FSA LEVEL ONE EXAM REVIEW
QUESTIONS WITH CORRECT ANSWERS
Lower the cost of capital - Answer- In fact, in 2015 researchers from the University of
Oxford evaluated 200 empirical ESG studies and found that "90 percent of the studies
on the cost of capital show that sound sustainability standards ______ the cost of
capital for companies."
Other Institutions driving demand for sustainability information - Answer- Policy-based
initiatives
Individual nations
Non-policy efforts like sustainability stock exchanges
Statements from various industry bodies
1. Why are investors demanding quality sustainability information? - Answer- Investors
source quality sustainability information to meet their investment goals. While investors
are generally defined as people or organizations that allocate financial capital with the
goal of achieving a profit, investors are not a monolith. Investment goals and
accompanying strategies may include using the information to achieve above-market
returns, assessing risk to protect against diminished returns and major losses, or
evaluating the predictability of investment outcomes. Whether operating in public or
private markets, the ability of investors to use financially material sustainability
information to achieve enhanced outcomes is evidenced by an increasingly robust body
of independent research. The channels through which investors demonstrate demand
for sustainability information from companies vary, as discussed in Chapter 10
2. What factors drive demand for quality sustainability information within companies? -
Answer- Sustainability data, both qualitative and quantitative, can contribute to company
success in the near, medium, and long term by improving the management of sustain-
ability-related risks and opportunities.
Where key performance indicators (KPIs) are measured and managed, companies may
be better equipped to identify and mitigate risks, reduce costs, optimize efficiencies,
and even increase market share and revenue growth through new products and
services. Indeed, by demonstrating an ability to manage sustainability-related risks and
opportunities to bolster company performance, companies can leverage sustainability
disclosure to effectively communicate with investors and improve cost of capital. Simply
put, demand for sustainability information within companies is often (though not always)
driven by the goal to improve bottom-line performance
3. Besides companies and their investors, what other institutions influence demand for
sustainability information? - Answer- The performance benefits that investors and
,companies experience when integrating sustainability information into their decision-
making processes are not the only factors driving demand for sustainability information.
Other organizations, both public and private, influence the global ESG dialogue.
International, national, and local policy-based initiatives stimulate sustainability
disclosure by passing recommendations and guidance, as well as regulatory
requirements, for the disclosure of sustainability information from publicly listed
companies. Non-policy efforts, particularly those initiated by securities exchanges and
industry associations, increasingly encourage sustainability disclosure among listees
and members.
Stock Market Crash of 1929 - Answer- London Stock Exchange Crash followed by NY
Stock Exchange crash
largely due to fraudulent investment practices, declines in consumer demand,
misguided economic policy, and overextended credit, as well as other factors.
led to Great Depression
Bankers and companies failed to fully disclose information about the companies whose
securities were being offered for sale, creating widespread securities sales using false
or misleading information
Securities and Exchange Commission (SEC) - Answer- Established in 1934
mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate
capital formation.
1. To protect investors
2. To influence corporate behavior - Answer- The legislative history of the formation of
the US SEC demonstrates two equally important purposes for the US SEC's existence
Total Mix Concept - Answer- Suggests that material information is not defined by
whether or not it would have changed an investor's decision. Rather, information is
deemed to be material if it is significantly likely to be considered by a reasonable
investor in investment decisions—a higher threshold than if it "might" be considered—
by such an investor.
Probability and magnitude test for materiality - Answer- According to this test, the
determination of materiality should also consider the probability that an event will
happen and the magnitude of the occurrence of the event
(on top of total mix concept of materiality)
Generally accepted accounting principles (GAAP) - Answer- Principles aimed at
improving the consistency and comparability of financial reporting procedures.
,Historical Cost Accounting - Answer- measures an assets value as the actual cost paid
for the asset at the time of purchase
original nominal value is reported on the balance sheet even if the value of the asset
changes over time
Going from traditional cost accounting to more accurate measurements that show
changes over time - Answer- In other words, the accounting profession recognized the
importance of providing forward-looking information rather than just historical accuracy.
The purpose of accounting definitively shifted, and financial statements were now
intended "to provide information which will be of assistance in making economic
decisions
helped for standardization
International Accounting Standards Board (IASB) - Answer- oversees the development
of the International Financial Reporting Standards (IFRS Standards), the goal of which
is to "develop, in the public interest, a single set of high quality, understandable,
enforceable and globally accepted financial reporting standards based upon clearly
articulated principles
AICPA Report published after FASB created - Answer- In addition to providing
decision-useful information to investors, the report determined the objective of financial
statements is "to report on those activities of the enterprise affecting society which can
be determined and described and measured and which are important to the role of the
enterprise in its social environment
SASB - Answer- Founded in 2011, the Sustainability Accounting Standards Board
(SASB) addresses this need by developing industry-specific standards that help
companies disclose financially material, decision-useful, and cost-effective sustainability
information to investors
SASB Standards facilitate the collection, management, and reporting of sustainability
information that is relevant, reliable, and comparable. In doing so, SASB empowers
both corporate and investor decision-making, risk management, and strategy-setting.
Sustainability defined by 1987 Brundtland Report - Answer- World Commission on
Environment and Development, formally titled Our Common
sustainable development - "humanity has the ability to make development sustainable
to ensure that it meets the needs of the present without compromising the ability of
future generations to meet their own needs."
Investors use sustainability information to - Answer- improve their ability to achieve
above- market returns
, reduce risk and volatility, and protect against diminished returns
improve environmental and social investment outcomes, with financial returns as an
equivalent or a secondary consideration.
Research suggests that companies committed to sustainability ______ in stock market
performance - Answer- Outperform
Harvard Business School predicted that an investment of $1 (US) made in 1993 in a
value-weighted portfolio of companies performing well in sustainability would grow to
$22.6 by the end of 2010, while a control portfolio of non-sustainability performers would
grow to only $15.4 in the same time period
ESG Performance is linked to improved ___ - Answer- Profitability
"Reduced costs, improved worker productivity, mitigated risk potential, and created
revenue-generating opportunities"
Price Volatility - Answer- Companies with higher sustainability or ESG ratings have
lower price and earnings per share (EPS) volatility than those with low sustainability
performance scores
Notably, the researchers found that sustainability information was the only reliable
signal for predicting EPS volatility, providing better insight than traditional measures
such as return on equity (ROE).
Positive Relationship - Answer- A 2015 meta-analysis of more than 2,000 empirical
studies found that the majority of studies demonstrate a ______ relationship between
sustainability performance and financial performance. Of the studies in the sample, 90
percent demonstrated a non-negative relationship between sustainability and corporate
financial performance.9 In other words, a corporate focus on sustainability does not
come at the expense of financial objectives, and in most cases, it enhances companies'
abilities to achieve those objectives.
Internal demand for sustainability information - Answer- According to a 2019 CEO study
jointly conducted by the UN Global Compact and Accenture, 94 percent of CEOs
believe that "sustainability issues are important to the future success of their business"
and "recognize that sustainability can drive competitive advantage."
1. Why was disclosure the basis of regulatory reform in the wake of the 1930's stock
market crash? - Answer- The stock market crash of 1929 sent shock- waves throughout
global markets, leading to global economic declines and the onset of the Great
Depression in the United States. The event provides perhaps the most striking example
of how lack of transparency in capital markets can have disastrous consequences -
harming socioeconomic well-being, bankrupting companies, and eroding investors'
confidence in the information they rely on from companies to make investment
QUESTIONS WITH CORRECT ANSWERS
Lower the cost of capital - Answer- In fact, in 2015 researchers from the University of
Oxford evaluated 200 empirical ESG studies and found that "90 percent of the studies
on the cost of capital show that sound sustainability standards ______ the cost of
capital for companies."
Other Institutions driving demand for sustainability information - Answer- Policy-based
initiatives
Individual nations
Non-policy efforts like sustainability stock exchanges
Statements from various industry bodies
1. Why are investors demanding quality sustainability information? - Answer- Investors
source quality sustainability information to meet their investment goals. While investors
are generally defined as people or organizations that allocate financial capital with the
goal of achieving a profit, investors are not a monolith. Investment goals and
accompanying strategies may include using the information to achieve above-market
returns, assessing risk to protect against diminished returns and major losses, or
evaluating the predictability of investment outcomes. Whether operating in public or
private markets, the ability of investors to use financially material sustainability
information to achieve enhanced outcomes is evidenced by an increasingly robust body
of independent research. The channels through which investors demonstrate demand
for sustainability information from companies vary, as discussed in Chapter 10
2. What factors drive demand for quality sustainability information within companies? -
Answer- Sustainability data, both qualitative and quantitative, can contribute to company
success in the near, medium, and long term by improving the management of sustain-
ability-related risks and opportunities.
Where key performance indicators (KPIs) are measured and managed, companies may
be better equipped to identify and mitigate risks, reduce costs, optimize efficiencies,
and even increase market share and revenue growth through new products and
services. Indeed, by demonstrating an ability to manage sustainability-related risks and
opportunities to bolster company performance, companies can leverage sustainability
disclosure to effectively communicate with investors and improve cost of capital. Simply
put, demand for sustainability information within companies is often (though not always)
driven by the goal to improve bottom-line performance
3. Besides companies and their investors, what other institutions influence demand for
sustainability information? - Answer- The performance benefits that investors and
,companies experience when integrating sustainability information into their decision-
making processes are not the only factors driving demand for sustainability information.
Other organizations, both public and private, influence the global ESG dialogue.
International, national, and local policy-based initiatives stimulate sustainability
disclosure by passing recommendations and guidance, as well as regulatory
requirements, for the disclosure of sustainability information from publicly listed
companies. Non-policy efforts, particularly those initiated by securities exchanges and
industry associations, increasingly encourage sustainability disclosure among listees
and members.
Stock Market Crash of 1929 - Answer- London Stock Exchange Crash followed by NY
Stock Exchange crash
largely due to fraudulent investment practices, declines in consumer demand,
misguided economic policy, and overextended credit, as well as other factors.
led to Great Depression
Bankers and companies failed to fully disclose information about the companies whose
securities were being offered for sale, creating widespread securities sales using false
or misleading information
Securities and Exchange Commission (SEC) - Answer- Established in 1934
mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate
capital formation.
1. To protect investors
2. To influence corporate behavior - Answer- The legislative history of the formation of
the US SEC demonstrates two equally important purposes for the US SEC's existence
Total Mix Concept - Answer- Suggests that material information is not defined by
whether or not it would have changed an investor's decision. Rather, information is
deemed to be material if it is significantly likely to be considered by a reasonable
investor in investment decisions—a higher threshold than if it "might" be considered—
by such an investor.
Probability and magnitude test for materiality - Answer- According to this test, the
determination of materiality should also consider the probability that an event will
happen and the magnitude of the occurrence of the event
(on top of total mix concept of materiality)
Generally accepted accounting principles (GAAP) - Answer- Principles aimed at
improving the consistency and comparability of financial reporting procedures.
,Historical Cost Accounting - Answer- measures an assets value as the actual cost paid
for the asset at the time of purchase
original nominal value is reported on the balance sheet even if the value of the asset
changes over time
Going from traditional cost accounting to more accurate measurements that show
changes over time - Answer- In other words, the accounting profession recognized the
importance of providing forward-looking information rather than just historical accuracy.
The purpose of accounting definitively shifted, and financial statements were now
intended "to provide information which will be of assistance in making economic
decisions
helped for standardization
International Accounting Standards Board (IASB) - Answer- oversees the development
of the International Financial Reporting Standards (IFRS Standards), the goal of which
is to "develop, in the public interest, a single set of high quality, understandable,
enforceable and globally accepted financial reporting standards based upon clearly
articulated principles
AICPA Report published after FASB created - Answer- In addition to providing
decision-useful information to investors, the report determined the objective of financial
statements is "to report on those activities of the enterprise affecting society which can
be determined and described and measured and which are important to the role of the
enterprise in its social environment
SASB - Answer- Founded in 2011, the Sustainability Accounting Standards Board
(SASB) addresses this need by developing industry-specific standards that help
companies disclose financially material, decision-useful, and cost-effective sustainability
information to investors
SASB Standards facilitate the collection, management, and reporting of sustainability
information that is relevant, reliable, and comparable. In doing so, SASB empowers
both corporate and investor decision-making, risk management, and strategy-setting.
Sustainability defined by 1987 Brundtland Report - Answer- World Commission on
Environment and Development, formally titled Our Common
sustainable development - "humanity has the ability to make development sustainable
to ensure that it meets the needs of the present without compromising the ability of
future generations to meet their own needs."
Investors use sustainability information to - Answer- improve their ability to achieve
above- market returns
, reduce risk and volatility, and protect against diminished returns
improve environmental and social investment outcomes, with financial returns as an
equivalent or a secondary consideration.
Research suggests that companies committed to sustainability ______ in stock market
performance - Answer- Outperform
Harvard Business School predicted that an investment of $1 (US) made in 1993 in a
value-weighted portfolio of companies performing well in sustainability would grow to
$22.6 by the end of 2010, while a control portfolio of non-sustainability performers would
grow to only $15.4 in the same time period
ESG Performance is linked to improved ___ - Answer- Profitability
"Reduced costs, improved worker productivity, mitigated risk potential, and created
revenue-generating opportunities"
Price Volatility - Answer- Companies with higher sustainability or ESG ratings have
lower price and earnings per share (EPS) volatility than those with low sustainability
performance scores
Notably, the researchers found that sustainability information was the only reliable
signal for predicting EPS volatility, providing better insight than traditional measures
such as return on equity (ROE).
Positive Relationship - Answer- A 2015 meta-analysis of more than 2,000 empirical
studies found that the majority of studies demonstrate a ______ relationship between
sustainability performance and financial performance. Of the studies in the sample, 90
percent demonstrated a non-negative relationship between sustainability and corporate
financial performance.9 In other words, a corporate focus on sustainability does not
come at the expense of financial objectives, and in most cases, it enhances companies'
abilities to achieve those objectives.
Internal demand for sustainability information - Answer- According to a 2019 CEO study
jointly conducted by the UN Global Compact and Accenture, 94 percent of CEOs
believe that "sustainability issues are important to the future success of their business"
and "recognize that sustainability can drive competitive advantage."
1. Why was disclosure the basis of regulatory reform in the wake of the 1930's stock
market crash? - Answer- The stock market crash of 1929 sent shock- waves throughout
global markets, leading to global economic declines and the onset of the Great
Depression in the United States. The event provides perhaps the most striking example
of how lack of transparency in capital markets can have disastrous consequences -
harming socioeconomic well-being, bankrupting companies, and eroding investors'
confidence in the information they rely on from companies to make investment
