FSA Level I & II Sample Questions PDF

FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) CREDENTIAL™ LEVEL I SAMPLE QUESTIONS The following sample questions have been developed to mimic the style and rigor of the questions on the FSA Level I exam. As with the Level I exam, the correct answers are derived from the informati...

FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) CREDENTIAL™ LEVEL I SAMPLE QUESTIONS The following sample questions have been developed to mimic the style and rigor of the questions on the FSA Level I exam. As with the Level I exam, the correct answers are derived from the information contained in the Level I Study Guide. Note: the below sample questions are for the FSA Level I pilot exam. More details about the pilot exam can be found on the FSA website. 1 What is the primary challenge that the disclosure of company policies (such as ESG policies or whistleblower policies) can pose to investment analysis? A. The presence of a company policy is represented through binary data, which does not provide useful insight into actual company performance B. Company policies always increase the labor burden of analysis, where large narrative documents must be manually processed C. Company policies may be written in response to poor performance and often provide fraudulent data, reducing the reliability of the information D. It is not always clear who at the company is accountable for implementing the policy, inhibiting investor-investee engagement 2 How do trends in index investing influence corporate-investor engagement on sustainability? A. The decline of index investing can encourage investment stewardship through proxy voting B. The growth of index investing can encourage use of the “Wall Street rule” and decrease dialogue-based engagement C. The decline of index investing can encourage shareholders to file resolutions and increase withdrawal rates D. The growth of index investing can encourage investment stewardship based on how buy-sell decisions are made 3 Corporate disclosures of sustainability information serve which two of the following purposes in capital markets? (Choose two) A. Aid in valuation for financial analysts B. Demand additional regulation for corporations C. Allow investors to assess risks and opportunities related to their investments D. Prevent non-governmental organizations from “naming and shaming” poor ESG performers 1: A; 2: D; 3: A & C © SASB  FSA LEVEL I SAMPLE QUESTIONS 4 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: 1. Incorporate inventory management and procurement processes to supplement product delivery service 2. Adapting product delivery service to enhance delivery options 3. Upgrading product ordering processes to reduce costs, time, and/or errors 4. Refining new and old business lines to establish brand leadership A. 1, 2, 3, 4 B. 3, 1, 2, 4 C. 2, 3, 1, 4 D. 3, 2, 1, 4 5 Which of the following is suitable to be included as an “activity metric” in SASB’s standards? A. A description of the company’s strategy to protect customer data B. Number of media publications C. History of product recalls D. CAPEX 6 Why is SASB’s objective of cost-effectiveness for reporting companies ultimately in the best interest of providers of capital? A. If companies limit the amount of information they report, they are more likely to report information that is material, reducing the level of immaterial data in the market B. If companies spend more than the value disclosure generates, there is potential for sustainability disclosure as a business function to negatively impact enterprise value C. If companies increase spending on reporting processes, they will be better equipped to gather and disclose new data, increasing the availability of sustainability data available D. 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 4: D; 5: B; 6: B © SASB  FSA LEVEL I SAMPLE QUESTIONS 7 Which of the following provides an example of line-item sustainability disclosure guidance issued by a regulator? 1. The US Securities and Exchange Commission (US SEC) 2010 Guidance lists four climate change issues that companies should consider for disclosure under existing applications of materiality to SEC filings. 2. 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. 3. The Australian Securities and Investments Commission (ASIC) 2019 Regulatory Guide states that that companies should present information about an entity’s operations and financial position in a concise manner. 4. The Canadian Securities Administration (CSA) 2010 Environmental Reporting Guidance requires the disclosure of matters related to climate in order to comply with previously-established Continuous Disclosure Obligations. A. 1 B. 2 C. 3 D. 4 8 Which two features explain how SASB’s standards-development process is designed to improve the decision-usefulness of sustainability information for investors? (Choose two) A. A topic is only included in a standard if it includes evidence of financial impacts B. Investors’ feedback during the standards development process is prioritized over other stakeholders C. The accounting metrics are quantitative to make it easier to integrate into conventional financial analysis tools D. The technical protocols are intended to improve the reliability of the information by forming the basis for suitable criteria 9 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. A. Data about factors that drive brand value : impacts on valuation methods for assets and liabilities B. Data about regulatory compliance : operational performance and cost structure C. Data about product features required by law : cost structure for profitability ratios (e.g. ROI) D. Data about the number of safety incidents : revenue growth in the context of price-based ratios (e.g. PE or PEG ratios) 7: B; 8: A&D; 9: B © SASB  FSA LEVEL I SAMPLE QUESTIONS 10 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) A. Percent of customers injured by other motorists in the previous year B. Number of safety-related defect complaints C. Number of vehicles recalled D. Number of suppliers satisfying third-party factory safety standards E. Percentage of retired union employees diagnosed with chronic illnesses originating from the workplace F. Percentage of vehicles with 5-star safety rating 11 On the spectrum of “values-” to “value”-focused investing, which investment strategy that uses sustainability information is farthest on the “value” end? A. Impact Investing B. Negative Screening C. ESG Integration D. Positive Screening 12 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) A. “Labor Practices is a frequent topic in media coverage of the industry and shareholder resolutions in the industry but it is not important to our customers or our board of directors.” B. “The industry is not unionized and strikes are a rare occurrence within the industry. Workers are generally extremely well paid and labor practices are healthy for the most part.” C. “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.” D. “Surveyed customers and suppliers indicated that cost containment strategies warranted disclosure except where it concerned what they viewed as a non-issue—labor practices— even though labor costs account for the 3rd greatest share of costs.” 10: B;C&F 11: C; 12: B & C © SASB FUNDAMENTALS OF SUSTAINABILITY ACCOUNTING (FSA) CREDENTIAL™ LEVEL II SAMPLE QUESTIONS The following sample questions have been developed to mimic the style and rigor of the questions on the FSA Level II exam. As with the Level II exam, the correct answers are derived from the information contained in the Level II Study Guide. The correct answers are listed at the end of the final sample case study. The study guide includes explanations for each answer. In the exam, there are 13 case studies and 53 exam questions; you have 2 hours to complete the exam. Reading a case study and answering 3 questions should take you between 6 and 7 minutes. We encourage you to practice how long it takes you to read each of the following 4 case studies + 2-4 questions. We have vetted the exam to ensure 2 hours is enough time for someone with mastery of the material to complete with time to spare to review. CASE STUDY 1 - HOTELS & LODGING INDUSTRY Key revenue drivers in the Hotels & Lodging industry include consumer and business discretionary spending, domestic and international travel, and consumers’ sense of financial security. Major costs include wages and purchases (room supplies, food, and beverages), which together account for over 60% of revenue. Since the industry is very capital-intensive for hotel owners, some companies have transitioned their business models away from direct property ownership to hotel management via franchising and third party property ownership. Hotel and lodging companies have relatively large consumption of, and dependence on, energy and water resources though they are not the industry’s greatest source of operating costs. Variability in energy prices or water availability impacts financial results or even the ability to operate. In the U.S., the average retail price of electricity for the commercial end-use sector was 7.25 cents per kilowatt-hour (kWh) in 2001 and is projected to increase to 18.5 cents per kWh by 2040, representing a 2.4% increase annually. The industry also relies heavily on human capital for guest services and daily operations. These jobs typically require long working hours and are filled by a large percentage of women and immigrants. Furthermore, as approximately 80% of all tourism takes place in coastal areas, the industry faces challenges from shifting weather patterns and rising sea levels. Below is information from two companies in the Hotels & Lodging industry, which may or may not be material. Note that determining the average number of occupied rooms requires multiplying the average occupancy rate by the number of hotel rooms. © SASB FSA LEVEL II SAMPLE QUESTIONS Company A Company B Revenue (in millions) $1,840 $6,420 Number of Hotel Rooms 92,896 128,234 Average occupancy rate 71% 82% % Locations owned (as opposed to leased) 65% 30% % of revenue from leisure/tourism customers 35% 72% Percent of revenue from: Mountain regions 30% 15% Landlocked, non-mountain regions 60% 45% Coastal regions 10% 40% Total energy consumed (in thousands of gigajoules) 5,132 3,725 Reclaim rate of hotel room keys 79% 31% Total water withdrawn (in thousands of cubic meters) 12,120 8,478 Water withdrawn in regions with high/extremely high 2,545 2,296 water stress (in thousands of cubic meters) Voluntary employee turnover rate for hotel employees 60% 95% Total employee workplace injury rate (incidents per 1.2 0.4 thousand hours worked) 1 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? A. The percent of revenue from coastal regions B. The percent of revenue from business customers C. The reclaim rate of plastic hotel room keys D. The amount of energy needed to generate $1 of revenue 2 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? A. Revenue generated per cubic meter of water withdrawn B. Cubic meters of water withdrawn per total number of rooms C. Cubic meters of water withdrawn per average number of occupied rooms D. Percent of water withdrawn from regions with high/extremely high water stress 2: D 1: A © SASB FSA LEVEL II SAMPLE QUESTIONS 3 As compared to Company A, how would Company B’s performance on energy management predominantly impact the valuation model? A. Decrease cost of capital B. Increase growth projections C. Decrease expense projections D. Increase book value of assets 4 How will performance on SASB metrics impact Company A’s valuation as compared to Company B? A. Company B’s higher percentage of revenue from leisure customers will likely decrease valuation. B. Company B’s lower reclamation rate of hotel room keys will likely increase valuation. C. Company A’s lower percentage of revenue from coastal regions will likely decrease valuation. D. Company A’s lower voluntary employee turnover rate will likely increase valuation. CASE STUDY 2 - TELECOMMUNICATIONS INDUSTRY The Telecommunications industry is the foundation of modern communications and information sharing, fueled by the growth of the Internet economy. The U.S. is the largest telecom market in the world, expected to grow by 3.7% per year in the next 5 years. Meanwhile, emerging markets are averaging growth rates closer to 12% per year. Telecom companies work in partnership with phone manufacturers to bundle services and devices, such as mobile phones. This carries a shared responsibility for device end-of–life management. Mobile phones are a target for developing legislation related to electronic waste (e-waste) since these devices are typically replaced every two to five years. Improper disposal can lead to hazardous substances leaching into the environment, threatening human health. Telecom companies’ customer relationships provide an opportunity for cost savings for materials via product recycling and re-use. Similarly, telecom companies can pursue various strategies to achieve cost savings through energy efficiency efforts, including purchasing more efficient equipment, optimizing the locations for network equipment and data centers, and implementing server virtualization. In addition, long-term power purchase agreements with renewable energy providers or on-site generation can provide a hedge against volatile energy prices. Companies A and B are two telecom companies. Company A is a market leader in North America, which is its largest geographic source of revenue. In a networked industry with high, fixed infrastructure costs, market leaders benefit from network effects and economies of scale. This, in turn, allows for infrastructure upgrades to deliver better services. On the other hand, telecom companies face risks from anti-trust regulation aimed at fostering competition. Company B recently acquired a software company, which had revenues last year equivalent to 18% of Company’s B’s revenues. In the Software industry, the number of job openings continues to grow 4: D 3: C © SASB FSA LEVEL II SAMPLE QUESTIONS but companies are finding it difficult to recruit qualified employees, especially as other firms compete for highly-skilled employees. The industry is characterized by relatively low representation from women and minority groups so efforts to recruit from and develop diverse talent pools can mitigate the talent shortage. Moreover, a workforce that reflects a company’s customer base can help companies better understand their customers’ needs. Below is information about companies A and B from the most recent fiscal year. Company A Company B Revenue (in millions) $66,840 $65,428 Wireless subscribers (in millions) 69,632 68,327 Wireless network bandwidth capacity (in megabits per 12.78 12.23 second) Distribution of network infrastructure % in North and South America 50% 35% % in Europe and Russia 25% 15% % in Africa 10% 30% % in Asia and Oceania 15% 20% Total energy consumed (in thousands of megawatt-hours) 8,150 7,980 percentage grid electricity 85% 88% percentage renewable energy 15% 12% % of customers’ personally identifiable information 0.5% 6% compromised in data security breaches last year Materials recovered through take back programs, percentage of recovered materials that are: reused, 22% 8% recycled, and 8% 22% landfilled 70% 70% Amount of legal and regulatory fines and settlements N/A N/A associated with anti-competitive practices (in thousands) 5 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? A. Data privacy B. Affordability and fair pricing C. Systemic risks from technology disruptions D. Recruitment and retention of a diverse workforce 5: D © SASB FSA LEVEL II SAMPLE QUESTIONS 6 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? A. Rising costs and legislative focus on energy use B. Growth in emerging markets C. Growth in wireless data use D. Legislation to increase product reclamation 7 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) A. Company A increased their percentage of energy from renewables B. Company A invested in efficiency upgrades for their data centers C. Company B hired a developer team to virtualize their servers D. Company B negotiated stable pricing deals with their largest utility providers CASE STUDY 3 - INSURANCE INDUSTRY Companies in the Insurance industry offer a range of policy lines, including life, supplemental health, property, casualty, automobile, liability, and reinsurance. Insurance premiums, underwriting profits, and income from the investment of premiums drive industry growth, while insurance claim payments present the most significant cost and source of uncertainty. Technology is increasing the transparency of insurance markets, as customers and ratings agencies evaluate timeliness of claim payments, fairness of pricing, and customer complaints. The extent to which insurance companies, as large asset owners, incorporate environmental, social, and governance (ESG) factors into investment decision-making can influence their investment returns. Fixed income assets, such as corporate debt, are heavily favored by insurance companies and can be particularly sensitive to ESG factors. Apart from investment decisions, exposure to environmental risks to insured properties can affect both tangible and intangible assets, as inadequate consideration of risks such as floods or extreme weather events can increase benefits payments and reduce profit and/or raise a company’s risk profile. Advances in technology and the development of new policy products have allowed insurance companies to limit claim payments while encouraging responsible behavior. These products include consumer insurance incentives for safe driving, smoking cessation, or building insurance incentives for construction designed to minimize use of natural resources, such as water or energy. These policies can reduce the incidence of triggering events for insurance payout, enhancing profitability. Within the industry, companies that engage in non-traditional or non-insurance activities, including credit default swaps (CDS) protection, have been identified as more likely to amplify or contribute to systemic risk in the financial markets and are targeted for additional regulatory oversight. Inadequate risk assessment for credit risk, trade risk, and financial guarantee insurance products can generate systemic risk, and lead to withdrawals and liquidity risks. 7: B,C 6: B © SASB FSA LEVEL II SAMPLE QUESTIONS 8 How could stakeholder concerns materially impact the insurance industry? A. Pending regulation scrutinizing companies’ systemic impact on financial markets B. Employees unsatisfied with their company’s consideration of environmental risk exposure from customer plans C. An NGO pressuring companies to integrate ESG factors into investment management D. Risk of falling behind peer companies that offer policies that incentivize responsible behavior 9 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) A. Metric 1 B. Metric 2 C. Metric 3 D. Metric 4 E. Metric 5 CASE STUDY 4 - METALS AND MINING INDUSTRY The Metals & Mining industry is involved in extracting all metals and minerals, producing and refining ores, quarrying stones, smelting and manufacturing metals, and providing mining support activities. The largest metal mining companies have truly global operations spanning six continents. These companies depend on concessions, licenses, and permits from governments to conduct their business and gain access to natural resources. In the U.S. and abroad, there are a variety of laws designed to prohibit any corrupt use of commerce to influence foreign officials to violate their lawful duty, or to secure improper advantages to assist in obtaining or retaining business. Some provisions hold companies accountable if they fail to prevent bribery. Though the outputs of the Metals & Mining industry are long-lived, reusable, and can be recycled, one ton of metal ore produced generates two or three tons of waste rock, or mine tailings. They are typically stored on-site in impoundments or used as in-pit backfill. In the latter case, such storage can create the potential for groundwater contamination and could affect the stability of active mines in the 9: A, C 8: C © SASB FSA LEVEL II SAMPLE QUESTIONS area. As ore quality declines, even more waste rock needs to be extracted to generate the same yields. Conversely, innovations in the industry are creating lighter, more durable products, enabling efficiency downstream. Metal recycling rates are increasing and new technologies are reducing the need for extracting virgin materials. The Metals & Mining industry has relatively high fatality rates compared to other industries. Whereas miner safety regulations outside the US may have lax enforcement, many mining companies have created policies around zero harm or the goal of zero fatalities. These companies have found there is an inverse relationship between worker injuries and near misses, and safety management directly impacts labor productivity through avoidance of non-productive time, regulatory fines, payout of medical benefits, and employee morale. Below is information from three consecutive years of performance on select financial and sustainability data points from one company in the Metals & Mining industry. Data for Company A Year 1 Year 2 Year 3 Revenue (in millions) $32,557 $33,742 $35,198 Net income (in millions) $2,930 $3,082 $3,292 % Revenue from Foreign Sources 76% 79% 81% Country of Largest Revenue South Africa China China Total number of employees 74,654 77,370 80,531 Number of mining complexes 14 14 14 Total weight of tailings waste (in metric tons) 154,000 160,200 168,300 Number of non-technical delays 1 1 0 Duration of non-technical delays 7 3 0 Fatality Rate full-time employees; 0.034 0.06 1 contract employees 0.07 0 0.03 Near Miss Frequency Rate full-time employees; 0.4 0.32 0.39 contract employees 0.36 0.48 0.42 Suppose the company’s Near Miss Frequency Rate (NMFR) is higher than the industry 10 average, when normalized by workforce participants. How should management and investors view the company’s performance on NMFR? A. As a risk, because a higher NMFR indicates an unsafe work environment and increased safety-related costs B. As a risk, because robust NMFR reporting indicates an increased likelihood of additional safety-related regulations C. As an opportunity, because a higher NMFR indicates an efficient operating environment D. As an opportunity, because robust NMFR reporting indicates potential for reduced safety risks 10: D © SASB FSA LEVEL II SAMPLE QUESTIONS 11 The efficiency of the company’s production of tailings waste is improving based on the 3-year trend when: A. revenue is normalized by the weight of tailings produced. B. the weight of tailings produced is normalized by number of mining complexes. C. net income is normalized by the weight of tailings produced. D. the weight of tailings produced is normalized by number of employees. 12 Company A’s management of business ethics and payments transparency will likely translate to impacts on which financial metric? A. Pricing power B. Research and Development C. Assets D. Cost of capital 11: C; 12: D © SASB