Friedman’s View: The sole responsibility of business is to maximize profit for shareholders. Introducing broader social or environmental goals can threaten economic freedom and efficiency.
Criticism: Pure profit-seeking can lead to:
- Environmental damage
- Worker exploitation
- Unsafe labor conditions
What is Corporate Social Responsibility (CSR), and what are key arguments for and against it?
Session 1.1 The Rise of corporate social responsibility (CSR)
Definition: CSR means businesses should act ethically and align decisions with societal values (Bowen, 1953).
Criticism:
- CSR has become politicised.
- Strong opposition remains, especially where CSR intersects with politics or culture.
- Critics argue firms should focus on returns, not societal goals.
How does ESG (Environmental, Social, Governance) serve as a practical risk driver for businesses?
Session 1.1 The Rise of corporate social responsibility (CSR)
- ESG is not only about ethics but about managing real risks to operations, reputation, and profitability.
- Even if CSR is based on values, ESG issues are practical business concerns.
What is the debate around the alignment between CSR activities and shareholder value?
Session 1.1 The Rise of corporate social responsibility (CSR)
- Some CSR actions benefit both society and shareholders (win-win).
- Others prioritize ethics or sustainability even if they reduce short-term profits.
- The real challenge: Where to draw the line between social responsibility and shareholder value.
What are the key components of ESG (Environmental, Social, Governance), and how do they relate to business risks and responsibilities?
Session 1.1 The Rise of corporate social responsibility (CSR)
ESG Components:
- Environment, Social, Governance
Dual ESG Perspective:
- Inside-Out: Company’s impact on people and planet
- Outside-In: ESG-related financial risks and opportunities affecting the company
Key Insight:
- ESG isn’t just about being responsible — it’s critical for strategic survival and risk management.
- Ignoring ESG can damage both the planet and a company’s bottom line.
What is the role of governance in setting company priorities, and how does Tirole’s view expand traditional corporate governance?
Session 1.2: Strategy & Business Model
Administrative/Management/Supervisory Bodies:
- Hold highest decision-making authority (e.g., Board, CEO).
- In two-tier systems: separation of management and oversight.
- Set priorities — including ESG considerations.
Tirole’s View on Corporate Governance:
- Critiques traditional shareholder-value focus as too narrow.
- Governance should promote the welfare of all stakeholders, not just shareholders.
- Emphasizes incentives and controls to align decisions with social, environmental, and economic impacts.
Good governance internalizes ESG impacts and prioritizes long-term stakeholder welfare over short-term profit.
How does corporate governance balance internal and external objectives, and why does this matter for ESG?
Session 1.2: Strategy & Business Model
- Corporate governance uses internal controls (management, board, auditors) and external pressures (investors, markets, regulators) to guide the firm.
- The legal framework shapes responsibilities and incentives.
- Stakeholder interests should be included in strategy, especially for managing ESG risks and goals.
- The Voice/Exit mechanism lets stakeholders influence or withdraw.
What are the two main stakeholder groups in ESG, and how should strategy evolve to better address their needs?
Session 1.2: Strategy & Business Model
Two Stakeholder Groups:
- Affected stakeholders – impacted by company actions (e.g., workers, communities, customers).
- Users of financial/sustainability statements – e.g., investors, creditors, NGOs, analysts.
Traditional focus: Users (especially investors/creditors) have shaped strategy by prioritizing financial returns.
Needed shift for ESG:
- Include affected stakeholders more actively.
- Integrate ESG considerations.
- Align with broader sustainability goals.
- Engage those with direct impacts for long-term success.
What is a business model, and what are examples of innovative and sector-based classifications?
Session 1.2: Strategy & Business Model
- Business model: Explains how a firm generates revenue, uses resources, and competes in markets.
- Transforms inputs into value in the short, medium, and long term.
- Innovative models: Freemium, Subscription, E-Commerce, Crowdsourcing, Reverse Engineering, Pay What You Want.
- Sector classification: Uses NACE (EU standard) – includes sectors like Manufacturing, Health Care, Tech, Services, Mining, etc.
What is the Business Model Canvas and how does it help companies?
Session 1.2: Strategy & Business Model
- A visual tool to describe how a business creates, delivers, and captures value.
- Functions like a blueprint for aligning strategy, structure, processes, and systems.
- Helps articulate a clear value proposition and guide strategic implementation.
What are the limitations of traditional accounting in capturing key value drivers?
Session 1.2: Strategy & Business Model
Traditional accounting misses many value drivers, creating a gap between book value and market value.
4 Main Limitations:
- Intangibles – Brand, goodwill, customer lists often not recorded under IAS 38, despite high value.
- Human Capital – Employee knowledge and innovation are treated as expenses, not assets.
- Externalities – Environmental/social impacts aren’t reflected but affect long-term value (e.g., emissions).
- Dependencies & Contingencies – Ignores future needs, liabilities, and supplier risks.
What is Integrated Reporting, and what are its goals and benefits?
Session 1.2: Strategy & Business Model
Integrated Reporting addresses fragmented traditional reporting by:
- Combining financial and non-financial data
- Offering a holistic view of value creation over time
Aims:
- Align strategy with value creation
- Include social, human, intellectual, and environmental capital
- Consider short-, medium-, and long-term perspectives
Since 2022, part of the IFRS system to unify financial and sustainability reporting.
Key Benefit: Delivers a more complete, connected view of performance and value—financially and sustainably
What are the seven guiding principles of Integrated Reporting, and what do they aim to achieve?
Session 1.2: Strategy & Business Model
Integrated Reporting aims to help organizations communicate a clear, concise, and comprehensive view of value creation over time. The 7 principles are:
- Strategic Focus & Future Orientation – Link reporting to strategy and future value creation.
- Connectivity of Information – Show how financial, environmental, and social factors are interrelated.
- Stakeholder Relationships – Reflect how the organization engages and considers stakeholders.
- Materiality – Focus on what truly matters for long-term value creation.
- Conciseness – Provide essential info without clutter.
- Reliability & Completeness – Include all relevant, accurate info—positive and negative.
- Consistency & Comparability – Ensure reports are consistent over time and comparable across organizations.
How does Integrated Reporting differ from traditional reporting in its view of value creation?
Session 1.2: Strategy & Business Model
Traditional reporting focuses mainly on financial performance.
- Integrated Reporting takes a holistic view by considering how value is: Created, preserved, or eroded
- Across multiple types of capital
Emphasizes the value creation process over short-, medium-, and long-term through interconnected inputs and outputs.
What are the six types of capital in Integrated Reporting, and how are they treated in the balance sheet?
Session 1.2: Strategy & Business Model
1. Capital typically recognized in the balance sheet:
- Financial Capital – Investments, financing (assets, liabilities, equity)
- Produced/Physical Capital – Tangible assets used in production (e.g., equipment, inventories)
2. Capital partially recognized in the balance sheet:
- Intellectual Capital – IP like patents, software, plus organizational systems, processes, and tacit knowledge
3. Capital not recognized in the balance sheet:
- Social & Relationship Capital – Norms, values, brand, stakeholder relations
- Human Capital – Skills, expertise, experience, motivation
- Natural Capital – Natural resources and environmental processes critical for sustainability
What does a hypothetical integrated balance sheet under Integrated Reporting include, and what challenges affect its adoption?
Session 1.2: Strategy & Business Model
Integrated Balance Sheet shows a holistic view of value by combining financial and ESG element
Adoption Challenge:
- Voluntary addition
- Aligns with ESRS standards (EU)
- Hindered by political dynamics and inconsistent interpretations across regions and standard-setters
What are the five key reporting dimensions under the EU’s NFRD/CSRD framework, and what must firms report for each?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
Five Reporting Dimensions:
- Environmental matters
- Social issues
- Employee matters
- Respect for human rights
- Anti-corruption and bribery efforts
For each dimension, firms must report:
- A brief description of the business model
- Policies and due diligence processes
- Outcomes of those policies (effectiveness/results)
Applies to: PIEs (Public Interest Entities)
Part of the EU Green Deal: aims for climate neutrality by 2050, aligning sustainability with industrial and innovation policy
What are the roles of the Sustainable Finance Strategy and the Green Deal?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
EU Sustainable Finance Strategy:
- Directs public & private money to environmentally and socially sustainable activities
- Makes sustainability a core part of financial decision-making
European Green Deal:
- EU’s main strategy to reach climate neutrality by 2050
- Drives systemic change via policy, regulation, and innovation
What are the three main areas through which the Green Deal builds on the EU’s Sustainable Finance Strategy?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
- Capital Flows: Defines EU Taxonomy, labels green financial products, and directs investments toward sustainable projects.
- Risk Management: Integrates ESG in ratings, clarifies investor duties, and incentivizes green finance in banking/insurance.
- Transparency & Long-Termism: Improves sustainability disclosures and promotes long-term governance in capital markets.
What are the four core EU regulations shaping sustainable finance and their main focus?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
- EU Taxonomy: Defines sustainable business activities (e.g., green asset ratios)
- CSRD: Defines sustainable companies via mandatory ESG reporting (ESRS)
- EBA Disclosures (CRR/IFR): ESG risk exposure for banks/investment firms
- SFDR: Transparency on sustainable financial products for investors
Goal: Create a standardized framework for sustainability in business & finance across the EU.
EU Taxonomy (2020/852)
What are the criteria and goals under the EU Taxonomy (2020/852) for classifying an activity as environmentally sustainable?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
Eligible Activities (3 types):
- Contributing activities – Directly support 1 of 6 environmental goals
- Enabling activities – Help other activities make substantial contributions (e.g., renewable tech components)
- Transition activities – Not fully green but help shift toward climate neutrality (e.g., cleaner gas plants)
EU Environmental Goals (6):
- Climate change mitigation
- Climate change adaptation
- Sustainable use of water/marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection of biodiversity and ecosystems
Purpose: Redirect capital toward sustainable activities and improve market transparency by aligning financial and non-financial reporting.
CSRD (2023/2464)
What is the CSRD (2023/2464), and what are the key implementation timelines and assurance requirements?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
CSRD replaces the NFRD and expands ESG reporting obligations across the EU => Aims to standardize disclosure and increase transparency.
Reporting Schedule by Cohort:
- 2025: PIEs already under NFRD (>500 employees)
- 2026: Large listed/non-listed companies (not under NFRD)
- 2027: Listed SMEs
- 2029: Non-EU companies with significant EU operations
Assurance Requirements:
- Limited assurance from 2026
- Reasonable assurance from 2028
CSRD (2023/2464)
What content must be included in mandatory sustainability reports under CSRD and ESRS?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
Mandatory report content:
- Business model, sustainability strategy, and governance
- Sustainability risks & impacts (incl. supply chain)
- Mitigation actions, KPIs, targets, incentive systems
- Due diligence policies and processes
European Sustainability Reporting Standards (ESRS):
- Cross-cutting: ESRS 1 (General Requirements), ESRS 2 (General Disclosures)
- Environment (E1–E5): Climate, pollution, water, biodiversity, circular economy
- Social (S1–S4): Workforce, value chain, communities, end-users
- Governance (G1): Business conduct
- Industry-specific: Still in development
Note: Over 1,100 data points may apply, subject to materiality.
CSRD (2023/2464)
What exemptions apply under the Omnibus Proposal?
Session 1.3: Green Deal, Sustainable Finance Strategy and Developments
Omnibus Exemptions (adjustments):
- Cohort 1 PIEs: Only firms with >1,000 employees report in 2025
- Cohort 2 Large companies: Delayed to 2028; only >1,000 employees
- Cohort 3 Listed SMEs: Excluded entirely
- Cohort 4 Non-EU companies: Unchanged — starts 2029
