Sustainability Accounting Quiz

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Questions and Answers

What is the primary challenge that the disclosure of company policies (such as ESG policies or whistleblower policies) can pose to investment analysis?

Company policies always increase the labor burden of analysis, where large narrative documents must be manually processed

Company policies may be written in response to poor performance and often provide fraudulent data, reducing the reliability of the information

The presence of a company policy is represented through binary data, which does not provide useful insight into actual company performance

It is not always clear who at the company is accountable for implementing the policy, inhibiting investor-investee engagement (correct)

How do trends in index investing influence corporate-investor engagement on sustainability?

The decline of index investing can encourage shareholders to file resolutions and increase withdrawal rates

The decline of index investing can encourage investment stewardship through proxy voting

The growth of index investing can encourage investment stewardship based on how buy-sell decisions are made (correct)

The growth of index investing can encourage use of the “Wall Street rule” and decrease dialogue-based engagement

Corporate disclosures of sustainability information serve which two of the following purposes in capital markets? (Choose two)

Aid in valuation for financial analysts (correct)

Demand additional regulation for corporations

Allow investors to assess risks and opportunities related to their investments (correct)

Prevent non-governmental organizations from “naming and shaming” poor ESG performers

The chart below presents examples of business initiatives designed to reflect the different stages of sustainability-based value creation, as identified by multiple thought leaders in the field. Select the arrangement of initiatives that progress from early-stage to late-stage:

2, 3, 1, 4 Signup and view all the answers

Which of the following is suitable to be included as an “activity metric” in SASB's standards?

CAPEX Signup and view all the answers

Why is SASB's objective of cost-effectiveness for reporting companies ultimately in the best interest of providers of capital?

If companies focus on internal reporting to inform performance management decisions, they will naturally produce decision-useful information that meets the needs of external users Signup and view all the answers

Which of the following provides an example of line-item sustainability disclosure guidance issued by a regulator?

The European Union Taxonomy for Sustainable Economic Activities (The EU Taxonomy) expects companies to report capital and operating expenditures associated with activities classified as environmentally sustainable. Signup and view all the answers

Which two features explain how SASB's standards-development process is designed to improve the decision-usefulness of sustainability information for investors? (Choose two)

The accounting metrics are quantitative to make it easier to integrate into conventional financial analysis tools Signup and view all the answers

An analyst wants to understand the connection between a company's sustainability data and one of four financial drivers (revenue, cost, assets and liabilities, and cost of capital) that are relevant to a discounted cash flow (DCF) analysis. Choose the pairing that correctly matches a data type with its relevance to a DCF analysis.

Data about regulatory compliance : operational performance and cost structure Signup and view all the answers

Completeness is an important concept in disclosures of material information. For a company in an industry where workplace safety is likely to be material, if a company with 0 fatalities but 1,000 near-misses only discloses the number of fatal accidents, then investors are missing the complete picture. In the Automobile industry, information about the safety of a company's car models is likely to be material. Which three metrics, when taken together, are most likely to represent a complete disclosure? (Choose three)

Number of vehicles recalled Signup and view all the answers

On the spectrum of “values-” to “value”-focused investing, which investment strategy that uses sustainability information is farthest on the "value" end?

ESG Integration Signup and view all the answers

Which two statements, if true, provide evidence that the potential disclosure topic of Labor Practices fails to meet the criteria for inclusion in the Oil & Gas - Services Standard? (Choose two)

"There are instances where labor practices is material in a specific set of circumstances—such as in Gabon in 2013—but it is not material across the industry." Signup and view all the answers

If an analyst determines that Company A is less likely than Company B to face material impacts from environmental and climate risks, what piece of information would likely lead to that conclusion?

The percent of revenue from coastal regions Signup and view all the answers

An analyst comparing the two companies' management of water use found that, on a normalized basis, Company A was actually outperforming Company B. Which normalization did the analyst use?

Percent of water withdrawn from regions with high/extremely high water stress Signup and view all the answers

As compared to Company A, how would Company B's performance on energy management predominantly impact the valuation model?

Decrease expense projections Signup and view all the answers

How will performance on SASB metrics impact Company A's valuation as compared to Company B?

Company A's lower percentage of revenue from coastal regions will likely decrease valuation. Signup and view all the answers

Due to the differences in revenue streams, management of which sustainability topic(s) will likely have more material impacts for Company B than for Company A?

Recruitment and retention of a diverse workforce Signup and view all the answers

When comparing Company A's performance to Company B's, what external factor(s) provides relevant insight into differences in near-term forecasts for the two companies?

Rising costs and legislative focus on energy use Signup and view all the answers

If each company's performance data on energy consumption remained the same next year while all other data points increased, which two statements would likely offer the best explanation? (Choose two)

Company A invested in efficiency upgrades for their data centers Signup and view all the answers

How could stakeholder concerns materially impact the insurance industry?

Pending regulation scrutinizing companies' systemic impact on financial markets Signup and view all the answers

Suppose an analyst is reviewing performance data from a company for the following SASB metrics:

Metric 1: Complaints-to-claims ratio Metric 2: Notional amount of CDS protection sold Metric 3: Net premiums written related to energy efficiency and low carbon technology Metric 4: Amount of life and annuity liabilities that can be surrendered upon request with penalties lower than 20% Metric 5: Percentage of policies in which weather-related natural catastrophe risks have been mitigated through reinsurance and/or alternative risk transfer

Which two provide information about progressive impacts? (Choose two)

Metric 5 Signup and view all the answers

The efficiency of the company's production of tailings waste is improving based on the 3-year trend when:

the weight of tailings produced is normalized by number of mining complexes. Signup and view all the answers

Company A's management of business ethics and payments transparency will likely translate to impacts on which financial metric?

Pricing power Signup and view all the answers

Study Notes

Level I Sample Questions - Sustainability Accounting

Primary challenge of disclosing company policies (ESG/whistleblower): Policies often expressed as binary data, not providing insight into actual performance. Narrative documents require manual processing and can be unreliable. Accountability for policy implementation also hinders engagement.

Index Investing Trends and Corporate-Investor Engagement

Index investing decline: Encourages more dialogue-based engagement and shareholder resolution filing. Increased withdrawal rates.
Index investing growth: Encourages investment stewardship based on buy-sell decisions and encourages use of "Wall Street rule."

Corporate Sustainability Disclosure Purposes

Two purposes in capital markets: Aid in valuation for financial analysts and allow investors to assess investment risks and opportunities.

Business Initiatives and Sustainability Value Creation Stages

Early-stage initiatives: Inventory management, enhanced procurement processes, and refining delivery logistics.
Late-stage initiatives: Upgrade product ordering methods, refine business lines for brand leadership.

SASB Activity Metric

Activity metric: Description of the company's strategy to protect customer data.

SASB Cost-Effectiveness and Capital Provider Interest

Cost-effectiveness: Reporting companies limit information to more material data, reducing immaterial data in the market and decreasing negative effects on enterprise value.

Line-Item Sustainability Disclosure Guidance

US SEC: 2010 Guidance on climate change factors. Focus of disclosure.
European Union Taxonomy: Expectations regarding sustainable economic activities. Company expenditures on sustainable operations.
Australian ASIC: 2019 Regulatory Guide on presenting concise financial information.
Canadian Securities Administration: 2010 Guidance for climate disclosure with established disclosure obligations.

SASB Standards and Decision-Usefulness for Investors

Financial impact evidence: Standards include evidence of financial impacts from a topic.
Prioritized investor feedback: Investor feedback is prioritized during standard development.
Quantitative accounting metrics: Metrics use quantitative data for easier integration into conventional financial analysis.
Reliable information: Protocols improve the reliability of sustainability information.

Data Type and Relevance to DCF Analysis

Brand value data: Influences valuation methods.
Regulatory compliance data: Affects operational performance and cost structure.
Product data: Impacts profitability ratios.
Safety incidents data: Affects revenue growth.

Completeness in Material Information Disclosure

Essential metrics for Automotive industry safety: Number of customers injured by other motorists, safety-related defect complaints, and vehicle recalls. (Information about vehicle recalls) are relevant.

Investment Strategies and Sustainability Information

Value-focused sustainability strategy:* Impact investing is more value-focused than other strategies; negative screening or ESG integration.

Labor Practice Criteria for Oil & Gas Services Standard

Frequent media coverage and shareholder resolutions: Labor practices are frequently discussed.
Materiality in circumstances: Limited materiality across the industry.
Customer surveys: Customers consider labor practices as immaterial in most cases but a specific circumstances and non issues; they do matter at times.

Stakeholder Concerns and Insurance Industry Impacts

Regulation scrutiny: Pending regulation scrutiny on companies' financial market impact.
Environmental risk exposure: Employee dissatisfaction with company environmental risk exposure for customers' plans.
NGO pressure: Pressure to integrate ESG factors.

Insurance Industry Issues and Stakeholder Concerns

Systemic impact: Pending regulatory scrutiny of companies' systemic impact on financial markets.
Environmental risk exposure: Employees' dissatisfaction with companies’ environmental risk exposure from customers' plans.
NGO pressure: Pressure on companies to integrate ESG variables into management.

Information about CDS: Notional amount of CDS protection sold; Net premiums written related to energy efficiency.
Environmental metrics: Amount of life and annuity liabilities that can be surrendered with penalties lower than 20%.
Natural catastrophe risks: Policies that mitigate weather-related risks.

Metals and Mining Industry Operations

Global operations: Span six continents.
Concessions and permits: Reliance on concessions, licenses, and permits for conducting business.
Global regulations: Laws prohibiting corrupt use of commerce, and ensuring ethical practices.
Waste management: Significant amounts of waste rock, or mine tailings produced, disposed, recycled, or repurposed.
Tailings disposal concerns: Potential for groundwater contamination and impact on existing mines.

Near Miss Frequency Rate (NMFR) for Metals and Mining

Risk assessment: A high NMFR indicates a potentially unsafe work environment and increased safety-related costs.
Opportunity?: Robust reporting potentially signals increased potential for reduced safety risks .

Tailings Waste Production Efficiency

Normalization factors: Productivity is increased when revenue is normalized using the weight of tailings produced or the net income normalized by the weight of tailings produced.
Normalization considerations: Weights of tailings production should be normalized by the number of mining complexes or number of employees.

Company A's Management of Business Ethics and Transparency

Metric impact: Ethical practices can increase pricing power or change perceptions and/or influence perceptions of their value by investors.

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Description

Test your knowledge on sustainability accounting concepts, including ESG policies, index investing trends, and corporate sustainability disclosures. This quiz covers key challenges and purposes within capital markets related to sustainability initiatives.