FSA LEVEL ONE EXAM QUESTIONS
AND ANSWERS
SASB - Correct Answers -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 - Correct Answers -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 - Correct Answers -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 - Correct Answers -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 ___ - Correct Answers -Profitability
"reduced costs, improved worker productivity, mitigated risk potential, and created
revenue-generating opportunities"
,Price Volatility - Correct Answers -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, provid- ing better insight than traditional measures
such as return on equity (ROE).
Positive Relationship - Correct Answers -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 finan- cial 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 - Correct Answers -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."
Lower the cost of capital - Correct Answers -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 - Correct Answers -
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? - Correct Answers -
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? -
Correct Answers -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 informa-
tion within companies is often (though not always) driven by the goal to improve bottom-
line performance
Sustainability Strategy - Correct Answers -a company's approach for improving its
performance on one or more sustainability topics. They represent tactical, focused
responses to a specific performance area
can be one way a company responds to requests from stakeholders or improves its
brand. However, by virtue of their focus on a specific element of the business, ___ ___
are often independent of the company's core business strategy and do not necessarily
translate into sustained long-term success
Sustainable Business Strategy - Correct Answers -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
3. Besides companies and their investors, what other institutions influence demand for
sustainability information? - Correct Answers -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 - Correct Answers -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) - Correct Answers -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 - Correct Answers -The legislative history of the
formation of the US SEC demonstrates two equally important purposes for the US
SEC's existence
Total Mix Concept - Correct Answers -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 - Correct Answers -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) - Correct Answers -Principles aimed
at improving the consistency and comparability of financial reporting procedures.
Historical Cost Accounting - Correct Answers -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 - Correct Answers -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
AND ANSWERS
SASB - Correct Answers -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 - Correct Answers -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 - Correct Answers -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 - Correct Answers -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 ___ - Correct Answers -Profitability
"reduced costs, improved worker productivity, mitigated risk potential, and created
revenue-generating opportunities"
,Price Volatility - Correct Answers -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, provid- ing better insight than traditional measures
such as return on equity (ROE).
Positive Relationship - Correct Answers -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 finan- cial 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 - Correct Answers -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."
Lower the cost of capital - Correct Answers -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 - Correct Answers -
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? - Correct Answers -
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? -
Correct Answers -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 informa-
tion within companies is often (though not always) driven by the goal to improve bottom-
line performance
Sustainability Strategy - Correct Answers -a company's approach for improving its
performance on one or more sustainability topics. They represent tactical, focused
responses to a specific performance area
can be one way a company responds to requests from stakeholders or improves its
brand. However, by virtue of their focus on a specific element of the business, ___ ___
are often independent of the company's core business strategy and do not necessarily
translate into sustained long-term success
Sustainable Business Strategy - Correct Answers -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
3. Besides companies and their investors, what other institutions influence demand for
sustainability information? - Correct Answers -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 - Correct Answers -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) - Correct Answers -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 - Correct Answers -The legislative history of the
formation of the US SEC demonstrates two equally important purposes for the US
SEC's existence
Total Mix Concept - Correct Answers -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 - Correct Answers -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) - Correct Answers -Principles aimed
at improving the consistency and comparability of financial reporting procedures.
Historical Cost Accounting - Correct Answers -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 - Correct Answers -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
