FSA SASB LEVEL I TEST WITH CORRECT ANSWERS 2024

- answer- What is the historical evolution of disclosure? Why is that relevant today? - answer-x How and why has sustainability accounting and disclosure evolved to supplement financial A&D? - answer- Characteristics of SASB D&A - answer-D&A metrics contextualize understanding of a firm's operations and strategic initiatives What is SICS? - answer-Sustainable Industry Classification System create and outline SASB Sectors and Industries Classification system to meet the needs of users of financially material sustainability information to classify and categorize industries. Falls in between granular classification and repetition, focusing on risks and opportunities and value creation How do companies use SASB Standards to disclose? - answer- How does investor demand for sustainability information shapes corporate disclosure? - answer- How does sustainability encourage cross-functionality? - answer- What are the stages of sustainability disclosure? - answer- What is the influence of board governance on the reliability of sustainability information? - answer- What is the influence of internal controls on the reliability of sustainability information? - answer- What is the influence of third-party assurance on the reliability of sustainability information? - answer- What is the role of sustainability management in corporate strategy and risk management? - answer- How is sustainability information used in public equities? - answer- How is sustainability information used in corporate fixed income? - answer- How is sustainability information used in private markets? - answer- What challenges do investors face using sustainability information? - answer- How do investor challenges using sustainability information impact the market? - answer- Why are investors demanding quality sustainability information? - answer-Financial and sustainability performance are linked. It gives a better understanding of risk and long term success. Investment goals vary but include: Achieving above market returns, assessing risk and protecting against losses, an evaluating the predictability of investment outcomes. What factors drive demand for quality sustainability information? - answer-SI, both qualitative and quantitative, provides insight into financial performance, contributes to short/med/long-term success by improving management of sustainability-related risks and opportunities. 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. Can improve cost of capital. Demand for SI usually is to drive bottom-line performance. Besides companies and investors, what other institutions influence demand for SI? - answer-Regulation (state, national, international policy) for recommendations or requirements of disclosure, non-policy initiatives such as ones by securities exchanges and other industry organizations Why was disclosure the basis of regulator reform in the wake of the 1930s stock market crash? - answer-Lack of transparency in the market had disastrous implications (economic decline, great depression, bankruptcy, harming socioeconomic wellbeing). Disclosure promotes transparency and fosters sound and efficient capital markets. Disclosure effectively protects investors, positively influences corporate behavior, and enables informed investor decisions. What is the relevance of materiality in the context of disclosure? - answer-Materiality is what is financially relevant enough to impact investor decisions and therefore, needs to be disclosed. It was adopted to provide guidance to reporting companies, as lack of guidance would place undue burden on reporting companies. How has materiality historically been interpreted? - answer-Historically, materiality is information that impacts financial performance and decision making. How has the purpose of accounting changed since 1930s and why did financial reporting move towards standardization? - answer-Early on, accounting was specifically accurate record keeping and historical cost accounting (foundation of accounting). However, companies began to do this on their own way so comparability was lacking. This pushed a standard definition of accounting-- provides information for the purpose of making economic decisions, using both historic and forward looking info. IFRS and GAAP standardize disclosure to make it more consistent, comparable, and reliable so investors can access and compare companies. What does the rise of intangible assets mean for corporate disclosure? - answer-Increasing proportion of intangible assets (as a % of total S&P market value) means traditional financial statements do not capture all the truth of performance and value drivers. Tangible assets alone do not constitute a complete set of info so a gap in info exists where these assets are not being identified, measures, or managed What factors contribute to increasing investor interest in non-financial information? - answer-Key organizations endorsed financial and non financial reporting in businesses, more was evidently not captured in financial documents (evidenced by scandals like Enron). Non-financial reporting discloses relevant information about financial condition and long term value, as short termism is rejected and long term value creation is decided in the fiduciary duties of care What challenges exist in sustainability disclosure that do not necessarily exist in financial disclosure? - answer-Young, many audiences are interested (people, investors, communities) so balancing many needs, many experts and professionals required, many methods and methodologies that are highly variable are needed and exist. High variability in scale and scope of data can skew analysis and limit comparability. What does "climate-first" disclosure guidance tell us about regulators' approach to sustainability disclosure? - answer-Often focusing on climate info (rather than comprehensive ESG). This can encourage sustainability disclosure while also focusing and easing companies into it. This is internationally common. What are the four main characteristics of sustainability disclosure guidance? - answer-Interpretive Guidance: interprets or clarifies how sustainability disclosure applies to existing disclosure guidance (requests it without making it a rule) Principle-Based Guidance: provides a list of tenants to guide companies Comply-or-explain Guidance: applies to new and mandatory disclosure requirements, where companies must comply or explain why they have not Line-item Disclosure: disclosure using specified metrics and methodologies to produce specific line items. What two considerations must sustainability disclosure guidance balance and how do standards help achieve that balance. - answer-Flexibility and Usability. Standards that are well crated offer long term solution by enabling comparability while also allowing for slight adjustments and additions. Metrics reported in the same way by different companies but are tailored to industry context and regulatory environment. What role do frameworks and standards play in the sustainability disclosure value chain? - answer-Organizations produce information--> organizations that use information. Frameworks and standards connect producers and users. They influence what and how companies disclose and how to structure data, increase transparency, and engage in market feedback loops (which they use to shape their frameworks and standards to consider the needs of both companies and users) What three types of organizations are most influential ESG data quality, and how are they different from one another? - answer-1. Organizations that issue sustainability disclosure guidance: promote transparency (internally and externally), free to access, publically conductor decision making 2. ESG Data Aggregators: compile and present publically-available data, investors use this to access and analyze data from a variety of companies in one place. 3. Third parties that rate/rank ESG performance of companies: use unique methodologies to assess the ESG performance of individual companies, sourcing data from public and private sources. The last two usually charge a fee and have protected intellectual property. They all exist along the value chain (data aggregators and rating providers downstream of disclosure guidance), provide different services, and have unique stakeholder relationships. What are some of the most common disclosure frameworks and standards? How do they differ? How are they complementary? - answer-Frameworks and standards: CDP, CDSB (climate disclosure standards board), GRI (global reporting initiative), IIRC (international integrated reporting council), SASB (sustainability accounting standards board), TCFD (Task force on climate-related financial disclosures) Differ: scope covered, type of guidance they offer, the industry agnosticism or specificity, target audience, approach to materiality, governance models employed to develop The same: Materiality and scope. Frameworks offer concepts (CDSB, IIRC, TCFD) and what topics should be covered. Standards (GRI, SASB) are specific, replicable, and detail guidance for what should be disclosed. Standards make frameworks actionable. CDP and GRI define materiality in terms of understanding a company's outward impact on economy, environment, and people. The rest focus on info needed to understand the impact of sustainability issues on enterprise value. How do jurisdictions throughout the world traditionally define materiality? - answer-Traditionally defined by securities regulators and accounting standards bodies, in the context of financial disclosure. Most are the same, the nuances exist regarding the means to determine materiality, legal concepts of reasonable investor, treatment of misstatements/omissions. How do traditional characteristics of materiality apply to materiality in the context of sustainability disclosure? - answer-Sustainability materiality is broadly defined as info relevant to decisions of multiple stakeholders. However, it is more and more traditional (treated the same as traditional material financial info) where the scope of info is limited to what is necessary to understand a company's performance and prospects. What is 'dynamic materiality' and how does it apply to sustainability information? - answer-What is material in sustainability changes over time as new risks/opportunities/understandings emerge and evolve. This demonstrates the connectedness between environmental social issues and financial materiality. What are the three primary objectives of the SASB Standards, and how is the standard-setting process designed to meet those objectives? - answer-Financially Material: robust research process that assess each topic for financial impact (revenue, costs, assets, liability, cost of capital) Decision Useful: Assess each disclosure topic and metrics under different decision-useful characteristics, such as financial impact, level of interest amongst providers of capital, prevalence in an industry, and how actionable they are. Metrics must represent a topic's performance, provide complete info, be comparable between and across companies and over time, verifiable and replicable, aligned with standards, able to be added to investment decisions, and free from bias Cost Effective: feedback from stakeholders as to costs associated with disclosure of different topics. Considers if already calculated, easy to calculate, is actually necessary and material. Meant to surface the minimum set of disclosure topics that are likely to be financially material, avoiding excess info generation What are disclosure topics in a SASB Standard, and what purpose do they serve? - answer-Topics in each SASB Standard that are likely to have financially material impacts on a company in a given industry. They represent industry-specific impacts of General Issue Categories (GICs). What are the different types of metrics in a SASB Standard, and what purpose do they each service? - answer-Accounting Metrics: quantitative or narrative discussion. KPIs and benchmarks, very useful for investors Activity Metrics: not performance measurement, but the scale of the business itself, which allows for contextualization of impact. How does SASB achieve each of the four fundamental tenets to SASB's approach to standard-setting? - answer-1.Evidence based: robust research process to assess financial impact of each disclosure topics 2.Market informed: actively reaches out to stakeholders to gain perspectives 3.Industry specific: Develops these at the industry level to understand how each industry is affected, using the SIC (categorizing industries based on resource use, sustainability impact, business model, and regulatory environment) 4. Transparent: embedded throughout, ots of public engagements and commentary, as well as transparent public messaging. What two documents define SASB's governance procedures, and what purpose do they each serve? - answer-1. Conceptual Framework: defines the principles and characteristics of the approach to how they make decisions, guiding board members, stakeholders who use it, and improve engagement by giving a language of communication. Ensures all standards are developed consistently, providing a framework to resolve questions that emerge. 2. Rules of Procedure: More detailed; Establishes the mechanisms of standard setting followed by SASB in establishing its activities and how it is governed and overseen. (policies and practices, due process, oversight) How do the SASB Standards evolve over time? - answer-Project-based model. Proposed inboard meetings--> research, market feedback, vetting evidence--> suggest to public and get feedback--> gain board approval. What are two reasons why companies report using SASB Standards? - answer-Meet unique ESG disclosure objectives alongside other frameworks AND to communicate the link between sustainability management and financial performance to investors Where do companies disclose SASB data? - answer-Annual reports, integrated reports, regulatory filings, annual sustainability reports, stand-alone SASB reports, web-based reports. Companies choose the best channel for their intended audience. How do companies disclose SASB-aligned data when a standard does not perfectly align with their business? - answer-Sustainable Industry Classification System (SICS) developed to identify topics that are likely financially material to companies in a given industry, but focused on "pure play" companies, that exist in only one product or service category. Companies can disclosure from a secondary industry, or omit/modify the topics (but must disclose their rationale) What presentation formats have companies embraced when reporting sustainability information aligned with SASB Standards? - answer-Publishing assurance statements to signal reliability, organize and format in various ways, provide data visualizations and time-series data, and present information in an excel file so people can do their own analysis. Users can also use multi-year data to see improvement and how that may continue in the future. In what ways do investors typically demonstrate demand for sustainability information to companies, and how has the growth of index funds shaped corporate-investor communication? - answer-Investors express demand through public calls for disclosure, direct engagement, shareholder proposals and proxy voting, sometimes through buy/sell decisions. Index investing growth increasingly incentivizes investors to work with companies to improve performance because they do not select individual securities anymore. *Growth of index funds leads to more active engagement on ESG* How do SASB Standards support cross-functional communication? - answer-SASB Standards serve as a bridge between professional roles for communication sustainability information, and it requires input, expertise, and information from a wide variety of actors and business functions (internal audit, legal compliance, management approval, investor relations). This can also be a set of common metrics for measuring financially material sustainability topics to smooth internal communication. Why do companies pursue sustainability disclosure? - answer-Take ownership of their sustainability story to counterbalance what third parties say, clearly communicate topics identified as important by management, peer influence, direct response to investor requests, or a way to maintain accountability while improving performance management. Need to first understand informational and audience needs to identify the WHY How do metrics/KPIs contribute to a successful sustainable business strategy? - answer-Relevant KPIs can be the difference between effectively managing performance or experiencing performance declines. ESG metrics that are related to financial materiality can inform business strategy, identify key opportunities for value creation, identify and mitigate ESG risks, and can even lead to a competitive advantage. How do disclosures based on SASB Standards help meet the needs of different types of investors? - answer-Investors leverage info yielded through SASB Standards to support investment decisions. Impact investors track KPIs, fund managers apply positive and negative screens, equity analyst integrates ESG into fundamental analysis, private equity funds enage companies on ESG performance goals, credit analysts bolster risk analysis all in the pre and post investment decision making. Why are SASB Standards best suited for ESG integration? - answer-Investors adjust traditional analysis using SI, such as financial models adjusted for revenue, costs, off-balance-sheet liabilities, or adjustments to capital cost. The goal is to consider whether ESG factors contribute to or detract from the financial prospects of a given investment opportunity (Not to apply values). SASB Standards allow the users to address the material factors that may affect company or sector performance. SASB Standards are best suited for ESG integration because they are directly linked to the channels of financial impact that are relevant to assessing investment prospects How is the use of sustainability information in corporate fixed-income different from the use of sustainability information in public equity? How is that similar or different from the use of sustainability information in private equity? - answer-Public equity investors conduct analyses to price securities and evaluate future returns, their ESG analysis focuses both on risks and opportunities related to the firm. Investors traditionally take on an involved role, engaging with the company through due diligence, holding, and support, as well as KPI identification. Fixed income investors are concerned with evaluating a company's ability to repay and are concerned with factors that influence default probability. Investors' primary concern revolves around a company's ability to manage ESG-related risks and protect against downside risk What challenges inhibit investors' ability to use sustainability data? - answer-Policies: when reporting "yes or no" to having a policy, lots of how the policy works and how the culture supports it is missing Comparability: not even company uses the same metrics, terminology, or units of measure Range of Scoring Methods: many different ways to score, not every company is on every third party site Comprehensiveness: Lack of rigor and lack of internal controls results in an incomplete story, usually captures what is easiest to capture (GHG emissions) Governance: Not all companies have systems in place to collect correctly, need more checks and balances, corporate boards are beginning to have a responsibility to consider SI in key decisions, and investors begin to look at how a company manages ESG Differentiating Materiality: investors find it difficult to keep identifying financially material SI material as it changes Never ending demand for more information: self explanatory Research demonstrating importance of sustainability success? - answer-- Harvard Business School predicted that an investment of $1 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 of non sustainability would only grow to $15.4 - 90% of studies in a 2,000 case study demonstrated a non-negative relationship between sustainability and corporate financial performance. Price Volatility - answer-Companies with a higher ESG rating have lower price and earnings per share volatility than those with low sustainability performance, SI is the only reliable signal for predicting EPS volatility, being a better indicator than ROE Private Equity in SI - answer-PE investors recognize ESG investing as a means to improve portfolio performance, mitigate risk, and generate alpha Stock Market Crash of 1929 - answer-prominent fraud came to light (fraudulent investment practices, declines in consumer demand, misguided economic policy, overextended credit) lead to Great Depression, GDP fell by 15% and 80% drop in US market value. Evidence of unethical and risky financial practices, failure to fully disclose, lack of transparency. US SEC - answer-US Securities and Exchange Commission. Mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. 2 key purposes: 1. protect investors and 2. Influence corporate behavior Total Mix - answer-US Supreme Court determined that information is material if its exclusion would have altered the "total mix" of info considered by a reasonable investor Probability and Magnitude Test - answer-Another test for materiality; considering the probability that an event will happen and the magnitude of the occurrence of that event. GAAP - answer-Generally Accepted Accounting Principles. Established as a cornerstone of transparency and disclosure, aimed at improving the consistency and comparability of financial reporting procedures Historical Cost Accounting - answer-Original accounting, measures asset value as the actual cost paid for the asset at the time of purchase, original nominal value reported on balance sheet even if the value of the asset changes over time. CAP - answer-American Institute of Accountants' Committee on Accounting Procedure, first established GAAP, permits the use of multiple accounting methods IASC - answer-International Accounting Standards Committee, founded in 1973 to develop international accounting standards. Originally intended to focus on policies and principles that have been established in sophisticated world markets, but it became the IASB IASB - answer-International Accounting Standards Board; independent standard-setting organization with robust governance and due process. It oversees the development of the International Financial Reporting Standards (IFRS Standards) IFRS Standards - answer-Goal is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards that are based upon clearly articulated principles. Used in over 140 jurisdictions. FASB - answer-Financial Accounting Standards Board, established to replace APB, in need of widespread standardized accounting. FASB is an independent, full time organization dedicated to the development of financial accounting standards and is the authoritative source of US GAAP Enterprise Value - answer-The total market value of a firm's equity and debt, minus the value of its cash and marketable securities. It measures the value of the firm's underlying business. Intangible Asset - answer-Accounts payable, pre-paid expenses, patents; less represented in financial accounting, more and more common in market Tangible Assets - answer-Physical; cash, inventory, vehicles, equipment, buildings, investment. In 1975, accounted for 83% of market value in S&P 500, in 2020, only 10% Management's Discussion and Analysis (MD&A) - answer-Management commentary; section of a company's annual report in which management explains many different aspects of the company's past performance and future plans Two Principles of MD&A - answer-1. Provide management's view of the entity's performance, position, and progress (including forward looking information) 2. Supplement and complement information presented in the financial statements (and possess the qualitative characteristics described in the IFRS Conceptual Framework for Financial Reporting) US SEC 4 points of an MD&A - answer-1. Focus on Material Information 2. Include KPIs 3. Disclose known trends and uncertainties that are reasonably likely 4. Analyze the information that is disclosed Rise of Corporate Governance Codes - answer-Financial statements were falling short, so CGC were enacted in reaction to corporate misconduct that shook the public's trust and meets the needs for transparency and accountability. Growth in asset management demand for SI - answer-Morgan Stanley Survey:95% of asset owners are integrating or considering integrating sustainable investment into their portfolios CFA Institute survey: 73% of a 1,500 portfolio study take ESG into account UBS Survey: 78% of equities integrate ESG Challenges to Sustainability Reporting - answer-1. Every audience has different needs 2. Variability in data types, methods, and measurements 3. Wide range of methodologies and difficulty with comparison SI2 - answer-Sustainability Investing INstitute found that 97% of US companies (n=500) disclose SI and 40% voluntarily address it through financial accounting Interpretive Guidance - answer-Disclosure guidance that clarifies or elaborates on the application of existing guidance to sustainability information SEC 2010 Guidance example suggests considering: 1. Legislative and regulatory impacts 2. International accords 3. Indirect consequences of regulation or business trends 4. Physical impacts of climate change. Principles-Based Disclosure Guidance - answer-Aim to yield qualitative info/quantitative metrics while also allowing flexibility in which metrics to report. Provides a list of tenants to guide companies through reporting process Rules-Based Approach - answer-Details specific reporting format and standards with relatively high degree of detail Comply-Or-Explain Disclosure Guidance - answer-Requires reporting companies to either comply with required rules or codes or explain why they have chosen not to. Offering a new way to self regulate, letting market decide what information is useful to investment decisions. Addresses issue of being no one size fits all solution Line-Item Disclosure Guidance - answer-Information required to be disclosed using a specified methodology to produce specific line items; similar to traditional financial disclosure structure. Encourages comparison Pros and Cons of Flexibility in Disclosure - answer-Pro: Flexibility makes it easier for companies to report information, thus increasing the level of disclosure Con: Flexibility risks proliferating disclosures that are not comparable or useful Pros and Cons of Specific Disclosure - answer-Pro: Supports comparability and decision-usefullness Con: Risks creating pushback or frustration from the corporate community, especially if it is not well-crafted Sustainability Disclosure Value Chain - answer-Reporters: collects, validates, set up internal controls, involve external audit, publish Disclosure Platforms/Software Providers: Provide platforms to enable filers to collect and report, and provide taxonomies Auditors: USe standards against which they provide external assurance Data Providers: Aggregate info and make it available Analytics Platforms: provide ratings and advanced analysis capabilities End Users: consume data! Regulators: mandate, and may use info for creating regulations Data Aggregators - answer-Compile and present data, making it possible for investors to access data from a variety of companies in one place rather than sourcing data directly from individual companies. Structured data: quantitative, clearly organizable for easy analysis Unstructured data: text heavy, think text and news and reports examples: B Analytics, Carbon Disclosure Project (CDP), Global Real Estate Sustainability Benchmark (GRESB), Standard & Poor's (S&P) SAM Corporate Sustainability Assessment (CSA) ESG Ratings and Analytics Providers - answer-Rating agencies employ a unique methodology for scoring or ranking individual companies based on comparative ESG assessments. Examples: Institutional Shareholders Services (ISS) ESG, MSCI, Sustainalytics, Vigeo Eiris Role of Regulators - answer-The free market alone cannot create global standardization so regulators help build more consistency in requirements for reporting and are likely to increase the number of companies that report CDP - answer-Measuring and managing environmental risks and opportunities; gives a card-like scale ranging from a-F Climate Disclosure Standards Board (CDSB) - answer-Framework for reporting environmental info. Similar rigor as to financial reporting, standardized reporting process, helps stakeholders consider the impacts of natural capital on corporate performance alongside financial capital Global Reporting Initiative (GRI) - answer-Reports on economy, environment, and surrounding society, including impacts on human rights. Sets reporting principles that define report content and set sexpectations for quality. International Integrated Reporting Council (IIRC) - answer-Using IR Frameworks, connects 6 capitals and aims to communicate and understand the interdependence of those six with financial reporting Sustainability Accounting Standards Board (SASB) - answer-Identify, manage, and communicate financially material sustainability information to investors, covers industry specific ESG topics Task Force on Climate-related Financial Disclosures (TCFD) - answer-Principles-based framework for climate-related financial disclosure Seven Characteristics of Sustainability Disclosure Frameworks and Standards - answer-1. Scope: ecompasses a lot such as environmental information, social info, operational governance info, economic info, physical assets, intellectual assets 2. Type of guidance: Frameworks (TCFD, IR, CDSB) and standards (GRI and SASB) 3. Primary Audience 4. Scope of Materiality: 1. in the context of enterprise value creation or financial materiality that applies to the value or company and 2. in the context of significant impact on economy, environment, and people, company's impacts on broader society (double materiality) 5. Industry agnostic (disclosure guidance aims to capture performance on a set of criteria that can be applied to any company regardless of industry) v industry specific (establishes criteria that are relevant to companies in specific industries) 6. Time Horizons. Financial timelines are usually long term but sustainability can be short, long, and medium term 7. Governance model. Different allocation of voices, how long, and how decisions are made. 2 Types of Guidance - answer-Frameworks: Set of concepts and principles for how info is structured and prepared and what broad topics are covered, help promote consistency of information Standards: Specific, replicable, detailed guidance for what should be disclosed. some flexibility to pick most reliable Countries with global materiality standards - answer-Australia, Brazil, Canada, EU, France, India, Japan, Philippines, US Defining Characteristics of International Traditional Materiality - answer-- User of information -User's objectives -Use of the term reasonable (somewhere between idiot and expert;evolves) -Scope of Information -Omissions, Misstatements, and Obscurement -Location of Information Double Materiality - answer-1. Reflect the organization's significant economic, environmental, and social impacts (material to sustainability and business impacts on ESG) 2. Would substantively influence the assessments and decisions of stakeholders (material to investors) Financial Materiality --> Environmental & Social Materiality - answer-Financial Materiality: company impact on climate can be financially material and climate change can impact the company ESM: company's impact on climate is interesting to consumers, civil society, employees, investors Dynamic Materiality - answer-What is material changes over time; what is material today may not be material tomorrow; especially in sustainability; what is material can be based on the author Language of Specificity in Disclosure - answer-Boilerplate: Broad, nonspecific wording that does not describe the realities of the registrant's particular operating context (widely applicable) Company-Tailored Narrative: disclosure using specific language that can be understood only in the context of the reporting company, accounts for unique circumstances and lends insights into such areas are past performance, future targets, and individual risk/opportunity management Metrics: comparable, specific, detailed 3 SASB Objectives - answer-1. Financially Material 2. Decision-Useful 3. Cost-Effective (continue testing how much it would cost for them to collect data, without limiting decision usefulness) Structure of SASB Standards - answer--Sectors and Industries -Sustainability dimensions (broad themes) -General Issue Categories (industry agnostic, cross cutting themes that compare across industries) -Disclosure topics (industry specific GICs that have financially material impacts on companies in an industry) -Metrics (quant and qual indicators to measure each disclosure topic) SASB Governing Bodies - answer-Foundation Board of Directors: organizational, fiduciary duty, oversees standards board and technical staff and operations of both Standards Board: oversight of the standard setting process and responsibility for following the two governing docs to ensure quality outcomes Five Factor Test for Evidence - answer-Explores investor interest across topics 1. Financial impacts and risk 2. Legal, regulatory, and policy drivers 3. Industry norms and competitive drivers 4. Investor/stakeholder concerns and social trends 5. Opportunities for innovation Channels of evaluating financial evidence and drivers - answer-1. Revenues (market share, new markets, pricing power) and costs (Cost of revenue, R&D, CAPEX) 2. Assets & Liabilities (tangible and intangible assets, contingent liabilities, pensions) 3. Cost of Capital (risk premium, industry divestment risk) Types of Financial Impacts - answer-Acute: events that may be rare or unlikely but significant, like extreme weather or spills or financial collapse Progressive: less-extreme effects in a given year but can erode value over time, like making a production line more energy efficiency Actual: may materialize in the form of existing regulation and known changes in consumer demand Potential: latent, due to pending regulation, threats of competition, or increased interest in sustainability Characteristics of Disclosure Topics - answer-1. Financially Impactful 2. Of interest to users Additionally but less: - Prevalent: can be applied to many companies within an industry and across geography - Actionable: are the topics identified actually actionable by the companies Characteristics of accounting metrics for SASB - answer-1. Representationally faithful: the metric performance correlates with performance on the disclosure topic it aims to address 2. Complete: Metrics provide enough data and info to understand and interpret performance on the disclosure topic Also looking for: comparable, neutral, verifiable, aligned, and understandable Market feedback and participation for SASB - answer-Industry expertise (corporate professionals, investors, NGOs, lawyers, consultants), consultation, roundtables, public comment periods, unsolicited input SASB Development Process - answer-identify sustainability issues--> industry research--> market input--> evidence vetting--> public comment--> revisions and board approval all experience ongoing Standards maintenance Why do companies report using SASB Standards? - answer-- to meet unique disclosure objectives alongside additional frameworks - to communicate the link between sustainability management and financial performance Where do companies report using SASB Standards? - answer-- in annual reports, including regulatory filings or integrated reports -in annual sustainability reports, including reports using multiple frameworks or standards - as a stand alone SASB report - as a web based report What do companies report using SASB Standards? - answer--choosing the right industries, disclosure topics, and metrics - assessing industry topics and metrics -modifying or omitting existing metrics -providing context How are companies reporting using SASB Standards? - answer--deciding to publish assurance statements -organizing and formatting data - time series data - downloadable excel data -embracing continuous improvement Investor demand for SASB - answer-Blackrock, Canada Pension Plan Investment Board, Mexico's Green Finance Advisory Council, Morrow Sodali Institutional Investor Survey, Norges Bank Investment Management, State Street Global Advisors, Vanguard Bank of America, Morgan Stanley, Goldman Sachs, Barclays integrate ESG into their research 200 case study, 83% say ESG factors are integral to what they do and 89% say their firms have explicit ESG policy in place Stewardship Codes - answer-Formalize enhanced expectation of investors' role in corporate governance, based on fiduciary duty. They naturally promote stronger coordination among investors and investees in addressing ESG related risks and opportunities as well as encouraging better disclosure with more standardized metrics to make it easier for investors to understand the material ESG issues relevant to a company Voting Shifts towards ESG - answer-1. Proxy votes: voting against or withholding votes from directors who make insufficient progress integrating climate risk 2. Shareholder resolution: index funds (rising from 27-46 by 2019) prose a request or recommendation to board of directors at a company. It is a lengthy process but can get great action from companies 3. Withdrawal: rates increasing, as more companies respond to index fund resolutions Business roles applicable to sustainability disclosure - answer-Board of Directors: optimize shareholder value, oversee risk management, provide perspective on financial materiality, oversee integrated reporting and compare with peers CEO and CFO: provide perspective on financial materiality, relate ESG risks and opportunities to business strategy, certify accuracy of internal controls, communication perspective with stakeholders Legal Counsel: perspective on legal risks related to omissions/inclusion, advice on adherence to emerging ESG requirements CSO: relate ESG risks and opportunities to business, identify necessary collaborative relationships, provide insight into existing processes and best practices Chief Audit and Internal Audit: oversee risk management and controls, provide perspective on needs of independent assurance providers, identify level of data oversight needed and alignments between reporting for consistency Risk Management: company wide perspective on internal and external risks Compliance: identify how to comply with regulatory requirements, ongoing monitoring of compliance Investor relationships: connections between sustainability performance and enterprise value creation, engage with investors Business Unit Managers: unit specific knowledge and metrics Tech: what tech to use, how to gather data HR: human capital metric perspective Independent Assurance Provider: oversee quality of data Why may a company choose to report? - answer-- To take ownership of their sustainability story - Peer effects - In response to investor interest -Improving performance management Preparing Quality Data - answer-Gap Analysis: what data is already reported eternally, what is being collected but not reported, what information still needs collecting Categories of metrics Identifying reliable info: appropriate board insight (audit committee and risk identification), established internal controls (activities that help companies achieve their objectives by mitigating risks of incorrect data), data assurance (review by external, independent professionals on the credibility of data) Examples of internal control activities - answer-- calibration test of measurement equipment -establishing automated tolerance limits that trigger warnings for anomalies - protecting data access -reconciling invoices to the general ledger -performing analytical reviews to follow up on unusual data - establishing independent reviews Types of Data Assurance - answer-Audits: most well known, examination of financial statements and internal controls by CPAs Examinations: audit-level engagements designed to provide high level assurance on info that is NOT historical financial statements Reasonable Assurance: most rigorous assurance, on par with audits, examine reported info, source data, and internal controls Limited assurance or review: limited in scope, lower degree of confidence Special Disclosure Situations - answer-- companies can choose to report across multiple industries if they span multiple industries - the may omit, add, or modify if explained, however that makes it harder to compare Reporting timeline - answer-Start of Fiscal Year: - define goals and KPIs -Establish timeline -Align with key players -Establish process of internal reviews 3-7 Months Before: -adjust and refine content - collect and analyze ata -evaluate performance and develop narrative 2 Months before -seek extern assurance 1 month before - conduct internal reviews and gain sign offs PUBLISH Sustainability Strategy - answer-company's approach for improving its performance on one or more sustainability topics Sustainable Business Strategy - answer-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 (pathway: identify metrics-> develop knowledge from data -> craft strategy based on findings) KPI Purpose - answer-Foundation of successful sustainable business strategy development because they offer direct performance information. Key metrics on financially material sustainability issues can go much further in informing a firm's creation prospects. Connecting SASB metrics to strategy - answer-1. ESG metrics directly tied to financial materiality can support companies in aligning sustainability with enterprise value creation 2. Analyses that include financially material sustainability information can prevent unwelcome surprises for the company and its investors 3. Sustainability performance management can support companies in effectively differentiating themselves from their peers helping to attract customers and investors Stages of Value Creation - answer-1. Minimizing costs 2. Optimizing efficiencies 3. New products and/or technologies 4. New business models and differentiated value proposition ERM - answer-Enterprise Risk Management Framework, which is the culture, capabilities and practices, integrated with strategy-setting performance that organizations rely on to manage risk in creating, preserving, and realizing value. Connecting ERM and Sustainability to Strategy - answer-1. Governance and Culture of ESG-related Risks: how decisions are made and how these decisions are executed 2. Strategy and Objective-Setting for ESG-related Risks 3. Performance on ESG-related risks 4. Review and Revision of ESG-related risks 5. Information, communication, and reporting for ESG-related risks Sustainability information can provide a more complete picture of company's risk landscape SASB metrics useful in 5 phases of risk management process - answer-1. Identification: SASB Standards are likely to represent business-critical risks and opportunities 2. Assessment: can guide companies to better assess their performance 3. Response: better understand whether to accept, avoid, reduce, or transfer a risk 4. Monitoring: designed to support internal decision-making 5. Reporting: support external decision making through disclosure in core communication channels. Ways investors use sustainability information - answer-1. Increase alpha (financial return beyond a benchmark) and reduce risk 2. It falls within fiduciary duty of care 3. To 'do well while doing good" 4. To align with positive morals 5. To have the best of both worlds--value on each end. What questions can SASB Standards help investors answer? - answer--How do sustainability issues impact core value drivers in industry-level analysis? - How do emerging sustainability risks and opportunities unfold over the investment timeline? -How do companies leverage opportunities or mitigate risks to material sustainability issues? How can these issues and corresponding metrics be integrated into firm-level analysis, either on a comparative basis or in terms of fundamental value? - How do differentiated, industry-specific sustainability factors affect a portfolio across all sectors? Which sectors or industries are facing headwinds or tailwinds? - How do sustainability issues impact key signals of risk or return pertinent to underwriting decisions What does SASB's focus on financial material do? - answer-1. Makes it easier for investors to evaluate performance on issues most pertinent to enterprise value creation 2. Can reduce friction and thus make it easier for companies to adopt and report. Adjusted valuations - answer-When ESG info is stand alone, users are likely to adjust their valuations based on negative ESG performance, but when presented side by side, they will adjust based o both positive and negatives. Two uses of sustainability information for investors - answer-1. Make decisions about exclusionary or negative screening 2. Make decisions about which investments to prioritize or actively select NOT mutually exclusive Socially Reponsisble Investing - answer-Excluding investments affiliated with certain geographic conflicts or operating in 'sin stock' industries (weapons, alcohol, gambling); not used as much as exclusionary screening Exclusionary Screening - answer-Investment strategies employed to avoid specific investments. SI can be used to inform exclusionary screening processes, either values or norms based Values Based Screening - answer-Aims to avoid investments based on beliefs or ethical standards of the investors Norms Based Screening - answer-Excluding investments based on a company's behavior regarding internationally accepted norms and standards surrounding human rights, labor practices, and other issues Inclusionary Investment Strategies - answer-Positive Screening: strategy used to prioritize and/or actively choose firms to invest in based on certain criteria Negative Screening: Excluding specific companies or sectors associated with specific risks or activities that an investor does not want Thematic Investing: investors optimize capital allocation to a specific ESG issue Impact Investing: Considering sustainability information in investment products and strategies with the goal of creating positive impacts alongside financial returns ESG Integration: incorporate sustainability information into traditional selection processes, target investments for ESG performance Characteristics of Impact Investing - answer-1. Intentional (explicit goal of achieving social or environmental impact) 2. Impact Measurements (measured and reported to assess whether the investment achieved the desired impact) 3. Impact Management (goal of mitigating negative outcomes and maximizing positive outcomes) Thematic Bonds - answer-Climate, social, green, sustainability-linked Fund projects that generate positive impacts Industry agnostic and specific investor information - answer-Agnostic can include: gender policy, labor and human rights, governance and then specific can be throughout Pre-Investment Information - answer-Data Decisions: some investors use SASB's industry standards as a template, can influence what to start demanding from companiess Industry Analysis - answer-Provides a framework for consistently analyzing and valuing peer companies in an industry Research frames: illuminating additional value drivers or risk factors, providing factors that impact existing drivers and factors UN ESG Integration Framework - answer-Research: Materiality framework, voting, ESG agenda meetings, watch lists, red-flag indicators, company questionnaires Security Valuation-Fixed Income: relative ranking, multiple valuations, duration analysis,forecasted financials and ratios Portfolio Construction: ESG and financial risk exposures, portfolio scenario analysis, portfolio weightings, ESG profile vs benchmarking Four key areas of risk in fixed-income investing - answer-Credit risk, interest rate risk, yield curve risk, liquidity risk Fundamental analysis - answer-Aims to evaluate the intrinsic value of a security be examining relevant financial and economic factors to evaluate whether a security is correctly valued. Includes comparative analysis (compares industry peers against one another) and company valuation (determine the appropriate value of a company using various inputs and outputs) Comparative Analysis - answer-Finds leaders and laggards, determines which companies are best leveraging market opportunities and to analyze the strength of their ability to respond to emerging risks and demand trends. Company Valuation - answer-Tracing each sustainability issue to its ultimate value impact and providing insight into the likelihood and magnitude of those impacts, factor these issues into company valuations and cost of capital SASB Metrics and Financial Analysis - answer-SASB Metrics are often linked to more than one type of financial impact, such a revenue, cost, asset & liability, and cost of capital Designed to yield useful quant and qual info on sustainability factors to inform company valuation Credit Analysis and ESG - answer-PE investors will look for the upside growth potential with limited risk Fixed income investors will focus more on a company's ability to repay debt and interest (industry specific financially material SI can support company level analysis for fixed income investments through confidence boosting in ability to manage risk and repay debt) Index fund - answer-Mutual fund constructed to match the performance components of a market index (S&P Global 1200), low cost option for investors to track popular stock and bond market indices while achieving broad diversification ESG in Index Funds - answer-Index managers must set ESG benchmarks and to consider risk appetite and volatility limit Tilt: a type of fund that includes a core holding of stocks to mimic a benchmark and then securities are added to a fund to tilt it towards enhanced performance (towards or away certain characteristics, away from carbon emissions) Screens: Selecting a set of criteria, applying it to assets under consideration, and screening out assets based on their ability or inability Systemic Risk - answer-The risk of collapse of an entire financial system o an entire market related to broad-reaching factors and an entity's connections to these systems or institutions, like climate change. classifying industries based on sustainability characteristics can help investors reduce systemic risk across a portfolio ESG integration can improve investment analysis at a company, security, and portfolio message Sector Allocation - answer-Sectors become more or less correlated with one another depending on sustainability risks and opportunities Post-Investment Engagement - answer-Active ownership: investor engagement can influence sustainability, meetings, proxy voting, shareholder resolutions Monitoring and Engagement: actively monitor holdings for adherence and influence company-level decision making. Index investors need to establish a framework to focus, PE investor have less, so it is much easier. Corporate fixed income investors dont have much leverage Proxy voting and resolution: Proxy votes press for better governance of ESG and companies increasingly respond Investor reporting - answer-Benchmarks: offer performance comparisons, where a client can see the performance of their funds relative to the performance of others (usually an index) and thus gain performance insight GP Reporting: Limited Partner monitoring: Building an effective investor framework - answer-determine what data to use, evaluate investment opportunities, steward investments, engage with companies, proxy vote, report to clients and stakeholders Existing challenges to high quality ESG investor data - answer-Policies: when reporting "yes or no" to having a policy, lots of how the policy works and how the culture supports it is missing Comparability: not even company uses the same metrics, terminology, or units of measure Range of Scoring Methods: many different ways to score, not every company is on every third party site Comprehensiveness: Lack of rigor and lack of internal controls results in an incomplete story, usually captures what is easiest to capture (GHG emissions) Governance: Not all companies have systems in place to collect correctly, need more checks and balances, corporate boards are beginning to have a responsibility to consider SI in key decisions, and investors begin to look at how a company manages ESG Differentiating Materiality: investors find it difficult to keep identifying financially material SI material as it changes Never ending demand for more information: self explanatory General Partner - answer-Investor who jointly owns and manages a business. The GP may have unlimited liability, and typically brings specialized knowledge and skills to contribute to the business GP Reporting - answer-Process whereby a GP reports info (financial and other) to limited partners, usually through quarterly reporting packages and including both financial and narrative information Actual Impacts - answer-Form of financial impact that is actively observable and measurable. They represent actual trends, events, or upcoming changes that are occuring or will occur with a high degree of certainty Acute Impacts - answer-Impacts on a company's financial condition or operating performance that may be rare or unlikely but can have significant consequences such as extreme weather events or unanticipated accidents (think oil spill) Alliance Organization - answer-A formal association formed for the mutual benefit of member organizations in association with specific shared interests of goals. Member organizations benefit from a communication network, shared resources, and collaboration Alpha - answer-The return on an investment in excess of market index or benchmark Assurance Readiness - answer-Assessed through internal audits or other internal disclosure procedures, assurance readiness seeks to determine the appropriate level of external assurance and overall preparedness of a company to smooth the assurance process and control related assurance expenses Benchmarks (Financial) - answer-A standard or point of reference used to evaluate the performance of a security, portfolio, fund, or investment manager. Stock and bond indexes are often used as benchmarks Certifications - answer-For public companies, disclosure regulations often require executive certification of internal controls where an executive, typically the CEO and/or CFO must certify the accuracy and completeness of disclosed information Coalitions - answer-A formal group of companies and organizations formed, sometimes temporarily, in pursuit of combined action towards a specific outcome. Coalition members often collaborate and collectively communicate goals and development related to a particular topic of their coalition (Sustainable Apparel Coalition, Sustainable Packaging Coalition) Credit Risk - answer-The risk of a borrower defaulting on its ability to make required payments (interest or principal) resulting in a loss to the lender Equity - answer-Equity investors invest money into a company in exchange for a share of ownership, usually represented through stock ownership. Returns on equity vary according to the profitability of the business over the length of time the share is held ESG Integration - answer-An investment strategy that uses sustainability information to evaluate or enhance the financial returns of a given investment opportunity Financed Emissions - answer-When a bank or other financial institution lends capital to companies or projects that produce significant green house gas emissions, it indirectly exposes itself to climate-related risk and associated financial consequences Fixed-Income - answer-Fixed-income investors loan money to a company in return for a pre-determined number of interest payments (in addition to the principal) until the security's maturity date. The interest rate depends on the creditworthiness of the borrower. Fiexe interest payments provide a fixed stream of income to the investor. Bonds are the most common fixed income instrument. Fundamental Analysis - answer-A type of analysis that aims to evaluate the intrinsic value of a security by examining relevant financial and economic factors. Fundamental analysis attempts to determine if a security is under values or over valued relative to market price Impairment Calculations - answer-A calculation conducted to determine the permanent loss in the value of a company's asset(s). Impairment occurs when an asset's market value depreciated in excess of its book value Information Validation Pathways - answer-Digital information procedures and testing processes used to consistently ensure the integrity and security of digitally reported data Liquidity Risk - answer-The risk that an investor, business, or financial institution will not be able to meet short term financial obligations due to an inability to convert an asset into cash without incurring a loss Normalization - answer-The process of adjusting and/or organizing data to enable effective analysis Private Equity - answer-PE Investors directly invest in private companies and engage in company buyouts rather than investing through public exchanges Sell-side Analyst - answer-Investment analyst, usually employed by a brokerage firm, that makes buy, sell, and hold recommendations to clients based on a target investment's growth potential or other criteria Shared Value - answer-First introduced in an HBR article, shared value refers to a company's ability to create "economic value in a way that also creates value for society by addressing its needs and challenges" Strategic Planning - answer-The process of developing and documenting a roadmap for achieving firm wide goals and defining future direction. Strategic plans inform resource allocation decisions, management and business unit priorities, operational decisions, and may extend to controls for strategy implementation. Systematic or market risk - answer-The type of risk inherent to the overall market that cannot be diversified away. For examples, declines in value caused by global recession. Tracking Error - answer-The difference between the return an investment or portfolio generates and the benchmark t was trying to imitate Universal Owner - answer-Universal owners are investors that own the externalities associated with their holdings, which are large enough to have exposure to the entire economy and financial market. Their returns depend on the health of the overall economy. Universal owners can improve long-term financial performance by addressing sustainability related risks and opportunities and by fostering sustainable markets Withdrawl rates - answer-The rate at which shareholder proposals are resolved and withdrawn before going to a vote in response to negotiated dialogue between shareholders and a company Yield Curve risk - answer-The risk that their yield curve will shift in response to a change in market interest rates, impacting the price of the fixed-income securities