Part I-1 How a Company’s Circumstances Influence Material Sustainability Issues Flashcards
(31 cards)
What is an industry’s sustainability profile?
Defined by the combination of risks and opportunities likely to impact the financial performance of a company in a given industry
To begin to understand the sustainability profile of a company, users can benefit from investigating three primary considerations:
Social license to operate
Use of common capitals
Costs to society, or externalities
What is a social license to operate?
Ongoing acceptance of a business from the local, regional, or national community
Industries with an extensive social license to operate include those that:
Operate as quasi-public services (e.g. utilities, student loan providers, telephone and cable companies, transportation authorities)
Have access to exclusive use of a public good (utilities, healthcare)
Benefit from intellectual property protection (media, biotech, tech)
Have a fiduciary duty that extends beyond shareholders (finance and professional services)
What is use of common capitals?
Non-financial capitals available to an industry as a source of value creation but not owned or controlled by the companies in that industry; for example, water and employees.
Examples of common capital include:
Natural capital - forests, air, mineral deposits, water
Public infrastructure such as roads and wastewater systems
Human capital
What are costs to society, or externalities?
Include a diverse range of impacts that results from a company’s operations - pollution, degradation of ecosystems, or loss of biodiversity
Rather than affecting a company’s financial performance, externalities are (blank)…
internalized over time - depletion of key resources used in production, fines and penalties, lawsuits, additional regulations, depreciation of brand value, shifts in customer demand
Examples of activities that can create negative externalities include:
Effluents and emissions that affect public health and reduce property value
High incidents of corruption that harm broader economic performance and efficiency resources allocation
Significant greenhouse gas emissions that contribute to atmospheric warming
Examples of activities that can create positive externalities include:
Business operations that bolster the economic well-being of surrounding communities
Outsourcing and offshoring that economically impact surrounding communities
A company’s differences from its SICS industry can arise from two general types of factors:
Operations (i.e. internal factors) Operating environment (external factors)
What is a regulated energy market?
Regulated - contain vertically integrated utilities that own and operate everything from the generation of power to its retail distribution
What is a deregulated energy market?
Deregulated markets - encourage competition at the wholesale power level, commonly split generation from distribution
Two main internal factors can help determine whether a company fits precisely within the scope of a SICS industry:
Major revenue streams (key products or services)
Main inputs for value creation (human capital, natural resources)
Which external factors can influence what sustainability issues are likely to materially affect a company’s financial condition, operating performance, and future performance outlook, and therefore which industry Standards might apply?
Business Climate
Economic Climate
Regulatory Climate
Operating Location(s)
A company’s (blank) policies and (blank) processes serve as the critical interface between internal operations and external environment
management practices and decision-making processes
What are the four pillars of ESG management ?
Governance, Strategy, Risk Management, Performance Metric and Targets
What is governance in the context of ESG?
Governance - level of accountability corporate governing bodies maintain related to ESG performance
What is strategy?
Strategy - how company strives to create value - indication of how well it understands operating environment, internal operating factors and actions that generate long term success
What is risk management?
Risk Management - company’s process for identifying, assessing and managing risks, including those related to sustainability, is a key operating function that dictates how well a company can capture the full spectrum of of risks facing a business and can inform a user’s understanding of the adequacy of RM practices
What are performance metrics and targets?
Performance Metrics and Targets - used to assess a company’s progress and relative performance
What two main internal operating factors can be used to evaluate the financial materiality of sustainability information?
Source of revenue
Inputs of capital
What four factors of a company’s external operating context influence financial materiality of sustainability information?
Business Climate
Economic Climate
Regulatory Climate
Operating Location(s)
What role does governance, strategy, and risk management play in ESG analysis?
Can be used to guide analysis of
how well a company manages, or is prepared to manage, sustainability-related risks and
opportunities that can create, erode, or protect value over time
