FSA LEVEL II PRACTICE EXAM
QUESTIONS AND ANSWERS
Influences of OPERATIONS on Material Sustainability Factors (internal) - Answer- *1.
MAJOR REVENUE STREAMS*
- not normally associated with the industry (e.g. horizontal company)
- Companies to reference SASB Technical Bulletins to see if there are revenue and
market share thresholds to assist in determining disclosure (e.g. in Tech, standard
relevant if company generates 15%+ of revenue or among top 5 companies in terms of
market share by revenue)
[Example]
Royal Dutch Shell has significant revenue from O&G Upstream, Midstream and
Downstream (three dif standards for these)
*2. MAIN INPUTS FOR VALUE CREATION*
- not primarily associated with industry (e.g. company relying on HC where automation
is industry norm)
[Example]
If Semiconductor outsources manufacturing ("fabless"), then H&S disclosure topic may
not be relevant for disclosure because not under their direct management (potentially no
need to report on other related topics to manufacturing, like GHG, waste, etc.)
Note - these internal factors change over time (e.g. O&G expands, semiconductor
outsources more manufacturing)
Influences of OPERATING ENVIRONMENTS on Material Sustainability Factors
(external) - Answer- *GEOGRAPHIC FOOTPRINT*
- company location, its facilities, its main markets, potential new markets
[Example]
Metals & Mining companies operating in developed countries (vs most operating in
areas of conflict or weak rule of law disclose on reserves near these areas/indigenous
land and MD&A)
*BUSINESS CLIMATE*
[Example]
,Most companies in Internet Media have monopolistic power and should disclose on anti-
competitive practices (vs those that are in more competitive markets)
*REGULATORY CLIMATE*
[Example]
Agricultural Products companies operating in regions where agricultural workers well
protected by legislation, insurance, injury benefits less need to disclose H&S data
*POLITICAL CLIMATE*
- many of these impacts revolve around corruption
[Example]
Aerospace & Defense companies. usually with global nature, operating in regions w/
low corruption less likely to face corruption/bribery risks
*ECONOMIC CLIMATE*
[Example]
Hotels & Lodging companies big energy consumers. If all ops in country where
electricity produced from natural gas, energy management less material topic (less price
volatility risk)
Characteristics that shape an industry's sustainability profile - Answer- 1. Social License
to Operate
2. Use of Common Capitals
3. Costs to Society or Environmental Externalities
Social License to Operate (industry characteristic) - Answer- The ongoing approval and
acceptance of a company's activities by society, especially among local communities
and civil society
In exchange for license, company expected to fulfill certain social goals (or otherwise
have restrictions)
- License can be extensive or special treatment
- Failure can result in regulations or suspension of activities (affecting revenue, cost of
goods sold, compliance cost, cost of capital due to higher risk)
[Types of industries]
- quasi-public services (utilities, student loan providers, transport authorities, mortgage)
- extensive use of public good
,- intellectual property protection (biotech, tech, media)
- fiduciary duties beyond stakeholders (finance)
[Example]
Telecom company has monopoly in exchange for universal access
Use of Common Capitals (industry characteristic) - Answer- Non-financial capitals
available as source of value creation but not controlled by company
[Types]
- Natural capital (water, mineral deposits, forests)
- Public infrastructure (roads, wastewater systems)
- Human capital
[Examples]
- Electricity company uses a lot of water for cooling (may be required to manage water
sustainably)
- Technology company that relies on highly skilled labor (strong talent retention efforts)
Costs to Society or Environmental Externalities (industry characteristic) - Answer- A
diverse range of impacts that result from a company's operations
[Types]
- Effluents and emissions that affect public health (pollution)
- Outsourcing and offshoring (degradation of ecosystems, loss of biodiversity)
- Significant GHG emissions
- High incidence of corruption
- Although these impacts may not currently affect company performance, they tend to
be internalized over time (e.g. through fines, lawsuits, additional regulations, depletion
of key resources, consumer demand, brand value)
- These externalities can be positive (e.g. pharma producing imp. vaccines for public
health -> vaccines often subsidized by governments to increase consumption)
How climate change affects sectors differently:
- O&G
- Auto Parts
- Processed Foods
- Health Care
- Banks - Answer- O&G
- regulations (to limit rise of 2C, 60-80% of coil, O&G reserves are unburnable
- result equity valuation reductions by 40% (higher cost of capital, rating downgrades,
difficulties repaying debt)
, HEALTH CARE
- event readiness for climate-related weather events - affects infrastructure and demand
- leads to cost to repair physical assets and lost revenue from customers
PROCESSED FOODS
- environmental impacts of their ingredient supply chains
- price volatility, consumer trends, lack of market share
AUTOMOBILES
- downstream (use-phase emissions)
- Regulations and consumer attention
BANKS
- "financed emissions" -> pressure from investors and regulations to focus
- indirect exposure through portfolio can diminish returns and reduce shareholder value
Factors that Differentiate a Company from SASB Industry Standard - Answer- *1.
Operations (internal)*
- Major revenue streams
- Main inputs for value creation
*2. Operating environment (external)*
- Geographic footprint
- Business climate
- Regulatory climate
- Political climate
- Economic climate
["Pure-play" companies are those that display typical characteristics of their SICS
industry]
SASB's Five-Factor Test to Assess Company's Specific Operating Circumstances vs
SASB Industry Standard - Answer- (1) Direct Financial Impacts and Risks
(2) Legal, Regulatory, and Policy Drivers
(3) Industry Norms, Best Practices, and Competitive Drivers
(4) Stakeholder Concerns and Social Trends
QUESTIONS AND ANSWERS
Influences of OPERATIONS on Material Sustainability Factors (internal) - Answer- *1.
MAJOR REVENUE STREAMS*
- not normally associated with the industry (e.g. horizontal company)
- Companies to reference SASB Technical Bulletins to see if there are revenue and
market share thresholds to assist in determining disclosure (e.g. in Tech, standard
relevant if company generates 15%+ of revenue or among top 5 companies in terms of
market share by revenue)
[Example]
Royal Dutch Shell has significant revenue from O&G Upstream, Midstream and
Downstream (three dif standards for these)
*2. MAIN INPUTS FOR VALUE CREATION*
- not primarily associated with industry (e.g. company relying on HC where automation
is industry norm)
[Example]
If Semiconductor outsources manufacturing ("fabless"), then H&S disclosure topic may
not be relevant for disclosure because not under their direct management (potentially no
need to report on other related topics to manufacturing, like GHG, waste, etc.)
Note - these internal factors change over time (e.g. O&G expands, semiconductor
outsources more manufacturing)
Influences of OPERATING ENVIRONMENTS on Material Sustainability Factors
(external) - Answer- *GEOGRAPHIC FOOTPRINT*
- company location, its facilities, its main markets, potential new markets
[Example]
Metals & Mining companies operating in developed countries (vs most operating in
areas of conflict or weak rule of law disclose on reserves near these areas/indigenous
land and MD&A)
*BUSINESS CLIMATE*
[Example]
,Most companies in Internet Media have monopolistic power and should disclose on anti-
competitive practices (vs those that are in more competitive markets)
*REGULATORY CLIMATE*
[Example]
Agricultural Products companies operating in regions where agricultural workers well
protected by legislation, insurance, injury benefits less need to disclose H&S data
*POLITICAL CLIMATE*
- many of these impacts revolve around corruption
[Example]
Aerospace & Defense companies. usually with global nature, operating in regions w/
low corruption less likely to face corruption/bribery risks
*ECONOMIC CLIMATE*
[Example]
Hotels & Lodging companies big energy consumers. If all ops in country where
electricity produced from natural gas, energy management less material topic (less price
volatility risk)
Characteristics that shape an industry's sustainability profile - Answer- 1. Social License
to Operate
2. Use of Common Capitals
3. Costs to Society or Environmental Externalities
Social License to Operate (industry characteristic) - Answer- The ongoing approval and
acceptance of a company's activities by society, especially among local communities
and civil society
In exchange for license, company expected to fulfill certain social goals (or otherwise
have restrictions)
- License can be extensive or special treatment
- Failure can result in regulations or suspension of activities (affecting revenue, cost of
goods sold, compliance cost, cost of capital due to higher risk)
[Types of industries]
- quasi-public services (utilities, student loan providers, transport authorities, mortgage)
- extensive use of public good
,- intellectual property protection (biotech, tech, media)
- fiduciary duties beyond stakeholders (finance)
[Example]
Telecom company has monopoly in exchange for universal access
Use of Common Capitals (industry characteristic) - Answer- Non-financial capitals
available as source of value creation but not controlled by company
[Types]
- Natural capital (water, mineral deposits, forests)
- Public infrastructure (roads, wastewater systems)
- Human capital
[Examples]
- Electricity company uses a lot of water for cooling (may be required to manage water
sustainably)
- Technology company that relies on highly skilled labor (strong talent retention efforts)
Costs to Society or Environmental Externalities (industry characteristic) - Answer- A
diverse range of impacts that result from a company's operations
[Types]
- Effluents and emissions that affect public health (pollution)
- Outsourcing and offshoring (degradation of ecosystems, loss of biodiversity)
- Significant GHG emissions
- High incidence of corruption
- Although these impacts may not currently affect company performance, they tend to
be internalized over time (e.g. through fines, lawsuits, additional regulations, depletion
of key resources, consumer demand, brand value)
- These externalities can be positive (e.g. pharma producing imp. vaccines for public
health -> vaccines often subsidized by governments to increase consumption)
How climate change affects sectors differently:
- O&G
- Auto Parts
- Processed Foods
- Health Care
- Banks - Answer- O&G
- regulations (to limit rise of 2C, 60-80% of coil, O&G reserves are unburnable
- result equity valuation reductions by 40% (higher cost of capital, rating downgrades,
difficulties repaying debt)
, HEALTH CARE
- event readiness for climate-related weather events - affects infrastructure and demand
- leads to cost to repair physical assets and lost revenue from customers
PROCESSED FOODS
- environmental impacts of their ingredient supply chains
- price volatility, consumer trends, lack of market share
AUTOMOBILES
- downstream (use-phase emissions)
- Regulations and consumer attention
BANKS
- "financed emissions" -> pressure from investors and regulations to focus
- indirect exposure through portfolio can diminish returns and reduce shareholder value
Factors that Differentiate a Company from SASB Industry Standard - Answer- *1.
Operations (internal)*
- Major revenue streams
- Main inputs for value creation
*2. Operating environment (external)*
- Geographic footprint
- Business climate
- Regulatory climate
- Political climate
- Economic climate
["Pure-play" companies are those that display typical characteristics of their SICS
industry]
SASB's Five-Factor Test to Assess Company's Specific Operating Circumstances vs
SASB Industry Standard - Answer- (1) Direct Financial Impacts and Risks
(2) Legal, Regulatory, and Policy Drivers
(3) Industry Norms, Best Practices, and Competitive Drivers
(4) Stakeholder Concerns and Social Trends
